Columbia Financial, Inc. — 1Q23 Form 10-Q Summary
Business context and reporting period
Columbia Financial, Inc. is the majority-owned holding company of Columbia Bank and Freehold Bank, operating primarily through retail and commercial banking, lending, securities and related financial services. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparison to the three months ended March 31, 2022 and financial condition comparisons to December 31, 2022. The company operated 67 branches and had 105.8 million common shares outstanding as of May 5, 2023, including shares held by Columbia Bank, MHC.
Key financial metrics
| Metric | 1Q23 / March 31, 2023 | Comparable / December 31, 2022 |
|---|---|---|
| Total assets | $10.635 billion | $10.408 billion |
| Loans receivable, net | $7.734 billion | $7.625 billion |
| Total deposits | $7.674 billion | $8.001 billion |
| Borrowings | $1.707 billion | $1.127 billion |
| Stockholders’ equity | $1.039 billion | $1.054 billion |
| Net income | $18.7 million | $20.4 million in 1Q22 |
| Basic and diluted EPS | $0.18 | $0.20 in 1Q22 |
| Net interest income | $60.9 million | $62.7 million in 1Q22 |
| Net interest margin | 2.58% | 2.98% in 1Q22 |
| Non-interest income | $8.1 million | $7.0 million in 1Q22 |
| Non-interest expense | $43.9 million | $40.7 million in 1Q22 |
| Provision for credit losses | $0.2 million | $1.5 million in 1Q22 |
| Cash and cash equivalents | $319.4 million | $179.2 million at December 31, 2022 |
Material changes versus prior comparable period
- Profitability: Net income declined 8.2% to $18.7 million. The decrease reflected lower net interest income and higher operating expenses, partly offset by lower credit-loss provisions, higher non-interest income and lower income taxes.
- Net interest income and margin: Net interest income fell 3.0% to $60.9 million. Interest income increased $24.1 million, but interest expense increased $26.0 million to $32.0 million as deposit and borrowing costs rose sharply. The net interest margin contracted 40 basis points to 2.58%.
- Operating costs: Non-interest expense increased 7.7%, primarily because compensation and employee benefits increased $5.2 million, reflecting higher staffing and costs associated with the RSI Bank acquisition completed in May 2022. The 1Q22 period also included litigation settlements and merger-related costs that did not recur in 1Q23.
- Balance sheet: Total assets increased 2.2%. Net loans increased 1.4%, led by multifamily, construction and commercial business loans. Deposits declined 4.1%, while borrowings increased 51.4%, primarily through additional Federal Home Loan Bank advances.
- Capital return: The company repurchased 2.378 million shares for approximately $47.3 million, or $19.90 per share. Stockholders’ equity declined 1.4% after the repurchases, despite net income and an improvement in accumulated other comprehensive loss.
- Accumulated other comprehensive loss: Net unrealized losses on available-for-sale securities improved during the quarter, contributing $12.1 million of after-tax other comprehensive income. Accumulated other comprehensive loss was $167.9 million at March 31, 2023.
Cash flow, liquidity, debt and capital
- Operating activities used $3.6 million of cash, compared with $32.9 million provided in 1Q22. Investing activities used $63.6 million, while financing activities provided $207.4 million, primarily from increased borrowings.
- Cash and cash equivalents increased $140.2 million to $319.4 million. Available liquidity was reported at approximately $2.9 billion, including cash, $1.1 billion of FHLB borrowing capacity, $1.4 billion of Federal Reserve borrowing capacity and $384.0 million of correspondent lines. Unpledged loan collateral available for pledge exceeded $2.7 billion.
- The company had no borrowings from the Federal Reserve Discount Window and had not used the Bank Term Funding Program as of March 31, 2023.
- Uninsured deposits, excluding collateralized municipal deposits, totaled $2.1 billion, or 27.7% of total deposits. Management stated that available liquidity was sufficient to cover uninsured deposits.
- The company, Columbia Bank and Freehold Bank exceeded applicable regulatory capital requirements. The company’s March 31, 2023 total risk-based capital ratio was 14.75%, tier 1 risk-based capital ratio was 13.97%, common equity tier 1 ratio was 13.87% and tier 1 leverage ratio was 10.19%.
Credit quality and risk exposures
- Non-performing loans were $6.6 million, or 0.09% of gross loans, compared with $6.7 million at year-end 2022. Non-performing assets were 0.06% of total assets.
- The allowance for credit losses on loans was $52.9 million, or 0.68% of gross loans, compared with $52.8 million, or 0.69%, at December 31, 2022. Net charge-offs were approximately $105,000 in 1Q23.
- Multifamily and commercial real estate loans totaled $3.7 billion, or 48.0% of gross loans. Commercial real estate exposure and the company’s use of economic forecasts in its CECL model remain important credit-risk considerations.
- Available-for-sale securities had a fair value of $1.273 billion and gross unrealized losses of $171.3 million at March 31, 2023. Held-to-maturity securities had an amortized cost of $417.2 million and fair value of $372.2 million. Management reported that temporarily impaired securities were investment grade.
- Interest-rate sensitivity modeling indicated that a 200-basis-point increase in rates would reduce projected 12-month net interest income by approximately 0.94% and reduce net portfolio value by approximately 17.60%; a 200-basis-point decrease would reduce projected net interest income by approximately 2.83% and increase net portfolio value by approximately 10.79%.
Guidance, outlook, management commentary and unusual items
The filing does not provide formal earnings or financial guidance. Management indicated that liquidity and capital remained strong, while noting continued competition for deposits, rising funding costs and exposure to changing interest rates. The company’s forward-looking risks include economic conditions, inflation, monetary policy, deposit pricing, regulatory changes, credit quality, real estate values, acquisition integration and the availability and cost of liquidity.
- Between April 1 and May 5, 2023, the company sold approximately $245.0 million of available-for-sale securities at a pre-tax loss of approximately $9.5 million and used the proceeds to repay short-term borrowings. This subsequent event was not reflected in the March 31 balance sheet.
- The company identified industry-wide depositor concerns following the failures of Silicon Valley Bank and Signature Bank as an additional risk. Large deposit outflows could adversely affect liquidity, results and the viability of the bank notwithstanding reported liquidity resources.
- The company expects potential increases in FDIC insurance premiums or a special assessment related to the resolution of failed banks; the amount and timing were not clear in the filing.
- The Freehold Bank merger into Columbia Bank is scheduled to become effective November 6, 2023.
- There were no modifications to loans involving borrowers experiencing financial difficulty during 1Q23, no material legal proceedings identified by management, and no material changes to previously disclosed risk factors other than banking-sector liquidity and FDIC assessment risks.
Important facts for investors to verify
- Assess the sustainability of net interest margin as deposit costs and wholesale borrowing costs continue to reprice.
- Reconcile the post-quarter-end $9.5 million securities-sale loss and the associated reduction in short-term borrowings in subsequent filings.
- Monitor deposit trends, uninsured deposit balances, wholesale funding reliance and available borrowing capacity.
- Review the fair value and duration sensitivity of securities portfolios, including the substantial unrealized losses.
- Evaluate multifamily and commercial real estate concentration, delinquency trends, collateral values and future CECL provisions.
- Confirm the financial and operational effects of the planned Freehold Bank merger and any future FDIC assessments or regulatory capital changes.