Columbia Financial, Inc. annual report, FY2021

Columbia Financial, Inc. — FY2021 Form 10-K Summary

Business context and reporting period

Columbia Financial, Inc. is the holding company for Columbia Bank and Freehold Bank, community-oriented federally chartered savings banks serving New Jersey and surrounding markets. The filing covers the fiscal year ended December 31, 2021; it is an annual report rather than a standalone fourth-quarter filing.

At year-end, Columbia Bank operated 62 full-service offices and Freehold Bank operated two offices. The Company provides commercial and residential lending, deposits, title insurance and related financial services. Its loan strategy emphasizes multifamily and commercial real estate, commercial business lending and residential mortgages.

Freehold Bank acquisition completed December 1, 2021; the Company issued 2,591,007 shares to Columbia Bank MHC and acquired approximately $316.5 million of assets.
Pending acquisition of RSI Bank was expected to close in the second quarter of 2022, subject to regulatory and other customary approvals.

Financial performance and key metrics

Metric	FY2021	FY2020	Change
Net interest income	$233.1 million	$221.6 million	Up 5.2%
Provision for loan losses	$(10.0) million reversal	$18.4 million provision	$28.4 million favorable change
Non-interest income	$38.8 million	$31.3 million	Up 24.2%
Non-interest expense	$155.7 million	$158.1 million	Down 1.5%
Net income	$92.0 million	$57.6 million	Up 59.8%
Basic and diluted EPS	$0.88	$0.52	Up $0.36
Return on average assets	1.01%	0.66%	Up 35 basis points
Return on average equity	8.98%	5.67%	Up 331 basis points
Net interest margin	2.76%	2.72%	Up 4 basis points

Interest income declined $25.6 million as loan and securities yields fell, but interest expense declined $37.1 million because of lower deposit pricing and reduced borrowings. The Company recognized a $7.7 million gain on the sale of $237.0 million of SBA PPP loans and a $2.9 million loss on early debt extinguishment.

Total assets increased 4.8% to $9.2 billion, including $6.3 billion of gross loans and $2.1 billion of securities. Total deposits increased 11.7% to $7.6 billion, while borrowings declined 52.8% to $377.3 million. Stockholders’ equity increased 6.7% to $1.1 billion.

Cash and cash equivalents: $71.0 million, down from $423.0 million.
Available-for-sale securities: $1.7 billion; held-to-maturity securities: $429.7 million.
Core deposits totaled approximately $5.8 billion.
Uninsured deposits totaled $300.3 million.
FHLB advances totaled $340.5 million; the Company also had a $29.8 million unsecured term note due December 2024.
The Company had a $30.0 million unsecured revolving credit facility that was undrawn at year-end.
Allowance for loan losses was $62.7 million, or 0.99% of gross loans, versus $74.7 million, or 1.21%, in 2020.
Net charge-offs were $2.0 million, or 0.03% of average loans, versus $5.5 million, or 0.09%, in 2020.
Non-performing assets declined to $3.9 million, or 0.04% of assets, from $8.2 million, or 0.09%.
Operating cash flow was $98.7 million; investing activities used $443.6 million and financing activities used $7.1 million.

Material changes versus the prior comparable period

Loan composition shifted toward real estate lending. Multifamily and commercial real estate loans increased 14.0% to $3.2 billion, or 50.7% of gross loans; one-to-four-family loans increased 7.8% to $2.1 billion.
Commercial business loans declined 39.9% to $452.2 million, primarily due to the sale and forgiveness of PPP loans. Remaining PPP loans totaled $44.9 million.
Construction loans declined 10.2% to $295.0 million, while home equity loans and advances declined 13.9% to $276.6 million.
Deposits grew principally through non-interest-bearing and interest-bearing demand accounts; certificates of deposit declined 9.2%.
The Company prepaid $495.5 million of FHLB borrowings using excess liquidity, reducing funding costs but generating debt-extinguishment losses.
Debt securities increased 35.1% to $2.1 billion. Unrealized losses increased as market interest rates rose, but management recorded no other-than-temporary impairment.
The Company repurchased 6.1 million shares for approximately $107.8 million during 2021. A new authorization for up to 5.0 million additional shares remained in place, with 4.8 million shares available at year-end.
No common-stock dividends had been declared, and management did not anticipate paying dividends in the near term.

Guidance, outlook, commentary, risks and unusual items

Management expects to continue growing loans, deposits, securities and branch operations, while gradually shifting the loan mix toward commercial lending and the deposit mix toward commercial and non-interest-bearing accounts. The Company also plans to expand fee-based activities, technology capabilities and selectively pursue acquisitions.

Management identified a generally improving economic environment and lower delinquency and non-accrual levels as factors supporting the reversal of loan-loss provisions. However, the allowance remains judgmental and could require future increases if economic conditions, collateral values or borrower performance deteriorate.

Multifamily and commercial real estate exposure represents a significant concentration and was 236.5% of Columbia Bank’s total risk-based capital. Construction lending also carries elevated risk, including speculative construction exposure.
Interest-rate risk is material because liabilities generally reprice faster than assets and the loan portfolio contains a high proportion of fixed-rate loans. Modeling indicated a 5.56% decline in one-year net interest income under a 100-basis-point rate decrease and a 6.60% decline in net portfolio value under an immediate 200-basis-point rate increase.
COVID-19 loan deferrals declined substantially, but four loans totaling $24.3 million remained on deferral at year-end; two were making partial payments.
CECL became effective January 1, 2022. Management estimated adoption would decrease the allowance for loan losses and reserves for unfunded commitments by approximately 12%, net of tax, and stated that regulatory capital ratios were not expected to be materially affected.
The pending RSI acquisition could push consolidated assets above $10 billion, potentially triggering additional regulatory requirements, CFPB supervision and debit-card interchange-fee restrictions beginning as early as July 1, 2023, subject to transaction timing and applicable rules.
Additional risks include deposit competition, liquidity and deposit-renewal risk, New Jersey and regional real-estate concentration, cybersecurity and technology dependence, LIBOR transition, regulatory changes, climate and disaster risks, and acquisition-integration risk.
The Company disclosed a Delaware shareholder litigation settlement concerning 2019 equity awards. The court approved the settlement and a $1.3 million attorney-fee award; management stated that the matter would not materially affect results.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Freehold Bank, acquired December 1, 2021, was excluded from management’s internal-control assessment under SEC acquisition guidance.

Important facts for investors to verify

Whether the RSI Bank acquisition closed as expected and its effect on assets, capital, earnings, dilution and regulatory costs.
The actual post-adoption CECL allowance, provision expense and retained-earnings impact beginning in 2022.
Trends in multifamily, commercial real estate and speculative construction criticized loans, collateral values, charge-offs and allowance coverage.
Deposit retention and pricing, particularly for municipal deposits, uninsured deposits and certificates of deposit maturing within one year.
Net interest margin performance as interest rates rise and fixed-rate assets reprice more slowly than deposits and borrowings.
Progress in integrating Freehold Bank and the effect of acquisitions and technology investments on operating expenses.
Execution of the authorized share repurchase program and the Company’s continuing decision not to pay common-stock dividends.