Business Context and Reporting Period
Columbia Financial, Inc., a Delaware-based bank holding company for Columbia Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Results reflect the April 1, 2020 acquisition of Roselle Bank and the ongoing integration of the 2019 Stewardship acquisition. The filing period was materially affected by the COVID-19 pandemic, related loan modifications, government stimulus programs, and lower interest rates.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net interest income | $55.9 million | $40.8 million | $106.6 million | $83.2 million |
| Provision for loan losses | $5.7 million | $0.1 million | $15.3 million | $0.5 million |
| Non-interest income | $7.0 million | $6.8 million | $13.4 million | $12.8 million |
| Non-interest expense | $37.4 million | $31.8 million | $76.0 million | $61.4 million |
| Net income | $15.1 million | $12.0 million | $21.9 million | $27.0 million |
| Basic and diluted EPS | $0.14 | $0.11 | $0.20 | $0.24 |
| Net interest margin | 2.73% | 2.53% | 2.69% | 2.61% |
- Total assets were $9.0 billion at June 30, 2020, up 9.5% from December 31, 2019.
- Gross loans were $6.6 billion, up 7.4% from year-end 2019; net loans were $6.6 billion after a $74.0 million allowance for loan losses.
- Deposits were $6.6 billion, up 16.6% from year-end 2019. Borrowings were $1.1 billion, down 19.7%.
- Cash and cash equivalents were $225.9 million, compared with $75.5 million at December 31, 2019.
- Stockholders’ equity was $1.04 billion. The company’s total capital ratio was 18.22% and common equity tier 1 ratio was 16.67% at June 30, 2020; the bank’s corresponding ratios were 15.58% and 14.33%.
- Net cash provided by operating activities was $3.2 million for the six months, compared with net cash used of $0.8 million in the prior-year period. Net cash used in investing activities was $86.9 million, while financing activities provided $234.1 million. Ending cash increased by $150.3 million.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 25.5%, primarily because net interest income rose 36.8% as the loan and securities portfolios expanded and funding costs declined.
- Six-month net income declined 18.9% because the $14.8 million increase in loan-loss provision and $14.6 million increase in non-interest expense more than offset the $23.3 million increase in net interest income.
- Interest yields declined as a result of the lower-rate environment, but the cost of interest-bearing liabilities declined faster, increasing the net interest margin.
- Non-interest expense increased because of acquired operations, additional employees, occupancy costs, stock-based compensation, merger-related costs, and interest-rate swap activity. Stock-based compensation expense was $2.2 million in Q2 and $4.4 million for the six months.
- The company issued 4,759,048 shares to Columbia Bank MHC in connection with the Roselle acquisition and recorded $23.8 million of goodwill.
- The company repurchased 3.46 million shares for $53.4 million during the six months and completed the authorized repurchase programs on April 23, 2020.
- Commercial business loans increased substantially, including $467.0 million of SBA Paycheck Protection Program loans at June 30, 2020.
Outlook, Risks, Contingencies, and Unusual Items
- COVID-19 was identified as the principal risk. Management expects continued uncertainty regarding borrower repayment capacity, credit losses, collateral values, business activity, employee availability, securities values, and liquidity.
- Through June 30, the company had granted $963.0 million of COVID-19-related loan modification requests. As of July 21, $577.4 million of modified loans had not resumed full payments, equal to 8.72% of June 30 total loans. Of that amount, $248.0 million of commercial loans were making partial payments and $162.0 million had received an additional deferral period.
- Non-accrual loans increased to $13.5 million, or 0.20% of gross loans, from $6.7 million, or 0.11%, at year-end 2019. Net charge-offs for the six months were $3.0 million, including a $2.8 million charge-off of one commercial business loan.
- The allowance for loan losses increased to $74.0 million, or 1.12% of total loans, from $61.7 million, or 1.00%. Management stated that additional reserves may be required as the pandemic’s effects develop.
- The company deferred adoption of CECL under the CARES Act until the earlier of December 31, 2020 or the end of the national emergency. Based on June 30 analyses, management expected CECL adoption to increase the allowance for loan losses and reserves for unfunded commitments by 10% to 20%.
- The voluntary early retirement program had not generated expense through June 30, but management anticipated approximately $3.0 million of additional compensation expense in the third quarter.
- Management planned to temporarily suspend de novo branch expansion and focus on digital capabilities. Four Stewardship branches were closed during the six months, resulting in a $770,000 loss.
- Interest-rate sensitivity modeling indicated that a 200-basis-point rate increase would increase projected one-year net interest income by approximately 2.90%, while a 100-basis-point decrease would reduce it by approximately 3.25%. The modeled net portfolio value would decline 4.69% under a 200-basis-point increase and 3.58% under a 100-basis-point decrease.
- The company stated that legal proceedings arising in the ordinary course were not expected to have a material adverse effect. Management concluded that disclosure controls and procedures were effective as of June 30, 2020.
Important Facts for Investors to Verify
- Whether deferred loan payments resume as scheduled and whether the $577.4 million of modified loans produce higher future delinquencies, charge-offs, or reserve requirements.
- The final impact and timing of CECL adoption, including whether the anticipated 10% to 20% reserve increase is accurate.
- Credit performance of the $467.0 million SBA PPP portfolio and the effect of loan forgiveness and fee recognition on future earnings.
- Operating results and cost savings from the Roselle and Stewardship acquisitions, including branch closures and integration expenses.
- The sustainability of the 2.73% quarterly net interest margin as asset yields and deposit costs reprice in the low-rate environment.
- Future compensation costs associated with the early retirement program and remaining stock-based compensation obligations.
- Liquidity, collateral, and counterparty exposure related to interest-rate swaps, including $27.6 million of derivative liabilities and $49.9 million of posted collateral at June 30, 2020.