Columbia Financial, Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Columbia Financial, Inc., the majority-owned subsidiary of Columbia Bank, MHC, reported unaudited consolidated results for the three and nine months ended September 30, 2019. The Company operates primarily through Columbia Bank, with a loan portfolio concentrated in residential, multifamily and commercial real estate, construction, commercial business and consumer lending.
The filing was dated November 12, 2019. On November 1, 2019, after the reporting period, the Company completed its acquisition of Stewardship Financial Corporation and merged Atlantic Stewardship Bank into Columbia Bank. The reported September 30 financial statements do not include the acquisition's operating effects.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net income | $14.2 million | $10.8 million | $41.2 million | $7.9 million |
| EPS, basic and diluted | $0.13 | $0.10 | $0.37 | $0.07 |
| Net interest income | $41.7 million | $40.6 million | $124.9 million | $120.7 million |
| Provision for loan losses | $1.2 million | $1.5 million | $1.7 million | $5.9 million |
| Non-interest income | $10.1 million | $5.3 million | $22.9 million | $15.3 million |
| Non-interest expense | $31.1 million | $26.6 million | $92.5 million | $114.4 million |
| Net interest margin | 2.52% | 2.65% | 2.58% | 2.73% |
- Q3 net income increased 31.3%; nine-month net income increased $33.3 million, substantially reflecting the absence of the $34.8 million Columbia Bank Foundation contribution recorded in 2018.
- Q3 income before tax was $19.6 million and the effective tax rate was 27.5%, compared with 39.1% in the prior-year quarter. The nine-month effective tax rate was 23.3%, compared with 49.8% in 2018.
- Interest income grew, but deposit and borrowing costs rose faster, reducing the net interest margin by 13 basis points in Q3 and 15 basis points for the nine-month period.
Financial condition, liquidity and capital
| Balance-sheet metric | September 30, 2019 | December 31, 2018 | Change |
|---|---|---|---|
| Total assets | $7.07 billion | $6.69 billion | +5.7% |
| Net loans receivable | $5.12 billion | $4.92 billion | +$206.6 million |
| Total deposits | $4.78 billion | $4.41 billion | +8.4% |
| Borrowings | $1.13 billion | $1.19 billion | -5.1% |
| Cash and cash equivalents | $58.0 million | $42.2 million | +$15.8 million |
| Stockholders’ equity | $991.8 million | $972.1 million | +2.0% |
- Loans grew primarily through multifamily and commercial real estate loans, which increased $174.8 million, and commercial business loans, which increased $41.5 million.
- Deposits increased $369.4 million, supported by growth in high-yield checking, commercial demand accounts and certificates of deposit. Certificates of deposit of $100,000 or more totaled approximately $1.0 billion.
- Nine-month operating cash flow was $29.8 million, compared with $46.6 million in 2018. Investing activities used $283.9 million, largely reflecting loan growth and securities purchases, while financing activities provided $269.8 million, primarily from deposit growth and borrowings.
- The Company repurchased 2.742 million shares for $42.1 million through September 30, 2019, including 2.478 million shares during Q3. The authorization covered up to 4.0 million shares.
- The allowance for loan losses was $62.6 million, or 1.21% of gross loans, compared with 1.26% at year-end 2018. Non-accrual loans increased to $4.3 million from $2.8 million, but remained 0.08% of gross loans. There were no loans 90 days or more past due and still accruing interest, and no real estate owned at quarter-end.
- The Company and Bank exceeded applicable regulatory capital requirements. At September 30, 2019, the Bank's total risk-based capital ratio was 18.00%, common equity tier 1 ratio was 16.75% and leverage ratio was 12.21%; the Bank was considered well capitalized.
Material changes versus prior comparable periods
- Profitability improved significantly, driven by higher net interest income, substantially lower loan-loss provision, increased fee and securities-related income, and a lower effective tax rate.
- Non-interest income increased 91.2% in Q3 and 50.1% for nine months. Q3 included $1.3 million of securities gains, $382,000 of loan-sale gains, higher customer swap-related fees and a $461,000 bank-owned life insurance death benefit.
- Net interest margin compressed because funding costs increased faster than asset yields. The average cost of interest-bearing liabilities increased 30 basis points in Q3 and 49 basis points for nine months.
- Reported nine-month non-interest expense declined 19.2% because 2018 included the $34.8 million foundation contribution. Excluding that item, 2019 non-interest expense increased 16.2%, reflecting compensation, professional fees, software costs, stock-based compensation and merger-related expenses.
- The Company adopted ASU 2016-01, resulting in a $548,000 after-tax reclassification from accumulated other comprehensive income to retained earnings. Other 2019 accounting adoptions did not materially affect the financial statements.
Outlook, risks, contingencies and unusual items
- No formal earnings or financial guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year results.
- The Stewardship acquisition closed after quarter-end for $15.75 in cash per Stewardship share. Integration, transaction costs and the effects of the combined organization are not reflected in the September 30 results.
- Management identifies risks from economic conditions, real estate values, unemployment, vacancy rates, interest rates, competitive pricing, regulatory changes, credit quality, liquidity and acquisition integration.
- Interest-rate sensitivity modeling indicated that a 200-basis-point increase could increase projected 12-month net interest income by 1.53% but reduce net portfolio value by 12.34%; a 200-basis-point decrease could reduce projected net interest income by 4.67% and net portfolio value by 8.35%. These are model estimates subject to significant assumptions.
- The Company is exposed to uncertainty regarding the discontinuation of LIBOR and the transition to alternative benchmarks such as SOFR, including possible contract, systems and valuation effects.
- Management's most significant accounting estimates concern the allowance for loan losses, deferred tax assets and retirement and post-retirement benefits. Adoption of the current expected credit loss standard was expected in 2020, but the ultimate impact was indeterminable at the filing date.
- Legal proceedings arise in the ordinary course of business; management did not expect them to have a material adverse effect.
Investor verification checklist
- Verify the financial and capital effects of the November 1, 2019 Stewardship acquisition, including purchase accounting, integration costs, deposits, loans and goodwill.
- Monitor deposit pricing, certificate-of-deposit maturities and the effect of higher funding costs on net interest margin.
- Review multifamily and commercial real estate concentration, non-accrual loans, charge-offs and the adequacy of the allowance for loan losses.
- Separate recurring operating income from securities gains, loan-sale gains, customer swap fees and the bank-owned life insurance death benefit.
- Assess the effect of stock repurchases and newly issued restricted stock and options on future share count, compensation expense and tangible capital.
- Confirm the eventual impact of the expected-credit-loss standard, lease accounting and LIBOR transition.
- Review the Company's interest-rate risk assumptions and actual results against the disclosed sensitivity scenarios.