Columbia Financial, Inc. — Form 10-K Summary
Business context and reporting period
Columbia Financial is the holding company for Columbia Bank, a New Jersey-focused community savings bank with 50 full-service offices and additional title-insurance and related subsidiaries. The filing covers the fiscal year ended December 31, 2018. The Company changed its fiscal year-end from September 30 to December 31 in May 2018; the December 31, 2017 annual comparison is unaudited and is not directly comparable to the prior September 30 fiscal-year periods.
On April 19, 2018, the Company completed a minority stock offering, issuing 115.9 million shares in total and generating approximately $492.4 million of proceeds. Columbia Bank MHC retained control.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total assets | $6.692 billion | $5.767 billion | +16.0% |
| Loans receivable, net | $4.917 billion | $4.400 billion | +11.7% |
| Deposits | $4.414 billion | $4.263 billion | +3.5% |
| Borrowings | $1.189 billion | $929.1 million | +28.0% |
| Stockholders’ equity | $972.1 million | $472.1 million | +105.9% |
| Net interest income | $164.0 million | $143.3 million | +14.5% |
| Net income | $22.7 million | $24.8 million | -8.2% |
| Basic and diluted EPS | $0.20 | Not applicable | Newly public company |
Interest income increased 19.6% to $226.3 million, while interest expense increased 35.4% to $62.3 million. The net interest margin declined to 2.74% from 2.82%, and the interest-rate spread declined to 2.45% from 2.62%, reflecting higher funding costs.
Provision for loan losses declined to $6.7 million from $9.8 million. Net charge-offs were $2.5 million versus $3.5 million, and the allowance for loan losses was $62.3 million, or 1.26% of gross loans, versus $58.2 million, or 1.31%.
Non-interest income increased 29.0% to $21.7 million, including gains on securities and loan sales compared with losses in 2017. Non-interest expense increased 37.9% to $145.4 million, primarily because of a $34.8 million contribution to the Columbia Bank Foundation related to the minority offering and higher personnel costs. Excluding unusual items, the core efficiency ratio improved to 59.6% from 62.8%.
Return on average assets was 0.36% versus 0.46%, and return on average equity was 2.87% versus 5.37%. The reported returns were affected by the offering-related charitable contribution and the substantial increase in equity.
Balance sheet, asset quality, cash flow, debt and liquidity
- Loan growth was concentrated in multifamily and commercial real estate loans, which totaled $2.142 billion, or 43.2% of gross loans; one-to-four-family loans totaled $1.830 billion, or 36.9%; construction loans totaled $261.5 million; and commercial business loans increased 20.1% to $333.9 million.
- Total securities increased 36.5% to $1.3 billion, primarily from redeployment of offering proceeds. Approximately 95.3% of the securities portfolio consisted of direct government or government-sponsored enterprise obligations, or investment-grade securities.
- Non-performing assets declined to $2.9 million, or 0.04% of assets, from $7.5 million, or 0.13%. Non-accrual loans declined to $2.8 million from $6.5 million. The Company sold approximately $1.7 million of non-performing residential and home-equity loans during 2018.
- Operating activities provided $56.6 million of cash. Investing activities used $943.1 million, largely because of loan growth and securities purchases. Financing activities provided $863.3 million, including stock-offering proceeds, deposit growth and increased borrowings. Cash and cash equivalents ended at $42.2 million, down from $65.5 million.
- Deposits increased modestly, but core deposits declined by approximately $145.9 million. Certificates of deposit rose to $1.700 billion, and $1.108 billion, or 65.1% of certificates of deposit, matured within one year.
- Borrowings consisted primarily of $1.030 billion of FHLB advances and $159.6 million of overnight FHLB lines. The Company redeemed all $51.5 million of junior subordinated debt in August 2018.
- Management stated that available contingent liquidity from cash, securities, FHLB capacity, Federal Reserve access and correspondent lines exceeded current contingent liquidity needs. Columbia Financial had $153.8 million of parent-only liquid assets.
- At December 31, 2018, Columbia Bank was well capitalized, with total risk-based capital of 19.04%, common equity Tier 1 capital of 17.79% and a leverage ratio of 12.60%.
Material changes versus the prior comparable period
- The minority stock offering materially increased equity and funded growth in loans and securities, but also produced a $34.8 million charitable contribution and higher capital-related reporting complexity.
- Loan mix continued shifting toward commercial lending, particularly multifamily, commercial real estate, construction and commercial business loans, while consumer loans declined 12.2%.
- Funding costs rose as interest rates increased. Average interest-bearing liability costs rose to 1.32% from 1.10%, while average interest-earning asset yields increased to 3.77% from 3.72%.
- Asset quality improved substantially, although commercial business criticized and classified loans increased to $13.4 million and commercial business net charge-offs increased to $2.0 million.
- Unrealized securities losses increased to $27.4 million from $14.3 million, primarily because of interest-rate movements. Management concluded the losses were temporary and recorded no impairment charge.
Outlook, management commentary, risks and unusual items
Management intends to grow loans, deposits and fee-based activities; increase commercial business relationships; continue residential mortgage lending; expand the branch network; invest in technology; and consider acquisitions of banks and fee-based businesses. No specific earnings or financial guidance was provided.
Key risks include concentration in New Jersey and surrounding metropolitan markets; multifamily, commercial real estate and construction exposure; interest-rate and funding-cost pressure; competition for deposits and loans; dependence on municipal deposits; liquidity and deposit-retention risk; cybersecurity and third-party service-provider risk; regulatory and compliance costs; acquisition and integration risk; and potential changes in tax laws and accounting standards.
The Company expects the Current Expected Credit Loss standard, effective January 1, 2020, could increase its allowance for credit losses, although the ultimate impact was not determinable at filing. LIBOR discontinuation after 2021 could also affect certain loans, borrowings and derivatives. The Company reported no material legal proceedings, no material subsequent events through March 29, 2019, and effective disclosure controls.
The Company does not currently anticipate paying common-stock dividends. Stock repurchases were generally restricted during the first year after the offering, and future dividends would be subject to regulatory requirements and potential limitations on Columbia Bank MHC’s ability to waive dividends.
Most important facts for investors to verify
- Reconcile 2018 results with the non-comparable December 31, 2017 period and the prior September 30 fiscal-year reporting periods.
- Assess whether loan growth, particularly in commercial real estate, construction and commercial business lending, is adequately compensated for by pricing and reserves.
- Monitor net interest margin, deposit pricing, certificate-of-deposit renewals, municipal-deposit concentration and reliance on FHLB borrowings.
- Evaluate the sustainability of reported earnings after excluding the $34.8 million offering-related charitable contribution and other unusual items.
- Review the effect of CECL adoption, including any increase in the allowance for credit losses and reduction to retained earnings.
- Track criticized and classified commercial business loans, delinquencies, charge-offs and collateral values despite the very low reported non-performing asset ratio.
- Confirm future dividend policy, regulatory approval requirements and the continuing control of Columbia Bank MHC.
- Review off-balance-sheet exposure, including $195.2 million of loan commitments, $714.6 million of unused lines of credit, $7.0 million of standby letters of credit and $320.0 million of interest-rate swaps.