Columbia Financial, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Columbia Financial, Inc. is the majority-owned holding company of Columbia Bank and Freehold Bank. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the same periods in 2021 and to December 31, 2021 for financial condition. The company completed its acquisition of RSI Bank on May 1, 2022; Freehold Bank was acquired on December 1, 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total interest income | $79.9 million | $66.1 million | $221.7 million | $201.6 million |
| Net interest income | $69.2 million | $57.4 million | $198.4 million | $172.2 million |
| Net interest margin | 3.01% | 2.67% | 3.00% | 2.75% |
| Net income | $20.9 million | $21.0 million | $64.3 million | $68.7 million |
| Basic EPS | $0.20 | $0.20 | $0.61 | $0.66 |
| Provision for credit losses | $1.5 million | $0.5 million | $4.5 million | $(2.6) million reversal |
| Non-interest income | $8.2 million | $8.9 million | $22.9 million | $31.9 million |
| Non-interest expense | $47.8 million | $37.1 million | $130.3 million | $112.4 million |
| Net cash provided by operating activities | Not presented by quarter | $112.2 million | $67.5 million |
At September 30, 2022, total assets were $10.0 billion, up 8.5% from December 31, 2021. Loans receivable, net, were $7.27 billion, up 15.5%; deposits were $8.06 billion, up 6.5%; and borrowings were $674.0 million, up 78.6%. Cash and cash equivalents were $102.0 million, compared with $71.0 million at year-end 2021.
The allowance for credit losses on loans was $51.9 million, or 0.71% of gross loans. Non-performing loans were $7.0 million, or 0.10% of gross loans. Stockholders’ equity was $1.03 billion, down 4.6% from year-end, primarily because of after-tax unrealized losses on available-for-sale securities and share repurchases.
Cash increased by $31.1 million during the first nine months. Investing activities used $293.9 million, principally because of a $640.0 million net increase in loans, while financing activities provided $212.8 million, including $255.1 million of net short-term borrowings. The company repurchased 3.42 million shares for $71.8 million during the period.
Material changes versus comparable periods
- Q3 net income declined $63,000, or 0.3%, despite a $11.8 million increase in net interest income, because of higher credit-loss provisions, lower non-interest income, and substantially higher operating expenses.
- For the first nine months, net income declined $4.4 million, or 6.5%. Net interest income increased $26.2 million, but non-interest income fell $9.0 million, non-interest expense increased $17.9 million, and credit-loss expense increased $7.1 million versus the prior-year reversal.
- Rising interest rates increased asset yields and initially benefited the net interest margin. The Federal Reserve raised rates multiple times between March and September 2022, while deposit repricing lagged. Borrowing costs increased and deposit costs are expected to remain sensitive to further rate changes.
- Non-interest income was pressured by the absence of the prior-year $7.7 million gain on PPP loan sales, lower loan-sale gains, lower title insurance fees, and lower securities gains.
- Compensation and employee benefits increased $14.9 million year to date, and the company reported 121 more full-time-equivalent employees than at September 30, 2021, primarily due to acquisitions. Q3 merger-related expense was $1.2 million; year-to-date expense was $2.7 million.
- The RSI acquisition added approximately $595.1 million of assets and $520.4 million of liabilities, generated $28.0 million of initial goodwill, and resulted in the issuance of 6.09 million shares to Columbia Bank, MHC. Goodwill related to RSI was $26.0 million at September 30, 2022 after tax-related adjustments.
- The company adopted CECL on January 1, 2022. The adoption increased retained earnings by $6.2 million net of tax, reduced the loan allowance by $16.8 million, established a $7.7 million allowance for unfunded commitments, and established a $490,000 securities allowance.
- Accumulated other comprehensive loss increased to $201.1 million, primarily from $142.6 million of after-tax unrealized losses on available-for-sale securities during the first nine months. These losses were largely attributed to rising interest rates.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that the company remained within its interest-rate-risk policy guidelines. Modeling indicated that a parallel 200-basis-point rate increase would reduce estimated one-year net interest income by approximately 2.91% and reduce net portfolio value by 17.61%; a 200-basis-point decline would reduce estimated net interest income by approximately 3.53% and increase net portfolio value by 8.16%.
- Key risks include higher interest rates, deposit repricing and funding costs, inflation, economic weakness, declining real estate values, rising unemployment, borrower credit deterioration, regulatory changes, liquidity availability, and integration of acquired businesses.
- Management identified the allowance for credit losses, deferred tax asset realizability, and retirement and post-retirement benefit valuations as critical accounting estimates. CECL estimates rely on historical data, current conditions, and economic forecasts covering six quarters with a four-quarter reversion period.
- Non-performing loans increased from $3.9 million at year-end 2021 to $7.0 million at September 30, 2022, although the ratio remained low at 0.10% of gross loans.
- Available-for-sale securities had $187.6 million of gross unrealized losses at September 30, 2022, and held-to-maturity securities had $51.6 million of gross unrealized losses. Management reported that the securities were investment grade and did not identify credit losses on the available-for-sale portfolio at quarter-end.
- Regulatory capital remained above minimum requirements. At September 30, 2022, the company reported total capital to risk-weighted assets of 15.54%, while Columbia Bank reported 13.90% and Freehold Bank reported 22.85%.
- Management stated that no material legal proceedings were expected to adversely affect financial condition, no material risk-factor changes had occurred since the 2021 Form 10-K, and no material subsequent events occurred through November 9, 2022.
Important facts for investors to verify
- Whether deposit costs and borrowing costs accelerate as interest rates rise, narrowing the 3.01% quarterly net interest margin.
- The sustainability of loan growth, particularly in one-to-four-family, multifamily, and commercial real estate lending, and the related CECL reserve coverage.
- Trends in non-performing loans, delinquencies, charge-offs, and criticized or classified loans.
- The magnitude and duration of unrealized securities losses and their potential effect on tangible capital, liquidity, or securities-sale decisions.
- Integration progress and recurring cost impacts from the RSI and Freehold acquisitions, including goodwill and core deposit intangible valuations.
- Future non-interest income after the prior-year PPP loan-sale gain and securities-sale gains have largely rolled off.
- Remaining share-repurchase authorization and the effect of additional repurchases on capital and per-share results.
- The company’s regulatory capital and liquidity position under more adverse interest-rate, deposit outflow, credit-loss, and economic scenarios.