Columbia Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Columbia Financial, Inc. is the majority-owned subsidiary of Columbia Bank, a New Jersey-based savings bank. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods and to December 31, 2020 for balance-sheet data.
The company entered into an agreement in June 2021 to acquire Freehold Bank. Subject to regulatory approvals and other customary conditions, the transaction was expected to close in the fourth quarter of 2021. No material subsequent events through August 9, 2021 were identified.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Net interest income | $58.1 million | $114.8 million |
| Non-interest income | $14.4 million | $23.0 million |
| Non-interest expense | $37.6 million | $75.3 million |
| Income before taxes | $36.6 million | $65.5 million |
| Net income | $26.7 million | $47.7 million |
| Basic and diluted EPS | $0.26 | $0.45 |
| Net interest margin | 2.77% | 2.79% |
| Effective tax rate | 27.1% | 27.2% |
- Net interest income increased 4.0% in the quarter and 7.7% year to date, primarily because deposit and borrowing costs declined faster than asset yields.
- The company recorded a $1.8 million reversal of provision for loan losses in the quarter and a $3.0 million reversal year to date, compared with provisions of $5.7 million and $15.3 million, respectively, in 2020.
- Gain on sale of loans was $8.5 million in the quarter and $10.7 million year to date, including a $7.7 million gain from the sale of $237.0 million of SBA PPP loans.
- Total assets were $9.1 billion at June 30, 2021, up 3.1% from December 31, 2020. Securities increased substantially, while net loans declined.
- Debt securities available for sale totaled $1.6 billion and held-to-maturity securities totaled $402.1 million. Loans receivable, net, totaled $5.9 billion.
- Deposits were $7.1 billion, up 4.4% from year-end. Borrowings were $749.7 million, down 6.2%, primarily due to repayment of FHLB borrowings.
- Cash and cash equivalents were $387.2 million, compared with $423.0 million at December 31, 2020.
- Stockholders’ equity was $1.03 billion. The company repurchased 3.47 million shares for approximately $58.5 million during the first six months.
- Net cash provided by operating activities was $72.3 million. Investing activities used $303.3 million, principally for purchases of debt securities, while financing activities provided $195.3 million. Cash and cash equivalents decreased $35.7 million during the period.
Material changes versus prior comparable periods
- Quarterly net income increased 76.8% to $26.7 million from $15.1 million; year-to-date net income increased 118.3% to $47.7 million from $21.9 million.
- Quarterly non-interest income more than doubled to $14.4 million from $7.0 million, and six-month non-interest income increased 71.6% to $23.0 million from $13.4 million. The primary driver was higher loan-sale gains, especially PPP loan sales.
- Interest expense fell 50.3% in the quarter and 52.6% year to date, reflecting lower deposit pricing, lower borrowing costs and lower borrowing balances.
- Interest income declined 10.2% in the quarter and 9.8% year to date as yields on loans, securities and other interest-earning assets decreased in the low-rate environment.
- The reported quarterly net interest margin increased four basis points to 2.77%; the six-month margin increased ten basis points to 2.79%. Excluding PPP deferred-fee acceleration, management reported margins of 2.66% for the quarter and 2.64% year to date.
- Net loans declined 2.6% from year-end, primarily because of PPP loan sales and forgiveness, lower commercial business loans, and reductions in residential, construction and home-equity lending. Multifamily and commercial real estate loans increased $297.1 million.
- Non-performing loans declined to $4.3 million, or 0.07% of gross loans, from $8.2 million, or 0.13%, at December 31, 2020. The allowance for loan losses declined to $69.9 million, or 1.17% of loans, from $74.7 million, or 1.21%.
- Other comprehensive income was $26.4 million year to date, compared with $15.5 million in 2020, largely reflecting changes in the funded status of retirement obligations and derivatives.
Guidance, outlook, risks and unusual items
- The company expected to adopt the current expected credit loss methodology on January 1, 2022. Based on its June 30 analysis, management estimated that adoption would reduce the allowance for loan losses and reserves for unfunded commitments by approximately 15% to 25%; the filing states that the effect on regulatory capital ratios was not expected to be significant.
- COVID-19-related modifications that had not resumed full payments totaled $63.8 million at June 30, 2021, down from $85.1 million at December 31, 2020, and $33.3 million at July 22, 2021. The company continued to monitor borrowers, economic conditions and its COVID-19 qualitative reserve factor.
- Interest-rate risk modeling indicated that a 200-basis-point rate increase would increase one-year net interest income by approximately 1.27%, while a 100-basis-point decrease would reduce it by approximately 6.13%. Estimated net portfolio value would decline 8.93% under an immediate and sustained 200-basis-point increase and 6.29% under a 100-basis-point decrease.
- The company and bank exceeded applicable regulatory capital requirements. At June 30, 2021, the company reported total capital and common equity tier 1 ratios of 17.87% and 16.57%, respectively; the bank reported 16.41% and 15.23%.
- Unusual or non-recurring items included the $7.7 million PPP loan-sale gain, a $742,000 loss on early extinguishment of debt, $314,000 of branch-closure losses, $75,000 of Freehold acquisition expenses, and a $1.4 million year-to-date decrease in the fair value of equity securities.
- Key risks include credit losses, real estate values, interest-rate movements, deposit pricing and liquidity, regulatory changes, COVID-19 effects, execution and integration of acquisitions, and the ability to obtain approvals and close the Freehold transaction.
- Management stated that legal proceedings arising in the ordinary course were not expected to have a material adverse effect, and that risk factors had not materially changed from the 2020 Form 10-K.
Most important facts for investors to verify
- Whether the Freehold Bank acquisition received all required approvals and closed as anticipated in the fourth quarter of 2021.
- How much 2021 earnings depended on PPP loan sales, deferred-fee acceleration and other potentially non-recurring items.
- The effect of CECL adoption on the allowance, retained earnings, credit metrics and regulatory capital beginning January 1, 2022.
- Whether COVID-19-modified loans continued to return to full payment and whether commercial real estate or other concentrations generate future losses.
- The sustainability of the 2.77% quarterly net interest margin as low asset yields, deposit repricing and interest-rate conditions change.
- The pace and cost of stock repurchases, remaining authorization, and their effect on shares outstanding and tangible capital.
- Current liquidity, securities-market exposure and the company’s ability to fund growth while reducing borrowings and investing heavily in securities.