Columbia Financial, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Columbia Financial, Inc. is the majority-owned holding company of Columbia Bank, a New Jersey-based community bank. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparative results for the three months ended March 31, 2018 and financial-condition comparisons with December 31, 2018. The company reported 115.9 million common shares outstanding as of May 9, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Comparable / Prior Period |
|---|---|---|
| Net income | $14.9 million | $11.8 million in Q1 2018 |
| Basic and diluted EPS | $0.13 | Not available for Q1 2018 |
| Net interest income | $42.4 million | $39.1 million in Q1 2018 |
| Net interest margin | 2.70% | 2.80% in Q1 2018 |
| Provision for loan losses | $436,000 | $2.0 million in Q1 2018 |
| Non-interest income | $6.0 million | $4.5 million in Q1 2018 |
| Non-interest expense | $29.6 million | $26.0 million in Q1 2018 |
| Effective tax rate | 19.03% | 24.41% in Q1 2018 |
| Total assets | $6.82 billion | $6.69 billion at December 31, 2018 |
| Net loans | $4.95 billion | $4.92 billion at December 31, 2018 |
| Deposits | $4.61 billion | $4.41 billion at December 31, 2018 |
| Borrowings | $1.10 billion | $1.19 billion at December 31, 2018 |
| Stockholders’ equity | $994.5 million | $972.1 million at December 31, 2018 |
Revenue, Profitability, Cash Flow, Debt and Liquidity
- Total interest income increased to $62.9 million from $51.8 million, while interest expense increased to $20.5 million from $12.7 million. The resulting net interest income rose 8.5%.
- Net income increased 26.6% year over year, supported by higher net interest income, lower loan-loss provision, higher non-interest income and a lower effective tax rate.
- The net interest margin declined 10 basis points because the average cost of interest-bearing liabilities increased 60 basis points, outpacing the 29-basis-point increase in the yield on interest-earning assets. The average cost of certificates of deposit increased amid higher rates and a shift toward higher-cost funding.
- Operating cash flow was $17.8 million, compared with $10.1 million in Q1 2018. Investing activities used $97.8 million, primarily for purchases of debt securities and additions to office properties and equipment. Financing activities provided $102.9 million, primarily from a $192.8 million increase in deposits, partly offset by debt repayments.
- Cash and cash equivalents increased to $65.1 million from $42.2 million at year-end. Management stated that a portion of deposit inflows had not yet been deployed into higher-yielding assets.
- Borrowings decreased by $90.5 million, reflecting repayments of long-term and short-term borrowings that exceeded new long-term borrowing proceeds.
- Regulatory capital remained strong. At March 31, 2019, the company reported total capital to risk-weighted assets of 23.58% and Tier 1 capital to adjusted total assets of 15.62%. The bank reported corresponding ratios of 18.66% and 12.19% and exceeded applicable well-capitalized thresholds.
Material Changes Versus Prior Comparable Period
- Net income increased by $3.1 million, or 26.6%.
- Net interest income increased by $3.3 million, or 8.5%, despite margin compression caused by rising funding costs.
- The loan-loss provision declined by $1.6 million, or 78.2%; net charge-offs declined to $7,000 from $226,000.
- Non-interest income increased by $1.5 million, or 32.9%, including higher title insurance fees, bank-owned life insurance income, loan fees and miscellaneous income.
- Non-interest expense increased by $3.5 million, or 13.6%, driven by compensation, employee stock ownership plan costs, advertising, professional fees and technology-related amortization.
- Total assets increased 1.9% from year-end, primarily due to growth in debt securities and loans. Deposits increased 4.4%, while borrowings decreased 7.6%.
- Non-accrual loans increased to $6.8 million, or 0.14% of gross loans, from $2.8 million, or 0.06%, at December 31, 2018. The increase included loans associated with one borrower that were placed on non-accrual status despite not being delinquent.
Outlook, Management Commentary, Risks and Unusual Items
- The filing provides no formal earnings or financial guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Principal risks include economic conditions, competition and pricing, changes in interest rates and monetary policy, regulatory changes, credit quality, acquisitions and integration, securities-market conditions and the availability and cost of liquidity.
- Interest-rate modeling indicated that a parallel 200-basis-point increase could raise projected twelve-month net interest income by 1.54% but reduce net portfolio value by 14.03%. A 200-basis-point decrease could reduce projected net interest income by 5.29%. Management cautions that these simulations depend on assumptions regarding deposit repricing, prepayments and balance-sheet composition.
- Management identifies potential credit risks from economic deterioration, declining real-estate values, unemployment, vacancy rates and higher interest rates. The allowance for loan losses was $62.8 million, or 1.26% of gross loans, unchanged as a percentage from year-end.
- The company adopted ASU 2016-01, recording a $548,000 after-tax reclassification from accumulated other comprehensive income to retained earnings and presenting equity securities separately at fair value through earnings. It also adopted revenue-recognition and pension-cost presentation standards without a material overall effect.
- The company is evaluating the current expected credit loss standard, which becomes effective in 2020. The eventual impact is not determinable and will depend on portfolio composition, credit quality and economic conditions at adoption.
- Temporary unrealized losses on investment securities totaled $15.4 million across available-for-sale and held-to-maturity portfolios. Management reported that the securities were investment grade, that it did not intend to sell them, and that no other-than-temporary impairment charge was recorded.
- Management reported no material subsequent events through May 13, 2019, no material change in risk factors from the 2018 Form 10-K, and no material adverse effect expected from pending legal actions arising in the ordinary course.
Important Facts for Investors to Verify
- Whether deposit growth can continue without further increases in funding costs and additional net-interest-margin pressure.
- The cause and resolution of the increase in non-accrual loans, particularly the loans associated with one borrower.
- The adequacy of the $62.8 million allowance under changing economic conditions and the eventual impact of CECL adoption.
- The sensitivity of net interest income, economic value and capital to future interest-rate movements.
- The sustainability of lower loan-loss provisions, higher non-interest income and the 19.03% effective tax rate.
- The deployment and yield of the increased cash balance and the effect of continued securities purchases on liquidity and interest-rate risk.