Columbia Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Columbia Financial, Inc. is the holding company for Columbia Bank, a savings institution focused on residential, multifamily and commercial real estate, construction, commercial business and consumer lending. This filing covers the quarter ended March 31, 2018, with comparative results for the three and six months ended March 31, 2017. Interim results are unaudited and are not necessarily indicative of full-year performance.
The company completed its minority stock offering on April 19, 2018, after the reporting date. It received gross proceeds of $498.3 million, issued 49,832,345 shares to subscribers and the employee stock ownership plan, and began trading on Nasdaq under the symbol CLBK on April 20, 2018.
Financial condition and key metrics
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 |
|---|---|---|
| Net interest income | $39.1 million | $34.8 million |
| Provision for loan losses | $2.0 million | $0.4 million |
| Non-interest income | $4.5 million | $5.8 million |
| Non-interest expense | $26.0 million | $24.9 million |
| Income before taxes | $15.6 million | $15.3 million |
| Net income | $11.8 million | $10.3 million |
| Net interest margin | 2.80% | 2.86% |
| Effective tax rate | 24.4% | 32.7% |
For the six months ended March 31, 2018, net interest income was $76.0 million, net income was $15.5 million, provision expense was $5.4 million, and net cash provided by operating activities was $12.7 million. Net income was $20.3 million in the comparable 2017 period.
- Total assets were $6.565 billion at March 31, 2018, up 20.9% from $5.429 billion at September 30, 2017.
- Loans, net, were $4.480 billion, up from $4.308 billion; gross loans increased to $4.528 billion.
- Deposits were $5.395 billion, up from $4.123 billion, primarily reflecting subscription funds for the stock offering.
- Borrowings were $589.4 million, down from $733.0 million.
- Cash and cash equivalents were $634.4 million, compared with $101.0 million at September 30, 2017.
- Stockholders’ equity was $473.9 million, compared with $475.9 million, as net income was more than offset by accumulated other comprehensive losses.
- Available-for-sale securities were $852.2 million and held-to-maturity securities were $254.1 million.
Material changes versus the prior comparable period
- Quarterly net income increased $1.5 million, or approximately 14%, primarily because the $4.3 million increase in net interest income and $1.2 million reduction in income tax expense exceeded higher loan-loss provisions, lower non-interest income and higher operating expenses.
- Six-month net income declined $4.8 million, or approximately 24%, because higher loan-loss provisions, tax expense and non-interest expense more than offset the $7.8 million increase in net interest income.
- Quarterly net interest income increased 12.3%, supported by higher average loan and securities balances, while the net interest margin declined six basis points to 2.80%.
- The six-month provision for loan losses increased $5.0 million to $5.4 million, attributed to loan growth and changes in qualitative risk factors.
- Quarterly non-interest income declined 22.1%; the prior-year period included higher bank-owned life insurance gains and a gain on the sale of real estate owned. Six-month non-interest income also declined because prior-year gains on securities, loans and real estate owned did not recur.
- Quarterly non-interest expense increased 4.4%, primarily from compensation, occupancy and advertising costs.
- Accumulated other comprehensive loss increased to $75.4 million from $46.2 million, reflecting unrealized securities losses and pension-related changes. The company early adopted ASU 2018-02 and reclassified $11.7 million of tax effects from accumulated other comprehensive loss to retained earnings.
Asset quality, liquidity, capital and outlook
- The allowance for loan losses was $60.0 million, or 1.32% of total loans, versus $54.6 million, or 1.26%, at September 30, 2017.
- Non-performing loans declined to $3.7 million, or 0.08% of total loans, from $6.4 million, or 0.15%. Non-performing assets declined to $4.7 million, or 0.07% of assets, from $6.8 million, or 0.13%.
- Six-month cash flow was substantially affected by the pending offering: operating activities provided $12.7 million, investing activities used $608.8 million, and financing activities provided $1.130 billion. Ending cash and cash equivalents were $634.4 million.
- At March 31, 2018, the company reported total capital to risk-weighted assets of 15.24%, common equity tier 1 capital of 12.77%, and tier 1 capital to adjusted total assets of 10.00%. Columbia Bank also exceeded minimum and well-capitalized thresholds.
- Interest-rate sensitivity modeling estimated that a 100-basis-point increase in rates would increase annual net interest income by 4.0%, while a 200-basis-point increase would increase it by 7.7%. Economic value of equity was estimated to decline 13.4% under an immediate and sustained 200-basis-point increase. These are model-based estimates and were materially affected by the pending offering and elevated cash balances.
- Management stated that it remained focused on growth, product and service enhancement, customer relationships, asset quality and expense control. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Key risks include economic conditions in the company’s markets, competition and pricing, interest-rate movements, deposit pricing and retention, credit losses, real estate values, regulatory requirements, liquidity costs, securities-market conditions and acquisition or integration risks.
- The allowance for loan losses, securities valuations, post-retirement benefits and deferred tax assets involve significant management judgment and could change materially with economic conditions or regulatory review.
- The company reported $22.1 million of gross unrealized losses on available-for-sale securities and $9.2 million on held-to-maturity securities at March 31, 2018. Management considered these losses temporary and recorded no other-than-temporary impairment.
- Management identified routine legal actions and claims but did not expect them to have a material adverse effect. Risk factors were not materially changed from those in the February 2018 prospectus.
- The company was an emerging growth company and used the extended transition period for certain accounting standards. It was evaluating the effects of the expected-credit-loss, leases, derivatives and other accounting updates.
Investor verification checklist
- Verify the final accounting, share count, ownership structure and use of proceeds following the April 2018 minority stock offering.
- Assess whether loan growth and the higher allowance ratio lead to sustained provision expense or changes in credit quality.
- Monitor the net interest margin as excess offering-related liquidity is invested and deposit costs reprice.
- Review the effect of unrealized securities losses and pension-related accumulated other comprehensive loss on tangible capital and equity.
- Reconcile post-offering liquidity, borrowings and securities balances with the March 31, 2018 balance sheet.
- Evaluate sensitivity to interest-rate increases, deposit competition, real estate valuations and regulatory capital requirements.