Business Context and Reporting Period
Columbia Financial, Inc. and subsidiaries, including Columbia Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The Company is a bank holding company focused primarily on residential, multifamily and commercial real estate lending, commercial business lending, deposits and investment securities. It was an emerging growth company and completed a minority stock offering during the period.
Financial Condition and Key Metrics
| Metric | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
|---|---|---|
| Net interest income | $41.0 million | $80.1 million |
| Provision for loan losses | $2.4 million | $4.4 million |
| Non-interest income | $5.4 million | $9.9 million |
| Non-interest expense | $61.7 million | $87.7 million |
| Net income (loss) | $(14.7) million | $(3.0) million |
| Basic and diluted EPS | $(0.13) | $(0.03) |
| Net interest margin | 2.76% | 2.78% |
At June 30, 2018, total assets were $6.3 billion, up $510.9 million, or 8.9%, from December 31, 2017. Net loans were $4.65 billion, up $248.6 million, while available-for-sale securities were $932.1 million, up $221.5 million. Deposits were $4.29 billion and borrowings were $930.6 million.
Stockholders’ equity was $941.3 million, compared with $472.1 million at year-end 2017. The increase primarily reflected $492.4 million of net proceeds from the minority stock offering. The Company also recorded $45.4 million of unallocated shares purchased for its Employee Stock Ownership Plan.
Cash and cash equivalents totaled $67.2 million at June 30, 2018, compared with $65.5 million at December 31, 2017. Six-month operating cash flow was $29.8 million, investing cash flow was $(513.3) million, and financing cash flow was $485.2 million. The investing outflow principally reflected loan originations and purchases of securities, while financing inflows included the stock offering and changes in borrowings.
The allowance for loan losses was $62.5 million, or 1.33% of total loans, versus $58.2 million, or 1.31%, at year-end. Non-performing loans declined to $3.8 million, or 0.08% of total loans, from $6.5 million, or 0.15%. Non-performing assets were $4.4 million, or 0.07% of total assets.
As of June 30, 2018, the Company exceeded applicable regulatory capital requirements. Total capital to risk-weighted assets was 25.37%, common equity tier 1 capital was 22.94%, and tier 1 capital to adjusted total assets was 16.88%.
Material Changes Versus the Prior Comparable Period
- Second-quarter net interest income increased 15.1% to $41.0 million; six-month net interest income increased 13.7% to $80.1 million.
- Net interest margin declined seven basis points year over year in both the quarter and six-month period, to 2.76% and 2.78%, respectively, as funding costs increased and lower-yielding cash reserves grew.
- The provision for loan losses increased to $2.4 million in the quarter and $4.4 million for the six months, compared with $375 thousand and $751 thousand, respectively, in 2017.
- Net non-interest expense included a $34.8 million contribution of Company common stock to the Columbia Bank Foundation in connection with the minority stock offering. This was the principal reason for the quarterly and year-to-date net losses.
- Compensation and employee benefit expense increased because of the newly established ESOP, strategic hires, merit increases and incentives.
- Non-interest income increased 13.5% in the quarter but declined 5.8% for the six months, partly reflecting differing bank-owned life insurance gains between periods.
- The loan portfolio expanded substantially, led by one-to-four-family, multifamily and commercial, construction and commercial business loans; home equity balances declined.
- Unrealized losses on available-for-sale securities increased accumulated other comprehensive loss by $12.7 million after tax during the six months, primarily reflecting interest-rate-related market value changes. Management stated that the losses were temporary and recorded no other-than-temporary impairment.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects results to remain sensitive to economic conditions, competition, interest rates, regulatory developments, credit performance, liquidity and the cost and availability of funding. Forward-looking statements are subject to these risks and to risks described in the Company’s February 2018 prospectus.
Management identified the allowance for loan losses, securities valuation and impairment, post-retirement benefit valuation and deferred tax asset valuation as critical accounting areas. Future reserves could increase if economic conditions, collateral values, unemployment, vacancies, interest rates or borrower performance deteriorate.
Interest-rate modeling indicated that a 200-basis-point immediate and sustained increase could reduce estimated annual net interest income by 2.7%? The filing’s table reports a 2.4% increase in estimated annual net interest income for a 200-basis-point increase; the separate EVE model projects a 15.9% decline, or $161.2 million, in economic value of equity. A 100-basis-point decline was modeled to reduce estimated annual net interest income by 2.7% and increase EVE by 3.6%. These are model estimates, not forecasts.
The Company completed steps to redeem its outstanding trust preferred securities during the third quarter of 2018, resulting in accelerated amortization of related deferred issuance costs in the second quarter. The Company was evaluating the effect of New Jersey tax-law changes enacted July 1, 2018. No material subsequent events were identified through August 14, 2018.
Management stated that legal proceedings arising in the ordinary course are not expected to materially affect financial condition. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Investor Verification Items
- Verify the recurring earnings impact of the $34.8 million foundation stock contribution and distinguish it from ongoing operating expenses.
- Assess whether loan growth, the higher $62.5 million allowance and the increased provision for loan losses are consistent with future credit quality.
- Monitor net interest margin, deposit pricing, certificate-of-deposit growth and borrowing costs as interest rates change.
- Review the duration, unrealized losses and credit exposure in the securities portfolio, particularly mortgage-backed securities.
- Confirm the effect of the minority stock offering, ESOP share allocation and trust-preferred-securities redemption on future capital, interest expense and per-share results.
- Evaluate the impact of New Jersey tax-law changes and the Company’s implementation of new accounting standards.
- Review the assumptions underlying interest-rate sensitivity and economic-value-of-equity models, recognizing that actual results may differ materially.