Columbia Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Columbia Financial, Inc., the majority-owned holding company of Columbia Bank, reported unaudited results for the three and six months ended June 30, 2019. The Company operates primarily as a banking institution focused on deposits, residential and commercial real estate lending, commercial business loans, securities, and related financial services.
Financial condition and key metrics
- Total assets increased 4.3% to $6.98 billion from $6.69 billion at December 31, 2018.
- Loans receivable, net increased 2.7% to $5.05 billion; gross loans were $5.10 billion.
- Deposits increased 5.8% to $4.67 billion, led by interest-bearing demand accounts and certificates of deposit.
- Borrowings declined to $1.16 billion from $1.19 billion.
- Cash and cash equivalents increased to $54.4 million from $42.2 million.
- Stockholders’ equity increased 3.7% to $1.01 billion, including $27.0 million of six-month net income and a $3.9 million treasury-stock repurchase.
- Second-quarter net income was $12.0 million, or $0.11 per diluted share, compared with a $14.7 million net loss, or $(0.13) per share, in the prior-year quarter.
- Six-month net income was $27.0 million, or $0.24 per diluted share, compared with a $3.0 million net loss, or $(0.03) per share.
- Second-quarter net interest income was $40.8 million; six-month net interest income was $83.2 million.
- Net interest margin declined to 2.53% in the quarter and 2.61% for the six months, versus 2.76% and 2.78%, respectively, in the comparable 2018 periods.
- Non-interest income increased to $6.8 million in the quarter and $12.8 million for the six months.
- Provision for loan losses declined to $112,000 in the quarter and $548,000 for the six months.
- Allowance for loan losses was $62.4 million, or 1.22% of gross loans, compared with 1.26% at year-end 2018.
- Net cash used in operating activities was $775,000; investing activities used $214.4 million, principally for loan and securities growth; financing activities provided $227.4 million, primarily from deposit growth and borrowings. Cash and cash equivalents increased by $12.2 million.
- At June 30, 2019, the Bank reported strong regulatory capital ratios, including total risk-based capital of 18.36%, common equity tier 1 capital of 17.11%, and tier 1 leverage capital of 12.38%; the Bank exceeded well-capitalized thresholds.
Material changes versus the prior comparable periods
- Profitability improved substantially because the 2018 comparison included a one-time $34.8 million contribution of Company stock to the Columbia Bank Foundation. Excluding that item, 2019 non-interest expense increased because of higher compensation, professional fees, other expenses, and merger-related costs.
- Interest income increased, but higher deposit and borrowing costs largely offset the benefit, causing net interest margin compression. The cost of interest-bearing deposits increased as the Company shifted toward higher-cost certificates of deposit.
- Loans grew primarily in multifamily and commercial real estate, construction, and commercial business lending, while one-to-four family and home equity balances declined.
- Non-interest income benefited from higher loan fees and service charges, securities gains, and gains on loan sales.
- Non-accrual loans increased to $6.7 million, or 0.13% of gross loans, from $2.8 million, or 0.06%, at December 31, 2018. The increase included one construction loan and higher one-to-four family and commercial business non-accrual balances.
- The Company adopted ASU 2016-01, reclassifying $1.9 million of equity securities and moving a $548,000 after-tax unrealized gain from accumulated other comprehensive income to retained earnings. Other 2019 accounting adoptions had no material impact.
Guidance, outlook, commentary, risks, and unusual items
- The Company entered into a definitive agreement to acquire Stewardship Financial Corporation in an all-cash transaction at $15.75 per Stewardship share. Stewardship had approximately $964.3 million of assets, $748.1 million of loans, $781.9 million of deposits, and 12 branches at June 30, 2019.
- The acquisition remained subject to shareholder and regulatory approvals and other customary closing conditions. Merger-related expenses were $462,000 in the first six months.
- Management identified interest-rate risk, deposit pricing pressure, credit quality, real estate values, unemployment, economic conditions, regulatory changes, acquisition integration, and liquidity costs as key risks. No specific earnings or revenue guidance was provided.
- Interest-rate modeling indicated that a 200-basis-point rate increase could raise one-year net interest income by approximately 1.46% but reduce modeled net portfolio value by 12.48%; a 200-basis-point decline could reduce net interest income by 4.28%.
- The Company was evaluating the expected-credit-loss standard, ASU 2016-13, effective for the Company in 2020. Management stated that the eventual impact was indeterminable and would depend on portfolio composition, credit quality, and economic conditions.
- The Company authorized repurchases of up to 4.0 million shares. It repurchased 263,900 shares during the quarter at an average price of $14.65, leaving 3,472,200 shares authorized for future repurchase at June 30, 2019.
- Management stated that legal proceedings arising in the ordinary course were not expected to have a material adverse effect, that risk factors had not materially changed from the 2018 Form 10-K, and that disclosure controls were effective.
Important facts for investors to verify
- Expected closing date, regulatory approvals, purchase accounting, financing, and integration costs for the Stewardship acquisition.
- Whether deposit repricing and increased certificate-of-deposit funding continue to pressure net interest margin.
- Trends in non-accrual loans, construction exposure, commercial real estate credit quality, charge-offs, and the adequacy of the allowance.
- The estimated capital and retained-earnings impact of adopting the expected-credit-loss standard.
- Liquidity availability, borrowing maturities, pledged securities, and the ability to fund continued loan growth.
- Progress and remaining authorization under the stock repurchase program.
- The sustainability of reported earnings after excluding the unusual 2018 charitable contribution and considering 2019 merger-related and other public-company expenses.