umbia Financial(CLBK) - 2019 Q4 - Annual Report

Part I Business Columbia Financial, Inc. operates as the holding company for Columbia Bank, a federally chartered savings bank providing traditional financial services and actively pursuing growth through strategic acquisitions - Columbia Financial, Inc. is the holding company for Columbia Bank, a federally chartered savings bank serving businesses and consumers in its market areas[13][14] - On November 1, 2019, the Company completed its acquisition of Stewardship Financial Corporation and its subsidiary, Atlantic Stewardship Bank[18] - On December 2, 2019, the Company entered into an agreement to acquire RSB Bancorp, MHC, and its subsidiaries, with the transaction expected to close in the second quarter of 2020[19][21] - The company operates 64 full-service banking offices across ten counties in New Jersey, considering its market area to be the State of New Jersey and the suburbs surrounding New York City and Philadelphia[24][25] Lending Activities The company's diverse lending activities focus on commercial loans, with multifamily and commercial real estate loans comprising the largest portfolio segment Loan Portfolio Composition as of December 31, 2019 | Loan Category | Amount (in billions) | Percentage of Total Portfolio | | :--- | :--- | :--- | | Multifamily and Commercial Real Estate | $2.9 | 47.3% | | One-to-Four Family Residential | $2.1 | 33.7% | | Home Equity Loans and Advances | $0.388 | 6.3% | | Construction Loans | $0.283 | - | | Other Consumer Loans | $0.002 | - | - The company intends to continue emphasizing commercial lending, having hired additional lenders to expand its commercial real estate and commercial and industrial lending efforts[31] - The largest single lending relationship exposure was $107.5 million, well below the regulatory limit of $126.7 million for loans to one borrower[67] Securities Activities The securities portfolio primarily comprises U.S. Government and agency obligations, structured to mitigate credit risk with a high concentration in government-backed securities - The securities portfolio is primarily composed of U.S. Government and agency obligations, mortgage-backed securities, and corporate debt, classified as either held-to-maturity or available-for-sale[71] - To mitigate credit risk, approximately 94.3% of the total securities portfolio consisted of direct government obligations or government-sponsored enterprise obligations as of December 31, 2019[75] - At December 31, 2019, mortgage-backed securities and CMOs issued by Freddie Mac, Fannie Mae, and Ginnie Mae comprised 89.2% of the available-for-sale portfolio and 93.0% of the held-to-maturity portfolio[72][73] Deposit Activities and Other Sources of Funds The company's primary funding sources are diverse deposits from various customer segments and supplemental borrowings from the FHLB and Federal Reserve - Primary sources of funds are deposits, borrowings, and loan/securities repayments[77] - Deposit customers are categorized into retail, business, and municipal sectors, with various products offered including checking, savings, and certificates of deposit[78][79] - The company utilizes advances from the FHLB as a key source of supplemental funding and has access to the Federal Reserve Bank's discount window[81] Regulation and Supervision Columbia Bank is primarily regulated by the OCC and FDIC, adhering to federal regulations including capital requirements, QTL, and CRA, and was 'well capitalized' in 2019 - The Bank is primarily regulated by the Office of the Comptroller of the Currency (OCC), with secondary oversight from the FDIC. The holding company is supervised by the Federal Reserve Board[82][84] - The Bank must meet several minimum capital standards, including ratios for common equity Tier 1, Tier 1, and Total capital to risk-weighted assets. As of December 31, 2019, the Bank exceeded all applicable requirements and was considered 'well capitalized'[90][96][100] - The Bank must satisfy the Qualified Thrift Lender (QTL) test, requiring at least 65% of its "portfolio assets" to be in "qualified thrift investments," which it met as of December 31, 2019[101][102] - The Bank received a "satisfactory" Community Reinvestment Act (CRA) rating in its most recent federal examination[110] Risk Factors The company faces significant risks from its concentrated commercial real estate loan portfolio, acquisition strategy, geographic concentration, interest rate fluctuations, and new accounting standards - The company's multifamily and commercial real estate loan portfolio totaled $2.9 billion, or 47.3% of the total loan portfolio, exposing it to increased lending risks compared to residential mortgages[158] - The company's non-owner-occupied commercial real estate loans represented 319% of the Bank's total risk-based capital, exceeding the 300% threshold in regulatory guidance, which could lead to increased supervisory scrutiny[160] - The geographic concentration of the loan portfolio in New Jersey and the metropolitan New York and Philadelphia areas makes the company vulnerable to local economic downturns[173][174] - The company faces risks from its M&A strategy, including integration challenges and potential dilution of tangible book value, as evidenced by the 2019 acquisition of Stewardship and the pending acquisition of Roselle Bank[177] - The company is exposed to significant interest rate risk due to a high percentage of fixed-rate loans and certificates of deposit on its balance sheet[179] - The upcoming transition from LIBOR to an alternative reference rate like SOFR creates uncertainty and could adversely affect the value of LIBOR-based instruments and lead to disputes[203] - The implementation of the Current Expected Credit Loss (CECL) accounting standard, effective January 1, 2020, is expected to increase the allowance for loan losses by no more than 10% and may introduce greater volatility[205][291] Properties The company operates through a main office and 64 branch offices in New Jersey, with a mix of owned and leased properties - The company operates a network of 64 branch offices in New Jersey[207] - The company owns 28 of its properties and leases the remaining 36[207] Legal Proceedings The company is involved in routine legal proceedings that management deems immaterial to its financial condition and operations - Management considers all current legal proceedings to be routine and immaterial to the company's financial condition[208] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with no current dividend payments anticipated, while an active stock repurchase program is in place - The company's common stock is listed on the Nasdaq under the symbol "CLBK"[212] - The company has not declared any dividends and does not currently anticipate paying them, partly due to the Federal Reserve's policy of not permitting its mutual holding company (MHC) to waive dividend receipts[213][215] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Shares Repurchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - 31, 2019 | 327,700 | $15.81 | | Nov 1 - 30, 2019 | 44,231 | $16.64 | | Dec 1 - 31, 2019 | 473,800 | $16.98 | | Total | 845,731 | $16.51 | - The Board of Directors authorized a stock repurchase program for up to 4,000,000 shares on June 11, 2019, and expanded it by an additional 3,000,000 shares on December 5, 2019[222][223] Selected Financial Data This section summarizes the company's consolidated financial data, highlighting significant asset and net income growth in 2019, alongside key performance ratios Selected Financial Condition Data (in thousands) | | Dec 31, 2019 ($) | Dec 31, 2018 ($) | | :--- | :--- | :--- | | Total assets | $8,188,694 | $6,691,618 | | Loans receivable, net | $6,135,857 | $4,916,840 | | Deposits | $5,645,842 | $4,413,873 | | Stockholder's equity | $982,517 | $972,060 | Selected Operating Data (in thousands) | | Year Ended Dec 31, 2019 ($) | Year Ended Dec 31, 2018 ($) | | :--- | :--- | :--- | | Net interest income | $172,371 | $164,034 | | Provision for loan losses | $4,224 | $6,677 | | Non-interest income | $31,636 | $21,688 | | Non-interest expense | $128,701 | $145,386 | | Net income | $54,717 | $22,736 | Selected Performance and Capital Ratios | Ratio | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Return on average assets | 0.77% | 0.36% | | Return on average equity | 5.50% | 2.87% | | Net interest margin | 2.58% | 2.74% | | Efficiency ratio | 63.09% | 78.28% | | NPLs to total gross loans | 0.11% | 0.06% | | Columbia Bank Tier 1 capital (to adjusted total assets) | 10.25% | 12.60% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A discusses the company's financial condition and operations, emphasizing strategic growth, asset and income expansion, and detailed risk management Business Strategy The company's business strategy focuses on profitable growth through commercial banking expansion, balance sheet growth, fee income generation, and strategic acquisitions - Expand commercial business lending, which offers shorter terms and variable rates to help manage interest rate risk[249] - Increase fee income by growing the title insurance business, expanding wealth management services, and pursuing acquisitions of other fee-based businesses[252][253] - Expand the franchise through de novo branching and acquisitions of other financial institutions, such as the completed Stewardship acquisition and the pending Roselle Bank acquisition[256] - Enhance technology infrastructure, including a new commercial loan underwriting system (implemented in 2019) and a planned digital mortgage system[262] Comparison of Financial Condition at December 31, 2019 and 2018 Total assets, net loans, and deposits significantly increased in 2019, primarily driven by the Stewardship Financial acquisition, while stockholders' equity saw modest growth - Total assets increased 22.4% to $8.2 billion, largely due to the acquisition of Stewardship Financial[298] Loan Portfolio Growth (2018 vs. 2019) | Loan Category | 2019 (in millions) | 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | One-to-four family | $2,077.1 | $1,830.2 | 13.5% | | Multifamily and commercial | $2,920.0 | $2,142.2 | 36.3% | | Commercial business loans | $483.2 | $333.9 | 44.7% | | Total Gross Loans | $6,169.3 | $4,962.3 | 24.3% | Deposit Growth (2018 vs. 2019) | Deposit Category | 2019 (in millions) | 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Non-interest-bearing demand | $958.4 | $723.8 | 32.4% | | Interest-bearing demand | $1,720.4 | $1,219.4 | 41.1% | | Certificates of deposit | $2,013.1 | $1,700.3 | 18.4% | | Total Deposits | $5,645.8 | $4,413.9 | 27.9% | Results of Operations Net income significantly increased in 2019 due to the absence of a prior-year charitable contribution, alongside growth in net interest and non-interest income Summary of Income Statement Changes (2019 vs. 2018) | Item | 2019 (in millions) | 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Net interest income | $172.4 | $164.0 | 5.1% | | Provision for loan losses | $4.2 | $6.7 | (36.7)% | | Non-interest income | $31.6 | $21.7 | 45.9% | | Non-interest expense | $128.7 | $145.4 | (11.5)% | | Net income | $54.7 | $22.7 | 140.7% | - The decrease in non-interest expense was primarily due to a one-time $34.8 million charitable contribution to the Columbia Bank Foundation in 2018. Excluding this, non-interest expense increased by $18.1 million in 2019[343][353] - The increase in non-interest income was largely driven by a $4.1 million increase in income from swap transactions and a $2.5 million increase in gains on the sale of securities[342][351] - The effective tax rate for 2019 was 23.0%, down from 32.5% in 2018. The 2018 rate was higher due to the net loss impact from the large charitable contribution[344][355] Risk Management The company's risk management framework addresses credit, interest rate, and liquidity risks through conservative practices, monitoring, and diverse funding sources Non-Performing Assets (in thousands) | | Dec 31, 2019 ($) | Dec 31, 2018 ($) | | :--- | :--- | :--- | | Non-accrual loans | $6,687 | $2,789 | | Real estate owned | $0 | $92 | | Total non-performing assets | $6,687 | $2,881 | | NPA to total assets | 0.08% | 0.04% | Allowance for Loan Losses Activity (Year Ended Dec 31, 2019, in thousands) | | Amount ($) | | :--- | :--- | | Beginning Balance (Jan 1, 2019) | $62,342 | | Provision for loan losses | $4,224 | | Charge-offs | ($5,353) | | Recoveries | $496 | | Ending Balance (Dec 31, 2019) | $61,709 | - The allowance for loan losses as a percentage of total loans decreased from 1.26% in 2018 to 1.00% in 2019, largely due to purchase accounting standards related to the Stewardship acquisition[426] Interest Rate Sensitivity Analysis (as of Dec 31, 2019) | Rate Change (bps) | Change in Net Interest Income (12 months) | Change in Net Portfolio Value (NPV) | | :--- | :--- | :--- | | +200 | +0.43% | (13.60)% | | +100 | +0.43% | (5.40)% | | -100 | (1.01)% | +1.90% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and KPMG's unqualified opinion, highlighting critical audit matters related to loan loss allowance and acquired loan fair value - Includes the Report of Independent Registered Public Accounting Firm (KPMG LLP), which provides an unqualified opinion on the consolidated financial statements and internal control over financial reporting[509][510] - KPMG identified two critical audit matters: the assessment of the allowance for loan losses for loans collectively evaluated for impairment, and the assessment of the fair value measurement of loans acquired in the Stewardship Financial Corporation acquisition[514][518] - The section includes the full set of consolidated financial statements and accompanying notes, as well as condensed financial statements for the parent company, Columbia Financial, Inc[473] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2019[475] - There were no material changes in the Company's internal control over financial reporting during the fourth quarter of 2019[476] - Management assessed internal control over financial reporting using the COSO 2013 framework and concluded it was effective as of December 31, 2019[481] Part III Directors, Executive Officers and Corporate Governance This section incorporates by reference information on directors, executive officers, corporate governance, and the Code of Ethics from the 2020 Proxy Statement - Information regarding directors, corporate governance, and the code of ethics is incorporated by reference from the Company's 2020 Proxy Statement[485][488][490] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2020 Proxy Statement - Details on executive compensation are incorporated by reference from the Company's 2020 Proxy Statement[491] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the company's 2020 Proxy Statement - Information on security ownership is incorporated by reference from the Company's 2020 Proxy Statement[492] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's 2020 Proxy Statement - Details on related party transactions and director independence are incorporated by reference from the Company's 2020 Proxy Statement[493][494] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2020 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the Company's 2020 Proxy Statement[495] Part IV Exhibits, Financial Statement Schedules This section lists exhibits filed with the Form 10-K, including corporate governance documents, employment agreements, compensation plans, and CEO/CFO certifications - Lists all exhibits filed with the report, including corporate governance documents, employment agreements, and compensation plans[502][504] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and Section 1350 are filed as exhibits[506]