umbia Financial(CLBK) - 2020 Q4 - Annual Report

Part I Business Columbia Financial is a bank holding company offering diverse financial services, primarily in New Jersey, with recent growth through acquisitions General Overview and Recent Acquisitions The company operates as a community-focused bank, recently expanding through the acquisitions of Stewardship Financial and Roselle Entities - Columbia Financial, Inc is the holding company for Columbia Bank, a federally chartered savings bank founded in 1927, offering traditional financial services to businesses and consumers[20][21] - The company completed the acquisition of Stewardship Financial Corporation on November 1, 2019, for a total consideration of $136.3 million in cash[26] - On April 1, 2020, the company acquired the Roselle Entities, issuing 4,759,048 additional shares of its common stock to its MHC as consideration[27] - Effective October 15, 2020, the Bank began operating as a "covered savings association," which provides rights and privileges similar to a national bank and removes certain lending limits applicable to savings associations[23] Market Area and Competition The company operates 61 branches in New Jersey, a high-income market, facing intense competition from various financial institutions - As of December 31, 2020, the company operated 61 full-service banking offices in twelve New Jersey counties[31] - The market area is characterized by a high median household income of $97,516 in 2020 for the twelve counties served, significantly above the national median of $67,761[33] - The company faces intense competition for both deposits and loans from a wide range of financial institutions, including large national banks, community banks, credit unions, and emerging fintech companies[34][35][36] Lending Activities and Credit Risks The company's $6.1 billion loan portfolio is diversified, with a strategic focus on commercial lending and associated credit risk management Loan Portfolio Composition as of December 31, 2020 | Loan Category | Amount (Billions) | Percentage of Total Loans | | :--- | :--- | :--- | | Multifamily and Commercial Real Estate | $2.8 | 45.7% | | One-to-Four Family Residential | $1.9 | 31.5% | | Commercial Business (incl. PPP) | $0.75 | 12.2% | | Construction | $0.33 | 5.3% | | Home Equity Loans and Advances | $0.32 | 5.2% | - The company originated $344.4 million in Paycheck Protection Program (PPP) loans as of December 31, 2020, as part of the CARES Act[52] - Credit risks vary by loan type: multifamily/commercial loans depend on property cash flow, residential loans are sensitive to interest rate changes and property values, and commercial business loans rely on the success of the borrower's business[63][66][67] - The maximum regulatory lending limit to a single borrower was $138.7 million at year-end 2020, with the largest relationship totaling $115.5 million, which was performing as per its terms[76] Securities and Deposit Activities The securities portfolio is primarily government-backed, while deposits from a diverse customer base serve as the main source of funding - The securities portfolio is primarily composed of mortgage-backed securities and CMOs issued by Freddie Mac, Fannie Mae, and Ginnie Mae, which comprised 91.1% of the available-for-sale portfolio and 98.1% of the held-to-maturity portfolio at December 31, 2020[81][83] - To mitigate credit risk, 93.9% of the total securities portfolio consisted of direct government obligations or government-sponsored enterprise obligations as of December 31, 2020[85] - Deposits are the primary source of funds, attracted from retail, business, and municipal customers through products like checking, savings, money market accounts, and certificates of deposit[86][87][88] - The company supplements its funding with borrowings, primarily advances from the Federal Home Loan Bank (FHLB), for which it must own capital stock and pledge collateral[90] Regulation and Supervision The company and its bank subsidiary are subject to extensive federal regulation and supervision and were considered "well capitalized" - The Bank is primarily supervised by the Office of the Comptroller of the Currency (OCC), while the holding company (Columbia Financial, Inc) and the mutual holding company (MHC) are supervised by the Federal Reserve Board[92][94] - The Bank must adhere to minimum capital standards, including a common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0% It also must maintain a capital conservation buffer of 2.5%[98][99][103] - As of December 31, 2020, the Bank exceeded all applicable capital requirements and met the criteria for being considered "well capitalized"[105][110] - The Bank received a "satisfactory" Community Reinvestment Act (CRA) rating in its most recent federal examination[114] Human Capital Management The company employed 628 people and focused on talent management, DEI initiatives, and employee safety during the COVID-19 pandemic - As of December 31, 2020, the company had 628 total employees (557 full-time, 71 part-time)[141][143] - The voluntary turnover rate was 7.92% and involuntary turnover was 10.91% in 2020, impacted by the pandemic and a voluntary early retirement program that 55 employees accepted[143] - The company is implementing an Environmental Social Governance (ESG) program and has named a Diversity Officer to support its Diversity, Equity, and Inclusion (DEI) strategy[153] - In response to COVID-19, the company took significant steps to protect employee health and safety, including implementing technologies for a remote work environment[160][162] Risk Factors The company faces significant risks from the COVID-19 pandemic, loan portfolio concentrations, competition, and extensive industry regulation - The COVID-19 pandemic poses significant risks, including potential increases in loan delinquencies, a need to increase the allowance for loan losses, and negative impacts from changes in consumer and business spending habits[184][185][187] - A significant portion of the loan portfolio is concentrated in multifamily and commercial real estate ($2.8 billion, or 45.7% of total loans), which exposes the company to greater risks of non-payment compared to residential mortgages[192] - The geographic concentration of the loan portfolio, primarily in New Jersey and the metropolitan New York and Philadelphia areas, makes the company vulnerable to local economic downturns[202][203] - The company is subject to significant operational and technological risks, including systems failures, cybersecurity breaches, and the need to keep pace with technological change to remain competitive[220][223][225] - Intense government regulation, including changes from the Dodd-Frank Act and the upcoming transition from LIBOR, could materially impact profitability and increase compliance costs[235][237][238] Properties The company operates from a main office and 61 branch offices across New Jersey, with a mix of owned and leased properties - The company operates through a main office and 61 branch offices in New Jersey[243] - The company owns 28 of its properties and leases the remaining 33[243] Legal Proceedings The company is involved in routine legal proceedings that are considered immaterial to its financial condition - Management considers all current legal proceedings to be routine and immaterial to the company's financial condition[244] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq (CLBK), with no current dividend payments and an active share repurchase program - The company's common stock is listed on the Nasdaq Global Select Market under the symbol "CLBK"[247] - The company has not declared any dividends and does not currently anticipate paying them, citing regulatory limitations on its mutual holding company's ability to waive dividend receipts[248][250] Stock Repurchases for Quarter Ended Dec 31, 2020 | Period | Total Shares Purchased | Average Price Paid | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | Oct 2020 | 1,516,966 | $12.36 | 1,516,710 | | Nov 2020 | 973,728 | $12.36 | 973,600 | | Dec 2020 | 1,017,723 | $15.15 | 1,015,700 | | Total | 3,508,417 | $13.66 | 3,506,010 | - On September 10, 2020, the Board authorized a new stock repurchase program for up to 5,000,000 shares[258] Selected Financial Data The company's financial data shows asset growth to $8.8 billion and net income of $57.6 million in 2020, with non-GAAP reconciliations provided Selected Financial Condition Data (in thousands) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total assets | $8,798,536 | $8,188,694 | $6,691,618 | | Loans receivable, net | $6,107,094 | $6,135,857 | $4,916,840 | | Deposits | $6,778,624 | $5,645,842 | $4,413,873 | | Stockholder's equity | $1,011,287 | $982,517 | $972,060 | Selected Operating Data (in thousands) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net interest income | $221,573 | $172,371 | $164,034 | | Provision for loan losses | $18,447 | $4,224 | $6,677 | | Net income | $57,603 | $54,717 | $22,736 | Key Performance Ratios | Ratio | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Return on average assets | 0.66% | 0.77% | 0.36% | | Return on average equity | 5.67% | 5.50% | 2.87% | | Net interest margin | 2.72% | 2.58% | 2.74% | | Basic and diluted EPS | $0.52 | $0.49 | $0.20 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income rose to $57.6 million in 2020, driven by higher net interest income from acquisitions, despite a significant increase in loan loss provisions Business Strategy The company's strategy centers on profitable growth through organic expansion, commercial relationship building, and strategic acquisitions - Increase earnings through organic growth of loans and securities, funded by deposits and borrowings, while shifting the loan mix toward commercial loans and the deposit mix toward commercial deposits[279][280] - Expand commercial business relationships, focusing on commercial business lending to manage interest rate risk and offer a full range of products[282] - Grow fee income by expanding existing title insurance and wealth management services, increasing loan servicing activities, and potentially acquiring other fee-based businesses[285][286] - Expand the franchise through de novo branching, branch acquisitions, and the acquisition of other financial institutions, as demonstrated by the recent acquisitions of Stewardship Financial and the Roselle Entities[287][289] - Manage capital through asset growth and tools like stock repurchase programs The company has repurchased an aggregate of 11,130,942 shares as of December 31, 2020[300] Comparison of Financial Condition at December 31, 2020 and 2019 Total assets grew 7.4% to $8.8 billion, driven by acquisitions and deposit growth, while total loans remained stable Financial Condition Comparison (in millions) | Account | Dec 31, 2020 | Dec 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $8,798.5 | $8,188.7 | 7.4% | | Total Gross Loans | $6,162.5 | $6,169.3 | (0.1%) | | Total Deposits | $6,778.6 | $5,645.8 | 20.1% | | Total Borrowings | $799.4 | $1,407.0 | (43.2%) | | Stockholders' Equity | $1,011.3 | $982.5 | 2.9% | - The increase in commercial business loans was primarily driven by $344.4 million in SBA Paycheck Protection Program (PPP) loans originated during 2020[340] - The increase in deposits was partially driven by $333.2 million in deposits assumed from the acquisition of the Roselle Entities[350] Results of Operations Comparison Net income increased 5.3% to $57.6 million in 2020, as higher net interest income was offset by a large provision for loan losses Results of Operations (Year Ended Dec 31, in thousands) | Metric | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $221,573 | $172,371 | 28.5% | | Provision for Loan Losses | $18,447 | $4,224 | 336.7% | | Non-interest Income | $31,270 | $31,636 | (1.2%) | | Non-interest Expense | $158,139 | $128,701 | 22.9% | | Net Income | $57,603 | $54,717 | 5.3% | - The increase in provision for loan losses in 2020 was primarily due to the deterioration of economic conditions related to the COVID-19 pandemic[365][373] - The increase in non-interest expense in 2020 was driven by higher compensation (including equity plan expenses and a voluntary early retirement program), occupancy costs from acquisitions, and a $1.2 million loss on extinguishment of debt[367][377] - The significant increase in 2019 net income compared to 2018 was largely due to a one-time $34.8 million charitable contribution made in 2018, which reduced that year's net income[382][383] Risk Management The company manages credit, interest rate, and liquidity risks through disciplined underwriting, modeling, and maintaining a stable funding base - The allowance for loan losses increased to $74.7 million, or 1.21% of total loans, at Dec 31, 2020, up from $61.7 million, or 1.00% of total loans, at year-end 2019, primarily due to the economic impact of the COVID-19 pandemic[438][441] - Non-performing assets increased to $8.2 million (0.09% of total assets) at Dec 31, 2020, from $6.7 million (0.08% of total assets) at year-end 2019[419] Interest Rate Risk Simulation (as of Dec 31, 2020) | Rate Change (bps) | Change in Net Interest Income (%) | Change in Net Portfolio Value (%) | | :--- | :--- | :--- | | +200 | 4.60% | (2.39%) | | +100 | 2.21% | (0.08%) | | -100 | (6.90%) | (9.00%) | - As of January 31, 2021, the company had granted COVID-19 related loan modifications on loans with current balances of $734.7 million for commercial and $178.1 million for consumer loans[450] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal controls over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[491] - Management's report on internal control over financial reporting concluded that the company's internal controls were effective as of December 31, 2020, based on the COSO framework[493][497] - The independent registered public accounting firm's attestation report expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting[498] Part III Directors, Executive Officers and Corporate Governance Information on directors, officers, and corporate governance is incorporated by reference from the company's 2021 Proxy Statement - Information related to directors, corporate governance, and the code of ethics is incorporated by reference from the 2021 Proxy Statement[501][504][505] Executive Compensation Details regarding executive and director compensation are incorporated by reference from the company's 2021 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement[507] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by management and beneficial owners is incorporated by reference from the 2021 Proxy Statement - Information regarding security ownership is incorporated by reference from the 2021 Proxy Statement[508] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information regarding related party transactions and director independence is incorporated by reference from the 2021 Proxy Statement[509][510] Principal Accounting Fees and Services Details regarding principal accountant fees and services are incorporated by reference from the company's 2021 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[511] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section contains a list of all exhibits filed with the Form 10-K, including the company's certificate of incorporation, bylaws, employment agreements, and SEC certifications[514][528] Financial Statements The company's audited consolidated financial statements received an unqualified opinion from its independent auditor - KPMG LLP issued an unqualified opinion on the consolidated financial statements, stating they present fairly the financial position and results of operations in conformity with US GAAP[530] - KPMG LLP also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2020[531][543] - A critical audit matter identified was the assessment of the allowance for loan losses for loans collectively evaluated for impairment, due to the significant measurement uncertainty and subjective judgment involved[535][536]