umbia Financial(CLBK) - 2023 Q4 - Annual Report

PART I Business Columbia Financial, Inc. is a New Jersey-focused bank holding company, growing through acquisitions and specializing in diversified lending and non-interest income services General and Acquisition History Columbia Financial, Inc. is a Delaware corporation and holding company for Columbia and Freehold Banks, expanding through strategic acquisitions - Columbia Financial, Inc. is the holding company for Columbia Bank and Freehold Bank, both federally chartered stock savings banks[83] - Columbia Bank operates as a "covered savings association," enjoying rights similar to a national bank, including exemption from the qualified thrift lender test[84] - The company has a history of strategic acquisitions, including Stewardship Financial (2019), Roselle Bank (2020), Freehold Bank (2021), and RSI Bank (2022), to expand its market presence[59][122][124] Market Area and Competition The company operates in New Jersey, facing intense competition from diverse financial institutions for loans and deposits in a high-income market - As of December 31, 2023, Columbia Bank operated 65 offices across twelve New Jersey counties, and Freehold Bank operated two offices in Freehold, New Jersey[47] Market Area Economic Indicators (2024 Projections & Dec 2023 Data) | Indicator | Company's 12-County Market | New Jersey State | National | | :--- | :--- | :--- | :--- | | Projected Median Household Income (2024) | $105,598 | $96,278 | $75,874 | | Unemployment Rate (Dec 2023) | N/A | 4.8% | 3.7% | - The company faces intense competition from large national banks, community banks, credit unions, and non-depository fintech companies for both loans and deposits[61][62][88] Lending Activities and Credit Risks The company's lending focuses on commercial real estate and multifamily loans, totaling $3.8 billion, with associated credit risks from concentration and construction financing Loan Portfolio Composition (December 31, 2023) | Loan Category | Amount (Billions) | % of Total Loans | | :--- | :--- | :--- | | Multifamily & Commercial Real Estate | $3.8 | 48.5% | | One-to-Four Family Residential | $2.8 | 35.6% | | Construction Loans | $0.443 | 5.7% | | Home Equity Loans & Advances | $0.267 | 3.4% | - The company's largest multifamily loan was $48.7 million and its largest commercial real estate loan was a $27.7 million participation loan as of year-end 2023[65] - Construction financing is considered higher risk due to reliance on initial estimates and potential for delays, mitigated by lending to experienced developers and requiring sales agreements[79][100] - Commercial business loans carry higher risk as repayment depends on borrower cash flow, and collateral may be difficult to appraise and can depreciate[126] Securities and Deposit Activities The company's securities portfolio is primarily government-backed, while deposits from diverse customers are the main funding source, supplemented by FHLB borrowings - The securities portfolio is classified as either held-to-maturity (amortized cost) or available-for-sale (fair value)[82] - As of December 31, 2023, the available-for-sale portfolio was 79.3% MBS and CMOs, while the held-to-maturity portfolio was 87.6% MBS and CMOs[134][135] - Deposits are the primary source of funds from retail, business, and municipal customers, with cash management services offered to business clients[139][141] - The company supplements liquidity with FHLB borrowings and maintains access to the Federal Reserve's discount window and Bank Term Funding Program[143] Regulation and Supervision The company and its banks are regulated by the OCC, FDIC, and Federal Reserve, exceeding stringent capital requirements and deemed "well capitalized" as of December 31, 2023 - The company and its subsidiary banks are subject to supervision and regulation by the OCC, FDIC, and the Federal Reserve Board[144][170] Minimum Regulatory Capital Requirements | Capital Ratio | Minimum Requirement | Requirement with Buffer | | :--- | :--- | :--- | | Common Equity Tier 1 to Risk-Weighted Assets | 4.5% | 7.0% | | Tier 1 to Risk-Weighted Assets | 6.0% | 8.5% | | Total Capital to Risk-Weighted Assets | 8.0% | 10.5% | | Tier 1 Leverage Ratio | 4.0% | 4.0% | - As of December 31, 2023, both Columbia Bank and Freehold Bank exceeded all regulatory capital requirements and were considered "well capitalized"[123][178] - The FDIC imposes special assessments for Silicon Valley Bank and Signature Bank failures, with the company unable to reasonably estimate the additional assessment amount[185][161] Human Capital Management As of December 31, 2023, the company employed 774 individuals, focusing on retention, talent development, and DEI, with 61% women and 37% minorities - The company employed 720 full-time and 54 part-time employees as of December 31, 2023[223] - In 2023, the voluntary employee turnover rate was 17.04%, reflecting a competitive market for talent[224] - The company has a strong focus on Diversity, Equity, and Inclusion (DEI), with a workforce comprising approximately 61% women and 37% minorities at year-end 2023[203] - Succession planning is a critical initiative, supported by programs like the Associate Development Program and Leadership Development Program to build a leadership pipeline[206] Risk Factors The company faces significant lending risks from high commercial real estate concentration, regulatory scrutiny due to asset growth, and operational risks including interest rate fluctuations and cybersecurity threats - Lending Risks: The company has a high concentration in multifamily and commercial real estate loans, totaling $3.8 billion or 48.5% of the portfolio, exposing it to greater non-payment risk than residential loans[216][243] - Regulatory Scrutiny: Non-owner-occupied commercial real estate loans represented 315.2% of total risk-based capital, exceeding the 300% regulatory guideline and potentially leading to increased supervisory attention[244] - Growth and Regulatory Risks: Surpassing $10 billion in assets increases regulation, including Durbin Amendment debit card interchange fee restrictions and CFPB supervision[254][286][287] - Market and Operational Risks: The company is exposed to interest rate risk, liquidity risk from potential deposit outflows, and significant operational risks from information technology reliance and cybersecurity threats[260][259][264] Cybersecurity The company implements a comprehensive, three-lines-of-defense cybersecurity program with Board oversight, ensuring data protection and timely reporting of material incidents - The company has a comprehensive cybersecurity program to protect sensitive information and customer data, managed through an enterprise-wide strategy[330] - A multiple lines of defense approach is used, involving an Information Security Officer (ISO), an Enterprise Technology Risk Management (ETRM) function, and an internal audit department for independent assurance[332][307] - The Board of Directors actively oversees the cybersecurity program, receiving regular reports on cyber risks, threats, and the status of security initiatives[333] - Procedures have been enhanced for timely reporting of material cybersecurity incidents on Form 8-K within four business days of determination[331] Properties The company operates 67 branch offices in New Jersey, with 31 owned and 34 leased properties - The company operates through 65 Columbia Bank branches and 2 Freehold Bank branches in New Jersey[335] - The company owns 31 of its properties and leases the remaining 34[335] 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 under "CLBK," with no current dividends, but an active stock repurchase program, including 138,620 shares bought in Q4 2023 - The company's common stock is listed on the Nasdaq Global Select Market under the symbol "CLBK"[311] - The company has not paid dividends and does not currently anticipate doing so, citing regulatory hurdles for its mutual holding company to waive dividend receipts[312][313] - On May 25, 2023, the Board authorized the sixth stock repurchase program for up to 2,000,000 shares[344] Stock Repurchases (Q4 2023) | Period | Total Shares Repurchased | Average Price Paid per Share ($) | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | Oct 2023 | 127,487 | $15.83 | 124,420 | | Nov 2023 | 14,000 | $16.38 | 14,000 | | Dec 2023 | 6,826 | $19.18 | 200 | | Total Q4 | 148,313 | $16.04 | 138,620 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, highlighting a 2.3% asset growth to $10.6 billion and a 58.1% net income decrease to $36.1 million in 2023, driven by reduced net interest income Business Strategy The company's strategy focuses on balanced growth, commercial banking expansion, increasing fee income, franchise expansion, and stockholder-focused capital management - Increase earnings through balanced growth of the loan portfolio and deposit base, with a strategic shift towards commercial loans and deposits to enhance net interest margin[348] - Expand commercial business relationships, with a focus on commercial business lending which grew 7.2% in 2023[378][349] - Grow fee income by expanding existing title insurance and wealth management services and considering acquisitions of other fee-based businesses[352][380] - Pursue franchise expansion through selective de novo branching and strategic acquisitions of other financial institutions[353][354] - Manage capital through asset growth and stock repurchase programs, having repurchased 25.9 million shares under six programs as of December 31, 2023[361] Critical Accounting Policies and Estimates The Allowance for Credit Losses (ACL) is a critical estimate, increasing to $55.1 million in 2023, with sensitivity to unemployment rates and other critical policies including deferred tax assets - The Allowance for Credit Losses (ACL) is a critical accounting estimate due to significant judgment in forecasting economic conditions and determining qualitative loss factors[417] - The ACL on loans increased to $55.1 million at December 31, 2023, from $52.8 million at December 31, 2022, primarily due to loan growth and increased qualitative factors[417] - A sensitivity analysis showed that if the U.S. unemployment rate forecast was 9% instead of approximately 4.3%, the ACL would have been approximately $18.4 million higher[365] - The company held a net deferred tax asset of $25.5 million as of December 31, 2023, which management believes is more likely than not to be realized[392] Comparison of Financial Condition at December 31, 2023 and 2022 Total assets grew 2.3% to $10.6 billion in 2023, driven by loan growth, while deposits decreased 1.9% and stockholders' equity declined 1.3% due to repurchases Financial Condition Highlights (in millions) | Account | Dec 31, 2023 (Millions) | Dec 31, 2022 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $10,645.6 | $10,408.2 | 2.3% | | Loans Receivable, net | $7,819.4 | $7,624.8 | 2.6% | | Total Securities | $1,454.8 | $1,702.4 | (14.5)% | | Total Deposits | $7,846.6 | $8,001.2 | (1.9)% | | Total Borrowings | $1,528.7 | $1,127.0 | 35.6% | | Total Stockholders' Equity | $1,040.3 | $1,053.6 | (1.3)% | - The loan portfolio growth was led by increases in multifamily real estate (+$170.0 million), construction (+$106.5 million), and commercial business loans (+$35.6 million)[422] - The decrease in deposits was driven by outflows from demand and savings accounts, partially offset by significant inflows into higher-yielding money market (+$537.0 million) and certificate of deposit accounts (+$517.0 million)[396][411] Results of Operations Net income decreased 58.1% to $36.1 million in 2023, primarily due to a 22.8% decline in net interest income and increased non-interest expenses Summary of Operations (Year Ended Dec 31, in millions) | Metric | 2023 (Millions) | 2022 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $205.9 | $266.8 | (22.8)% | | Provision for Credit Losses | $4.8 | $5.5 | (12.7)% | | Non-interest Income | $27.4 | $30.4 | (9.9)% | | Non-interest Expense | $182.4 | $174.8 | 4.3% | | Net Income | $36.1 | $86.2 | (58.1)% | - The primary driver of the net income decrease was a significant compression in net interest income, caused by a 340.9% increase in total interest expense to $189.1 million, far outpacing the 27.5% growth in total interest income[445][476] - Non-interest expense increased mainly due to a $3.9 million rise in compensation and a $6.0 million increase in federal deposit insurance premiums, including a one-time special assessment[473][479] - Non-interest income decreased primarily due to an $11.1 million increase in the loss on securities transactions, partially offset by higher income from BOLI and loan sale gains[446][478] Risk Management The company manages credit, interest rate, and liquidity risks, with non-performing assets increasing to $12.6 million and a 200 basis point rate increase projected to decrease net interest income by 4.11% Non-Performing Assets (in millions) | Metric | Dec 31, 2023 (Millions) | Dec 31, 2022 (Millions) | Dec 31, 2021 (Millions) | | :--- | :--- | :--- | :--- | | Total Non-Performing Assets | $12.6 | $6.7 | $3.9 | | as a % of Total Assets | 0.12% | 0.06% | 0.04% | Allowance for Credit Losses (ACL) Activity (in millions) | ACL Activity | 2023 (Millions) | 2022 (Millions) | 2021 (Millions) | | :--- | :--- | :--- | :--- | | Beginning Balance | $52.8 | $62.7 | $74.7 | | Provision for (reversal of) credit losses | $4.8 | $6.0 | $(10.0) | | Net Charge-offs | $(2.5) | $(0.045) | $(2.0) | | Ending Balance | $55.1 | $52.8 | $62.7 | | ACL as % of Total Loans | 0.70% | 0.69% | 0.99% | - Interest rate risk simulation at year-end 2023 showed that a +200 basis point shock would decrease Net Interest Income by 4.11% and Net Portfolio Value by 18.29% over 12 months[551][580] - The company maintains liquidity through its core deposit base and access to wholesale funding, including FHLB advances and other credit lines[553][608] Financial Statements and Supplementary Data This section presents consolidated financial statements for 2021-2023, with an unqualified audit opinion from KPMG LLP, highlighting the Allowance for Credit Losses as a critical audit matter - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[631][7] - The auditor identified the assessment of the collective Allowance for Credit Losses (ACL) as a Critical Audit Matter, due to high audit effort and subjective judgment in evaluating methodology, models, and assumptions for expected credit losses[10][53] Key Financial Statement Data (Year Ended Dec 31, 2023, in thousands) | Metric | Amount (Thousands) | | :--- | :--- | | Total Assets | $10,645,568 | | Total Liabilities | $9,605,233 | | Total Stockholders' Equity | $1,040,335 | | Net Income | $36,086 | | Total Comprehensive Income | $56,647 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 2023 - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023[36] - Based on an assessment using the COSO framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2023[49] - No material changes were made to the Company's internal control over financial reporting during the fourth quarter ended December 31, 2023[617] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Related Party Transactions This section incorporates information by reference from the 2024 Proxy Statement, covering directors, executive officers, corporate governance, compensation, security ownership, and related party transactions - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees (Item 14) is incorporated by reference from the Company's 2024 Proxy Statement[23][621][599] PART IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Form 10-K, including corporate governance documents, employment agreements, regulatory certifications, and Inline XBRL financial data files - The financial statements required for this item are incorporated by reference from Item 8 of the report[602] - Exhibits filed with the report include corporate governance documents (Exhibits 3.1, 3.2), employment agreements for key executives (Exhibits 10.1-10.9), and regulatory certifications (Exhibits 31.1, 31.2)[4][5] - The report includes financial data formatted in Inline XBRL (Extensible Business Reporting Language) as required by the SEC[604]