Columbia Financial, Inc. CLBK has announced a strategic repositioning of its balance sheet. This move will enhance the company’s earnings potential, expand net interest margin (NIM) and reduce reliance on higher-cost funding.

CEO Thomas J. Kemly said “This well-timed transaction accelerates our strategy to align the balance sheet with higher-yielding assets while preserving a strong capital base.”

Nonetheless, CLBK shares declined 1.5% yesterday on broader market weakness.

Details of CLBK’s Balance Sheet Repositioning Strategy

Columbia Financial offloaded $321 million of available-for-sale debt securities with a weighted average yield of 1.53% and an average life of 3.6 years. These securities were largely acquired during the COVID-19 pandemic when interest rates were at historic lows.

The transaction aligns with Columbia Financial's focus on maintaining a strong capital position and flexibility.

CLBK strategically deployed proceeds across three key areas – funding $85 million in loan growth, purchasing $66 million in higher-yielding debt securities and prepaying $170 million in higher-cost borrowings.

While the repositioning resulted in a pre-tax loss of $38 million, this was neutral to CLBK’s tangible book value as unrealized losses had already been reflected in equity.

Why Columbia Financial Repositioned its Balance Sheet

Earnings Growth and Margin Expansion: The repositioning is expected to boost CLBK’s 2025 earnings by 24% relative to current analyst consensus while expanding NIM by 15 basis points. This improvement stems from reallocating funds into higher-yielding assets and reducing interest expenses on borrowed funds.

Accelerated Payback and Capital Strength: With a conservative payback estimate of just 3.1 years, the transaction is a calculated step toward long-term profitability. Columbia Financial’s regulatory capital ratios will remain robust, ensuring its “well-capitalized” status with total capital at 13.87% and tier 1 leverage at 9.99% on the proforma basis as of Sept. 30, 2024.

Reduced Funding Costs: Prepaying higher-cost borrowings will lower CLBK’s reliance on wholesale funding. Thus, this will enhance the company’s financial stability and operational flexibility.

Our Take on CLBK’s Actions

Columbia Financial's repositioning reflects a proactive approach to navigating the changing economic landscape while driving shareholder value.

Shares of CLBK have gained 22.3% over the past six months, underperforming the industry’s rally of 24.3%.
 

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At present, Columbia Financial carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Banks Taking Similar Steps

Earlier this week, Associated Banc-Corp ASB announced balance sheet repositioning transactions to support its organic growth strategy. While the transactions will result in a net loss in the fourth quarter of 2024, the strategy is focused on long-term growth and profitability.

As part of the move, ASB sold approximately $1.3 billion of investment securities (yielded 1.87% on average) and intends to sell $0.7 billion of low-yielding mortgage loans, primarily from single-product relationships. These transactions are expected to result in a post-tax loss of $253 million.

Similarly, Valley National Bancorp. VLY announced the completion of the sale of a diverse pool of performing commercial real estate (CRE) mortgage loans to Brookfield Asset Management Ltd. BAM.

The loan pool, with a contractual balance of roughly $925 million, was sold at a discount of roughly 1% to par value to BAM, with VLY retaining customer-facing servicing responsibilities.

This move aligns with Valley National’s efforts to manage the CRE loan portfolio prudently and reduce its exposure to the loan category, thus mitigating concentration risk. As of Sept. 30, 2024, CRE loans were 61.6% of total loans.

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