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Conversion profile — Columbia Financial Inc. (MHC)

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Conversion profile — Columbia Financial Inc. (MHC)

Fair Lawn, N.J.-based Columbia Financial Inc. (MHC), the mid-tier stock holding company for Columbia Bank, is undertaking one of the largest mutual holding company conversions in history and has the potential to be in the upper echelon of market performers. Gross proceeds at the supermax of the offering range are nearly $500 million. The asset size of greater than $5 billion, attractive market demographics and strong insider purchases bode well for Columbia Financial's debut, but the recent volatility spike in the stock market adds an element of uncertainty.

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Attractive market area

Columbia Bank operates 48 branches throughout New Jersey. One-third of its branch network and 40% of its deposits are in Bergen County. Eight of its branches are in southwest New Jersey, in the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD metropolitan statistical area, within the counties of Burlington, Gloucester and Camden.

On a county basis, the weighted average of 2018 median household income for all Columbia Bank branches is $86,154, well above $78,317 for New Jersey and $61,045 for the U.S. Projected population growth between 2018 and 2023, according to Claritas, is 1.7% for Columbia Bank's entire franchise by county, compared to 1.3% for New Jersey and 3.5% for the U.S.

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Improving deposit base

Columbia Bank improved its deposit mix during the fiscal year ended Sept. 30, 2017. Noninterest-bearing deposits were up 9.0%, and comprised 15.6% of total deposits. In the prospectus, the company pointed to commercial banking relationships as the primary growth driver. Additionally, the bank captured a new municipal deposit account in fiscal year 2017. Total municipal deposits grew to $436.4 million from $382.1 million in the prior fiscal year.

Changing loan mix

Like many mutual banks, Columbia Bank has been placing greater emphasis on originating commercial loans. The company said in the prospectus: "Specifically, in the past year, we have hired additional lenders with significant experience in our market area to expand our commercial real estate and commercial and industrial lending efforts." Commercial real estate and multifamily loans increased to $1.82 billion at Sept. 30, 2017, from $1.56 billion in the prior year. Columbia Bank grew commercial business loans at a faster rate, albeit from a lower base, up to $267.7 million from $177.7 million.

Largest loans (as of Sept. 30, 2017)

* Commercial real estate: $24.8 million for refinancing a retail property that is anchored by a supermarket in Bergen County.

* Multifamily: $20.7 million to refinance an apartment property in Bergen County.

* Commercial business: $18.5 million to an auto dealership in Passaic County, backed by real estate and business assets.

* Commercial construction: $12.6 million outstanding balance (committed amount of $22.4 million) for a multifamily property with retail units in Monmouth County.

* One- to four-family: $5.5 million backed by a residential property in Bergen County.

Healthy credit quality

Nonaccrual loans fell to $6.4 million at Sept. 30, 2017, down 48% from the year-ago period and representing just 0.15% of total loans. Net charge-offs to average loans also was down, to 0.09% in the year ended Sept. 30, 2017, from 0.14% in the prior year.

Strong insider purchases

Two-thirds of the executive officers and directors are planning to purchase 55,000 shares in the offering, which is the maximum allowable amount. Aggregate insider purchases are 735,000 shares, accounting for 1.5% of the shares offered at the supermax.

Most of the insiders have been with Columbia Bank for more than a decade. John Salvetti, principal at S.R. Snodgrass PC, is the most recent addition to the board of directors, joining in May 2017. Columbia Bank appointed Dennis Gibney, formerly principal at FinPro Capital Advisors Inc., as CFO in 2014.

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Peer group analysis

In terms of gross proceeds, Columbia Financial likely will be the fourth-largest MHC conversion of all time. The initial public offering pops are all over the place for the 15 largest transactions, ranging from negative 7.9% for Philadelphia-based Beneficial Bancorp Inc. in July 2007 to 65.6% for Boston-based Brookline Bancorp Inc. in March 1998. Market timing, more so than valuation, location or financial performance, was crucial to scoring the highest pops.

From the U.S. federal election in November 2016 through January 2018, the SNL U.S. Bank and Thrift index's total return was 54.6%, topping the S&P 500's 35.2%. Historical low volatility accompanied the stock surge. Market sentiment shifted at the beginning of February 2018. Volatility skyrocketed as the banking index fell 8.9% from the close on Feb. 1 through Feb. 8, slightly worse than the S&P 500's return. The market has recovered since then, bouncing up 7.2% for banking stocks and 6.6% for the S&P 500 through Feb. 23.

S&P Global Market Intelligence created a peer group of 10 select public thrifts for Columbia Financial. As of Feb. 23, the median price to tangible book of the peers was 135.8%. At the supermax of the offering range, Columbia Financial is priced at an as-reported price to fully converted tangible book of 80.5%, representing a 40.8% discount to the peer median.

The market performance of Columbia Financial hinges on how the peer group trades and whether that February hiccup was an aberration or an early warning sign for a new downward trend. If the peer group continues to trade at the same level, a 40% IPO pop for Columbia Financial would narrow the price-to-tangible book discount to 17.0%. A 50% IPO pop would bring the discount down to 11.1% and result in a fully converted valuation on par with Fairfield, N.J.-based Kearny Financial Corp., which will reach its three-year conversion anniversary in May and is in the process of acquiring Clifton, N.J.-based Clifton Bancorp Inc.

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