Why Columbia Financial Rallied on Tuesday

Shares of Columbia Financial (NASDAQ: CLBK) rallied 7.4% on Tuesday as of 12:46 p.m. ET.

The small-cap bank held its earnings call last night, handily beating targets. The bank, which makes mainly a variety of real estate loans for both consumers and commercial businesses, reported net interest rate margin increases and lower charge-offs.

Columbia's results vault higher on better underwriting

In the quarter, Columbia Financial reported net interest income of $57.4 million, up 26.7% from the year-ago quarter, while earnings per share rose 150% to $0.15. Both figures beat expectations by a fair amount.

The reasons for the beat were largely those of good old-fashioned banking practices. Net interest income rose due to the company reinvesting securities made when rates were lower, pre-pandemic, into higher-yielding securities, while the Federal Reserve's recent rate cuts helped lower deposit costs. Meanwhile, provisions for loan losses declined on lower charge-offs, revealing good underwriting on the part of management. That's how Columbia posted these strong revenue and earnings growth figures while only growing loans by 4.8% annualized in the quarter.

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Columbia is performing solidly amid regional bank fears

Regional banks had sold off recently after some bad loans were identified at a few leading regional banks around certain auto-related businesses affected by tariffs. That caused a sell-off across the sector on fears there may be more bad loans. However, Columbia's portfolio, consisting mainly of multifamily and one- to four-family residential units, as well as commercial real estate, held up quite well.

There have been concerns over commercial real estate loans over the past few years due to work-from-home lifestyles, but only 2.2% of Columbia's total loans are in non-medical office buildings that aren't also occupied by the owner.

As of now, Columbia Financial's business model looks relatively unexciting, with just a 6% return on equity (ROE) and high real estate exposure. However, that ROE is up from just 2.6% in the year-ago quarter. So, if the bank can continue to expand margins and grow at a steady pace, and if the real estate market recovers, Columbia's stock, still well off its prior highs, may continue recovering along with it.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.