Oritani Financial Corp - FORM 10-Q - February 9, 2016

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________

FORM 10-Q
______________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2015
 
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to
Commission File No. 001-34786
   
Oritani Financial Corp.
(Exact name of registrant as specified in its charter)
   

Delaware
 
30-0628335
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
370 Pascack Road, Township of Washington, New Jersey 07676
(Address of Principal Executive Offices)
 
(201) 664-5400
(Registrant's telephone number)
 
N/A
(Former name or former address, if changed since last report)
   
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.
 
    YES      NO  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
    YES      NO  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
  (Do not check if a smaller reporting company)
 
Smaller Reporting company
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
    YES      NO  
 
As of February 9, 2016, there were 56,245,065 shares of the Registrant's common stock, par value $0.01 per share, issued and 44,402,197 shares outstanding.
 
Oritani Financial Corp.
FORM 10-Q
 
Index

 
 
  
 
Part I. Financial Information
  Page
 
 
 
Item 1.
Financial Statements
3
 
 
 
 
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
27
 
 
 
Item 3.
38
 
 
 
Item 4.
39
 
 
 
 
Part II. Other Information
 
 
 
 
Item 1.
40
 
 
 
Item 1A.
40
 
 
 
Item 2.
40
 
 
 
Item 3.
40
 
 
 
Item 4.
40
 
 
 
Item 5.
40
 
 
 
Item 6.
41
 
 
 
 
42
 
Part I. Financial Information
Item 1. Financial Statements
 
Oritani Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

 
  
December 31, 2015
    
June 30, 2015
  
 
  
(unaudited)
    
(audited)
  
Assets
  
   
 
Cash on hand and in banks
  
$
9,859
    
$
11,380
  
Federal funds sold and short term investments
    
—
      
3,749
  
Cash and cash equivalents
    
9,859
      
15,129
  
Loans, net
    
2,911,468
      
2,756,212
  
Securities available for sale, at fair value
    
224,434
      
258,963
  
Securities held to maturity, fair value of $156,292 and $107,749, respectively.
    
157,570
      
107,990
  
Bank Owned Life Insurance (at cash surrender value)
    
91,983
      
90,609
  
Federal Home Loan Bank of New York stock ("FHLB"), at cost
    
39,761
      
39,898
  
Accrued interest receivable
    
9,717
      
9,266
  
Investments in real estate joint ventures, net
    
5,599
      
6,658
  
Real estate held for investment
    
—
      
655
  
Real estate owned
    
487
      
4,059
  
Office properties and equipment, net
    
14,567
      
14,431
  
Deferred tax assets, net
    
41,811
      
41,356
  
Other assets
    
5,735
      
7,839
  
Total Assets
  
$
3,512,991
    
$
3,353,065
  
Liabilities
                
Deposits
  
$
2,120,476
    
$
1,962,737
  
Borrowings
    
793,807
      
796,372
  
Advance payments by borrowers for taxes and insurance
    
20,006
      
20,445
  
Other liabilities
    
60,346
      
55,841
  
Total Liabilities
    
2,994,635
      
2,835,395
  
Stockholders' Equity
                
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued;
44,397,697 shares outstanding at December 31, 2015 and 44,012,239 shares outstanding at June 30, 2015.
    
562
      
562
  
Additional paid-in capital
    
510,016
      
508,999
  
Restricted Stock Awards
    
(4,242
)
    
(8,088
)
Treasury stock, at cost; 11,847,368 shares at December 31, 2015 and 12,232,826 shares at June 30, 2015.
    
(157,466
)
    
(162,344
)
Unallocated common stock held by the employee stock ownership plan
    
(21,158
)
    
(22,803
)
Retained income
    
194,871
      
203,192
  
Accumulated other comprehensive loss, net of tax
    
(4,227
)
    
(1,848
)
Total Stockholders' Equity
    
518,356
      
517,670
  
Total Liabilities and Stockholders' Equity
  
$
3,512,991
    
$
3,353,065
  

See accompanying notes to unaudited consolidated financial statements.

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2015
    
2014
    
2015
    
2014
  
 
  
(unaudited)
  
Interest income:
  
   
   
   
 
Interest on mortgage loans
  
$
31,148
    
$
31,041
    
$
61,937
    
$
60,768
  
Interest on securities available for sale
    
1,154
      
1,671
      
2,357
      
3,471
  
Interest on securities held to maturity
    
663
      
450
      
1,234
      
814
  
Dividends on FHLB stock
    
391
      
500
      
792
      
976
  
Interest on federal funds sold and short term investments
    
1
      
1
      
2
      
3
  
Total interest income
    
33,357
      
33,663
      
66,322
      
66,032
  
Interest expense:
                                
Deposits
    
4,456
      
2,843
      
8,118
      
5,457
  
Borrowings
    
3,607
      
5,756
      
8,761
      
11,561
  
Total interest expense
    
8,063
      
8,599
      
16,879
      
17,018
  
Net interest income before provision for loan losses
    
25,294
      
25,064
      
49,443
      
49,014
  
Provision for loan losses
    
—
      
—
      
—
      
200
  
Net interest income after provision for loan losses
    
25,294
      
25,064
      
49,443
      
48,814
  
Other income:
                                
Service charges
    
208
      
240
      
466
      
463
  
Real estate operations, net
    
36
      
315
      
271
      
668
  
Income from investments in real estate joint ventures
    
311
      
487
      
718
      
1,335
  
Bank-owned life insurance
    
678
      
680
      
1,374
      
1,192
  
Net gain (loss) on sale of assets
    
25,554
      
(10
)
    
29,866
      
(10
)
Net gain (loss) on sale of securities
    
604
      
—
      
604
      
(2
)
Other income
    
91
      
69
      
168
      
142
  
Total other income
    
27,482
      
1,781
      
33,467
      
3,788
  
Other expenses:
                                
Compensation, payroll taxes and fringe benefits
    
10,056
      
7,730
      
17,759
      
14,954
  
Advertising
    
90
      
105
      
180
      
195
  
Office occupancy and equipment expense
    
689
      
692
      
1,407
      
1,421
  
Data processing service fees
    
496
      
472
      
1,014
      
935
  
Federal insurance premiums
    
399
      
390
      
798
      
778
  
Net expense from real estate operations
    
11
      
990
      
341
      
1,129
  
FHLBNY prepayment fees
    
13,873
      
—
      
13,873
      
—
  
Other expenses
    
1,315
      
930
      
2,294
      
1,954
  
Total operating expenses
    
26,929
      
11,309
      
37,666
      
21,366
  
Income before income tax expense
    
25,847
      
15,536
      
45,244
      
31,236
  
Income tax expense
    
9,996
      
5,490
      
17,211
      
11,029
  
Net income
  
$
15,851
    
$
10,046
    
$
28,033
    
$
20,207
  
Earnings per basic common share
  
$
0.38
    
$
0.24
    
$
0.68
    
$
0.48
  
Earnings per diluted common share
  
$
0.37
    
$
0.24
    
$
0.66
    
$
0.47
  
 
See accompanying notes to unaudited consolidated financial statements.

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2015
    
2014
    
2015
    
2014
  
 
  
(unaudited)
  
Net income
  
$
15,851
    
$
10,046
    
$
28,033
    
$
20,207
  
Other comprehensive loss:
                                
Change in unrealized holding (loss) gain on securities available for sale
    
(1,650
)
    
191
      
(1,204
)
    
(1,013
)
Reclassification adjustment for security (gains) losses included in net income
    
(343
)
    
—
      
(343
)
    
84
  
Amortization related to post-retirement obligations
    
31
      
14
      
64
      
27
  
Change in unrealized loss on interest rate swaps
    
1,468
      
(1,873
)
    
(896
)
    
(2,279
)
Total other comprehensive loss
    
(494
)
    
(1,668
)
    
(2,379
)
    
(3,181
)
Total comprehensive income
  
$
15,357
    
$
8,378
    
$
25,654
    
$
17,026
  
 
See accompanying notes to unaudited consolidated financial statements.

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2015 and 2014 (unaudited)
(In thousands, except share data)

 
  
Shares Outstanding
    
Common stock
    
Additional paid-in capital
    
Restricted Stock Awards
    
Treasury stock
    
Unallocated common stock held by ESOP
    
Retained income
    
Accumulated other comprehensive income (loss), net of tax
    
Total stockholders' equity
  
Balance at June 30, 2014
    
45,499,332
    
$
562
    
$
504,434
    
$
(12,086
)
  
$
(140,451
)
  
$
(24,331
)
  
$
195,970
    
$
2,194
    
$
526,292
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
20,207
      
—
      
20,207
  
Other comprehensive loss, net of tax
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(3,181
)
    
(3,181
)
Cash dividends declared
    
—
      
—
      
—
      
—
      
—
      
—
      
(25,073
)
    
—
      
(25,073
)
Purchase of treasury stock
    
(1,082,361
)
    
—
      
—
      
—
      
(16,023
)
    
—
      
—
      
—
      
(16,023
)
Compensation cost for stock options and restricted stock
    
—
      
—
      
3,027
      
—
      
—
      
—
      
—
      
—
      
3,027
  
ESOP shares allocated or committed to be released
    
—
      
—
      
675
      
—
      
—
      
869
      
—
      
—
      
1,544
  
Exercise of stock options
    
43,814
      
—
      
—
      
—
      
577
      
—
      
(103
)
    
—
      
474
  
Vesting of restricted stock awards
    
—
      
—
      
(3,857
)
    
3,893
      
—
      
—
      
(36
)
    
—
      
—
  
Forfeiture of restricted stock awards
    
(6,400
)
    
—
      
—
      
81
      
(81
)
    
—
      
—
      
—
      
—
  
Tax benefit from stock-based compensation
    
—
      
—
      
446
      
—
      
—
      
—
      
—
      
—
      
446
  
Balance at December 31, 2014
    
44,454,385
    
$
562
    
$
504,725
    
$
(8,112
)
  
$
(155,978
)
  
$
(23,462
)
  
$
190,965
    
$
(987
)
  
$
507,713
  
 
                                                                        
Balance at June 30, 2015
    
44,012,239
    
$
562
    
$
508,999
    
$
(8,088
)
  
$
(162,344
)
  
$
(22,803
)
  
$
203,192
    
$
(1,848
)
  
$
517,670
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
28,033
      
—
      
28,033
  
Other comprehensive loss, net of tax
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(2,379
)
    
(2,379
)
Cash dividends declared
    
—
      
—
      
—
      
—
      
—
      
—
      
(35,229
)
    
—
      
(35,229
)
Purchase of treasury stock
    
(100,978
)
    
—
      
—
      
—
      
(1,593
)
    
—
      
—
      
—
      
(1,593
)
Issuance of restricted stock awards
    
10,000
      
—
      
—
      
(133
)
    
133
      
—
      
—
      
—
      
—
  
Compensation cost for stock options and restricted stock
    
—
      
—
      
2,996
      
—
      
—
      
—
      
—
      
—
      
2,996
  
ESOP shares allocated or committed to be released
    
—
      
—
      
1,430
      
—
      
—
      
1,645
      
—
      
—
      
3,075
  
Exercise of stock options
    
482,436
      
—
      
—
      
—
      
6,411
      
—
      
(1,106
)
    
—
      
5,305
  
Vesting of restricted stock awards
    
—
      
—
      
(3,887
)
    
3,906
      
—
      
—
      
(19
)
    
—
      
—
  
Forfeiture of restricted stock awards
    
(6,000
)
    
—
      
—
      
73
      
(73
)
    
—
      
—
      
—
      
—
  
Tax benefit from stock-based compensation
    
—
      
—
      
478
      
—
      
—
      
—
      
—
      
—
      
478
  
Balance at December 31, 2015
    
44,397,697
    
$
562
    
$
510,016
    
$
(4,242
)
  
$
(157,466
)
  
$
(21,158
)
  
$
194,871
    
$
(4,227
)
  
$
518,356
  
 
See accompanying notes to unaudited consolidated financial statements.

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)

 
  
Six months ended December 31,
  
 
  
2015
    
2014
  
 
  
(unaudited)
  
Cash flows from operating activities:
  
 
Net income
  
$
28,033
    
$
20,207
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
ESOP and stock-based compensation expense
    
6,071
      
4,571
  
Depreciation of premises and equipment
    
447
      
483
  
Net amortization and accretion of premiums and discounts on securities
    
594
      
667
  
Provision for loan losses
    
—
      
200
  
Amortization and accretion of deferred loan fees, net
    
(1,836
)
    
(1,655
)
Increase in deferred taxes
    
(1,842
)
    
(434
)
(Gain) loss on sale of investment securities
    
(604
)
    
2
  
Gain on sale of real estate joint ventures and real estate investments
    
(29,538
)
    
—
  
(Gain) loss  on sale of real estate owned
    
(328
)
    
10
  
Writedown of real estate owned
    
250
      
900
  
Proceeds from sale of real estate owned
    
3,967
      
65
  
Increase in cash surrender value of bank owned life insurance
    
(1,374
)
    
(1,192
)
(Increase) decrease in accrued interest receivable
    
(451
)
    
1,040
  
Decrease (increase)  in other assets
    
3,872
      
(943
)
Increase (decrease) in other liabilities
    
5,731
      
(1,688
)
Net cash provided by operating activities
    
12,992
      
22,233
  
Cash flows from investing activities:
                
Net increase in loans receivable
    
(116,396
)
    
(113,457
)
Purchase of mortgage loans
    
(37,341
)
    
—
  
Purchase of securities available for sale
    
(42,213
)
    
—
  
Purchase of securities held to maturity
    
(58,960
)
    
(62,850
)
Proceeds from payments, calls and maturities of securities available for sale
    
35,193
      
44,911
  
Proceeds from payments, calls and maturities of securities held to maturity
    
9,194
      
4,273
  
Proceeds from sales of securities available for sale
    
38,985
      
17,245
  
Proceeds from sales of securities held to maturity
    
—
      
3,375
  
Purchase of Bank Owned Life Insurance
    
—
      
(20,000
)
Net decrease in Federal Home Loan Bank of New York stock
    
137
      
5,000
  
Proceeds from sales of real estate joint ventures and real estate investments
    
29,638
      
—
  
Net increase in real estate held for investment
    
(1
)
    
(99
)
Net decrease  (increase) in real estate joint ventures
    
389
      
(510
)
Purchase of fixed assets
    
(583
)
    
(230
)
Net cash used in investing activities
    
(141,958
)
    
(122,342
)
Cash flows from financing activities:
                
Net increase in deposits
    
157,739
      
211,892
  
Purchase of treasury stock
    
(1,593
)
    
(16,023
)
Dividends paid to shareholders
    
(35,229
)
    
(25,073
)
Exercise of stock options
    
5,305
      
474
  
(Decrease) increase in advance payments by borrowers for taxes and insurance
    
(439
)
    
649
  
Proceeds from borrowed funds
    
182,435
      
54,313
  
Repayment of borrowed funds
    
(185,000
)
    
(135,800
)
Tax benefit from stock based compensation
    
478
      
446
  
Net cash provided by financing activities
    
123,696
      
90,878
  
Net decrease in cash and cash equivalents
    
(5,270
)
    
(9,231
)
Cash and cash equivalents at beginning of period
    
15,129
      
18,931
  
Cash and cash equivalents at end of period
  
$
9,859
    
$
9,700
  
Supplemental cash flow information:
                
Cash paid during the period for:
                
Interest
  
$
17,409
    
$
17,090
  
Income taxes
  
$
12,383
    
$
8,245
  
Noncash transfer
                
Loans receivable transferred to real estate owned
  
$
317
    
$
1,493
  

See accompanying notes to unaudited consolidated financial statements.

Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements are composed of the accounts of Oritani Financial Corp., its wholly owned subsidiaries, Oritani Bank ("the Bank"); Hampshire Financial, LLC, and Oritani, LLC, and the wholly owned subsidiaries of Oritani Bank; Oritani Finance Company, Ormon LLC ("Ormon"), and Oritani Investment Corp., as well as its wholly owned subsidiary, Oritani Asset Corporation (a real estate investment trust), (collectively, the "Company").  Intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all of the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included.  The results of operations and other data presented for the six month period ended December 31, 2015 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2016.

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for the preparation of the Form 10-Q.  The consolidated financial statements presented should be read in conjunction with the Company's audited consolidated financial statements and notes to consolidated financial statements included in the Company's June 30, 2015 Annual Report on Form 10-K, filed with the SEC on September 14, 2015.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities presented in the Consolidated Balance Sheets at December 31, 2015 and June 30, 2015 and in the Consolidated Statements of Income for the three and six months ended December 31, 2015 and 2014.  Actual results could differ significantly from those estimates.

A material estimate that is particularly susceptible to significant changes relates to the determination of the allowance for loan losses. The allowance for loan losses represents management's best estimate of losses known and inherent in the portfolio that are both probable and reasonable to estimate. While management uses the most current information available to estimate losses on loans, actual losses are dependent on future events and, as such, increases in the allowance for loan losses may be necessary.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

2. Earnings Per Share ("EPS")

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The weighted average common shares outstanding includes the average number of shares of common stock outstanding and allocated or committed to be released Employee Stock Ownership Plan shares.
 
Diluted earnings per share is computed using the same method as basic earnings per share, but reflects the potential dilution that could occur if stock options were exercised and converted into common stock.  These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. When applying the treasury stock method, we add: (1) the assumed proceeds from option exercises; (2) the tax benefit that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options and vesting of shares of restricted stock; and (3) the average unamortized compensation costs related to stock options. We then divide this sum by our average stock price to calculate shares assumed to be repurchased. The excess of the number of shares issuable over the number of shares assumed to be repurchased is added to basic weighted average common shares to calculate diluted EPS.

The following is a summary of the Company's earnings per share calculations and reconciliation of basic to diluted earnings per share.

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2015
    
2014
    
2015
    
2014
  
 
  
(In thousands, except per share data)
  
Net income
  
$
15,851
    
$
10,046
    
$
28,033
    
$
20,207
  
Weighted average common shares outstanding—basic
    
41,504
      
41,785
      
41,380
      
42,008
  
Effect of dilutive stock options outstanding
    
1,276
      
910
      
1,209
      
932
  
Weighted average common shares outstanding—diluted
    
42,780
      
42,695
      
42,589
      
42,940
  
Earnings per share-basic
  
$
0.38
    
$
0.24
    
$
0.68
    
$
0.48
  
Earnings per share-diluted
  
$
0.37
    
$
0.24
    
$
0.66
    
$
0.47
  
 
For the three months ended December 31, 2015 and 2014 there were 4,705 and 20,954 option shares, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for those periods.  Anti-dilutive shares for the six months ended December 31, 2015 and 2014 were 6,114  and 19,960, respectively.

3. Stock Repurchase Program
 
On March 4, 2015, the Board of Directors of the Company authorized a fourth stock repurchase plan pursuant to which the Company is authorized to repurchase up to 5% of the outstanding shares, or 2,205,451 shares.   At December 31, 2015, there are 1,987,506 shares yet to be purchased under the current plans.  At  December 31, 2015, a total of  13,179,026  shares were acquired under repurchase programs at a weighted average cost of  $13.28 per share.  The timing of the repurchases depend on certain factors, including but not limited to, market conditions and prices, the Company's liquidity and capital requirements, and alternative uses of capital.  Repurchased shares will be held as treasury stock and will be available for general corporate purposes.  The Company may conduct repurchases in accordance with a Rule 10b5-1 trading plan.  

4. Equity Incentive Plans
 
The 2007 Equity Incentive Plan ("the 2007 Equity Plan") was approved by the Company's stockholders on April 22, 2008, which authorized the issuance of up to 4,172,817 shares of Company common stock pursuant to grants of incentive and non-statutory stock options, stock appreciation rights, and restricted stock awards.  The 2011 Equity Incentive Plan ("2011 Equity Plan") was approved by the Company's stockholders on July 26, 2011.  The 2011 Equity Plan authorized the issuance of up to 5,790,849 shares of the Company's common stock pursuant to grants of stock options, restricted stock awards and restricted stock units, with no more than 1,654,528 of the shares issued as restricted stock awards or restricted stock units.  Employees and outside directors of the Company or Oritani Bank are eligible to receive awards under the Equity Plans.
 
Stock options are granted at an exercise price equal to the market price of our common stock on the grant date, based on quoted market prices. Stock options generally vest over a five-year service period and expire ten years from issuance.  The vesting of the options accelerate upon death or disability, retirement or a change in control and expire 90 days after termination of service, excluding disability or retirement.  The Company recognizes compensation expense for all option grants over the awards' respective requisite service periods.  Management estimated the fair values of all option grants using the Black-Scholes option-pricing model.   Management estimated the expected life of the options using the simplified method.  The Treasury yield in effect at the time of the grant provides the risk-free rate for periods within the contractual life of the option.  The Company classified share-based compensation for employees and outside directors within "compensation, payroll taxes and fringe benefits" in the consolidated statements of income to correspond with the same line item as the cash compensation paid.

 The fair value of the options issued during the six months ended December 31, 2015 was estimated using the Black-Scholes options-pricing model with the assumptions in the following table.  There were no options issued during the  six months ended December 31, 2014.

 
Six months ended December 31, 2015
Option shares granted
  
20,000
Expected dividend yield
  
6.75%
Expected volatility
  
26.10%
Risk-free interest rate
  
2.03%
Expected option life
 
6.5

The following is a summary of the Company's stock option activity and related information as of December 31, 2015 and changes therein during the six months then ended:

 
  
Number of Stock Options
    
Weighted Average Grant Date Fair Value
    
Weighted Average Exercise Price
    
Weighted Average Remaining Contractual Life (years)
  
Outstanding at June 30, 2015
    
5,900,164
    
$
2.57
    
$
11.50
      
5.8
  
Granted
    
20,000
      
1.64
      
15.89
      
10.0
  
Exercised
    
(482,436
)
    
2.44
      
11.02
      
3.7
  
Forfeited
    
(20,000
)
    
2.69
      
12.65
      
6.2
  
Outstanding at December 31, 2015
    
5,417,728
    
$
2.57
    
$
11.55
      
5.5
  
Exercisable at December 31, 2015
    
4,579,942
    
$
2.56
    
$
11.42
      
4.4
  
 
The Company recorded $523,000 and $533,000 of share based compensation expense related to the options granted for the three months ended December 31, 2015 and 2014, respectively.  The Company recorded $1.1 million of share based compensation expense related to the options granted for both six month periods ended December 31, 2015 and 2014.   Expected future expense related to the non-vested options outstanding at December 31, 2015 is $1.4 million over a weighted average period of 0.7 years. Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.


Restricted stock shares vest over a five-year service period on the anniversary date of the grant. Vesting of the restricted stock shares accelerate upon death or disability, retirement or a change in control. The product of the number of shares granted and the grant date market price of the Company's common stock determines the fair value of restricted shares under the Company's restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.
 
The following is a summary of the status of the Company's restricted stock shares as of December 31, 2015 and changes therein during the six months then ended:

 
  
Number of Shares Awarded
    
Weighted Average Grant Date Fair Value
  
Non-vested at June 30, 2015
    
668,040
    
$
12.17
  
Granted
    
10,000
      
15.89
  
Vested
    
(322,553
)
    
12.05
  
Forfeited
    
(6,000
)
    
11.95
  
Non-vested at December 31, 2015
    
349,487
    
$
12.38
  
 
The Company recorded $962,000 of share based compensation expense related to the restricted stock shares for both of the three month periods ended December 31, 2015 and 2014.  The Company recorded $1.9 million of share based compensation expense related to the restricted stock shares for both six month periods ended December 31, 2015 and 2014, respectively.   Expected future expense related to the non-vested restricted shares at December 31, 2015 is $2.9 million over a weighted average period of 0.9 years.

5. Post-retirement Benefits
 
The Company provides several post-retirement benefit plans to directors and to certain active and retired employees. The Company has a nonqualified Directors' Retirement Plan ("Retirement Plan"), a nonqualified Benefit Equalization Plan ("BEP Plan"), which provides benefits to employees who are disallowed certain benefits under the Company's qualified benefit plans, and a Post Retirement Medical Plan ("Medical Plan") for directors and certain eligible employees.

Net periodic benefit costs for the three and six months ended December 31, 2015 and 2014 are presented in the following tables.

 
Retirement Plan
    
BEP Plan
    
Medical Plan
  
 
Three months ended December 31,
  
 
2015
    
2014
    
2015
    
2014
    
2015
    
2014
  
 
(In thousands)
  
Service cost
  
$
43
    
$
37
    
$
—
    
$
—
    
$
19
    
$
31
  
Interest cost
    
57
      
51
      
12
      
10
      
59
      
45
  
Amortization of unrecognized:
                                                
Prior service cost
    
—
      
15
      
—
      
—
      
—
      
—
  
Net loss
    
7
      
—
      
10
      
6
      
39
      
2
  
Total
  
$
107
    
$
103
    
$
22
    
$
16
    
$
117
    
$
78
  

 
  
Six months ended December 31,
  
 
  
2015
    
2014
    
2015
    
2014
    
2015
    
2014
  
 
  
(In thousands)
  
Service cost
  
$
87
    
$
74
    
$
—
    
$
—
    
$
39
    
$
62
  
Interest cost
    
113
      
102
      
24
      
20
      
118
      
91
  
Amortization of unrecognized:
                                                
Prior service cost
    
—
      
30
      
—
      
—
      
—
      
—
  
Net loss
    
15
      
—
      
20
      
12
      
77
      
4
  
Total
  
$
215
    
$
206
    
$
44
    
$
32
    
$
234
    
$
157
  
 
6. Loans, net
 
Loans, net are summarized as follows:

 
  
December 31, 2015
    
June 30, 2015
  
 
  
(In thousands)
  
Residential
  
$
212,301
    
$
186,342
  
Residential commercial real estate
    
1,374,172
      
1,229,816
  
Credit/grocery retail commercial real estate
    
444,938
      
481,216
  
Other commercial real estate
    
912,057
      
894,016
  
Construction and land loans
    
7,616
      
6,132
  
Total loans
    
2,951,084
      
2,797,522
  
Less:
                
Deferred loan fees, net
    
8,981
      
10,421
  
Allowance for loan losses
    
30,635
      
30,889
  
Loans, net
  
$
2,911,468
    
$
2,756,212
  
 
The Company's allowance for loan losses is analyzed quarterly and many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other environmental factors.  There have been no material changes to the allowance for loan loss methodology as disclosed in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 14, 2015.

The activity in the allowance for loan losses for the three and six months ended December 31, 2015 and 2014 is summarized as  follows:

 
Three months ended December 31,
  
Six months ended December 31,
  
 
(In thousands)
  
 
2015
  
2014
  
2015
  
2014
  
Balance at beginning of period
  
$
30,634
    
$
31,569
    
$
30,889
    
$
31,401
  
Provisions for loan losses
    
—
      
—
      
—
      
200
  
Recoveries of loans previously charged off
    
1
      
1
      
1
      
2
  
Loans charged off
    
—
      
(304
)
    
(255
)
    
(337
)
Balance at end of period
  
$
30,635
    
$
31,266
    
$
30,635
    
$
31,266
  
 

The following table provides the three and six month activity in the allowance for loan losses allocated by loan category at December 31, 2015 and 2014.  The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
Three months ended December 31, 2015
  
 
Residential
  
Residential commercial real estate
  
Credit/grocery retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Unallocated
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
  
$
1,680
    
$
10,606
    
$
4,612
    
$
13,048
    
$
688
    
$
—
    
$
30,634
  
Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Recoveries
    
—
      
—
      
—
      
1
      
—
      
—
      
1
  
Provisions
    
(162
)
    
287
      
(958
)
    
809
      
24
      
—
      
—
  
Ending balance
  
$
1,518
    
$
10,893
    
$
3,654
    
$
13,858
    
$
712
    
$
—
    
$
30,635
  

 
  
Six months ended December 31, 2015
  
 
  
Residential
    
Residential commercial real estate
    
Credit/grocery retail commercial real estate
    
Other commercial real estate
    
Construction
and land loans
    
Unallocated
    
Total
  
 
  
(In thousands)
  
Allowance for loan losses:
  
   
   
   
   
   
   
 
Beginning balance
  
$
1,521
    
$
10,814
    
$
4,042
    
$
13,943
    
$
569
    
$
—
    
$
30,889
  
Charge-offs
    
(98
)
    
—
      
—
      
(157
)
    
—
      
—
      
(255
)
Recoveries
    
—
      
—
      
—
      
1
      
—
      
—
      
1
  
Provisions
    
95
      
79
      
(388
)
    
71
      
143
      
—
      
—
  
Ending balance
  
$
1,518
    
$
10,893
    
$
3,654
    
$
13,858
    
$
712
    
$
—
    
$
30,635
  

 
  
Three months ended December 31, 2014
  
 
  
Residential
    
Residential commercial real estate
    
Credit/grocery retail commercial real estate
    
Other commercial real estate
    
Construction
and land loans
    
Unallocated
    
Total
  
 
  
(In thousands)
  
Allowance for loan losses:
  
   
   
   
   
   
   
 
Beginning balance
  
$
2,170
    
$
5,679
    
$
2,743
    
$
19,036
    
$
301
    
$
1,640
    
$
31,569
  
Charge-offs
    
(304
)
    
—
      
—
      
—
      
—
      
—
      
(304
)
Recoveries
    
—
      
—
      
—
      
1
      
—
      
—
      
1
  
Provisions
    
347
      
3,532
      
423
      
(4,140
)
    
26
      
(188
)
    
—
  
Ending balance
  
$
2,213
    
$
9,211
    
$
3,166
    
$
14,897
    
$
327
    
$
1,452
    
$
31,266
  

   
Six months ended December 31, 2014
  
 
  
Residential
    
Residential commercial real estate
    
Credit/grocery retail commercial real estate
    
Other commercial real estate
    
Construction and land loans
    
Unallocated
    
Total
  
 
  
(In thousands)
  
Allowance for loan losses:
  
   
   
   
   
   
   
 
Beginning balance
  
$
1,568
    
$
5,327
    
$
2,652
    
$
17,995
    
$
1,108
    
$
2,751
    
$
31,401
  
Charge-offs
    
(304
)
    
—
      
—
      
(33
)
    
—
      
—
      
(337
)
Recoveries
    
—
      
—
      
—
      
1
      
1
      
—
      
2
  
Provisions
    
949
      
3,884
      
514
      
(3,066
)
    
(782
)
    
(1,299
)
    
200
  
Ending balance
  
$
2,213
    
$
9,211
    
$
3,166
    
$
14,897
    
$
327
    
$
1,452
    
$
31,266
  

The following table details the amount of loans receivables that are evaluated individually, and collectively, for impairment, and the related portion of allowance for loan loss that is allocated to each loan portfolio segment at December 31, 2015 and June 30, 2015.

   
At December 31, 2015
  
 
  
Residential
    
Residential commercial real estate
    
Credit/grocery retail commercial real estate
    
Other commercial real estate
    
Construction and land loans
    
Total
  
   
(In thousands)
  
Allowance for loan losses:
  
   
   
   
   
   
 
Individually evaluated for impairment
  
$
20
    
$
27
    
$
—
    
$
1,290
    
$
47
    
$
1,384
  
Collectively evaluated for impairment
    
1,498
      
10,866
      
3,654
      
12,568
      
665
      
29,251
  
Total
  
$
1,518
    
$
10,893
    
$
3,654
    
$
13,858
    
$
712
    
$
30,635
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
3,633
    
$
317
    
$
—
    
$
10,345
    
$
68
    
$
14,363
  
Collectively evaluated for impairment
    
208,668
      
1,373,855
      
444,938
      
901,712
      
7,548
      
2,936,721
  
Total
  
$
212,301
    
$
1,374,172
    
$
444,938
    
$
912,057
    
$
7,616
    
$
2,951,084
  
 
                                                

   
At June 30, 2015
  
 
  
Residential
    
Residential commercial real estate
    
Credit/grocery retail commercial real estate
    
Other commercial real estate
    
Construction
and land loans
    
Total
  
   
(In thousands)
  
Allowance for loan losses:
  
   
   
   
   
   
 
Individually evaluated for impairment
  
$
20
    
$
27
    
$
—
    
$
1,290
    
$
28
    
$
1,365
  
Collectively evaluated for impairment
    
1,501
      
10,787
      
4,042
      
12,653
      
541
      
29,524
  
Total
  
$
1,521
    
$
10,814
    
$
4,042
    
$
13,943
    
$
569
    
$
30,889
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
3,780
    
$
311
    
$
—
    
$
11,439
    
$
224
    
$
15,754
  
Collectively evaluated for impairment
    
182,562
      
1,229,505
      
481,216
      
882,577
      
5,908
      
2,781,768
  
Total
  
$
186,342
    
$
1,229,816
    
$
481,216
    
$
894,016
    
$
6,132
    
$
2,797,522
  
 
The Company continuously monitors the credit quality of its loan portfolio.  In addition to internal staff, the Company utilizes the services of a third party loan review firm to evaluate the credit quality ratings of its loan receivables.  Credit quality is monitored by reviewing certain credit quality indicators.  Assets classified as "Satisfactory" are deemed to possess average to superior credit quality, requiring no more than normal attention.  Assets classified as "Pass/Watch" have generally acceptable asset quality yet possess higher risk characteristics/circumstances than satisfactory assets.  Such characteristics may include strained liquidity, slow pay, stale financial statements or other circumstances requiring greater attention from bank staff.  We classify an asset as "Special Mention" if the asset has a potential weakness that warrants management's close attention.  Such weaknesses, if left uncorrected, may result in the deterioration of the repayment prospects of the asset.  An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as "Doubtful" have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  Included in the Substandard caption are all loans that were past due 90 days (or more) and all impaired loans.

The following table provides information about the loan credit quality at December 31, 2015 and June 30, 2015:

 
  
At December 31, 2015
  
 
  
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
  
(In thousands)
  
Residential
  
$
189,579
    
$
17,610
    
$
404
    
$
4,708
    
$
—
    
$
212,301
  
Residential commercial real estate
    
1,357,337
      
8,561
      
7,957
      
317
      
—
      
1,374,172
  
Credit/grocery retail commercial real estate
    
422,072
      
22,866
      
—
      
—
      
—
      
444,938
  
Other commercial real estate
    
817,338
      
61,365
      
14,083
      
19,271
      
—
      
912,057
  
Construction and land loans
    
7,549
      
—
      
—
      
67
      
—
      
7,616
  
Total
  
$
2,793,875
    
$
110,402
    
$
22,444
    
$
24,363
    
$
—
    
$
2,951,084
  

 
  
   
   
   
   
   
 
 
At June 30, 2015
  
 
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
(In thousands)
  
Residential
  
$
162,769
    
$
18,236
    
$
416
    
$
4,921
    
$
—
    
$
186,342
  
Residential commercial real estate
    
1,203,514
      
18,487
      
2,125
      
5,690
      
—
      
1,229,816
  
Credit/grocery retail commercial real estate
    
477,351
      
3,865
      
—
      
—
      
—
      
481,216
  
Other commercial real estate
    
790,076
      
68,689
      
15,366
      
19,885
      
—
      
894,016
  
Construction and land loans
    
5,908
      
—
      
—
      
224
      
—
      
6,132
  
Total
  
$
2,639,618
    
$
109,277
    
$
17,907
    
$
30,720
    
$
—
    
$
2,797,522
  
 

The following table provides information about loans past due at December 31, 2015 and June 30, 2015:

 
  
At December 31, 2015
  
 
  
30-59 Days Past Due
    
60-89 Days Past Due
    
90 days or More Past Due
    
Total Past Due
    
Current
    
Total Loans
    
Nonaccrual (1)
  
 
  
(In thousands)
  
Residential
  
$
1,782
    
$
772
    
$
738
    
$
3,292
    
$
209,009
    
$
212,301
    
$
1,262
  
Residential commercial real estate
    
1,176
      
—
      
—
      
1,176
      
1,372,996
      
1,374,172
      
317
  
Credit/grocery retail commercial real estate
    
—
      
—
      
—
      
—
      
444,938
      
444,938
      
—
  
Other commercial real estate
    
3,517
      
676
      
247
      
4,440
      
907,617
      
912,057
      
9,234
  
Construction and land loans
    
—
      
—
      
67
      
67
      
7,549
      
7,616
      
67
  
Total
  
$
6,475
    
$
1,448
    
$
1,052
    
$
8,975
    
$
2,942,109
    
$
2,951,084
    
$
10,880
  

 
  
At June 30, 2015
  
 
  
30-59 Days Past Due
    
60-89 Days Past Due
    
90 days or More Past Due
    
Total Past Due
    
Current
    
Total Loans
    
Nonaccrual (2)
  
 
  
(In thousands)
  
Residential
  
$
340
    
$
432
    
$
888
    
$
1,660
    
$
184,682
    
$
186,342
    
$
1,329
  
Residential commercial real estate
    
—
      
311
      
—
      
311
      
1,229,505
      
1,229,816
      
311
  
Credit/grocery retail commercial real estate
    
—
      
—
      
—
      
—
      
481,216
      
481,216
      
—
  
Other commercial real estate
    
3,278
      
—
      
3,569
      
6,847
      
887,169
      
894,016
      
10,711
  
Construction and land loans
    
—
      
—
      
224
      
224
      
5,908
      
6,132
      
224
  
Total
  
$
3,618
    
$
743
    
$
4,681
    
$
9,042
    
$
2,788,480
    
$
2,797,522
    
$
12,575
  

(1)
Included in nonaccrual loans at December 31, 2015 are residential loans totaling $156,000 that were 30-59 days past due; residential loans totaling $368,000 and other commercial real estate loans totaling $675,000 that were 60-89 days past due; residential commercial real estate loans totaling $317,000 and other commercial real estate loans totaling $8.3 million that were current.
(2)
Included in nonaccrual loans at June 30, 2015 are other commercial real estate loans totaling $1.1 million that were 30-59 days past due; residential loans totaling $16,000 and residential commercial real estate loans totaling $311,000 that were 60-89 days past due; residential loans totaling $425,000 and other commercial real estate loans totaling $6.1 million that were current.


The Company defines an impaired loan as a loan for which it is probable, based on current information, that the Company will not collect all amounts due under the contractual terms of the loan agreement.  Loans we individually classify as impaired include multifamily, commercial mortgage and construction loans with balances of $1.0 million or more, unless a condition exists for loans less than $1.0 million that would increase the Bank's potential loss exposure.  At December 31, 2015 impaired loans were primarily collateral-dependent and totaled $14.4 million, of which $6.7 million had a specific allowance for credit losses of $1.4 million and $7.7 million of impaired loans had no related allowance for credit losses.  At June 30, 2015 impaired loans were primarily collateral-dependent and totaled $15.8 million, of which $7.3 million  had a related allowance for credit losses of $1.4 million and $8.5 million of impaired loans had no related allowance for credit losses.

The following table provides information about the Company's impaired loans at December 31, 2015 and June 30, 2015:

 
  
Impaired Loans
  
 
  
At December 31, 2015
    
Six months ended December 31, 2015
  
 
  
Recorded Investment
    
Unpaid Principal Balance
    
Allowance
    
Average Recorded Investment
    
Interest Income Recognized
  
 
  
(In thousands)
  
With no related allowance recorded:
  
   
   
   
   
 
Residential
  
$
3,447
    
$
3,447
    
$
—
    
$
3,558
    
$
71
  
Other commercial real estate
    
4,221
      
4,221
      
—
      
4,519
      
105
  
 
    
7,668
      
7,668
      
—
      
8,077
      
176
  
With an allowance recorded:
                                        
Residential
  
$
166
    
$
186
    
$
20
    
$