Oritani Financial Corp - FORM 10-Q - February 8, 2017

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EX-32 - EXHIBIT 32 - Oritani Financial Corpexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - Oritani Financial Corpexhibit31_2.htm
EX-31.1 - EXHIBIT31.1 - Oritani Financial Corpexhibit31_1.htm
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, 2016
 
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 8, 2017, there were 56,245,065 shares of the Registrant's common stock, par value $0.01 per share, issued and 45,864,066 shares outstanding.



Oritani Financial Corp.
FORM 10-Q
 
Index

 
 
  
 
Part I. Financial Information
  Page
 
 
 
Item 1.
3
 
 
 
 
Consolidated Balance Sheets as of December 31, 2016 (unaudited) and June 30, 2016
3
 
 
 
 
Consolidated Statements of Income for the Three and Six Months Ended December 31, 2016 and 2015 (unaudited)
4
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2016 and 2015 (unaudited)
5
 
 
 
 
Consolidated Statements of Stockholders' Equity for the Six Months Ended December 31, 2016 and 2015 (unaudited)
6
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2016 and 2015 (unaudited)
8
 
 
 
 
9
 
 
 
Item 2.
36
 
 
 
Item 3.
50
 
 
 
Item 4.
52
 
 
 
 
 
 
 
 
Item 1.
52
 
 
 
Item 1A.
52
 
 
 
Item 2.
52
 
 
 
Item 3.
52
 
 
 
Item 4.
52
 
 
 
Item 5.
52
 
 
 
Item 6.
53
 
 
 
 
54
 
Part I. Financial Information
Item 1. Financial Statements
 
Oritani Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

 
  
December 31, 2016
    
June 30, 2016
  
 
  
(unaudited)
    
(audited)
  
Assets
            
Cash on hand and in banks
  
$
29,533
    
$
16,243
  
Federal funds sold and short term investments
    
2,849
      
328
  
Cash and cash equivalents
    
32,382
      
16,571
  
Loans, net
    
3,383,198
      
3,131,957
  
Securities available for sale, at fair value
    
180,194
      
141,850
  
Securities held to maturity, fair value of $198,685 and $170,706, respectively.
    
201,813
      
168,107
  
Bank Owned Life Insurance (at cash surrender value)
    
94,672
      
93,327
  
Federal Home Loan Bank of New York stock ("FHLB"), at cost
    
38,878
      
38,003
  
Accrued interest receivable
    
10,247
      
9,943
  
Investments in real estate joint ventures, net
    
4,364
      
4,307
  
Real estate owned
    
266
      
487
  
Office properties and equipment, net
    
13,939
      
14,338
  
Deferred tax assets, net
    
40,328
      
47,360
  
Other assets
    
11,888
      
3,088
  
Total Assets
  
$
4,012,169
    
$
3,669,338
  
Liabilities
                
Deposits
  
$
2,591,074
    
$
2,260,003
  
Borrowings
    
800,635
      
781,623
  
Advance payments by borrowers for taxes and insurance
    
20,372
      
21,415
  
Other liabilities
    
61,624
      
71,097
  
Total Liabilities
    
3,473,705
      
3,134,138
  
Stockholders' Equity
                
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued;
45,860,066 shares outstanding at December 31, 2016 and 45,247,420 shares outstanding at June 30, 2016.
    
562
      
562
  
Additional paid-in capital
    
511,487
      
513,177
  
Non-vested restricted stock awards
    
(483
)
    
(4,242
)
Treasury stock, at cost; 10,384,999 shares at December 31, 2016 and 10,997,645 shares at June 30, 2016.
    
(138,280
)
    
(146,173
)
Unallocated common stock held by the employee stock ownership plan
    
(19,099
)
    
(20,481
)
Retained earnings
    
186,485
      
202,429
  
Accumulated other comprehensive loss, net of tax
    
(2,208
)
    
(10,072
)
Total Stockholders' Equity
    
538,464
      
535,200
  
Total Liabilities and Stockholders' Equity
  
$
4,012,169
    
$
3,669,338
  

See accompanying notes to unaudited consolidated financial statements.
3

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,
  
 
  
2016
    
2015
    
2016
    
2015
  
 
  
(unaudited)
  
Interest income:
                        
Interest on loans
  
$
33,135
    
$
31,148
    
$
65,108
    
$
61,937
  
Interest on securities available for sale
    
826
      
1,154
      
1,652
      
2,357
  
Interest on securities held to maturity
    
871
      
663
      
1,674
      
1,234
  
Dividends on FHLB stock
    
417
      
391
      
874
      
792
  
Interest on federal funds sold and short term investments
    
2
      
1
      
3
      
2
  
Total interest income
    
35,251
      
33,357
      
69,311
      
66,322
  
Interest expense:
                                
Deposits
    
5,964
      
4,456
      
11,703
      
8,118
  
Borrowings
    
3,058
      
3,607
      
6,079
      
8,761
  
Total interest expense
    
9,022
      
8,063
      
17,782
      
16,879
  
Net interest income before provision for loan losses
    
26,229
      
25,294
      
51,529
      
49,443
  
Provision for loan losses
    
—
      
—
      
—
      
—
  
Net interest income after provision for loan losses
    
26,229
      
25,294
      
51,529
      
49,443
  
Other income:
                                
Service charges
    
176
      
208
      
358
      
466
  
Real estate operations, net
    
—
      
36
      
—
      
271
  
Income from investments in real estate joint ventures
    
260
      
311
      
576
      
718
  
Bank-owned life insurance
    
666
      
678
      
1,345
      
1,374
  
Net gain on sale of assets
    
—
      
25,554
      
—
      
29,866
  
Net gain on sale of securities
    
—
      
604
      
—
      
604
  
Other income
    
81
      
91
      
162
      
168
  
Total other income
    
1,183
      
27,482
      
2,441
      
33,467
  
Other expenses:
                                
Compensation, payroll taxes and fringe benefits
    
8,207
      
10,056
      
15,565
      
17,759
  
Advertising
    
125
      
90
      
215
      
180
  
Office occupancy and equipment expense
    
781
      
689
      
1,581
      
1,407
  
Data processing service fees
    
559
      
496
      
1,103
      
1,014
  
Federal insurance premiums
    
300
      
399
      
750
      
798
  
Net expense from real estate operations
    
69
      
11
      
124
      
341
  
FHLBNY prepayment fees
    
—
      
13,873
      
—
      
13,873
  
Other expenses
    
1,017
      
1,315
      
1,988
      
2,294
  
Total operating expenses
    
11,058
      
26,929
      
21,326
      
37,666
  
Income before income tax expense
    
16,354
      
25,847
      
32,644
      
45,244
  
Income tax expense
    
4,978
      
9,470
      
10,657
      
16,252
  
Net income
  
$
11,376
    
$
16,377
    
$
21,987
    
$
28,992
  
Earnings per basic common share
  
$
0.26
    
$
0.39
    
$
0.51
    
$
0.70
  
Earnings per diluted common share
  
$
0.26
    
$
0.38
    
$
0.50
    
$
0.68
  
 
See accompanying notes to unaudited consolidated financial statements.
4

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

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2016
    
2015
    
2016
    
2015
  
 
  
(unaudited)
  
Net of tax:
                        
Net income
  
$
11,376
    
$
16,377
    
$
21,987
    
$
28,992
  
Other comprehensive income (loss):
                                
Change in unrealized holding loss on securities available for sale
    
(1,062
)
    
(1,650
)
    
(1,454
)
    
(1,204
)
Reclassification adjustment for security gains included in net income
    
—
      
(343
)
    
—
      
(343
)
Amortization related to post-retirement obligations
    
57
      
31
      
130
      
64
  
Net change in unrealized gain (loss) on interest rate swaps
    
7,889
      
1,468
      
9,188
      
(896
)
Total other comprehensive income (loss)
    
6,884
      
(494
)
    
7,864
      
(2,379
)
Total comprehensive income
  
$
18,260
    
$
15,883
    
$
29,851
    
$
26,613
  
 
See accompanying notes to unaudited consolidated financial statements.
5

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2016 and 2015 (unaudited)
(In thousands, except share data)

 
  
Shares Outstanding
    
Common stock
    
Additional paid-in capital
    
Non-vested 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, 2015
    
44,012,239
    
$
562
    
$
508,999
    
$
(8,088
)
  
$
(162,344
)
  
$
(22,803
)
  
$
203,192
    
$
(1,848
)
  
$
517,670
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
28,992
      
—
      
28,992
  
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
)
    
—
      
—
      
—
      
—
  
Cumulative effect of change in accounting principle-adoption of ASU 2016-09
    
—
      
—
      
—
      
—
      
—
      
—
      
(33
)
    
—
      
(33
)
Balance at December 31, 2015
    
44,397,697
    
$
562
    
$
509,538
    
$
(4,242
)
  
$
(157,466
)
  
$
(21,158
)
  
$
195,797
    
$
(4,227
)
  
$
518,804
  

Continued on next page
6


 
  
Shares Outstanding
    
Common stock
    
Additional paid-in capital
    
Non-vested 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, 2016
    
45,247,420
    
$
562
    
$
513,177
    
$
(4,242
)
  
$
(146,173
)
  
$
(20,481
)
  
$
202,429
    
$
(10,072
)
  
$
535,200
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
21,987
      
—
      
21,987
  
Other comprehensive loss, net of tax
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
7,864
      
7,864
  
Cash dividends declared
    
—
      
—
      
—
      
—
      
—
      
—
      
(36,598
)
    
—
      
(36,598
)
Purchase of treasury stock
    
(98,655
)
    
—
      
—
      
—
      
(1,574
)
    
—
      
—
      
—
      
(1,574
)
Issuance of restricted stock awards
    
10,000
      
—
      
—
      
(133
)
    
133
      
—
      
—
      
—
      
—
  
Compensation cost for stock options and restricted stock
    
—
      
—
      
849
      
—
      
—
      
—
      
—
      
—
      
849
  
ESOP shares allocated or committed to be released
    
—
      
—
      
1,340
      
—
      
—
      
1,382
      
—
      
—
      
2,722
  
Exercise of stock options
    
701,301
      
—
      
—
      
—
      
9,334
      
—
      
(1,320
)
    
—
      
8,014
  
Vesting of restricted stock awards
    
—
      
—
      
(3,879
)
    
3,892
      
—
      
—
      
(13
)
    
—
      
—
  
Balance at December 31, 2016
    
45,860,066
    
$
562
    
$
511,487
    
$
(483
)
  
$
(138,280
)
  
$
(19,099
)
  
$
186,485
    
$
(2,208
)
  
$
538,464
  
 
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,
  
 
  
2016
    
2015
  
 
  
(unaudited)
  
Cash flows from operating activities:
      
Net income
  
$
21,987
    
$
28,992
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
ESOP and stock-based compensation expense
    
3,571
      
6,071
  
Tax benefit from stock-based compensation
    
1,286
      
959
  
Depreciation of premises and equipment
    
454
      
447
  
Net amortization and accretion of premiums and discounts on securities
    
625
      
594
  
Amortization and accretion of deferred loan fees, net
    
(1,129
)
    
(1,836
)
Decrease (increase) in deferred taxes
    
1,082
      
(1,842
)
Gain on sale of investment securities
    
—
      
(604
)
Gain on sale of real estate joint ventures and real estate investments
    
—
      
(29,538
)
Gain on sale of real estate owned
    
—
      
(328
)
Writedown of real estate owned
    
89
      
250
  
Proceeds from sale of real estate owned
    
132
      
3,967
  
Increase in cash surrender value of bank owned life insurance
    
(1,345
)
    
(1,374
)
Increase in accrued interest receivable
    
(304
)
    
(451
)
Decrease in other assets
    
7,554
      
3,872
  
(Decrease) increase in other liabilities
    
(9,185
)
    
5,884
  
Net cash provided by operating activities
    
24,817
      
15,063
  
Cash flows from investing activities:
                
Net increase in loans receivable
    
(184,187
)
    
(116,396
)
Purchase of loans
    
(65,925
)
    
(37,341
)
Purchase of securities available for sale
    
(66,222
)
    
(42,213
)
Purchase of securities held to maturity
    
(49,649
)
    
(58,960
)
Proceeds from payments, calls and maturities of securities available for sale
    
25,004
      
35,193
  
Proceeds from payments, calls and maturities of securities held to maturity
    
15,637
      
9,194
  
Proceeds from sales of securities available for sale
    
—
      
38,985
  
Net (increase) decrease in Federal Home Loan Bank of New York stock
    
(875
)
    
137
  
Proceeds from sales of real estate joint ventures and real estate investments
    
—
      
29,638
  
Net increase in real estate held for investment
    
—
      
(1
)
Net (increase) decrease in real estate joint ventures
    
(57
)
    
389
  
Purchase of fixed assets
    
(40
)
    
(583
)
Net cash used in investing activities
    
(326,314
)
    
(141,958
)
Cash flows from financing activities:
                
Net increase in deposits
    
331,071
      
157,739
  
Purchase of treasury stock
    
(1,574
)
    
(1,593
)
Dividends paid to shareholders
    
(36,598
)
    
(35,229
)
Exercise of stock options
    
8,014
      
5,305
  
Decrease in advance payments by borrowers for taxes and insurance
    
(1,043
)
    
(439
)
Proceeds from borrowed funds
    
19,500
      
182,435
  
Repayment of borrowed funds
    
(488
)
    
(185,000
)
Payment of employee taxes withheld from shared-based awards
    
(1,574
)
    
(1,593
)
Net cash provided by financing activities
    
317,308
      
121,625
  
Net increase (decrease) in cash and cash equivalents
    
15,811
      
(5,270
)
Cash and cash equivalents at beginning of period
    
16,571
      
15,129
  
Cash and cash equivalents at end of period
  
$
32,382
    
$
9,859
  
Supplemental cash flow information:
                
Cash paid during the period for:
                
Interest
  
$
17,746
    
$
17,409
  
Income taxes
  
$
15,787
    
$
12,383
  
Noncash transfer
                
Loans receivable transferred to real estate owned
  
$
—
    
$
317
  

See accompanying notes to unaudited consolidated financial statements.


8
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 subsidiary, Oritani Bank (the "Bank") 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 three and six month periods ended December 31, 2016 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2017.

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") 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, 2016 Annual Report on Form 10-K, filed with the SEC on September 13, 2016.

The consolidated financial statements have been prepared in conformity with 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, 2016 and June 30, 2016 and in the Consolidated Statements of Income for the three and six months ended December 31, 2016 and 2015.  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.
9
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


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 the assumed proceeds from option exercises and 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,
  
 
  
2016
    
2015
    
2016
    
2015
  
 
  
(In thousands, except per share data)
  
Net income
  
$
11,376
    
$
16,377
    
$
21,987
    
$
28,992
  
Weighted average common shares outstanding—basic
    
43,024
      
41,504
      
42,899
      
41,380
  
Effect of dilutive stock options outstanding
    
1,294
      
1,545
      
1,216
      
1,440
  
Weighted average common shares outstanding—diluted
    
44,318
      
43,049
      
44,115
      
42,820
  
Earnings per share-basic
  
$
0.26
    
$
0.39
    
$
0.51
    
$
0.70
  
Earnings per share-diluted
  
$
0.26
    
$
0.38
    
$
0.50
    
$
0.68
  
 
For the three months ended December 31, 2016 and 2015 there were 787 and 4,705 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, 2016 and 2015 were 2,733 and 6,114, 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, 2016, there are 1,888,851 shares yet to be purchased under the current plan.  At  December 31, 2016, a total of  13,277,681  shares had been acquired under repurchase programs at a weighted average cost of  $13.30 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.  
10
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

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 options issued during the six months ended December 31, 2016 and 2015 was estimated using the Black-Scholes options-pricing model with the assumptions in the following table.

 
Six months ended December 31,
 
  
2016
  
2015
Option shares granted
  
20,000
    
20,000
Expected dividend yield
  
5.35%
    
6.75%
Expected volatility
  
20.81%
    
26.10%
Risk-free interest rate
  
1.39%
    
2.03%
Expected option life
  
6.5
  
 
6.5

The following is a summary of the Company's stock option activity and related information as of December 31, 2016 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, 2016
    
4,568,005
    
$
2.59
    
$
11.65
      
5.3
  
Granted
    
20,000
      
1.34
      
15.65
      
10.0
  
Exercised
    
(701,301
)
    
2.57
      
11.43
      
3.6
  
Forfeited
    
—
      
—
      
—
      
—
  
Outstanding at December 31, 2016
    
3,886,704
    
$
2.59
    
$
11.71
      
3.9
  
Exercisable at December 31, 2016
    
3,808,831
    
$
2.60
    
$
11.63
      
3.9
  
 
The Company recorded $17,000 and $523,000 of share based compensation expense related to options for the three months ended December 31, 2016 and 2015, respectively.  The Company recorded $283,000 and $1.1 million of share based compensation expense related to options for the six months ended December 31, 2016 and 2015, respectively.    Expected future expense related to the non-vested options outstanding at December 31, 2016 is $131,000 over a weighted average period of 2.8 years.  Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.



11
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
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, 2016 and changes therein during the six months then ended:

 
  
Number of Shares Awarded
    
Weighted Average Grant Date Fair Value
  
Non-vested at June 30, 2016
    
347,487
    
$
12.37
  
Granted
    
10,000
      
15.65
  
Vested
    
(318,553
)
    
12.08
  
Forfeited
    
—
      
—
  
Non-vested at December 31, 2016
    
38,934
    
$
15.46
  
 
The Company recorded $60,000 and $962,000 of share based compensation expense related to the restricted stock shares for the three months ended December 31, 2016 and 2015, respectively.  The Company recorded $569,000 and $1.9 million of share based compensation expense related to the restricted stock shares for the six months ended December 31, 2016 and 2015, respectively.   Expected future expense related to the non-vested restricted shares at December 31, 2016 is $524,000 over a weighted average period of 2.5 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, 2016 and 2015 are presented in the following tables.

 
Retirement Plan
    
BEP Plan
    
Medical Plan
  
 
Three months ended December 31,
  
 
2016
    
2015
    
2016
    
2015
    
2016
    
2015
  
 
(In thousands)
  
Service cost
  
$
38
    
$
43
    
$
—
    
$
—
    
$
14
    
$
19
  
Interest cost
    
45
      
57
      
10
      
12
      
59
      
59
  
Amortization of unrecognized:
                                                
Net loss
    
—
      
7
      
13
      
10
      
87
      
39
  
Total
  
$
83
    
$
107
    
$
23
    
$
22
    
$
160
    
$
117
  

 
Six months ended December 31,
  
 
  
2016
    
2015
    
2016
    
2015
    
2016
    
2015
  
 
(In thousands)
  
Service cost
  
$
76
    
$
87
    
$
—
    
$
—
    
$
29
    
$
39
  
Interest cost
    
91
      
113
      
20
      
24
      
117
      
118
  
Amortization of unrecognized:
                                                
Net loss
    
—
      
15
      
26
      
20
      
174
      
77
  
Total
  
$
167
    
$
215
    
$
46
    
$
44
    
$
320
    
$
234
  
 

12
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
6. Loans, net
 
Loans, net are summarized as follows:

 
  
December 31, 2016
    
June 30, 2016
  
 
  
(In thousands)
  
Residential
  
$
238,861
    
$
223,701
  
Residential commercial real estate
    
1,808,344
      
1,596,876
  
Credit/grocery retail commercial real estate
    
519,780
      
457,058
  
Other commercial real estate
    
852,076
      
887,443
  
Construction and land loans
    
2,361
      
4,810
  
Total loans
    
3,421,422
      
3,169,888
  
Less:
                
Deferred loan fees, net
    
8,347
      
7,980
  
Allowance for loan losses
    
29,877
      
29,951
  
Loans, net
  
$
3,383,198
    
$
3,131,957
  
 
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 13, 2016.

The activity in the allowance for loan losses for the three and six months ended December 31, 2016 and 2015 is summarized as follows:

 
Three months ended December 31,
  
Six months ended December 31,
  
 
(In thousands)
  
 
2016
  
2015
  
2016
  
2015
  
Balance at beginning of period
  
$
29,878
    
$
30,634
    
$
29,951
    
$
30,889
  
Provisions for loan losses
    
—
      
—
      
—
      
—
  
Recoveries of loans previously charged off
    
—
      
1
      
2
      
1
  
Loans charged off
    
(1
)
    
—
      
(76
)
    
(255
)
Balance at end of period
  
$
29,877
    
$
30,635
    
$
29,877
    
$
30,635
  
 
13
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The following table provides the three and six month activity in the allowance for loan losses allocated by loan category at December 31, 2016 and 2015.  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, 2016
  
 
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:
                        
Beginning balance
  
$
1,794
    
$
13,610
    
$
3,472
    
$
10,843
    
$
159
    
$
29,878
  
Charge-offs
    
—
      
—
      
—
      
(1
)
    
—
      
(1
)
Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
  
Provisions
    
(168
)
    
814
      
(145
)
    
(476
)
    
(25
)
    
—
  
Ending balance
  
$
1,626
    
$
14,424
    
$
3,327
    
$
10,366
    
$
134
    
$
29,877
  

 
Six months ended December 31, 2016
  
 
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:
                        
Beginning balance
  
$
1,300
    
$
12,837
    
$
3,646
    
$
11,850
    
$
318
    
$
29,951
  
Charge-offs
    
(75
)
    
—
      
—
      
(1
)
    
—
      
(76
)
Recoveries
    
—
      
—
      
—
      
2
      
—
      
2
  
Provisions
    
401
      
1,587
      
(319
)
    
(1,485
)
    
(184
)
    
—
  
Ending balance
  
$
1,626
    
$
14,424
    
$
3,327
    
$
10,366
    
$
134
    
$
29,877
  

 
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
  
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
  
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
  

14
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

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, 2016 and June 30, 2016.

   
At December 31, 2016
  
 
  
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
    
$
—
    
$
—
    
$
68
    
$
20
    
$
108
  
Collectively evaluated for impairment
    
1,606
      
14,424
      
3,327
      
10,298
      
114
      
29,769
  
Total
  
$
1,626
    
$
14,424
    
$
3,327
    
$
10,366
    
$
134
    
$
29,877
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
3,686
    
$
—
    
$
—
    
$
9,912
    
$
20
    
$
13,618
  
Collectively evaluated for impairment
    
235,175
      
1,808,344
      
519,780
      
842,164
      
2,341
      
3,407,804
  
Total
  
$
238,861
    
$
1,808,344
    
$
519,780
    
$
852,076
    
$
2,361
    
$
3,421,422
  
 
                                                

   
At June 30, 2016
  
 
  
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
    
$
—
    
$
—
    
$
51
    
$
47
    
$
118
  
Collectively evaluated for impairment
    
1,280
      
12,837
      
3,646
      
11,799
      
271
      
29,833
  
Total
  
$
1,300
    
$
12,837
    
$
3,646
    
$
11,850
    
$
318
    
$
29,951
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
3,631
    
$
310
    
$
—
    
$
9,154
    
$
56
    
$
13,151
  
Collectively evaluated for impairment
    
220,070
      
1,596,566
      
457,058
      
878,289
      
4,754
      
3,156,737
  
Total
  
$
223,701
    
$
1,596,876
    
$
457,058
    
$
887,443
    
$
4,810
    
$
3,169,888
  
 
15
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

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, 2016 and June 30, 2016:

 
  
At December 31, 2016
  
 
  
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
  
(In thousands)
  
Residential
  
$
214,800
    
$
1,840
    
$
17,882
    
$
4,339
    
$
—
    
$
238,861
  
Residential commercial real estate
    
1,788,183
      
18,143
      
2,018
      
—
      
—
      
1,808,344
  
Credit/grocery retail commercial real estate
    
509,488
      
10,292
      
—
      
—
      
—
      
519,780
  
Other commercial real estate
    
740,627
      
72,753
      
18,974
      
19,722
      
—
      
852,076
  
Construction and land loans
    
2,341
      
—
      
—
      
20
      
—
      
2,361
  
Total
  
$
3,255,439
    
$
103,028
    
$
38,874
    
$
24,081
    
$
—
    
$
3,421,422
  

 
  
At June 30, 2016
  
 
  
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
  
(In thousands)
  
Residential
  
$
199,911
    
$
18,882
    
$
531
    
$
4,377
    
$
—
    
$
223,701
  
Residential commercial real estate
    
1,583,686
      
9,563
      
3,317
      
310
      
—
      
1,596,876
  
Credit/grocery retail commercial real estate
    
438,562
      
15,523
      
2,973
      
—
      
—
      
457,058
  
Other commercial real estate
    
798,457
      
51,567
      
17,553
      
19,866
      
—
      
887,443
  
Construction and land loans
    
4,754
      
—
      
—
      
56
      
—
      
4,810
  
Total
  
$
3,025,370
    
$
95,535
    
$
24,374
    
$
24,609
    
$
—
    
$
3,169,888
  

16
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The following table provides information about loans past due at December 31, 2016 and June 30, 2016:

 
  
At December 31, 2016
  
 
  
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
  
$
1,840
    
$
833
    
$
879
    
$
3,552
    
$
235,309
    
$
238,861
    
$
893
  
Residential commercial real estate
    
246
      
—
      
—
      
246
      
1,808,098
      
1,808,344
      
—
  
Credit/grocery retail commercial real estate
    
—
      
—
      
—
      
—
      
519,780
      
519,780
      
—
  
Other commercial real estate
    
1,047
      
377
      
2,962
      
4,386
      
847,690
      
852,076
      
9,480
  
Construction and land loans
    
—
      
—
      
20
      
20
      
2,341
      
2,361
      
20
  
Total
  
$
3,133
    
$
1,210
    
$
3,861
    
$
8,204
    
$
3,413,218
    
$
3,421,422
    
$
10,393
  

 
  
At June 30, 2016
  
 
  
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
  
$
1,745
    
$
531
    
$
684
    
$
2,960
    
$
220,741
    
$
223,701
    
$
931
  
Residential commercial real estate
    
3,601
      
1,166
      
—
      
4,767
      
1,592,109
      
1,596,876
      
310
  
Credit/grocery retail commercial real estate
    
—
      
—
      
—
      
—
      
457,058
      
457,058
      
—
  
Other commercial real estate
    
3,746
      
—
      
1,641
      
5,387
      
882,056
      
887,443
      
8,671
  
Construction and land loans
    
—
      
—
      
56
      
56
      
4,754
      
4,810
      
56
  
Total
  
$
9,092
    
$
1,697
    
$
2,381
    
$
13,170
    
$
3,156,718
    
$
3,169,888
    
$
9,968
  

(1)
Included in nonaccrual loans at December 31, 2016 are residential loans totaling $14,000 that were 60-89 days past due and other commercial real estate loans totaling $6.5 million that were current.
(2)
Included in nonaccrual loans at June 30, 2016 are residential loans totaling $180,000 that were 30-59 days past due; residential loans totaling $66,000, residential commercial real estate loans totaling $310,000 and other commercial real estate loans totaling $7.0 million that were current.
 

17
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

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, 2016 impaired loans were primarily collateral-dependent and totaled $13.6 million, of which $848,000 had a related allowance for credit losses of $108,000 and $12.8 million of impaired loans had no related allowance for credit losses.  At June 30, 2016 impaired loans were primarily collateral-dependent and totaled $13.2 million, of which $487,000  had a related allowance for credit losses of $118,000 and $12.7 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, 2016 and June 30, 2016:

   
At December 31, 2016
    
At June 30, 2016
  
   
Recorded Investment
    
Unpaid Principal Balance
    
Allowance
    
Recorded Investment
    
Unpaid Principal Balance
    
Allowance
  
   
(In thousands)
  
With no related allowance recorded:
                                    
Residential
  
$
3,505
    
$
3,505
    
$
—
    
$
3,447
    
$
3,447
    
$
—
  
Residential commercial real estate
    
—
      
—
      
—
      
310
      
310
      
—
  
Other commercial real estate
    
9,265
      
9,265
      
—
      
8,907
      
8,907
      
—
  
Construction and land loans
    
—
      
—
      
—
      
—
      
—
      
—
  
 
    
12,770
      
12,770
      
—
      
12,664
      
12,664
      
—
  
With an allowance recorded:
                                                
Residential
  
$
161
    
$
181
    
$
20
    
$
164
    
$
184
    
$
20
  
Residential commercial real estate
    
—
      
—
      
—
      
—
      
—
      
—
  
Other commercial real estate
    
579
      
647
      
68
      
196
      
247
      
51
  
Construction and land loans
    
—
      
20
      
20
      
9
      
56
      
47
  
 
    
740
      
848
      
108
      
369
      
487
      
118
  
Total:
                                                
Residential
  
$
3,666
    
$
3,686
    
$
20
    
$
3,611