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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 March 31, 2017
 
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) (Zip Code)
 
(201) 664-5400
(Registrant's telephone number, including area code)
 
N/A
(Former name, former address, and former fiscal year, 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, smaller reporting company, or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth 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
 
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. 

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 May 10, 2017, there were 56,245,065 shares of the Registrant's common stock, par value $0.01 per share, issued and 45,878,266 shares outstanding.




Oritani Financial Corp.
FORM 10-Q
 
Index

 
 
 
 
Part I. Financial Information
  Page
 
 
 
Item 1.
Financial Statements
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
8
 
 
 
 
9
 
 
 
Item 2.
36
 
 
 
Item 3.
50
 
 
 
Item 4.
52
 
 
 
 
Part II. Other Information
 
 
 
 
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)

 
 
March 31, 2017
   
June 30, 2016
 
 
 
(unaudited)
   
(audited)
 
Assets
           
Cash on hand and in banks
 
$
29,849
   
$
16,243
 
Federal funds sold and short term investments
   
1,219
     
328
 
Cash and cash equivalents
   
31,068
     
16,571
 
Loans, net
   
3,531,199
     
3,131,957
 
Securities available for sale, at fair value
   
166,894
     
141,850
 
Securities held to maturity, fair value of $188,079 and $170,706, respectively
   
190,569
     
168,107
 
Bank Owned Life Insurance (at cash surrender value)
   
95,306
     
93,327
 
Federal Home Loan Bank of New York ("FHLB") stock , at cost
   
38,464
     
38,003
 
Accrued interest receivable
   
10,849
     
9,943
 
Investments in real estate joint ventures, net
   
     
4,307
 
Real estate owned
   
140
     
487
 
Office properties and equipment, net
   
14,027
     
14,338
 
Deferred tax assets, net
   
40,250
     
47,360
 
Other assets
   
7,416
     
3,088
 
Total Assets
 
$
4,126,182
   
$
3,669,338
 
Liabilities
               
Deposits
 
$
2,680,196
   
$
2,260,003
 
Borrowings
   
791,157
     
781,623
 
Advance payments by borrowers for taxes and insurance
   
25,356
     
21,415
 
Other liabilities
   
72,806
     
71,097
 
Total Liabilities
   
3,569,515
     
3,134,138
 
Stockholders' Equity
               
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued;
45,876,066 shares outstanding at March 31, 2017 and 45,247,420 shares outstanding at June 30, 2016.
   
562
     
562
 
Additional paid-in capital
   
511,935
     
513,177
 
Non-vested restricted stock awards
   
(483
)
   
(4,242
)
Treasury stock, at cost; 10,368,999 shares at March 31, 2017 and 10,997,645 shares at June 30, 2016.
   
(138,067
)
   
(146,173
)
Unallocated common stock held by the employee stock ownership plan
   
(18,753
)
   
(20,481
)
Retained earnings
   
203,091
     
202,429
 
Accumulated other comprehensive loss, net of tax
   
(1,618
)
   
(10,072
)
Total Stockholders' Equity
   
556,667
     
535,200
 
Total Liabilities and Stockholders' Equity
 
$
4,126,182
   
$
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 March 31,
   
Nine months ended March 31,
 
 
 
2017
   
2016
   
2017
   
2016
 
 
 
(unaudited)
 
Interest income:
                       
Interest on loans
 
$
34,407
   
$
31,061
   
$
99,515
   
$
92,998
 
Interest on securities available for sale
   
799
     
1,146
     
2,451
     
3,503
 
Interest on securities held to maturity
   
909
     
738
     
2,583
     
1,972
 
Dividends on FHLB stock
   
469
     
401
     
1,343
     
1,193
 
Interest on federal funds sold and short term investments
   
2
     
2
     
5
     
4
 
Total interest income
   
36,586
     
33,348
     
105,897
     
99,670
 
Interest expense:
                               
Deposits
   
6,244
     
4,628
     
17,947
     
12,746
 
Borrowings
   
3,547
     
3,569
     
9,626
     
12,330
 
Total interest expense
   
9,791
     
8,197
     
27,573
     
25,076
 
Net interest income before provision for loan losses
   
26,795
     
25,151
     
78,324
     
74,594
 
Provision for loan losses
   
     
     
     
 
Net interest income after provision for loan losses
   
26,795
     
25,151
     
78,324
     
74,594
 
Other income:
                               
Service charges
   
206
     
151
     
564
     
617
 
Real estate operations, net
   
     
23
     
     
294
 
Income from investments in real estate joint ventures
   
193
     
267
     
769
     
985
 
Bank-owned life insurance
   
634
     
670
     
1,979
     
2,044
 
Net gain on sale of assets
   
20,621
     
2,009
     
20,621
     
31,875
 
Net gain on sale of securities
   
     
     
     
604
 
Other income
   
87
     
70
     
249
     
238
 
Total other income
   
21,741
     
3,190
     
24,182
     
36,657
 
Other expenses:
                               
Compensation, payroll taxes and fringe benefits
   
6,801
     
7,573
     
22,366
     
25,332
 
Advertising
   
143
     
91
     
358
     
271
 
Office occupancy and equipment expense
   
834
     
817
     
2,415
     
2,224
 
Data processing service fees
   
538
     
506
     
1,641
     
1,520
 
Federal insurance premiums
   
300
     
402
     
1,050
     
1,200
 
Net expense from real estate operations
   
181
     
15
     
305
     
356
 
FHLBNY prepayment fees
   
     
     
     
13,873
 
Other expenses
   
1,096
     
948
     
3,084
     
3,242
 
Total operating expenses
   
9,893
     
10,352
     
31,219
     
48,018
 
Income before income tax expense
   
38,643
     
17,989
     
71,287
     
63,233
 
Income tax expense
   
14,377
     
5,749
     
25,034
     
22,001
 
Net income
 
$
24,266
   
$
12,240
   
$
46,253
   
$
41,232
 
Earnings per basic common share
 
$
0.56
   
$
0.29
   
$
1.07
   
$
0.99
 
Earnings per diluted common share
 
$
0.54
   
$
0.28
   
$
1.04
   
$
0.96
 
 
See accompanying notes to unaudited consolidated financial statements.
4


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

 
 
Three months ended March 31,
   
Nine months ended March 31,
 
 
 
2017
   
2016
   
2017
   
2016
 
 
 
(unaudited)
 
Net of tax:
                       
Net income
 
$
24,266
   
$
12,240
   
$
46,253
   
$
41,232
 
Other comprehensive income (loss):
                               
Change in unrealized holding (loss) gain on securities available for sale
   
(3
)
   
1,721
     
(1,457
)
   
517
 
Reclassification adjustment for security gains included in net income
   
     
     
     
(343
)
Amortization related to post-retirement obligations
   
57
     
31
     
188
     
96
 
Net change in unrealized gain (loss) on interest rate swaps
   
536
     
(4,858
)
   
9,723
     
(5,755
)
Total other comprehensive income (loss)
   
590
     
(3,106
)
   
8,454
     
(5,485
)
Total comprehensive income
 
$
24,856
   
$
9,134
   
$
54,707
   
$
35,747
 
 
See accompanying notes to unaudited consolidated financial statements.
5


Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Nine months ended March 31, 2017 and 2016 (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 earnings
   
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
   
     
     
     
     
     
     
41,232
     
     
41,232
 
Other comprehensive loss, net of tax
   
     
     
     
     
     
     
     
(5,485
)
   
(5,485
)
Cash dividends declared
   
     
     
     
     
     
     
(42,556
)
   
     
(42,556
)
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
   
     
     
4,483
     
     
     
     
     
     
4,483
 
ESOP shares allocated or committed to be released
   
     
     
1,756
     
     
     
1,984
     
     
     
3,740
 
Exercise of stock options
   
1,151,466
     
     
     
     
15,303
     
     
(2,689
)
   
     
12,614
 
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 March 31, 2016
   
45,066,727
   
$
562
   
$
511,351
   
$
(4,242
)
 
$
(148,574
)
 
$
(20,819
)
 
$
199,127
   
$
(7,333
)
 
$
530,072
 

Continued on next page
6

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Nine months ended March 31, 2017 and 2016 (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 earnings
   
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
   
     
     
     
     
     
     
46,253
     
     
46,253
 
Other comprehensive loss, net of tax
   
     
     
     
     
     
     
     
8,454
     
8,454
 
Cash dividends declared
   
     
     
     
     
     
     
(44,223
)
   
     
(44,223
)
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
   
     
     
927
     
     
     
     
     
     
927
 
ESOP shares allocated or committed to be released
   
     
     
1,710
     
     
     
1,728
     
     
     
3,438
 
Exercise of stock options
   
717,301
     
     
     
     
9,547
     
     
(1,355
)
   
     
8,192
 
Vesting of restricted stock awards
   
     
     
(3,879
)
   
3,892
     
     
     
(13
)
   
     
 
Balance at March 31, 2017
   
45,876,066
   
$
562
   
$
511,935
   
$
(483
)
 
$
(138,067
)
 
$
(18,753
)
 
$
203,091
   
$
(1,618
)
 
$
556,667
 
 
See accompanying notes to unaudited consolidated financial statements.
7


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

 
 
Nine months ended March 31,
 
 
 
2017
   
2016
 
 
 
(unaudited)
 
Cash flows from operating activities:
     
Net income
 
$
46,253
   
$
41,232
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
ESOP and stock-based compensation expense
   
4,365
     
8,223
 
Tax benefit from stock-based compensation
   
1,289
     
1,886
 
Depreciation of premises and equipment
   
664
     
673
 
Net amortization and accretion of premiums and discounts on securities
   
995
     
879
 
Amortization and accretion of deferred loan fees, net
   
(1,757
)
   
(2,659
)
(Increase) decrease in deferred taxes
   
(509
)
   
1,051
 
Gain on sale of investment securities
   
     
(604
)
Gain on sale of real estate joint ventures and real estate investments
   
(20,621
)
   
(31,547
)
Gain on sale of real estate owned
   
     
(328
)
Writedown of real estate owned
   
215
     
250
 
Increase in cash surrender value of bank owned life insurance
   
(1,979
)
   
(2,044
)
Increase in accrued interest receivable
   
(906
)
   
(640
)
Decrease (increase) in other assets
   
14,290
     
(5,298
)
Increase in other liabilities
   
1,994
     
8,611
 
Net cash provided by operating activities
   
44,293
     
19,685
 
Cash flows from investing activities:
               
Net increase in loans receivable
   
(331,560
)
   
(196,162
)
Purchase of loans
   
(65,925
)
   
(63,020
)
Purchase of securities available for sale
   
(66,222
)
   
(42,213
)
Purchase of securities held to maturity
   
(51,150
)
   
(60,102
)
Proceeds from payments, calls and maturities of securities available for sale
   
38,114
     
46,662
 
Proceeds from payments, calls and maturities of securities held to maturity
   
28,196
     
15,727
 
Proceeds from sales of securities available for sale
   
     
38,985
 
Net (increase) decrease in Federal Home Loan Bank of New York stock
   
(461
)
   
3,186
 
Proceeds from sales of real estate joint ventures and real estate investments
   
25,083
     
32,590
 
Net increase in real estate held for investment
   
     
(21
)
Net (increase) decrease in real estate joint ventures
   
(155
)
   
337
 
Proceeds from sale of real estate owned
   
132
     
3,967
 
Purchase of fixed assets
   
(337
)
   
(747
)
Net cash used in investing activities
   
(424,285
)
   
(220,811
)
Cash flows from financing activities:
               
Net increase in deposits
   
420,193
     
261,906
 
Purchase of treasury stock
   
(1,574
)
   
(1,593
)
Dividends paid to shareholders
   
(44,223
)
   
(42,556
)
Exercise of stock options
   
8,192
     
12,614
 
Increase in advance payments by borrowers for taxes and insurance
   
3,941
     
2,167
 
Proceeds from borrowed funds
   
119,130
     
161,143
 
Repayment of borrowed funds
   
(109,596
)
   
(195,000
)
Payment of employee taxes withheld from shared-based awards
   
(1,574
)
   
(1,593
)
Net cash provided by financing activities
   
394,489
     
197,088
 
Net increase (decrease) in cash and cash equivalents
   
14,497
     
(4,038
)
Cash and cash equivalents at beginning of period
   
16,571
     
15,129
 
Cash and cash equivalents at end of period
 
$
31,068
   
$
11,091
 
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
27,180
   
$
25,480
 
Income taxes
 
$
16,712
   
$
21,554
 
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

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 nine month periods ended March 31, 2017 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 March 31, 2017 and June 30, 2016 and in the Consolidated Statements of Income for the three and nine months ended March 31, 2017 and 2016.  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 March 31,
   
Nine months ended March 31,
 
 
 
2017
   
2016
   
2017
   
2016
 
 
 
(In thousands, except per share data)
 
Net income
 
$
24,266
   
$
12,240
   
$
46,253
   
$
41,232
 
Weighted average common shares outstanding—basic
   
43,585
     
42,030
     
43,125
     
41,595
 
Effect of dilutive stock options outstanding
   
1,234
     
1,409
     
1,255
     
1,385
 
Weighted average common shares outstanding—diluted
   
44,819
     
43,439
     
44,380
     
42,980
 
Earnings per share-basic
 
$
0.56
   
$
0.29
   
$
1.07
   
$
0.99
 
Earnings per share-diluted
 
$
0.54
   
$
0.28
   
$
1.04
   
$
0.96
 
 
For the three months ended March 31, 2016 there were 4,007 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.  There were no anti-dilutive shares for the three months ended March 31, 2017.  Anti-dilutive shares for the nine months ended March 31, 2017 and 2016 were 1,405 and 5,250, 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 March 31, 2017, there are 1,888,851 shares yet to be purchased under the current plan.  At  March 31, 2017, 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 nine months ended March 31, 2017 and 2016 was estimated using the Black-Scholes options-pricing model with the assumptions in the following table.

 
Nine months ended March 31,
 
 
2017
 
2016
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 March 31, 2017 and changes therein during the nine 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
   
(717,301
)
   
2.57
     
11.42
     
3.6
 
Expired
   
(15,371
)
   
2.37
     
10.73
     
2.0
 
Outstanding at March 31, 2017
   
3,855,333
   
$
2.59
   
$
11.71
     
3.7
 
Exercisable at March 31, 2017
   
3,777,460
   
$
2.61
   
$
11.63
     
3.6
 
 
The Company recorded $17,000 and $522,000 of share based compensation expense related to options for the three months ended March 31, 2017 and 2016, respectively.  The Company recorded $301,000 and $1.6 million of share based compensation expense related to options for the nine months ended March 31, 2017 and 2016, respectively.    Expected future expense related to the non-vested options outstanding at March 31, 2017 is $115,000 over a weighted average period of 2.6 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 March 31, 2017 and changes therein during the nine 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 March 31, 2017
   
38,934
   
$
15.46
 
 
The Company recorded $60,000 and $966,000 of share based compensation expense related to the restricted stock shares for the three months ended March 31, 2017 and 2016, respectively.  The Company recorded $629,000 and $2.9 million of share based compensation expense related to the restricted stock shares for the nine months ended March 31, 2017 and 2016, respectively.   Expected future expense related to the non-vested restricted shares at March 31, 2017 is $464,000 over a weighted average period of 2.2 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 nine months ended March 31, 2017 and 2016 are presented in the following tables.

 
Retirement Plan
   
BEP Plan
   
Medical Plan
 
 
Three months ended March 31,
 
 
2017
   
2016
   
2017
   
2016
   
2017
   
2016
 
 
(In thousands)
 
Service cost
 
$
38
   
$
44
   
$
   
$
   
$
14
   
$
19
 
Interest cost
   
45
     
57
     
10
     
12
     
59
     
59
 
Amortization of unrecognized:
                                               
Net loss
   
     
7
     
13
     
10
     
87
     
39
 
Total
 
$
83
   
$
108
   
$
23
   
$
22
   
$
160
   
$
117
 

 
Nine months ended March 31,
 
 
 
2017
   
2016
   
2017
   
2016
   
2017
   
2016
 
 
(In thousands)
 
Service cost
 
$
113
   
$
131
   
$
   
$
   
$
43
   
$
58
 
Interest cost
   
136
     
170
     
30
     
36
     
176
     
176
 
Amortization of unrecognized:
                                               
Net loss
   
     
22
     
39
     
30
     
262
     
116
 
Total
 
$
249
   
$
323
   
$
69
   
$
66
   
$
481
   
$
350
 
 

12

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

6. Loans, net
 
Loans, net are summarized as follows:

 
 
March 31, 2017
   
June 30, 2016
 
 
 
(In thousands)
 
Residential
 
$
249,581
   
$
223,701
 
Residential commercial real estate
   
1,932,366
     
1,596,876
 
Grocery/credit retail commercial real estate
   
516,123
     
457,058
 
Other commercial real estate
   
868,537
     
887,443
 
Construction and land loans
   
2,904
     
4,810
 
Total loans
   
3,569,511
     
3,169,888
 
Less:
               
Deferred loan fees, net
   
8,435
     
7,980
 
Allowance for loan losses
   
29,877
     
29,951
 
Loans, net
 
$
3,531,199
   
$
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 nine months ended March 31, 2017 and 2016 is summarized as follows:

 
Three months ended March 31,
 
Nine months ended March 31,
 
 
(In thousands)
 
 
2017
 
2016
 
2017
 
2016
 
Balance at beginning of period
 
$
29,877
   
$
30,635
   
$
29,951
   
$
30,889
 
Provisions for loan losses
   
     
     
     
 
Recoveries of loans previously charged off
   
     
5
     
2
     
6
 
Loans charged off
   
     
(692
)
   
(76
)
   
(947
)
Balance at end of period
 
$
29,877
   
$
29,948
   
$
29,877
   
$
29,948
 
 
13

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


The following table provides the three and nine month activity in the allowance for loan losses allocated by loan category at March 31, 2017 and 2016.  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 March 31, 2017
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit retail commercial real estate
 
Other commercial real estate
 
Construction and land loans
 
Total
 
 
(In thousands)
 
Allowance for loan losses:
                       
Beginning balance
 
$
1,626
   
$
14,424
   
$
3,327
   
$
10,366
   
$
134
   
$
29,877
 
Charge-offs
   
     
     
     
     
     
 
Recoveries
   
     
     
     
     
     
 
Provisions
   
(503
)
   
940
     
(551
)
   
88
     
26
     
 
Ending balance
 
$
1,123
   
$
15,364
   
$
2,776
   
$
10,454
   
$
160
   
$
29,877
 

 
Nine months ended March 31, 2017
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit 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
   
(102
)
   
2,527
     
(870
)
   
(1,397
)
   
(158
)
   
 
Ending balance
 
$
1,123
   
$
15,364
   
$
2,776
   
$
10,454
   
$
160
   
$
29,877
 

 
Three months ended March 31, 2016
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit retail commercial real estate
 
Other commercial real estate
 
Construction and land loans
 
Total
 
 
(In thousands)
 
Allowance for loan losses:
                       
Beginning balance
 
$
1,518
   
$
10,893
   
$
3,654
   
$
13,858
   
$
712
   
$
30,635
 
Charge-offs
   
     
     
     
(692
)
   
     
(692
)
Recoveries
   
     
     
     
5
     
     
5
 
Provisions
   
(143
)
   
962
     
14
     
(431
)
   
(402
)
   
 
Ending balance
 
$
1,375
   
$
11,855
   
$
3,668
   
$
12,740
   
$
310
   
$
29,948
 

 
Nine months ended March 31, 2016
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit 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
)
   
     
     
(849
)
   
     
(947
)
Recoveries
   
     
     
     
6
     
     
6
 
Provisions
   
(48
)
   
1,041
     
(374
)
   
(360
)
   
(259
)
   
 
Ending balance
 
$
1,375
   
$
11,855
   
$
3,668
   
$
12,740
   
$
310
   
$
29,948
 

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 March 31, 2017 and June 30, 2016.

   
At March 31, 2017
 
 
 
Residential
   
Residential commercial real estate
   
Grocery/credit 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
   
1,103
     
15,364
     
2,776
     
10,386
     
140
     
29,769
 
Total
 
$
1,123
   
$
15,364
   
$
2,776
   
$
10,454
   
$
160
   
$
29,877
 
Loans receivable:
                                               
Individually evaluated for impairment
 
$
3,685
   
$
   
$
   
$
10,302
   
$
20
   
$
14,007
 
Collectively evaluated for impairment
   
245,896
     
1,932,366
     
516,123
     
858,235
     
2,884
     
3,555,504
 
Total
 
$
249,581
   
$
1,932,366
   
$
516,123
   
$
868,537
   
$
2,904
   
$
3,569,511
 
 
                                               

   
At June 30, 2016
 
 
 
Residential
   
Residential commercial real estate
   
Grocery/credit 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 March 31, 2017 and June 30, 2016:

 
 
At March 31, 2017
 
 
 
Satisfactory
   
Pass/Watch
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(In thousands)
 
Residential
 
$
227,358
   
$
17,213
   
$
159
   
$
4,851
   
$
   
$
249,581
 
Residential commercial real estate
   
1,902,398
     
27,962
     
2,006
     
     
     
1,932,366
 
Grocery/credit retail commercial real estate
   
502,710
     
13,413
     
     
     
     
516,123
 
Other commercial real estate
   
733,960
     
96,635
     
19,100
     
18,842
     
     
868,537
 
Construction and land loans
   
2,884
     
     
     
20
     
     
2,904
 
Total
 
$
3,369,310
   
$
155,223
   
$
21,265
   
$
23,713
   
$
   
$
3,569,511
 

 
 
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
 
Grocery/credit 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 March 31, 2017 and June 30, 2016:

 
 
At March 31, 2017
 
 
 
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
 
$
331
   
$
718
   
$
811
   
$
1,860
   
$
247,721
   
$
249,581
   
$
1,193
 
Residential commercial real estate
   
243
     
     
     
243
     
1,932,123
     
1,932,366
     
 
Grocery/credit retail commercial real estate
   
     
     
     
     
516,123
     
516,123
     
 
Other commercial real estate
   
1,869
     
205
     
2,406
     
4,480
     
864,057
     
868,537
     
9,097
 
Construction and land loans
   
     
     
20
     
20
     
2,884
     
2,904
     
20
 
Total
 
$
2,443
   
$
923
   
$
3,237
   
$
6,603
   
$
3,562,908
   
$
3,569,511
   
$
10,310
 

 
 
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
 
Grocery/credit 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 March 31, 2017 are residential loans totaling $347,000 and other commercial real estate loans totaling $205,000 that were 60-89 days past due, residential loans totaling $14,000 and other commercial real estate loans totaling $1.2 million that were 30-59 days past due, residential loans totaling $21,000 and other commercial real estate loans totaling $5.3 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 March 31, 2017 impaired loans were primarily collateral-dependent and totaled $14.0 million, of which $752,000 had a related allowance for credit losses of $108,000 and $13.3 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 March 31, 2017 and June 30, 2016:

   
At March 31, 2017
   
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
   
9,750
     
9,750
     
     
8,907
     
8,907
     
 
Construction and land loans
   
     
     
     
     
     
 
 
   
13,255
     
13,255
     
     
12,664
     
12,664
     
 
With an allowance recorded:
                                               
Residential
 
$
160
   
$
180
   
$
20
   
$
164
   
$
184
   
$
20
 
Residential commercial real estate
   
     
     
     
     
     
 
Other commercial real estate
   
484
     
552
     
68
     
196
     
247
     
51
 
Construction and land loans
   
     
20
     
20
     
9
     
56
     
47
 
 
   
644
     
752
     
108
     
369
     
487
     
118
 
Total: