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EX-32 - Oritani Financial Corpexhibit32k.htm
EX-31.2 - Oritani Financial Corpexhibit31_2k.htm
EX-31.1 - Oritani Financial Corpexhibit31_1k.htm
EX-23.2 - KPMG CONSENT - Oritani Financial Corpexhibit23_2k.htm
EX-23.1 - CROWE HORWATH CONSENT - Oritani Financial Corpexhibit23_1k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended         June 30, 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
 
07676
(Address of Principal Executive Offices)
 
Zip Code
 
(201) 664-5400
(Registrant's telephone number)
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
The NASDAQ Stock Market, LLC
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES NO
   
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES NO
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. .
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company.  See the 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)
..
Small 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 August 29, 2017, there were 56,245,065 shares of the Registrant's common stock, par value $0.01 per share, issued and 46,180,504 shares outstanding.
 


The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on December 31, 2016, as reported by the Nasdaq Global Market, was approximately $745.1 million.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
1. Proxy Statement for the 2017 Annual Meeting of Stockholders of the Registrant (Part III).


Oritani Financial Corp.
2017 Annual Report on Form 10-K
 
Index
 
 
 
 
Page
 
 
 
 
Part I
 
 
 
 
Item 1.
1
Item 1A.
26
Item 1B.
29
Item 2.
30
Item 3.
30
Item 4.
Mine Safety Disclosures
30
 
 
 
 
Part II
 
 
 
 
Item 5.
30
Item 6.
32
Item 7.
33
Item 7A.
49
Item 8.
49
Item 9.
50
Item 9A.
50
Item 9B.
51
 
 
 
 
Part III
 
 
 
 
Item 10.
51
Item 11.
51
Item 12.
51
Item 13.
52
Item 14.
52
 
 
 
 
Part IV
 
Item 15.
52
Item 16.
Form 10-K Summary
52
     
 
 
 
Signatures
 
106
 
PART I
 
ITEM 1.
BUSINESS
 
Forward-Looking Statements
 
This Annual Report contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements may be identified by reference to a future period or periods, or by use of forward looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events: general economic conditions, either nationally or in our market or service areas, that are worse than expected; significantly increased competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; changes in consumer spending, borrowing, and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, taxing authorities and the Financial Accounting Standards Board; and changes in our organization, compensation, and benefit plans.
 
Oritani Financial Corp. ("the Company") wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions, which may be made to any forward looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
Oritani Financial Corp.
 
Oritani Financial Corp. is the stock holding company for Oritani Bank.  It is a Delaware corporation that was incorporated in March 2010.  The Company is the successor to Oritani Financial Corp. ("Oritani-Federal"), a federal corporation and former stock holding company of Oritani Bank.  In conjunction with the second step transaction of Oritani Financial Corp., MHC, the former mutual holding company parent of Oritani-Federal, Oritani-Federal ceased to exist and the Company became its successor.  The second step transaction was completed on June 24, 2010 and accounted for as capital raised by entities under common control.  The Company sold a total of 41,363,214 shares of common stock at $10.00 per share in the related stock offering.  Concurrent with the completion of the offering, shares of Oritani-Federal common stock owned by public stockholders were exchanged for 1.50 shares of the Company's common stock.  In lieu of fractional shares, shareholders were paid in cash.  The Company also issued 481,546 shares of common stock for the accelerated vesting of restricted stock awards triggered by the conversion.  As a result of the offering, the exchange, and shares issued due to the accelerated vesting, as of June 30, 2010, the Company had 56,202,485 shares outstanding.  Net proceeds from the offering were $401.8 million.
 
Oritani Financial Corp. owns 100% of the outstanding shares of common stock of Oritani Bank. Oritani Financial Corp. primarily engages in the business of holding the common stock of Oritani Bank as well as two inactive limited liability companies that owned a variety of real estate investments. Oritani Financial Corp.'s executive office is located at 370 Pascack Road, in the Township of Washington, New Jersey 07676, and its telephone number is (201) 664-5400. Oritani Financial Corp. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System ("FRB"). At June 30, 2017, Oritani Financial Corp. had consolidated assets of $4.14 billion, consolidated deposits of $2.86 billion and consolidated stockholders' equity of $559.2 million. Its consolidated net income for the fiscal year ended June 30, 2017 was $49.1 million.
 
Oritani Financial Corp.'s website (www.oritani.com) contains a link to the Company's filings with the Securities and Exchange Commission including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these filings, if any.  These filings are available, free of charge, as soon as practicable after they are filed with the Securities and Exchange Commission and can be found under the 'Investor Relations' heading.  Oritani-Federal filings can also be found here.  Information on the website should not be considered a part of this report.
 
Oritani Bank
 
General
 
Oritani Bank is a New Jersey-chartered savings bank headquartered in the Township of Washington, New Jersey. Oritani Bank was originally founded in 1911, as a New Jersey building and loan association. Over the years, Oritani Bank has expanded through internal growth as well as through a series of business combinations. Oritani Bank conducts business from its corporate office located at 370 Pascack Road, in the Township of Washington, New Jersey, lending offices in New York City and Cherry Hill, New Jersey. and its 25 branch offices located in the New Jersey counties of Bergen, Hudson, Essex and Passaic. The telephone number at its corporate office is (201) 664-5400. At June 30, 2017, Oritani Bank's assets totaled $4.14 billion and deposits totaled $2.86 billion.
 
Our principal business consists of attracting retail and commercial bank deposits from the general public in the areas surrounding our corporate office in the Township of Washington, New Jersey and our branch offices located in the New Jersey Counties of Bergen, Hudson, Essex and Passaic, and investing those deposits, together with funds generated from operations, in commercial real estate loans, one to four family residential mortgage loans as well as in second mortgage and equity loans, and investment securities. We originate loans primarily for investment and hold such loans in our portfolio. Occasionally, we will also enter into loan participations. Our revenues are derived principally from interest on loans and securities as well as our investments in real estate and real estate joint ventures. We also generate revenues from fees and service charges and other income. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities.

 
1


Market Area
 
From our headquarters in the Township of Washington, New Jersey, we operate 26 full service branches, including our corporate office. We operate branches in four counties of New Jersey: Bergen, Hudson, Essex and Passaic.  The majority of our branches (seventeen) and deposits are located in Bergen County.  In addition, we operate five branches in Hudson County, one branch in Essex County and two branches in Passaic County.  Our residential lending area generally encompasses northern New Jersey.  Our market area for commercial lending, including residential CRE, is broader, generally including the state of New Jersey, eastern Pennsylvania, southern New York, New York City, Long Island, and Delaware.
 
In terms of population, Bergen County ranks as the largest county in New Jersey (out of 21 counties) while Hudson County ranks fourth, Essex County ranks third and Passaic County ranks ninth.  The economy in our primary market area has benefited from being varied and diverse. It is largely urban and suburban with a broad economic base.  As one of the wealthiest states in the nation, New Jersey, with an estimated population of 8.9 million, is considered one of the most attractive banking markets in the United States.  As of June 2017, the unemployment rate for New Jersey was 4.1%, which was lower than the national rate of 4.4%, with a total of 4.5 million New Jersey residents employed as of June 2017.  Bergen County is considered part of the New York metropolitan area.  Its county seat is Hackensack.  Bergen County ranks 45th among the highest-income counties in the United States in 2015 in terms of per-capita income.
 
Bergen County is bordered by Rockland County, New York to the north, the Hudson River to the east, Hudson County to the south, Passaic County to the west and also a small border with Essex County to the west.
 
Passaic County is bordered by Orange County, New York to the north, Rockland County, New York to the northeast, Bergen County to the east, Essex County to the south, Morris County to the southwest and Sussex County to the west.
 
Essex County is bordered by Passaic County to the north, Morris County to the west, Union County to the south, Hudson County to the east and also a small border with Bergen County to the east.
 
Hudson County's only land border is with Bergen County to the north and west. It is bordered by the Hudson River and Upper New York Bay to the east; Kill van Kull (which connects Newark Bay with Upper New York Bay) to the south and Newark Bay and the Hackensack River or the Passaic River to the west.
 
Competition
 
We face intense competition within our market area both in making loans and attracting deposits.  Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions.  Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking.  As of June 30, 2016, the latest date for which statistics are available, our market share of deposits was approximately 4.0% in Bergen County and less than 1.0% in each of Essex, Hudson, and Passaic Counties.
 
Our competition for loans and deposits comes principally from locally owned and out-of-state commercial banks, savings institutions, mortgage banking firms, insurance companies, the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.

Lending Activities
 
Our principal lending activity is the origination of residential commercial real estate loans and commercial real estate loans as well as residential real estate mortgage loans and home equity loans.  Our residential commercial real estate portfolio consists primarily of mortgage loans secured by apartment buildings.  Our commercial real estate portfolio consist primarily of mortgage loans secured by retail anchor shopping centers, commercial offices, retail space, warehouses, and mixed-use buildings.  Our residential real estate portfolio consists of one to four family residential real property and home equity loans.  The residential commercial real estate and commercial real estate portfolios represented $3.35 billion, or 92.9%, of our total loan portfolio at June 30, 2017.  One to four family residential real estate mortgage loans represented $253.3 million, or 7.0%, of our total loan portfolio at June 30, 2017.  At June 30, 2017, construction and land loans totaled $4.2 million, or 0.1%, of our loan portfolio.
 
2


Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, by type of loan at the date  indicated.

   
June 30,
 
   
2017
   
2016
   
2015
   
2014
   
2013
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Residential
 
$
253,310
     
7.0
%
 
$
223,701
     
7.1
%
 
$
186,342
     
6.7
%
 
$
158,180
     
6.2
%
 
$
151,372
     
6.5
%
Residential CRE
   
1,945,297
     
54.0
     
1,596,876
     
50.3
     
1,229,816
     
43.9
     
998,439
     
39.3
     
996,168
     
43.1
 
Grocery/Credit Retail CRE
   
535,567
     
14.9
     
457,058
     
14.4
     
481,216
     
17.2
     
624,705
     
24.5
     
364,741
     
15.7
 
Other CRE
   
866,826
     
24.0
     
887,443
     
28.0
     
894,016
     
32.0
     
729,071
     
28.6
     
760,336
     
32.8
 
Construction and land loans
   
4,210
     
0.1
     
4,810
     
0.2
     
6,132
     
0.2
     
34,951
     
1.4
     
44,537
     
1.9
 
Total loans
   
3,605,210
     
100.0
%
   
3,169,888
     
100.0
%
   
2,797,522
     
100.0
%
   
2,545,346
     
100.0
%
   
2,317,154
     
100.0
%
Other items:
                                                                               
Net deferred loan origination fees
   
8,235
             
7,980
             
10,421
             
10,051
             
9,991
         
Allowance for loan losses
   
30,272
             
29,951
             
30,889
             
31,401
             
31,381
         
Total loans, net
 
$
3,566,703
           
$
3,131,957
           
$
2,756,212
           
$
2,503,894
           
$
2,275,782
         

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2017. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization.


   
Residential
   
Residential CRE
   
Grocery/Credit Retail CRE
   
Other CRE
   
Construction and Land Loans
   
Total
 
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
 
Due During the Years Ended June 30,
 
(Dollars in thousands)
 
2018
 
$
20,335
     
4.42
%
 
$
24,375
     
4.04
%
 
$
     
%
 
$
65,764
     
4.38
%
 
$
597
     
5.00
%
 
$
111,071
     
4.32
%
2019 to 2020
   
2,578
     
4.77
     
31,561
     
3.77
     
7,548
     
6.12
     
65,479
     
4.66
     
1,913
     
5.00
     
109,079
     
4.51
 
2021 to 2022
   
1,060
     
4.61
     
174,209
     
3.82
     
84,370
     
3.55
     
97,157
     
4.72
     
     
     
356,796
     
4.00
 
2023  to 2027
   
11,158
     
4.06
     
1,258,106
     
3.44
     
320,028
     
3.63
     
502,842
     
3.92
     
1,404
     
5.00
     
2,093,538
     
3.59
 
2028  to 2032
   
28,669
     
3.42
     
359,049
     
3.33
     
69,216
     
3.99
     
106,635
     
4.83
     
     
     
563,569
     
3.70
 
2033 and beyond
   
189,510
     
3.93
     
97,997
     
4.13
     
54,405
     
4.49
     
28,949
     
5.03
     
296
     
5.75
     
371,157
     
4.15
 
Total
 
$
253,310
     
3.93
%
 
$
1,945,297
     
3.50
%
 
$
535,567
     
3.79
%
 
$
866,826
     
4.25
%
 
$
4,210
     
5.05
%
 
$
3,605,210
     
3.76
%

The following table sets forth, at June 30, 2017, the dollar amount of all fixed- and adjustable-rate loans that are contractually due after June 30, 2018.
 
 
 
Fixed
   
Adjustable
   
Total
 
 
 
(In thousands)
 
Residential
 
$
195,357
   
$
37,618
   
$
$232,975
 
Residential CRE
   
193,714
     
1,727,208
     
1,920,922
 
Grocery/Credit Retail CRE
   
101,197
     
434,370
     
535,567
 
Other CRE
   
200,076
     
600,986
     
801,062
 
Construction and land loans
   
296
     
3,317
     
3,613
 
Total loans
 
$
690,640
   
$
2,803,499
   
$
3,494,139
 
 
3

Loans:
 
Residential Loans. We originate one to four family residential mortgage loans, substantially all of which are secured by properties located in our primary market area.  At June 30, 2017, $253.3 million, or 7.0% of our loan portfolio, consisted of one to four family residential mortgage loans and home equity loans.  We generally retain for our portfolio substantially all of the loans that we originate.  Residential mortgage loan originations are generally obtained from existing or past customers, through advertising, and through referrals from local builders, real estate brokers, and attorneys, and are underwritten pursuant to Oritani Bank's policies and standards.  The Company maintains a program where a fee is paid to a broker for a loan referral that results in an origination or a purchase of a recently closed loan.  Generally, residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%.  We generally will not make loans with a loan-to-value ratio in excess of 90%.  Fixed rate mortgage loans are originated for terms of up to 30 years.  Generally, fixed rate residential mortgage loans are underwritten according to Freddie Mac guidelines, policies and procedures, with a maximum origination amount of $2.0 million.  Oritani Bank's residential underwriting satisfies the "qualified mortgages" regulations issued by the Consumer Financial Protection Bureau.  Oritani Bank does not originate non-qualified mortgage loans.  We do not originate or purchase, and our loan portfolio does not include, any sub-prime loans.
 
We also offer adjustable rate mortgage loans for one to four family properties, with an interest rate based on the weekly average yield on U.S. Treasuries adjusted to a constant maturity of one-year, which adjust either annually or every three years from the outset of the loan or which adjust annually after a five-, seven- or ten-year initial fixed rate period.  Originations of adjustable rate residential mortgage loans totaled $12.6 million and $13.0 million for the fiscal years ended June 30, 2017 and 2016, respectively.  Our adjustable rate residential mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 6%, regardless of the initial rate.  Our adjustable rate residential mortgage loans amortize over terms of up to 30 years.
 
Adjustable rate mortgage loans decrease the Bank's risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower.  At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates.  Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable rate mortgage loans may be limited during periods of rapidly rising interest rates.  At June 30, 2017, $37.6 million, or 14.9%, of our residential mortgage loans had adjustable rates of interest.
 
In an effort to provide financing for first-time home buyers, we offer our own first-time home buyer loan program.  This program offers one to four family residential mortgage loans to qualified individuals.  These loans are underwritten and offered with terms and adjustable and fixed rates of interest similar to our other one to four family mortgage loan products.  With this program, borrowers receive a discounted mortgage interest rate and do not pay certain loan origination fees.  Such loans must be secured by an owner-occupied residence.  These loans are originated using similar underwriting guidelines as our other one to four family mortgage loans.  Such loans are originated in amounts of up to 90% of the lower of the property's appraised value or the sale price.  Private mortgage insurance is not required for such loans.  The maximum amount of such loan is $275,000.  We also participate in the Federal Home Loan Bank's ("FHLB") Mortgage Partnership Finance ("MPF") program.  The MPF program offers potentially lower rates to qualified individuals on one to four family residential mortgage loans and provides the Bank with additional opportunity for income.  Loans originated through the MPF program can be sold to FHLB with minimal recourse to the Bank.
 
We also offer our directors, officers and employees who satisfy certain criteria and our general underwriting standards fixed or adjustable rate loan products with reduced interest rates, excluding loans originated through the MPF program.  These loans adhere to all other terms and conditions contained in the loan policy.
 
All residential mortgage loans that we originate include "due-on-sale" clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid.  Regulations limit the amount that a savings bank may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated.  All borrowers are required to obtain title insurance for the benefit of Oritani Bank.  We also require homeowner's insurance and fire and casualty insurance and, where circumstances warrant, flood insurance on properties securing real estate loans.

We also offer second mortgage loans and home equity lines of credit, which are included in the residential mortgage loan portfolio.  These mortgage loans are secured by one to four family residences, substantially all of which are located in our primary market area.  At June 30, 2017, second mortgage and equity loans totaled $9.0 million, or 0.25% of total loans.  Additionally, at June 30, 2017, the unadvanced amounts of home equity lines of credit totaled $6.9 million.  The underwriting standards utilized for second mortgage loans and equity lines of credit include a determination of the applicant's credit history, an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan.  The combined (first and second mortgage liens) loan-to-value ratio for second mortgage loans and home equity lines of credit is generally limited to 70%.  Second mortgage loans are offered with fixed and adjustable rates of interest and with terms of up to 30 years.  Our home equity lines of credit have adjustable rates of interest which are indexed to the prime rate, as reported in The Wall Street Journal.
 
Second mortgage loans and equity loans entail greater risk than do residential mortgage loans, particularly if they are secured by an asset that has a superior security interest.  In addition, equity loan collections depend on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Commercial Real Estate ("CRE") Loans. We originate residential and non-residential commercial real estate mortgage loans.  At June 30, 2017, $3.35 billion, or 92.9% of our loan portfolio, consisted of commercial real estate loans.  Our residential CRE mortgage loans, $1.95 billion or  54.0% of our loan portfolio, are primarily permanent loans secured by apartment buildings and mobile home parks.  The non-residential CRE mortgage portfolio consists of grocery/credit retail CRE and other CRE.  Our grocery/credit retail CRE mortgage loans, $535.6 million or 14.9% of our loan portfolio, are primarily permanent mortgage loans secured by grocery or credit anchor tenants at multi-store, or stand alone, facilities.  Our other CRE mortgage loans, $866.8 million or 24.0% of our loan portfolio, are primarily permanent loans secured by improved property such as retail multi-stores without a credit anchor, mixed-use properties, self-storage facilities, commercial warehouses, and office buildings.  The typical CRE mortgage loan has a fixed rate of interest for the first three or five years, after which the loan reprices to a market index plus a spread, with a floor of the original rate. The fixed rate period is occasionally extended to as much as ten years.  These loans typically amortize over 30 years though we will often require shorter amortization. We also offer such loans on a self-amortizing basis with fixed rate terms up to 20 years.  References to commercial real estate loans below refer to residential and non-residential commercial real estate.
4


The terms and conditions of each CRE loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors.  In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower's expertise and credit history, risks inherent in the property's tenants, the global cash flows of the borrower, the value of the underlying property and other factors.  Loan to value ratios are a very important consideration.  Depending on the collateral type, our lending policies allow commercial real estate loan originations in an amount up to 80% of the appraised value or the purchase price of the property, whichever is less.  However, our maximum loan to value ratio is generally 75% on purchase  transactions and 70% on refinance transactions.  Other factors we consider, with respect to commercial real estate rental properties, include the term of the lease(s) and the quality of the tenant(s).  We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.25 times.  Environmental reports are generally required for commercial real estate loans.  Commercial real estate loans made to corporations, partnerships and other business entities may require personal guarantees by the principals as warranted.  Property inspections are conducted, for most CRE loans, no less than every three years, or more frequently as warranted.
 
For commercial real estate loans with balances greater than $2.5 million, a borrower's financial information is monitored on an ongoing basis by requiring annual financial statement updates and payment history reviews.  We require commercial borrowers to provide annually updated financial statements and federal tax returns.  These requirements also apply to the individual principals of our commercial borrowers.  We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable.  The largest residential CRE loan in our portfolio at June 30, 2017 was a $33.4 million loan secured by multi-tenant, mixed use buildings, located in Brooklyn, New York.  The largest grocery/credit retail CRE loan at June 30, 2017 was a $30.1 million loan secured by several freestanding pharmacy stores, located in Virginia, Pennsylvania and Connecticut.  The largest other CRE loan in our portfolio at June 30, 2017 was a $26.8 million loan secured by multi-tenant, mixed use buildings, located in Brooklyn, New York.  All of these loans are performing in accordance with their terms.  Our largest commercial real estate relationship consisted of 47 properties primarily secured by bank branches, CVS, and  Walgreens stores, located mainly in our primary market area with a public real estate investment trust.  The aggregate outstanding loan balance for this relationship, comprised of several legal entities, is $63.9 million at June 30, 2017, and these loans are all performing in accordance with their terms.
 
Loans secured by commercial real estate (residential and non-residential) generally involve larger principal amounts and a greater degree of risk than one to four family residential mortgage loans.  Because payments on loans secured by commercial real estate are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.  See "Item 1A, Risk Factors – Our Continued Emphasis On Commercial Real Estate Lending Could Expose Us To Increased Lending Risks."
 
Construction Loans. We curtailed construction lending during fiscal 2009 due to market and economic conditions and now only originate such loans on an exception basis.  We originate construction loans for the development of residential and commercial properties located in our primary market area.  Residential construction loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction of their personal residences.  At June 30, 2017, construction and land loans totaled $4.2 million, or 0.1 % of total loans.
 
5


 
 
Loan Originations, Purchases, Sales, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our corporate office as well as commercial real estate origination offices in Cherry Hill, New Jersey and New York City.  All loans originated by us are underwritten pursuant to our policies and procedures.  We originate both adjustable rate and fixed rate loans.  Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates.
 
During the fiscal years ended June 30, 2017 and 2016, loan originations totaled $732.0 million and $710.1 million, respectively, all of which were retained by us.  Loan purchases totaled $65.9 million and $98.8 million for the years ended June 30, 2017 and 2016.  There were no loans originated and sold under the FHLB MPF program during fiscal 2017 or 2016.
 
We will also participate in loans, sometimes as the "lead lender."  When we are not the lead lender, the underwriting of the loan participations closely match our own underwriting criteria and procedures.  At June 30, 2017, we had $152.8 million in loan participation interests.
 
At June 30, 2017, we were servicing loans sold in the amount of $2.9 million.  Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.

Non-Performing and Problem Assets
 
We commence collection efforts when a loan becomes ten days past due with system generated reminder notices.  Subsequent late charges and delinquent notices are issued and the account is monitored on a regular basis thereafter.  Collections meetings with executive management are regularly held and every delinquent loan is discussed.  When a loan is more than 30 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated.  Personal, direct contact with the borrower is attempted early in the collection process.  We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency.  A summary report of all loans 30 days or more past due is reported to the Board of Directors on a monthly basis.  If no repayment plan is in process and the loan is delinquent at least two payments, the file is referred to counsel for the commencement of foreclosure or other collection efforts.
 
Loans are placed on non-accrual status when they are more than 90 days delinquent.  When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed.  Once the outstanding principal balance is brought current, income is recognized to the extent the loan is deemed fully collectible.  If the deficiencies causing the delinquency are resolved, such loans may be returned to accrual status once all arrearages are resolved and a period of satisfactory payment performance, usually six months.  See additional discussion regarding our non-performing assets at June 30, 2017 in "Management Discussion and Analysis."
6


 
Non-Performing Assets and Restructured Loans. The table below sets forth the amounts and categories of our non-performing assets and troubled debt restructurings at the dates indicated.

 
 
At June 30,
 
 
 
2017 (1)
   
2016 (2)
   
2015 (3)
   
2014 (4)
   
2013 (5)
 
 Non-performing assets
 
(Dollars in thousands)
 
Non-accrual loans:
                             
Residential
 
$
1,556
   
$
931
   
$
1,329
   
$
5,350
   
$
4,044
 
Residential CRE
   
     
310
     
311
     
3,508
     
7,139
 
Other CRE
   
8,667
     
8,671
     
10,711
     
8,670
     
9,539
 
Construction and land loans
   
     
56
     
224
     
444
     
3,188
 
Total non-accrual loans
 
$
10,223
   
$
9,968
   
$
12,575
   
$
17,972
   
$
23,910
 
Loans greater than 90 days delinquent and still accruing
 
$
   
$
   
$
   
$
   
$
 
Total non-performing loans
 
$
10,223
   
$
9,968
   
$
12,575
   
$
17,972
   
$
23,910
 
Real estate owned
   
140
     
487
     
4,059
     
3,850
     
1,742
 
Total non-performing assets
 
$
10,363
   
$
10,455
   
$
16,634
   
$
21,822
   
$
25,652
 
Ratios:
                                       
Non-performing loans to total loans
   
0.28
%
   
0.31
%
   
0.45
%
   
0.71
%
   
1.03
%
Non-performing assets to total assets
   
0.25
%
   
0.28
%
   
0.50
%
   
0.69
%
   
0.91
%
                                         
Troubled Debt Restructurings
                                       
Non-performing TDRs (included in nonaccrual loans)
                                       
Residential
   
178
     
184
     
188
     
3,080
     
200
 
Residential CRE
   
     
310
     
311
     
501
     
468
 
Other CRE
   
4,070
     
3,703
     
2,710
     
4,386
     
1,087
 
Construction and land loans
   
     
56
     
224
     
     
 
Total Non-performing TDRs
 
$
4,248
   
$
4,253
   
$
3,433
   
$
7,967
   
$
1,755
 
Performing TDRs
                                       
Residential
   
     
     
     
     
372
 
Other CRE
   
362
     
386
     
418
     
     
 
Construction and land loans
   
     
     
     
     
1,664
 
Total Performing TDRs
   
362
     
386
     
418
     
     
2,036
 
Total Troubled Debt Restructurings
 
$
4,610
   
$
4,639
   
$
3,851
   
$
7,967
   
$
3,791
 
 
       
(1)
Included in nonaccrual loans are residential loans totaling $21,000 and other commercial real estate loans totaling $6.8 million that were less than 30 days delinquent; and residential loans totaling $921,000 that were less than 90 days delinquent.

(2)
Included in nonaccrual loans are residential loans totaling $66,000 residential CRE loans totaling $310,000 and other commercial real estate loans totaling $7.0 million that were less than 30 days delinquent; and residential loans totaling $180,000 that were less than 90 days delinquent.

(3)
Included in nonaccrual loans are residential loans totaling $425,000 and other commercial real estate loans totaling $6.1 million that were less than 30 days delinquent, and residential loans totaling $16,000, residential CRE loans totaling $311,000 and other commercial real estate loans totaling $1.1 million that were less than 90 days delinquent.

(4)
Included in nonaccrual loans are residential loans totaling $3.0 million, residential CRE loans totaling $501,000, other commercial real estate loans totaling $4.1 million that were less than 30 days delinquent, and residential loans totaling $17,000 and other commercial real estate loans totaling $1.0 million that were less than 90 days delinquent.

(5)
Included in nonaccrual loans are residential loans totaling $217,000 and other commercial real estate loans totaling $1.5 million that were less than 30 days delinquent, and residential loans totaling $739,000 and other commercial real estate loans totaling $61,000 that were less than 90 days delinquent.


As noted in the above table, there were nonaccrual loans of $10.2 million at June 30, 2017 and $10.0 million at June 30, 2016.  Additional interest income of $283,000 and $555,000 would have been recorded during the years ended June 30, 2017 and 2016, respectively, if the loans had performed in accordance with their original terms.  Interest income on these loans of $531,000 and $169,000 was included in net income for the years ended June 30, 2017 and 2016, respectively. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations- Comparison of Operating Results for the Years Ended June 30, 2017 and June 30, 2016, Provision for Loan Losses."
 
7


Delinquent Loans. The following table sets forth our loan delinquencies by type, amount and loan relationship at the dates indicated.
 
 
 
Loans Delinquent For
             
 
 
60-89 Days
   
90 Days and over
   
Total
 
 
 
Number
   
Amount
   
Number
   
Amount
   
Number
   
Amount
 
 
 
(Dollars in thousands)
 
At June 30, 2017
                                   
Residential
   
4
   
$
1,776
     
7
   
$
614
     
11
   
$
2,390
 
Residential CRE
   
     
     
     
     
     
 
Other CRE
   
     
     
3
     
1,897
     
3
     
1,897
 
Construction and land loans
   
     
     
     
     
     
 
Total
   
4
   
$
1,776
     
10
   
$
2,511
     
14
   
$
4,287
 
At June 30, 2016
           
             
             
 
Residential
   
3
   
$
531
     
5
   
$
684
     
8
   
$
1,215
 
Residential CRE
   
1
     
1,166
     
     
     
1
     
1,166
 
Other CRE
   
     
     
4
     
1,641
     
4
     
1,641
 
Construction and land loans
   
     
     
1
     
56
     
1
     
56
 
Total
   
4
   
$
1,697
     
10
   
$
2,381
     
14
   
$
4,078
 
At June 30, 2015
           
             
             
 
Residential
   
3
   
$
432
     
4
   
$
888
     
7
   
$
1,320
 
Residential CRE
   
1
     
311
     
     
     
1
     
311
 
Other CRE
   
     
     
3
     
3,569
     
3
     
3,569
 
Construction and land loans
   
     
     
1
     
224
     
1
     
224
 
Total
   
4
   
$
743
     
8
   
$
4,681
     
12
   
$
5,424
 
At June 30, 2014
           
             
             
 
Residential
   
1
   
$
214
     
6
   
$
2,374
     
7
   
$
2,588
 
Residential CRE
   
     
     
3
     
3,007
     
3
     
3,007
 
Other CRE
   
     
     
5
     
3,580
     
5
     
3,580
 
Construction and land loans
   
     
     
4
     
444
     
4
     
444
 
Total
   
1
   
$
214
     
18
   
$
9,405
     
19
   
$
9,619
 
At June 30, 2013
                                               
Residential
   
6
   
$
1,530
     
6
   
$
3,088
     
12
   
$
4,618
 
Residential CRE
   
1
     
203
     
3
     
7,139
     
4
     
7,342
 
Other CRE
   
5
     
1,710
     
7
     
7,963
     
12
     
9,673
 
Construction and land loans
   
     
     
1
     
3,188
     
1
     
3,188
 
Total
   
12
   
$
3,443
     
17
   
$
21,378
     
29
   
$
24,821
 

In addition to the delinquent loans listed above, we had loans that were delinquent 90 days or more past due as to principal.  Typically, such loans had passed their maturity date but continued making monthly payments, keeping their interest current, while negotiating external financing or an extension from the Company.  There were no loans delinquent 90 days or more past their maturity date at June 30, 2017, 2016, 2015 or 2014.  At June 30, 2013, loans that were delinquent 90 days or more past their maturity date totaled $10.00 million.
 
Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until sold.  When property is acquired it is recorded at the lower of cost or fair market value at the date of foreclosure, establishing a new cost basis.  Holding costs and declines in fair value result in charges to expense after acquisition.  The Company had real estate owned of $140,000 at June 30, 2017 and $487,000 at June 30, 2016.  Declines in the fair value of some properties within the real estate owned portfolio prompted write-downs of $215,000 during the year ended June 30, 2017.  The Company sold one property with book value of $132,000 during the year ended June 30, 2017.  Proceeds from the sale of real estate owned were $132,000, resulting in no gain or loss.
 
Classified Assets. Federal Deposit Insurance Corporation ("FDIC") regulations provide that loans and other assets of lesser quality should be classified as "substandard," "doubtful" or "loss" assets.  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."  Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
8

 
We are to establish general reserves, where appropriate, for our entire loan portfolio, including loans classified as doubtful, substandard or special mention.  General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When we classify problem assets as "loss," we are required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.  The Company utilizes the services of a third party loan review firm to help ensure that loans are properly classified.  They report to the Audit Committee quarterly and their scope is determined by the Audit Committee annually.  On an annual basis, the loan review firm reviews a significant portion of the existing portfolio over the course of the year, typically an aggregate of approximately 65% of the commercial real estate portfolios, including a sampling of both new and seasoned loans, a review of all "Regulation O" loans, construction loans with balances of $250,000 or more, and review of all criticized or classified CRE loans with balances of $250,000 or more.  Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC and the New Jersey Department of Banking and Insurance ("NJDOBI") which can order the establishment of additional general or specific loss allowances.  Such examinations typically occur annually.
 
The following table shows the aggregate amounts of our classified assets, including non-performing loans, at the date indicated.
 
 
Classified Assets At June 30,
 
 
2017
 
2016
 
2015
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
 
(Dollars in thousands)
 
Substandard assets:
                       
Residential
   
14
   
$
5,002
     
9
   
$
4,377
     
9
   
$
4,921
 
Residential CRE
   
1
     
240
     
1
     
310
     
3
     
5,690
 
Other CRE
   
21
     
18,312
     
21
     
19,866
     
20
     
19,885
 
Construction and land loans
   
     
     
1
     
56
     
1
     
224
 
Total
   
36
   
$
23,554
     
32
   
$
24,609
     
33
   
$
30,720
 
 
The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations.  Not all classified assets constitute non-performing assets.

We also utilize an additional classification for assets that do not meet the definition of any of the classified assets yet contain an element that warrants a rating that is less than "pass."  We classify an asset as "special mention" if the asset has a potential weakness that warrants management's close attention.  While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset.  Our assets classified as "special mention" totaled $22.0 million, $24.4 million and $17.9 million at June 30, 2017, 2016, and 2015, respectively.   See Note 5 of the Notes to the Consolidated Financial Statements.
 
Impaired Loans. 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 residential CRE, grocery/credit retail CRE, Other CRE 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.  Troubled debt restructurings ("TDRs") are also included in impaired loans regardless of balance.  Impaired loans are individually assessed to determine that each loan's carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows.  If the loan's carrying value does exceed the fair value, specific reserves are established to reduce the loan's carrying value.  For classification purposes, impaired loans are typically classified as substandard.  Impaired loans at June 30, 2017, 2016 and 2015 were $13.9 million,  $13.2 million and $15.8 million, respectively.   See Note 5 of the Notes to the Consolidated Financial Statements.

Allowance for Loan Losses
 
Our allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable.  Management, in determining the allowance for loan losses, considers the losses inherent in our loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions.  Loan losses are charged to the allowance for loans losses and recoveries are credited to it.  Additions to the allowance for loan losses are provided by charges against income based on various factors which, in our judgment, deserve current recognition in estimating probable incurred losses.  We regularly review the loan portfolio and make adjustments for loan losses in order to maintain the allowance for loan losses in accordance with U.S. generally accepted accounting principles ("GAAP").  The allowance for loan losses consists primarily of the following two components:
 
(1) Specific allowances established for impaired loans.  The amount of impairment provided for as an allowance is represented by the deficiency, if any, between the present value of expected future cash flows discounted at the original loan's effective interest rate or the underlying collateral value (less estimated costs to sell) if the loan is collateral dependent, and the carrying value of the loan.  No reserve is necessary if the impaired value exceeds the book value.  Impaired loans are included within the Substandard classification.
9



(2) General allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired.  The portfolio is grouped into similar risk characteristics, primarily loan type, collateral type, and internal credit risk rating.  We apply an estimated loss rate to each loan group.  The loss rates applied are based on a seven year look back period, which measures our historical charge-offs, and our loss emergence period, which represents the estimated average time between when a loss event occurs and when such loss is specifically reserved or charged off.  This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.  Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

The adjustments to our loss experience are based on our evaluation of several environmental factors, including:

actual loss history incurred on similar loans;
changes in local, regional, national, and international economic and business conditions and developments that affect the collectibility of our portfolio, including the condition of various market segments;
changes in the nature and volume of our portfolio and in the terms of our loans;
changes in the experience, ability, and depth of lending management and other relevant staff;
changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;
changes in the quality of our loan review system; and
changes in the value of underlying collateral for collateral-dependent loans; and
the existence and effect of any concentrations of credit, and changes in the level of such concentrations.

We evaluate the allowance for loan losses based on the combined total of the specific and general components.  Generally when the loan portfolio increases, absent other factors, our allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred losses than would be the case without the increase.  Generally when the loan portfolio decreases, absent other factors, our allowance for loan loss methodology results in a lower dollar amount of estimated probable incurred losses than would be the case without the decrease.
 
Each quarter we evaluate the allowance for loan losses and adjust the allowance as appropriate through a provision or recovery for loan losses.  While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  In addition, as an integral part of their examination process, the NJDOBI and the FDIC will periodically review the allowance for loan losses.  They may require us to adjust the allowance based on their analysis of information available to them at the time of their examination.  Such examinations typically occur annually.
 
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the fiscal years indicated.
 
 
 
At or For the Years Ended June 30,
 
 
 
2017
   
2016
   
2015
   
2014
   
2013
 
 
 
(Dollars in thousands)
 
Balance at beginning of period
 
$
29,951
   
$
30,889
   
$
31,401
   
$
31,381
   
$
31,187
 
Charge-offs:
                                       
Residential
   
75
     
98
     
333
     
24
     
86
 
Residential CRE
   
     
     
     
1,226
     
 
Other CRE
   
13
     
849
     
380
     
459
     
1,305
 
Construction and land loans
   
     
     
     
     
2,418
 
Total charge-offs
   
88
     
947
     
713
     
1,709
     
3,809
 
Recoveries:
                                       
Residential
   
     
     
     
     
 
Residential CRE
   
     
     
     
10
     
115
 
Other CRE
   
409
     
9
     
     
17
     
 
Construction and land loans
   
     
     
1
     
1,002
     
38
 
Total recoveries
   
409
     
9
     
1
     
1,029
     
153
 
Net recoveries (charge-offs)
   
321
     
(938
)
   
(712
)
   
(680
)
   
(3,656
)
Provision for loan losses
   
     
     
200
     
700
     
3,850
 
Balance at end of year
 
$
30,272
   
$
29,951
   
$
30,889
   
$
31,401
   
$
31,381
 
Ratios:
                                       
Net charge-offs to average loans outstanding
   
(0.01
)%
   
0.03
%
   
0.03
%
   
0.03
%
   
0.17
%
Allowance for loan losses to total loans at end of period
   
0.84
%
   
0.94
%
   
1.10
%
   
1.23
%
   
1.35
%
 
10


The allowance for loan losses has been relatively stable.  The level of provision for loan losses significantly decreased subsequent to 2013.  There was no provision for loan losses during 2017 and 2016.  Improving delinquency and nonaccrual trends, changes in loan risk ratings (versus prior periods), loan growth, charge-offs and economic and business conditions continue to have a meaningful impact on the current level of provision for loan losses.  The provision for loan losses decreased in the years subsequent to 2013 partially due to these factors.  In addition, improvements in general economic and business conditions have also impacted the level of provisioning by decreasing the necessary level of general allowances despite growth in the loan portfolio.
 
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (including loans held for sale), and the percent of loans in each category to total loans at the dates indicated.  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.
 
 
At June 30,
 
 
2017
   
2016
   
2015
 
 
Allowance
for Loan
Losses
   
Percent of
Loans in
Each
Category to
Total Loans
   
Allowance
for Loan
Losses
   
Percent of
Loans in
Each
Category to
Total Loans
   
Allowance
for Loan
Losses
   
Percent of
Loans in
Each
Category to
Total Loans
 
 
(Dollars in thousands)
 
Residential
 
$
1,261
     
7.0
%
 
$
1,300
     
7.1
%
 
$
1,521
     
6.7
%
Residential CRE
   
15,794
     
54.0
%
   
12,837
     
50.4
%
   
10,814
     
44.0
%
Grocery/Credit Retail CRE
   
3,000
     
14.9
%
   
3,646
     
14.4
%
   
4,042
     
17.2
%
Other CRE
   
10,017
     
24.0
%
   
11,850
     
28.0
%
   
13,943
     
32.0
%
Construction and land loans
   
200
     
0.1
%
   
318
     
0.2
%
   
569
     
0.2
%
Total
 
$
30,272
     
100.0
%
 
$
29,951
     
100.0
%
 
$
30,889
     
100.0
%
 
 
At June 30,
 
 
2014
   
2013
 
 
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
   
Allowance
for Loan
Losses
 
Percent of
Loans in
Each
Category to
Total Loans
 
 
   
(Dollars in thousands)
     
Residential
 
$
1,568
     
6.2
%
 
$
2,592
     
6.5
%
Residential CRE
   
5,327
     
39.2
%
   
5,539
     
43.0
%
Grocery/Credit Retail CRE
   
2,652
     
16.5
%
   
1,947
     
9.9
%
Other CRE
   
17,995
     
36.7
%
   
17,460
     
38.7
%
Construction and land loans
   
1,108
     
1.4
%
   
1,233
     
1.9
%
Unallocated
   
2,751
     
0.0
%
   
2,610
     
0.0
%
Total
 
$
31,401
     
100.0
%
 
$
31,381
     
100.0
%

The Company previously maintained an unallocated component related to the general allowance.  Management did not target a specific unallocated percentage of the total general allocation, or total allowance for loan losses.  The primary purpose of the unallocated component was to account for the inherent imprecision of the loss estimation process related primarily to periodic updating of appraisals on impaired loans, as well as periodic updating of commercial loan credit risk ratings by loan officers and the Company's internal credit review process.  Enhancements in the allowance for loan loss methodology during the year ended June 30, 2015 has eliminated the use of the unallocated component.

11

Investments
 
The Board of Directors is responsible for adopting our investment policy.  The investment policy is reviewed periodically by management and any changes to the policy are recommended to and subject to the approval of the Board of Directors.  Authority to make investments under the approved investment policy guidelines is delegated to appropriate officers.  While general investment strategies are developed and authorized by the Board of Directors, the execution of specific actions primarily rests with Oritani Bank's President, Chief Financial Officer and Asset/Liability Committee, which have responsibility for ensuring that the guidelines and requirements included in the investment policy are followed and that all securities are considered prudent for investment.  Each of our President, Chief Financial Officer and Asset/Liability Committee have specified authority to purchase various types of investments; all investment purchases in excess of 1% of total assets, or $41.4 million at June 30, 2017, must be approved by our Board of Directors.  All investment transactions are reviewed and ratified or approved (as the case may be) at regularly scheduled meetings of the Board of Directors.  Any investment which, subsequent to its purchase, fails to meet the guidelines of the policy is reported to the Board of Directors at its next meeting where the Board decides whether to hold or sell the investment.
 
New Jersey-chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks and corporate debt instruments.  Oritani Financial Corp., as a Delaware corporation, may invest in equity securities subject to certain limitations.
 
The investment policy requires that all securities transactions be conducted in a safe and sound manner.  Investment decisions must be based upon a thorough analysis of each security instrument to determine if its quality and inherent risks fit within Oritani Bank's overall asset/liability management objectives, the effect on its risk-based capital measurement and the prospects for yield and/or appreciation.  The investment policy provides that Oritani Bank may invest in U.S Treasury notes, U.S. and state agency securities, mortgage-backed securities, and other conservative investment opportunities.  Typical investments are currently in U.S. agency or FHLB securities and government sponsored mortgage-backed securities.
 
Our investment portfolio at June 30, 2017, included $1.5 million in equity securities.  We also invest in mortgage-backed securities, all of which are guaranteed by government sponsored enterprises.  At June 30, 2017, our mortgage-backed securities portfolio totaled $329.3 million, or 8.0% of total assets, and consisted of $312.8 million in fixed-rate securities and $16.5 million in adjustable-rate securities, guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.  Securities can be classified as held to maturity or available for sale at the date of purchase.
 
U.S. Government and Federal Agency Obligations. At June 30, 2017, our U.S. Government and federal agency securities portfolio totaled $6.8 million, all of which was classified as held to maturity.
 
Equity Securities. At June 30, 2017, our equity securities portfolio totaled $1.5 million, all of which were classified as available for sale.  The portfolio consists of financial industry common stock. There were no impairment charges on available for sale securities for the years ended June 30, 2017, 2016 or 2015.  Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations.  Such investments are carried at their fair value and fluctuations in the fair value of such investments, including temporary declines in value, directly affect our net capital position.
 
Mortgage-Backed Securities. We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.  We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae.  Our investment policy also authorizes the investment in collateralized mortgage obligations ("CMOs"), also insured or issued by Freddie Mac, Fannie Mae and Ginnie Mae.  We limit CMO investments to those classes of CMOs carrying the most stable cash flows and lowest prepayment risk of any class of CMOs and which pass the Federal Financial Institutions Examination Council's average life restriction tests at the time of purchase.  These CMO classes are typically referred to as Planned Amortization Classes or sequentials.
 
Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate which is less than the interest rate on the underlying mortgages.  Mortgage-backed securities typically represent a participation interest in a pool of single-family or multifamily mortgages, although we focus our investments on mortgage-backed securities backed by one to four family mortgages.  The issuers of such securities (generally U.S. government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors such as us, and guarantee the payment of principal and interest to investors.  Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements.  However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize our specific liabilities and obligations.
 
At June 30, 2017, our mortgage-backed securities totaled $329.3 million, or 8.0%, of total assets and 8.8% of interest earning assets.  At June 30, 2017, 5.0% of the mortgage-backed securities were backed by adjustable rate mortgage loans and 95.0% were backed by fixed rate mortgage loans.  The mortgage-backed securities portfolio had a weighted average yield of 2.34% at June 30, 2017.  The fair value of our mortgage-backed securities at June 30, 2017 was $326.9 million, which is $2.6 million less than the amortized cost of $329.5 million.  Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities.  There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer.  In addition, the market value of such securities may be adversely affected by changes in interest rates.  All of the Company's mortgage-backed securities are insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
 
12


Securities Portfolios. The following table sets forth the composition of our investment securities portfolio at the dates indicated.
 
Securities and Mortgage-Backed Securities Held to Maturity
 
 
At June 30,
 
 
2017
   
2016
   
2015
 
 
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
 
 
(In thousands)
 
United States Government and federal agency obligations
 
$
6,750
   
$
6,696
   
$
6,750
   
$
6,752
   
$
   
$
 
Mortgage-backed securities:
                                               
Freddie Mac
   
49,832
     
49,354
     
9,129
     
9,291
     
1,638
     
1,770
 
Fannie Mae
   
105,018
     
104,187
     
83,112
     
84,689
     
55,808
     
55,440
 
Ginnie Mae
   
613
     
641
     
1,398
     
1,464
     
1,928
     
2,012
 
Collateralized mortgage obligations
   
77,418
     
76,326
     
67,718
     
68,510
     
48,616
     
48,527
 
Total securities held to maturity
 
$
239,631
   
$
237,204
   
$
168,107
   
$
170,706
   
$
107,990
   
$
107,749
 
 

Securities and Mortgage-Backed Securities Available for Sale
 
 
At June 30,
 
 
2017
   
2016
   
2015
 
 
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
 
 
(In thousands)
 
Equity securities
 
$
601
   
$
1,498
   
$
601
   
$
1,125
   
$
1,208
   
$
2,110
 
Mortgage-backed securities:
                                               
Freddie Mac
   
230
     
236
     
815
     
849
     
5,162
     
5,325
 
Fannie Mae
   
10,964
     
11,091
     
14,650
     
15,185
     
36,432
     
36,855
 
Collateralized mortgage obligations
   
85,437
     
85,105
     
123,173
     
124,691
     
213,569
     
214,673
 
Total securities available for sale
 
$
97,232
   
$
97,930
   
$
139,239
   
$
141,850
   
$
256,371
   
$
258,963
 
13


Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2017 are summarized in the following table.  Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments, scheduled redemptions or early redemptions that are likely to occur.
 
 
 
One Year or Less
   
More than One Year
through Five Years
   
More than Five Years
through Ten Years
   
More than Ten Years
   
Total Securities
 
 
 
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Fair Value
   
Weighted
Average
Yield
 
 
 
(Dollars in thousands)
 
Securities Held to Maturity
                                                                 
United States Government and federal agency obligations
 
$
     
%
 
$
6,750
     
1.18
%
 
$
     
%
 
$
     
%
 
$
6,750
   
$
6,696
     
1.18
%
Mortgage-backed securities:
                                                                                       
Freddie Mac
   
     
     
     
     
15,053
     
2.46
     
34,779
     
2.46
     
49,832
     
49,354
     
2.46
 
Fannie Mae
   
     
     
4,618
     
2.87
     
19,790
     
2.40
     
80,610
     
2.43
     
105,018
     
104,187
     
2.44
 
Ginnie Mae
   
     
     
     
     
     
     
613
     
4.39
     
613
     
641
     
4.39
 
Collateralized mortgage obligations
   
     
     
     
     
8,579
     
1.99
     
68,839
     
1.97
     
77,418
     
76,326
     
1.97
 
Total securities held to maturity
 
$
     
   
$
11,368
     
1.87
%
 
$
43,422
     
2.34
%
 
$
184,841
     
2.27
%
 
$
239,631
   
$
237,204
     
2.26
%
 
                                                                                       
Securities Available for Sale
                                                                                       
Equity securities
 
$
601
     
%
 
$
     
%
 
$
     
%
 
$
     
%
 
$
601
   
$
1,498
     
%
Mortgage-backed securities:
                                                                                       
Freddie Mac
   
     
     
230
     
4.63
     
     
     
     
     
230
     
236
     
4.63
 
Fannie Mae
   
     
     
4,380
     
4.20
     
6,584
     
1.98
     
     
     
10,964
     
11,091
     
2.87
 
Collateralized mortgage obligations
   
     
     
11,547
     
2.51
     
21,034
     
2.34
     
52,856
     
2.36
     
85,437
     
85,105
     
2.38
 
Total securities available for sale
 
$
601
     
   
$
16,157
     
3.00
%
 
$
27,618
     
2.25
%
 
$
52,856
     
2.36
%
 
$
97,232
   
$
97,930
     
2.42
%


14

Sources of Funds
 
General. Deposits have traditionally been the primary source of funds for use in lending and investment activities.  We  use borrowings, primarily FHLB advances,  to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage the cost of funds.   We also use interest rate swaps to lengthen the maturities of liabilities and manage cost of funds.  In addition, funds are derived from scheduled loan payments, mortgaged-backed securities scheduled payments and prepayments, investment maturities, loan prepayments, retained earnings and income on other earning assets.  While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
 
Deposits. Our deposits are generated primarily from residents and businesses within our primary market area including the local municipal deposit market.  We offer a selection of deposit accounts, including checking accounts (demand deposits and NOW), money market deposit accounts, savings accounts, retirement accounts and time deposits.  The Bank also accepts brokered deposits and has augmented its usage of these funds to supplement its funding sources and decrease its cost of funds.  Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate.
 
Interest rates, maturity terms, service fees and other account features are established on a periodic basis.  Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals.  Personalized customer service, attractive account features, long-standing relationships with customers, convenient locations, competitive rates of interest and an active marketing program are relied upon to attract and retain deposits.
 
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition.  The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand while managing interest rate risk and minimizing interest expense.
 
At June 30, 2017, $1.12 billion, or 39.35% of our deposit accounts were time deposits, of which $658.8 million had maturities of one year or less.  We had brokered deposits totaling $510.4 million, $253.2 million and $248.4 million at June 30, 2017, 2016 and 2015, respectively.  The following table sets forth the distribution of total deposits by account type, at the dates indicated.
 
 
At June 30,
 
 
2017
 
2016
 
2015
 
 
Balance
 
Percent
 
Weighted
Average
Rate
 
Balance
 
Percent
 
Weighted
Average
Rate
 
Balance
 
Percent
 
Weighted
Average
Rate
 
 
(Dollars in thousands)
 
Deposit type:
                                   
Checking accounts
 
$
706,554
     
24.74
%
   
0.62
%
 
$
453,136
     
20.05
%
   
0.36
%
 
$
436,172
     
22.22
%
   
0.37
%
Money market accounts
   
847,888
     
29.68
%
   
1.05
%
   
681,710
     
30.16
%
   
0.76
%
   
589,012
     
30.01
%
   
0.56
%
Savings accounts
   
177,896
     
6.23
%
   
0.23
%
   
165,623
     
7.33
%
   
0.24
%
   
160,020
     
8.15
%
   
0.24
%
Time deposits
   
1,124,140
     
39.35
%
   
1.34
%
   
959,534
     
42.46
%
   
1.31
%
   
777,533
     
39.62
%
   
1.15
%
Total deposits
 
$
2,856,478
     
100.00
%
   
1.01
%
 
$
2,260,003
     
100.00
%
   
0.88
%
 
$
1,962,737
     
100.00
%
   
0.73
%
 
As of June 30, 2017, the aggregate amount of outstanding time deposits in amounts greater than or equal to $250,000 was approximately $221.8 million.  The following table sets forth the maturity of those deposits as of June 30, 2017.
 
 
 
At June 30, 2017
 
 
 
(In thousands)
 
Three months or less
 
$
39,258
 
Over three months through six months
   
39,024
 
Over six months through one year
   
54,599
 
Over one year to three years
   
57,874
 
Over three years
   
31,050
 
Total
 
$
221,805
 
15


Borrowings. Our borrowings primarily consist of advances from the FHLB of New York and, to a lesser extent, advances from other financial institutions.  As of June 30, 2017, we had total borrowings in the amount of $642.1 million, which represented 17.94% of total liabilities, with an estimated weighted average maturity of 3.2 years and a weighted average rate of 1.59%.  At June 30, 2017, borrowings are secured by mortgage-backed securities and investment securities with a book value of $58.9 million and performing mortgage loans with an outstanding balance of $2.97 billion.
 
The following table sets forth information concerning balances and interest rates on our FHLB advances and other borrowings at and for the periods shown:
 
 
At or For the Years Ended June 30,
 
 
2017
   
2016
   
2015
 
 
(Dollars in thousands)
 
Balance at end of period
 
$
642,059
   
$
781,623
   
$
796,372
 
Average balance during period
 
$
719,647
   
$
731,078
   
$
871,396
 
Maximum outstanding at any month end
 
$
928,391
   
$
842,194
   
$
1,043,523
 
Weighted average interest rate at end of period
   
1.59
%
   
1.39
%
   
2.39
%
Average interest rate during period
   
1.83
%
   
2.21
%
   
2.66
%
 
As of June 30, 2017, Oritani had interest rate swap agreements with total notional amount of $450.0 million.   Oritani will receive 1 month LIBOR from the counterparties and pay interest to the counterparties at a fixed rate.  See Note 13 of the Notes to the Consolidated Financial Statements.

Subsidiary Activities and Joint Venture Information
 
Oritani Financial Corp. is the owner of Oritani Bank, Hampshire Financial LLC and Oritani LLC.  Hampshire Financial LLC and Oritani LLC are New Jersey limited liability companies that owned real estate and investments in real estate.  As of June 30, 2016, all of the investments owned by Hampshire Financial LLC and Oritani LLC had been sold, and the subsidiaries are inactive.  Proceeds from the sale of real estate investments for the year ended June 30, 2016 were $17.1 million resulting in gains of $16.0 million.  There were no sales in 2017 or 2015.
 
Oritani Bank has the following subsidiaries: Ormon LLC, Oritani Finance Company, Oritani Investment Corp. and Oritani Asset Corporation.  Ormon LLC is a New Jersey limited liability company that owned real estate investments in New Jersey as well as investments in joint ventures that owned income-producing commercial and residential rental properties.  As of June 30, 2017, all of the investments owned by Ormon LLC had been sold, and the subsidiary is inactive.  Proceeds from the sale of real estate investments for the years ended June 30, 2017, 2016 and 2015 were $25.3 million resulting in gains of $20.9 million, $21.5 million resulting in gains of $21.5 million and $11.8 million resulting in gains of $11.6 million, respectively.
 
Oritani Finance Company is a New Jersey corporation that invests in non-New Jersey residential CRE and non-residential commercial real estate loans and provides lending opportunities in New York and Pennsylvania.
 
Oritani Investment Corp. is a New Jersey corporation that owns Oritani Asset Corporation, a real estate investment trust, formed in 1998 for the sole purpose of acquiring mortgage loans and mortgage-backed securities from Oritani Bank.
 
Oritani Asset Corporation's primary objective is to maximize long-term returns on equity.  At June 30, 2017, Oritani Asset Corporation had $535.8 million in assets.  Oritani Asset Corporation is taxed and operates in a manner that enables it to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended.
 

Personnel
 
As of June 30, 2017, we had 197 full-time employees and 48 part-time employees.  Our employees are not represented by any collective bargaining group.  Management believes that we have good relations with our employees.
 
16


SUPERVISION AND REGULATION
 
General
 
Federal law allows a state savings bank, such as Oritani Bank, that qualifies as a "qualified thrift lender" (discussed below), to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of the Home Owners' Loan Act, as amended ("HOLA").  Such an election results in the savings bank's holding company being regulated as savings and loan holding company rather than as a bank holding company.  At the time of its reorganization into a holding company structure, Oritani Bank elected to be treated as a savings association under the applicable provisions of the HOLA.  Accordingly, Oritani Financial Corp. is a savings and loan holding company and is required to file certain reports with, and is subject to examination by, and otherwise must comply with the rules and regulations of the Federal Reserve Board that are applicable to savings and loan holding companies.  Oritani Financial Corp. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
 
Oritani Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Funds ("DIF") of the FDIC.  Oritani Bank is subject to extensive regulation, examination and supervision by the Commissioner of the NJDOBI as the issuer of its charter, and by the FDIC as the deposit insurer and its primary federal regulator.  Oritani Bank must file reports with the NJDOBI and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening, closing, moving or acquiring branch offices.  The NJDOBI and the FDIC conduct periodic examinations to assess Oritani Bank's compliance with various regulatory requirements.  This regulation and supervision establishes a comprehensive framework of activities in which a savings bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors.  The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
 
Any change in these laws or regulations, whether by the NJDOBI, the FDIC, the FRB or the U.S. Congress, could have a material adverse impact on Oritani Financial Corp., Oritani Bank and their operations.
 
Certain of the regulatory requirements that are or will be applicable to Oritani Bank and Oritani Financial Corp. are described below.  This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Oritani Bank and Oritani Financial Corp. and is qualified in its entirety by reference to the actual statutes and regulations.
 
New Jersey Banking Regulation
 
Activity Powers. Oritani Bank derives its lending, investment and other powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations.  Under these laws and regulations, savings banks, such as Oritani Bank, generally may invest in:

(1)
real estate mortgages;
(2)
consumer and commercial loans;
(3)
specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies;
(4)
certain types of corporate equity securities; and
(5)
certain other assets.
 
A savings bank may also invest pursuant to a "leeway" power that permits investments not otherwise permitted by the New Jersey Banking Act.  "Leeway" investments must comply with a number of limitations on the individual and aggregate amounts of "leeway" investments.  Under this "leeway" authority, New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the NJDOBI by regulation or by specific authorization is required. A savings bank may also exercise trust powers upon approval of the NJDOBI. The exercise of these lending, investment and activity powers are limited by federal law and the related regulations. See "Federal Banking Regulation-Activity Restrictions on State-Chartered Banks" below.
 
Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank's capital funds. A savings bank may lend an additional 10% of its capital funds if the loan is secured by collateral meeting the requirements of the New Jersey Banking Act. Oritani Bank currently complies with applicable loans-to-one-borrower limitations.
 
Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Oritani Bank. See "-Federal Banking Regulation-Prompt Corrective Action" below.
 
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Minimum Capital Requirements. Regulations of the NJDOBI impose on New Jersey-chartered depository institutions, such as Oritani Bank, minimum capital requirements similar to those imposed by the FDIC on insured state banks. See "Federal Banking Regulation-Capital Requirements."
 
Examination and Enforcement. The NJDOBI may examine Oritani Bank whenever it deems an examination advisable. The NJDOBI typically examines Oritani Bank at least every two years. The NJDOBI may order any savings bank to discontinue any violation of law or unsafe or unsound banking practice, and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the NJDOBI has ordered the activity to be terminated, to show cause at a hearing before the NJDOBI why such person should not be removed.
 
Federal Banking Regulation
 
Capital Requirements. FDIC regulations require banks to maintain minimum levels of capital.  Federal regulations require state banks to meet several minimum capital standards:  a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio.  The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
As noted, the risk-based capital standards for state banks require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset.  Higher levels of capital are required for asset categories believed to present greater risk.  Common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings.  Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital.  Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.  Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital.  Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.  Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.  In assessing an institution's capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.  The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.  The capital conservation buffer as of January 1, 2017 is 1.25%.
 The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of an institution's exposure to declines in the economic value of a bank's capital due to changes in interest rates when assessing the bank's capital adequacy. Under such a risk assessment, examiners evaluate a bank's capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. Institutions with significant interest rate risk may be required to hold additional capital. According to the agencies, applicable considerations include:

the quality of the bank's interest rate risk management process;
the overall financial condition of the bank; and
the level of other risks at the bank for which capital is needed.
 
The following table shows the Company's and the Bank's Core capital, Tier 1 risk-based capital, and Total risk-based capital ratios at June 30, 2017:
 
 
At June 30, 2017
 
 
The Company
   
The Bank
 
 
Capital
   
Percent of Assets (1)
   
Capital
   
Percent of Assets (1)
 
 
(Dollars in thousands)
 
                         
Common equity tier 1 (to risk-weighted assets)
 
$
555,703
     
15.02
%
 
$
521,414
     
14.10
%
Tier 1  capital (to risk-weighted assets)
   
555,703
     
15.02
%
   
521,414
     
14.10
%
Total capital (to risk-weighted assets)
   
585,975
     
15.84
%
   
551,686
     
14.92
%
Tier 1  Leverage capital (to average assets)
   
555,703
     
13.51
%
   
521,414
     
12.68
%
Capital conservation buffer
   
290,077
     
7.84
%
   
255,793
     
6.92
%
(1)
For purposes of calculating Core capital, assets are based on adjusted total leverage assets.  In calculating Tier 1 risk-based capital and total risk-based capital, assets are based on total risk-weighted assets.
 
As the above table shows, as of June 30, 2017, the Company and Bank were considered "well capitalized" under FDIC guidelines.
 
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Prompt Corrective Action. Federal law requires, among other things, that the federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC's regulations define the five capital categories as follows:
 
An institution is classified as "well capitalized" if:
• 
its ratio of common equity tier 1 capital to risk-weighted assets is at least 6.5%; and
• 
its ratio of total capital to risk-weighted assets is at least 10%; and
• 
its ratio of Tier 1 capital to risk-weighted assets is at least 8%; and
• 
its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specific capital level.
 
An institution is classified as "adequately capitalized" if:
• 
its ratio of common equity tier 1 capital to risk-weighted assets is at least 4.5%; and
• 
its ratio of total capital to risk-weighted assets is at least 8%; and
• 
its ratio of Tier 1 capital to risk-weighted assets is at least 6%; and
• 
its ratio of Tier 1 capital to total assets is at least 4%.
 
An institution is classified as "undercapitalized" if:

• 
its ratio of common equity tier 1 capital to risk-weighted assets is less than 4.5%; or
• 
its total risk-based capital is less than 8%; or
• 
its Tier 1 risk-based-capital is less than 6%; or
• 
its leverage ratio is less than 4% .
 
An institution is classified as "significantly undercapitalized" if:

• 
its ratio of common equity tier 1 capital to risk-weighted assets is less than 3.0%; or
its total risk-based capital is less than 6%;
• 
its Tier 1 capital to risk-weighted assets is less than 4%; or
• 
its leverage ratio is less than 3%.

An institution that has a tangible capital to total assets ratio equal to or less than 2% is deemed to be "critically undercapitalized."
 
The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is "critically undercapitalized." The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution's financial condition or upon the occurrence of certain events, including:

insolvency, or when the assets of the bank are less than its liabilities to depositors and others;
substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;
existence of an unsafe or unsound condition to transact business;
likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and
insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution's capital with no reasonable prospect of replenishment of capital without federal assistance.
 
Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the FDIC.
 
Before making a new investment or engaging in a new activity as principal that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC insurance funds. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a "financial subsidiary" are subject to additional restrictions.
 
Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank's total assets or $50 billion. The bank must have policies and procedures to assess the financial subsidiary's risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary's assets with the bank's and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Oritani Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it has not yet determined to do so.
 
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Insurance of Deposit Accounts. Oritani Bank is a member of the DIF, which is administered by the FDIC. Deposit accounts at Oritani Bank are insured by the FDIC, generally up to a maximum of $250,000.
 
The FDIC imposes an assessment for deposit insurance against all insured depository institutions.  This assessment is primarily based on a risk assessment of the institution, and certain risk adjustments specified by the FDIC, with riskier institutions paying higher assessments.  Effective April 1, 2011, the FDIC implemented a requirement of the Dodd-Frank Act that it revise its assessment system to base it on each institution's total assets less tangible capital of each institution instead of deposits.  The FDIC also revised its assessment schedule so that it ranged from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest.  In conjunction with the DIF achieving a 1.5% ratio, the FDIC reduced the assessment range for most banks to 1.5 basis points to 30 basis points, effective July 1, 2016.
 
The deposit insurance assessment rates are in addition to the assessments for payments on the bonds issued in the late 1980s by the Financing Corporation, or FICO, to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.  The FICO payments will continue until the FICO bonds mature in 2017 through 2019.  Our expense for the assessment of deposit insurance and the FICO payments was $1.4 million and $1.6 million for the years ended June 30, 2017 and 2016, respectively.
 
The FDIC has authority to increase deposit insurance assessments.  A material increase in insurance assessments would likely have an adverse effect on the operating expenses and results of the Bank.
 
Federal Home Loan Bank System. Oritani Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the FHLB of New York, Oritani Bank is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 4.5% of its borrowings from the FHLB, or 0.2% of mortgage-related assets, whichever is greater. As of June 30, 2017, Oritani Bank was in compliance with this requirement.
 
Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including Oritani Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders, to remove directors and officers and terminate deposit insurance. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.
 
Transactions with Affiliates of Oritani Bank. Transactions between an insured bank, such as Oritani Bank, and any of its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and implementing regulations. An affiliate of an insured bank is any company or entity that controls, is controlled by or is under common control with the bank. Generally, a subsidiary of a bank that is not also a depository institution or financial subsidiary is not treated as an affiliate of the bank for purposes of Sections 23A and 23B.
 
Section 23A:

limits the extent to which the bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such bank's capital stock and retained earnings, and limits all such transactions with all affiliates to an amount equal to 20% of such capital stock and retained earnings; and
requires that all such transactions be on terms that are consistent with safe and sound banking practices.
 
The term "covered transaction" includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100% to 130% of the loan amounts. There is a general prohibition on the purchase of a low quality asset from an affiliate. In addition, any covered transaction by a bank with an affiliate and any purchase of assets or services by a bank from an affiliate must be on terms that are substantially the same, or at least as favorable to the bank, as those that would be provided to a non-affiliate.
 
Prohibitions Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
 
Privacy Standards. FDIC regulations require Oritani Bank to disclose its privacy policy, including identifying with whom it shares "non-public personal information," of customers at the time of establishing the customer relationship and annually thereafter. Oritani Bank does not share "non-public personal information" with third parties.
 
In addition, Oritani Bank is required to provide its customers with the ability to "opt-out" of having Oritani Bank share their non-public personal information with unaffiliated third parties before they can disclose such information, subject to certain exceptions.
 
The FDIC and other federal banking agencies adopted guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
 
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Community Reinvestment Act and Fair Lending Laws. All FDIC insured institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the institution's record of compliance with the Community Reinvestment Act. Among other things, the current Community Reinvestment Act regulations replace the prior process-based assessment factors with an evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests:

a lending test, to evaluate the institution's record of making loans in its service areas;
an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and
a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices.

An institution's failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in an inability to receive regulatory approval for certain activities such as branching and acquisitions. Oritani Bank received a "satisfactory" Community Reinvestment Act rating in our most recently completed federal examination, which was conducted by the FDIC in 2015.
 
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.
 
Loans to a Bank's Insiders
 
Federal Regulation. A bank's loans to its executive officers, directors, any owner of more than 10% or more of its stock (each, an insider) and any of certain entities affiliated with any such persons (an insider's related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider's related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Oritani Bank. See "New Jersey Banking Regulation-Loans-to-One Borrower Limitations." All loans by a bank to all insiders and insiders' related interests in the aggregate generally may not exceed the bank's unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer's children and certain loans secured by the officer's primary residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank's unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider's related interests, would exceed either (1) $500,000 or (2) the greater of $25,000 or 5% of the bank's unimpaired capital and surplus.
 
Generally, loans to insiders must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
 
In addition, federal law prohibits extensions of credit to a bank's insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.
 
New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act.
 
Other Regulations
 
Interest and other charges collected or contracted for by Oritani Bank are subject to state usury laws and federal laws concerning interest rates. Oritani Bank's operations are also subject to federal laws applicable to credit transactions, such as the:

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;