Oritani Financial Corp - FORM 10-Q - February 9, 2018

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EX-32 - EXHIBIT 32 - Oritani Financial Corpexhibit32.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________

FORM 10-Q
______________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2017
 
OR

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

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

Large accelerated filer
 
☒
 
Accelerated filer
 
☐
Non-accelerated filer
 
  (Do not check if a smaller reporting company)
 
Smaller Reporting company
 
 
 
  
 
Emerging growth company
 
☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
    YES      NO  
 
As of February 9, 2018, there were 56,245,065 shares of the Registrant's common stock, par value $0.01 per share, issued and 46,321,258 shares outstanding.



Oritani Financial Corp.
FORM 10-Q
 
Index

 
 
  
 
  Page
 
 
 
3
 
 
 
 
Consolidated Balance Sheets as of December 31, 2017 (unaudited) and June 30, 2017
3
 
 
 
 
Consolidated Statements of Income for the Three and Six Months Ended December 31, 2017 and 2016 (unaudited)
4
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2017 and 2016 (unaudited)
5
 
 
 
 
Consolidated Statements of Stockholders' Equity for the Six Months Ended December 31, 2017 and 2016 (unaudited)
6
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016 (unaudited)
8
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
9
 
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
36
 
 
 
50
 
 
 
52
 
 
 
 
 
 
 
 
52
 
 
 
52
 
 
 
52
 
 
 
Defaults Upon Senior Securities
52
 
 
 
Mine Safety Disclosures
52
 
 
 
Other Information
52
 
 
 
53
 
 
 
 
54
 
Part I. Financial Information
Item 1. Financial Statements
 
Oritani Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

 
  
December 31, 2017
    
June 30, 2017
  
 
  
(unaudited)
    
(audited)
  
Assets
            
Cash on hand and in banks
  
$
38,373
    
$
33,252
  
Federal funds sold and short term investments
    
598
      
326
  
Cash and cash equivalents
    
38,971
      
33,578
  
Loans, net
    
3,586,243
      
3,566,703
  
Securities available for sale, at fair value
    
52,908
      
97,930
  
Securities held to maturity, fair value of $247,376 and $237,204, respectively
    
251,254
      
239,631
  
Bank Owned Life Insurance (at cash surrender value)
    
97,221
      
95,946
  
Federal Home Loan Bank of New York ("FHLB") stock , at cost
    
27,519
      
32,504
  
Accrued interest receivable
    
10,868
      
10,620
  
Real estate owned
    
—
      
140
  
Office properties and equipment, net
    
13,621
      
13,909
  
Deferred tax assets, net
    
26,764
      
37,693
  
Other assets
    
17,022
      
9,030
  
Total Assets
  
$
4,122,391
    
$
4,137,684
  
Liabilities
                
Deposits
  
$
2,945,593
    
$
2,856,478
  
Borrowings
    
539,516
      
642,059
  
Advance payments by borrowers for taxes and insurance
    
22,389
      
23,496
  
Other liabilities
    
67,348
      
56,428
  
Total Liabilities
    
3,574,846
      
3,578,461
  
Stockholders' Equity
                
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued;
46,304,550 shares outstanding at December 31, 2017 and 45,992,366 shares outstanding at June 30, 2017.
    
562
      
562
  
Additional paid-in capital
    
513,316
      
512,337
  
Non-vested restricted stock awards
    
(201
)
    
(458
)
Treasury stock, at cost; 9,940,515 shares at December 31, 2017 and 10,252,699 shares at June 30, 2017.
    
(132,371
)
    
(136,517
)
Unallocated common stock held by the employee stock ownership plan
    
(17,331
)
    
(18,407
)
Retained earnings
    
178,484
      
198,186
  
Accumulated other comprehensive income, net of tax
    
5,086
      
3,520
  
Total Stockholders' Equity
    
547,545
      
559,223
  
Total Liabilities and Stockholders' Equity
  
$
4,122,391
    
$
4,137,684
  

See accompanying notes to unaudited consolidated financial statements.
3

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

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
  
 
  
(unaudited)
  
Interest income:
                        
Interest on loans
  
$
35,891
    
$
33,135
    
$
71,728
    
$
65,108
  
Interest on securities available for sale
    
457
      
826
      
953
      
1,652
  
Interest on securities held to maturity
    
1,145
      
871
      
2,244
      
1,674
  
Dividends on FHLB stock
    
451
      
417
      
936
      
874
  
Interest on federal funds sold and short term investments
    
108
      
2
      
111
      
3
  
Total interest income
    
38,052
      
35,251
      
75,972
      
69,311
  
Interest expense:
                                
Deposits
    
7,788
      
5,964
      
15,141
      
11,703
  
Borrowings
    
2,656
      
3,058
      
5,579
      
6,079
  
Total interest expense
    
10,444
      
9,022
      
20,720
      
17,782
  
Net interest income before provision for loan losses
    
27,608
      
26,229
      
55,252
      
51,529
  
Provision for loan losses
    
—
      
—
      
—
      
—
  
Net interest income after provision for loan losses
    
27,608
      
26,229
      
55,252
      
51,529
  
Other income:
                                
Service charges
    
196
      
176
      
424
      
358
  
Real estate operations, net
    
3
      
—
      
3
      
—
  
Income from investments in real estate joint ventures
    
—
      
260
      
—
      
576
  
Bank-owned life insurance
    
630
      
666
      
1,276
      
1,345
  
Net loss on sale of assets
    
—
      
—
      
(2
)
    
—
  
Net loss on sale of securities
    
(324
)
    
—
      
(324
)
    
—
  
Other income
    
73
      
81
      
144
      
162
  
Total other income
    
578
      
1,183
      
1,521
      
2,441
  
Other expenses:
                                
Compensation, payroll taxes and fringe benefits
    
7,483
      
8,207
      
14,039
      
15,565
  
Advertising
    
143
      
125
      
285
      
215
  
Office occupancy and equipment expense
    
780
      
781
      
1,529
      
1,581
  
Data processing service fees
    
420
      
559
      
964
      
1,103
  
Federal insurance premiums
    
300
      
300
      
600
      
750
  
Other expenses
    
1,042
      
1,086
      
2,235
      
2,112
  
Total operating expenses
    
10,168
      
11,058
      
19,652
      
21,326
  
Income before income tax expense
    
18,018
      
16,354
      
37,121
      
32,644
  
Income tax expense
    
14,048
      
4,978
      
21,155
      
10,657
  
Net income
  
$
3,970
    
$
11,376
    
$
15,966
    
$
21,987
  
Earnings per basic common share
  
$
0.09
    
$
0.26
    
$
0.36
    
$
0.51
  
Earnings per diluted common share
  
$
0.09
    
$
0.26
    
$
0.35
    
$
0.50
  
 
See accompanying notes to unaudited consolidated financial statements.
4

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

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
  
 
  
(unaudited)
  
Net of tax:
                        
Net income
  
$
3,970
    
$
11,376
    
$
15,966
    
$
21,987
  
Other comprehensive income:
                                
Change in unrealized holding loss on securities available for sale
    
(361
)
    
(1,062
)
    
(365
)
    
(1,454
)
Reclassification adjustment for security loss included in net income
    
184
      
—
      
184
      
—
  
Amortization related to post-retirement obligations
    
5
      
57
      
10
      
130
  
Net change in unrealized gain on interest rate swaps
    
1,847
      
7,889
      
1,737
      
9,188
  
Total other comprehensive income
    
1,675
      
6,884
      
1,566
      
7,864
  
Total comprehensive income
  
$
5,645
    
$
18,260
    
$
17,532
    
$
29,851
  
 
See accompanying notes to unaudited consolidated financial statements.
5

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2017 and 2016 (unaudited)
(In thousands, except share data)

 
  
Shares Outstanding
    
Common stock
    
Additional paid-in capital
    
Non-vested restricted stock awards
    
Treasury stock
    
Unallocated common stock held by ESOP
    
Retained earnings
    
Accumulated other comprehensive income (loss), net of tax
    
Total stockholders' equity
  
Balance at June 30, 2016
    
45,247,420
    
$
562
    
$
513,177
    
$
(4,242
)
  
$
(146,173
)
  
$
(20,481
)
  
$
202,429
    
$
(10,072
)
  
$
535,200
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
21,987
      
—
      
21,987
  
Other comprehensive income , net of tax
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
7,864
      
7,864
  
Cash dividends declared ($0.85 per share)
    
—
      
—
      
—
      
—
      
—
      
—
      
(36,598
)
    
—
      
(36,598
)
Purchase of treasury stock
    
(98,655
)
    
—
      
—
      
—
      
(1,574
)
    
—
      
—
      
—
      
(1,574
)
Issuance of restricted stock awards
    
10,000
      
—
      
—
      
(133
)
    
133
      
—
      
—
      
—
      
—
  
Compensation cost for stock options and restricted stock
    
—
      
—
      
849
      
—
      
—
      
—
      
—
      
—
      
849
  
ESOP shares allocated or committed to be released
    
—
      
—
      
1,340
      
—
      
—
      
1,382
      
—
      
—
      
2,722
  
Exercise of stock options
    
701,301
      
—
      
—
      
—
      
9,334
      
—
      
(1,320
)
    
—
      
8,014
  
Vesting of restricted stock awards
    
—
      
—
      
(3,879
)
    
3,892
      
—
      
—
      
(13
)
    
—
      
—
  
Balance at December 31, 2016
    
45,860,066
    
$
562
    
$
511,487
    
$
(483
)
  
$
(138,280
)
  
$
(19,099
)
  
$
186,485
    
$
(2,208
)
  
$
538,464
  

Continued on next page
6
Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2017 and 2016 (unaudited)
(In thousands, except share data)

 
  
Shares Outstanding
    
Common stock
    
Additional paid-in capital
    
Non-vested restricted stock awards
    
Treasury stock
    
Unallocated common stock held by ESOP
    
Retained earnings
    
Accumulated other comprehensive income (loss), net of tax
    
Total stockholders' equity
  
Balance at June 30, 2017
    
45,992,366
    
$
562
    
$
512,337
    
$
(458
)
  
$
(136,517
)
  
$
(18,407
)
  
$
198,186
    
$
3,520
    
$
559,223
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
15,966
      
—
      
15,966
  
Other comprehensive income, net of tax
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
1,566
      
1,566
  
Cash dividends declared ($0.80 per share)
    
—
      
—
      
—
      
—
      
—
      
—
      
(35,159
)
    
—
      
(35,159
)
Purchase of treasury stock
    
(4,787
)
    
—
      
—
      
—
      
(81
)
    
—
      
—
      
—
      
(81
)
Compensation cost for stock options and restricted stock
    
—
      
—
      
101
      
—
      
—
      
—
      
—
      
—
      
101
  
ESOP shares allocated or committed to be released
    
—
      
—
      
1,088
      
—
      
—
      
1,076
      
—
      
—
      
2,164
  
Exercise of stock options
    
323,971
      
—
      
—
      
—
      
4,314
      
—
      
(549
)
    
—
      
3,765
  
Vesting of restricted stock awards
    
—
      
—
      
(210
)
    
170
      
—
      
—
      
40
      
—
      
—
  
Forfeiture of restricted stock awards
    
(7,000
)
    
—
      
—
      
87
      
(87
)
    
—
      
—
      
—
      
—
  
Balance at December 31, 2017
    
46,304,550
    
$
562
    
$
513,316
    
$
(201
)
  
$
(132,371
)
  
$
(17,331
)
  
$
178,484
    
$
5,086
    
$
547,545
  
 
See accompanying notes to unaudited consolidated financial statements.
7

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

 
  
Six months ended December 31,
  
 
  
2017
    
2016
  
 
  
(unaudited)
  
Cash flows from operating activities:
      
Net income
  
$
15,966
    
$
21,987
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
ESOP and stock-based compensation expense
    
2,265
      
3,571
  
Tax benefit from stock-based compensation
    
331
      
1,286
  
Depreciation of premises and equipment
    
388
      
454
  
Net amortization and accretion of premiums and discounts on securities
    
584
      
625
  
Amortization and accretion of deferred loan fees, net
    
(1,246
)
    
(1,129
)
Decrease in deferred taxes
    
11,198
      
1,082
  
Loss on sale of real estate owned
    
2
      
—
  
Loss on sale of investment securities
    
324
      
—
  
Writedown of real estate owned
    
—
      
89
  
Increase in cash surrender value of bank owned life insurance
    
(1,276
)
    
(1,345
)
Increase in accrued interest receivable
    
(248
)
    
(304
)
(Increase) decrease in other assets
    
(6,377
)
    
7,554
  
Increase (decrease) in other liabilities
    
10,670
      
(9,185
)
Net cash provided by operating activities
    
32,581
      
24,685
  
Cash flows from investing activities:
                
Proceeds from sales of securities available for sale
    
29,506
      
—
  
Net decrease (increase) in loans receivable
    
34,472
      
(184,187
)
Purchase of mortgage loans
    
(52,766
)
    
(65,925
)
Purchase of securities available for sale
    
—
      
(66,222
)
Purchase of securities held to maturity
    
(34,134
)
    
(49,649
)
   Purchase of Federal Home Loan Bank stock
    
(19,890
)
    
(35,243
)
Proceeds from payments, calls and maturities of securities available for sale
    
14,735
      
25,004
  
Proceeds from payments, calls and maturities of securities held to maturity
    
22,067
      
15,637
  
Proceeds from redemption of Federal Home Loan Bank stock
    
24,875
      
34,368
  
   Proceeds from sale of real estate owned
    
138
      
132
  
Net increase in real estate joint ventures
    
—
      
(57
)
Purchase of fixed assets
    
(100
)
    
(40
)
Net cash provided by (used in) investing activities
    
18,903
      
(326,182
)
Cash flows from financing activities:
                
Net increase in deposits
    
89,115
      
331,071
  
Purchase of treasury stock
    
(81
)
    
(1,574
)
Dividends paid to shareholders
    
(35,159
)
    
(36,598
)
Exercise of stock options
    
3,765
      
8,014
  
Decrease in advance payments by borrowers for taxes and insurance
    
(1,107
)
    
(1,043
)
Proceeds from borrowed funds
    
32,870
      
19,500
  
Repayment of borrowed funds
    
(135,413
)
    
(488
)
Payment of employee taxes withheld from shared-based awards
    
(81
)
    
(1,574
)
Net cash (used in) provided by financing activities
    
(46,091
)
    
317,308
  
Net increase in cash and cash equivalents
    
5,393
      
15,811
  
Cash and cash equivalents at beginning of period
    
33,578
      
16,571
  
Cash and cash equivalents at end of period
  
$
38,971
    
$
32,382
  
Supplemental cash flow information:
                
Cash paid during the period for:
                
Interest
  
$
20,650
    
$
17,746
  
Income taxes
  
$
8,787
    
$
15,787
  

See accompanying notes to unaudited consolidated financial statements.

 
8
 
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

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

In the opinion of management, all of the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included.  The results of operations and other data presented for the six month period ended December 31, 2017 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2018.

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for the preparation of the Form 10-Q.  The consolidated financial statements presented should be read in conjunction with the Company's audited consolidated financial statements and notes to consolidated financial statements included in the Company's June 30, 2017 Annual Report on Form 10-K, filed with the SEC on August 29, 2017.

The consolidated financial statements have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities presented in the Consolidated Balance Sheets at December 31, 2017 and June 30, 2017 and in the Consolidated Statements of Income for the three and six months ended December 31, 2017 and 2016.  Actual results could differ significantly from those estimates.

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

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
9
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


2. Earnings Per Share ("EPS")

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

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

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
  
 
  
(In thousands, except per share data)
  
Net income
  
$
3,970
    
$
11,376
    
$
15,966
    
$
21,987
  
Weighted average common shares outstanding—basic
    
44,104
      
43,024
      
44,000
      
42,899
  
Effect of dilutive stock options outstanding
    
1,052
      
1,294
      
1,054
      
1,216
  
Weighted average common shares outstanding—diluted
    
45,156
      
44,318
      
45,054
      
44,115
  
Earnings per share-basic
  
$
0.09
    
$
0.26
    
$
0.36
    
$
0.51
  
Earnings per share-diluted
  
$
0.09
    
$
0.26
    
$
0.35
    
$
0.50
  
 
For the three months ended December 31, 2016 there were 787 option shares, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the period.  There were no anti-dilutive shares for the three months ended December 31, 2017.  Anti-dilutive shares for the six months ended December 31, 2017 and 2016 were 489 and 2,733, respectively.

3. Stock Repurchase Program
 
On March 4, 2015, the Board of Directors of the Company authorized a fourth stock repurchase plan pursuant to which the Company is authorized to repurchase up to 5% of the outstanding shares, or 2,205,451 shares.   At December 31, 2017, there are 1,884,064 shares yet to be purchased under the current plan.  At  December 31, 2017, a total of  13,282,468  shares had been acquired under repurchase programs at a weighted average cost of  $13.30 per share.  The timing of the repurchases depend on certain factors, including but not limited to, market conditions and prices, the Company's liquidity and capital requirements, and alternative uses of capital.  Repurchased shares will be held as treasury stock and will be available for general corporate purposes.  
  
10
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

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

There were no options granted during the six months ended December 31, 2017. The fair value of options granted during the six months ended December 31, 2016 was estimated using the Black-Scholes options-pricing model with the assumptions in the following table.


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

The following is a summary of the Company's stock option activity and related information as of December 31, 2017 and changes therein during the six months then ended:

 
  
Number of Stock Options
    
Weighted Average Grant Date Fair Value
    
Weighted Average Exercise Price
    
Weighted Average Remaining Contractual Life (years)
  
Outstanding at June 30, 2017
    
3,729,034
    
$
2.59
    
$
11.70
      
3.4
  
Exercised
    
(323,971
)
    
2.61
      
11.62
      
3.2
  
Forfeited
    
(12,000
)
    
1.64
      
15.89
      
7.8
  
Expired
    
(8,000
)
    
1.64
      
15.89
      
7.6
  
Outstanding at December 31, 2017
    
3,385,063
    
$
2.59
    
$
11.67
      
2.9
  
Exercisable at December 31, 2017
    
3,352,657
    
$
2.60
    
$
11.63
      
2.8
  
 
The Company recorded $11,000 and $17,000 of share based compensation expense related to options for the three months ended December 31, 2017 and 2016, respectively. The Company recorded $23,000 and $283,000 of share based compensation expense related to options for the six months ended December 31, 2017 and 2016, respectively. Expected future expense related to the non-vested options outstanding at December 31, 2017 is $47,000 over a weighted average period of 2.4 years.  Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.



11
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Restricted stock shares vest over a five-year service period on the anniversary date of the grant. Vesting of the restricted stock shares accelerate upon death or disability, retirement or a change in control. The product of the number of shares granted and the grant date market price of the Company's common stock determines the fair value of restricted shares under the Company's restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.
 
The following is a summary of the status of the Company's restricted stock shares as of December 31, 2017 and changes therein during the six months then ended:

 
  
Number of Shares Awarded
    
Weighted Average Grant Date Fair Value
  
Non-vested at June 30, 2017
    
35,934
    
$
15.60
  
Vested
    
(13,734
)
    
15.31
  
Forfeited
    
(6,000
)
    
15.89
  
Non-vested at December 31, 2017
    
16,200
    
$
15.73
  
 
The Company recorded $39,000 and $60,000 of share based compensation expense related to the restricted stock shares for the three months ended December 31, 2017 and 2016, respectively.  The Company recorded $79,000 and $569,000 of share based compensation expense related to the restricted stock shares for the six months ended December 31, 2017 and 2016, respectively. Expected future expense related to the non-vested restricted shares at December 31, 2017 is $209,000 over a weighted average period of 2.4 years.

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

Net periodic benefit costs for the three and six months ended December 31, 2017 and 2016 are presented in the following tables.

 
Retirement Plan
    
BEP Plan
    
Medical Plan
  
 
Three months ended December 31,
  
 
2017
    
2016
    
2017
    
2016
    
2017
    
2016
  
 
(In thousands)
  
Service cost
  
$
33
    
$
38
    
$
—
    
$
—
    
$
15
    
$
14
  
Interest cost
    
52
      
45
      
11
      
10
      
52
      
59
  
Amortization of unrecognized:
                                                
Net loss
    
—
      
—
      
9
      
13
      
—
      
87
  
Total
  
$
85
    
$
83
    
$
20
    
$
23
    
$
67
    
$
160
  

 
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
    
2017
    
2016
  
 
(In thousands)
  
Service cost
  
$
65
    
$
76
    
$
—
    
$
—
    
$
30
    
$
29
  
Interest cost
    
104
      
91
      
22
      
20
      
105
      
117
  
Amortization of unrecognized:
                                                
Net loss
    
—
      
—
      
18
      
26
      
—
      
174
  
Total
  
$
169
    
$
167
    
$
40
    
$
46
    
$
135
    
$
320
  
 

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

 
  
December 31, 2017
    
June 30, 2017
  
 
  
(In thousands)
  
Residential
  
$
257,716
    
$
253,310
  
Residential commercial real estate
    
1,995,144
      
1,945,297
  
Grocery/credit retail commercial real estate
    
517,796
      
535,567
  
Other commercial real estate
    
845,536
      
866,826
  
Construction and land loans
    
8,091
      
4,210
  
Total loans
    
3,624,283
      
3,605,210
  
Less:
                
Deferred loan fees, net
    
7,638
      
8,235
  
Allowance for loan losses
    
30,402
      
30,272
  
Loans, net
  
$
3,586,243
    
$
3,566,703
  
 
The Company's allowance for loan losses is analyzed quarterly and many factors are considered, including changes in the portfolio, delinquencies, nonaccrual loan levels, and other environmental factors.  There have been no material changes to the allowance for loan loss methodology as disclosed in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on August 29, 2017.

The activity in the allowance for loan losses for the three and six months ended December 31, 2017 and 2016 is summarized as follows:

 
Three months ended December 31,
  
Six months ended December 31,
  
 
(In thousands)
  
 
2017
  
2016
  
2017
  
2016
  
Balance at beginning of period
  
$
30,402
    
$
29,878
    
$
30,272
    
$
29,951
  
Provisions for loan losses
    
—
      
—
      
—
      
—
  
Recoveries of loans previously charged off
    
—
      
—
      
152
      
2
  
Loans charged off
    
—
      
(1
)
    
(22
)
    
(76
)
Balance at end of period
  
$
30,402
    
$
29,877
    
$
30,402
    
$
29,877
  
 
13
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The following table provides the three and six month activity in the allowance for loan losses allocated by loan category at December 31, 2017 and 2016.  The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
Three months ended December 31, 2017
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,286
    
$
15,762
    
$
3,196
    
$
9,937
    
$
221
    
$
30,402
  
Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
  
Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
  
Provisions
    
616
      
713
      
(296
)
    
(1,154
)
    
121
      
—
  
Ending balance
  
$
1,902
    
$
16,475
    
$
2,900
    
$
8,783
    
$
342
    
$
30,402
  

 
Six months ended December 31, 2017
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,261
    
$
15,794
    
$
3,000
    
$
10,017
    
$
200
    
$
30,272
  
Charge-offs
    
(22
)
    
—
      
—
      
—
      
—
      
(22
)
Recoveries
    
120
      
—
      
—
      
—
      
32
      
152
  
Provisions
    
543
      
681
      
(100
)
    
(1,234
)
    
110
      
—
  
Ending balance
  
$
1,902
    
$
16,475
    
$
2,900
    
$
8,783
    
$
342
    
$
30,402
  

 
Three months ended December 31, 2016
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,794
    
$
13,610
    
$
3,472
    
$
10,843
    
$
159
    
$
29,878
  
Charge-offs
    
—
      
—
      
—
      
(1
)
    
—
      
(1
)
Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
  
Provisions
    
(168
)
    
814
      
(145
)
    
(476
)
    
(25
)
    
—
  
Ending balance
  
$
1,626
    
$
14,424
    
$
3,327
    
$
10,366
    
$
134
    
$
29,877
  

 
Six months ended December 31, 2016
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,300
    
$
12,837
    
$
3,646
    
$
11,850
    
$
318
    
$
29,951
  
Charge-offs
    
(75
)
    
—
      
—
      
(1
)
    
—
      
(76
)
Recoveries
    
—
      
—
      
—
      
2
      
—
      
2
  
Provisions
    
401
      
1,587
      
(319
)
    
(1,485
)
    
(184
)
    
—
  
Ending balance
  
$
1,626
    
$
14,424
    
$
3,327
    
$
10,366
    
$
134
    
$
29,877
  

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

The following table details the amount of loans receivables that are evaluated individually, and collectively, for impairment, and the related portion of allowance for loan loss that is allocated to each loan portfolio segment at December 31, 2017 and June 30, 2017.

   
At December 31, 2017
  
 
  
Residential
    
Residential commercial real estate
    
Grocery/credit retail commercial real estate
    
Other commercial real estate
    
Construction and land loans
    
Total
  
   
(In thousands)
  
Allowance for loan losses:
                                    
Individually evaluated for impairment
  
$
100
    
$
—
    
$
—
    
$
—
    
$
—
    
$
100
  
Collectively evaluated for impairment
    
1,802
      
16,475
      
2,900
      
8,783
      
342
      
30,302
  
Total
  
$
1,902
    
$
16,475
    
$
2,900
    
$
8,783
    
$
342
    
$
30,402
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
5,131
    
$
—
    
$
—
    
$
8,208
    
$
—
    
$
13,339
  
Collectively evaluated for impairment
    
252,585
      
1,995,144
      
517,796
      
837,328
      
8,091
      
3,610,944
  
Total
  
$
257,716
    
$
1,995,144
    
$
517,796
    
$
845,536
    
$
8,091
    
$
3,624,283
  
 
                                                

   
At June 30, 2017
  
 
  
Residential
    
Residential commercial real estate
    
Grocery/credit retail commercial real estate
    
Other commercial real estate
    
Construction
and land loans
    
Total
  
   
(In thousands)
  
Allowance for loan losses:
                                    
Individually evaluated for impairment
  
$
—
    
$
—
    
$
—
    
$
43
    
$
—
    
$
43
  
Collectively evaluated for impairment
    
1,261
      
15,794
      
3,000
      
9,974
      
200
      
30,229
  
Total
  
$
1,261
    
$
15,794
    
$
3,000
    
$
10,017
    
$
200
    
$
30,272
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
3,684
    
$
—
    
$
—
    
$
10,173
    
$
—
    
$
13,857
  
Collectively evaluated for impairment
    
249,626
      
1,945,297
      
535,567
      
856,653
      
4,210
      
3,591,353
  
Total
  
$
253,310
    
$
1,945,297
    
$
535,567
    
$
866,826
    
$
4,210
    
$
3,605,210
  
 
15
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The Company continuously monitors the credit quality of its loan portfolio.  In addition to internal staff, the Company utilizes the services of a third party loan review firm to evaluate the credit quality ratings of its loan receivables.  Credit quality is monitored by reviewing certain credit quality indicators.  Assets classified as "Satisfactory" are deemed to possess average to superior credit quality, requiring no more than normal attention.  Assets classified as "Pass/Watch" have generally acceptable asset quality yet possess higher risk characteristics/circumstances than satisfactory assets.  Such characteristics may include strained liquidity, slow pay, stale financial statements or other circumstances requiring greater attention from bank staff.  We classify an asset as "Special Mention" if the asset has a potential weakness that warrants management's close attention.  Such weaknesses, if left uncorrected, may result in the deterioration of the repayment prospects of the asset.  An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as "Doubtful" have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  Included in the Substandard caption are all loans that were past due 90 days (or more) and all impaired loans.

The following table provides information about the loan credit quality at December 31, 2017 and June 30, 2017:

 
  
At December 31, 2017
  
 
  
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
  
(In thousands)
  
Residential
  
$
232,637
    
$
18,447
    
$
142
    
$
6,490
    
$
—
    
$
257,716
  
Residential commercial real estate
    
1,966,707
      
26,841
      
1,596
      
—
      
—
      
1,995,144
  
Grocery/credit retail commercial real estate
    
514,756
      
—
      
3,040
      
—
      
—
      
517,796
  
Other commercial real estate
    
705,820
      
115,890
      
13,192
      
10,634
      
—
      
845,536
  
Construction and land loans
    
8,091
      
—
      
—
      
—
      
—
      
8,091
  
Total
  
$
3,428,011
    
$
161,178
    
$
17,970
    
$
17,124
    
$
—
    
$
3,624,283
  

 
  
At June 30, 2017
  
 
  
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
  
(In thousands)
  
Residential
  
$
229,481
    
$
17,256
    
$
1,571
    
$
5,002
    
$
—
    
$
253,310
  
Residential commercial real estate
    
1,915,526
      
27,778
      
1,753
      
240
      
—
      
1,945,297
  
Grocery/credit retail commercial real estate
    
532,472
      
—
      
3,095
      
—
      
—
      
535,567
  
Other commercial real estate
    
725,714
      
107,249
      
15,551
      
18,312
      
—
      
866,826
  
Construction and land loans
    
4,210
      
—
      
—
      
—
      
—
      
4,210
  
Total
  
$
3,407,403
    
$
152,283
    
$
21,970
    
$
23,554
    
$
—
    
$
3,605,210
  

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

The following table provides information about loans past due at December 31, 2017 and June 30, 2017:

 
  
At December 31, 2017
  
 
  
30-59 Days Past Due
    
60-89 Days Past Due
    
90 days or More Past Due
    
Total Past Due
    
Current
    
Total Loans
    
Nonaccrual (1)
  
 
  
(In thousands)
  
Residential
  
$
1,849
    
$
814
    
$
5,614
    
$
8,277
    
$
249,439
    
$
257,716
    
$
6,489
  
Residential commercial real estate
    
—
      
—
      
—
      
—
      
1,995,144
      
1,995,144
      
—
  
Grocery/credit retail commercial real estate
    
—
      
—
      
—
      
—
      
517,796
      
517,796
      
—
  
Other commercial real estate
    
2,459
      
—
      
3,562
      
6,021
      
839,515
      
845,536
      
8,000
  
Construction and land loans
    
—
      
—
      
—
      
—
      
8,091
      
8,091
      
—
  
Total
  
$
4,308
    
$
814
    
$
9,176
    
$
14,298
    
$
3,609,985
    
$
3,624,283
    
$
14,489
  

 
  
At June 30, 2017
  
 
  
30-59 Days Past Due
    
60-89 Days Past Due
    
90 days or More Past Due
    
Total Past Due
    
Current
    
Total Loans
    
Nonaccrual (2)
  
 
  
(In thousands)
  
Residential
  
$
1,243
    
$
1,776
    
$
614
    
$
3,633
    
$
249,677
    
$
253,310
    
$
1,556
  
Residential commercial real estate
    
240
      
—
      
—
      
240
      
1,945,057
      
1,945,297
      
—
  
Grocery/credit retail commercial real estate
    
—
      
—
      
—
      
—
      
535,567
      
535,567
      
—
  
Other commercial real estate
    
606
      
—
      
1,897
      
2,503
      
864,323
      
866,826
      
8,667
  
Construction and land loans
    
—
      
—
      
—
      
—
      
4,210
      
4,210
      
—
  
Total
  
$
2,089
    
$
1,776
    
$
2,511
    
$
6,376
    
$
3,598,834
    
$
3,605,210
    
$
10,223
  

(1)
Included in nonaccrual loans at December 31, 2017 are residential loans totaling $672,000 that were 60-89 days past due; other commercial real estate loans totaling $1.1 million that were 30-59 days past due; residential loans totaling $203,000 and other commercial real estate loans totaling $3.3 million that were less than 30 days past due.
(2)
Included in nonaccrual loans at June 30, 2017 are residential loans totaling $716,000 that were 30-59 days past due; residential loans totaling $205,000 that were 60-89 days past due; and residential loans totaling $21,000 and other commercial real estate loans totaling $6.8 million that were less than 30 days past due.
 

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

The Company defines an impaired loan as a loan for which it is probable, based on current information, that the Company will not collect all amounts due under the contractual terms of the loan agreement.  Loans we individually classify as impaired include multifamily, commercial mortgage and construction loans with balances of $1.0 million or more, unless a condition exists for loans less than $1.0 million that would increase the Bank's potential loss exposure.  At December 31, 2017 impaired loans were primarily collateral-dependent and totaled $13.3 million, of which $1,509,000 had a related allowance for credit losses of $100,000 and $11.8 million of impaired loans had no related allowance for credit losses.  At June 30, 2017 impaired loans were primarily collateral-dependent and totaled $13.9 million, of which $538,000  had a related allowance for credit losses of $43,000 and $13.3 million of which had no related allowance for credit losses.


The following table provides information about the Company's impaired loans at December 31, 2017 and June 30, 2017:

   
At December 31, 2017
    
At June 30, 2017
  
   
Recorded Investment
    
Unpaid Principal Balance
    
Allowance
    
Recorded Investment
    
Unpaid Principal Balance
    
Allowance
  
   
(In thousands)
  
With no related allowance recorded:
                                    
Residential
  
$
3,621
    
$
3,622
    
$
—
    
$
3,684
    
$
3,684
    
$
—
  
Other commercial real estate
    
8,079
      
8,208
      
—
      
9,635
      
9,635
      
—
  
 
    
11,700
      
11,830
      
—
      
13,319
      
13,319
      
—
  
With an allowance recorded:
                                                
Residential
    
1,409
      
1,509
      
100
      
—
      
—
      
—
  
Other commercial real estate
    
—
      
—
      
—
      
495
      
538
      
43
  
 
    
1,409
      
1,509
      
100
      
495
      
538
      
43
  
Total:
                                                
Residential
    
5,030
      
5,131
      
100
      
3,684
      
3,684
      
—
  
Other commercial real estate
    
8,079
      
8,208
      
—
      
10,130
      
10,173
      
43
  
 
  
$
13,109
    
$
13,339
    
$
100
    
$
13,814
    
$
13,857
    
$
43
  
18
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
The following tables present the average recorded investment and interest income recognized on impaired loans for the three and six months ended December 31, 2017 and 2016:

   
Three months ended December 31,
  
   
2017
    
2016
  
   
Average Recorded Investment
    
Interest Income Recognized
    
Average Recorded Investment
    
Interest Income Recognized
  
   
(In thousands)
  
With no related allowance recorded:
                        
Residential
  
$
3,639
    
$
1
    
$
3,505
    
$
34
  
Other commercial real estate
    
8,189
      
126
      
9,356
      
146
  
 
    
11,828
      
127
      
12,861
      
180
  
With an allowance recorded:
                                
Residential
    
1,107
      
13
      
162
      
2
  
Other commercial real estate
    
—
      
—
      
587
      
—
  
Construction and land loans
    
—
      
—
      
2
      
—
  
 
    
1,107
      
13
      
751
      
2
  
Total:
                                
Residential
    
4,746
      
14
      
3,667
      
36
  
Other commercial real estate
    
8,189
      
126
      
9,943
      
146
  
Construction and land loans
    
—
      
—
      
2
      
—
  
 
  
$
12,935
    
$
140
    
$
13,612
    
$
182
  
Cash basis interest income
          
$
109
            
$
158
  



   
Six months ended December 31,
  
   
2017
    
2016
  
   
Average Recorded Investment
    
Interest Income Recognized
    
Average Recorded Investment
    
Interest Income Recognized
  
   
(In thousands)
  
With no related allowance recorded:
                        
Residential
  
$
3,638
    
$
37
    
$
3,480
    
$
69
  
Other commercial real estate
    
8,227
      
226
      
8,954
      
267
  
 
    
11,865
      
263
      
12,434
      
336
  
With an allowance recorded:
                                
Residential
    
632
      
13
      
163