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 September 30, 2019
 
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 every Interactive Data File required to be submitted 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
 
☐  
 
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  ☒ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange on which registered
Common
 
ORIT
 
The NASDAQ Stock Market
 
As of November 12, 2019, there were 56,245,065 shares of the Registrant’s common stock, par value $0.01 per share, issued and 45,153,395 shares outstanding.



Oritani Financial Corp.
FORM 10-Q
 
Index

 
 
 
 
 Page
 
 
 
Item 1.
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
38
 
 
 
Item 3.
40
 
 
 
Item 4.
52
 
 
 
 
 
 
 
 
Item 1.
52
 
 
 
Item 1A.
52
 
 
 
Item 2.
52
 
 
 
Item 3.
52
 
 
 
Item 4.
52
 
 
 
Item 5.
52
 
 
 
Item 6.
53
 
 
 
 
54
 


Part I. Financial Information
Item 1. Financial Statements
 
Oritani Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

 
 
September 30,
2019
   
June 30,
2019
 
   
(unaudited)
   
(audited)
 
Assets
           
Cash on hand and in banks
 
$
20,312
   
$
19,145
 
Federal funds sold and short term investments
   
6,831
     
7,366
 
Cash and cash equivalents
   
27,143
     
26,511
 
Loans, net
   
3,421,268
     
3,491,322
 
Equity securities
   
1,344
     
1,358
 
Debt securities available for sale, at market value
   
30,578
     
32,752
 
Debt securities held to maturity, fair value of $325,054 and $334,179, respectively
   
321,871
     
332,215
 
Bank Owned Life Insurance (at cash surrender value)
   
101,490
     
100,872
 
Federal Home Loan Bank of New York (“FHLB”) stock at cost
   
23,007
     
25,925
 
Accrued interest receivable
   
11,979
     
11,935
 
Real estate owned
   
—
     
557
 
Office properties and equipment, net
   
14,796
     
12,904
 
Deferred tax assets, net
   
32,231
     
31,045
 
Other assets
   
3,951
     
3,120
 
Total Assets
 
$
3,989,658
   
$
4,070,516
 
Liabilities
               
Deposits
 
$
2,936,546
   
$
2,923,244
 
Borrowings
   
426,563
     
521,555
 
Advance payments by borrowers for taxes and insurance
   
23,952
     
24,607
 
Other liabilities
   
73,297
     
71,963
 
Total Liabilities
   
3,460,358
     
3,541,369
 
Stockholders’ Equity
               
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued; 45,100,052 shares outstanding at September 30, 2019 and 45,097,052 shares outstanding at June 30, 2019.
   
562
     
562
 
Additional paid-in capital
   
515,868
     
515,491
 
Non-vested restricted stock awards
   
(190
)
   
(216
)
Treasury stock, at cost; 11,145,013 shares at September 30, 2019 and 11,148,013 shares at June 30, 2019.
   
(153,050
)
   
(153,091
)
Unallocated common stock held by the employee stock ownership plan
   
(14,733
)
   
(15,085
)
Retained earnings
   
183,533
     
182,032
 
Accumulated other comprehensive income, net of tax
   
(2,690
)
   
(546
)
Total Stockholders’ Equity
   
529,300
     
529,147
 
Total Liabilities and Stockholders’ Equity
 
$
3,989,658
   
$
4,070,516
 

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 September 30,
 
   
2019
   
2018
 
   
(unaudited)
 
Interest income:
           
Interest on loans
 
$
37,257
   
$
35,952
 
Dividends on FHLB stock
   
405
     
448
 
Equity securities
   
11
     
10
 
Interest on debt securities available for sale
   
184
     
240
 
Interest on debt securities held to maturity
   
1,986
     
1,929
 
Interest on federal funds sold and short term investments
   
54
     
22
 
Total interest income
   
39,897
     
38,601
 
Interest expense:
               
Deposits
   
12,289
     
9,037
 
Borrowings
   
3,145
     
3,269
 
Total interest expense
   
15,434
     
12,306
 
Net interest income before provision for loan losses
   
24,463
     
26,295
 
Reversal of provision for loan losses
   
—
     
(2,000
)
Net interest income after provision for loan losses
   
24,463
     
28,295
 
Non-interest income:
               
Fees and service charges
   
367
     
312
 
Bank-owned life insurance
   
618
     
624
 
Gains on sale of OREO
   
29
     
—
 
Change in fair value of equity securities
   
(14
)
   
(119
)
Other income
   
2
     
4
 
Total non-interest income
   
1,002
     
821
 
Non-interest expense:
               
Compensation, payroll taxes and fringe benefits
   
6,233
     
6,331
 
Advertising
   
142
     
143
 
Office occupancy and equipment expense
   
723
     
760
 
Data processing service fees
   
540
     
499
 
Federal insurance premiums
   
—
     
300
 
Other expenses
   
1,209
     
2,594
 
Total non-interest expense
   
8,847
     
10,627
 
Income before income tax expense
   
16,618
     
18,489
 
Income tax expense
   
4,318
     
5,092
 
Net income
 
$
12,300
   
$
13,397
 
Earnings per basic common share
 
$
0.28
   
$
0.30
 
Earnings per diluted common share
 
$
0.28
   
$
0.30
 

See accompanying notes to unaudited consolidated financial statements.
4

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

 
Three months ended
September 30,
 
   
2019
   
2018
 
   
(unaudited)
 
Net of tax:
           
Net income
 
$
12,300
   
$
13,397
 
Other comprehensive income
               
Change in unrealized holding gain (loss) on debt securities available for sale
   
56
     
(119
)
Amortization related to post-retirement obligations
   
9
     
8
 
Change in funded status of retirement obligations
   
(384
)
   
—
 
Net change in unrealized (loss) gain on interest rate swaps
   
(1,825
)
   
874
 
Total other comprehensive (loss) income
   
(2,144
)
   
763
 
Total comprehensive income
 
$
10,156
   
$
14,160
 

See accompanying notes to unaudited consolidated financial statements.
5

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Three months ended September 30, 2019 and 2018 (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, 2018
   
46,616,646
   
$
562
   
$
514,002
   
$
(176
)
 
$
(129,433
)
 
$
(16,631
)
 
$
179,799
   
$
11,223
   
$
559,346
 
Net income
   
—
     
—
     
—
     
—
     
—
     
—
     
13,397
     
—
     
13,397
 
Other comprehensive income , net of tax
   
—
     
—
     
—
     
—
     
—
     
—
     
—
     
763
     
763
 
Cash dividends declared (0.25 per share)
   
—
     
—
     
—
     
—
     
—
     
—
     
(11,134
)
   
—
     
(11,134
)
Purchase of treasury stock
   
(18,788
)
   
—
     
—
     
—
     
(292
)
   
—
     
—
     
—
     
(292
)
Issuance of restricted stock awards
   
10,000
     
—
     
—
     
(135
)
   
135
     
—
     
—
     
—
     
—
 
Compensation cost for stock options and restricted stock
   
—
     
—
     
43
     
—
     
—
     
—
     
—
     
—
     
43
 
ESOP shares allocated or committed to be released
   
—
     
—
     
328
     
—
     
—
     
350
     
—
     
—
     
678
 
Exercise of stock options
   
12,000
     
—
     
—
     
—
     
161
     
—
     
(18
)
   
—
     
143
 
Reclassification due to the adoption of ASU No. 2016-01
   
—
     
—
     
—
     
—
     
—
     
—
     
658
     
(658
)
   
—
 
Balance at September 30, 2018
   
46,619,858
   
$
562
   
$
514,373
   
$
(311
)
 
$
(129,429
)
 
$
(16,281
)
 
$
182,702
   
$
11,328
   
$
562,944
 
 
                                                                       
Balance at June 30, 2019
   
45,097,052
   
$
562
   
$
515,491
   
$
(216
)
 
$
(153,091
)
 
$
(15,085
)
 
$
182,032
   
$
(546
)
 
$
529,147
 
Net income
   
—
     
—
     
—
     
—
     
—
     
—
     
12,300
     
—
     
12,300
 
Other comprehensive loss, net of tax
   
—
     
—
     
—
     
—
     
—
     
—
     
—
     
(2,144
)
   
(2,144
)
Cash dividends declared (0.25 per share)
   
—
     
—
     
—
     
—
     
—
     
—
     
(10,800
)
   
—
     
(10,800
)
Compensation cost for stock options and restricted stock
   
—
     
—
     
24
     
—
     
—
     
—
     
—
     
—
     
24
 
ESOP shares allocated or committed to be released
   
—
     
—
     
385
     
—
     
—
     
352
     
—
     
—
     
737
 
Exercise of stock options
   
3,000
     
—
     
—
     
—
     
41
     
—
     
(5
)
   
—
     
36
 
Vesting of restricted stock awards
   
—
     
—
     
(32
)
   
26
     
—
     
—
     
6
     
—
     
—
 
Balance at September 30, 2019
   
45,100,052
   
$
562
   
$
515,868
   
$
(190
)
 
$
(153,050
)
 
$
(14,733
)
 
$
183,533
   
$
(2,690
)
 
$
529,300
 
 
See accompanying notes to unaudited consolidated financial statements.
6

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

 
 
Three months ended
September 30,
 
 
 
2019
   
2018
 
 
 
(unaudited)
 
Cash flows from operating activities:
     
Net income
 
$
12,300
   
$
13,397
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
ESOP and stock-based compensation expense
   
761
     
721
 
Tax benefit from stock-based compensation
   
1
     
1
 
Depreciation of premises and equipment
   
174
     
196
 
Net amortization and accretion of premiums and discounts on securities
   
301
     
324
 
Reversal of provision for loan losses
   
—
     
(2,000
)
Amortization and accretion of deferred loan fees, net
   
(636
)
   
(551
)
Decrease in deferred taxes
   
354
     
595
 
Fair value adjustment for equity securities
   
14
     
119
 
Gain on sale of real estate owned
   
(29
)
   
—
 
Increase in cash surrender value of bank owned life insurance
   
(618
)
   
(623
)
Increase in accrued interest receivable
   
(44
)
   
(631
)
Increase in other assets
   
(6,649
)
   
(1,438
)
Increase in other liabilities
   
1,333
     
533
 
Net cash provided by operating activities
   
7,262
     
10,643
 
Cash flows from investing activities:
               
Net decrease in loans receivable
   
70,690
     
41,469
 
Purchase of mortgage loans
   
—
     
(7,896
)
Purchase of debt securities held to maturity
   
(7,469
)
   
—
 
Purchase of Federal Home Loan Bank stock
   
(3,141
)
   
(12,563
)
Proceeds from payments, calls and maturities of debt securities available for sale
   
2,234
     
3,285
 
Proceeds from payments, calls and maturities of debt securities held to maturity
   
17,531
     
15,381
 
Proceeds from redemption of Federal Home Loan Bank stock
   
6,059
     
15,624
 
Proceeds from sale of real estate owned
   
586
     
—
 
Purchase of fixed assets
   
(11
)
   
(64
)
Net cash provided by investing activities
   
86,479
     
55,236
 
Cash flows from financing activities:
               
Net increase in deposits
   
13,302
     
8,897
 
Purchase of treasury stock
   
—
     
(292
)
Dividends paid to shareholders
   
(10,800
)
   
(11,134
)
Exercise of stock options
   
36
     
143
 
(Decrease) increase in advance payments by borrowers for taxes and insurance
   
(655
)
   
435
 
Proceeds from borrowed funds
   
—
     
45,000
 
Repayment of borrowed funds
   
(94,992
)
   
(115,213
)
Net cash used in financing activities
   
(93,109
)
   
(72,164
)
Net increase (decrease) in cash and cash equivalents
   
632
     
(6,285
)
Cash and cash equivalents at beginning of period
   
26,511
     
34,848
 
Cash and cash equivalents at end of period
 
$
27,143
   
$
28,563
 
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
15,478
   
$
12,210
 
Income taxes
 
$
4,705
   
$
5,079
 
Noncash item for lease adoption ASU 2016-02
 
$
2,208
   
$
—
 

See accompanying notes to unaudited consolidated financial statements.
7
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements



1. Basis of Presentation

The consolidated financial statements are composed of the accounts of Oritani Financial Corp., its wholly owned subsidiaries, Oritani Bank (the “Bank”), Hampshire Financial LLC (inactive) and Oritani LLC (inactive), and the wholly owned subsidiaries of Oritani Bank; Zorm 2009, LLC, Ormon LLC (Ormon) (inactive), and Oritani Investment Corp., as well as its wholly owned subsidiary, Oritani Asset Corporation (a real estate investment trust), (collectively, the "Company").  Intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all of the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included.  The results of operations and other data presented for the three month period ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2020.

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, 2019 Annual Report on Form 10-K, filed with the SEC on August 28, 2019.

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 September 30, 2019 and June 30, 2019 and in the Consolidated Statements of Income for the Three Months Ended September 30,  2019 and 2018.  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 incurred 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.

8
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
September 30,
 
   
2019
   
2018
 
   
(In thousands, except per share data)
 
Net income
 
$
12,300
   
$
13,397
 
Weighted average common shares outstanding—basic
   
43,286
     
44,640
 
Effect of dilutive stock options outstanding
   
668
     
632
 
Weighted average common shares outstanding—diluted
   
43,954
     
45,272
 
Earnings per share-basic
 
$
0.28
   
$
0.30
 
Earnings per share-diluted
 
$
0.28
   
$
0.30
 

For the three months ended September 30, 2019 there were no option shares that could potentially dilute basic earnings per share. For the three months ended September 30, 2018 there were 1,677 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 those periods. 

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 was authorized to repurchase up to 5% of the outstanding shares, or 2,205,451 shares.  During the twelve months ended  June 30, 2019, a total of  1,888,851  shares had been acquired under repurchase programs at a weighted average cost of  $15.20 per share.  With these purchases, the fourth repurchase plan was completed. Repurchased shares are held as treasury stock and will be available for general corporate purposes. The Company may conduct repurchases in accordance with a Rule 10b5-1 trading plan. 

9
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 three months ended September 30, 2019. The fair value of options granted during the three months ended September 30, 2018 was estimated using the Black-Scholes options-pricing model with the assumptions in the following table.

 
 
 
 
 
Three Months ended September 30, 2018
Option shares granted
 
20,000
Expected dividend yield
 
7.47%
Expected volatility
 
17.68%
Risk-free interest rate
 
2.82%
Expected option life (in years)
 
6.5

The following is a summary of the Company’s stock option activity and related information as of September 30, 2019 and changes therein during the three 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, 2019
   
2,222,691
   
$
2.64
   
$
12.16
     
2.4
 
Exercised
   
(3,000
)
   
2.71
     
11.95
     
2.0
 
Outstanding at September 30, 2019
   
2,219,691
   
$
2.64
   
$
12.16
     
2.2
 
Exercisable at September 30, 2019
   
2,150,091
   
$
2.69
   
$
12.05
     
2.0
 
 
The Company recorded $6,000 and $11,000 of share based compensation expense related to options for the three months ended September 30, 2019 and 2018, respectively.  Expected future expense related to the non-vested options outstanding at September 30, 2019 is $61,000 over a weighted average period of 3.3 years.  Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.

10
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 September 30, 2019 and changes therein during the three months then ended:

 
 
Number of
Shares
Awarded
   
Weighted
Average
Grant Date
Fair Value
 
Non-vested at June 30, 2019
   
16,800
   
$
15.97
 
Vested
   
(2,000
)
   
16.15
 
Non-vested at September 30, 2019
   
14,800
   
$
15.95
 
 
The Company recorded $19,000 and $32,000 of share based compensation expense related to the restricted stock shares for the three months ended September 30, 2019 and 2018, respectively.  Expected future expense related to the non-vested restricted shares at September 30, 2019 is $191,000 over a weighted average period of 2.9 years.

11
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

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 months ended September 30, 2019 and 2018 are presented in the following table:


Retirement Plan
   
BEP Plan
   
Medical Plan
 
 
Three Months Ended September 30,
 
 
2019
   
2018
   
2019
   
2018
   
2019
   
2018
 
 
(In thousands)
 
Service cost
 
$
35
   
$
31
   
$
—
   
$
—
   
$
17
   
$
11
 
Interest cost
   
49
     
54
     
11
     
13
     
52
     
59
 
Amortization of unrecognized:
                                               
Net loss
   
—
     
—
     
12
     
8
     
1
     
—
 
Total
 
$
84
   
$
85
   
$
23
   
$
21
   
$
70
   
$
70
 

The service cost component of net periodic benefit cost is included in compensation and employee benefits on the Statements of Income. The other components of net periodic benefit cost, including interest cost and amortization of actuarial gain/loss are included in other expenses on the Statements of Income.


12
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

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

 
 
September 30,
2019
   
June 30,
2019
 
 
 
(In thousands)
 
Residential
 
$
260,651
   
$
267,011
 
Residential commercial real estate
   
2,018,584
     
2,086,314
 
Grocery/credit retail commercial real estate
   
469,753
     
482,831
 
Other commercial real estate
   
689,078
     
683,739
 
Construction and land loans
   
20,705
     
9,170
 
Total loans
   
3,458,771
     
3,529,065
 
Less:
               
Unearned deferred fees and discounts, net
   
8,895
     
9,147
 
Allowance for loan losses
   
28,608
     
28,596
 
Loans, net
 
$
3,421,268
   
$
3,491,322
 
 
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 28, 2019.

The activity in the allowance for loan losses for the three months ended September 30, 2019 and 2018 is summarized as follows:


Three months ended
September 30,
 
 
(In thousands)
 
 
2019
 
2018
 
Balance at beginning of period
 
$
28,596
   
$
30,562
 
Reversal of provision for loan losses
   
—
     
(2,000
)
Recoveries of loans previously charged off
   
12
     
3
 
Loans charged off
   
—
     
—
 
Balance at end of period
 
$
28,608
   
$
28,565
 

13
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


The following table provides the three month activity in the allowance for loan losses allocated by loan category at September 30, 2019 and 2018. 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 September 30, 2019
 
 
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
 
$
2,321
   
$
15,694
   
$
3,249
   
$
6,968
   
$
364
   
$
28,596
 
Charge-offs
   
—
     
—
     
—
     
—
     
—
     
—
 
Recoveries
   
12
     
—
     
—
     
—
     
—
     
12
 
Provisions
   
(585
)
   
405
     
(97
)
   
(117
)
   
394
     
—
 
Ending balance
 
$
1,748
   
$
16,099
   
$
3,152
   
$
6,851
   
$
758
   
$
28,608
 


 
Three Months ended September 30, 2018
 
   
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
 
$
1,990
   
$
17,259
   
$
3,015
   
$
7,828
   
$
470
   
$
30,562
 
Charge-offs
   
—
     
—
     
—
     
—
     
—
     
—
 
Recoveries
   
3
     
—
     
—
     
—
     
—
     
3
 
Provisions
   
107
     
(1,825
)
   
118
     
(52
)
   
(348
)
   
(2,000
)
Ending balance
 
$
2,100
   
$
15,434
   
$
3,133
   
$
7,776
   
$
122
   
$
28,565
 

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


The following tables detail 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 September 30, 2019 and June 30, 2019.


At September 30, 2019
 
 
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
 
$
—
   
$
—
   
$
—
   
$
—
   
$
—
   
$
—
 
Collectively evaluated for impairment
   
1,748
     
16,099
     
3,152
     
6,851
     
758
     
28,608
 
Total
 
$
1,748
   
$
16,099
   
$
3,152
   
$
6,851
   
$
758
   
$
28,608
 
Loans receivable:
                                               
Individually evaluated for impairment
 
$
2,090
   
$
—
   
$
—
   
$
3,476
   
$
—
   
$
5,566
 
Collectively evaluated for impairment
   
258,561
     
2,018,584
     
469,753
     
685,602
     
20,705
     
3,453,205
 
Total
 
$
260,651
   
$
2,018,584
   
$
469,753
   
$
689,078
   
$
20,705
   
$
3,458,771
 


 
At June 30, 2019
 
 
 
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
 
$
—
   
$
—
   
$
—
   
$
—
   
$
—
   
$
—
 
Collectively evaluated for impairment
   
2,321
     
15,694
     
3,249
     
6,968
     
364
     
28,596
 
Total
 
$
2,321
   
$
15,694
   
$
3,249
   
$
6,968
   
$
364
   
$
28,596
 
Loans receivable:
                                               
Individually evaluated for impairment
 
$
5,580
   
$
—
   
$
—
   
$
3,758
   
$
—
   
$
9,338
 
Collectively evaluated for impairment
   
261,431
     
2,086,314
     
482,831
     
679,981
     
9,170
     
3,519,727
 
Total
 
$
267,011
   
$
2,086,314
   
$
482,831
   
$
683,739
   
$
9,170
   
$
3,529,065
 
 
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 tables provide information about the loan credit quality at September 30, 2019 and June 30, 2019:

 
 
At September 30, 2019
 
 
 
Satisfactory
   
Pass/Watch
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(In thousands)
 
Residential
 
$
238,533
   
$
17,483
   
$
1,009
   
$
3,626
   
$
—
   
$
260,651
 
Residential commercial real estate
   
1,998,795
     
18,253
     
1,536
     
—
     
—
     
2,018,584
 
Grocery/credit retail commercial real estate
   
466,915
     
2,838
     
—
     
—
     
—
     
469,753
 
Other commercial real estate
   
620,558
     
60,445
     
4,417
     
3,658
     
—
     
689,078
 
Construction and land loans
   
20,705
     
—
     
—
     
—
     
—
     
20,705
 
Total
 
$
3,345,506
   
$
99,019
   
$
6,962
   
$
7,284
   
$
—
   
$
3,458,771
 

 
 
At June 30, 2019
 
 
 
Satisfactory
   
Pass/Watch
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(In thousands)
 
Residential
 
$
241,524
   
$
17,965
   
$
351
   
$
7,171
   
$
—
   
$
267,011
 
Residential commercial real estate
   
2,068,384
     
16,385
     
1,545
     
—
     
—
     
2,086,314
 
Grocery/credit retail commercial real estate
   
479,963
     
2,868
     
—
     
—
     
—
     
482,831
 
Other commercial real estate
   
617,061
     
58,219
     
4,246
     
4,213
     
—
     
683,739
 
Construction and land loans
   
9,170
     
—
     
—
     
—
     
—
     
9,170
 
Total
 
$
3,416,102
   
$
95,437
   
$
6,142
   
$
11,384
   
$
—
   
$
3,529,065
 

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


The following tables provide information about loans past due at September 30, 2019 and June 30, 2019:

 
 
At September 30, 2019
 
 
 
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
 
$
2,486
   
$
2,226
   
$
534
   
$
5,246
   
$
255,405
   
$
260,651
   
$
3,014
 
Residential commercial real estate
   
—
     
—
     
—
     
—
     
2,018,584
     
2,018,584
     
—
 
Grocery/credit retail commercial real estate
   
—
     
—
     
—
     
—
     
469,753
     
469,753
     
—
 
Other commercial real estate
   
420
     
187
     
—
     
607
     
688,471
     
689,078
     
3,476
 
Construction and land loans
   
—
     
—
     
—
     
—
     
20,705
     
20,705
     
—
 
Total
 
$
2,906
   
$
2,413
   
$
534
   
$
5,853
   
$
3,452,918
   
$
3,458,771
   
$
6,490
 

 
 
At June 30, 2019
 
 
 
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
 
$
2,482
   
$
1,409
   
$
5,164
   
$
9,055
   
$
257,956
   
$
267,011
   
$
6,531
 
Residential commercial real estate
   
—
     
—
     
—
     
—
     
2,086,314
     
2,086,314
     
—
 
Grocery/credit retail commercial real estate
   
—
     
—
     
—
     
—
     
482,831
     
482,831
     
—
 
Other commercial real estate
   
1,789
     
—
     
—
     
1,789
     
681,950
     
683,739
     
3,522
 
Construction and land loans
   
—
     
—
     
—
     
—
     
9,170
     
9,170
     
—
 
Total
 
$
4,271
   
$
1,409
   
$
5,164
   
$
10,844
   
$
3,518,221
   
$
3,529,065
   
$
10,053
 

(1)
Included in nonaccrual loans at September 30, 2019 are residential loans totaling $350,000 that were 30-59 days past due; and residential loans totaling $952,000 that were 60-89 days past due; and residential loans totaling $1.2 and other commercial real estate loans totaling $3.5 million that were less than 30 days past due.
(2)
Included in nonaccrual loans at June 30, 2019 are residential loans totaling $30,000 that were 30-59 days past due; residential loans totaling $768,000 that were 60-89 days past due; and residential loans totaling $568,000 and other commercial real estate loans totaling $2.4 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 September 30, 2019 and June 30, 2019, impaired loans were primarily collateral-dependent and totaled $5.6 and $9.3 million respectively, with no related allowance for credit losses.

The following table provides information about the Company’s impaired loans at September 30, 2019 and June 30, 2019:


At September 30, 2019
   
At June 30, 2019
 
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Allowance
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Allowance
 
 
(In thousands)
 
With no related allowance recorded:
                                   
Residential
 
$
2,096
   
$
2,090
   
$
—
   
$
5,580
   
$
5,580
   
$
—
 
Other commercial real estate
   
3,299
     
3,476
     
—
     
3,938
     
3,758
     
—
 
                     Total
 
$
5,395
   
$
5,566
   
$
—
   
$
9,518
   
$
9,338
   
$
—
 

The following tables present the average recorded investment and interest income recognized on impaired loans for the Three Months ended September 30, 2019 and 2018:


Three months ended September 30,
 
 
2019
   
2018
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
 
(In thousands)
 
With no related allowance recorded:
                       
Residential
 
$
2,154
   
$
12
   
$
5,197
   
$
18
 
Other commercial real estate
   
3,327
     
36
     
3,956
     
73
 
 
 
$
5,481
   
$
48
   
$
9,153
   
$
91
 
Cash basis interest income
         
$
48
           
$
49
 

18
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


Troubled debt restructured loans (“TDRs”) are those loans whose terms have been modified because of deterioration in the financial condition of the borrower.  The Company has selectively modified certain borrower’s loans to enable the borrower to emerge from delinquency and keep their loans current.  The eligibility of a borrower for a TDR modification depends upon the facts and circumstances of each transaction, which may change from period to period, and involve judgment by management regarding the likelihood that the modification will result in the maximum recovery by the Company.  Modifications could include extension of the terms of the loan, reduced interest rates, and forgiveness of accrued interest and/or principal.  Once an obligation has been restructured because of such credit problems, it continues to be considered restructured until paid in full or, if the obligation yields a market rate (a rate equal to or greater than the rate the Company was willing to accept at the time of the restructuring for a new loan with comparable risk), until the year subsequent to the year in which the restructuring takes place, provided the borrower has performed under the modified terms for a six month period.  Management classifies all TDRs as impaired loans.  Included in impaired loans at September 30, 2019 and June 30, 2019, are $1.3 million and $1.5 million, respectively of loans which are deemed TDRs.

The following table presents additional information regarding the Company’s TDRs as of September 30, 2019 and June 30, 2019:

 
Troubled Debt Restructurings
at September 30, 2019
   
Troubled Debt Restructurings
at June 30, 2019
 
 
Performing
   
Nonperforming
   
Total
   
Performing
   
Nonperforming
   
Total
 
 
(In thousands)
   
(In thousands)
 
Residential
 
$
—
   
$
167
   
$
167
   
$
—
   
$
167
   
$
167
 
Other commercial real estate
   
—
     
1,085
     
1,085
     
236
     
1,096
     
1,332
 
Total
 
$
—
   
$
1,252
   
$
1,252
   
$
236
   
$
1,263
   
$
1,499
 
Allowance
 
$
—
   
$
—
   
$
—
   
$
—
     
—
   
$
—
 

There were no loan relationships modified in a troubled debt restructuring during the three months ended September 30, 2019 and 2018.

There were no payment defaults (90 days or more past due) on loans modified as troubled debt restructurings within twelve months of modification during the three months ended September 30, 2019 and 2018.

19
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


7. Securities 

Debt Securities Held to Maturity

The following is a comparative summary of debt securities held to maturity at September 30, 2019 and June 30, 2019:

 
 
At September 30, 2019
 
 
 
Amortized
cost
   
Gross
unrecognized
gains
   
Gross
unrecognized
losses
   
Fair value
 
 
 
(In thousands)
 
U.S. Government and Federal agency obligations
                       
Due in less than one year
 
$
5,000
   
$
—
   
$
9
   
$
4,991
 
Mortgage-backed securities:
                               
Residential MBS
   
203,617
     
2,276
     
479
     
205,414
 
Commercial MBS
   
26,788
     
871
     
1
     
27,658
 
CMO
   
71,436
     
470
     
448
     
71,458
 
Corporate Note
                               
         Due in five to ten years
   
15,030
     
503
     
—
     
15,533
 
 
 
$
321,871
   
$
4,120
   
$
937
   
$
325,054
 

 
 
At June 30, 2019
 
 
 
Amortized
cost
   
Gross
unrecognized
gains
   
Gross
unrecognized
losses
   
Fair value
 
 
 
(In thousands)
 
U.S. Government and Federal agency obligations
                       
Due in less than one year
 
$
5,000
   
$
—
   
$
21
   
$
4,979
 
Mortgage-backed securities:
                               
Residential MBS
   
207,587
     
1,952
     
639
     
208,900
 
Commercial MBS
   
26,952
     
511
     
27
     
27,436
 
CMO
   
77,643
     
434
     
512
     
77,565
 
Corporate Note
                               
         Due in five to ten years
   
15,033
     
266
     
—
     
15,299
 
 
 
$
332,215
   
$
3,163
   
$
1,199
   
$
334,179
 
 
The contractual maturities of mortgage-backed securities held to maturity generally exceed 20 years; however, the effective lives are expected to be shorter due to anticipated prepayments and, in the case of CMOs, cash flow priorities.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

The debt securities held to maturity proceeds, fair values pledged, and other than temporary impairment charges information are reflected in the table below:


Three Months Ended
   
Three Months Ended
   
At
 
 
September 30, 2019
   
September 30, 2018
   
June 30, 2019
 
 
(dollars in thousands)
 
     
Proceeds from sale of held-to-maturity debt securities
 
$
—
   
$
—
   
$
—
 
Fair value of debt securities held-to-maturity pledged as collateral for advances
   
6,934
     
8,500
     
7,501
 
Fair value of debt securities held-to-maturity pledged for interest rate swap
   
—
     
—
     
—
 
Fair value of debt securities held-to-maturity pledged as collateral for municipal deposits
   
18,778
     
—
     
19,511
 
Other than temporary impairment charges on held-to-maturity debt securities
   
—
     
—
     
—
 


20
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements



Gross unrecognized losses on debt securities held to maturity and the fair value of the related securities, aggregated by security category and length of time that individual securities have been in a continuous unrecognized loss position at September 30, 2019 and June 30, 2019 were as follows:

 
At September 30, 2019
 
 
Less than 12 months
   
Greater than 12 months
   
Total
 
 
Fair value
   
Gross
unrecognized
losses
   
Fair value
   
Gross
unrecognized
losses
   
Fair value
   
Gross
unrecognized
losses
 
 
(In thousands)
 
U.S. Government and Federal agency obligations
                                   
Due in less than one year
 
$
—
   
$
—
   
$
4,991
   
$
9
   
$
4,991
   
$
9
 
Mortgage-backed securities:
                                               
Residential MBS
   
63,869
     
191
     
41,176
     
288
     
105,045
     
479
 
Commercial MBS
   
4,364
     
1
     
—
     
—
     
4,364
     
1
 
CMO
   
17,446
     
110
     
28,716
     
338
     
46,162
     
448
 
 
 
$
85,679
   
$
302
   
$
74,883
   
$
635
   
$
160,562
   
$
937
 

 
At June 30, 2019
 
 
Less than 12 months
   
Greater than 12 months
   
Total
 
 
Fair value
   
Gross
unrecognized
losses
   
Fair value
   
Gross
unrecognized
losses
   
Fair value
   
Gross
unrecognized
losses
 
 
(In thousands)
 
U.S. Government and Federal agency obligations
                                   
Due in less than one year
 
$
—
   
$
—
   
$
4,979
   
$
21
   
$
4,979
   
$
21
 
Mortgage-backed securities:
                                               
Residential MBS
   
—
     
—
     
103,110
     
639
     
103,110
     
639
 
Commercial MBS
   
—
     
—
     
4,370
     
27
     
4,370
     
27
 
CMO
   
—
     
—
     
45,043
     
512
     
45,043
     
512
 
 
 
$
—
   
$
—
   
$
157,502
   
$
1,199
   
$
157,502
   
$
1,199
 

Management evaluated the securities in the above tables and concluded that none of the securities with losses has impairments that are other-than-temporary.  The unrecognized losses on securities were caused by interest rate changes and market conditions.  Because the decline in fair value is attributable to changes in interest rates and market conditions and not credit quality, and because the Company has no intent to sell and believes it is not more than likely than not that it will be required to sell these securities until a market price recovery or maturity, these securities are not considered other-than-temporarily impaired.

21
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

Debt Securities Available for Sale

The following is a comparative summary of debt securities available for sale at September 30, 2019 and June 30, 2019:

 
At September 30, 2019
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Fair value
 
 
(In thousands)
 
Mortgage-backed securities:
                       
Residential MBS
 
$
2
   
$
—
   
$
—
   
$
2
 
Commercial MBS
   
3,882
     
—
     
7
     
3,875
 
CMO
   
26,900
     
4
     
203
     
26,701
 
 
 
$
30,784
   
$
4
   
$
210
   
$
30,578
 

 
At June 30, 2019
 
 
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Fair value
 
 
(In thousands)
 
Mortgage-backed securities:
                       
Residential MBS
 
$
9
   
$
—
   
$
—
   
$
9
 
Commercial MBS
   
3,921
     
—
     
5
     
3,916
 
CMO
   
29,108
     
3
     
284
     
28,827
 
 
 
$
33,038
   
$
3
   
$
289
   
$
32,752
 
 
The contractual maturities of mortgage-backed securities available for sale generally exceed 20 years; however, the effective lives are expected to be shorter due to anticipated prepayments and, in the case of CMOs, cash flow priorities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

The debt securities available proceeds, fair values pledged, and other than temporary impairment charges information are reflected in the table below:



Three Months Ended
   
Three Months Ended
   
At
 
 
September 30, 2019
   
September 30, 2018
   
June 30, 2019
 
 
(dollars in thousands)
 
     
Proceeds from sales of debt securities available for sale
 
$
—
   
$
—
   
$
—
 
Fair value of debt securities available for sale pledged as collateral for advances
   
12,290
     
—
     
12,879
 
Fair value of debt securities available for sale pledged for interest rate swap
   
—
     
—
     
—
 
Fair value of debt securities available for sale pledged as collateral for municipal deposits
   
—
     
—
     
—
 
Other than temporary impairment charges on debt securities available for sale
   
—
     
—
     
—
 

22
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements



Gross unrealized losses on debt securities available for sale and the fair value of the related securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019 and June 30, 2019 were as follows:

 
At September 30, 2019
 
 
Less than 12 months
 
Greater than 12 months
 
Total
 
 
Fair value
 
Gross
unrealized
losses
 
Fair value
 
Gross
unrealized
losses
 
Fair value
 
Gross
unrealized
losses
 
 
(In thousands)
 
Mortgage-backed securities:
                       
Commercial MBS
 
$
3,875
   
$
7
   
$
—
   
$
—
   
$
3,875
   
$
7
 
CMO
   
4,305
     
8
     
20,991
     
195
     
25,296
     
203
 
 
 
$
8,180
   
$
15
   
$
20,991
   
$
195
   
$
29,171
   
$
210
 

 
At June 30, 2019
 
 
Less than 12 months
 
Greater than 12 months
 
Total
 
 
Fair value
 
Gross
unrealized
losses
 
Fair value
 
Gross
unrealized
losses
 
Fair value
 
Gross
unrealized
losses
 
 
(In thousands)
 
Mortgage-backed securities:
                       
Commercial MBS
 
$
3,916
   
$
5
   
$
—
   
$
—
   
$
3,916
   
$
5
 
CMO
   
—
   
$
—
     
27,063
     
284
   
$
27,063
   
$
284
 
 
 
$
3,916
   
$
5
   
$
27,063
   
$
284
   
$
30,979
   
$
289
 
 
Management evaluated the securities in the above tables and concluded that none of the securities with losses has impairments that are other-than-temporary.  The unrealized losses on securities were caused by interest rate changes and market conditions.  Because the decline in fair value is attributable to changes in interest rates and market conditions and not credit quality, and because the Company has no intent to sell and believes it is not more than likely than not that it will be required to sell these securities until a market price recovery or maturity, these securities are not considered other-than-temporarily impaired.

Equity Securities

The Company's portfolio of equity securities had an estimated fair value of  $1.3 million and $1.4 million at September 30, 2019 and June 30, 2019, respectively. Equity Securities are reported at estimated fair value on the Company's Consolidated Balance Sheets. The Company adopted FASB Accounting Standard Update ("ASU") 2016-01 on July 1, 2018. The ASU supersedes the guidance to classify equity securities with readily determinable fair value into different categories and requires equity securities to be measured at fair value with changes in the fair value recognized through net income rather than accumulated other comprehensive income (loss). Upon adoption, the Company recorded an after tax cumulative-effect adjustment of $658,000 in the consolidated statement of stockholders' equity, reclassified its equity securities out of available for sale securities to equity securities on the consolidated balance sheets for all periods presented, and recognized unrealized changes in fair value through earnings. For periods prior to the adoption of ASU 2016-01, unrealized changes in fair value of equity securities were included in accumulated other comprehensive income (loss). Unrealized changes in fair value of equity securities recognized through income for the three months ended September 30, 2019 and 2018 is a net loss of $14,000 and $119,000, respectively. There were no sales of equity securities for the three months ended September 30, 2019 and 2018.


23
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


8. Deposits

Deposits include checking (non-interest and interest-bearing demand deposits), money market, savings and time deposits. We had brokered deposits totaling $451.6 million and $471.2 million at September 30, 2019 and June 30, 2019, respectively.   Total municipal deposits were $520.8 million and $512.0 million at September 30, 2019 and June 30, 2019, respectively. Municipal deposits are secured by a Federal Home Loan Bank of New York municipal deposit letter of credit in the amount of $120.0 million and $150.0 million at September 30, 2019 and June 30, 2019, respectively. Municipal deposits are also secured by debt securities held to maturity with fair values of $18.8 million at September 30, 2019. As of September 30, 2019 and June 30, 2019, the aggregate amount of outstanding time deposits in amounts greater than $250,000 was $224.3 million and $253.5 million, respectively. 

 Deposit balances are summarized as follows:

 
 
September 30,
2019
   
June 30,
2019
 
 
 
(Dollars in thousands)
 
Checking accounts
 
$
688,899
   
$
668,453
 
Money market deposit accounts
   
651,976
     
622,670
 
Savings accounts
   
378,272
     
383,763
 
Time deposits
   
1,217,399
     
1,248,358
 
 
 
$
2,936,546
   
$
2,923,244
 

9. Derivatives and Hedging Activities

Oritani is exposed to certain risks regarding its ongoing business operations.  Derivative instruments are used to offset a portion of the Company's interest rate risk.  Specifically, the Company has utilized interest rate swaps to partially offset the interest rate risk inherent in the Company's balance sheet.  Oritani recognizes interest rate swaps as either assets or liabilities at fair value in the statement of financial condition with an offset recorded in Other Comprehensive Income and any ineffectiveness is recorded in earnings.  The interest rate swaps have been designed as cash flow hedges.   For all cash flow hedges the balance sheet item that has been hedged is brokered deposits. 

Oritani is exposed to credit-related losses in the event of nonperformance by the counterparties to the agreements.  Oritani controls the credit risk through monitoring procedures and does not expect the counterparty to fail their obligations.  Oritani only deals with primary dealers and believes that the credit risk inherent in these contracts was not significant during and at period end.  Oritani has the right to demand that the counterparty post collateral to cover any market value shortfall of the counterparty regarding the transaction.

At September 30, 2019, Oritani had nineteen interest rate swap agreements with a total notional outstanding of $345.0 million.  These agreements all feature exchanges of fixed for variable payments covering various hedging periods maturing between June 2020 and June 2025.   The Company is paying fixed rates on these swaps ranging from 0.77% to 1.90%, in exchange for receiving variable payments linked to one month LIBOR.

The following table presents amounts included in the consolidated balance sheets related to the fair value of derivative financial instruments at September 30, 2019 and June 30, 2019.

24
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements




     
At September 30, 2019
   
At June 30, 2019
 
 
.
 
Balance Sheet Line Item
 
Notional
Amount
   
Fair
Value
   
Notional
Amount
   
Fair
Value
 
Cash flow hedge interest rate swaps
                       
Gross unrealized gain
 
Other Assets
 
$
150,000
   
$
884
   
$
185,000
   
$
1,624
 
Gross unrealized loss
 
Other Liabilities
   
195,000
     
(3,248
)
   
170,000
     
(1,408
)
Gross notional / net fair value
     
$
345,000
   
$
(2,364
)
 
$
355,000
   
$
216
 
Average rate paid
       
1.54
%
           
1.50
%
       
Average rate received
       
2.30
%
           
2.37
%
       
Weighted average maturity (years)
       
3.2
             
3.3
         

Gains (losses) included in the consolidated statements of income and in comprehensive income, on a pre-tax basis, related to cash flow hedge interest rate swaps are as follows:


Three Months Ended September 30,
 
 
2019
   
2018
 
 
(Dollars in thousands)
 
Amount of (loss) gain recognized in other comprehensive income
 
$
(1,858
)
 
$
1,851
 
Amount of unrealized gain (loss) reclassified from accumulated other comprehensive loss to interest expense
   
722
     
616
 
Net change in unrealized (loss) gain on interest rate swaps, before taxes
 
$
(2,580
)
 
$
1,235
 

Ineffectiveness recognized during the three months ended September 30, 2019 and 2018 was immaterial.   There were $1.9 million and $96,000, accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss at September 30, 2019 and June 30, 2019, respectively. Amounts reported in accumulated other comprehensive income related to cash flow interest rate swaps are reclassified to interest expense as interest payments are made.  There were no securities pledged for the swaps at September 30, 2019 and June 30, 2019. At September 30, 2019 and June 30, 2019, we had cash of $2.9 million and $710,000 pledged for swaps.
25
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements




10. Income Taxes

The Company files income tax returns in the United States federal jurisdiction and in New Jersey, and New York city and state jurisdictions. The Company is no longer subject to federal and state income tax examinations by tax authorities for years prior to 2014. Currently, the Company is not under examination by any taxing authority. The Company's federal return for the tax year ended December 31, 2015 was audited during fiscal 2019.

The enactment of the Tax Cuts and Jobs Act on December 22, 2017 lowered the federal corporate income tax rate to 21% beginning in 2018 from a maximum rate of 35% in 2017. The benefit of the lower federal tax rate was partially offset by the impact of New Jersey (“NJ”) tax legislation enacted on July 1, 2018 that imposes a temporary surtax of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. The legislation also requires mandatory unitary combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019. The legislation required a revaluation of our deferred tax assets/liabilities based on the rates at which they are expected to reverse in the future. The revaluation of the Company's deferred tax balances resulted in a one-time non-cash charge of $477,000 which was included in income tax expense for the three months ended September 30, 2018. Excluding the impact of the revaluation, the effective tax rate for the 2018 period was 25%. The increase in effective tax rate in the 2019 period was the result of the NJ tax legislation. The Company reports earnings on a fiscal year basis and the increased income tax implications of the NJ legislation were partially recognized by the Company ratably over the course of the fiscal year ending June 30, 2019. The full impact of the legislation will be recognized in the fiscal year ending June 30, 2020. The Company's estimated effective tax rate for the fiscal year ending June 30, 2020 is 26%.


26
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

11. Fair Value Measurements
 
The Company adopted FASB ASC 820, “Fair Value Measurements and Disclosures,” on July 1, 2008. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below:
 
Basis of Fair Value Measurement:
 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;
 

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;
 

Level 3: Price or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).
 
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
Following are descriptions of the valuation methodologies and key inputs used to measure assets recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. The descriptions include an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
 
Cash and Cash Equivalents
 
Due to their short-term nature, the carrying amount of these instruments approximates fair value.
 
Securities
 
The Company records securities held to maturity at amortized cost. Equity securities and securities available for sale are measured at fair value on a recurring basis. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. The fair values for securities are obtained from an independent nationally recognized third-party pricing service. Our independent pricing service provides us with prices which are primarily categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the majority of securities in our portfolio. Pricing services may employ modeling techniques in determining pricing. Inputs to these models include market spreads, dealer quotes, prepayment speeds, credit information and the instrument’s terms and conditions, among other things. Management compares the pricing to a second independent pricing source for reasonableness. Equity securities are reported at Level 1 based on quoted market prices for identical securities in active markets.
 
FHLB of New York Stock
 
FHLB of New York Stock is recorded at cost (par value) and evaluated for impairment based on the ultimate recoverability of the par value. There is no active market for this stock and no significant observable market data is available for this instrument. The Company considers the profitability and asset quality of FHLB, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. The Company believes its investment in FHLB stock is ultimately recoverable at par. The carrying amount of FHLB stock approximates fair value, since this is the amount for which it could be redeemed.
 
27
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

Loans
 
The Company does not record loans at fair value on a recurring basis. However, periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements. The estimated fair value for significant nonperforming loans and impaired loans are valued utilizing independent appraisals of the collateral securing such loans that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. The appraisals may be  adjusted downward by management (0-20% adjustment rate and 0-10%  risk premium rate), as necessary, for changes in relevant valuation factors subsequent to the appraisal date and the timing of anticipated cash flows (0-8% discount rate).  The Company classifies impaired loans as Level 3.
 
In connection with the adoption of ASU 2016-01 on July 1, 2018, the Company refined the methodology used to estimate the fair value of the loan portfolio using an exit price notion resulting in prior periods no longer being comparable. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, and other adjustments.  The application of an exit price notion requires the use of significant judgment.   Estimated fair value for loans is determined using portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential, multifamily, commercial real estate, construction, land and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms.  At September 30, 2019 and June 30, 2019,  estimated fair value of loans is determined using a discounted cash flow model that employs an exit discount rate that reflects the current market pricing for loans with similar characteristics and remaining maturity, adjusted by underwriting uncertainty, liquidity and credit discounts. The Company classifies the estimated fair value of loans held for investment as Level 3.

Real Estate Owned
 
Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at fair value less estimated selling costs when acquired, thus establishing a new cost basis. Subsequently, real estate owned is carried at the lower of cost or fair value, less estimated selling costs. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered Level 3. When an asset is acquired, the excess of the loan balance over fair value, less estimated liquidation costs (5%-20% discount rate), is charged to the allowance for loan losses.  If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in the economic conditions.
 
Deposit Liabilities
 
The estimated fair value of deposits with no stated maturity, such as checking, savings, and money market accounts, is equal to the amount payable on demand at the balance sheet date. The estimated fair value of term deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The Company classifies the estimated fair value of term deposits as Level 2.
 
Borrowings
 
The book value of overnight borrowings approximates the estimated fair value. The estimated fair value of term borrowings is calculated based on the discounted cash flow of contractual amounts due, using market rates currently available for borrowings of similar amount and remaining maturity. The Company classifies the estimated fair value of term borrowings as Level 2.
28
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements




Derivatives
 
The fair value of our interest rate swaps was estimated using Level 2 inputs.  The fair value was determined using third party prices that are based on discounted cash flow analyses using observed market interest rate curves and volatilities.
 
Commitments to Extend Credit and to Purchase or Sell Securities
 
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to purchase or sell securities is estimated based on bid quotations received from securities dealers. The fair value of off-balance-sheet commitments approximates book value.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and June 30, 2019 by level within the fair value hierarchy. There were no transfers between levels within the fair value hierarchy during the three months ended September 30, 2019.

 
 
Fair Value as of
September 30, 2019
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Unobservable
Inputs
(Level 3)
 
 
 
(In thousands)
 
Assets:
                       
Equity Securities
 
$
1,344
   
$
1,344
   
$
—
   
$
—
 
Mortgage-backed securities available for sale
                               
Residential MBS
   
2
     
—
     
2
     
—
 
Commercial MBS
   
3,875
     
—
     
3,875
     
—
 
CMO
   
26,701
     
—
     
26,701
     
—
 
Total debt securities available for sale
   
30,578
     
—
     
30,578
     
—
 
Interest rate swaps
   
884
     
—
     
884
     
—
 
Total assets measured on a recurring basis
 
$
32,806
   
$
1,344
   
$
31,462
   
$
—
 
Liabilities:
                               
Interest rate swaps
 
$
(3,248
)
 
$
—
   
$
(3,248
)
 
$
—
 

 
 
Fair Value as of
June 30, 2019
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Unobservable
Inputs
(Level 3)
 
 
 
(In thousands)
 
Assets:
                       
Equity Securities
 
$
1,358
   
$
1,358
   
$
—
   
$
—
 
Mortgage-backed securities available for sale
                               
Residential MBS
   
9
     
—
     
9
     
—
 
Commercial MBS
   
3,916
     
—
     
3,916
     
—
 
CMO
   
28,827
     
—
     
28,827
     
—
 
Total debt securities available for sale
   
32,752
     
—
     
32,752
     
—
 
                                 
Interest rate swaps
   
1,624
     
—
     
1,624
     
—
 
Total assets measured on a recurring basis
 
$
35,734
   
$
1,358
   
$
34,376
   
$
—
 
Liabilities:
                               
Interest rate swaps
 
$
(1,408
)
 
$
—
   
$
(1,408
)
 
$
—
 
 
29
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


Assets Recorded at Fair Value on a Nonrecurring Basis
 
The Company may be required, from time to time, to measure the fair value of certain other financial assets on a nonrecurring basis in accordance with U.S. GAAP. The adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or write downs of individual assets.

The following tables present the recorded amount of assets measured at fair value on a nonrecurring basis as of September 30, 2019 and June 30, 2019 by level within the fair value hierarchy.


Fair Value as of
September 30, 2019
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
 
(In thousands)
 
Assets:
               
Impaired loans:
               
   Other commercial real estate
 
$
1,016
   
$
—
   
$
—
   
$
1,016
 
Total impaired loans
   
1,016
     
—
     
—
     
1,016
 
Real estate owned
                               
Total real estate owned
   
—
     
—
     
—
     
—
 
Total assets measured on a non-recurring basis
 
$
1,016
   
$
—
   
$
—
   
$
1,016
 


Fair Value as of
June 30, 2019
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
 
(In thousands)
 
Assets:
               
Impaired loans:
               
Other commercial real estate
 
$
1,164
   
$
—
   
$
—
   
$
1,164
 
Total impaired loans
   
1,164
     
—
     
—
     
1,164
 
Real estate owned
                               
Other commercial real estate
   
557
     
—
     
—
     
557
 
Total real estate owned
   
557
     
—
     
—
     
557
 
Total assets measured on a non-recurring basis
 
$
1,721
   
$
—
   
$
—
   
$
1,721
 

30
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


Estimated Fair Value of Financial Instruments
 
The following tables present the carrying amount, estimated fair value, and placement in the fair value hierarchy of financial instruments not recorded at fair values in their entirety on a recurring basis on the Company’s balance sheet at September 30, 2019 and June 30, 2019. These tables exclude financial instruments for which the carrying amount approximates fair value. Financial instruments for which the carrying amount approximates fair value include cash and cash equivalents, FHLB stock, non-maturity deposits, overnight borrowings, and accrued interest.
 
 
September 30, 2019
 
 
Carrying
Amount
 
Fair
Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
 
(In thousands)
 
Financial assets:
                   
Debt securities held to maturity
 
$
321,871
   
$
325,054
   
$
—
   
$
325,054
   
$
—
 
Loans, net
   
3,421,268
     
3,408,434
     
—
     
—
     
3,408,434
 
Financial liabilities:
                                       
Time deposits
   
1,217,399
     
1,228,591
     
—
     
1,228,591
     
—
 
Term borrowings
   
426,563
     
431,197
     
—
     
431,197
     
—
 
 
 
June 30, 2019
 
 
Carrying
Amount
 
Fair
Value
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
 
(In thousands)
 
Financial assets:
                   
Debt securities held to maturity
 
$
332,215
   
$
334,179
   
$
—
   
$
334,179
   
$
—
 
Loans, net
   
3,491,322
     
3,469,016
     
—
     
—
     
3,469,016
 
Financial liabilities:
                                       
Time deposits
   
1,248,358
     
1,255,282
     
—
     
1,255,282
     
—
 
Term borrowings
   
490,755
     
493,674
     
—
     
493,674
     
—
 
 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, deferred tax assets, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
31
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


12. Other Comprehensive Income
 
The components of comprehensive income, both gross and net of tax, are presented for the periods below (in thousands):


 
Three Months ended September 30,
 
   
2019
   
2018
 
Gross:
           
Net income
 
$
16,618
   
$
18,489
 
Other comprehensive income
               
Change in unrealized holding gain (loss) on debt securities available for sale
   
79
     
(153
)
Amortization related to post-retirement obligations
   
13
     
8
 
Change in funded status of retirement obligations
   
(547
)
   
—
 
Net change in unrealized (loss) gain on interest rate swaps
   
(2,580
)
   
1,235
 
Total other comprehensive (loss) income
   
(3,035
)
   
1,090
 
Total comprehensive income
   
13,583
     
19,579
 
Tax applicable to:
               
Net income
   
4,318
     
5,092
 
Other comprehensive income
               
Change in unrealized holding gain (loss) on debt securities available for sale
   
23
     
(34
)
Amortization related to post-retirement obligations
   
4
     
—
 
Change in funded status of retirement obligations
   
(163
)
   
—
 
Net change in unrealized (loss) gain on interest rate swaps
   
(755
)
   
361
 
Total other comprehensive (loss) income
   
(891
)
   
327
 
Total comprehensive income
   
3,427
     
5,419
 
Net of tax:
               
Net income
   
12,300
     
13,397
 
Other comprehensive income
               
Change in unrealized holding gain (loss) on debt securities available for sale
   
56
     
(119
)
Amortization related to post-retirement obligations
   
9
     
8
 
Change in funded status of retirement obligations
   
(384
)
   
—
 
Net change in unrealized (loss) gain on interest rate swaps
   
(1,825
)
   
874
 
Total other comprehensive (loss) income
   
(2,144
)
   
763
 
Total comprehensive income
 
$
10,156
   
$
14,160
 

32
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


The following table presents the changes in the components of accumulated other comprehensive income (loss), net of tax, for the three months ended September 30, 2019 and 2018 (in thousands):

 
 
Unrealized Holding (Loss)
Gain on Debt Securities
Available for Sale
   
Post Retirement
Obligations
   
Unrealized Holding Gain
(Loss) on Interest
Rate Swaps
   
Accumulated Other
Comprehensive Income (Loss),
Net of Tax
 
Balance at June 30, 2019
 
$
(162
)
 
$
(288
)
 
$
(96
)
 
$
(546
)
Net change
   
56
     
(375
)
   
(1,825
)
   
(2,144
)
Balance at September 30, 2019
 
$
(106
)
 
$
(663
)
 
$
(1,921
)
 
$
(2,690
)
 
                               
Balance at June 30, 2018
 
$
(86
)
 
$
(314
)
 
$
11,623
   
$
11,223
 
Net change
   
(119
)
   
8
     
874
     
763
 
Reclassification due to the adoption of ASU No. 2016-01
   
(658
)
   
—
     
—
     
(658
)
Balance at September 30, 2018
 
$
(863
)
 
$
(306
)
 
$
12,497
   
$
11,328
 

The following table sets forth information about the amount reclassified from accumulated other comprehensive income (loss) to the consolidated statement of income and the affected line item in the statement where net income is presented (in thousands).

Accumulated Other Comprehensive Income (Loss) Component
 
Affected line item in the Consolidated
Statement of Income
 
Three Months ended
September 30,
2019
 
Three Months ended
September 30,
2018
                 
Amortization related to post-retirement obligations (1)
               
Net loss
 
Other expenses
 
 $
13
 
 $
8
   
Total before tax
   
13
   
8
   
Income tax benefit
   
4
   
—
   
Net of tax
 
 $
9
 
 $
8

(1) These accumulated other comprehensive income (loss) components are included in the computations of net periodic benefit cost. See Note 5. Post-retirement Benefits.

33
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


13. Revenue Recognition

Effective July 1, 2018 the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers ("Topic 606") and all subsequent ASUs that modified Topic 606. For further details on ASU No. 2014-09 see Note 14 - "Recent Accounting Pronouncements." The adoption of ASU No. 2014-09 did not have a material impact on the measurement or recognition of revenue as it does not apply to revenue associated with financial instruments, including revenue from loans and investment securities, which is the Company's primary source of revenue. In addition, certain non-interest income streams such as income on bank owned life insurance, gains on securities transactions, and other non-interest income are not in the scope of the guidance. The Company's revenue streams that are within the scope of Topic 606 include service charges on deposit accounts, ATM and card interchange fees, and sales of  OREO. However, the revenue recognition of these revenue streams did not change upon adoption of Topic 606 as our customer contracts generally do not have performance obligations and fees are assessed and collected as the transaction occurs.

The following table summarizes non-interest income for the periods indicated (in thousands):


 
Three Months Ended
September 30,
 
 
 
2019
   
2018
 
 
 
unaudited
 
Fees and service charges for customer services:
           
Service charges on deposits
 
$
112
   
$
125
 
ATM and card interchange fees
   
141
     
131
 
Service charges on loans
   
114
     
56
 
Total fees and service charges
 
$
367
   
$
312
 
Bank owned life insurance
   
618
     
624
 
Gains (losses) on sale of OREO
   
29
     
—
 
Change in fair value of equity securities
   
(14
)
   
(119
)
Other income
   
2
     
4
 
Total non-interest income
 
$
1,002
   
$
821
 

Service charges on deposit accounts include account maintenance fees, overdraft fees, insufficient fund fees, wire fees, and other deposit related fees.

ATM and card interchange fees include:

·
fees generated when an Oritani cardholder uses a non-Oritani ATM
·
a non-Oritani cardholder uses an Oritani ATM
·
fees earned whenever the Bank's debit cards are processed through card payment networks such as Visa
·
fees earned through partnering with a third-party service firm to provide Oritani branded credit cards

The Company's performance obligation for service charges on deposit accounts and ATM and card interchange fees is satisfied as services are rendered and related revenue is recognized immediately or in the month of performance of services.

Out-of-scope non-interest income primarily consists of gains and losses on the sale of investments, loans, and derivatives, and service charges on loans such as loan prepayment fees and loan servicing fees.

34
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements



14. Leases

On July 1, 2019, The Company adopted ASU 2016-02, “Leases (Topic 842)”, which requires recognition of a right-of-use (“ROU”) asset and lease liability on the balance sheet for operating and financing leases. The Company elected the transition method under which we recognize and measure leases that exist at the effective date and prior comparative periods are not adjusted. In addition, the Company elected the package of practical expedients and did not reassess whether an arrangement is or contains a lease, did not reassess lease classification, and did not reassess what qualifies as an initial direct cost. The Company also made accounting policy elections to exclude short-term leases of 12 months or less from the balance sheet and to separate lease and non-lease components from its lease obligations with the non-lease components being charged to earnings when incurred.

The Company’s lease agreements primarily consist of real estate leases for bank premises.  The Company’s bank premises operated under lease agreements have all been designated as operating leases.  The Company does not have leases designated as finance leases.  Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.  The Company’s lease agreements include options to extend or terminate the lease.  The decision to exercise renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. The Company’s leases have remaining lease terms between one to 6.7 years. Lease expense for lease payments is recognized on a straight-line basis over the lease term.  The Company has lease agreements with lease and non-lease components, which the Company has elected to account for separately as the non-lease component amounts are readily determinable under most leases.

The following table present the balance sheet information related to leases:


 
September 30, 2019
 
   
(Dollars in thousands)
 
Operating lease right-of-use assets included in Office properties and equipment, net
 
$
2,055
 
Operating lease liabilities included in Other liabilities
   
2,057
 
Weighted average remaining lease term, in years
   
4.6
 
Weighted average discount rate
   
2.27
%

The following table presents the components of total lease cost recognized in the consolidated statements of income and supplemental cash flow information related to leases:


Three months ended
 
 
September 30, 2019
 
 
(Dollars in thousands)
 
Lease cost
   
Operating lease cost
 
$
209
 
Short-term lease cost
   
27
 
Total lease cost (included in Office occupancy and equipment expense)
 
$
236
 
Cash paid toward operating lease liabilities
 
$
233
 

Future minimum operating lease payments and reconciliation to operating lease liabilities at September 30, 2019:


 
September 30, 2019
 
   
(Dollars in thousands)
 
       
2020
 
$
568
 
2021
   
576
 
2022
   
389
 
2023
   
310
 
2024
   
179
 
Thereafter
   
248
 
Total lease payments
   
2,270
 
less: imputed interest
   
(213
)
Total operating lease liabilities
 
$
2,057
 

35
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


15. Recent Accounting Pronouncements


In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments".  This update revises the methodology for estimating credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost.  Under ASU 2016-13, the current expected credit losses ("CECL") model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the statement of income and a related allowance for credit losses on the balance sheet at the time of origination or purchase of a loan receivable or held-to-maturity debt security.  Subsequent changes in this estimate are recorded through credit loss expense and related allowance.  The CECL model requires the use of not only relevant historical experience and current conditions, but also reasonable and supportable forecasts of future events and circumstances, thus incorporating a broad range of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance.  Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost.  Estimated credit losses are recorded through a credit loss expense and an allowance, rather than a write-down of the investment.  Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income.  Certain additional disclosures are required, including further disaggregation of credit quality indicators for loans receivable by year of origination.  This update is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).   The Company is reviewing credit loss estimation methodologies and assumptions to be utilized. We anticipate running parallel models during fiscal 2020 to refine our processes and procedures. The Company is evaluating the impact of this update on its consolidated financial statements, the extent of which is indeterminable at this time as it is contingent upon continued testing and refinement of models, methodologies and judgments. Further, the extent of the impact of adoption of CECL will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.

In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", which is intended to improve the recognition and measurement of financial instruments.  The ASU revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value.  It also amends certain disclosure requirements associated with the fair value of financial instruments.  The disclosure of fair value of the loan portfolio will be impacted as the fair value will be calculated using an exit price.  The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.   The Company adopted this standard effective July 1, 2018. The Company recorded a cumulative effect adjustment for its equity instruments to the balance sheet as of July 1, 2018 in the amount of $658,000, representing the unrealized gain, net of tax at June 30, 2018. The change in fair value of equity securities is realized in the statement of income.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and , for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. A modified retrospective transition is required under which comparative balance sheets from the earliest historical period presented will be revised to reflect what the financials would have looked like were the provisions of the update applied consistently in all prior periods. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842) Targeted Improvements” which allows entities adopting ASU No. 2016-02 to choose an additional transition method, under which an entity to initially applies the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendment in this update becomes effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company has elected the transition method permitted by ASU No. 2018-11 under which an entity shall recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. For leases existing at the effective date, the Company elected the package of practical expedients and therefore did not reassess whether an arrangement is or contains a lease, did not reassess lease classification, and did not reassess what qualifies as an initial direct cost. The Company also made accounting policy elections to exclude short-term leases of 12 months or less from the balance sheet and to separate and non-lease components from its lease obligations with the non-lease components being charged to earnings when incurred. Upon adoption of the new lease guidance on  July 1, 2019, the Company recorded a right-of-use-asset and lease liability of $2.2 million, included in Office properties and equipment, net and Other liabilities, respectively. The new guidance did not have a material impact on the Company’s statement of income or cash flows. See Note 14. “Leases” for additional information.

36
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements



16. Pending Business Combinations

On June 25, 2019, Valley National Bancorp (“Valley”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Oritani Financial Corp. (“Oritani”), providing for the merger of Oritani with and into Valley, with Valley as the surviving entity (the “Merger”). Immediately following the Merger, Oritani Bank, a New Jersey state-chartered savings bank and wholly-owned subsidiary of Oritani, will merge with and into Valley National Bank, a national banking association and wholly-owned subsidiary of Valley, with Valley National Bank surviving the merger.

Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each share of common stock of Oritani will be converted into 1.60 shares of Valley common stock, subject to the payment of cash in lieu of fractional shares. Outstanding Oritani stock options will be converted into options to acquire Valley common stock with the conversion and exercise price to be adjusted to reflect the exchange ratio. Oritani restricted stock will vest and will be converted into the right to receive, at the effective time of the Merger, the same consideration as holders of Oritani common stock are receiving in the Merger. Kevin J. Lynch, director, Chief Executive Officer and President of Oritani, is expected to be appointed to serve as a director of Valley and Valley National Bank as of the effective time of the Merger.

The Merger Agreement contains representations, warranties, and covenants of Valley and Oritani, including, among others, a covenant that requires (i) each of Valley and Oritani to conduct its business in the ordinary course and consistent with past practice during the period between the execution of the Merger Agreement and consummation of the Merger and (ii) Oritani to not engage in certain kinds of transactions during such period (without the prior written consent of Valley). Oritani has also agreed, subject to certain exceptions generally related to the Board’s evaluation and exercise of its fiduciary duties, to not (i) solicit proposals relating to alternative business combinations or (ii) enter into discussions or negotiations or provide confidential information in connection with any proposals for alternative business combinations.

The Merger Agreement provides certain termination rights for both Valley and Oritani. The Merger Agreement  provides that upon termination of the Merger Agreement under certain circumstances Oritani will be obligated to pay Valley a termination fee of $28 million and/or Valley’s reasonable out of pocket expenses up to $1.8 million. If the Merger Agreement is terminated under other certain circumstances, Valley will be obligated to pay Oritani up to $1.8 million of Oritani’s reasonable out of pocket expenses.

Completion of the Merger is subject to various conditions, including (i) receipt of the requisite approval (a) of the Merger by stockholders of Oritani and (b) of the issuance of Valley common stock in the Merger by stockholders of Valley, (ii) receipt of regulatory approvals, (iii) the absence of any law or order prohibiting the closing, and (iv) effectiveness of the registration statement to be filed by Valley with respect to the capital stock to be issued in the Merger. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including the accuracy of the representations and warranties of the other party and compliance of the other party with its covenants in all material respects.


37


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward Looking Statements
 
This Quarterly 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 numerous risks and uncertainties.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2019, include, but are not limited to, those related to the economic environment, particularly in the market areas in which Oritani Financial Corp. (the “Company”) operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
 
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.
 
Additional factors relating to our proposed merger (the “Merger”) with Valley National Bancorp (“Valley”) include the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; delays in closing the merger agreement or other risks that any of the closing conditions to the merger agreement may not be satisfied in a timely manner or at all and the diversion of management’s time from existing business operations due to time spent related to the Merger or integration efforts; the risk that our business and the business of Valley will not be integrated successfully or such integration may be more difficult, time consuming or costly than expected; expected revenue and other synergies and cost savings from the Merger may not be fully realized or realized within the expected time frame; revenues following the Merger may be lower than expected; and expenses related to the Merger and costs following the Merger that are higher than expected.

In connection with the Merger, Valley has filed with the SEC a Registration Statement on Form S-4 that includes a joint proxy statement/prospectus, which includes business and financial information about Valley and the Company from documents that Valley and the Company have previously filed with the SEC. Shareholders of the Company are urged to read the registration statement and the proxy statement/prospectus regarding the Merger and other relevant documents filed with the SEC, as well as any amendments or supplements to those documents.
38



Overview
 
Oritani Financial Corp. (the "Company”) is a Delaware corporation that was incorporated in March 2010.  The Company is the stock holding company of Oritani Bank.  The Company owns 100% of the outstanding shares of common stock of the Bank.  The Company has engaged primarily in the business of holding the common stock of the Bank and two limited liability companies.  The two limited liability companies previously owned a variety of real estate investments but the majority of such investments have now been sold.  The Bank’s principal business consists of attracting retail, commercial and municipal bank deposits from the general public and investing those deposits, together with funds generated from operations and borrowed funds, in multifamily and commercial real estate loans, one- to four-family residential mortgage loans as well as in second mortgage and equity loans, construction loans, business loans, other consumer loans, and investment securities.  The Bank originates loans primarily for investment and holds such loans in its portfolio.  Occasionally, the Bank will also enter into loan participations.  The Bank’s primary sources of funds are deposits, borrowings, investment maturities and principal and interest payments on loans and securities.  The Bank’s revenues are derived principally from interest on loans and securities.  The Bank also generates revenue from fees and service charges and other income.  The Bank’s results of operations depend significantly on its net interest income; which is the difference between the interest earned on interest-earning assets and the interest paid on interest-bearing liabilities.  The Bank’s net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the re-pricing of interest-earning assets and interest-bearing liabilities, and the prepayment rate on its mortgage-related assets.  Provisions for loan losses and asset impairment charges can also have a significant impact on results of operations.  Other factors that may affect the Bank’s results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities.
 
The Bank’s business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to its individual, business, and municipal customers.

Merger

On June 25, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Valley. Under the Merger Agreement, the Company will merge with and into Valley, with Valley as the surviving corporation, in an all-stock transaction. consummation of the Merger, each share of common stock of the Company will be converted into 1.60 shares of Valley common stock, subject to the payment of cash in lieu of fractional shares. Outstanding Company stock options will be converted into options to acquire Valley common stock with the conversion and exercise price to be adjusted to reflect the exchange ratio. Company restricted stock will vest and will be converted into the right to receive, at the effective time of the Merger, the same consideration as holders of Company common stock are receiving in the Merger. Following the Merger of the Company with and into Valley, Oritani Bank will merge with Valley National Bank, they wholly owned subsidiary of Valley, with Valley being the surviving institution. Completion of the Merger is subject to customary closing conditions, including the receipt of regulatory approvals and approval from the shareholders of the Company and Valley. The Merger is expected to close in the fourth quarter of calendar 2019.
 
39

Comparison of Financial Condition at September 30, 2019 and June 30, 2019
 
Total Assets.  Total assets decreased $80.9 million to $3.99 billion at September 30, 2019, from $4.07 billion at June 30, 2019. The primary contributor to the decreased asset level was a contraction in loan balances.

Net Loans. Loans, net decreased $70.0 million to $3.42 billion at September 30, 2019, from $3.49 billion at June 30, 2019. As discussed in “Comparison of Operating Results for the three months ended September 30, 2019 and 2018, Interest Income,” our origination volume is below target levels and loan principal payments remain elevated. Delinquency and non performing asset information is provided below:

 
 
9/30/2019
   
6/30/2019
   
3/31/2019
   
12/31/2018
   
9/30/2018
 
 
 
(Dollars in thousands)
 
Delinquency Totals
                             
30—59 days past due
 
$
2,556
   
$
3,146
   
$
1,648
   
$
2,890
   
$
15,261
 
60—89 days past due
   
1,461
     
641
     
975
     
8,431
     
356
 
Nonaccrual
   
6,490
     
10,053
     
10,184
     
10,706
     
9,083
 
Total
 
$
10,507
   
$
13,840
   
$
12,807
   
$
22,027
   
$
24,700
 
Non Performing Asset Totals
                                       
Nonaccrual loans, per above
 
$
6,490
   
$
10,053
   
$
10,184
   
$
10,706
   
$
9,083
 
Real Estate Owned
   
—
     
557
     
636
     
636
     
1,564
 
Total
 
$
6,490
   
$
10,610
   
$
10,820
   
$
11,342
   
$
10,647
 
Nonaccrual loans to total loans
   
0.19
%
   
0.28
%
   
0.29
%
   
0.30
%
   
0.26
%
Delinquent loans to total loans
   
0.30
%
   
0.39
%
   
0.36
%
   
0.63
%
   
0.70
%
Non performing assets to total assets
   
0.16
%
   
0.26
%
   
0.27
%
   
0.28
%
   
0.26
%

Overall, non-performing asset totals and charge-off levels continue to illustrate minimal credit issues at the Company.

Debt securities available for sale. Debt securities AFS decreased $2.2 million to $30.6 million at September 30, 2019 from $32.8 million at June 30, 2019. The decrease is primarily due to principal payments.

Debt securities held to maturity. Debt securities HTM decreased $10.3 million to $321.9 million at September 30, 2019, from $332.2 million at June 30, 2019. The decrease is primarily due to principal payments exceeding new purchases.

Federal Home Loan Bank of New York (“FHLB”) stock.  FHLB stock decreased $2.9 million to $23.0 million at September 30, 2019, from $25.9 million at June 30, 2019. FHLB stock holdings are required depending on several factors, including the level of borrowings with the FHLB. As FHLB borrowings decreased over the quarter, excess FHLB stock was redeemed.

Deposits.  Deposits balances increased $13.3 million to $2.94 billion at September 30, 2019 from $2.92 billion at June 30, 2019. See “Comparison of Operating Results for the three months ended September 30, 2019 and 2018, Interest Expense” for additional information regarding deposit balances. The Company’s loan to deposit ratio decreased to 116.5% at September 30, 2019.

Borrowings. Borrowings decreased $95.0 million to $426.6 million at September 30, 2019, from $521.6 million at June 30, 2019. Asset decreases and minor deposit increases allowed the Company to decrease its levels of borrowings.

Stockholders’ Equity.  Stockholders’ equity was essentially stable, increasing $153,000 to $529.3 million at September 30, 2019, from $529.1 million at June 30, 2019. The increase was primarily due to net income and the release of treasury shares in conjunction with stock option exercises, partially offset by dividends and decreased other comprehensive income. There were no stock repurchases during the quarter ended September 30, 2019. Based on our September 30, 2019 closing price of $17.70 per share, the Company stock was trading at 150.8% of book value.
40



Average Balance Sheet for the Three Months Ended September 30, 2019 and 2018
 
The following table presents certain information regarding Oritani Financial Corp.’s financial condition and net interest income for the three months ended September 30, 2019 and 2018.  The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities.  We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown.  We derived average balances from daily balances over the periods indicated.  Interest income includes fees that we consider adjustments to yields, including prepayment penalties.

 
 
Average Balance Sheet and Yield/Rate Information
For the Three Months Ended (unaudited)
 
 
 
September 30, 2019
   
September 30, 2018
 
 
 
Average
Outstanding
Balance
   
Interest
Earned/Paid
   
Average
Yield/Rate
   
Average
Outstanding
Balance
   
Interest
Earned/
Paid
   
Average
Yield/Rate
 
 
 
(Dollars in thousands)
 
Interest-earning assets:
                                   
Loans (1)
 
$
3,459,868
   
$
37,257
     
4.31
%
 
$
3,527,085
   
$
35,952
     
4.08
%
Federal Home Loan Bank Stock
   
23,658
     
405
     
6.85
%
   
27,648
     
448
     
6.48
%
Equity securities
   
1,335
     
11
     
3.30
%
   
1,528
     
10
     
2.62
%
Debt securities available for sale
   
31,992
     
184
     
2.30
%
   
41,977
     
240
     
2.29
%
Debt securities held to maturity
   
327,458
     
1,986
     
2.43
%
   
333,989
     
1,929
     
2.31
%
Federal funds sold and short term investments
   
8,612
     
54
     
2.51
%
   
4,339
     
22
     
2.03
%
Total interest-earning assets
   
3,852,923
     
39,897
     
4.14
%
   
3,936,566
     
38,601
     
3.92
%
Non-interest-earning assets
   
179,844
                     
204,748
                 
Total assets
 
$
4,032,767
                   
$
4,141,314
                 
Interest-bearing liabilities:
                                               
Savings deposits
   
380,385
     
1,094
     
1.15
%
   
200,300
     
190
     
0.38
%
Money market
   
637,726
     
2,078
     
1.30
%
   
756,447
     
2,057
     
1.09
%
Checking accounts
   
673,614
     
2,244
     
1.33
%
   
723,404
     
1,659
     
0.92
%
Time deposits
   
1,248,275
     
6,873
     
2.20
%
   
1,229,741
     
5,131
     
1.67
%
Total deposits
   
2,940,000
     
12,289
     
1.67
%
   
2,909,892
     
9,037
     
1.24
%
Borrowings
   
464,495
     
3,145
     
2.71
%
   
571,012
     
3,269
     
2.29
%
Total interest-bearing liabilities
   
3,404,495
     
15,434
     
1.81
%
   
3,480,904
     
12,306
     
1.41
%
Non-interest-bearing liabilities
   
98,821
                     
99,550
                 
Total liabilities
   
3,503,316
                     
3,580,454
                 
Stockholders’ equity
   
529,451
                     
560,860
                 
Total liabilities and stockholders’ equity
 
$
4,032,767
                   
$
4,141,314
                 
Net interest income
         
$
24,463
                   
$
26,295
         
Net interest rate spread (2)
                   
2.33
%
                   
2.51
%
Net interest-earning assets (3)
 
$
448,428
                   
$
455,662
                 
Net interest margin (4)
                   
2.54
%
                   
2.67
%
Average of interest-earning assets to interest-bearing liabilities
                   
113.17
%
                   
113.09
%
 
(1)
Average outstanding balance includes nonaccrual loans and interest earned includes prepayment income.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.

41

Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018
 
Net Income. Net income decreased $1.1 million to $12.3 million for the quarter ended September 30, 2019, from $13.4 million for the corresponding 2018 quarter. The primary causes of the decreased net income in 2019 was an increase in interest expense largely offset by decreased non-interest expenses, and a $2.0 million reversal of provision for loan losses in the 2018 period.
 
Interest Income. Total interest income increased $681,000 to $38.6 million for the three months ended September 30, 2019, from $37.9 million for the three months ended September 30, 2018.  The components of interest income for the three months ended September 30, 2019 and 2018, changed as follows:

 
 
Three Months ended September 30,
   
Increase / (decrease)
 
 
 
2019
   
2018
                   
 
 
Interest
Income
   
Yield
   
Interest
Income
   
Yield
   
Interest
Income
   
Average
Balance
   
Yield
 
 
 
(Dollars in thousands)
 
Interest on mortgage loans
 
$
37,257
     
4.31
%
 
$
35,952
     
4.08
%
 
$
1,305
   
$
(67,217
)
   
0.23
%
Dividends on FHLB stock
   
405
     
6.85
%
   
448
     
6.48
%
   
(43
)
   
(3,990
)
   
0.37
%
Equity securities
   
11
     
3.30
%
   
10
     
2.62
%
   
1
     
(193
)
   
0.68
%
Debt securities AFS
   
184
     
2.30
%
   
240
     
2.29
%
   
(56
)
   
(9,985
)
   
0.01
%
Debt securities HTM
   
1,986
     
2.43
%
   
1,929
     
2.31
%
   
57
     
(6,531
)
   
0.12
%
Interest on federal funds sold and short term investments
   
54
     
2.51
%
   
22
     
2.03
%
   
32
     
4,273
     
0.48
%
Total interest income
 
$
39,897
     
4.14
%
 
$
38,601
     
3.92
%
 
$
1,296
   
$
(83,643
)
   
0.22
%

As discussed in prior public releases, the market to originate multifamily and commercial real estate loans has been particularly challenging in recent periods. Proposed changes to rent regulations in New York and their potentially negative impact on rent regulated multifamily properties depressed sales volume in calendar 2019. Such legislation was passed in June 2019 and contained many tenant friendly provisions. Activity has remain sluggish in the current quarter as investors appear wary of the current environment. In addition, the decreased external interest rate environment has lowered the market rates on new multifamily and commercial real estate loan originations.

The Company’s loan balances decreased $70.1 million during the quarter ended September 30, 2019, versus June 30, 2019. Originations for the quarter were $129.4 million; however, principal repayments were elevated and totaled $200.1 million. The Company’s loan pipeline was $147.6 million at September 30, 2019.

The average balance of the loan portfolio decreased $67.2 million for the three months ended September 30, 2019 versus the comparable 2018 period. Loan originations and principal payments for the three months ended September 30, 2019 are above. For the comparable 2018 period, loan originations and principal payments totaled $82.0 million and $123.5 million, respectively. There were no loan purchases in either period.

The yield on the loan portfolio increased 23 basis points for the quarter ended September 30, 2019 versus the comparable 2018 period. On a linked quarter basis (September 30, 2019 versus June 30, 2019), the yield on the loan portfolio increased 7 basis points. The level of prepayment income impacted these results. Exclusive of prepayment penalties, the yield on the loan portfolio increased 20 basis points versus the quarter ended September 30, 2018 and 7 basis points versus the June 30, 2019 quarter. Prepayment penalties totaled $1.4 million, $1.4 million and $1.2 million for the quarters ended September 30, 2019, June 30, 2019 and September 30, 2018, respectively.
42

Interest Expense.  Total interest expense increased $3.1 million to $15.4 million for the three months ended September 30, 2019, from $12.3 million for the three months ended September 30, 2018.  The components of interest expense for the three months ended September 30, 2019 and 2018, changed as follows:

 
Three Months ended September 30,
   
Increase / (decrease)
 
 
2019
   
2018
                   
 
Interest
Expense
   
Cost
   
Interest
Expense
   
Cost
   
Interest
Expense
   
Average
Balance
   
Cost
 
 
(Dollars in thousands)
 
Savings deposits
 
$
1,094
     
1.15
%
 
$
190
     
0.38
%
 
$
904
   
$
180,085
     
0.77
%
Money market
   
2,078
     
1.30
%
   
2,057
     
1.09
%
   
21
     
(118,721
)
   
0.21
%
Checking accounts
   
2,244
     
1.33
%
   
1,659
     
0.92
%
   
585
     
(49,790
)
   
0.41
%
Time deposits
   
6,873
     
2.20
%
   
5,131
     
1.67
%
   
1,742
     
18,534
     
0.53
%
Total deposits
   
12,289
     
1.67
%
   
9,037
     
1.24
%
   
3,252
     
30,108
     
0.43
%
Borrowings
   
3,145
     
2.71
%
   
3,269
     
2.29
%
   
(124
)
   
(106,517
)
   
0.42
%
Total interest expense
 
$
15,434
     
1.81
%
 
$
12,306
     
1.41
%
 
$
3,128
   
$
(76,409
)
   
0.40
%

As discussed in recent public releases, deposit growth has been difficult to attain in the current environment. Competitors have offered deposit products with rates that exceed an alternative cost of funds. The Company increased the rate of interest offered on various deposit products in order to maintain balances. Recently, the Company has reduced the interest rates on such products and intends to continue to reduce interest rates. The Company has been largely successful in minimizing the outflow of deposits; however, sizeable growth has not been achieved. On a linked quarter comparison basis (versus the quarter ended June 30, 2019), the average balance of deposits increased $8.5 million, period end balances increased $13.3 million and the cost of deposits increased 6 basis points.

As detailed above, the average balance of deposits increased $30.1 million for the quarter ended September 30, 2019 versus the comparable 2018 period. The overall cost of deposits increased 43 basis points over the periods. The increased costs are primarily due to the impact of market pressures. Customer migration was largely responsible for some of the significant shifts in the average balance of products detailed above.

The average balance of borrowings decreased $106.5 million for the three months ended September 30, 2019 versus the comparable 2018 period, while the cost increased 42 basis points. The increase in the average balance of deposits and contraction of loan balances allowed the Company to reduce borrowings. The cost of borrowings has been impacted by the overall increase in interest rates, particularly overnight and short-term borrowings, and the maturities of lower cost borrowings.
43

Net Interest Income Before Provision for Loan Losses.  Net interest income decreased by $1.8 million to $24.5 million for the three months ended September 30, 2019, from $26.3 million for the three months ended September 30, 2018. The Company’s net interest income, spread and margin over the period are detailed in the chart below.

Net Interest Income Before
   
Prepayment Penalty
   
Net Interest Income Before Provision, Excluding Prepayment
   
Including Prepayment Penalties
   
Excluding Prepayment Penalties
 
Quarter Ended
Provision
   
Income
   
Penalties
   
Spread
   
Margin
   
Spread
   
Margin
 
 
(Dollars in thousands)
                         
September 30, 2019
 
$
24,463
   
$
1,382
   
$
23,081
     
2.33
%
   
2.54
%
   
2.19
%
   
2.40
%
June 30, 2019
   
24,657
     
1,444
     
23,213
     
2.32
%
   
2.53
%
   
2.17
%
   
2.38
%
March 31, 2019
   
24,109
     
275
     
23,834
     
2.29
%
   
2.48
%
   
2.26
%
   
2.45
%
December 31, 2018
   
26,027
     
1,727
     
24,300
     
2.51
%
   
2.68
%
   
2.33
%
   
2.51
%
September 30, 2018
   
26,295
     
1,154
     
25,141
     
2.51
%
   
2.67
%
   
2.40
%
   
2.55
%

The Company’s spread and margin have been significantly impacted by prepayment penalties. Due to this situation, the chart above details results with and without the impact of prepayment penalties. Net interest income before provision for loan losses, excluding prepayment penalties, is a non-GAAP financial measure since it excludes a component (prepayment penalty income) of net interest income and therefore differs from the most directly comparable measure calculated in accordance with GAAP. The Company believes the presentation of this non-GAAP financial measure is useful because it provides information to assess the underlying performance of the loan portfolio since prepayment penalty income can be expected to change as interest rates change. While prepayment penalty income is expected to continue, fluctuations in the level of prepayment income are also expected. The level of prepayment income is generally expected to decrease as external interest rates increase since borrowers would have less incentive to refinance existing loans. However, the time period when these events could occur may not align, and the specific behavior of borrowers is difficult to predict. Borrowers can be driven to prepay their loans based on factors other than interest rates. The level of loan prepayments and prepayment income experienced by the Company has been elevated (versus historical levels) despite a period of generally increasing interest rates.

Factors affecting the Company’s spread and margin have been discussed in recent public releases. Recent reductions in the discount rate by the Federal Open Market Committee have been reflected in the competitive environment and allowed the Company to reduce rates on certain deposit without a significant outflow of balances. This factor contributed to the 2 basis point expansion of spread and margin (excluding prepayment penalties) that was realized in the September 30, 2019 quarter, versus the preceding quarter. The Company intends to continue to strategically reduce the rates on its deposit offerings.

The Company’s net interest income and net interest rate spread were both negatively impacted in all periods due to the reversal of accrued interest income on loans delinquent more than 90 days. The total of such income reversed was $61,000 for the three months ended September 30, 2019 and $73,000 for the three months ended September 30, 2018.
44


Provision for Loan Losses. The Company recorded no provision for loan losses  for the three months ended September 30, 2019 and a reversal of provision for loan losses of $2.0 million for the three months ended September 30, 2018. A rollforward of the allowance for loan losses for the three months ended September 30, 2019 and 2018 is presented below:

 
 
Three Months ended
September 30,
 
 
 
2019
   
2018
 
 
 
(Dollars in thousands)
 
Balance at beginning of period
 
$
28,596
   
$
30,562
 
Provisions charged to operations
   
—
     
(2,000
)
Recoveries of loans previously charged off
   
12
     
3
 
Loans charged off
   
—
     
—
 
Balance at end of period
 
$
28,608
   
$
28,565
 
Allowance for loan losses to total loans
   
0.83
%
   
0.81
%
Net annualized (recoveries) charge-offs to average loans outstanding
   
—
%
   
—
%

The $2.0 million reversal of provision for loan losses in the 2018 period was due primarily to loan portfolio contraction and reduced qualitative factors within the allowance calculation as determined as part of our quarterly reassessment.

Non-Interest Income. Non-interest income increased $181,000 to $1.0 million for the three months ended September 30, 2019, from $821,000 for the three months ended September 30, 2018. The primary change was an $119,000 decrease in value of equity securities held by the Company that was reflected in the 2018 period.

Non-Interest Expense. Non-interest expense decreased $1.8 million to $8.8 million for the three months ended September 30, 2019, from $10.6 million for the three months ended September 30, 2018. The primary change was a decrease in other expenses, which decreased $1.7 million to $1.2 million for the three months ended September 30, 2019, from $2.9 million for the three months ended September 30, 2018. The reduction is primarily due to decreased professional fees associated with the remediation of Bank Secrecy Act and Anti-Money Laundering compliance matters (discussed in previous public releases). In addition, there was no expense for federal deposit insurance premiums in the 2019 period, versus $300,000 in the 2018 period. Assessment credits were awarded to small banks (with total consolidated assets of less than $10 billion) when the Deposit Insurance Fund Reserve Ratio reached 1.38%. The Company’s credit for the 2019 period fully offset its assessment.  

Income Tax Expense. Income tax expense for the three months ended September 30, 2019 was $4.3 million on pre-tax income of $16.6 million, resulting in an effective tax rate of 26.0%. Income tax expense for the three months ended September 30, 2018 was $5.1 million on pre-tax income of $18.5 million, resulting in an effective tax rate of 27.5%. The effective tax rate for the 2018 period includes the impact of the New Jersey (“NJ”) tax legislation enacted on July 1, 2018 that imposes a temporary surtax of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. The legislation also requires mandatory unitary combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019. The legislation required a revaluation of our deferred tax assets/liabilities based on the rates at which they are expected to reverse in the future. The revaluation of the Company's deferred tax balances resulted in a one-time non-cash charge of $477,000 which was included in income tax expense for the three months ended September 30, 2018. Excluding the impact of the revaluation, the effective tax rate for the 2018 period was 25.0%. The increase in effective tax rate in the 2019 period was the result of the NJ tax legislation. The Company reports earnings on a fiscal year basis and the increased income tax implications of the NJ legislation were partially recognized by the Company ratably over the course of the fiscal year ending June 30, 2019. The full impact of the legislation will be recognized in the fiscal year ending June 30, 2020. The Company’s estimated effective tax rate for the fiscal year ending June 30, 2020 is 26.0%.
45

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank (“FHLB”) borrowings and investment maturities.  While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.  The Company has other sources of liquidity if a need for additional funds arises, including advances from the FHLB and Federal Reserve Bank of New York.

The Company had no overnight borrowings at September 30, 2019. At June 30, 2019, the Company had $30.8 million in overnight borrowings.  The Company had total borrowings of $426.6 million at September 30, 2019 and $521.6 million at June 30, 2019.  The Company’s total borrowings at September 30, 2019 include $402.8 million in longer term borrowings with the FHLB and $23.8 million with another financial institution.  

In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans.  At September 30, 2019, outstanding commitments to originate loans totaled $35.0 million and outstanding commitments to extend credit totaled $34.8 million.  The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $903.3 million at September 30, 2019.  Based upon historical experience, management estimates that a large portion of such deposits will remain with the Company.  The portion that remains will be significantly impacted by the renewal rates offered by the Company.

The management of liquidity described in the above paragraphs primarily pertains to Oritani Bank. The Company, on an unconsolidated basis, also has liquidity sources and uses. The Company’s primary, recurring source of funds has been dividends from Oritani Bank. As a wholly owned subsidiary of the Company, the Bank will typically distribute its net income to the Company as a dividend. 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. Additionally, Oritani Bank must notify the Federal Reserve Board thirty days before declaring any dividend to the Company. The Federal Reserve Board may object to the payment of the dividend if it deems it to be unsafe or unsound or a violation of a law, regulation or order or if the institution will be undercapitalized after the dividend. An inability of Oritani Bank to pay dividends may restrict the Company's ability to pay dividends.

The Company’s primary use of funds has been dividends to shareholders and repurchases of common stock. The declarations of such dividends are at the discretion of the Company and the dividend amount could be reduced or eliminated if the payment of a dividend to shareholders would result in a liquidity concern. At September 30, 2019 and June 30, 2019, the Company, on an unconsolidated basis, had cash and cash equivalents of  $13.4 million and $24.2 million, respectively.
 
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The federal banking agencies implemented final rules ("Final Rules") to establish a new comprehensive regulatory capital framework (Basel III) with a phase-in period beginning on January 1, 2015 and ending on January 1, 2019. The Final Rules implemented certain regulatory amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd Frank Wall Street Reform and Consumer Protection Act and substantially amended the regulatory risk based capital rules applicable to the Company. The Final Rules require the Company and Bank to hold a 2.5 percent capital conservation buffer designed to absorb losses during periods of economic stress. As of September 30, 2019, management believes the Company and Bank meet all capital adequacy requirements to which they are subject and there are no conditions or events subsequent to this date that management believes have changed the Company's or Bank's risk-based capital category.
 
46



As of September 30, 2019 and June 30, 2019, the Company and Bank exceeded all regulatory capital requirements as follows:

September 30, 2019
 
 
Actual
 
Required
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(Dollars in thousands)
 
Company:
               
Common Equity Tier 1 ("CET1") (to risk-weighted assets)
 
$
531,990
     
14.91
%
 
$
160,517
     
4.50
%
Tier 1capital (to risk-weighted assets)
   
531,990
     
14.91
%
   
214,023
     
6.00
%
Total capital (to risk-weighted assets)
   
560,598
     
15.72
%
   
285,364
     
8.00
%
Tier 1 leverage capital (to average assets)
   
531,990
     
13.19
%
   
161,314
     
4.00
%
Capital Conservation Buffer
   
275,234
     
7.72
%
   
89,176
     
2.50
%

47

June 30, 2019
 
 
Actual
 
Required
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(Dollars in thousands)
 
Company:
               
Common Equity Tier 1 ("CET1") (to risk-weighted assets)
 
$
529,692
     
14.57
%
 
$
163,558
     
4.50
%
Tier 1capital (to risk-weighted assets)
   
529,692
     
14.57
%
   
218,078
     
6.00
%
Total capital (to risk-weighted assets)
   
558,288
     
15.36
%
   
290,770
     
8.00
%
Tier 1 leverage capital (to average assets)
   
529,692
     
12.98
%
   
163,288
     
4.00
%
Capital Conservation Buffer
   
267,518
     
7.36
%
   
90,866
     
2.50
%

September 30, 2019
 
 
Actual
   
Required
   
Well-Capitalized
 
 
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
 
 
(Dollars in thousands)
 
Bank:
                                   
Common Equity Tier 1 ("CET1") (to risk weighted assets)
 
$
498,699
     
13.98
%
   
160,492
     
4.50
%
 
$
231,822
     
6.50
%
Tier 1 capital (to risk-weighted assets)
   
498,699
     
13.98
%
   
213,990
     
6.00
%
   
285,320
     
8.00
%
Total capital (to risk-weighted assets)
   
527,307
     
14.79
%
   
285,320
     
8.00
%
   
356,650
     
10.00
%
Tier 1 Leverage capital (to average assets)
   
498,699
     
12.37
%
   
161,284
     
4.00
%
   
201,605
     
5.00
%
Capital conservation buffer
   
241,987
     
6.78
%
   
89,162
     
2.50
%
               

June 30, 2019
 
 
Actual
   
Required
   
Well-Capitalized
 
 
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
 
 
(Dollars in thousands)
 
Bank:
                                   
Common Equity Tier 1 ("CET1") (to risk weighted assets)
 
$
485,683
     
13.36
%
 
$
163,533
     
4.50
%
 
$
236,215
     
6.50
%
Tier 1 capital (to risk-weighted assets)
   
485,683
     
13.36
%
   
218,044
     
6.00
%
   
290,726
     
8.00
%
Total capital (to risk-weighted assets)
   
514,279
     
14.15
%
   
290,726
     
8.00
%
   
363,407
     
10.00
%
Tier 1 Leverage capital (to average assets)
   
485,683
     
11.90
%
   
163,258
     
4.00
%
   
204,073
     
5.00
%
Capital conservation buffer
   
225,553
     
6.15
%
   
90,582
     
2.50
%
               

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies proposed a rule to establish for institutions with assets of less than $10 billion that meet other specified criteria a “community bank leverage ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) of 9% that such institutions may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements noted above. A “qualifying community bank” with capital exceeding 9% will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized.” The rule was adopted in final form, effective January 1, 2020.
48



Critical Accounting Policies
 
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended June 30, 2019, included in the Company’s Annual Report on Form 10-K, as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets and liabilities are carried in the consolidated Balance Sheets at fair value or the lower of cost or fair value. Policies with respect to the methodologies used to determine the allowance for loan losses and judgments regarding the valuation of securities and derivatives as well as the valuation allowance against deferred tax assets are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations, involve a higher degree of complexity, and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors. For a further discussion of the critical accounting policies of the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K, for the year ended June 30, 2019.

49


Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has the authority and responsibility for managing interest rate risk. Oritani Bank has established an Asset/Liability Management Committee, comprised of various members of its senior management, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for recommending to the Board the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. The Asset/Liability Management Committee reports its activities to the Board on a monthly basis. An interest rate risk analysis is presented to the Board on a quarterly basis.
 
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates.  As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:

(i)
originating multifamily and commercial real estate loans that generally tend to have shorter interest duration and generally have interest rates that reset in five years or less. The chart below provides maturity/repricing information for the entire loan portfolio, the majority of which is comprised of multifamily and commercial real estate loans;
(ii)
investing in shorter duration securities and mortgage-backed securities;
(iii)
obtaining general financing through FHLB advances with a fixed long term; and
(iv)
utilizing interest rate swaps or other derivative instruments

Loan Portfolio by Reprice/Maturity Date
 
At September 30, 2019
 
(Dollars in thousands)
 
Repricing or Maturing Within:
Amount
   
Weighted
Average Rate
   
% of Total Loans
   
Cumulative % of
Total Loans
 
1 Year or less
 
$
$808,549
     
3.76
%
   
23.38
%
   
23.38
%
1 - 3 years
   
1,077,781
     
3.74
%
   
31.16
%
   
54.54
%
3 - 5 years
   
961,910
     
4.26
%
   
27.81
%
   
82.35
%
5 - 7 years
   
143,087
     
4.27
%
   
4.14
%
   
86.49
%
7 to 10 years
   
152,354
     
4.75
%
   
4.40
%
   
90.89
%
Greater than 10 years
   
315,090
     
4.36
%
   
9.11
%
   
100.00
%
Total
 
$
$3,458,771
     
4.01
%
   
100.00
%
       
 
At September 30, 2019, 54.54 % of the loan portfolio matures or reprices in 3 years or less, and 82.35% matures or reprices in 5 years or less.
 
Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates.  In addition, if changes occur that cause the estimated duration of a security to lengthen significantly, management will consider the sale of such security.  By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.
 
50


Net Portfolio Value. We compute the amounts by which the net present value of cash flow from assets, liabilities and off balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

The table below sets forth, as of September 30, 2019, the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates and loan prepayment and deposit decay rates, and should not be relied upon as indicative of actual results.
 
           
Estimated Increase
(Decrease) in NPV
   
NPV as a Percentage of
Present Value of Assets (3)
 
Change in Interest Rates (basis points) (1)
   
Estimated
NPV (2)
   
Amount
   
Percent
   
NPV Ratio (4)
   
Increase
(Decrease)
basis points
 
     
(Dollars in thousands)
 
 
+200
   
$
476,773
   
$
(60,298
)
   
(11.2
)%
   
12.4
%
   
(108
)
 
+100
     
514,264
     
(22,807
)
   
(4.2
)%
   
13.1
%
   
(36
)
 
—
     
537,071
     
—
     
—
%
   
13.5
%
   
—
 
 
(100
)
   
566,428
     
29,357
     
5.5
%
   
14.0
%
   
45
 
 
(200
)
   
587,634
     
50,563
     
9.4
%
   
14.2
%
   
72
 
 
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
NPV Ratio represents NPV divided by the present value of assets.
 
The table above indicates that at September 30, 2019, in the event of a 200 basis point decrease in interest rates, we would experience a 9.4% increase in net portfolio value. In the event of a 200 basis point increase in interest rates, we would experience a 11.2% decrease in net portfolio value. These changes in net portfolio value are within the limitations established in our asset and liability management policies.
 
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
 

51

Item 4. Controls and Procedures
 
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
 
There were no changes made in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting during the period covered by this report.

Part II – Other Information

Item 1. Legal Proceedings
 
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
 
Item 1A. Risk Factors

There have been no material changes from those risk factors previously disclosed in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on August 28, 2019.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)
Unregistered Sale of Equity Securities. There were no sales of unregistered securities during the period covered by this report.
(b)
Use of Proceeds. Not applicable.
(c)
Repurchase of Our Equity Securities.  There were no repurchases of our equity securities during the period covered by this report.

Item 3. Defaults Upon Senior Securities
 
Not applicable.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
Not applicable.

52


Item 6. Exhibits
 
The following exhibits are either filed as part of this report or are incorporated herein by reference:

3.1
 
3.2
 
4
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements
101.INS
 
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
inline XBRL Taxonomy Extension Schema Document
101.CAL
 
inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
 
inline XBRL Taxonomy Extension Presentation Linkbase Document

*
  Incorporated by reference to the Registration Statement on Form S-1 of Oritani Financial Corp. (file no. 333- 165226), as amended, filed with the Securities and Exchange Commission on March 5, 2010.

53


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
ORITANI FINANCIAL CORP.
 
 
 
 
 
Date:
November 12, 2019
/s/ Kevin J. Lynch
 
 
 
Kevin J. Lynch
 
 
 
President and Chief Executive Officer
 
 
 
 
 
Date:
November 12, 2019
/s/ John M. Fields, Jr.
 
 
 
John M. Fields, Jr.
 
 
 
Executive Vice President and Chief Financial Officer
 




54
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