Forward-Looking Statements
This Annual Report contains certain "forward-looking statements"“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,"“may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events: general economic conditions, either nationally or in our market or service areas, that are worse than expected; significantly increased competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; changes in consumer spending, borrowing, and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, taxing authorities and the Financial Accounting Standards Board; and changes in our organization, compensation, and benefit plans.
Oritani Financial Corp. ("(“the Company"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'sCompany’s financial performance and could cause the Company'sCompany’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; the risk that the necessary regulatory approvals may not be obtained, may be delayed, or may be obtained subject to conditions that are not anticipated; 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; 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 will file with the SEC a Registration Statement on Form S-4 that includes a joint proxy statement/prospectus, which will include 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.
Oritani Financial Corp.
Oritani Financial Corp. is the stock holding company for Oritani Bank. It is a Delaware corporation that was incorporated in March 2010. The Company is the successor to Oritani Financial Corp. ("Oritani-Federal"(“Oritani-Federal”), a federal corporation and former stock holding company of Oritani Bank. In conjunction with the second step transaction of Oritani Financial Corp., MHC, the former mutual holding company parent of Oritani-Federal, Oritani-Federal ceased to exist and the Company became its successor. The second step transaction was completed on June 24, 2010 and accounted for as capital raised by entities under common control. The Company sold a total of 41,363,214 shares of common stock at $10.00 per share in the related stock offering. Concurrent with the completion of the offering, shares of Oritani-Federal common stock owned by public stockholders were exchanged for 1.50 shares of the Company'sCompany’s common stock. In lieu of fractional shares, shareholders were paid in cash. The Company also issued 481,546 shares of common stock for the accelerated vesting of restricted stock awards triggered by the conversion. As a result of the offering, the exchange, and shares issued due to the accelerated vesting, as of June 30, 2010, the Company had 56,202,485 shares outstanding. Net proceeds from the offering were $401.8 million.
Oritani Financial Corp. owns 100% of the outstanding shares of common stock of Oritani Bank. Oritani Financial Corp. primarily engages in the business of holding the common stock of Oritani Bank as well as two inactive limited liability companies that owned a variety of real estate investments. Oritani Financial Corp.'s’s executive office is located at 370 Pascack Road, in the Township of Washington, New Jersey 07676, and its telephone number is (201) 664-5400. Oritani Financial Corp. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System ("FRB"(“FRB”). At June 30, 2018,2019, Oritani Financial Corp. had consolidated assets of $4.17$4.07 billion, consolidated deposits of $2.92 billion and consolidated stockholders'stockholders’ equity of $559.3$529.1 million. Its consolidated net income for the fiscal year ended June 30, 20182019 was $42.9$52.1 million.
Oritani Financial Corp.'s’s website (www.oritani.com) contains a link to the Company'sCompany’s filings with the Securities and Exchange Commission including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these filings, if any. These filings are available, free of charge, as soon as practicable after they are filed with the Securities and Exchange Commission and can be found under the 'Investor Relations'‘Investor Relations’ heading. Oritani-Federal filings can also be found here. Information on the website should not be considered a part of this report.
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.
Oritani Bank
General
Oritani Bank is a New Jersey-chartered savings bank headquartered in the Township of Washington, New Jersey. Oritani Bank was originally founded in 1911, as a New Jersey building and loan association. Over the years, Oritani Bank has expanded through internal growth as well as through a series of business combinations. Oritani Bank conducts business from its corporate office located at 370 Pascack Road, in the Township of Washington, New Jersey, lending offices in New York City and Cherry Hill, New Jersey. and its 25 branch offices located in the New Jersey counties of Bergen, Hudson, Essex and Passaic. The telephone number at its corporate office is (201) 664-5400. At June 30, 2018,2019, Oritani Bank's assets totaled $4.17$4.07 billion and deposits totaled $2.92 billion.
Our principal business consists of attracting retail and commercial bank deposits from the general public in the areas surrounding our corporate office in the Township of Washington, New Jersey and our branch offices located in the New Jersey Counties of Bergen, Hudson, Essex and Passaic, and investing those deposits, together with funds generated from operations, in commercial real estate loans, one to four family residential mortgage loans as well as in second mortgage and equity loans, and investment securities. We originate loans primarily for investment and hold such loans in our portfolio. Occasionally, we will also enter into loan participations. Our revenues are derived principally from interest on loans and securities as well as our investments in real estate and real estate joint ventures. We also generate revenues from fees and service charges and other income. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities.
Market Area
From our headquarters in the Township of Washington, New Jersey, we operate 26 full service branches, including our corporate office. We operate branches in four counties of New Jersey: Bergen, Hudson, Essex and Passaic. The majority of our branches (eighteen) including our Corporate office and deposits are located in Bergen County. In addition, we operate five branches in Hudson County, one branch in Essex County and two branches in Passaic County. Our residential lending area generally encompasses northern New Jersey. Our market area for commercial lending, including residential CRE, is broader, generally including the state of New Jersey, eastern Pennsylvania, southern New York, New York City, Long Island, and Delaware.
In terms of population, Bergen County ranks as the largest county in New Jersey (out of 21 counties) while Hudson County ranks fourth, Essex County ranks third and Passaic County ranks eight.ninth. The economy in our primary market area has benefited from being varied and diverse. It is largely urban and suburban with a broad economic base. As one of the wealthiest states in the nation, New Jersey, with an estimated population of 9.08.92 million, is considered one of the most attractive banking markets in the United States. As of June 2018,2019, the unemployment rate for New Jersey was 4.3%,3.5% a record low, which was higherlower than the national rate of 4.0%3.7%, with a total of 4.54.2 million New Jersey residents employed as of June 2018.2019. Bergen County is considered part of the New York metropolitan area. Its county seat is Hackensack. Bergen County ranks 45th among the highest-income counties in the United States in 2015 in terms of per-capita income.
Bergen County is bordered by Rockland County, New York to the north, the Hudson River to the east, Hudson County to the south, Passaic County to the west and also a small border with Essex County to the west.
Passaic County is bordered by Orange County, New York to the north, Rockland County, New York to the northeast, Bergen County to the east, Essex County to the south, Morris County to the southwest and Sussex County to the west.
Essex County is bordered by Passaic County to the north, Morris County to the west, Union County to the south, Hudson County to the east and also a small border with Bergen County to the east.
Hudson County'sCounty’s only land border is with Bergen County to the north and west. It is bordered by the Hudson River and Upper New York Bay to the east; Kill van Kull (which connects Newark Bay with Upper New York Bay) to the south and Newark Bay and the Hackensack River or the Passaic River to the west.
Competition
We face intense competition within our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. As of June 30, 2017,2018, the latest date for which statistics are available, our market share of deposits was approximately 4.8%4.7% in Bergen County and less than 1.0% in each of Essex, Hudson, and Passaic Counties.
Our competition for loans and deposits comes principally from locally owned and out-of-state commercial banks, savings institutions, mortgage banking firms, insurance companies, the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.
Lending Activities
Our principal lending activity is the origination of residential commercial real estate loans and commercial real estate loans as well as residential real estate mortgage loans and home equity loans. Our residential commercial real estate portfolio consists primarily of mortgage loans secured by apartment buildings. Our commercial real estate portfolio consist primarily of mortgage loans secured by retail anchor shopping centers, commercial offices, retail space, warehouses, and mixed-use buildings. Our residential real estate portfolio consists of one to four family residential real property and home equity loans. The residential commercial real estate and commercial real estate portfolios represented $3.30$3.25 billion, or 92.2%, of our total loan portfolio at June 30, 2018.2019. One to four family residential real estate mortgage loans represented $267.8$267.0 million, or 7.5%7.6%, of our total loan portfolio at June 30, 2018.2019. At June 30, 2018,2019, construction and land loans totaled $11.0$9.2 million, or 0.3%, of our loan portfolio.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, by type of loan at the date indicated.
| June 30, | June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | $ | 267,771 | 7.5 | % | $ | 253,310 | 7.0 | % | $ | 223,701 | 7.1 | % | $ | 186,342 | 6.7 | % | $ | 158,180 | 6.2 | % | $ | 267,011 | 7.6 | % | $ | 267,771 | 7.5 | % | $ | 253,310 | 7.0 | % | $ | 223,701 | 7.1 | % | $ | 186,342 | 6.7 | % | ||||||||||||||||||||||||||||||||||||||||
| Residential CRE | 2,005,315 | 56.0 | 1,945,297 | 54.0 | 1,596,876 | 50.3 | 1,229,816 | 43.9 | 998,439 | 39.3 | 2,086,314 | 59.0 | 2,005,315 | 56.0 | 1,945,297 | 54.0 | 1,596,876 | 50.3 | 1,229,816 | 43.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Grocery/Credit Retail CRE | 497,708 | 13.9 | 535,567 | 14.9 | 457,058 | 14.4 | 481,216 | 17.2 | 624,705 | 24.5 | 482,831 | 13.7 | 497,708 | 13.9 | 535,567 | 14.9 | 457,058 | 14.4 | 481,216 | 17.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other CRE | 796,589 | 22.3 | 866,826 | 24.0 | 887,443 | 28.0 | 894,016 | 32.0 | 729,071 | 28.6 | 683,739 | 19.4 | 796,589 | 22.3 | 866,826 | 24.0 | 887,443 | 28.0 | 894,016 | 32.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land loans | 10,960 | 0.3 | 4,210 | 0.1 | 4,810 | 0.2 | 6,132 | 0.2 | 34,951 | 1.4 | 9,170 | 0.3 | 10,960 | 0.3 | 4,210 | 0.1 | 4,810 | 0.2 | 6,132 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | 3,578,343 | 100.0 | % | 3,605,210 | 100.0 | % | 3,169,888 | 100.0 | % | 2,797,522 | 100.0 | % | 2,545,346 | 100.0 | % | 3,529,065 | 100.0 | % | 3,578,343 | 100.0 | % | 3,605,210 | 100.0 | % | 3,169,888 | 100.0 | % | 2,797,522 | 100.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other items: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net deferred loan origination fees | 6,878 | 8,235 | 7,980 | 10,421 | 10,051 | 9,147 | 6,878 | 8,235 | 7,980 | 10,421 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | 30,562 | 30,272 | 29,951 | 30,889 | 31,401 | 28,596 | 30,562 | 30,272 | 29,951 | 30,889 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans, net | $ | 3,540,903 | $ | 3,566,703 | $ | 3,131,957 | $ | 2,756,212 | $ | 2,503,894 | $ | 3,491,322 | $ | 3,540,903 | $ | 3,566,703 | $ | 3,131,957 | $ | 2,756,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2018.2019. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization.
| Residential | Residential CRE | Grocery/Credit Retail CRE | Other CRE | Construction and Land Loans | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | |||||||||||||||||||||||||||||||||||||
| Due During the Years Ended June 30, | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | $ | 19,931 | 4.62 | % | $ | 23,366 | 3.71 | % | $ | 4,218 | 5.85 | % | $ | 61,257 | 4.72 | % | $ | 4,803 | 5.75 | % | $ | 113,575 | 4.58 | % | ||||||||||||||||||||||||
| 2020 to 2021 | 803 | 4.79 | 57,219 | 4.37 | 28,586 | 4.30 | 75,223 | 4.67 | 3,538 | 5.25 | 165,369 | 4.52 | ||||||||||||||||||||||||||||||||||||
| 2022 to 2023 | 2,558 | 4.16 | 196,304 | 3.65 | 59,379 | 3.99 | 110,079 | 4.56 | — | — | 368,320 | 3.98 | ||||||||||||||||||||||||||||||||||||
| 2024 to 2028 | 6,938 | 4.05 | 997,047 | 3.43 | 251,100 | 3.56 | 318,762 | 3.99 | 2,332 | 5.75 | 1,576,179 | 3.57 | ||||||||||||||||||||||||||||||||||||
| 2029 to 2033 | 35,773 | 3.50 | 626,567 | 3.58 | 115,183 | 4.12 | 218,545 | 4.65 | — | — | 996,068 | 3.87 | ||||||||||||||||||||||||||||||||||||
| 2034 and beyond | 201,768 | 3.97 | 104,812 | 4.12 | 39,242 | 4.25 | 12,724 | 5.18 | 287 | 5.75 | 358,833 | 4.09 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 267,771 | 3.96 | % | $ | 2,005,315 | 3.56 | % | $ | 497,708 | 3.86 | % | $ | 796,590 | 4.39 | % | $ | 10,960 | 5.59 | % | $ | 3,578,344 | 3.82 | % | ||||||||||||||||||||||||
| Residential | Residential CRE | Grocery/Credit Retail CRE | Other CRE | Construction and Land Loans | Total | |||||||||||||||||||||||||||||||||||||||||||
| Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | |||||||||||||||||||||||||||||||||||||
| Due During the Years Ended June 30, | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | $ | 18,730 | 5.64 | % | $ | 50,599 | 4.06 | % | $ | 7,135 | 6.12 | % | $ | 76,246 | 4.51 | % | $ | — | 0.00 | % | $ | 152,710 | 4.57 | % | ||||||||||||||||||||||||
| 2021 to 2022 | 562 | 4.96 | 117,288 | 4.48 | 52,080 | 3.97 | 56,565 | 4.85 | 7,543 | 6.50 | 234,038 | 4.52 | ||||||||||||||||||||||||||||||||||||
| 2023 to 2024 | 2,045 | 4.22 | 133,614 | 4.01 | 114,283 | 4.04 | 85,898 | 4.70 | — | — | 335,840 | 4.20 | ||||||||||||||||||||||||||||||||||||
| 2025 to 2029 | 11,404 | 3.87 | 1,497,930 | 3.65 | 239,433 | 4.02 | 351,777 | 4.25 | 1,350 | 5.65 | 2,101,894 | 3.80 | ||||||||||||||||||||||||||||||||||||
| 2030 to 2034 | 30,848 | 3.62 | 185,539 | 3.90 | 23,249 | 5.07 | 86,573 | 4.54 | — | — | 326,209 | 4.13 | ||||||||||||||||||||||||||||||||||||
| 2035 and beyond | 203,422 | 4.07 | 101,344 | 4.20 | 46,651 | 4.35 | 26,680 | 4.78 | 277 | 5.75 | 378,374 | 4.19 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 267,011 | 4.12 | % | $ | 2,086,314 | 3.78 | % | $ | 482,831 | 4.13 | % | $ | 683,739 | 4.44 | % | $ | 9,170 | 6.35 | % | $ | 3,529,065 | 3.99 | % | ||||||||||||||||||||||||
The following table sets forth, at June 30, 2018,2019, the dollar amount of all fixed- and adjustable-rate loans that are contractually due after June 30, 2019.2020.
| Fixed | Adjustable | Total | Fixed | Adjustable | Total | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Residential | $ | 196,589 | $ | 51,251 | $ | $247,840 | $ | 208,532 | $ | 39,749 | $ | $248,281 | ||||||||||||
| Residential CRE | 470,998 | 1,510,951 | 1,981,949 | 201,758 | 1,833,957 | 2,035,715 | ||||||||||||||||||
| Grocery/Credit Retail CRE | 127,724 | 365,766 | 493,490 | 98,140 | 377,556 | 475,696 | ||||||||||||||||||
| Other CRE | 318,180 | 417,153 | 735,333 | 149,447 | 458,046 | 607,493 | ||||||||||||||||||
| Construction and land loans | 3,538 | 2,619 | 6,157 | 1,627 | 7,543 | 9,170 | ||||||||||||||||||
| Total loans | $ | 1,117,029 | $ | 2,347,740 | $ | 3,464,769 | $ | 659,504 | $ | 2,716,851 | $ | 3,376,355 | ||||||||||||
Loans:
Residential Loans. We originate one to four family residential mortgage loans, substantially all of which are secured by properties located in our primary market area. At June 30, 2018, $267.82019, $267.0 million, or 7.5%7.6% of our loan portfolio, consisted of one to four family residential mortgage loans and home equity loans. We generally retain for our portfolio substantially all of the loans that we originate. Residential mortgage loan originations are generally obtained from existing or past customers, through advertising, and through referrals from local builders, real estate brokers, and attorneys, and are underwritten pursuant to Oritani Bank'sBank’s policies and standards. The Company maintains a program where a fee is paid to a broker for a loan referral that results in an origination or a purchase of a recently closed loan. Generally, residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We generally will not make loans with a loan-to-value ratio in excess of 90%. Fixed rate mortgage loans are originated for terms of up to 30 years. Generally, fixed rate residential mortgage loans are underwritten according to Freddie Mac guidelines, policies and procedures, with a maximum origination amount of $2.0 million. Oritani Bank's residential underwriting satisfies the "qualified mortgages" regulations issued by the Consumer Financial Protection Bureau. Oritani Bank does not originate non-qualified mortgage loans. We do not originate or purchase, and our loan portfolio does not include, any sub-prime loans.
We also offer adjustable rate mortgage loans for one to four family properties, with an interest rate based on the weekly average yield on U.S. Treasuries adjusted to a constant maturity of one-year, which adjust either annually or every three years from the outset of the loan or which adjust annually after a five-, seven- or ten-year initial fixed rate period. Originations of adjustable rate residential mortgage loans totaled $10.2$8.8 million and $12.6$10.2 million for the fiscal years ended June 30, 20182019 and 2017,2018, respectively. Our adjustable rate residential mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 6%, regardless of the initial rate. Our adjustable rate residential mortgage loans amortize over terms of up to 30 years.
Adjustable rate mortgage loans decrease the Bank'sBank’s risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable rate mortgage loans may be limited during periods of rapidly rising interest rates. At June 30, 2018, $51.32019, $39.7 million, or 19.1%14.9%, of our residential mortgage loans had adjustable rates of interest.
In an effort to provide financing for first-time home buyers, we offer our own first-time home buyer loan program. This program offers one to four family residential mortgage loans to qualified individuals. These loans are underwritten and offered with terms and adjustable and fixed rates of interest similar to our other one to four family mortgage loan products. With this program, borrowers receive a discounted mortgage interest rate and do not pay certain loan origination fees. Such loans must be secured by an owner-occupied residence. These loans are originated using similar underwriting guidelines as our other one to four family mortgage loans. Such loans are originated in amounts of up to 90% of the lower of the property'sproperty’s appraised value or the sale price. Private mortgage insurance is not required for such loans. The maximum amount of such loan is $275,000. We also participate in the Federal Home Loan Bank's ("FHLB"Bank’s (“FHLB”) Mortgage Partnership Finance ("MPF"(“MPF”) program. The MPF program offers potentially lower rates to qualified individuals on one to four family residential mortgage loans and provides the Bank with additional opportunity for income. Loans originated through the MPF program can be sold to FHLB with minimal recourse to the Bank.
We also offer our directors, officers and employees who satisfy certain criteria and our general underwriting standards fixed or adjustable rate loan products with reduced interest rates, excluding loans originated through the MPF program. These loans adhere to all other terms and conditions contained in the loan policy.
All residential mortgage loans that we originate include "due-on-sale"“due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. Regulations limit the amount that a savings bank may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. All borrowers are required to obtain title insurance for the benefit of Oritani Bank. We also require homeowner'shomeowner’s insurance and fire and casualty insurance and, where circumstances warrant, flood insurance on properties securing real estate loans.
We also offer second mortgage loans and home equity lines of credit, which are included in the residential mortgage loan portfolio. These mortgage loans are secured by one to four family residences, substantially all of which are located in our primary market area. At June 30, 2018,2019, second mortgage and equity loans totaled $8.5$7.8 million, or 0.24%0.22% of total loans. Additionally, at June 30, 2018,2019, the unadvanced amounts of home equity lines of credit totaled $8.0$6.6 million. The underwriting standards utilized for second mortgage loans and equity lines of credit include a determination of the applicant'sapplicant’s credit history, an assessment of the applicant'sapplicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The combined (first and second mortgage liens) loan-to-value ratio for second mortgage loans and home equity lines of credit is generally limited to 70%. Second mortgage loans are offered with fixed and adjustable rates of interest and with terms of up to 30 years. Our home equity lines of credit have adjustable rates of interest which are indexed to the prime rate, as reported in The Wall Street Journal.
Second mortgage loans and equity loans entail greater risk than do residential mortgage loans, particularly if they are secured by an asset that has a superior security interest. In addition, equity loan collections depend on the borrower'sborrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Commercial Real Estate ("CRE") Loans. We originate residential and non-residential commercial real estate mortgage loans. At June 30, 2018, $3.302019, $3.25 billion, or 92.2% of our loan portfolio, consisted of commercial real estate loans. Our residential CRE mortgage loans, $2.01$2.09 billion or 56.0%59.0% of our loan portfolio, are primarily permanent loans secured by apartment buildings and mobile home parks. The non-residential CRE mortgage portfolio consists of grocery/credit retail CRE and other CRE. Our grocery/credit retail CRE mortgage loans, $497.7$482.8 million or 13.9%13.7% of our loan portfolio, are primarily permanent mortgage loans secured by grocery or credit anchor tenants at multi-store, or stand alone, facilities. Our other CRE mortgage loans, $796.6$683.7 million or 22.3%19.4% of our loan portfolio, are primarily permanent loans secured by improved property such as retail multi-stores without a credit anchor, mixed-use properties, self-storage facilities, commercial warehouses, and office buildings. The typical CRE mortgage loan has a fixed rate of interest for the first three or five years, after which the loan reprices to a market index plus a spread, with a floor of the original rate. The fixed rate period is occasionally extended to as much as ten years. These loans typically amortize over 30 years though we will often require shorter amortization. We also offer such loans on a self-amortizing basis with fixed rate terms up to 20 years. References to commercial real estate loans below refer to residential and non-residential commercial real estate.
The terms and conditions of each CRE loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors. In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower'sborrower’s expertise and credit history, risks inherent in the property'sproperty’s tenants, the global cash flows of the borrower, the value of the underlying property and other factors. Loan to value ratios are a very important consideration. Depending on the collateral type, our lending policies allow commercial real estate loan originations in an amount up to 80% of the appraised value or the purchase price of the property, whichever is less. However, our maximum loan to value ratio is generally 75% on purchase transactions and 70% on refinance transactions. Other factors we consider, with respect to commercial real estate rental properties, include the term of the lease(s) and the quality of the tenant(s). We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.25 times. Environmental reports are generally required for commercial real estate loans. Commercial real estate loans made to corporations, partnerships and other business entities may require personal guarantees by the principals as warranted. Property inspections are conducted, for most CRE loans, no less than every three years, or more frequently as warranted.
For commercial real estate loans with balances greater than $2.5 million, a borrower'sborrower’s financial information is monitored on an ongoing basis by requiring annual financial statement updates and payment history reviews. We require commercial borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to the individual principals of our commercial borrowers. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable. The largest residential CRE loan in our portfolio at June 30, 20182019 was a $32.7$31.9 million loan secured by multi-family and mixed-use buildings located in Brooklyn, New York. The largest credit retail CRE loan at June 30, 20182019 was a $30.1$29.3 million loan secured by several freestanding pharmacy stores, located in Virginia, Pennsylvania and Connecticut. The largest other CRE loan in our portfolio at June 30, 20182019 was a $26.3$29.3 million loan secured by a multi-tenant and mixed use buildingsretail power center located in Bronx,Rio Grande, New York.Jersey. All of these loans are performing in accordance with their terms. Our largest commercial real estate relationship consisted of 4240 properties primarily secured by multi-family buildings located mainly in our primary market area. The aggregate outstanding loan balance for this relationship, comprised of several legal entities, is $63.1$59.7 million at June 30, 2018,2019, and these loans are all performing in accordance with their terms.
Loans secured by commercial real estate (residential and non-residential) generally involve larger principal amounts and a greater degree of risk than one to four family residential mortgage loans. Because payments on loans secured by commercial real estate are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. See "Item“Item 1A, Risk Factors – Our Continued Emphasis On Commercial Real Estate Lending Could Expose Us To Increased Lending Risks."”
We originate construction loans for the development of residential and commercial properties located in our primary market area on a limited basis. Residential construction loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction of their personal residences. At June 30, 2018,2019, construction and land loans totaled $11.0$9.2 million, or 0.3 % of total loans.
Loan Originations, Purchases, Sales, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our corporate office as well as commercial real estate origination offices in Cherry Hill, New Jersey and New York City. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates.
During the fiscal years ended June 30, 20182019 and 2017,2018, loan originations totaled $470.7$414.4 million and $732.0$470.7 million, respectively, all of which were retained by us. Loan purchases totaled $69.2$138.5 million and $65.9$69.2 million for the years ended June 30, 20182019 and 2017.2018. There were no loans originated and sold under the FHLB MPF program during fiscal 20182019 or 2017.2018.
We will also participate in loans, sometimes as the "lead“lead lender."” When we are not the lead lender, the underwriting of the loan participations closely match our own underwriting criteria and procedures. At June 30, 2018,2019, we had $183.1$243.8 million in loan participation interests.
At June 30, 2018,2019, in addition to participation interests we were servicing loans sold in the amount of $2.5$2.3 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.
Non-Performing and Problem Assets
We commence collection efforts when a loan becomes ten days past due with system generated reminder notices. Subsequent late charges and delinquent notices are issued and the account is monitored on a regular basis thereafter. Collections meetings with executive management are regularly held and every delinquent loan is discussed. When a loan is more than 30 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated. Personal, direct contact with the borrower is attempted early in the collection process. We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency. A summary report of all loans 30 days or more past due is reported to the Board of Directors on a monthly basis. If no repayment plan is in process and the loan is delinquent at least two payments, the file is referred to counsel for the commencement of foreclosure or other collection efforts.
Loans are placed on non-accrual status when they are more than 90 days delinquent. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed. Once the outstanding principal balance is brought current, income is recognized to the extent the loan is deemed fully collectible. If the deficiencies causing the delinquency are resolved, such loans may be returned to accrual status once all arrearages are resolved and a period of satisfactory payment performance, usually six months. See additional discussion regarding our non-performing assets at June 30, 20182019 in "Management“Management Discussion and Analysis."”
Non-Performing Assets and Restructured Loans. The table below sets forth the amounts and categories of our non-performing assets and troubled debt restructurings at the dates indicated.
| At June 30, | At June 30, | |||||||||||||||||||||||||||||||||||||||
| 2018 (1) | 2017 (2) | 2016 (3) | 2015 (4) | 2014 (5) | 2019 (1) | 2018 (2) | 2017 (3) | 2016 (4) | 2015 (5) | |||||||||||||||||||||||||||||||
| Non-performing assets | (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
| Non-accrual loans: | ||||||||||||||||||||||||||||||||||||||||
| Residential | $ | 6,335 | $ | 1,556 | $ | 931 | $ | 1,329 | $ | 5,350 | $ | 6,531 | $ | 6,335 | $ | 1,556 | $ | 931 | $ | 1,329 | ||||||||||||||||||||
| Residential CRE | — | — | 310 | 311 | 3,508 | — | — | — | 310 | 311 | ||||||||||||||||||||||||||||||
| Other CRE | 1,542 | 8,667 | 8,671 | 10,711 | 8,670 | 3,522 | 1,542 | 8,667 | 8,671 | 10,711 | ||||||||||||||||||||||||||||||
| Construction and land loans | — | — | 56 | 224 | 444 | — | — | — | 56 | 224 | ||||||||||||||||||||||||||||||
| Total non-accrual loans | $ | 7,877 | $ | 10,223 | $ | 9,968 | $ | 12,575 | $ | 17,972 | $ | 10,053 | $ | 7,877 | $ | 10,223 | $ | 9,968 | $ | 12,575 | ||||||||||||||||||||
| Loans greater than 90 days delinquent and still accruing | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
| Total non-performing loans | $ | 7,877 | $ | 10,223 | $ | 9,968 | $ | 12,575 | $ | 17,972 | $ | 10,053 | $ | 7,877 | $ | 10,223 | $ | 9,968 | $ | 12,575 | ||||||||||||||||||||
| Real estate owned | 1,564 | 140 | 487 | 4,059 | 3,850 | 557 | 1,564 | 140 | 487 | 4,059 | ||||||||||||||||||||||||||||||
| Total non-performing assets | $ | 9,441 | $ | 10,363 | $ | 10,455 | $ | 16,634 | $ | 21,822 | $ | 10,610 | $ | 9,441 | $ | 10,363 | $ | 10,455 | $ | 16,634 | ||||||||||||||||||||
| Ratios: | ||||||||||||||||||||||||||||||||||||||||
| Non-performing loans to total loans | 0.22 | % | 0.28 | % | 0.31 | % | 0.45 | % | 0.71 | % | 0.28 | % | 0.22 | % | 0.28 | % | 0.31 | % | 0.45 | % | ||||||||||||||||||||
| Non-performing assets to total assets | 0.23 | % | 0.25 | % | 0.28 | % | 0.50 | % | 0.69 | % | 0.26 | % | 0.23 | % | 0.25 | % | 0.28 | % | 0.50 | % | ||||||||||||||||||||
| Troubled Debt Restructurings | ||||||||||||||||||||||||||||||||||||||||
| Non-performing TDRs (included in nonaccrual loans) | ||||||||||||||||||||||||||||||||||||||||
| Residential | 174 | 178 | 184 | 188 | 3,080 | 167 | 174 | 178 | 184 | 188 | ||||||||||||||||||||||||||||||
| Residential CRE | — | — | 310 | 311 | 501 | — | — | — | 310 | 311 | ||||||||||||||||||||||||||||||
| Other CRE | 1,407 | 4,070 | 3,703 | 2,710 | 4,386 | 1,096 | 1,407 | 4,070 | 3,703 | 2,710 | ||||||||||||||||||||||||||||||
| Construction and land loans | — | — | 56 | 224 | — | — | — | — | 56 | 224 | ||||||||||||||||||||||||||||||
| Total Non-performing TDRs | $ | 1,581 | $ | 4,248 | $ | 4,253 | $ | 3,433 | $ | 7,967 | $ | 1,263 | $ | 1,581 | $ | 4,248 | $ | 4,253 | $ | 3,433 | ||||||||||||||||||||
| Performing TDRs | ||||||||||||||||||||||||||||||||||||||||
| Other CRE | 309 | 362 | 386 | 418 | — | 236 | 309 | 362 | 386 | 418 | ||||||||||||||||||||||||||||||
| Total Performing TDRs | 309 | 362 | 386 | 418 | — | 236 | 309 | 362 | 386 | 418 | ||||||||||||||||||||||||||||||
| Total Troubled Debt Restructurings | $ | 1,890 | $ | 4,610 | $ | 4,639 | $ | 3,851 | $ | 7,967 | $ | 1,499 | $ | 1,890 | $ | 4,610 | $ | 4,639 | $ | 3,851 | ||||||||||||||||||||
| (1) | Included in nonaccrual loans are residential loans totaling $568,000 and other commercial real estate loans totaling $2.4 million that were less than 30 days delinquent; and residential loans and other commercial real estate loans totaling $798,000 and $1.1 million, respectively, that were 30 - 89 days delinquent. |
| (2) | Included in nonaccrual loans totaling $504,000 and other commercial real estate loans totaling $1.4 million that were less than 30 days delinquent; and residential loans totaling $617,000 that were |
| Included in nonaccrual loans are residential loans totaling $21,000 and other commercial real estate loans totaling $6.8 million that were less than 30 days delinquent; and residential loans totaling $921,000 that were |
| Included in nonaccrual loans are residential loans totaling $66,000 residential CRE loans totaling $310,000 and other commercial real estate loans totaling $7.0 million that were less than 30 days delinquent; and residential loans totaling $180,000 that were |
| Included in nonaccrual loans are residential loans totaling $425,000 and other commercial real estate loans totaling $6.1 million that were less than 30 days delinquent, and residential loans totaling $16,000, residential CRE loans totaling $311,000 and other commercial real estate loans totaling $1.1 million that were less than 90 days delinquent. |
As noted in the above table, there were nonaccrual loans of $10.1 million at June 30, 2019, $7.9 million at June 30, 2018 and $10.2 million at June 30, 2017. Additional interest income of $340,000, $198,000 and $283,000 would have been recorded during the years ended June 30, 2019, 2018 and 2017, respectively, if the loans had performed in accordance with their original terms. Interest income on these loans of $256,000, $531,000 and $531,000 was included in net income for the years ended June 30, 2019, 2018 and 2017, respectively. See "Item“Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations- Comparison of Operating Results for the Years Ended June 30, 2019, June 30, 2018 and June 30, 2017, Provision for Loan Losses."”
Delinquent Loans. The following table sets forth our loan delinquencies by type, amount and loan relationship at the dates indicated.
| Loans Delinquent For | Loans Delinquent For | |||||||||||||||||||||||||||||||||||||||||||||||
| 60-89 Days | 90 Days and over | Total | 60-89 Days | 90 Days and over | Total | |||||||||||||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| At June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | 4 | $ | 1,409 | 5 | $ | 5,164 | 9 | $ | 6,573 | |||||||||||||||||||||||||||||||||||||||
| Other CRE | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total | 4 | $ | 1,409 | 5 | $ | 5,164 | 9 | $ | 6,573 | |||||||||||||||||||||||||||||||||||||||
| At June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | 4 | $ | 753 | 7 | $ | 5,213 | 11 | $ | 5,966 | 4 | $ | 753 | 7 | $ | 5,213 | 11 | $ | 5,966 | ||||||||||||||||||||||||||||||
| Other CRE | — | — | 1 | 135 | 1 | 135 | — | — | 1 | 135 | 1 | 135 | ||||||||||||||||||||||||||||||||||||
| Total | 4 | $ | 753 | 8 | $ | 5,348 | 12 | $ | 6,101 | 4 | $ | 753 | 8 | $ | 5,348 | 12 | $ | 6,101 | ||||||||||||||||||||||||||||||
| At June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | 4 | $ | 1,776 | 7 | $ | 614 | 11 | $ | 2,390 | 4 | $ | 1,776 | 7 | $ | 614 | 11 | $ | 2,390 | ||||||||||||||||||||||||||||||
| Residential CRE | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Other CRE | — | — | 3 | 1,897 | 3 | 1,897 | — | — | 3 | 1,897 | 3 | 1,897 | ||||||||||||||||||||||||||||||||||||
| Construction and land loans | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total | 4 | $ | 1,776 | 10 | $ | 2,511 | 14 | $ | 4,287 | 4 | $ | 1,776 | 10 | $ | 2,511 | 14 | $ | 4,287 | ||||||||||||||||||||||||||||||
| At June 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | 3 | $ | 531 | 5 | $ | 684 | 8 | $ | 1,215 | 3 | $ | 531 | 5 | $ | 684 | 8 | $ | 1,215 | ||||||||||||||||||||||||||||||
| Residential CRE | 1 | 1,166 | — | — | 1 | 1,166 | 1 | 1,166 | — | — | 1 | 1,166 | ||||||||||||||||||||||||||||||||||||
| Other CRE | — | — | 4 | 1,641 | 4 | 1,641 | — | — | 4 | 1,641 | 4 | 1,641 | ||||||||||||||||||||||||||||||||||||
| Construction and land loans | — | — | 1 | 56 | 1 | 56 | — | — | 1 | 56 | 1 | 56 | ||||||||||||||||||||||||||||||||||||
| Total | 4 | $ | 1,697 | 10 | $ | 2,381 | 14 | $ | 4,078 | 4 | $ | 1,697 | 10 | $ | 2,381 | 14 | $ | 4,078 | ||||||||||||||||||||||||||||||
| At June 30, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | 3 | $ | 432 | 4 | $ | 888 | 7 | $ | 1,320 | 3 | $ | 432 | 4 | $ | 888 | 7 | $ | 1,320 | ||||||||||||||||||||||||||||||
| Residential CRE | 1 | 311 | — | — | 1 | 311 | 1 | 311 | — | — | 1 | 311 | ||||||||||||||||||||||||||||||||||||
| Other CRE | — | — | 3 | 3,569 | 3 | 3,569 | — | — | 3 | 3,569 | 3 | 3,569 | ||||||||||||||||||||||||||||||||||||
| Construction and land loans | — | — | 1 | 224 | 1 | 224 | — | — | 1 | 224 | 1 | 224 | ||||||||||||||||||||||||||||||||||||
| Total | 4 | $ | 743 | 8 | $ | 4,681 | 12 | $ | 5,424 | 4 | $ | 743 | 8 | $ | 4,681 | 12 | $ | 5,424 | ||||||||||||||||||||||||||||||
| At June 30, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | 1 | $ | 214 | 6 | $ | 2,374 | 7 | $ | 2,588 | |||||||||||||||||||||||||||||||||||||||
| Residential CRE | — | — | 3 | 3,007 | 3 | 3,007 | ||||||||||||||||||||||||||||||||||||||||||
| Other CRE | — | — | 5 | 3,580 | 5 | 3,580 | ||||||||||||||||||||||||||||||||||||||||||
| Construction and land loans | — | — | 4 | 444 | 4 | 444 | ||||||||||||||||||||||||||||||||||||||||||
| Total | 1 | $ | 214 | 18 | $ | 9,405 | 19 | $ | 9,619 | |||||||||||||||||||||||||||||||||||||||
In addition to the delinquent loans listed above, we occasionally have had loans that were delinquent 90 days or more past due as to principal. Typically, such loans had passed their maturity date but continued making monthly payments, keeping their interest current, while negotiating external financing or an extension from the Company. There were no loans delinquent 90 days or more past their maturity date at June 30, 2019, 2018, 2017, 2016 2015 or 2014.2015.
Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until sold. When property is acquired it is recorded at the lower of cost or fair market value at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value result in charges to expense after acquisition. The Company had real estate owned of $1.6 million$557,000 at June 30, 20182019 and $140,000 at June 30, 2017.2018. The Company sold one property with book value of $140,000$1.1 million during the year ended June 30, 2018.2019. Proceeds from the sale of real estate owned were $138,000,$1.9 million, resulting in $2,000 loss.$855,000 gain.
Classified Assets. Federal Deposit Insurance Corporation ("FDIC"(“FDIC”) regulations provide that loans and other assets of lesser quality should be classified as "substandard," "doubtful"“substandard,” “doubtful” or "loss"“loss” assets. An asset is considered "substandard"“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"“Substandard” assets include those characterized by the "distinct possibility"“distinct possibility” that we will sustain "some loss"“some loss” if the deficiencies are not corrected. Assets classified as "doubtful"“doubtful” have all of the weaknesses inherent in those classified "substandard,"“substandard,” with the added characteristic that the weaknesses present make "collection“collection or liquidation in full,"” on the basis of currently existing facts, conditions, and values, "highly“highly questionable and improbable."” Assets classified as "loss"“loss” are those considered "uncollectible"“uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
We are to establish general reserves, where appropriate, for our non-impaired loan portfolio, including non-impaired loans classified as doubtful, substandard or special mention. General allowances represent loss allowances which have been established to recognize the inherent incurred losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When we classify problem assets as "loss,"“loss,” we are required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. The Company utilizes the services of a third party loan review firm to help ensure that loans are properly classified. They report to the Audit Committee quarterly and their scope is determined by the Audit Committee annually. On an annual basis, the loan review firm reviews a significant portion of the existing portfolio over the course of the year, typically an aggregate of approximately 65% of the commercial real estate portfolios, including a sampling of both new and seasoned loans, a review of all "Regulation O" loans, construction loans with balances of $250,000 or more, and review of all criticized or classified CRE loans with balances of $250,000 or more. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC and the New Jersey Department of Banking and Insurance ("NJDOBI"(“NJDOBI”) which can order the establishment of additional general or specific loss allowances. Such examinations typically occur annually.
The following table shows the aggregate amounts of our classified assets, including non-performing loans, at the date indicated.
| Classified Assets At June 30, | Classified Assets At June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | 14 | $ | 6,335 | 14 | $ | 5,002 | 9 | $ | 4,377 | 14 | $ | 7,171 | 14 | $ | 6,335 | 14 | $ | 5,002 | ||||||||||||||||||||||||||||||
| Residential CRE | — | — | 1 | 240 | 1 | 310 | — | — | — | — | 1 | 240 | ||||||||||||||||||||||||||||||||||||
| Other CRE | 10 | 5,270 | 21 | 18,312 | 21 | 19,866 | 6 | 4,213 | 10 | 5,270 | 21 | 18,312 | ||||||||||||||||||||||||||||||||||||
| Construction and land loans | — | — | — | — | 1 | 56 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total | 24 | $ | 11,605 | 36 | $ | 23,554 | 32 | $ | 24,609 | 20 | $ | 11,384 | 24 | $ | 11,605 | 36 | $ | 23,554 | ||||||||||||||||||||||||||||||
There were no loans classified as doubtful or loss on June 30, 2019, 2018 2017 or 2016.2017. The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.
We also utilize an additional classification for assets that do not meet the definition of any of the classified assets yet contain an element that warrants a rating that is less than "pass."“pass.” We classify an asset as "special mention"“special mention” if the asset has a potential weakness that warrants management'smanagement’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. Our assets classified as "special mention"“special mention” totaled $6.1 million, $14.9 million $22.0 million and $24.4$22.0 million at June 30, 2019, 2018, 2017, and 2016,2017, respectively. See Note 5 of the Notes to the Consolidated Financial Statements.
Impaired Loans. The Company defines an impaired loan as a loan for which it is probable, based on current information, that the Company will not collect all amounts due under the contractual terms of the loan agreement. Loans we individually classify as impaired include residential CRE, grocery/credit retail CRE, Other CRE and construction loans with balances of $1.0 million or more, unless a condition exists for loans less than $1.0 million regardless of portfolio segment, that would increase the Bank'sBank’s potential loss exposure. Troubled debt restructurings ("TDRs") are also included in impaired loans regardless of balance. Impaired loans are individually assessed to determine that each loan'sloan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. If the loan'sloan’s carrying value does exceed the fair value, specific reserves are established to reduce the loan'sloan’s carrying value. For classification purposes, impaired loans are typically classified as substandard. Impaired loans at June 30, 2019, 2018 and 2017 and 2016 were $9.3 million, $9.2 million $13.9 million and $13.2$13.9 million, respectively. See Note 5 of the Notes to the Consolidated Financial Statements.
Allowance for Loan Losses
Our allowance for loan losses is maintained at a level necessary to absorb incurred loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the incurred losses inherent in our loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. Loan losses are charged to the allowance for loans losses and recoveries are credited to it. Additions to the allowance for loan losses are provided by charges against income based on various factors which, in our judgment, deserve current recognition in estimating probable incurred losses. We regularly review the loan portfolio and make adjustments for loan losses in order to maintain the allowance for loan losses in accordance with U.S. generally accepted accounting principles ("GAAP"(“GAAP”). The allowance for loan losses consists primarily of the following two components:
(1) Specific allowances established for impaired loans. The amount of impairment provided for as an allowance is represented by the deficiency, if any, between the present value of expected future cash flows discounted at the original loan'sloan’s effective interest rate or the underlying collateral value (less estimated costs to sell) if the loan is collateral dependent, and the carrying value of the loan. No reserve is necessary if the impaired value exceeds the book value. Impaired loans are included within the Substandard classification.
(2) General allowances established for incurred loan losses on a portfolio basis for loans that do not meet the definition of impaired. The portfolio is grouped into similar risk characteristics, primarily loan type, collateral type, and internal credit risk rating. We apply an estimated loss rate to each loan group. The loss rates applied are based on a eight years year look back period, which measures our historical charge-offs, and our loss emergence period, which represents the estimated average time between when a loss event occurs and when such loss is specifically reserved or charged off. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
The adjustments to our loss experience are based on our evaluation of several environmental factors, including:
actual loss history incurred on similar loans;
changes in local, regional, national, and international economic and business conditions and developments that affect the collectibility of our portfolio, including the condition of various market segments;
changes in the nature and volume of our portfolio and in the terms of our loans;
changes in the experience, ability, and depth of lending management and other relevant staff;
changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;
changes in the quality of our loan review system; and
changes in the value of underlying collateral for collateral-dependent loans; and
the existence and effect of any concentrations of credit, and changes in the level of such concentrations.
We evaluate the allowance for loan losses based on the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, our allowance for loan loss methodology results in a higher dollar amount of estimated probable incurred losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, our allowance for loan loss methodology results in a lower dollar amount of estimated probable incurred losses than would be the case without the decrease.
Each quarter we evaluate the allowance for loan losses and adjust the allowance as appropriate through a provision or recovery for loan losses. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the NJDOBI and the FDIC will periodically review the allowance for loan losses. They may require us to adjust the allowance based on their analysis of information available to them at the time of their examination. Such examinations typically occur annually.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the fiscal years indicated.
| At or For the Years Ended June 30, | At or For the Years Ended June 30, | |||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 30,272 | $ | 29,951 | $ | 30,889 | $ | 31,401 | $ | 31,381 | $ | 30,562 | $ | 30,272 | $ | 29,951 | $ | 30,889 | $ | 31,401 | ||||||||||||||||||||
| Charge-offs: | ||||||||||||||||||||||||||||||||||||||||
| Residential | 117 | 75 | 98 | 333 | 24 | 65 | 117 | 75 | 98 | 333 | ||||||||||||||||||||||||||||||
| Residential CRE | — | — | — | — | 1,226 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other CRE | — | 13 | 849 | 380 | 459 | — | — | 13 | 849 | 380 | ||||||||||||||||||||||||||||||
| Total charge-offs | 117 | 88 | 947 | 713 | 1,709 | 65 | 117 | 88 | 947 | 713 | ||||||||||||||||||||||||||||||
| Recoveries: | ||||||||||||||||||||||||||||||||||||||||
| Residential | 150 | — | — | — | — | 41 | 150 | — | — | — | ||||||||||||||||||||||||||||||
| Residential CRE | — | — | — | — | 10 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other CRE | 225 | 409 | 9 | — | 17 | 58 | 225 | 409 | 9 | — | ||||||||||||||||||||||||||||||
| Construction and land loans | 32 | — | — | 1 | 1,002 | — | 32 | — | — | 1 | ||||||||||||||||||||||||||||||
| Total recoveries | 407 | 409 | 9 | 1 | 1,029 | 99 | 407 | 409 | 9 | 1 | ||||||||||||||||||||||||||||||
| Net recoveries (charge-offs) | 290 | 321 | (938 | ) | (712 | ) | (680 | ) | 34 | 290 | 321 | (938 | ) | (712 | ) | |||||||||||||||||||||||||
| Provision for loan losses | — | — | — | 200 | 700 | |||||||||||||||||||||||||||||||||||
| (Reversal of)/provision for loan losses | (2,000 | ) | — | — | — | 200 | ||||||||||||||||||||||||||||||||||
| Balance at end of year | $ | 30,562 | $ | 30,272 | $ | 29,951 | $ | 30,889 | $ | 31,401 | $ | 28,596 | $ | 30,562 | $ | 30,272 | $ | 29,951 | $ | 30,889 | ||||||||||||||||||||
| Ratios: | ||||||||||||||||||||||||||||||||||||||||
| Net charge-offs to average loans outstanding | (0.01 | )% | (0.01 | )% | 0.03 | % | 0.03 | % | 0.03 | % | 0.00 | % | (0.01 | )% | (0.01 | %) | 0.03 | % | 0.03 | % | ||||||||||||||||||||
| Allowance for loan losses to total loans at end of period | 0.85 | % | 0.84 | % | 0.94 | % | 1.10 | % | 1.23 | % | 0.81 | % | 0.85 | % | 0.84 | % | 0.94 | % | 1.10 | % | ||||||||||||||||||||
The allowance for loan losses has been relatively stable. The Company recorded a reversal of provision for loan losses of $2.0 million for the twelve months ended June 30, 2019. There was no provision for loan losses during 2018 2017 and 2016.2017. Improving delinquency and nonaccrual trends, changes in loan risk ratings (versus prior periods), loan growth, charge-offs and economic and business conditions continue to have a meaningful impact on the current level of provision for loan losses. In addition, improvements in general economic and business conditions have also impacted the level of provisioning by decreasing the necessary level of general allowances despite growth in the loan portfolio.
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (including loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
| At June 30, | At June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential | $ | 1,990 | 7.5 | % | $ | 1,261 | 7.0 | % | $ | 1,300 | 7.1 | % | $ | 2,321 | 7.6 | % | $ | 1,990 | 7.5 | % | $ | 1,261 | 7.0 | % | ||||||||||||||||||||||||
| Residential CRE | 17,259 | 56.0 | % | 15,794 | 54.0 | % | 12,837 | 50.4 | % | 15,694 | 59.1 | % | 17,259 | 56.0 | % | 15,794 | 54.0 | % | ||||||||||||||||||||||||||||||
| Grocery/Credit Retail CRE | 3,015 | 13.9 | % | 3,000 | 14.9 | % | 3,646 | 14.4 | % | 3,249 | 13.7 | % | 3,015 | 13.9 | % | 3,000 | 14.9 | % | ||||||||||||||||||||||||||||||
| Other CRE | 7,828 | 22.3 | % | 10,017 | 24.0 | % | 11,850 | 28.0 | % | 6,968 | 19.4 | % | 7,828 | 22.3 | % | 10,017 | 24.0 | % | ||||||||||||||||||||||||||||||
| Construction and land loans | 470 | 0.3 | % | 200 | 0.1 | % | 318 | 0.2 | % | 364 | 0.3 | % | 470 | 0.3 | % | 200 | 0.1 | % | ||||||||||||||||||||||||||||||
| Total | $ | 30,562 | 100.0 | % | $ | 30,272 | 100.0 | % | $ | 29,951 | 100.0 | % | $ | 28,596 | 100.0 | % | $ | 30,562 | 100.0 | % | $ | 30,272 | 100.0 | % | ||||||||||||||||||||||||
| At June 30, | At June 30, | |||||||||||||||||||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | Allowance for Loan Losses | Percent of Loans in Each Category to Total Loans | |||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
| Residential | $ | 1,521 | 6.7 | % | $ | 1,568 | 6.2 | % | $ | 1,300 | 7.1 | % | $ | 1,521 | 6.7 | % | ||||||||||||||||
| Residential CRE | 10,814 | 44.0 | % | 5,327 | 39.2 | % | 12,837 | 50.4 | % | 10,814 | 44.0 | % | ||||||||||||||||||||
| Grocery/Credit Retail CRE | 4,042 | 17.2 | % | 2,652 | 16.5 | % | 3,646 | 14.4 | % | 4,042 | 17.2 | % | ||||||||||||||||||||
| Other CRE | 13,943 | 32.0 | % | 17,995 | 36.7 | % | 11,850 | 28.0 | % | 13,943 | 32.0 | % | ||||||||||||||||||||
| Construction and land loans | 569 | 0.2 | % | 1,108 | 1.4 | % | 318 | 0.2 | % | 569 | 0.2 | % | ||||||||||||||||||||
| Unallocated | — | 0.0 | % | 2,751 | 0.0 | % | ||||||||||||||||||||||||||
| Total | $ | 30,889 | 100.0 | % | $ | 31,401 | 100.0 | % | $ | 29,951 | 100.0 | % | $ | 30,889 | 100.0 | % | ||||||||||||||||
Investments
The Board of Directors is responsible for adopting our investment policy. The investment policy is reviewed periodically by management and any changes to the policy are recommended to and subject to the approval of the Board of Directors. Authority to make investments under the approved investment policy guidelines is delegated to appropriate officers. While general investment strategies are developed and authorized by the Board of Directors, the execution of specific actions primarily rests with Oritani Bank'sBank’s President, Chief Financial Officer and Asset/Liability Committee, which have responsibility for ensuring that the guidelines and requirements included in the investment policy are followed and that all securities are considered prudent for investment. Each of our President, Chief Financial Officer and Asset/Liability Committee have specified authority to purchase various types of investments; all investment purchases in excess of 1% of total assets, or $41.7$40.7 million at June 30, 2018,2019, must be approved by our Board of Directors. All investment transactions are reviewed and ratified or approved (as the case may be) at regularly scheduled meetings of the Board of Directors. Any investment which, subsequent to its purchase, fails to meet the guidelines of the policy is reported to the Board of Directors at its next meeting where the Board decides whether to hold or sell the investment.
New Jersey-chartered savings banks have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks and corporate debt instruments. Oritani Financial Corp., as a Delaware corporation, may invest in equity securities subject to certain limitations.
The investment policy requires that all securities transactions be conducted in a safe and sound manner. Investment decisions must be based upon a thorough analysis of each security instrument to determine if its quality and inherent risks fit within Oritani Bank'sBank’s overall asset/liability management objectives, the effect on its risk-based capital measurement and the prospects for yield and/or appreciation. The investment policy provides that Oritani Bank may invest in U.S Treasury notes, U.S. and state agency securities, mortgage-backed securities, and other conservative investment opportunities. Typical investments are currently in U.S. agency or FHLB securities and government sponsored mortgage-backed securities.
U.S. Government and Federal Agency Obligations. At June 30, 2018,2019, our U.S. Government and federal agency securities portfolio totaled $6.8$5.0 million, all of which was classified as held to maturity.
Equity Securities. AtThe Company's portfolio of equity securities had an estimated fair value of $1.4 million and $1.6 million at June 30, 2019 and 2018, ourrespectively. 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 portfolio totaled $1.6 million, allwith 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 which were classified as available for sale. The portfolio consists$658,000 in the consolidated statement of financial industry common stock. There were no impairment charges onstockholders' 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 yearstwelve months ended June 30, 2019 is a net loss of $208,000. There were no sales of equity securities for the twelve months ended June 30, 2019, 2018 2017 or 2016. Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations. Such investments are carried at their fair value and fluctuations in the fair value of such investments, including temporary declines in value, directly affect our net capital position.2017.
Mortgage-Backed Securities. We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae. Our investment policy also authorizes the investment in collateralized mortgage obligations ("CMOs"(“CMOs”), also insured or issued by Freddie Mac, Fannie Mae and Ginnie Mae. We limit CMO investments to those classes of CMOs carrying the most stable cash flows and lowest prepayment risk of any class of CMOs and which pass the Federal Financial Institutions Examination Council'sCouncil’s average life restriction tests at the time of purchase. These CMO classes are typically referred to as Planned Amortization Classes or sequentials.
Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate which is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multifamily mortgages, although we focus our investments on mortgage-backed securities backed by one to four family mortgages. The issuers of such securities (generally U.S. government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors such as us, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize our specific liabilities and obligations.
At June 30, 2018,2019, our mortgage-backed securities totaled $361.7$344.9 million, or 8.7%8.5%, of total assets and 9.2%8.8% of interest earning assets. At June 30, 2018, 1.2%2019, 1.1% of the mortgage-backed securities were backed by adjustable rate mortgage loans and 98.8%98.9% were backed by fixed rate mortgage loans. The mortgage-backed securities portfolio had a weighted average yield of 2.63%2.73% at June 30, 2018.2019. The fair value of our mortgage-backed securities at June 30, 20182019 was $353.0$346.7 million, which is $9.9$1.4 million less than the amortized cost of $362.8$345.2 million. Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates. All of the Company'sCompany’s mortgage-backed securities are insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Corporate Notes. We purchased Corporatecorporate notes during the third quarter of 2018. These securities have been classified as held to maturity since their purchase. At June 30, 2018,2019, corporate notes totaled $10.0$15.0 million, or 2.6%4.1% of our total securities portfolio.
Debt Securities Portfolios. The following table sets forth the composition of our investment securities portfolio at the dates indicated.
| At June 30, | At June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government and federal agency obligations | $ | 6,750 | $ | 6,633 | $ | 6,750 | $ | 6,696 | $ | 6,750 | $ | 6,752 | $ | 5,000 | $ | 4,979 | $ | 5,000 | $ | 4,906 | $ | 6,750 | $ | 6,752 | ||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential MBS | 220,057 | 214,115 | 141,990 | 140,680 | 75,238 | 76,559 | 207,587 | 208,900 | 220,057 | 214,115 | 75,238 | 76,559 | ||||||||||||||||||||||||||||||||||||
| Commercial MBS | 13,035 | 12,614 | 13,473 | 13,502 | 18,401 | 18,885 | 26,952 | 27,436 | 13,035 | 12,614 | 18,401 | 18,885 | ||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | 85,488 | 83,125 | 77,418 | 76,326 | 67,718 | 68,510 | 77,643 | 77,565 | 85,488 | 83,125 | 67,718 | 68,510 | ||||||||||||||||||||||||||||||||||||
| Corporate Notes | 10,044 | 10,024 | — | — | — | — | 15,033 | 15,299 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total securities held to maturity | $ | 335,374 | $ | 326,511 | $ | 239,631 | $ | 237,204 | $ | 168,107 | $ | 170,706 | ||||||||||||||||||||||||||||||||||||
| Total debt securities held to maturity | $ | 332,215 | $ | 334,179 | $ | 335,374 | $ | 326,511 | $ | 168,107 | $ | 170,706 | ||||||||||||||||||||||||||||||||||||
| At June 30, | At June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity securities | $ | 601 | $ | 1,565 | $ | 601 | $ | 1,498 | $ | 601 | $ | 1,125 | ||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential MBS | 70 | 71 | 6,974 | 6,921 | 11,106 | 11,321 | $ | 9 | $ | 9 | $ | 70 | $ | 71 | $ | 6,974 | $ | 6,921 | ||||||||||||||||||||||||||||||
| Commercial MBS | 4,074 | 4,137 | 4,220 | 4,406 | 4,359 | 4,713 | 3,921 | 3,916 | 4,074 | 4,137 | 4,220 | 4,406 | ||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | 40,106 | 38,918 | 85,437 | 85,105 | 123,173 | 124,691 | 29,108 | 28,827 | 40,106 | 38,918 | 85,437 | 85,105 | ||||||||||||||||||||||||||||||||||||
| Total securities available for sale | $ | 44,851 | $ | 44,691 | $ | 97,232 | $ | 97,930 | $ | 139,239 | $ | 141,850 | ||||||||||||||||||||||||||||||||||||
| Total debt securities available for sale | $ | 33,038 | $ | 32,752 | $ | 44,250 | $ | 43,126 | $ | 96,631 | $ | 96,432 | ||||||||||||||||||||||||||||||||||||
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 20182019 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments, scheduled redemptions or early redemptions that are likely to occur.
| One Year or Less | More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Total Securities | One Year or Less | More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Total Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Fair Value | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Fair Value | Weighted Average Yield | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities Held to Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities Held to Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States Government and federal agency obligations | $ | 1,750 | 1.05 | % | $ | 5,000 | 1.22 | % | $ | — | — | % | $ | — | — | % | $ | 6,750 | $ | 6,633 | 1.18 | % | $ | 5,000 | 1.22 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 5,000 | $ | 4,979 | 1.22 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential MBS | — | — | — | — | 93,549 | 2.51 | 126,508 | 2.84 | 220,057 | 214,115 | 2.70 | — | — | 35 | 5.01 | 86,323 | 2.50 | 121,229 | 2.98 | 207,587 | 208,900 | 2.78 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial MBS | — | — | 9,022 | 2.54 | 4,013 | 2.66 | — | — | 13,035 | 12,614 | 2.58 | — | — | 8,774 | 2.55 | 13,617 | 2.78 | 4,561 | 3.21 | 26,952 | 27,436 | 2.78 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | — | — | — | — | 24,047 | 1.79 | 61,441 | 2.79 | 85,488 | 83,125 | 2.51 | — | — | — | — | 31,213 | 1.90 | 46,430 | 3.18 | 77,643 | 77,565 | 2.67 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate Notes | — | — | — | — | 10,044 | 4.48 | — | — | 10,044 | 10,024 | 4.48 | — | — | — | — | 15,033 | 4.86 | — | — | 15,033 | 15,299 | 4.86 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total securities held to maturity | $ | 1,750 | 1.05 | $ | 14,022 | 2.07 | % | $ | 131,653 | 2.53 | % | $ | 187,949 | 2.82 | % | $ | 335,374 | $ | 326,511 | 2.67 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total debt securities held to maturity | $ | 5,000 | 1.22 | $ | 8,809 | 2.56 | % | $ | 146,186 | 2.64 | % | $ | 172,220 | 3.04 | % | $ | 332,215 | $ | 334,179 | 2.82 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities Available for Sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity securities | $ | 601 | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 601 | $ | 1,565 | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Securities Available for Sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential MBS | 4 | 4.50 | 66 | 4.53 | — | — | — | — | 70 | 71 | 4.53 | $ | 5 | 4.54 | % | $ | 4 | 4.50 | % | $ | — | — | % | $ | — | — | % | $ | 9 | $ | 9 | 4.52 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial MBS | — | — | 4,074 | 4.19 | — | — | — | — | 4,074 | 4,137 | 4.19 | 3,921 | 4.20 | — | — | — | — | — | — | 3,921 | 3,916 | 4.20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | — | — | 3,503 | 2.60 | 26,885 | 2.40 | 9,718 | 2.09 | 40,106 | 38,918 | 2.34 | — | — | 1,481 | 2.62 | 27,627 | 2.31 | — | — | 29,108 | 28,827 | 2.33 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total securities available for sale | $ | 605 | 0 | % | $ | 7,643 | 3.46 | % | $ | 26,885 | 2.40 | % | $ | 9,718 | 2.09 | % | $ | 44,851 | $ | 44,691 | 2.48 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total debt securities available for sale | $ | 3,926 | 4 | % | $ | 1,485 | 2.63 | % | $ | 27,627 | 2.31 | % | $ | — | — | % | $ | 33,038 | $ | 32,752 | 2.55 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sources of Funds
General. Deposits have traditionally been the primary source of funds for use in lending and investment activities. We use borrowings, primarily FHLB advances, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage the cost of funds. We also use interest rate swaps to lengthen the maturities of liabilities and manage cost of funds. In addition, funds are derived from scheduled loan payments, mortgaged-backed securities scheduled payments and prepayments, investment maturities, loan prepayments, retained earnings and income on other earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from residents and businesses within our primary market area including the local municipal deposit market. We offer a selection of deposit accounts, including checking accounts (demand deposits and NOW), money market deposit accounts, savings accounts, retirement accounts and time deposits. The Bank also accepts brokered deposits and has augmented its usage of these funds to supplement its funding sources and decrease its cost of funds. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate.
Interest rates, maturity terms, service fees and other account features are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, attractive account features, long-standing relationships with customers, convenient locations, competitive rates of interest and an active marketing program are relied upon to attract and retain deposits.
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand while managing interest rate risk and minimizing interest expense.
At June 30, 2018, $1.212019, $1.25 billion, or 41.6%42.7% of our deposit accounts were time deposits, of which $781.7$849.8 million had maturities of one year or less. We had brokered deposits totaling $450.4 million, $510.4$471.2 million and $253.2$450.4 million at June 30, 2018, 20172019 and 2016,2018, respectively. The following table sets forth the distribution of total deposits by account type, at the dates indicated.
| At June 30, | At June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | Balance | Percent | Weighted Average Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposit type: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Checking accounts | $ | 751,735 | 25.79 | % | 0.85 | % | $ | 706,554 | 24.74 | % | 0.62 | % | $ | 453,136 | 20.05 | % | 0.36 | % | $ | 668,453 | 22.87 | % | 1.36 | % | $ | 751,735 | 25.79 | % | 0.85 | % | $ | 706,554 | 24.74 | % | 0.62 | % | ||||||||||||||||||||||||||||||||||||
| Money market accounts | 763,003 | 26.17 | % | 1.13 | % | 847,888 | 29.68 | % | 1.05 | % | 681,710 | 30.16 | % | 0.76 | % | 622,670 | 21.30 | % | 1.32 | % | 763,003 | 26.17 | % | 1.13 | % | 847,888 | 29.68 | % | 1.05 | % | ||||||||||||||||||||||||||||||||||||||||||
| Savings accounts | 188,859 | 6.48 | % | 0.28 | % | 177,896 | 6.23 | % | 0.23 | % | 165,623 | 7.33 | % | 0.24 | % | 383,763 | 13.13 | % | 1.24 | % | 188,859 | 6.48 | % | 0.28 | % | 177,896 | 6.23 | % | 0.23 | % | ||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 1,211,531 | 41.56 | % | 1.62 | % | 1,124,140 | 39.35 | % | 1.34 | % | 959,534 | 42.46 | % | 1.31 | % | 1,248,358 | 42.70 | % | 2.17 | % | 1,211,531 | 41.56 | % | 1.62 | % | 1,124,140 | 39.35 | % | 1.34 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total deposits | $ | 2,915,128 | 100.00 | % | 1.21 | % | $ | 2,856,478 | 100.00 | % | 1.01 | % | $ | 2,260,003 | 100.00 | % | 0.88 | % | $ | 2,923,244 | 100.00 | % | 1.68 | % | $ | 2,915,128 | 100.00 | % | 1.21 | % | $ | 2,856,478 | 100.00 | % | 1.01 | % | ||||||||||||||||||||||||||||||||||||
As of June 30, 2018,2019, the aggregate amount of outstanding time deposits in amounts greater than or equal to $250,000 was approximately $244.7$253.5 million. The following table sets forth the maturity of those deposits as of June 30, 2018.2019.
| At June 30, 2018 | At June 30, 2019 | |||||||
| (In thousands) | (In thousands) | |||||||
| Three months or less | $ | 35,649 | $ | 62,405 | ||||
| Over three months through six months | 37,173 | 33,376 | ||||||
| Over six months through one year | 94,268 | 77,266 | ||||||
| Over one year to three years | 56,988 | 76,387 | ||||||
| Over three years | 20,671 | 4,097 | ||||||
| Total | $ | 244,749 | $ | 253,531 | ||||
Borrowings. Our borrowings primarily consist of advances from the FHLB of New York and, to a lesser extent, advances from other financial institutions. As of June 30, 2018,2019, we had total borrowings in the amount of $596.4$521.6 million, which represented 16.53%14.73% of total liabilities, with an estimated weighted average maturity of 2.42.31 years and a weighted average rate of 1.88%2.14%. At June 30, 2018,2019, borrowings are secured by mortgage-backed securities and investment securities with a book value of $24.9$20.4 million and performing mortgage loans with an outstanding balance of $2.84$2.80 billion.
The following table sets forth information concerning balances and interest rates on our FHLB advances and other borrowings at and for the periods shown:
| At or For the Years Ended June 30, | At or For the Years Ended June 30, | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
| Balance at end of period | $ | 596,372 | $ | 642,059 | $ | 781,623 | $ | 521,555 | $ | 596,372 | $ | 642,059 | ||||||||||||
| Average balance during period | $ | 543,290 | $ | 719,647 | $ | 731,078 | $ | 537,480 | $ | 543,290 | $ | 719,647 | ||||||||||||
| Maximum outstanding at any month end | $ | 649,860 | $ | 928,391 | $ | 842,194 | $ | 616,803 | $ | 649,860 | $ | 928,391 | ||||||||||||
| Weighted average interest rate at end of period | 1.88 | % | 1.59 | % | 1.39 | % | 2.14 | % | 1.88 | % | 1.59 | % | ||||||||||||
| Average interest rate during period | 2.08 | % | 1.83 | % | 2.21 | % | 2.42 | % | 2.08 | % | 1.83 | % | ||||||||||||
As of June 30, 2018,2019, Oritani had interest rate swap agreements with total notional amount of $405.0$355.0 million. Oritani will receive 1 month LIBOR from the counterparties and pay interest to the counterparties at a fixed rate. See Note 13 of the Notes to the Consolidated Financial Statements.
Subsidiary Activities and Joint Venture Information
Oritani Financial Corp. is the owner of Oritani Bank, Hampshire Financial LLC and Oritani LLC. Hampshire Financial LLC and Oritani LLC areis a New Jersey limited liability companies thatcompany and Oritani LLC is a Deleware limited liability company. Both Hampshire Financial LLC and Oritani LLC owned real estate and investments in real estate. As of June 30, 2016, all of the investments owned by Hampshire Financial LLC and Oritani LLC had been sold, and the subsidiaries are inactive. Proceeds from the sale of real estate investments for the year ended June 30, 2016 were $17.1 million resulting in gains of $16.0 million.
Oritani Bank has the following subsidiaries: Ormon LLC, Oritani Finance Company,ZORM 2009, LLC, Oritani Investment Corp. and Oritani Asset Corporation. Ormon LLC is a New Jersey limited liability company that owned real estate investments in New Jersey as well as investments in joint ventures that owned income-producing commercial and residential rental properties. As of June 30, 2017, all of the investments owned by Ormon LLC had been sold, and the subsidiary is inactive. Proceeds from the sale of real estate investments for the years ended June 30, 2017 and 2016 were $25.3 million resulting in gains of $20.9 million and $21.5 million resulting in gains of $21.5 million, respectively.million.
Oritani Investment Corp. is a New Jersey corporation that owns Oritani Asset Corporation, a real estate investment trust, formed in 1998 for the sole purpose of acquiring mortgage loans and mortgage-backed securities from Oritani Bank.
Oritani Asset Corporation'sCorporation’s primary objective is to maximize long-term returns on equity. At June 30, 2018,2019, Oritani Asset Corporation had $532.7$896.8 million in assets. Oritani Asset Corporation is taxed and operates in a manner that enables it to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended.
Personnel
As of June 30, 2018,2019, we had 194189 full-time employees and 5651 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.
SUPERVISION AND REGULATION
General
Federal law allows a state savings bank, such as Oritani Bank, that qualifies as a "qualified“qualified thrift lender"lender” (discussed below), to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of the Home Owners'Owners’ Loan Act, as amended ("HOLA"(“HOLA”). Such an election results in the savings bank'sbank’s holding company being regulated as savings and loan holding company rather than as a bank holding company. At the time of its reorganization into a holding company structure, Oritani Bank elected to be treated as a savings association under the applicable provisions of the HOLA. Accordingly, Oritani Financial Corp. is a savings and loan holding company and is required to file certain reports with, and is subject to examination by, and otherwise must comply with the rules and regulations of the Federal Reserve Board that are applicable to savings and loan holding companies. Oritani Financial Corp. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Oritani Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Funds ("DIF"(“DIF”) of the FDIC. Oritani Bank is subject to extensive regulation, examination and supervision by the Commissioner of the NJDOBI as the issuer of its charter, and by the FDIC as the deposit insurer and its primary federal regulator. Oritani Bank must file reports with the NJDOBI and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening, closing, moving or acquiring branch offices. The NJDOBI and the FDIC conduct periodic examinations to assess Oritani Bank'sBank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
Any change in these laws or regulations, whether by the NJDOBI, the FDIC, the FRB or the U.S. Congress, could have a material adverse impact on Oritani Financial Corp., Oritani Bank and their operations.
Certain of the regulatory requirements that are or will be applicable to Oritani Bank and Oritani Financial Corp. are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Oritani Bank and Oritani Financial Corp. and is qualified in its entirety by reference to the actual statutes and regulations.
New Jersey Banking Regulation
Activity Powers. Oritani Bank derives its lending, investment and other powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, such as Oritani Bank, generally may invest in:
| (1) | real estate mortgages; |
| (2) | consumer and commercial loans; |
| (3) | specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies; |
| (4) | certain types of corporate equity securities; and |
| (5) | certain other assets. |
A savings bank may also invest pursuant to a "leeway"“leeway” power that permits investments not otherwise permitted by the New Jersey Banking Act. "Leeway"“Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of "leeway"“leeway” investments. Under this "leeway"“leeway” authority, New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the NJDOBI by regulation or by specific authorization is required. A savings bank may also exercise trust powers upon approval of the NJDOBI. The exercise of these lending, investment and activity powers are limited by federal law and the related regulations. See "Federal“Federal Banking Regulation-Activity Restrictions on State-Chartered Banks"Banks” below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank'sbank’s capital funds. A savings bank may lend an additional 10% of its capital funds if the loan is secured by collateral meeting the requirements of the New Jersey Banking Act. Oritani Bank currently complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Oritani Bank. See "-Federal“-Federal Banking Regulation-Prompt Corrective Action"Action” below.
Minimum Capital Requirements. Regulations of the NJDOBI impose on New Jersey-chartered depository institutions, such as Oritani Bank, minimum capital requirements similar to those imposed by the FDIC on insured state banks. See "Federal“Federal Banking Regulation-Capital Requirements."”
Examination and Enforcement. The NJDOBI may examine Oritani Bank whenever it deems an examination advisable. The NJDOBI typically examines Oritani Bank at least every two years. The NJDOBI may order any savings bank to discontinue any violation of law or unsafe or unsound banking practice, and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the NJDOBI has ordered the activity to be terminated, to show cause at a hearing before the NJDOBI why such person should not be removed.
Federal Banking Regulation
Capital Requirements. FDIC regulations require banks to maintain minimum levels of capital. Federal regulations require state banks to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
As noted, the risk-based capital standards for state banks require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders'stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution'sinstitution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital“capital conservation buffer"buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is beingwas phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer as of January 1, 2018June 30, 2019 is 1.875%.2.50% and is fully phased in.
Legislation enacted in May 2018 requires the federal banking agencies, including the FDIC, to establish a Community"Community Bank Leverage Ratio"Ratio” (the ratio of a bank'sbank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A "qualifying“qualifying community bank"bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered "well capitalized"“well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution'sinstitution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8 percent and not more than 10 percent. A financial institution can elect to be subject to this new definition. The establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal regulators. The regulators have issued a proposed rule with 9 percent as the Community Bank Leverage Ratio.
The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of an institution'sinstitution’s exposure to declines in the economic value of a bank'sbank’s capital due to changes in interest rates when assessing the bank'sbank’s capital adequacy. Under such a risk assessment, examiners evaluate a bank'sbank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. Institutions with significant interest rate risk may be required to hold additional capital. According to the agencies, applicable considerations include:
the quality of the bank'sbank’s interest rate risk management process;
the overall financial condition of the bank; and
the level of other risks at the bank for which capital is needed.
The following table shows the Company's and the Bank'sBank’s Core capital, Tier 1 risk-based capital, and Total risk-based capital ratios at June 30, 2018:2019:
| At June 30, 2018 | At June 30, 2019 | |||||||||||||||||||||||||||||||
| The Company | The Bank | The Company | The Bank | |||||||||||||||||||||||||||||
| Capital | Percent of Assets (1) | Capital | Percent of Assets (1) | Capital | Percent of Assets (1) | Capital | Percent of Assets (1) | |||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
| Common equity tier 1 (to risk-weighted assets) | $ | 548,122 | 14.82 | % | $ | 470,857 | 12.73 | % | $ | 529,692 | 14.57 | % | $ | 485,683 | 13.36 | % | ||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | 548,122 | 14.82 | % | 470,857 | 12.73 | % | 529,692 | 14.57 | % | 485,683 | 13.36 | % | ||||||||||||||||||||
| Total capital (to risk-weighted assets) | 578,685 | 15.64 | % | 501,419 | 13.56 | % | 558,288 | 15.36 | % | 514,279 | 14.15 | % | ||||||||||||||||||||
| Tier 1 Leverage capital (to average assets) | 548,122 | 13.25 | % | 470,857 | 11.38 | % | 529,692 | 12.98 | % | 485,683 | 11.90 | % | ||||||||||||||||||||
| Capital conservation buffer | 282,759 | 7.64 | % | 205,541 | 5.56 | % | 267,518 | 7.36 | % | 223,553 | 6.15 | % | ||||||||||||||||||||
| (1) | For purposes of calculating Core capital, assets are based on adjusted total leverage assets. In calculating Tier 1 risk-based capital and total risk-based capital, assets are based on total risk-weighted assets. |
As the above table shows, as of June 30, 2018,2019, the Company and Bank were considered "well capitalized"“well capitalized” under FDIC guidelines.
Prompt Corrective Action. Federal law requires, among other things, that the federal bank regulatory authorities take "prompt“prompt corrective action"action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC'sFDIC’s regulations define the five capital categories as follows:
An institution is classified as "well capitalized"“well capitalized” if:
| • | its ratio of common equity tier 1 capital to risk-weighted assets is at least 6.5%; and |
| • | its ratio of total capital to risk-weighted assets is at least 10%; and |
| • | its ratio of Tier 1 capital to risk-weighted assets is at least 8%; and |
| • | its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specific capital level. |
An institution is classified as "adequately capitalized"“adequately capitalized” if:
| • | its ratio of common equity tier 1 capital to risk-weighted assets is at least 4.5%; and |
| • | its ratio of total capital to risk-weighted assets is at least 8%; and |
| • | its ratio of Tier 1 capital to risk-weighted assets is at least 6%; and |
| • | its ratio of Tier 1 capital to total assets is at least 4%. |
An institution is classified as "undercapitalized"“undercapitalized” if:
| • | its ratio of common equity tier 1 capital to risk-weighted assets is less than 4.5%; or |
| • | its total risk-based capital is less than 8%; or |
| • | its Tier 1 risk-based-capital is less than 6%; or |
| • | its leverage ratio is less than 4% . |
An institution is classified as "significantly undercapitalized"“significantly undercapitalized” if:
| • | its ratio of common equity tier 1 capital to risk-weighted assets is less than 3.0%; or |
its total risk-based capital is less than 6%;
| • | its Tier 1 capital to risk-weighted assets is less than 4%; or |
| • | its leverage ratio is less than 3%. |
An institution that has a tangible capital to total assets ratio equal to or less than 2% is deemed to be "critically“critically undercapitalized."”
The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is "critically“critically undercapitalized."” The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution'sinstitution’s financial condition or upon the occurrence of certain events, including:
insolvency, or when the assets of the bank are less than its liabilities to depositors and others;
substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;
existence of an unsafe or unsound condition to transact business;
likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and
insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution'sinstitution’s capital with no reasonable prospect of replenishment of capital without federal assistance.
Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the FDIC.
Before making a new investment or engaging in a new activity as principal that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC insurance funds. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a "financial subsidiary"“financial subsidiary” are subject to additional restrictions.
Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank'sbank’s total assets or $50 billion. The bank must have policies and procedures to assess the financial subsidiary'ssubsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary'ssubsidiary’s assets with the bank'sbank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Oritani Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it has not yet determined to do so.
Insurance of Deposit Accounts. Oritani Bank is a member of the DIF, which is administered by the FDIC. Deposit accounts at Oritani Bank are insured by the FDIC, generally up to a maximum of $250,000.
The FDIC imposes an assessment for deposit insurance against all insured depository institutions. This assessment is primarily based on a risk assessment of the institution, and certain risk adjustments specified by the FDIC, with riskier institutions paying higher assessments. Effective April 1, 2011, the FDIC implemented a requirement of the Dodd-Frank Act that it revise its assessment system to base it on each institution'sinstitution’s total assets less tangible capital of each institution instead of deposits. The FDIC also revised its assessment schedule so that it ranged from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest. In conjunction with the DIF achieving a 1.5% ratio, the FDIC reduced the assessment range for most banks to 1.5 basis points to 30 basis points, effective July 1, 2016.
The deposit insurance assessment rates are in addition to the assessments for payments on the bonds issued in the late 1980s by the Financing Corporation, or FICO, to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The FICO payments will continue until the final FICO bonds mature in 2018 through 2019. Our expense for the assessment of deposit insurance and the FICO payments was $1.2$1.1 million and $1.4$1.2 million for the years ended June 30, 20182019 and 2017,2018, respectively.
The FDIC has authority to increase deposit insurance assessments. A material increase in insurance assessments would likely have an adverse effect on the operating expenses and results of the Bank.
Federal Home Loan Bank System. Oritani Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the FHLB of New York, Oritani Bank is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 4.5% of its borrowings from the FHLB, or 0.2% of mortgage-related assets, whichever is greater. As of June 30, 2018,2019, Oritani Bank was in compliance with this requirement.
Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including Oritani Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders, to remove directors and officers and terminate deposit insurance. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.
Transactions with Affiliates of Oritani Bank. Transactions between an insured bank, such as Oritani Bank, and any of its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and implementing regulations. An affiliate of an insured bank is any company or entity that controls, is controlled by or is under common control with the bank. Generally, a subsidiary of a bank that is not also a depository institution or financial subsidiary is not treated as an affiliate of the bank for purposes of Sections 23A and 23B.
Section 23A:
limits the extent to which the bank or its subsidiaries may engage in "covered transactions"“covered transactions” with any one affiliate to an amount equal to 10% of such bank'sbank’s capital stock and retained earnings, and limits all such transactions with all affiliates to an amount equal to 20% of such capital stock and retained earnings; and
requires that all such transactions be on terms that are consistent with safe and sound banking practices.
The term "covered transaction"“covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100% to 130% of the loan amounts. There is a general prohibition on the purchase of a low quality asset from an affiliate. In addition, any covered transaction by a bank with an affiliate and any purchase of assets or services by a bank from an affiliate must be on terms that are substantially the same, or at least as favorable to the bank, as those that would be provided to a non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Privacy Standards. FDIC regulations require Oritani Bank to disclose its privacy policy, including identifying with whom it shares "non-public“non-public personal information,"” of customers at the time of establishing the customer relationship and annually thereafter. Oritani Bank does not share "non-public“non-public personal information"information” with third parties.
In addition, Oritani Bank is required to provide its customers with the ability to "opt-out"“opt-out” of having Oritani Bank share their non-public personal information with unaffiliated third parties before they can disclose such information, subject to certain exceptions.
The FDIC and other federal banking agencies adopted guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies'agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
Community Reinvestment Act and Fair Lending Laws. All FDIC insured institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the institution'sinstitution’s record of compliance with the Community Reinvestment Act. Among other things, the current Community Reinvestment Act regulations replace the prior process-based assessment factors with an evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests:
a lending test, to evaluate the institution'sinstitution’s record of making loans in its service areas;
an investment test, to evaluate the institution'sinstitution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and
a service test, to evaluate the institution'sinstitution’s delivery of services through its branches, ATMs and other offices.
An institution'sinstitution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in an inability to receive regulatory approval for certain activities such as branching and acquisitions. Oritani Bank received a "satisfactory"“satisfactory” Community Reinvestment Act rating in our most recently completed federal examination, which was conducted by the FDIC in 2018.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.
Loans to a Bank'sBank’s Insiders
Federal Regulation. A bank'sbank’s loans to its executive officers, directors, any owner of more than 10% or more of its stock (each, an insider) and any of certain entities affiliated with any such persons (an insider'sinsider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider'sinsider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Oritani Bank. See "New“New Jersey Banking Regulation-Loans-to-One Borrower Limitations."” All loans by a bank to all insiders and insiders'insiders’ related interests in the aggregate generally may not exceed the bank'sbank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer'sofficer’s children and certain loans secured by the officer'sofficer’s primary residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank'sbank’s unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider'sinsider’s related interests, would exceed either (1) $500,000 or (2) the greater of $25,000 or 5% of the bank'sbank’s unimpaired capital and surplus.
Generally, loans to insiders must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
In addition, federal law prohibits extensions of credit to a bank'sbank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.
New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act.
Other Regulations
Interest and other charges collected or contracted for by Oritani Bank are subject to state usury laws and federal laws concerning interest rates. Oritani Bank'sBank’s operations are also subject to federal laws applicable to credit transactions, such as the:
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of Oritani Bank also are subject to the:
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers'customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
Check Clearing for the 21st Century Act (also known as "Check 21"“Check 21”), which gives "substitute“substitute checks,"” such as digital check images and copies made from that image, the same legal standing as the original paper check;
Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the "USA“USA PATRIOT Act"Act”), which significantly expanded the responsibilities of financial institutions, including savings banks, in preventing the use of the U.S. financial system to fund terrorist activities. Among other provisions, the USA PATRIOT Act and the related regulations of the FRB require savings associations operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations; and
The Gramm-Leach-Bliley Act, which placed limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution'sinstitution’s privacy policy and provide such customers the opportunity to "opt out"“opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. Oritani Financial Corp. is a non-diversified savings and loan holding company within the meaning of the HOLA. As such, Oritani Financial Corp. is registered with the Federal Reserve Board and subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over Oritani Financial Corp and its subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. As a Delaware corporation, Oritani Financial Corp. is generally subject to state business organization laws. Oritani Financial Corp. is subject to the requirements of Delaware law that generally limit dividends to an amount equal to the difference between the amount by which total assets exceed total liabilities and the amount equal to the aggregate par value of the outstanding shares of capital stock. If there is no difference between these amounts, dividends are limited to net income for the current and/or preceding year. The rights of the stockholders of Oritani Financial Corp. are governed by the Delaware General Corporate Law.
Permitted Activities. Pursuant to the HOLA and federal regulations and policy, a savings and loan holding company such as Oritani Financial Corp. may generally engage in the activities permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act and certain other activities that have been authorized for savings and loan holding companies by regulation.
The HOLA prohibits a savings and loan holding company, including Oritani Financial Corp., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities other than those permitted by the HOLA, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
Any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state is prohibited, subject to two exceptions:
| (i) | the approval of interstate supervisory acquisitions by savings and loan holding companies; and |
| (ii) | the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. |
Qualified Thrift Lender Test. In order for Oritani Financial Corp. to continue to be regulated as a savings and loan holding company (rather than as a bank holding company), Oritani Bank must qualify as a "qualified“qualified thrift lender"lender” under federal law or satisfy the "domestic“domestic building and loan association"association” test under the Internal Revenue Code. The qualified thrift lender test requires that a savings institution maintain at least 65% of its "portfolio assets"“portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangible, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified“qualified thrift investments"investments” (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine out of each 12 month period. Oritani Bank currently maintains the majority of its portfolio assets in qualified thrift investments and has met the qualified thrift lender test in each of the last 12 months.
Capital. Until recently, Savings and loan holding companies were not subject to specific regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to depository institutions themselves. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act's directive as to savings and loan holding companies. The consolidated regulatory capital requirements applied to savings and loan holding companies to the same extent as bank holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer is being phased in between 2016 and 2019.
Source of Strength. The Dodd-Frank Act extended the "source“source of strength"strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Dividends. 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 violative of a law, regulation or order or if the institution will be undercapitalized after the dividend. An inability of the subsidiary institution to pay dividends may restrict the parent savings and loan holding company's ability to pay dividends.
With respect to the payment of dividends by Oritani Financial Corp., the Federal Reserve Board has issued a supervisory letter regarding the payment of dividends by bank holding companies that it has also made applicable to savings and loan holding companies. In general, the supervisory letter provides that dividends should be paid only out of current earnings and if the prospective rate of earnings retention by the holding company appears consistent with the organization's capital needs, asset quality and overall financial condition. The guidance provides for prior Federal Reserve Board review of capital distributions in certain circumstances, such as where the company's net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund a dividend or the company's overall rate of earnings retention is inconsistent with the company's capital needs and overall financial condition. Stock repurchases are also subject to prior regulatory review under certain circumstances. These regulatory policies could affect the ability of Oritani Financial Corp. to pay dividends or otherwise engage in capital distributions. The financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the regulator and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Acquisition. Under the Federal Change in Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect "control"“control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company'scompany’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company'scompany’s outstanding voting stock. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Certain acquisitions of control of a New Jersey savings bank or its parent company require the prior approval of the NJDOBI.
Federal Securities Laws
Oritani Financial Corp.'s’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Oritani Financial Corp. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Oritani Financial Corp. common stock held by persons who are affiliates (generally officers, directors and principal stockholders) of Oritani Financial Corp. may not be resold without registration or unless sold in accordance with certain resale restrictions. If Oritani Financial Corp. meets specified current public information requirements, each affiliate of Oritani Financial Corp. is able to sell in the public market, without registration, a limited number of shares in any three-month period.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act of 2002, our Chief Executive Officer and Chief Financial Officer each are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002 have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal controls or in other factors that could significantly affect internal controls. Oritani Financial Corp is required to report under Section 404 of the Sarbanes-Oxley Act and has reported that it complies with such in all material respects.
FEDERAL AND STATE TAXATION
Federal Taxation
General. Oritani Financial Corp. and Oritani Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The Company's federal return for the tax year ended December 31, 2015 is currently under audit. On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Act"). Among numerous provisions included in the Act was the reduction of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Oritani Financial Corp. or Oritani Bank.
Method of Accounting. For federal income tax purposes, Oritani Financial Corp. currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.
Bad Debt Reserves. Historically, Oritani Bank has been subject to special provisions in the tax law regarding allowable tax bad debt deductions and related reserves. Tax law changes were enacted in 1996, pursuant to the Small Business Protection Act of 1996 (the "1996 Act"“1996 Act”), that eliminated the use of the percentage of taxable income method for tax years after 1995 and required recapture into taxable income over a six year period of all bad debt reserves accumulated after 1988. Oritani Bank recaptured its reserve balance over the six-year period ended December 31, 2003.
Currently, the Oritani Bank consolidated group uses the specific charge-off method to account for bad debt deductions for income tax purposes.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should Oritani Bank fail to meet certain thrift asset and definitional tests.
At June 30, 2018,2019, our total federal pre-base year reserve was approximately $15.1 million. However, under current law, pre-base year reserves remain subject to recapture should Oritani Bank make certain non-dividend distributions, repurchase any of its stock, pay dividends in excess of tax earnings and profits, or cease to maintain a bank charter.
Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the "Code") imposes an alternative minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Oritani Financial Corp. and Oritani Bank have not been subject to the AMT and have no such amounts available as credits for carryover. As a result of the Act, AMT was eliminated effective January 1, 2018.
Net Operating Loss Carryforward. A financial institution may carry back net operating losses ("NOL"(“NOL”) to the preceding two taxable years and forward to the succeeding 20 taxable years. At June 30, 2018,2019, Oritani Bank had no net operating loss carryforward for federal income tax purposes. As a result of the Act, NOLs generated after December 31, 2017 can no longer be carried back but can be carried forward indefinitely.
State Taxation
New Jersey State Taxation. Oritani Financial Corp. and its subsidiaries file New Jersey Corporation Business income tax returns on a calendar year basis. Generally, New Jersey income, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax. New Jersey corporate tax is imposed in an amount equal to the corporate business tax ("CBT") at 9% of taxable income or the minimum tax due per entity, whichever is greater. However, if Oritani Investment Corp, a subsidiary of the Bank, meets certain requirements, it may be eligible to elect to be taxed as a New Jersey Investment Company, which would allow it to be taxed at a rate of 3.6%. On July 1, 2018, the State of New Jersey enacted new legislation that imposes a temporary surtax of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey'sJersey’s current status as a separate return state. In addition, the legislation modifies the dividends-received deduction for tax years beginning after December 31, 2016 by reducing the amount of the exclusion from 100 percent to 95 percent for 80% or more owned subsidiaries.
New York State Taxation. Oritani Financial Corp. files New York State tax returns on a calendar year basis. New York State imposes a corporate income tax, based on net income allocable to New York State at a rate of 6.5%. In addition, New York State imposes a tax surcharge allocable to business activities carried on in the Metropolitan Commuter Transportation District.
New York City Taxation. Oritani Financial Corp. is also subject to the New York City Financial Corporation Tax calculated, subject to a New York City income and expense allocation, on a similar basis as the New York State Tax, at a rate of 8.85%.
Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file annual returns and pay annual fees and a franchise tax to the state of Delaware.
The Company's New York state tax return for the tax years ended December 31, 2015 and 2016 was audited during fiscal year 2018. The Company'sCompany’s New Jersey, New York City, and Delaware returns are not currently under audit and have not been subject to an audit in the past five years.
If the Merger with Valley is not completed, we will have incurred significant expenses without realizing the expected benefits of the Merger and could be subject to additional risks.
Prior to completion of the Merger, we will incur or have incurred substantial expenses in connection with the completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, we would have to recognize these expenses without receiving the merger consideration. In addition, if the Merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. The market price of our common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the Merger will be consummated. We also could be subject to litigation related to any failure to complete the Merger or to proceedings commenced by Valley against us seeking damages or to compel us to perform our obligations under the Merger Agreement. These factors and similar risks could have an adverse effect on the results of operations, business and stock prices of the Company.
We will be subject to business uncertainties and contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger on employees, customers, suppliers and vendors may have an adverse effect on our business, financial condition and results of operations. These uncertainties may impair our ability to retain and motivate key personnel pending the consummation of the Merger, as such, personnel may experience uncertainty about their future roles following the consummation of the Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Valley our business could be harmed. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us. In addition, competitors may target our existing customers by highlighting potential uncertainties and integration difficulties that may result from the Merger.
The termination fee and the restrictions on third party proposals set forth in the Merger Agreement may discourage others from trying to acquire us.
Until the completion of the Merger, with some exceptions, we are prohibited from soliciting, initiating, encouraging or participating in any discussion of any inquiries or proposals that may lead to an acquisition proposal, such as a merger or other business combination transaction, with any person other than Valley. In addition, we have agreed to pay to Valley in certain circumstances, including if we terminate the Merger Agreement to enter into a transaction with another party, a termination fee equal to $28 million and/or Valley’s reasonable out of pocket expenses up to $1.8 million. These provisions could discourage other companies from trying to acquire us even though those other companies might be willing to offer greater value to our stockholders than Valley has offered in the Merger. Similarly, such a competing company might propose a price lower than it might otherwise have been willing to offer because of the potential added expense of the termination fee that may become payable to Valley in certain circumstances under the Merger Agreement.
Future Changes in Interest Rates Could Reduce Our Profits.
Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:
the interest income we earn on our interest-earning assets, such as loans and securities; and
the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Reinvestment risk remains high in the current rate environment. Increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable rate loans.
In response to improving economic conditions, the Federal Reserve Board'sBoard’s Open Market Committee has slowly increased its federal funds rate target from a range of 0.00% - 0.25% that was in effect for several years to the current target range of 1.75%2.25% - 2.00%2.50% that was in effect at June 30, 2018.2019. Given our liability sensitivity, our net interest rate spread and net interest margin are at risk of being reduced due to potential increases in our cost of funds that may outpace any increases in our yield on interest-earning assets.
Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At June 30, 20182019 the fair value of our available for sale agency securities, mortgage-backed securities and corporate debt obligations totaled $44.7$32.8 million. Unrealized net losses on these available for sale securities totaled approximately $160,000$286,000 at June 30, 20182019 and are reported as a separate component of stockholders'stockholders’ equity, net of taxes. Decreases in the fair value of securities available for sale in future periods would have an adverse effect on stockholders'stockholders’ equity.
The Company'sCompany’s net interest income is particularly vulnerable to a scenario in which market interest rates "flatten."“flatten.” This would occur if short term interest rates were approximately the same rate as long term interest rates. In such a scenario, interest income would likely decrease and interest expense would likely increase.
We evaluate interest rate sensitivity by estimating the change in Oritani Bank'sBank’s net portfolio value over a range of interest rate scenarios. Net portfolio value is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. At June 30, 2018,2019, in the event of an immediate 200 basis point increase in interest rates, our financial model projects that we would experience a $87.1 million, or 14.33%, decrease in net portfolio value. See "Item“Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk."”
Our Continued Emphasis On Commercial Real Estate Lending Could Expose Us To Increased Lending Risks.
Our business strategy centers on continuing our emphasis on residential and non-residential commercial real estate lending. We have grown our loan portfolio with respect to these types of loans and intend to continue to emphasize these types of lending. At June 30, 2018, $3.302019, $3.25 billion, or 92.21%92.17%, of our total loan portfolio consisted of residential and non-residential commercial real estate loans. As a result, our credit risk profile will be higher than traditional thrift institutions that have higher concentrations of one to four family residential loans. Loans secured by residential and non-residential commercial real estate generally expose a lender to greater risk of non-payment and loss than one to four family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the underlying property. This risk increases during a negative economic cycle. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one to four family residential mortgage loans. Accordingly, an adverse development with respect to one loan or one credit relationship can expose us to greater risk of loss compared to an adverse development with respect to a one to four family residential mortgage loan. We seek to minimize these risks through our underwriting policies, which require such loans to be qualified on the basis of the property'sproperty’s collateral value, net income and debt service ratio; however, there is no assurance that our underwriting policies will protect us from credit-related losses. Finally, if we foreclose on residential and non-residential commercial real estate loans, our holding period for the collateral typically is longer than one to four family residential mortgage loans because there are fewer potential purchasers of the collateral.
Our business strategy of commercial real estate lending could be negatively impacted by regulatory guidance. The FDIC has issued guidance that recommends that such loans should not exceed 300% of the bank'sbank’s capital unless enhanced risk management measures are in place. The FDIC further detailed circumstances where such balances in excess of this guideline would be considered acceptable. The component of the Bank'sBank’s commercial real estate loan portfolio impacted by the FDIC guidance as of June 30, 20182019 represented 643.9%618.8% of the Bank'sBank’s capital at that date. While the FDIC has not placed restrictions on the Bank'sBank’s commercial real estate lending, there can be no assurance that such restrictions will not be imposed in the future.
The largest commercial real estate loan in our portfolio at June 30, 20182019 was a $32.7$31.9 million loan secured by multi-family and mixed-use buildings, located in Brooklyn, New York. Our largest loan relationship is secured by multi-family buildings located mainly in our primary market area. The aggregate outstanding loan balance for this relationship is $63.1$59.7 million at June 30, 2018.2019. As discussed in "Business“Business of Oritani Financial Corp-Lending Activities"Activities”, we have been utilizing stricter underwriting for these types of loans, and curtailed our construction lending.
If the Bank Regulators Impose Limitations on Our Commercial Real Estate Lending Activities, Our Earnings Could Be Adversely Affected.
In 2006, the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System (collectively, the "Agencies"“Agencies”) issued joint guidance entitled "Concentrations“Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices"Practices” (the "CRE Guidance"“CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank'sbank’s commercial real estate lending exposure may receive increased supervisory scrutiny where total non-owner occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate and construction and land loans, represent 300% or more of an institution'sinstitution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our level of non-owner occupied commercial real estate equaled 643.88%618.83% of our total risk-based capital at June 30, 2018.2019. Including owner-occupied commercial real estate, our ratio of commercial real estate loans to total risk-based capital ratio would be 656.11%630.58% at June 30, 2018.2019.
In December 2015, the Agencies released a new statement on prudent risk management for commercial real estate lending (the "2015 Statement"“2015 Statement”). In the 2015 Statement, the Agencies express concerns about easing commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that the Agencies will continue "to“to pay special attention"attention” to commercial real estate lending activities and concentrations going forward. If the FDIC were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, or require higher capital ratios as a result of the level of commercial real estate loans we hold, our earnings could be adversely affected.
If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Will Decrease.
We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. While our allowance for loan losses was 0.85%0.81% of total loans at June 30, 2018,2019, material additions to our allowance could materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
A New Accounting Standard will Likely Require us to Increase Our Allowance for Loan Losses and May Have a Material Adverse Effect on Our Financial Condition and Results of Operations.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company and Oritani Bank for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable incurred, which would likely require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.
We may be adversely affected by recent changes in tax laws.
The Tax Cuts and Jobs Act, which was enacted in December 2017, is likely to have both positive and negative effects on our financial performance. For example, the new legislation will result in a reduction in our federal corporate tax rate from 35% to 21% beginning in 2018, which will have a favorable impact on our earnings and capital generation abilities. However, the new legislation also enacted limitations on certain deductions that will have an impact on the banking industry, borrowers and the market for single family residential real estate. These limitations include (1) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (2) the elimination of interest deductions for certain home equity loans, (3) a limitation on the deductibility of business interest expense, and (4) a limitation on the deductibility of property taxes and state and local income taxes.
The recent changes in the tax laws may have an adverse effect on the market for, and the valuation of, residential properties, and on the demand for such loans in the future and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, like New Jersey and New York. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
Legislation in New Jersey adopted in July 2018 will increaseincreased our state income tax liability and could increaseincreased our overall tax expense. The legislation imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and of 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. The surtax will be discontinued for our tax year beginning on July 2022. The new legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey's current status as a separate return state, and limits the deductibility of dividends received. These changes are not temporary. Regulations implementing
Changes to LIBOR may adversely impact the legislativevalue of, and the return on, our loans and investment securities which are indexed to LIBOR.
On July 27, 2017, the U.K Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities including our subordinated notes, what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes have not yet been issued, so we cannot yet fully evaluatein views or alternatives on the impactvalues of the legislationloans and liabilities, whose interest rates are tied to LIBOR.
Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our overall tax expense. However, the new legislation may cause us to lose the benefit of certain ofloans, and our tax management strategies and may cause our total tax expense to increase.investment securities.
Our Risk Management Program May Not Be Effective in Mitigating Risk and Reducing the Potential for Significant Losses.
Our risk management program is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring, modeling and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
Because the Nature of the Financial Services Business Involves a High Volume of Transactions, We Face Significant Operational Risks.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.
Risks Associated with System Failures, Interruptions, or Breaches of Security Could Negatively Affect Our Earnings.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches (including privacy breaches), but such events may still occur and may not be adequately addressed if they do occur. In addition any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
Attempts by hackers to damage, disrupt, or gain unauthorized access to a computer, computer system, or electronic communications network have increased in frequency, particularly on financial institutions. While we have systems in place designed to detect and prevent such cyber attacks, successful intrusions have been perpetrated at other financial institutions and we cannot guarantee that we will not be impacted by such an event.
The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
Risks Associated with Cyber-Security Could Negatively Affect Our Earnings.
The financial services industry has experienced an increase in both the number and severity of reported cyber attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions
We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.
We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers'customers’ transaction data may put us at risk for possible losses due to fraud or operational disruption.
Our customers are also the target of cyber attacks and identity theft. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.
The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations
Strong Competition Within Our Market Area May Limit Our Growth and Profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with numerous commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we have, have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our loan and deposit balances, and/or decrease our net interest spread. For additional information see "Business“Business of Oritani Financial Corp—Competition."”
We Operate in a Highly Regulated Industry, Which Limits the Manner and Scope of Our Business Activities.
We are subject to extensive supervision, regulation and examination by the NJDOBI, FDIC and Federal Reserve Board. As a result, we are limited in the manner in which we conduct our business, undertake new investments and activities and obtain financing. This regulatory structure is designed primarily for the protection of the DIF and our depositors, and not to benefit our stockholders. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, stock repurchases, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. In addition, we must comply with significant anti-money laundering and anti-terrorism laws. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws.
In December 2017, Oritani Bank (the "Bank"“Bank”), the wholly owned subsidiary of Oritani Financial Corp. (the "Company"“Company”), entered into an informal agreement ("(“Informal Agreement"Agreement”) with the Federal Deposit Insurance Corporation ("FDIC"(“FDIC”) and the New Jersey Department of Banking and Insurance ("NJDOBI"(“NJDOBI”) with regard to Bank Secrecy Act ("BSA"(“BSA”) and Anti-Money Laundering ("AML"(“AML”) compliance matters. The BankCompany has agreed to 1) develop, adopt and implement a system of internal controls designed to ensure full complianceincurred expenses associated with the BSA, 2) conduct a comprehensive system validationremediation of these matters. Such expenses totaled $1.5 million and $1.3 million for the twelve months ended June 30, 2019 and 2018, respectively. These costs are included in other expenses. The Company believes significant progress has been made regarding the remediation of these matters and the majority of the Bank's BSA/AML system, and 3) perform an initial review, and thereafter on an annual basis, of the Bank's staffing BSA staffing needs. The Bank also agreed to review certain transactions and accounts within a specified timeframe for BSA and AML compliance, and to provide the FDIC and the NJDOBI with quarterly progress reports.
The Dodd-Frank Wall Street Reform and Consumer Protection Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.
Not applicable.
At June 30, 2018,2019, the Company and the Bank conducted business from its corporate headquarters in Washington Township, New Jersey, lending offices in New York City and Cherry Hill, New Jersey and 25 full service branch offices located in Bergen, Hudson, Essex and Passaic Counties, New Jersey. The aggregate net book value of premises and equipment was $13.5$12.9 million at June 30, 2018.2019.
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'sCompany’s financial position.
Not applicable.
| ITEM 5. |
Our shares of common stock are traded on the NASDAQ Global Market under the symbol "ORIT"“ORIT”. As of June 30, 2018,2019, we have 1,7521,699 stockholders of record (excluding the numbers of person or entities holding stock in street name through various brokerage firms), and 46,616,64645,097,052 shares outstanding. The following table presents quarterly market information for Oritani Financial Corp.'s common stock for the periods indicated. The following high and low sales price information was provided by the NASDAQ Stock Market.
| For the Years Ended June 30, | ||||||||||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||||||||||
| High | Low | Dividends | High | Low | Dividends | |||||||||||||||||||||||||||
| First Quarter | $ | 17.45 | $ | 15.30 | $ | 0.175 | $ | 16.74 | $ | 15.56 | $ | 0.175 | ||||||||||||||||||||
| Second Quarter | 17.70 | 15.90 | 0.625 | (1 | ) | 18.95 | 15.35 | 0.675 | (1 | ) | ||||||||||||||||||||||
| Third Quarter | 17.30 | 15.05 | 0.250 | 19.00 | 16.30 | 0.175 | ||||||||||||||||||||||||||
| Fourth Quarter | 17.20 | 15.00 | 0.250 | 17.75 | 16.32 | 0.175 | ||||||||||||||||||||||||||
The Company'sCompany’s Board of Directors intends to review the payment of dividends quarterly and plans to maintain a regular cash dividend in the future, subject to capital requirements, financial condition, results of operations, tax considerations, industry standards, economic conditions, regulatory restrictions that affect the payment of dividends by the Bank to the Company and other relevant factors. No assurances can be given that any cash dividends will be paid or that, if paid, will not be reduced or eliminated in the future.
The sources of funds for the payment of a cash dividend are the retained proceeds from the sale of shares of common stock and earnings on those proceeds, interest and principal payments with respect to Oritani Financial Corp.'s’s loan to the Employee Stock Ownership Plan, and dividends from Oritani Bank. For a discussion of the corporate and regulatory limitations applicable to the payment of dividends, see "Item“Item 1. Business—Supervision and Regulation—Holding Company Regulation."”
Stock Performance Graph
The following graph compares the cumulative total return on a hypothetical $100 investment made on June 30, 20132014 in: (a) Oritani Financial Corp. stock, (b) the NASDAQ Bank Index, (c) the NASDAQ Composite Index, (d) the SNL US Thrift Index and (e) the KBW Bank Index. The graph is calculated assuming that all dividends are reinvested during the relevant periods. The graph shows how a $100 investment would increase or decrease in value over time based on dividends (stock or cash) and increases or decreases in the market price of the stock.
On March 4, 2015, the Company announced its fourth Share Repurchase Program, which authorized the purchase of an additional 5% of its outstanding shares of common stock, or 2,205,451 shares. This stock repurchase program commenced upon the completion of the third repurchase program on March 4, 2015. The timing of the repurchases depend on certain factors, including but not limited to, market conditions and prices, the Company'sCompany’s liquidity and capital requirements, and alternative uses of capital. Repurchased shares will be held as treasury stock and will be available for general corporate purposes. The Company may also conduct repurchases through a Rule 10b5-1 trading plan. The repurchase program has no expiration date and has 1,888,851 shares yet to be purchased as of June 30, 2018.
As of August 29, 2018,28, 2019, the Company has repurchased, under the repurchase plans approved since the second step transaction, 13,277,6811,888,851 shares of its stock at an average price of $13.30$15.20 per share. With these purchases, the fourth repurchase plan has been completed.
The following information is derived from the audited consolidated financial statements of Oritani Financial Corp. For additional information, reference is made to "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and the Consolidated Financial Statements of Oritani Financial Corp. and related notes included elsewhere in this Annual Report.
| At June 30, | At June 30, | |||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Selected Financial Condition Data: | ||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 4,167,039 | $ | 4,137,684 | $ | 3,669,338 | $ | 3,353,065 | $ | 3,140,200 | $ | 4,070,516 | $ | 4,167,039 | $ | 4,137,684 | $ | 3,669,338 | $ | 3,353,065 | ||||||||||||||||||||
| Loans, net | 3,540,903 | 3,566,703 | 3,131,957 | 2,756,212 | 2,503,894 | 3,491,322 | 3,540,903 | 3,566,703 | 3,131,957 | 2,756,212 | ||||||||||||||||||||||||||||||
| Securities available for sale, at market value | 44,691 | 97,930 | 141,850 | 258,963 | 384,137 | |||||||||||||||||||||||||||||||||||
| Debt securities available for sale, at market value | 32,752 | 43,126 | 97,930 | 141,850 | 258,963 | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities held to maturity | 335,374 | 239,631 | 168,107 | 107,990 | 32,422 | 332,215 | 335,374 | 239,631 | 168,107 | 107,990 | ||||||||||||||||||||||||||||||
| Bank owned life insurance | 98,438 | 95,946 | 93,327 | 90,609 | 68,054 | 100,872 | 98,438 | 95,946 | 93,327 | 90,609 | ||||||||||||||||||||||||||||||
| Federal Home Loan Bank of New York stock, at cost | 30,365 | 32,504 | 38,003 | 39,898 | 49,046 | 25,925 | 30,365 | 32,504 | 38,003 | 39,898 | ||||||||||||||||||||||||||||||
| Accrued interest receivable | 11,261 | 10,620 | 9,943 | 9,266 | 10,214 | 11,935 | 11,261 | 10,620 | 9,943 | 9,266 | ||||||||||||||||||||||||||||||
| Investments in real estate joint ventures, net | — | — | 4,307 | 6,658 | 6,391 | — | — | — | 4,307 | 6,658 | ||||||||||||||||||||||||||||||
| Real estate held for investment | — | — | — | 655 | 917 | — | — | — | — | 655 | ||||||||||||||||||||||||||||||
| Deposits | 2,915,128 | 2,856,478 | 2,260,003 | 1,962,737 | 1,580,975 | 2,923,244 | 2,915,128 | 2,856,478 | 2,260,003 | 1,962,737 | ||||||||||||||||||||||||||||||
| Borrowings | 596,372 | 642,059 | 781,623 | 796,372 | 967,443 | 521,555 | 596,372 | 642,059 | 781,623 | 796,372 | ||||||||||||||||||||||||||||||
| Stockholders' equity | 559,346 | 559,223 | 535,200 | 517,670 | 526,292 | |||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 529,147 | 559,346 | 559,223 | 535,200 | 517,670 | |||||||||||||||||||||||||||||||||||
| Selected Operating Data: | ||||||||||||||||||||||||||||||||||||||||
| Interest income | $ | 152,826 | $ | 142,462 | $ | $134,324 | $ | $131,759 | $ | $128,226 | $ | 155,755 | $ | 152,826 | $ | $142,462 | $ | $134,324 | $ | $131,759 | ||||||||||||||||||||
| Interest expense | 42,900 | 37,851 | 34,023 | 35,009 | 31,103 | 54,667 | 42,900 | 37,851 | 34,023 | 35,009 | ||||||||||||||||||||||||||||||
| Net interest income | 109,926 | 104,611 | 100,301 | 96,750 | 97,123 | 101,088 | 109,926 | 104,611 | 100,301 | 96,750 | ||||||||||||||||||||||||||||||
| Provision for loan losses | — | — | — | 200 | 700 | |||||||||||||||||||||||||||||||||||
| (Reversal)/provision for loan losses | (2,000 | ) | — | — | — | 200 | ||||||||||||||||||||||||||||||||||
| Net interest income after provision for loan losses | 109,926 | 104,611 | 100,301 | 96,550 | 96,423 | 103,088 | 109,926 | 104,611 | 100,301 | 96,550 | ||||||||||||||||||||||||||||||
| Other income | 3,588 | 16,844 | 44,244 | 19,282 | 5,602 | |||||||||||||||||||||||||||||||||||
| Other expense | 39,504 | 45,929 | 63,716 | 42,716 | 39,478 | |||||||||||||||||||||||||||||||||||
| Non-interest income | 4,758 | 3,594 | 16,968 | 44,244 | 19,282 | |||||||||||||||||||||||||||||||||||
| Non-interest expense | 38,785 | 39,510 | 46,053 | 63,716 | 42,716 | |||||||||||||||||||||||||||||||||||
| Income before income tax expense | 74,010 | 75,526 | 80,829 | 73,116 | 62,547 | 69,061 | 74,010 | 75,526 | 80,829 | 73,116 | ||||||||||||||||||||||||||||||
| Income tax expense | 31,116 | 26,382 | 28,534 | 26,214 | 21,488 | 17,002 | 31,116 | 26,382 | 28,534 | 26,214 | ||||||||||||||||||||||||||||||
| Net income | $ | 42,894 | $ | 49,144 | $ | 52,295 | $ | 46,902 | $ | 41,059 | $ | 52,059 | $ | 42,894 | $ | 49,144 | $ | 52,295 | $ | 46,902 | ||||||||||||||||||||
| At or For the Years Ended June 30, | At or For the Years Ended June 30, | |||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
| Selected Financial Ratios and Other Data: | ||||||||||||||||||||||||||||||||||||||||
| Performance Ratios: | ||||||||||||||||||||||||||||||||||||||||
| Return on assets (ratio of net income to average total assets) | 1.04 | % | 1.24 | % | 1.50 | % | 1.44 | % | 1.40 | % | 1.27 | % | 1.11 | % | 1.24 | % | 1.50 | % | 1.44 | % | ||||||||||||||||||||
| Return on equity (ratio of net income to average equity) | 7.65 | % | 8.98 | % | 9.91 | % | 9.10 | % | 7.80 | % | 9.60 | % | 8.16 | % | 8.98 | % | 9.91 | % | 9.10 | % | ||||||||||||||||||||
| Average interest rate spread (1) | 2.65 | % | 2.66 | % | 2.89 | % | 2.97 | % | 3.29 | % | 2.41 | % | 2.65 | % | 2.66 | % | 2.89 | % | 2.97 | % | ||||||||||||||||||||
| Net interest margin (2) | 2.79 | % | 2.79 | % | 3.04 | % | 3.14 | % | 3.50 | % | 2.59 | % | 2.79 | % | 2.79 | % | 3.04 | % | 3.14 | % | ||||||||||||||||||||
| Efficiency ratio (3) | 34.80 | % | 37.82 | % | 44.08 | % | 36.81 | % | 38.43 | % | 36.64 | % | 34.54 | % | 37.82 | % | 44.08 | % | 36.81 | % | ||||||||||||||||||||
| Non-interest expense to average total assets | 0.95 | % | 1.16 | % | 1.83 | % | 1.31 | % | 1.35 | % | 0.95 | % | 0.95 | % | 1.16 | % | 1.83 | % | 1.31 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 113.01 | % | 113.40 | % | 114.96 | % | 115.18 | % | 118.42 | % | 112.94 | % | 113.01 | % | 113.40 | % | 114.96 | % | 115.18 | % | ||||||||||||||||||||
| Asset Quality Ratios: | ||||||||||||||||||||||||||||||||||||||||
| Non-performing assets to total assets | 0.23 | % | 0.25 | % | 0.28 | % | 0.50 | % | 0.69 | % | 0.26 | % | 0.23 | % | 0.25 | % | 0.28 | % | 0.50 | % | ||||||||||||||||||||
| Non-performing loans to total loans | 0.22 | % | 0.28 | % | 0.31 | % | 0.45 | % | 0.71 | % | 0.28 | % | 0.22 | % | 0.28 | % | 0.31 | % | 0.45 | % | ||||||||||||||||||||
| Allowance for loan losses to total loans | 0.85 | % | 0.84 | % | 0.94 | % | 1.10 | % | 1.23 | % | 0.81 | % | 0.85 | % | 0.84 | % | 0.94 | % | 1.10 | % | ||||||||||||||||||||
| Capital Ratios: | ||||||||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 14.82 | % | 15.02 | % | 16.77 | % | 17.79 | % | 19.05 | % | 14.57 | % | 14.82 | % | 15.02 | % | 16.77 | % | 17.79 | % | ||||||||||||||||||||
| Total capital (to risk-weighted assets) | 15.64 | % | 15.84 | % | 17.69 | % | 18.85 | % | 20.19 | % | 15.36 | % | 15.64 | % | 15.84 | % | 17.69 | % | 18.85 | % | ||||||||||||||||||||
| Tier I capital (to risk-weighted assets) | 14.82 | % | 15.02 | % | 16.77 | % | 17.79 | % | 19.05 | % | 14.57 | % | 14.82 | % | 15.02 | % | 16.77 | % | 17.79 | % | ||||||||||||||||||||
| Tier I capital (to average assets) | 13.25 | % | 13.51 | % | 14.94 | % | 15.67 | % | 17.11 | % | 12.98 | % | 13.25 | % | 13.51 | % | 14.94 | % | 15.67 | % | ||||||||||||||||||||
| Other Data: | ||||||||||||||||||||||||||||||||||||||||
| Number of full service offices | 26 | 26 | 26 | 25 | 25 | 26 | 26 | 26 | 26 | 25 | ||||||||||||||||||||||||||||||
| Full time equivalent employees | 222 | 221 | 216 | 209 | 205 | 215 | 222 | 221 | 216 | 209 | ||||||||||||||||||||||||||||||
| (1) | The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period. |
| (2) | The net interest margin represents net interest income as a percent of average interest-earning assets for the period. |
| (3) | The efficiency ratio represents non-interest expense divided by the sum of net interest income before provision for loan losses and non-interest income. |
| ITEM 7. |
Pending Business StrategyCombinations
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 operatebe appointed to serve as a well-capitalizeddirector of Valley and profitable financial institution dedicatedValley 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 providing exceptional personal serviceconduct 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 our individualnot 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 customers.combinations or (ii) enter into discussions or negotiations or provide confidential information in connection with any proposals for alternative business combinations.
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 non-residential CRE. Such loans comprise 92.2%(b) of our total loan portfolio at June 30, 2018. We have focused on this typethe issuance of lending becauseValley common stock in the interest rates earned for such loans generally are higher thanMerger by stockholders of Valley, (ii) receipt of regulatory approvals, (iii) the prevailing rates for residential loans, resultingabsence 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 a greater level of interest income potential. We are also able to generate significantly higher fee income on such loans, particularly prepayment fees.the Merger. In addition, each party’s obligation to consummate the repayment terms usually expose usMerger is subject to less interest rate risk than fixed-rate residential loans. We generally incorporate one or morecertain other conditions, including the accuracy of the following features into our terms for CRE loans, thereby decreasing their interest rate risk: interest rates reset after five years or less at a predetermined spread to FHLB Advance rates; minimum stated interest rates;representations and balloon repayment date or maximum fixed-rate self-amortizing loan termwarranties of 20 years. CRE loans are generally considered to have a greater amountthe other party and compliance of credit risk versus 1-4 family residential lending. We have been able to mitigate these risks, we believe, primarily through our underwriting process. We have been involvedthe other party with its covenants in residential CRE lending for over thirty years. While our actual origination volume will depend on market conditions, we intend to continue our emphasis on CRE lending.all material respects.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.
Allowance for Loan Losses. The allowance for loan losses is established through provisions for loan losses charged to income based on management'smanagement’s evaluation of the probable incurred losses inherent in its portfolio. Such evaluation includes a review of all loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated net realizable value of the underlying collateral, economic conditions and other matters which warrant consideration.
While management uses available information to identify and recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company'sCompany’s lending area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company'sCompany’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. See Note 5, "Allowance for Loan Losses" of the Notes to the Consolidated Financial Statements for additional information regarding the allowance for loan losses.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.
Comparison of Financial Condition at June 30, 20182019 and June 30, 20172018
Total Assets. Total assets were relatively stable, increasing $29.4decreased $96.5 million to $4.07 billion at June 30, 2019, from $4.17 billion at June 30, 2018, from $4.14 billion at June 30, 2017.2018. The primary contributor to the decreased asset level was the contraction in loan balances and other assets.
Cash and Cash Equivalents. Cash and cash equivalents (which include fed funds and short term investments) increased $1.3decreased $8.3 million to $26.5 million at June 30, 2019, from $34.8 million at June 30, 2018, from $33.6 million at June 30, 2017.2018.
Net Loans. Loans, net decreased $25.8$49.6 million to $3.49 billion at June 30, 2019, from $3.54 billion at June 30, 2018, from $3.57 billion at2018. The average balance of the loan portfolio decreased $77.7 million for the year ended June 30, 2017.2019, versus the comparable 2018 period. Over that same time frame, the yield on the portfolio increased 10 basis points. See "Comparison“Comparison of Operating Results for the Periods Ended June 30, 20182019 and 2017-Total2018-Total Interest Income" for discussion regarding loans balances.Income,” our origination volume is below historical levels and loan principal payments remained elevated in fiscal 2019.
Federal Home Loan Bank of New York ("FHLB") stock. FHLB stock decreased $2.1$4.4 million to $25.9 million at June 30, 2019, from $30.4 million at June 30, 2018, from $32.5 million at June 30, 2017.2018. FHLB stock holdings are required depending on several factors, including the level of borrowings with the FHLB. As FHLB borrowings decreased over the period, excess FHLB stock was redeemed.
Deposits. Deposits increased $58.7$8.1 million to $2.92 billion at June 30, 2018,2019, from $2.86$2.92 billion at June 30, 2017. 2018.See "Comparison“Comparison of Operating Results for the Periods Ended June 30, 20182019 and 2017-Total2018-Total Interest Expense"Expense,” for discussion regarding deposit balances. The Company’s loan to deposit ratio was 119.4% at June 30, 2019.
Borrowings. Borrowings decreased $45.7$74.8 million to $521.6 million at June 30, 2019, from $596.4 million at June 30, 2018, from $642.1 million at June 30, 2017.2018. See "Comparison“Comparison of Operating Results for the Periods Ended June 30, 20182019 and 2017-Total2018-Total Interest Expense"Expense,” for discussion regarding borrowing amounts.
Comparison of Operating Results for the Periods Ended June 30, 20182019 and 20172018
Net Income. Net income decreased $6.3increased $9.2 million to $42.9$52.1 million for the twelve months ended June 30, 2018,2019, from $49.1$42.9 million for the corresponding 20172018 period. The most significant factor resulting in the increased income in the annual period is changes in income tax expense. Results for the twelve months ended June 30, 2018 were impacted by the Tax Cuts and Jobs Act which was signed into law on December 22, 2017.(the “Act”). The Act required the Company to revalue its deferred tax assets and deferred tax liabilities to account for the future impact of lower corporate tax rates on these deferred amounts. ThisThe revaluation in addition to other factors, resulted in a netone-time charge of $8.9 million that was recognized as of December 31, 2017 and included in the results for the twelve months ended June 30, 2018. Results for the twelve months ended June 30, 2017 were impacted by a balance sheet restructure with an after tax cost of $13.9 million, as well as the sale of the Company's last remaining investment in real estate joint ventures. The resulting after tax gain on this sale was $13.6$10.2 million.
Total Interest Income. The components of interest income for the years ended June 30, 20182019 and 2017,2018, changed as follows:
| Twelve Months Ended June 30, | Increase / (decrease) | |||||||||||||||||||||||||||
| 2018 | 2017 | Average | ||||||||||||||||||||||||||
| Income | Yield | Income | Yield | Income | Balance | Yield | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Interest on mortgage loans | $ | 144,051 | 4.05 | % | $ | 133,967 | 3.99 | % | $ | 10,084 | $ | 201,405 | 0.06 | % | ||||||||||||||
| Dividends on FHLB stock | 1,788 | 6.55 | % | 1,834 | 5.19 | % | (46 | ) | (8,021 | ) | 1.36 | % | ||||||||||||||||
| Interest on securities AFS | 1,504 | 2.14 | % | 3,154 | 1.85 | % | (1,650 | ) | (100,278 | ) | 0.29 | % | ||||||||||||||||
| Interest on securities HTM | 5,328 | 2.00 | % | 3,500 | 1.86 | % | 1,828 | 78,458 | 0.14 | % | ||||||||||||||||||
| Interest on federal funds sold and short term investments | 155 | 1.34 | % | 7 | 0.73 | % | 148 | 10,600 | 0.61 | % | ||||||||||||||||||
| Total interest income | $ | 152,826 | 3.88 | % | $ | 142,462 | 3.80 | % | $ | 10,364 | $ | 182,164 | 0.08 | % | ||||||||||||||
| Twelve Months Ended June 30, | Increase / (decrease) | |||||||||||||||||||||||||||
| 2019 | 2018 | Average | ||||||||||||||||||||||||||
| Income | Yield | Income | Yield | Income | Balance | Yield | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Interest on mortgage loans | $ | 144,457 | 4.15 | % | $ | 144,051 | 4.05 | % | $ | 406 | $ | (77,652 | ) | 0.10 | % | |||||||||||||
| Equity securities | 48 | 3.37 | % | 43 | 2.81 | % | 5 | (105 | ) | 0.56 | % | |||||||||||||||||
| Dividends on FHLB stock | 1,817 | 6.79 | % | 1,788 | 6.55 | % | 29 | (566 | ) | 0.24 | % | |||||||||||||||||
| Interest on debt securities AFS | 868 | 2.29 | % | 1,461 | 2.13 | % | (593 | ) | (30,761 | ) | 0.16 | % | ||||||||||||||||
| Interest on debt securities HTM | 8,189 | 2.41 | % | 5,328 | 2.00 | % | 2,861 | 72,102 | 0.41 | % | ||||||||||||||||||
| Interest on federal funds sold and short term investments | 376 | 2.26 | % | 155 | 1.34 | % | 221 | 5,115 | 0.92 | % | ||||||||||||||||||
| Total interest income | $ | 155,755 | 3.99 | % | $ | 152,826 | 3.88 | % | $ | 2,929 | $ | (31,867 | ) | 0.11 | % | |||||||||||||
Loan originations, purchases, sales and principal payments for the twelve months ended June 30, 2018 versus the comparable 2017 period. However, when period end balances are utilized, loans, net decreased $25.82019 totaled $414.4 million, to $3.54 billion at June 30, 2018, from $3.57 billion at June 30, 2017.$138.5 million, $8.1 million and $599.0 million, respectively. Loan originations, purchases and principal payments for the twelve monthmonths ended June 30, 2018 totaled $470.7 million, $69.2 million and $566.8 million, respectively. Loan originations, purchases and paymentsThere were no sales in the 2018 period. Prepayment penalties totaled $4.6 million for the twelve months ended June 30, 2017 totaled $732.0 million, $65.9 million2019 and $365.4 million, respectively.
Total Interest Expense. The components of interest expense for the years ended June 30, 20182019 and 2017,2018, changed as follows:
| Twelve Months Ended June 30, | Increase / (decrease) | Twelve Months Ended June 30, | Increase / (decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | Average | 2019 | 2018 | Average | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Expense | Cost | Expense | Cost | Expense | Balance | Cost | Expense | Cost | Expense | Cost | Expense | Balance | Cost | |||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings deposits | $ | 455 | 0.25 | % | $ | 391 | 0.23 | % | $ | 64 | $ | 11,003 | 0.02 | % | $ | 2,986 | 0.98 | % | $ | 455 | 0.25 | % | $ | 2,531 | $ | 121,059 | 0.73 | % | ||||||||||||||||||||||||||||
| Money market | 9,038 | 1.10 | % | 7,742 | 1.05 | % | 1,296 | 81,235 | 0.05 | % | 7,397 | 1.10 | % | 9,038 | 1.10 | % | (1,641 | ) | (149,906 | ) | 0.00 | % | ||||||||||||||||||||||||||||||||||
| Checking accounts | 4,955 | 0.66 | % | 3,015 | 0.46 | % | 1,940 | 91,486 | 0.20 | % | 8,556 | 1.21 | % | 4,955 | 0.66 | % | 3,601 | (44,554 | ) | 0.55 | % | |||||||||||||||||||||||||||||||||||
| Time deposits | 17,176 | 1.45 | % | 13,523 | 1.33 | % | 3,653 | 165,307 | 0.12 | % | 22,699 | 1.84 | % | 17,176 | 1.45 | % | 5,523 | 52,936 | 0.39 | % | ||||||||||||||||||||||||||||||||||||
| Total deposits | 31,624 | 1.08 | % | 24,671 | 0.95 | % | 6,953 | 349,031 | 0.13 | % | 41,638 | 1.43 | % | 31,624 | 1.08 | % | 10,014 | (20,465 | ) | 0.35 | % | |||||||||||||||||||||||||||||||||||
| Borrowings | 11,276 | 2.08 | % | 13,180 | 1.83 | % | (1,904 | ) | (176,357 | ) | 0.25 | % | 13,029 | 2.42 | % | 11,276 | 2.08 | % | 1,753 | (5,810 | ) | 0.34 | % | |||||||||||||||||||||||||||||||||
| Total interest expense | $ | 42,900 | 1.23 | % | $ | 37,851 | 1.14 | % | $ | 5,049 | $ | 172,674 | 0.09 | % | $ | 54,667 | 1.58 | % | $ | 42,900 | 1.23 | % | $ | 11,767 | $ | (26,275 | ) | 0.35 | % | |||||||||||||||||||||||||||
The average balance of borrowings decreased $176.4$5.8 million for the twelve months ended June 30, 20182019 versus the comparable 20172018 period, while the cost increased 2534 basis points. The increase in the average balance of deposits allowed the Company to reduce borrowings. The cost of borrowings has been impacted by the increased cost of overnight and short-term borrowings. The cost of overnight borrowings has increased as the federal discount rate has increased. Despite the increased cost of such borrowings, they remain a lower cost of funding than longer term borrowings. The company has decreased its usage of overnight borrowings, which has contributed to the overall increase in cost of borrowings. In addition, the increased cost of new longerinterest rates, particularly overnight and short term borrowings, also contributed toand the maturities of lower cost increase.borrowings.
Net Interest Income Before Provision for Loan Losses. Net interest income increaseddecreased by $5.3$8.8 million to $101.1 million for the twelve months ended June 30, 2019, from $109.9 million for the twelve months ended June 30, 2018, from $104.6 million for the twelve months ended June 30, 2017. The Company's spread and margin for the fiscal year ended June 30, 2018 were 2.65% and 2.79%, respectively. The spread and margin for the fiscal year ended June 30, 2017 were 2.66% and 2.79%, respectively. These results were impacted by the increased level of prepayment penalty income in the 2018 periods. The changes to spread and margin are illustrated in greater detail through the quarterly information provided in the table below. The table itemizes quarterly net interest income, and annualized spread and margin over the identified periods.2018.
| 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) | ||||||||||||||||||||||||||||
| June 30, 2018 | $ | 27,721 | $ | 1,836 | $ | 25,885 | 2.65 | % | 2.81 | % | 2.47 | % | 2.63 | % | ||||||||||||||
| March 31, 2018 | 26,953 | 553 | 26,400 | 2.60 | 2.74 | 2.54 | 2.68 | |||||||||||||||||||||
| December 31, 2017 | 27,608 | 1,638 | 25,970 | 2.67 | 2.81 | 2.50 | 2.64 | |||||||||||||||||||||
| September 30, 2017 | 27,644 | 1,289 | 26,355 | 2.68 | 2.82 | 2.55 | 2.68 | |||||||||||||||||||||
| June 30, 2017 | 26,287 | 236 | 26,051 | 2.54 | 2.68 | 2.52 | 2.66 | |||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||
| June 30, 2018 | 27,721 | 1,836 | 25,885 | 2.65 | 2.81 | 2.47 | 2.63 | |||||||||||||||||||||
The Company'sCompany’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 of an 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. The level of loan prepayments and prepayment income increased during fiscal 2018 despite a period of generally increasingBorrowers can be driven to prepay their loans based on factors other than interest rates.
The Company'sCompany’s spread and margin have been under pressure due to several factors, including: the flatteningincluding an inverted treasury yield curve, modifications of loans within the existing loan portfolio;portfolio, prepayments of higher yielding loans and investments, and increased funding costs. The Company executed a previously disclosed balance sheet restructuring partially to counter a portion of theWhile spread and margin compression resulting fromhave been under pressure for an extended period, the competitive market for deposits increased substantially in fiscal 2019. Although the Company has realized increases in both the cost of funds and the yield on interest earning assets, the increase in cost of funds has outpaced the increase in yield on assets. The cost increase incurred in the most recent fiscal year end is largely due to competition. The Company offered several high rate deposit products in order to retain deposit accounts and attain growth. While these factors.products were successful in maintaining balances, significant growth was not realized and the cost of funds increased. Subsequent to June 30, 2019, the Company reduced the interest rate paid on these products though the reduced rate is still higher than the Company’s cost of deposits. The Company did realize growth in higher cost certificates of deposits. The rates associated with these products were also reduced subsequent to June 30, 2019. In addition, several lower cost borrowings and interest rate swaps matured during the quarter ended June 30, 2019.
The Company'sCompany’s net interest income and net interest rate spread were both negatively impacted in bothmost periods due to the reversal of accrued interest income on loans delinquent more than 90 days. The total of such income reversed was $340,000 and $198,000 for the twelve months ended June 30, 2019 and 2018, and $283,000 for the twelve months ended June 30, 2017.respectively.
Provision for Loan Losses. The Company recorded a reversal of provision for loan losses of $2.0 million for the twelve months ended June 30, 2019. The Company reported no provision for loan losses for the yearstwelve months ended June 30, 2018 or 2017.2018. A rollforward of the allowance for loan losses for the years ended June 30, 20182019 and 20172018 is presented below.
| Twelve months ended | Twelve months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
| Balance at beginning of period | $ | 30,272 | $ | 29,951 | $ | 30,562 | $ | 30,272 | ||||||||
| Provisions charged to operations | — | — | (2,000 | ) | — | |||||||||||
| Recoveries of loans previously charged off | 407 | 409 | 99 | 407 | ||||||||||||
| Loans charged off | (117 | ) | (88 | ) | (65 | ) | (117 | ) | ||||||||
| Balance at end of period | $ | 30,562 | $ | 30,272 | $ | 28,596 | $ | 30,562 | ||||||||
| Allowance for loan losses to total loans | 0.85 | % | 0.84 | % | 0.81 | % | 0.85 | % | ||||||||
| Net charge-offs to average loans outstanding | (0.01 | %) | (0.01 | %) | 0.00 | % | (0.01 | %) | ||||||||
Delinquency and non performing asset information is provided below:
| 6/30/2018 | 6/30/2017 | 6/30/2016 | 6/30/2015 | 6/30/2019 | 6/30/2018 | 6/30/2017 | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Delinquency Totals | ||||||||||||||||||||||||||||
| 30 - 59 days past due* | $ | 5,253 | $ | 1,374 | $ | 8,912 | $ | 2,535 | $ | 3,146 | $ | 5,253 | $ | 1,374 | ||||||||||||||
| 60 - 89 days past due* | 171 | 1,571 | 1,698 | 416 | 641 | 171 | 1,571 | |||||||||||||||||||||
| Nonaccrual | 7,877 | 10,223 | 9,968 | 12,575 | 10,053 | 7,877 | 10,223 | |||||||||||||||||||||
| Total | $ | 13,301 | $ | 13,168 | $ | 20,578 | $ | 15,526 | $ | 13,840 | $ | 13,301 | $ | 13,168 | ||||||||||||||
| Non Performing Asset Totals | ||||||||||||||||||||||||||||
| Nonaccrual loans, per above | $ | 7,877 | $ | 10,223 | $ | 9,968 | $ | 12,575 | $ | 10,053 | $ | 7,877 | $ | 10,223 | ||||||||||||||
| Real Estate Owned | 1564 | 140 | 487 | 4,059 | 557 | 1,564 | 140 | |||||||||||||||||||||
| Total | $ | 9,441 | $ | 10,363 | $ | 10,455 | $ | 16,634 | $ | 10,610 | $ | 9,441 | $ | 10,363 | ||||||||||||||
| Nonaccrual loans to total loans | 0.22 | % | 0.28 | % | 0.31 | % | 0.45 | % | 0.28 | % | 0.22 | % | 0.28 | % | ||||||||||||||
| Delinquent loans to total loans | 0.37 | % | 0.37 | % | 0.65 | % | 0.55 | % | 0.39 | % | 0.37 | % | 0.37 | % | ||||||||||||||
| Non performing assets to total assets | 0.23 | % | 0.25 | % | 0.28 | % | 0.50 | % | 0.26 | % | 0.23 | % | 0.25 | % | ||||||||||||||
*Excludes non-accrual loans less than 90 days past due as they are included in the non-accrual total.
Non-Interest Expenses. Non-interest expenses decreased $725,000 to $38.8 million for the twelve months ended June 30, 2017. The 2017 period included a net loss on termination of derivatives of $7.7 million and a loss on the sale of securities of $826,000 which were incurred in conjunction with a balance sheet restructure. The 2017 period also included a $20.9 million gain on the sale of real estate joint venture.
Income Tax Expense. Income tax expense for the twelve months ended June 30, 20182019, was significantly impacted by the Act. Income tax expenses for the twelve months period ended June 30, 2018 $31.1$17.0 million on pre-tax income of $69.1 million, resulting in an effective tax rate of 42.0%24.6%. TheThis effective tax rate for the twelve-month period was elevated due to adjustments that were necessitated byis lower than prior fiscal years primarily as a result of the Act. The effective federalexpense for the twelve month period ending June 30, 2019, was positively affected by tax rate prospectively isstrategies regarding state tax liabilities, a refund of an item that was expensed in a prior period and the exercise of nonqualified stock options. The twelve month period ending June 30, 2019 was negatively impacted by New Jersey tax legislation enacted on July 1, 2018. The legislation required, among other consequences, a revaluation of our deferred tax assets/liabilities based on the rates at which they are expected to be approximately 21.0%.reverse in the future. The effective state rate prospectively is expected to increase due to recent legislation regarding New Jersey corporate taxes. An analysisrevaluation of the legislative changes andCompany's deferred tax balances resulted in a one-time non-cash charge of $477,000 which is included in income tax expense for the impact to the Company is being performed and will affect the September 2018 quarter. However, we have not completed our analysis and do not have an estimate of the impact at this time.period. Income tax expensesexpense for the twelve month period ended June 30, 20172018 was $26.4 million (effective rate of 34.9%). The effective$31.1 million. Income tax ratesexpense for all periods werethe twelve month period ended June 30, 2018 was significantly impacted by the amountAct, as previously discussed in “Comparison of excess tax benefit associated withOperating Results for the exercise or vesting of stock awards that occurred during the period.periods ended June 30, 2019 and 2018, Net Income.”
Comparison of Operating Results for the Periods Ended June 30, 20172018 and 20162017
A comparison of our operating results for the twelve monthsperiods ended June 30, 2018 and June 30, 2017 from $52.3 million for the corresponding 2016 period. The primary causes of the decreasecan be found in the 2017 period were due to atypical items. Changes in net gainsour Annual Report on sales of assets, FHLB prepayment penalties and net loss on termination of derivatives, net of their tax effect, accounted for the majority of the periodic disparities. Several of these items pertain to the balance sheet restructures occurring in 2017 and 2016. See additional details under "2017 Balance Sheet Restructure" and the Company's form 10KForm 10-K for the year ended June 30, 2017 for details of the "2016 Balance Sheet Restructure". Return on average assets and average equity was 1.24% and 8.98% for the fiscal year ended June 30, 2017, respectively. Return on average assets and average equity was 1.50% and 9.91% for the fiscal year ended June 30, 2016, respectively.
| Twelve Months Ended June 30, | Increase / (decrease) | |||||||||||||||||||||||||||
| 2017 | 2016 | Average | ||||||||||||||||||||||||||
| Income | Yield | Income | Yield | Income | Balance | Yield | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Interest on mortgage loans | $ | 133,967 | 3.99 | % | $ | 125,427 | 4.34 | % | $ | 8,540 | $ | 468,991 | (0.35 | )% | ||||||||||||||
| Dividends on FHLB stock | 1,834 | 5.19 | % | 1,588 | 4.35 | % | 246 | (1,173 | ) | 0.84 | % | |||||||||||||||||
| Interest on securities AFS | 3,154 | 1.85 | % | 4,566 | 1.99 | % | (1,412 | ) | (58,744 | ) | (0.14 | )% | ||||||||||||||||
| Interest on securities HTM | 3,500 | 1.86 | % | 2,737 | 1.95 | % | 763 | 48,147 | (0.09 | )% | ||||||||||||||||||
| Interest on federal funds sold | ||||||||||||||||||||||||||||
| and short term investments | 7 | 0.73 | % | 6 | 0.36 | % | 1 | (717 | ) | 0.37 | % | |||||||||||||||||
| Total interest income | $ | 142,462 | 3.80 | % | $ | 134,324 | 4.08 | % | $ | 8,138 | $ | 456,504 | (0.28 | )% | ||||||||||||||
| Twelve Months Ended June 30, | Increase / (decrease) | |||||||||||||||||||||||||||
| 2017 | 2016 | Average | ||||||||||||||||||||||||||
| Expense | Cost | Expense | Cost | Expense | Balance | Cost | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Savings deposits | $ | 391 | 0.23 | % | $ | 380 | 0.24 | % | $ | 11 | $ | 11,751 | (0.01 | )% | ||||||||||||||
| Money market | 7,742 | 1.05 | % | 5,034 | 0.77 | % | 2,708 | 84,851 | 0.28 | % | ||||||||||||||||||
| Checking accounts | 3,015 | 0.46 | % | 1,666 | 0.37 | % | 1,349 | 211,039 | 0.09 | % | ||||||||||||||||||
| Time deposits | 13,523 | 1.33 | % | 10,804 | 1.24 | % | 2,719 | 145,801 | 0.09 | % | ||||||||||||||||||
| Total deposits | 24,671 | 0.95 | % | 17,884 | 0.84 | % | 6,787 | 453,442 | 0.11 | % | ||||||||||||||||||
| Borrowings | 13,180 | 1.83 | % | 16,139 | 2.21 | % | (2,959 | ) | (11,431 | ) | (0.38 | )% | ||||||||||||||||
| Total interest expense | $ | 37,851 | 1.14 | % | $ | 34,023 | 1.19 | % | $ | 3,828 | $ | 442,011 | (0.05 | )% | ||||||||||||||
| 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) | ||||||||||||||||||||||||||||
| June 30, 2017 | $ | 26,287 | $ | 236 | $ | 26,051 | 2.54 | % | 2.68 | % | 2.52 | % | 2.66 | % | ||||||||||||||
| March 31, 2017 | 26,795 | 821 | 25,974 | 2.63 | 2.75 | 2.54 | 2.67 | |||||||||||||||||||||
| December 31, 2016 | 26,229 | 1,199 | 25,030 | 2.72 | 2.86 | 2.59 | 2.73 | |||||||||||||||||||||
| September 30, 2016 | 25,300 | 631 | 24,669 | 2.73 | 2.87 | 2.65 | 2.80 | |||||||||||||||||||||
| June 30, 2016 | 25,707 | 1,538 | 24,169 | 2.82 | 2.97 | 2.64 | 2.79 | |||||||||||||||||||||
| Twelve months ended | ||||||||
| June 30, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in thousands) | ||||||||
| Balance at beginning of period | $ | 29,951 | $ | 30,889 | ||||
| Provisions charged to operations | — | — | ||||||
| Recoveries of loans previously charged off | 409 | 9 | ||||||
| Loans charged off | (88 | ) | (947 | ) | ||||
| Balance at end of period | 30,272 | 29,951 | ||||||
| Allowance for loan losses to total loans | 0.84 | % | 0.94 | % | ||||
| Net charge-offs to average loans outstanding | (0.01 | )% | 0.03 | % | ||||
| 6/30/2017 | 6/30/2016 | 6/30/2015 | 6/30/2014 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Delinquency Totals | ||||||||||||||||
| 30 - 59 days past due* | $ | 1,374 | $ | 8,912 | $ | 2,535 | $ | 3,411 | ||||||||
| 60 - 89 days past due* | 1,571 | 1,698 | 416 | 214 | ||||||||||||
| Nonaccrual | 10,223 | 9,968 | 12,575 | 17,972 | ||||||||||||
| Total | $ | 13,168 | $ | 20,578 | $ | 15,526 | $ | 21,597 | ||||||||
| Non Performing Asset Totals | ||||||||||||||||
| Nonaccrual loans, per above | $ | 10,223 | $ | 9,968 | $ | 12,575 | $ | 17,972 | ||||||||
| Real Estate Owned | 140 | 487 | 4,059 | 3,850 | ||||||||||||
| Total | $ | 10,363 | $ | 10,455 | $ | 16,634 | $ | 21,822 | ||||||||
| Nonaccrual loans to total loans | 0.28 | % | 0.31 | % | 0.45 | % | 0.71 | % | ||||||||
| Delinquent loans to total loans | 0.37 | % | 0.65 | % | 0.55 | % | 0.85 | % | ||||||||
| Non performing assets to total assets | 0.25 | % | 0.28 | % | 0.50 | % | 0.69 | % | ||||||||
Average Balances and Yields.
The following table set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
| For the Years Ended June 30, | For the Years Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average Outstanding Balance | Interest Earned/ Paid | Average Yield/ Rate | Average Outstanding Balance | Interest Earned Paid | Average Yield/ Rate | Average Outstanding Balance | Interest Earned/ Paid | Average Yield/ Rate | Average Outstanding Balance | Interest Earned/ Paid | Average Yield/ Rate | Average Outstanding Balance | Interest Earned Paid | Average Yield/ Rate | Average Outstanding Balance | Interest Earned/ Paid | Average Yield/ Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans (1) | $ | 3,558,592 | $ | 144,051 | 4.05 | % | $ | 3,357,187 | $ | 133,967 | 3.99 | % | $ | 2,888,196 | $ | 125,427 | 4.34 | % | $ | 3,480,940 | $ | 144,457 | 4.15 | % | $ | 3,558,592 | $ | 144,051 | 4.05 | % | $ | 3,357,187 | $ | 133,967 | 3.99 | % | ||||||||||||||||||||||||||||||||||||
| Securities available for sale | 70,129 | 1,504 | 2.14 | % | 170,407 | 3,154 | 1.85 | % | 229,151 | 4,566 | 1.99 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities held to maturity | 267,034 | 5,328 | 2.00 | % | 188,576 | 3,500 | 1.86 | % | 140,429 | 2,737 | 1.95 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity securities | 1,424 | 48 | 3.37 | % | 1,529 | 43 | 2.81 | % | 1,508 | 35 | 2.32 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities available for sale | 37,839 | 868 | 2.29 | % | 68,600 | 1,461 | 2.13 | % | 168,899 | 3,119 | 1.85 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities held to maturity | 339,136 | 8,189 | 2.41 | % | 267,034 | 5,328 | 2.00 | % | 188,576 | 3,500 | 1.86 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank Stock | 27,313 | 1,788 | 6.55 | % | 35,334 | 1,834 | 5.19 | % | 36,507 | 1,588 | 4.35 | % | 26,747 | 1,817 | 6.79 | % | 27,313 | 1,788 | 6.55 | % | 35,334 | 1,834 | 5.19 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds sold and short term investments | 11,557 | 155 | 1.34 | % | 957 | 7 | 0.73 | % | 1,674 | 6 | 0.36 | % | 16,672 | 376 | 2.26 | % | 11,557 | 155 | 1.34 | % | 957 | 7 | 0.73 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 3,934,625 | 152,826 | 3.88 | % | 3,752,461 | 142,462 | 3.80 | % | 3,295,957 | 134,324 | 4.08 | % | 3,902,758 | 155,755 | 3.99 | % | 3,934,625 | 152,826 | 3.88 | % | 3,752,461 | 142,462 | 3.80 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-interest-earning assets | 203,782 | 196,441 | 182,675 | 193,798 | 203,782 | 196,441 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 4,138,407 | $ | 3,948,902 | $ | 3,478,632 | $ | 4,096,556 | $ | 4,138,407 | $ | 3,948,902 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings deposits | $ | 183,056 | 455 | 0.25 | % | $ | 172,053 | 391 | 0.23 | % | $ | 160,302 | 380 | 0.24 | % | $ | 304,115 | 2,986 | 0.98 | % | $ | 183,056 | 455 | 0.25 | % | $ | 172,053 | 391 | 0.23 | % | ||||||||||||||||||||||||||||||||||||||||||
| Money market | 820,985 | 9,038 | 1.10 | % | 739,750 | 7,742 | 1.05 | % | 654,899 | 5,034 | 0.77 | % | 671,079 | 7,397 | 1.10 | % | 820,985 | 9,038 | 1.10 | % | 739,750 | 7,742 | 1.05 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Checking accounts | 752,430 | 4,955 | 0.66 | % | 660,944 | 3,015 | 0.46 | % | 449,905 | 1,666 | 0.37 | % | 707,876 | 8,556 | 1.21 | % | 752,430 | 4,955 | 0.66 | % | 660,944 | 3,015 | 0.46 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 1,182,018 | 17,176 | 1.45 | % | 1,016,711 | 13,523 | 1.33 | % | 870,910 | 10,804 | 1.24 | % | 1,234,954 | 22,699 | 1.84 | % | 1,182,018 | 17,176 | 1.45 | % | 1,016,711 | 13,523 | 1.33 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total deposits | 2,938,489 | 31,624 | 1.08 | % | 2,589,458 | 24,671 | 0.95 | % | 2,136,016 | 17,884 | 0.84 | % | 2,918,024 | 41,638 | 1.43 | % | 2,938,489 | 31,624 | 1.08 | % | 2,589,458 | 24,671 | 0.95 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Borrowings | 543,290 | 11,276 | 2.08 | % | 719,647 | 13,180 | 1.83 | % | 731,078 | 16,139 | 2.21 | % | 537,480 | 13,029 | 2.42 | % | 543,290 | 11,276 | 2.08 | % | 719,647 | 13,180 | 1.83 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 3,481,779 | 42,900 | 1.23 | % | 3,309,105 | 37,851 | 1.14 | % | 2,867,094 | 34,023 | 1.19 | % | 3,455,504 | 54,667 | 1.58 | % | 3,481,779 | 42,900 | 1.23 | % | 3,309,105 | 37,851 | 1.14 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-interest-bearing liabilities | 95,815 | 92,447 | 83,579 | 98,748 | 95,815 | 92,447 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 3,577,594 | 3,401,552 | 2,950,673 | 3,554,252 | 3,577,594 | 3,401,552 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' equity | 560,813 | 547,350 | 527,959 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 4,138,407 | $ | 3,948,902 | $ | 3,478,632 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 542,304 | 560,813 | 547,350 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 4,096,556 | $ | 4,138,407 | $ | 3,948,902 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 109,926 | $ | 104,611 | $ | 100,301 | $ | 101,088 | $ | 109,926 | $ | 104,611 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest rate spread (2) | 2.65 | % | 2.66 | % | 2.89 | % | 2.41 | % | 2.65 | % | 2.66 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest-earning assets (3) | $ | 452,846 | $ | 443,356 | $ | 428,863 | $ | 447,254 | $ | 452,846 | $ | 443,356 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin (4) | 2.79 | % | 2.79 | % | 3.04 | % | 2.59 | % | 2.79 | % | 2.79 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities | 113.01 | % | 113.40 | % | 114.96 | % | 112.94 | % | 113.01 | % | 113.40 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Includes nonaccrual loans. |
| (2) | Net interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period. |
| (3) | Net interest-earning assets represents total interest-earning assets less interest-bearing liabilities. |
| (4) | Net interest margin represents net interest income as a percent of average interest-earning assets for the period. |
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the fiscal years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns.
| Years Ended June 30, | Years Ended June 30, | Years Ended June 30, | Years Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2018 vs 2017 | 2017 vs 2016 | 2019 vs 2018 | 2018 vs 2017 | |||||||||||||||||||||||||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||||||||||||||||||||||||
| Volume | Rate | Total Increase (Decrease) | Volume | Rate | Total Increase (Decrease) | Volume | Rate | Total Increase (Decrease) | Volume | Rate | Total Increase (Decrease) | |||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Loans, net | $ | 8,037 | $ | 2,047 | $ | 10,084 | $ | 20,367 | $ | (11,827 | ) | $ | 8,540 | $ | (3,143 | ) | $ | 3,549 | $ | 406 | $ | 8,037 | $ | 2,047 | $ | 10,084 | ||||||||||||||||||||||
| Securities available for sale | (1,856 | ) | 206 | (1,650 | ) | (1,171 | ) | (241 | ) | (1,412 | ) | |||||||||||||||||||||||||||||||||||||
| Securities held to maturity | 1,456 | 372 | 1,828 | 938 | (175 | ) | 763 | |||||||||||||||||||||||||||||||||||||||||
| Equity securities | (3 | ) | 8 | 5 | 1 | 7 | 8 | |||||||||||||||||||||||||||||||||||||||||
| Debt securities available for sale | (655 | ) | 62 | (593 | ) | (1,857 | ) | 199 | (1,658 | ) | ||||||||||||||||||||||||||||||||||||||
| Debt securities held to maturity | 1,439 | 1,422 | 2,861 | 1,456 | 372 | 1,828 | ||||||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank Stock | (416 | ) | 370 | (46 | ) | (51 | ) | 297 | 246 | (37 | ) | 66 | 29 | (416 | ) | 370 | (46 | ) | ||||||||||||||||||||||||||||||
| Federal Funds sold and short term investments | 78 | 70 | 148 | (3 | ) | 4 | 1 | 69 | 152 | 221 | 78 | 70 | 148 | |||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 7,299 | 3,065 | 10,364 | $ | 20,081 | $ | (11,943 | ) | $ | 8,138 | (2,331 | ) | 5,260 | 2,929 | $ | 7,299 | $ | 3,065 | $ | 10,364 | ||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Savings accounts | 25 | 39 | 64 | 28 | (17 | ) | 11 | 301 | 2,230 | 2,531 | 25 | 39 | 64 | |||||||||||||||||||||||||||||||||||
| Money market | 850 | 446 | 1,296 | 652 | 2,056 | 2,708 | (1,650 | ) | 9 | (1,641 | ) | 850 | 446 | 1,296 | ||||||||||||||||||||||||||||||||||
| Checking accounts | 417 | 1,523 | 1,940 | 781 | 568 | 1,349 | (293 | ) | 3,894 | 3,601 | 417 | 1,523 | 1,940 | |||||||||||||||||||||||||||||||||||
| Time deposits | 2,199 | 1,454 | 3,653 | 1,809 | 910 | 2,719 | 769 | 4,754 | 5,523 | 2,199 | 1,454 | 3,653 | ||||||||||||||||||||||||||||||||||||
| Total deposits | 3,491 | 3,462 | 6,953 | 3,270 | 3,517 | 6,787 | (874 | ) | 10,888 | 10,014 | 3,491 | 3,462 | 6,953 | |||||||||||||||||||||||||||||||||||
| Borrowings | (3,230 | ) | 1,326 | (1,904 | ) | (252 | ) | (2,707 | ) | (2,959 | ) | (121 | ) | 1,874 | 1,753 | (3,230 | ) | 1,326 | (1,904 | ) | ||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 261 | 4,788 | 5,049 | 3,018 | 810 | 3,828 | (994 | ) | 12,761 | 11,767 | 261 | 4,788 | 5,049 | |||||||||||||||||||||||||||||||||||
| Change in net interest income | $ | 7,038 | $ | (1,723 | ) | $ | 5,315 | $ | 17,063 | $ | (12,753 | ) | $ | 4,310 | $ | (1,337 | ) | $ | (7,501 | ) | $ | (8,838 | ) | $ | 7,038 | $ | (1,723 | ) | $ | 5,315 | ||||||||||||||||||
Management of Market Risk
General. 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 mortgage 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. The Company also engages the services of an outside consultant to assist with the measurement and analysis of interest rate risk.
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 commercial real estate loans that generally tend to have shorter interest duration and generally have interest rates that reset at five years or less (see chart below); | |
| (ii) | investing in shorter duration securities and mortgage-backed securities; | |
| (iii) | obtaining general financing through FHLB advances with a fixed long term; | |
| (iv) | utilizing interest rate swaps or other derivative instruments; and | |
| (v) | obtaining long term financing through the use of listing services. |
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.
| Loan Portfolio by Reprice/Maturity Date | Loan Portfolio by Reprice/Maturity Date | Loan Portfolio by Reprice/Maturity Date | ||||||||||||||||||||||||||||||
| At June 30, 2018 | ||||||||||||||||||||||||||||||||
| At June 30, 2019 | At June 30, 2019 | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||
| Weighted | % of Total | Cumulative | Weighted | % of Total | Cumulative | |||||||||||||||||||||||||||
| Repricing or Maturing Within: | Amount | Avg. Rate | Loans | Percent | Amount | Avg. Rate | Loans | Percent | ||||||||||||||||||||||||
| Less than 1 year | $ | 659,616 | 3.74 | % | 18.43 | % | 18.43 | % | $ | 898,443 | 3.77 | % | 25.47 | % | 25.47 | % | ||||||||||||||||
| 1 - 3 years | 1,322,469 | 3.54 | % | 36.96 | % | 55.39 | % | 1,035,551 | 3.71 | % | 29.34 | % | 54.81 | % | ||||||||||||||||||
| 3 - 5 years | 882,995 | 3.90 | % | 24.68 | % | 80.07 | % | 982,645 | 4.20 | % | 27.84 | % | 82.65 | % | ||||||||||||||||||
| 5 -7 years | 180,962 | 4.09 | % | 5.06 | % | 85.13 | % | 136,012 | 4.31 | % | 3.85 | % | 86.50 | % | ||||||||||||||||||
| 7 - 10 years | 191,829 | 4.61 | % | 5.36 | % | 90.49 | % | 155,108 | 4.74 | % | 4.40 | % | 90.90 | % | ||||||||||||||||||
| Greater than 10 years | 340,473 | 4.46 | % | 9.51 | % | 100.00 | % | 321,307 | 4.38 | % | 9.10 | % | 100.00 | % | ||||||||||||||||||
| $ | 3,578,344 | 3.84 | % | 100.00 | % | $ | 3,529,066 | 3.99 | % | 100.00 | % | |||||||||||||||||||||
As of June 30, 2018, 80.07%2019, 82.65% of the portfolio mature or reprice in five 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 an available for sale 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 increases in market interest rates.
Net Portfolio Value. We compute the amounts by which our net present value of cash flow from assets, liabilities and off balance sheet items (the institution'sinstitution’s net portfolio value or "NPV"“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“Change in Interest Rates"Rates” column below.
The table below sets forth, as of June 30, 2018,2019, 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.
NPV as a Percentage of Present Value of Assets (3) | NPV as a Percentage of Present Value of Assets (3) | |||||||||||||||||||||||||||||||||||||||||||
| Change in Interest | Change in Interest | Estimated | Estimated Increase (Decrease) in NPV | Increase (Decrease) | Change in Interest | Estimated | Estimated Increase (Decrease) in NPV | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||
| Rates (basis points) (1) | Rates (basis points) (1) | NPV (2) | Amount | Percent | NPV Ratio (4) | (basis points) | Rates (basis points) (1) | NPV (2) | Amount | Percent | NPV Ratio (4) | (basis points) | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||
| 200 | $ | 520,742 | $ | ($87,097 | ) | (14.33 | )% | 13.17 | % | (158 | ) | 200 | $ | 421,866 | $ | ($68,685 | ) | (14.00 | )% | 10.93 | % | (131 | ) | |||||||||||||||||||||
| 100 | 565,112 | $ | (42,727 | ) | (7.03 | )% | 13.99 | % | (76 | ) | 100 | 462,059 | $ | (28,492 | ) | (5.81 | )% | 11.73 | % | (51 | ) | |||||||||||||||||||||||
| 0 | 607,839 | — | 0.00 | % | 14.75 | % | — | 0 | 490,551 | — | 0.00 | % | 12.24 | % | — | |||||||||||||||||||||||||||||
| -100 | 641,192 | $ | 33,353 | 5.49 | % | 15.29 | % | 54 | -100 | 512,079 | $ | 21,528 | 4.39 | % | 12.55 | % | 31 | |||||||||||||||||||||||||||
| -200 | 538,694 | $ | 48,143 | 9.81 | % | 12.95 | % | 71 | ||||||||||||||||||||||||||||||||||||
| (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 June 30, 20182019 in the event of a 100200 basis point decrease in interest rates, we would experience a 5.5%9.8% increase in net portfolio value. In the event of 200 and 100 basis point increases in interest rates, we would experience a 14.3%14.0% decrease and a 7.0%5.8% decrease in net portfolio value, respectively. These changes in net portfolio value are within the limitations established in our asset and liability management policies. This data does not reflect any future actions we may take in response to changes in interest rates, such as changing the mix of our assets and liabilities, which could change the results of the NPV and net interest income calculations.
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.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan and security repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments and security prepayments and calls are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. Our Asset/Liability Management Committee focuses on our level of liquid assets as well as our borrowing capacity with the FHLB. Funds can be obtained from the FHLB on a same day basis, significantly reducing the need to maintain excess liquid assets to address liquidity concerns.
We regularly adjust our investments in liquid assets based upon our assessment of:
| (i) | expected loan demand; | |
| (ii) | expected deposit flows; | |
| (iii) | expected payments from the loan and investment portfolios; | |
| (iv) | funds available through borrowings; | |
| (v) | yields available on interest-earning deposits and securities | |
| (vi) | yields and structures available on alternate investments; and | |
| (vii) | the objectives of our asset/liability management program |
Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 20182019 and 2017,2018, cash and cash equivalents totaled $34.8$26.5 million and $33.6$34.8 million, respectively. Securities classified as available for sale, which provide additional sources of liquidity, totaled $44.7$32.8 million and $97.9$43.1 million at June 30, 20182019 and 2017,2018, respectively. A substantial majority of the investment portfolio, including securities available for sale, can be pledged to facilitate liquidity through a borrowing.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
At June 30, 2018,2019, we had $58.6$92.2 million in loan commitments outstanding. In addition to commitments to originate loans, we had $14.2$17.2 million in unused lines of credit to borrowers. Time deposits due within one year of June 30, 20182019 totaled $781.7$849.8 million, or 26.82%29.07% of total deposits. . If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits. We believe, however, based on past experience, that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activity currently is the origination of loans and the purchase of loans and securities. During the year ended June 30, 2019, loan originations and purchases totaled $414.4 million and $138.5 million, respectively. During the year ended June 30, 2018, loan originations and purchases totaled $470.7 million and $69.2 million, respectively. During the year ended June 30, 2017, loan originations and purchases totaled $732.0 million and $65.9 million, respectively. Security purchases during the years ended June 30, 2019 and 2018 and 2017 totaled $145.0$68.1 million and $176.9$145.0 million, respectively.
Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in total deposits of $58.7$8.1 million and $596.5$58.7 million for the fiscal years ended June 30, 20182019 and 2017,2018, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of New York, which provide an additional source of funds. Borrowings reflected a net decrease of $45.7$74.8 million and $139.6$45.7 million during the fiscal years ended June 30, 20182019 and 2017,2018, respectively. FHLB advances have primarily been used to fund loan demand and provide longer-term sources of funding. At June 30, 2018,2019, the Company had additional borrowing capacity of $898.9$1,007.1 million with the FHLB.
Oritani Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2018,2019, Oritani Bank exceeded all regulatory capital requirements. Oritani Bank is considered "well capitalized"“well capitalized” under regulatory guidelines. See "Item“Item 1. Business—Supervision and Regulation—Federal Banking Regulation—Capital Requirements"Requirements” and Note 17 of the Notes to the Consolidated Financial Statements.
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'sCompany’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'sCompany’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. The Company had previously secured external financing, a source of funds independent of the Bank. At June 30, 2017, the Company had $12.5 million in borrowings outstanding from another financial institution. June 30, 20182019 and 2017,2018, the Company, on an unconsolidated basis, had cash and cash equivalents of $56.6$24.2 million and $24.4$56.6 million, respectively.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. We consider commitments to extend credit in determining our allowance for loan losses. For additional information, see Note 4, "Loans,"“Loans,” to our Consolidated Financial Statements.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.
The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at June 30, 2018.2019. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
| Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | Less than One Year | One to Three Years | Three to Five Years | More than Five Years | Total | Less than One Year | One to Three Years | Three to Five Years | More than Five Years | Total | ||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | $ | 193,735 | $ | 197,066 | $ | 169,076 | $ | 36,495 | $ | 596,372 | $ | 148,217 | $ | 232,549 | $ | 111,803 | $ | 28,986 | $ | 521,555 | ||||||||||||||||||||
| Operating leases | 769 | 1,173 | 395 | 34 | 2,371 | 759 | 758 | 186 | - | 1,703 | ||||||||||||||||||||||||||||||
| Total | $ | 194,504 | $ | 198,239 | $ | 169,471 | $ | 36,529 | $ | 598,743 | $ | 148,976 | $ | 233,307 | $ | 111,989 | $ | 28,986 | $ | 523,258 | ||||||||||||||||||||
| Commitments to extend credit | $ | 58,567 | $ | — | $ | — | $ | — | $ | 58,567 | $ | 92,203 | $ | — | $ | — | $ | — | $ | 92,203 | ||||||||||||||||||||
| Unadvanced construction loans | $ | 1,781 | $ | — | $ | — | $ | — | $ | 1,781 | $ | 7,457 | $ | — | $ | — | $ | — | $ | 7,457 | ||||||||||||||||||||
| Unused lines of credit | $ | 14,196 | $ | — | $ | — | $ | — | $ | 14,196 | $ | 17,155 | $ | — | $ | — | $ | — | $ | 17,155 | ||||||||||||||||||||
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
For information regarding market risk, see "Item“Item 7. Management'sManagement’s Discussion and Analysis of Financial Conditions and Results of Operation – Management of Market Risk."”
The Financial Statements are included in Part IV, Item 15 of this Form 10-K.
Not Applicable.
(a) Evaluation of disclosure 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 Exchange Act) as of the end of the fiscal year (the "Evaluation Date"“Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.
(b) Changes in internal controls.
The Company considers management of internal controls to be an ongoing matter. There were no changes made in our internal control over financial reporting during the Company'sCompany’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
(c) Management report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is a process designed to provide reasonable assurance to the Company'sCompany’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of Oritani Financial Corp.; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company'sCompany’s assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Oritani Financial Corp.'s’s management assessed the effectiveness of the Company'sCompany’s internal control over financial reporting as of June 30, 2018.2019. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on our assessment we believe that, as of June 30, 2018,2019, the Company'sCompany’s internal control over financial reporting is effective based on those criteria.
Oritani Financial Corp.'s’s independent registered public accounting firm that audited the consolidated financial statements has issued an audit report on the effectiveness of the Company'sCompany’s internal control over financial reporting as of June 30, 2018.2019. This report appears on page 55.
Not Applicable.
Information regarding director nominees, incumbent directors, executive officers, the Audit Committee of the board of directors, Audit Committee financial experts and procedures by which stockholders may recommend director nominees required by this item is set forth under "Proposal I Election of Directors" under the captions "Directors," "Executive Officers," "Nominees for Directors," "Continuing Directors," "Board Meetings and Committees," "Corporate Governance, Code of Ethics and Business Conduct" and "Procedures for the Consideration of Board Candidates Submitted by Stockholders"will be included in the Proxy Statement filed for the Annual Meeting of Stockholdersan amendment to this form 10-K to be held on November 20, 2018 and is incorporated herein by reference.
The Board has adopted a code of ethics for the principal executive officer, principal financial officer, principal accounting officer and all persons performing similar functions, and corporate governance guidelines for directors. These codes and guidelines are designed to deter wrongdoing and to promote honest and ethical conducts, the avoidance of conflicts of interest, full and accurate disclosure and compliance with all applicable laws, rules and regulations. Both of these documents are available through links under the investor relations tab on the Company's website www.oritani.com. Amendments to and waivers from the code of ethics and corporate governance guidelines for directors are disclosed on the Company's website.
The information required by this item is set forth under "Proposal 1 Election of Directors" under the captions "Compensation Committee," "Executive Compensation" and "Director Compensation"will be included in the Proxy Statement for the Annual Meeting of Stockholdersan amendment to this form 10-K to be heldfiled with the Securities and Exchange Commission on November 20, 2018 and is incorporated herein by reference.or before October 28, 2019.
| ITEM 12. |
The information required by this item regarding security ownership of certain beneficial owners and management is set forth under "General Information" under the caption "Security Ownership of Certain Beneficial Owners and Management"will be included in the Proxy Statement filed for the Annual Meeting of Stockholdersan amendment to this form 10-K to be heldfiled with the Securities and Exchange Commission on November 20, 2018 and is incorporated herein by reference.or before October 28, 2019.
Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of June 30, 20182019 regarding equity compensation plans categorized by those plans that have been approved by stockholders and those plans that have not been approved by stockholders.
| Plan | Number of Securities to be Issued Upon Exercise of Outstanding Options (1) | Weighted Average Exercise Price (2) | Number of Securities Remaining Available for Issuance Under Plan | Number of Securities to be Issued Upon Exercise of Outstanding Options (1) | Weighted Average Exercise Price (2) | Number of Securities Remaining Available for Issuance Under Plan (3) | ||||||||||||||||||
| Equity compensation plans approved by stockholders | 2,501,464 | $ | 12.05 | 263,407(3 | ) | 2,222,691 | $ | $12.16 | 253,407 | |||||||||||||||
| Equity compensation plans not approved by stockholders | — | — | — | — | — | — | ||||||||||||||||||
| 2,501,464 | $ | 12.05 | 263,407 | 2,222,691 | $ | $12.16 | 253,407 | |||||||||||||||||
| (1) | Consists of outstanding stock options to purchase |
| (2) | The weighted average exercise price reflects the exercise price of $11.95 per share for |
| (3) | Represents the number of available shares that may be granted as stock options and stock awards under the Company's stock-based compensation plans. |
The information required by this item is set forth under "Proposal I Election of Directors" under the caption "Director Independence" and "Transactions With Certain Related Persons"will be included in the Proxy Statement filed for the Annual Meeting of Stockholdersan amendment to this form 10-K to be heldfiled with the Securities and Exchange Commission on November 20, 2018 and is incorporated herein by reference.or before October 28, 2019.
The information required by this item is set forth under "Proposal II Ratification of the Appointment of the Independent Registered Public Accounting Firm"will be included in the Proxy Statement filed for the Annual Meeting of Stockholdersan amendment to this form 10-K to be heldfiled with the Securities and Exchange Commission on November 20, 2018 and is incorporated herein by reference.or before October 28, 2019.
(a)(1) Financial Statements
The following documents are filed as part of this Form 10-K.
| (A) | Report of Independent Registered Public Accounting Firm |
| (B) | Consolidated Balance Sheets—at June 30, |
| (C) | Consolidated Statements of Income—Years ended June 30, 2019, 2018 |
| (D) | Consolidated Statements of Comprehensive Income—Years ended June 30, 2019, 2018 |
| (E) | Consolidated Statements of |
| (F) | Consolidated Statements of Cash Flows—Years ended June June 30, 2019, 2018 |
| (G) | Notes to Consolidated Financial Statements. |
Not Applicable
Oritani Financial Corp.
Township of Washington, New Jersey
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Oritani Financial Corp. (the "Company") as of June 30, 20182019 and 2017,2018, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years thenin the three-year period ended June 30, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company'sCompany’s internal control over financial reporting as of June 30, 2018,2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the years in thenthe three-year period ended June 30, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018,2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company'sCompany’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s financial statements and an opinion on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated allowance for loan losses balance was $28,596,000 at June 30, 2019, which consists of two components: specific and general allocations. The allowance for loan losses is the estimated amount considered necessary to cover probable and reasonably estimable incurred credit losses inherent in the loan portfolio at the balance sheet date. The calculation of the allowance for loan losses involves significant estimates and subjective assumptions, which require a high degree of judgment relating to the Company’s loan portfolio, operations, and operating environment and how those items impact probable incurred losses inherent within the loan portfolio. Changes in these assumptions could have a material effect on the Company’s financial results.
The Company’s general allocation for “pass” classification loans includes reserve factors for historical charge-offs and qualitative general reserve factors. The component for qualitative general reserve factors involves an evaluation of items including: lending policy and procedures, economic and business conditions, nature and volume of portfolio, lending staff, volume and severity of delinquent loans, loan review system, collateral values, and concentrations of credit. The evaluation of these items results in qualitative general reserve factors, which contribute significantly to the general allocation component of the estimate of the allowance for loan losses. We identified the estimate of the aggregate effect of the qualitative general reserve factors on the allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment. Auditing management’s determination of qualitative general reserve factors involved especially subjective auditor judgment because management’s estimate relies on a qualitative analysis to determine the quantitative impact the items have on the allowance. Management’s analysis of these items requires significant judgment.
The primary procedures we performed to address this critical audit matter included:
| Testing the effectiveness of controls over the evaluation of the items used to estimate the qualitative general reserve factors, including controls addressing |
| o | The data used as the basis for the adjustments relating to qualitative general reserve factors |
| o | Management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative general reserve factors and the resulting allocation to the allowance |
| Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the qualitative general reserve factors which included: |
| o | Evaluation of the data used as a basis for the adjustments relating to qualitative general reserve factors |
| o | Evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative general reserve factors and the resulting allocation to the allowance. |
| o | Analytically evaluating the general allocation component year over year and testing for reasonableness |
Crowe LLP
We have served as the Company'sCompany’s auditor since 2016.
Livingston, New Jersey
August 29, 201828, 2019
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
| June 30, | June 30, | |||||||||||||||
| Assets | 2018 | 2017 | 2019 | 2018 | ||||||||||||
| Cash on hand and in banks | $ | 23,613 | $ | 33,252 | $ | 19,145 | $ | 23,613 | ||||||||
| Federal funds sold and short term investments | 11,235 | 326 | 7,366 | 11,235 | ||||||||||||
| Cash and cash equivalents | 34,848 | 33,578 | 26,511 | 34,848 | ||||||||||||
| Loans, net | 3,540,903 | 3,566,703 | 3,491,322 | 3,540,903 | ||||||||||||
| Securities available for sale, at fair value | 44,691 | 97,930 | ||||||||||||||
| Securities held to maturity, fair value of $326,511 and $237,204, respectively. | 335,374 | 239,631 | ||||||||||||||
| Equity securities | 1,358 | 1,566 | ||||||||||||||
| Debt securities available for sale, at fair value | 32,752 | 43,126 | ||||||||||||||
| Debt securities held to maturity, fair value of $334,179 and $326,511, respectively. | 332,215 | 335,374 | ||||||||||||||
| Bank Owned Life Insurance (at cash surrender value) | 98,438 | 95,946 | 100,872 | 98,438 | ||||||||||||
| Federal Home Loan Bank of New York ("FHLB") stock, at cost | 30,365 | 32,504 | 25,925 | 30,365 | ||||||||||||
| Accrued interest receivable | 11,261 | 10,620 | 11,935 | 11,261 | ||||||||||||
| Real estate owned | 1,564 | 140 | 557 | 1,564 | ||||||||||||
| Office properties and equipment, net | 13,455 | 13,909 | 12,904 | 13,455 | ||||||||||||
| Deferred tax assets, net | 25,864 | 37,693 | 31,045 | 25,864 | ||||||||||||
| Other assets | 30,276 | 9,030 | 3,120 | 30,275 | ||||||||||||
| Total Assets | $ | 4,167,039 | $ | 4,137,684 | $ | 4,070,516 | $ | 4,167,039 | ||||||||
| Liabilities | ||||||||||||||||
| Deposits | $ | 2,915,128 | $ | 2,856,478 | $ | 2,923,244 | $ | 2,915,128 | ||||||||
| Borrowings | 596,372 | 642,059 | 521,555 | 596,372 | ||||||||||||
| Advance payments by borrowers for taxes and insurance | 24,169 | 23,496 | 24,607 | 24,169 | ||||||||||||
| Other liabilities | 72,024 | 56,428 | 71,963 | 72,024 | ||||||||||||
| Total liabilities | 3,607,693 | 3,578,461 | 3,541,369 | 3,607,693 | ||||||||||||
| Stockholders' Equity | ||||||||||||||||
| Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued; 46,616,646 shares outstanding at June 30, 2018 and 45,992,366 shares outstanding at June 30, 2017 | 562 | 562 | ||||||||||||||
| Stockholders’ Equity | ||||||||||||||||
| Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued; 45,097,052 shares outstanding at June 30, 2019 and 46,616,646 shares outstanding at June 30, 2018 | 562 | 562 | ||||||||||||||
| Additional paid-in capital | 514,002 | 512,337 | 515,491 | 514,002 | ||||||||||||
| Restricted Stock Awards | (176 | ) | (458 | ) | (216 | ) | (176 | ) | ||||||||
| Treasury stock, at cost; 9,628,419 shares at June 30, 2018 and 10,252,699 shares at June 30, 2017 | (129,433 | ) | (136,517 | ) | ||||||||||||
| Treasury stock, at cost; 11,148,013 shares at June 30, 2019 and 9,628,419 shares at June 30, 2018 | (153,091 | ) | (129,433 | ) | ||||||||||||
| Unallocated common stock held by the employee stock ownership plan | (16,631 | ) | (18,407 | ) | (15,085 | ) | (16,631 | ) | ||||||||
| Retained income | 179,799 | 198,186 | 182,032 | 179,799 | ||||||||||||
| Accumulated other comprehensive income, net of tax | 11,223 | 3,520 | (546 | ) | 11,223 | |||||||||||
| Total stockholders' equity | 559,346 | 559,223 | ||||||||||||||
| Total Liabilities and Stockholders' Equity | $ | 4,167,039 | $ | 4,137,684 | ||||||||||||
| Total stockholders’ equity | 529,147 | 559,346 | ||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 4,070,516 | $ | 4,167,039 | ||||||||||||
See accompanying notes to consolidated financial statements.
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2019, 2018 2017 and 20162017
| Years ended June 30, | Years ended June 30, | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
| (Dollars in thousands, except per share data) | (Dollars in thousands, except per share data) | |||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Interest on mortgage loans | $ | 144,051 | $ | 133,967 | $ | 125,427 | $ | 144,457 | $ | 144,051 | $ | 133,967 | ||||||||||||
| Interest on securities available for sale | 1,504 | 3,154 | 4,566 | |||||||||||||||||||||
| Interest on securities held to maturity | 5,328 | 3,500 | 2,737 | |||||||||||||||||||||
| Dividends on equity securities | 48 | 43 | 35 | |||||||||||||||||||||
| Interest on debt securities available for sale | 868 | 1,461 | 3,119 | |||||||||||||||||||||
| Interest on debt securities held to maturity | 8,189 | 5,328 | 3,500 | |||||||||||||||||||||
| Dividends on FHLB stock | 1,788 | 1,834 | 1,588 | 1,817 | 1,788 | 1,834 | ||||||||||||||||||
| Interest on federal funds sold and short term investments | 155 | 7 | 6 | 376 | 155 | 7 | ||||||||||||||||||
| Total interest income | 152,826 | 142,462 | 134,324 | 155,755 | 152,826 | 142,462 | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Deposits (note 10) | 31,624 | 24,671 | 17,884 | 41,638 | 31,624 | 24,671 | ||||||||||||||||||
| Borrowings (note 12) | 11,276 | 13,180 | 16,139 | 13,029 | 11,276 | 13,180 | ||||||||||||||||||
| Total interest expense | 42,900 | 37,851 | 34,023 | 54,667 | 42,900 | 37,851 | ||||||||||||||||||
| Net interest income before provision for loan losses | 109,926 | 104,611 | 100,301 | 101,088 | 109,926 | 104,611 | ||||||||||||||||||
| Provision for loan losses (note 5) | — | — | — | |||||||||||||||||||||
| Reversal of provision for loan losses (note 5) | (2,000 | ) | — | — | ||||||||||||||||||||
| Net interest income after provision for loan losses | 109,926 | 104,611 | 100,301 | 103,088 | 109,926 | 104,611 | ||||||||||||||||||
| Other income: | ||||||||||||||||||||||||
| Service charges | 1,119 | 881 | 949 | |||||||||||||||||||||
| Non-interest income: | ||||||||||||||||||||||||
| Fees and service charges | 1,655 | 1,410 | 1,208 | |||||||||||||||||||||
| Bank Owned Life Insurance income | 2,434 | 2,492 | 2,618 | |||||||||||||||||||||
| Change in fair value of equity securities | (208 | ) | — | — | ||||||||||||||||||||
| Net loss on sale of debt securities available for sale | — | (324 | ) | (826 | ) | |||||||||||||||||||
| Net gain on sale of assets and loans | — | — | 20,856 | |||||||||||||||||||||
| Net gain/(losses) on sale of OREO | 855 | (2 | ) | — | ||||||||||||||||||||
| Net income from investments in real estate joint ventures | — | 769 | 1,177 | — | — | 769 | ||||||||||||||||||
| Bank Owned Life Insurance income | 2,492 | 2,618 | 2,718 | |||||||||||||||||||||
| Net (loss) gain on sale of securities | (324 | ) | (826 | ) | 990 | |||||||||||||||||||
| Net gain on sale of assets and loans | — | 20,856 | 37,544 | |||||||||||||||||||||
| Net (loss)/gain on sale of real estate owned | (2 | ) | — | 328 | ||||||||||||||||||||
| Net loss on termination of derivatives | — | (7,670 | ) | — | ||||||||||||||||||||
| Derivatives termination cost, net | — | — | (7,670 | ) | ||||||||||||||||||||
| Other income | 303 | 333 | 625 | 22 | 18 | 13 | ||||||||||||||||||
| Total other income | 3,588 | 16,961 | 44,331 | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Compensation, payroll taxes and benefits (notes 14 and 15) | 26,532 | 28,862 | 33,774 | |||||||||||||||||||||
| Total non-interest income | 4,758 | 3,594 | 16,968 | |||||||||||||||||||||
| Non-interest expense: | ||||||||||||||||||||||||
| Compensation, payroll taxes and fringe benefits (notes 14 and 15) | 23,678 | 25,082 | 27,140 | |||||||||||||||||||||
| Advertising | 571 | 502 | 361 | 570 | 571 | 502 | ||||||||||||||||||
| Office occupancy and equipment expense (notes 9 and 16) | 3,195 | 3,178 | 3,002 | 3,049 | 3,195 | 3,178 | ||||||||||||||||||
| Data processing service fees | 2,029 | 2,213 | 2,030 | 2,086 | 2,029 | 2,213 | ||||||||||||||||||
| Federal insurance premiums | 1,200 | 1,350 | 1,649 | 1,125 | 1,200 | 1,350 | ||||||||||||||||||
| FHLBNY prepayment penalties | — | 5,169 | 17,988 | — | — | 5,169 | ||||||||||||||||||
| Other expenses | 5,977 | 4,772 | 4,999 | 8,277 | 7,433 | 6,501 | ||||||||||||||||||
| Total operating expenses | 39,504 | 46,046 | 63,803 | |||||||||||||||||||||
| Total non-interest expense | 38,785 | 39,510 | 46,053 | |||||||||||||||||||||
| Income before income tax expense | 74,010 | 75,526 | 80,829 | 69,061 | 74,010 | 75,526 | ||||||||||||||||||
| Income tax expense (note 11) | 31,116 | 26,382 | 28,534 | 17,002 | 31,116 | 26,382 | ||||||||||||||||||
| Net income | $ | 42,894 | $ | 49,144 | $ | 52,295 | $ | 52,059 | $ | 42,894 | $ | 49,144 | ||||||||||||
| Basic income per common share | $ | 0.97 | $ | 1.14 | $ | 1.25 | $ | 1.19 | $ | 0.97 | $ | 1.14 | ||||||||||||
| Diluted income per common share | $ | 0.95 | $ | 1.10 | $ | 1.21 | $ | 1.18 | $ | 0.95 | $ | 1.10 | ||||||||||||
See accompanying notes to consolidated financial statements.
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended June 30, 2019, 2018 2017 and 20162017
(In thousands)
| Years ended June 30, | Years ended June 30, | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
| Net of tax: | ||||||||||||||||||||||||
| Net income | $ | 42,894 | $ | 49,144 | $ | 52,295 | $ | 52,059 | $ | 42,894 | $ | 49,144 | ||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||
| Change in unrealized holding (loss) gain on securities available for sale | (745 | ) | (1,593 | ) | 595 | |||||||||||||||||||
| Reclassification adjustment for security losses (gains) included in net income | 184 | 502 | (562 | ) | ||||||||||||||||||||
| Change in unrealized gain (loss) on interest rate swaps | 6,796 | 8,981 | (7,916 | ) | ||||||||||||||||||||
| Change in unrealized holding gain (loss) on securities available for sale | 582 | (745 | ) | (1,593 | ) | |||||||||||||||||||
| Reclassification adjustment for security losses included in net income | — | 184 | 502 | |||||||||||||||||||||
| Change in unrealized (loss) gain on interest rate swaps | (11,719 | ) | 6,796 | 8,981 | ||||||||||||||||||||
| Reclassification adjustment for derivative losses included in net income | — | 4,614 | — | — | — | 4,614 | ||||||||||||||||||
| Amortization related to post-retirement obligations | 21 | 246 | 129 | 26 | 21 | 246 | ||||||||||||||||||
| Change in funded status of retirement obligations | 347 | 842 | (470 | ) | — | 347 | 842 | |||||||||||||||||
| Total other comprehensive income (loss) | 6,603 | 13,592 | (8,224 | ) | ||||||||||||||||||||
| Total other comprehensive (loss) income | (11,111 | ) | 6,603 | 13,592 | ||||||||||||||||||||
| Total comprehensive income | $ | 49,497 | $ | 62,736 | $ | 44,071 | $ | 40,948 | $ | 49,497 | $ | 62,736 | ||||||||||||
See accompanying notes to consolidated financial statements.
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders'Stockholders’ Equity, continued
Years ended June 30, 2019, 2018 2017 and 20162017
(Dollars in thousands)
Shares Outstanding | Common stock | Additional paid-in capital | Restricted Stock Awards | Treasury stock | Un- allocated common stock held by ESOP | Retained income | Accumu- lated other compre- hensive income (loss), net of tax | Total stock- holders' equity | Shares Outstanding | Common stock | Additional paid-in capital | Restricted Stock Awards | Treasury stock | Un- allocated common stock held by ESOP | Retained income | Accumu- lated other compre- hensive income (loss), net of tax | Total stock- holders’ equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2016 | 45,247,420 | $ | 562 | $ | 513,177 | $ | (4,242 | ) | $ | (146,173 | ) | $ | (20,481 | ) | $ | 202,429 | $ | (10,072 | ) | $ | 535,200 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 49,144 | — | 49,144 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | 13,592 | 13,592 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend declared ($1.20 per share) | — | — | — | — | — | — | (51,850 | ) | — | (51,850 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (98,655 | ) | — | — | — | (1,574 | ) | — | — | — | (1,574 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock awards | 10,000 | — | — | (133 | ) | 133 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation cost for stock options and restricted stock | — | — | 1,004 | — | — | — | — | — | 1,004 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ESOP shares allocated or committed to be released | — | — | 2,066 | — | — | 2,074 | — | — | 4,140 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 833,601 | — | — | — | 11,097 | — | (1,530 | ) | — | 9,567 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | (3,910 | ) | 3,917 | — | — | (7 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2017 | 45,992,366 | $ | 562 | $ | 512,337 | $ | (458 | ) | $ | (136,517 | ) | $ | (18,407 | ) | $ | 198,186 | $ | 3,520 | $ | 559,223 | 45,992,366 | $ | 562 | $ | 512,337 | $ | (458 | ) | $ | (136,517 | ) | $ | (18,407 | ) | $ | 198,186 | $ | 3,520 | $ | 559,223 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 42,894 | — | 42,894 | — | — | — | — | — | — | 42,894 | — | 42,894 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | 6,603 | 6,603 | — | — | — | — | — | — | — | 6,603 | 6,603 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend declared ($1.30 per share) | — | — | — | — | — | — | (57,353 | ) | — | (57,353 | ) | — | — | — | — | — | — | (57,353 | ) | — | (57,353 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (492,458 | ) | — | — | — | (7,834 | ) | — | — | — | (7,834 | ) | (492,458 | ) | — | — | — | (7,834 | ) | — | — | — | (7,834 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation cost for stock options and restricted stock | — | — | 178 | — | — | — | — | — | 178 | — | — | 178 | — | — | — | — | — | 178 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ESOP shares allocated or committed to be released | — | — | 1,728 | — | — | 1,776 | — | — | 3,504 | — | — | 1,728 | — | — | 1,776 | — | — | 3,504 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 1,123,738 | — | — | — | 15,005 | — | (2,874 | ) | — | 12,131 | 1,123,738 | — | — | — | 15,005 | — | (2,874 | ) | — | 12,131 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | (241 | ) | 195 | — | — | 46 | — | — | — | — | (241 | ) | 195 | — | — | 46 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock awards | (7,000 | ) | — | — | 87 | (87 | ) | — | — | — | — | (7,000 | ) | — | — | 87 | (87 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification related to adoption of ASU 2018-02 | — | — | — | — | — | — | (1,100 | ) | 1,100 | — | — | — | — | — | — | (1,100 | ) | 1,100 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2018 | 46,616,646 | $ | 562 | $ | 514,002 | $ | (176 | ) | $ | (129,433 | ) | $ | (16,631 | ) | $ | 179,799 | $ | 11,223 | $ | 559,346 | 46,616,646 | $ | 562 | $ | 514,002 | $ | (176 | ) | $ | (129,433 | ) | $ | (16,631 | ) | $ | 179,799 | $ | 11,223 | $ | 559,346 | ||||||||||||||||||||||||||||||||
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders'Stockholders’ Equity continued
Years ended June 30, 2019, 2018 2017 and 20162017
(Dollars in thousands)
Shares Outstanding | Common stock | Additional paid-in capital | Restricted Stock Awards | Treasury stock | Un- allocated common stock held by ESOP | Retained income | Accumu- lated other compre- hensive income (loss), net of tax | Total stock- holders' equity | Shares Outstanding | Common stock | Additional paid-in capital | Restricted Stock Awards | Treasury stock | Un- allocated common stock held by ESOP | Retained income | Accumu- lated other compre- hensive income (loss), net of tax | Total stock- holders’ equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2015 | 44,012,239 | $ | 562 | $ | 508,999 | $ | (8,088 | ) | $ | (162,344 | ) | $ | (22,803 | ) | $ | 203,192 | $ | (1,848 | ) | $ | 517,670 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2018 | 46,616,646 | $ | 562 | $ | 514,002 | $ | (176 | ) | $ | (129,433 | ) | $ | (16,631 | ) | $ | 179,799 | $ | 11,223 | $ | 559,346 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 52,295 | — | 52,295 | — | — | — | — | — | — | 52,059 | — | 52,059 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | — | (8,224 | ) | (8,224 | ) | — | — | — | — | — | — | — | (11,111 | ) | (11,111 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend declared ($1.20 per share) | — | — | — | — | — | — | (50,007 | ) | — | (50,007 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (100,978 | ) | — | — | — | (1,593 | ) | — | — | — | (1,593 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation cost for stock options and restricted stock | — | — | 5,970 | — | — | — | — | — | 5,970 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ESOP shares allocated or committed to be released | — | — | 2,095 | — | — | 2,322 | — | — | 4,417 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 1,332,159 | — | — | — | 17,704 | — | (2,999 | ) | — | 14,705 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | (3,887 | ) | 3,906 | — | — | (19 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock awards | (6,000 | ) | — | — | 73 | (73 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle-adoption of ASU 2016-09 | — | — | — | — | — | — | (33 | ) | — | (33 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2016 | 45,247,420 | $ | 562 | $ | 513,177 | $ | (4,242 | ) | $ | (146,173 | ) | $ | (20,481 | ) | $ | 202,429 | $ | (10,072 | ) | $ | 535,200 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 49,144 | — | 49,144 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | 13,592 | 13,592 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend declared ($1.20 per share) | — | — | — | — | — | — | (51,850 | ) | — | (51,850 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend declared ($1.15 per share) | — | — | — | — | — | — | (49,994 | ) | — | (49,994 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (98,655 | ) | — | — | — | (1,574 | ) | — | — | — | (1,574 | ) | (1,890,767 | ) | — | — | — | (28,747 | ) | — | — | — | (28,747 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock awards | 10,000 | — | — | (133 | ) | 133 | — | — | — | — | 10,000 | — | — | (134 | ) | 134 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation cost for stock options and restricted stock | — | — | 1,004 | — | — | — | — | — | 1,004 | — | — | 149 | — | — | — | — | — | 149 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ESOP shares allocated or committed to be released | — | — | 2,066 | — | — | 2,074 | — | — | 4,140 | — | — | 1,457 | — | — | 1,546 | — | — | 3,003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 833,601 | — | — | — | 11,097 | — | (1,530 | ) | — | 9,567 | 361,173 | — | — | — | 4,955 | — | (513 | ) | — | 4,442 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock awards | — | — | (3,910 | ) | 3,917 | — | — | (7 | ) | — | — | — | — | (117 | ) | 94 | — | — | 23 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2017 | 45,992,366 | $ | 562 | $ | 512,337 | $ | (458 | ) | $ | (136,517 | ) | $ | (18,407 | ) | $ | 198,186 | $ | 3,520 | $ | 559,223 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification due to the adoption of ASU No. 2016-01 | — | — | — | — | — | — | 658 | (658 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 45,097,052 | $ | 562 | $ | 515,491 | $ | (216 | ) | $ | (153,091 | ) | $ | (15,085 | ) | $ | 182,032 | $ | (546 | ) | $ | 529,147 | |||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to audited consolidated financial statements.
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2019, 2018 2017 and 20162017
| Years ended June 30, | Years ended June 30, | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||
| Net income | $ | 42,894 | $ | 49,144 | $ | 52,295 | $ | 52,059 | $ | 42,894 | $ | 49,144 | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
| ESOP and stock-based compensation expense | 3,682 | 5,144 | 10,387 | 3,152 | 3,682 | 5,144 | ||||||||||||||||||
| Tax benefit from stock-based compensation | 1,122 | 1,430 | 2,118 | 261 | 1,122 | 1,430 | ||||||||||||||||||
| Depreciation of premises and equipment | 810 | 864 | 910 | 735 | 810 | 864 | ||||||||||||||||||
| Net amortization and accretion of premiums and discounts on securities | 1,170 | 1,322 | 1,145 | 1,143 | 1,170 | 1,322 | ||||||||||||||||||
| Provision for losses on loans | — | — | — | |||||||||||||||||||||
| Reversal of provision for losses on loans | (2,000 | ) | — | — | ||||||||||||||||||||
| Amortization and accretion of deferred loan fees, net | (2,692 | ) | (2,262 | ) | (3,371 | ) | (2,542 | ) | (2,692 | ) | (2,262 | ) | ||||||||||||
| Decrease (increase) in deferred taxes | 8,763 | (982 | ) | 229 | ||||||||||||||||||||
| Loss (gain) on sale of securities | 324 | 826 | (990 | ) | ||||||||||||||||||||
| (Increase) decrease in deferred taxes | (1,403 | ) | 8,763 | (982 | ) | |||||||||||||||||||
| Loss on sale of debt securities available for sale | — | 324 | 826 | |||||||||||||||||||||
| Fair value adjustment for equity securities | 208 | — | — | |||||||||||||||||||||
| Gain on sale of real estate joint ventures and real estate investments | — | (20,856 | ) | (37,544 | ) | — | — | (20,856 | ) | |||||||||||||||
| Net loss on termination of derivatives | — | 7,670 | — | — | — | 7,670 | ||||||||||||||||||
| Loss (gain) on sale of real estate owned | 2 | — | (328 | ) | ||||||||||||||||||||
| Net (gains) losses on sale of real estate owned | (855 | ) | 2 | — | ||||||||||||||||||||
| Writedown of real estate owned | — | 215 | 250 | 79 | — | 215 | ||||||||||||||||||
| Increase in cash surrender value of bank owned life insurance | (2,492 | ) | (2,618 | ) | (2,718 | ) | (2,434 | ) | (2,492 | ) | (2,618 | ) | ||||||||||||
| Increase in accrued interest receivable | (641 | ) | (677 | ) | (677 | ) | (674 | ) | (641 | ) | (677 | ) | ||||||||||||
| (Increase) decrease in other assets | (11,814 | ) | 20,194 | (9,708 | ) | |||||||||||||||||||
| Increase (decrease) in other liabilities | 15,651 | (22,195 | ) | 16,008 | ||||||||||||||||||||
| Decrease (increase) in other assets | 11,435 | (11,814 | ) | 20,194 | ||||||||||||||||||||
| (Decrease) increase in other liabilities | (292 | ) | 15,651 | (22,195 | ) | |||||||||||||||||||
| Net cash provided by operating activities | 56,779 | 37,219 | 28,006 | 58,872 | 56,779 | 37,219 | ||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||
| Net decrease (increase) in loans receivable | 96,155 | (366,559 | ) | (273,846 | ) | 184,586 | 96,155 | (366,559 | ) | |||||||||||||||
| Purchase of mortgage loans | (69,227 | ) | (65,925 | ) | (98,845 | ) | (138,523 | ) | (69,227 | ) | (65,925 | ) | ||||||||||||
| Purchase of securities available for sale | — | (66,222 | ) | (42,213 | ) | |||||||||||||||||||
| Purchase of securities held to maturity | (144,959 | ) | (110,664 | ) | (82,591 | ) | ||||||||||||||||||
| Proceeds from payments, calls and maturities of securities available for sale | 22,350 | 51,573 | 59,188 | |||||||||||||||||||||
| Proceeds from payments, calls and maturities of securities held to maturity | 48,247 | 36,561 | 22,010 | |||||||||||||||||||||
| Proceeds from sales of securities available for sale | 29,505 | 55,093 | 100,468 | |||||||||||||||||||||
| Proceeds from sales of securities held to maturity | — | 1,995 | — | |||||||||||||||||||||
| Proceeds from sale of loans receivable | 8,060 | — | — | |||||||||||||||||||||
| Purchase of debt securities available for sale | — | — | (66,222 | ) | ||||||||||||||||||||
| Purchase of debt securities held to maturity | (68,106 | ) | (144,959 | ) | (110,664 | ) | ||||||||||||||||||
| Proceeds from payments, calls and maturities of debt securities available for sale | 11,118 | 22,350 | 51,573 | |||||||||||||||||||||
| Proceeds from payments, calls and maturities of debt securities held to maturity | 70,216 | 48,247 | 36,561 | |||||||||||||||||||||
| Proceeds from sales of debt securities available for sale | — | 29,505 | 55,093 | |||||||||||||||||||||
| Proceeds from sales of debt securities held to maturity | — | — | 1,995 | |||||||||||||||||||||
| Proceeds from sale of real estate owned | 138 | 132 | 3,967 | 1,783 | 138 | 132 | ||||||||||||||||||
| Proceeds from redemption of Federal Home Loan Bank stock | 45,997 | 74,723 | 56,337 | 25,880 | 45,997 | 74,723 | ||||||||||||||||||
| Purchase of Federal Home Loan Bank stock | (43,858 | ) | (69,224 | ) | (54,442 | ) | (21,440 | ) | (43,858 | ) | (69,224 | ) | ||||||||||||
| Proceeds from sale of real estate joint ventures and real estate investments | — | 25,318 | 38,614 | — | — | 25,318 | ||||||||||||||||||
| Net increase in real estate held for investment | — | — | (23 | ) | ||||||||||||||||||||
| Net (increase) decrease in real estate joint ventures | — | (155 | ) | 648 | ||||||||||||||||||||
| Net increase in real estate joint ventures | — | — | (155 | ) | ||||||||||||||||||||
| Purchase of fixed assets | (356 | ) | (419 | ) | (835 | ) | (191 | ) | (356 | ) | (419 | ) | ||||||||||||
| Net cash used by investing activities | (16,008 | ) | (433,773 | ) | (271,563 | ) | ||||||||||||||||||
| Net cash provided (used) by investing activities | 73,383 | (16,008 | ) | (433,773 | ) | |||||||||||||||||||
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years Ended June 30, 2019, 2018 2017 and 20162017
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||
| Net increase in deposits | $ | 58,650 | $ | 596,475 | $ | 297,266 | $ | 8,116 | $ | 58,650 | $ | 596,475 | ||||||||||||
| Net proceeds from issuance of common stock | 12,131 | 9,567 | 14,705 | 4,442 | 12,131 | 9,567 | ||||||||||||||||||
| Purchase of treasury stock | (7,834 | ) | (1,574 | ) | (1,593 | ) | (28,747 | ) | (7,834 | ) | (1,574 | ) | ||||||||||||
| Dividends paid to shareholders | (57,353 | ) | (51,850 | ) | (50,007 | ) | (49,994 | ) | (57,353 | ) | (51,850 | ) | ||||||||||||
| Increase in advance payments by borrowers for taxes and insurance | 673 | 2,081 | 970 | 438 | 673 | 2,081 | ||||||||||||||||||
| Proceeds from borrowed funds | 82,683 | 144,130 | 353,433 | 70,627 | 82,683 | 144,130 | ||||||||||||||||||
| Repayment of borrowed funds | (128,370 | ) | (283,694 | ) | (368,182 | ) | (145,444 | ) | (128,370 | ) | (283,694 | ) | ||||||||||||
| Payment of employee taxes withheld from shared-based awards | (81 | ) | (1,574 | ) | (1,593 | ) | (30 | ) | (81 | ) | (1,574 | ) | ||||||||||||
| Net cash (used in) provided by financing activities | (39,501 | ) | 413,561 | 244,999 | (140,592 | ) | (39,501 | ) | 413,561 | |||||||||||||||
| Net increase in cash and cash equivalents | 1,270 | 17,007 | 1,442 | |||||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (8,337 | ) | 1,270 | 17,007 | ||||||||||||||||||||
| Cash and cash equivalents at beginning of period | 33,578 | 16,571 | 15,129 | 34,848 | 33,578 | 16,571 | ||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 34,848 | $ | 33,578 | $ | 16,571 | $ | 26,511 | $ | 34,848 | $ | 33,578 | ||||||||||||
| Supplemental cash flow information: | ||||||||||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||||||||||
| Interest | �� | $ | 42,770 | $ | 38,085 | $ | 34,475 | $ | 54,286 | $ | 42,770 | $ | 38,085 | |||||||||||
| Income taxes | $ | 22,668 | $ | 30,103 | $ | 27,272 | $ | 17,543 | $ | 22,668 | $ | 30,103 | ||||||||||||
| Noncash transfer | ||||||||||||||||||||||||
| Loans receivable transferred to real estate owned | $ | 1,564 | $ | — | $ | 317 | $ | — | $ | 1,564 | $ | — | ||||||||||||
See accompanying notes to consolidated financial statements.
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements are comprised of the accounts of Oritani Financial Corp. (the "Company"), and its wholly owned subsidiaries, Oritani Bank (the "Bank");, Hampshire Financial, LLC, and Oritani, LLC, and the wholly owned subsidiaries of Oritani Bank, Oritani Finance Company,ZORM 2009, LLC, Ormon LLC ("Ormon"), and Oritani Investment Corp., as well as its wholly owned subsidiary, Oritani Asset Corporation (a real estate investment trust), and prior to April 2019 Oritani Finance Company, collectively, the Company. All intercompany balances and transactions have been eliminated in consolidation.
Business
The Company provides a wide range of deposit banking services to individual and corporate customers in the New Jersey counties of Bergen, Hudson, Essex and Passaic. The Company provides loans to individual and corporate customers in New Jersey as well as corporate customers primarily in portions of the states of New York and Pennsylvania. The Company is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
The following are the significant accounting policies which were followed in preparing and presenting these consolidated financial statements.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"(“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 June 30, 20182019 and 2017,2018, and in the Consolidated Statements of Income for the years ended June 30, 2019, 2018 2017 and 2016.2017. Actual results could differ significantly from those estimates.
A substantial portion of the Company'sCompany’s loans are secured by real estate in the New Jersey, New York and Pennsylvania markets. In addition, the real estate joint ventures and real estate owned are located in that same market. Accordingly, as with most financial institutions in the market area, the ultimate collectibility of a substantial portion of the Company'sCompany’s loan portfolio and the recovery of the carrying amount of real estate joint ventures and real estate owned are susceptible to changes in market conditions.
Securities
Securities include debt and mortgage-backed andwith exception of marketable equity securities. Management determines the appropriate classification of securities as either available for sale or held to maturity at the purchase date. Securities that may be sold in response to changing market and interest rate conditions or as part of an overall asset/liability strategy are classified as available for sale. Gains or losses on sales of securities available for sale are based upon the specific-identification method. Securities classified as available for sale are carried at fair value with unrealized gains and losses net of applicable taxes, included in accumulated other comprehensive income (loss), a component of equity. If management has the intent and the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity. Securities held to maturity are carried at cost, adjusted for unamortized purchase premiums and discounts. Premiums and discounts on securities are accreted or amortized using the level-yield method over the estimated lives of the securities, including the effect of prepayments. Any portion of unrealized loss on an individual equity security deemed to be other than temporarily impaired is recognized as a loss in operations in the period in which such determination is made. For debt investment securities deemed other than temporarily impaired, the investment is written down through current earnings by the impairment related to the estimated credit loss and the non-credit related impairment is recognized in other comprehensive income. In the ordinary course of business, securities are pledged as collateral in conjunction with the Company'sCompany’s borrowings, lines of credit and derivative portfolios.
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).
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans
Mortgages on real estate and other loans are stated at the outstanding principal amount of the loans, net of deferred loan fees/costs and the allowance for loan losses. Loan origination and commitment fees, net of related costs, are deferred and amortized as an adjustment to the loan'sloan’s yield, utilizing the level yield method, over the actual lives of the related loans. Interest income on loans is accrued and credited to interest income as earned. Loans are generally placed on nonaccrual status when they become delinquent 90 days or more as to principal or interest, or when it appears that principal or interest is uncollectible. Interest accrued prior to a loan being placed on nonaccrual status is subsequently reversed. Interest income on nonaccrual loans is recognized only in the period it is ultimately collected. Loans are returned to an accrual status when factors indicating doubtful collectibility no longer exist. Loans are generally charged off after an analysis is completed which indicates, on the basis of currently existing facts, conditions, and values, collectibility of principal and interest is highly questionable and improbable.
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 individually classified as impaired include loans which have a principal balance balances of $1.0 million or more and are ninety days or more delinquent, unless a condition exists for loans less than $1.0 million that would increase the Bank'sBank’s potential loss exposure. All TDRs are considered impaired loans, regardless of their principal balance. Impaired loans are individually assessed to determine that each loan'sloan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. Residential mortgage and consumer loans are deemed smaller balance homogeneous loans which are evaluated collectively for impairment and are generally excluded from the population of impaired loans.
The portion of any residential real estate mortgage loan that is not adequately secured is generally charged off when deemed to be uncollectible unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment include; a loan that is adequately secured by collateral and is in the process of collection; a loan supported by a valid guarantee or insurance; or a loan supported by a valid claim against a solvent estate. Charge-offs of commercial real estate mortgage loans are made on the basis of management'smanagement’s ongoing evaluation of nonperforming loans. In the ordinary course of business, loans are pledged as collateral in conjunction with the Company'sCompany’s borrowings.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged to income based on management'smanagement’s evaluation of the probable incurred losses inherent in its portfolio. Such evaluation includes a review of the entire loan portfolio, including all loans for which full collectibility may not be reasonably assured and considers, among other matters, the estimated net realizable value of the underlying collateral, economic conditions and other matters which warrant consideration. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses consists of three elements: (i) specific reserves for individually impaired loans, (ii) reserves for adversely classified, or higher risk rated, loans that are not impaired, (iii) reserves for other loans based on historical loss factors (using the appropriate loss look-back and loss emergence periods) adjusted for both internal and external qualitative risk factors. See Note 5, "Allowance for Loan Losses" of the Notes to the Consolidated Financial Statements for additional information regarding the allowance for loan losses and loan credit quality.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company'sCompany’s market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company'sCompany’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Troubled-Debt Restructuring
Troubled debt restructured ("TDR"(“TDR”) loans are those loans whose terms have been modified because of deterioration in the financial condition of the borrower. 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 restructured debt is at 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 months month period.
Real Estate Owned
Real estate acquired through foreclosure or deed-in-lieu of foreclosure is recorded at fair value less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers'appraisers’ market knowledge and experience. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If the 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. Operating costs after acquisition are expensed.
Bank Owned Life Insurance
Bank-owned life insurance is accounted for using the cash surrender value method and is recorded at its realizable value adjusted for other charges or amounts due that are probable at settlement. The change in the cash surrender value, as well as insurance proceeds are included in other noninterest income.
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Federal Home Loan Bank of New York Stock
The Bank, as a member of the Federal Home Loan Bank of New York ("FHLB"(“FHLB”), is required to hold shares of capital stock in the FHLB in an amount based on the Bank'sBank’s total investment in mortgage related assets and advances. The requirement pertaining to mortgage related assets is a range from 0.10% to 0.25% of mortgage related assets, and is currently equal to 0.20%. The requirement pertaining to advances is a range from 4.0% to 5.0% of total advances, and is currently equal to 4.5%. The stock is carried at cost. In performing our other-than-temporary impairment analysis of FHLB stock, we evaluated, among other things, (i) its earnings performance, including the significance of any decline in net assets of the FHLB as compared to the regulatory capital amount of the FHLB, (ii) the commitment by the FHLB to make required dividend payments, and (iii) the liquidity position of the FHLB. We do not consider this security to be impaired at June 30, 2018.2019. Both cash and stock dividends are reported as income.
Office Properties and Equipment
Land is carried as cost. Office properties and equipment are carried at cost, less accumulated depreciation. Depreciation of office properties and equipment is computed on a straight-line basis over the estimated useful lives of the related assets. The Company uses the following estimated useful lives for its office properties and equipment categories: land improvements – 15 years; building and major building improvements – 40 years; minor building improvements – 10 years and furniture and fixtures – 3 to 7 years. Leasehold improvements are amortized over the lesser of the remaining life of the lease or the useful life of the improvement. Expenditures for maintenance and repairs are expensed as incurred.
Employee Benefit Plans
The Bank has a defined benefit pension plan which covered all employees who satisfied the eligibility requirements. The Plan was frozen as of December 31, 2008. The defined benefit pension plan is a multi-employer plan. Costs of the pension plan are based on the contribution required to be made to the program. The Bank'sBank’s policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974, as amended.
The Bank has a 401(k) savings incentive plan covering substantially all employees of the Bank. The Bank may match a percentage of the first 6% of employee contributions. The contribution percentage is determined annually by the Board of Directors.
The employee stock ownership plan ("ESOP"(“ESOP”) is accounted for in accordance with the provisions of ASC 718, "“Employers'Employers’ Accounting for Employee Stock Ownership Plans."” The funds borrowed by the ESOP from the Company to purchase the Company'sCompany’s common stock will be repaid from the Bank'sBank’s contributions over a period of up to 25 years. The Company'sCompany’s common stock not yet allocated to participants is recorded as a reduction of stockholders'stockholders’ equity at cost. Compensation expense for the ESOP is based on the market price of the Company'sCompany’s stock and is recognized as shares are committed to be released to participants. Dividends on allocated shares reduce retained earnings; dividends on unallocated ESOP shares reduce debt and accrued interest.
The Bank provides several nonqualified, defined benefit plans which provide benefits to executive officers and directors of the Company. These plans are unfunded and the costs of the plans are recognized over the period that services are provided.
The Company provides several post-retirement benefit plans to directors and certain retired employees and will provide such benefits to certain active officers that are accounted for in accordance with ASC 715, "“Compensation-Retirement Benefits"”. This guidance requires an employer to: (a) recognize in its statement of financial condition the overfunded or underfunded status of a defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation; (b) measure a plan'splan’s assets and its obligations that determine its funded status as of the date of its year-end balance sheet and (c) recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period. The Company accrues the cost of post-retirement benefit plans during the employee'semployee’s period of active service.
The Company'sCompany’s equity incentive plan is accounted for in accordance with ASC 718, "“Compensation-Stock Compensation"”. This guidance requires companies to recognize in the statement of earnings the grant-date fair value of stock based awards issued to employees. Compensation cost related to stock based awards is recognized on a straight-line basis over the requisite service periods. In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), an amendment to ASC 718. The update simplifies certain aspects of accounting for share-based payments. The amendments include the following:
Income Taxes
The Company records income taxes in accordance with ASC 740, "“Income Taxes,"” using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. Income taxes are allocated to the individual entities within the consolidated group based on the effective tax rate of the entity. The Company recognizes interest and penalties related to income tax matters in income tax expense.
Derivative Instruments and Hedging Activities
Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. As part of its asset/liability management strategies, the Company uses interest rate swaps to hedge variability in future cash flows caused by changes in interest rates and accounts for these swaps as cash flow hedges. Interest rate swaps are recorded on our Consolidated Balance Sheets as either an asset or liability at fair value. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income or loss and subsequently reclassified into earnings in the period during which the hedged forecasted transactions affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We formally document our risk management objectives, strategy, and the relationship between the hedging instrument and the hedged items. We evaluate the effectiveness of the hedge relationship, both at inception of the hedge and on an ongoing basis, by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. Derivatives not designated as hedges do not meet the hedge accounting requirements under U.S. GAAP. Changes in fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes items recorded directly to equity, such as unrealized gains and losses on securities available for sale, change in actuarial gains and losses on other post retirement benefits, unrealized gains and losses on derivatives used in cash flow hedging relationships, and change in service cost on other postretirement benefits, net of taxes. Comprehensive income and its components is presented in the consolidated statements of comprehensive income for all periods presented. See Note 22 for additional disclosures.
Earnings Per Share
Basic earnings per share, or EPS, is computed by dividing net income by the weighted average number of shares outstanding for the period. The weighted average common shares outstanding include 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 and unvested shares of restricted stock 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. The Company adopted ASU 2016-09 during the quarter ended June 30, 2016, retroactively effective July 1, 2015. The update amended the diluted earnings per share calculation in that excess tax benefits are no longer included in assumed proceeds when determining average diluted shares outstanding under the treasury stock method. This guidance is required to be applied prospectively upon adoption. For further discussion, see Note 1, "Summary of Significant Accounting Policies—Employee Benefit Plans".
When applying the treasury stock method for the years ended June 30, 2019, 2018 and 2017, we add the assumed proceeds from option exercises and the average unamortized compensation costs related to unvested shares of restricted stock and stock options. We then divide this sum by our average stock price to calculate shares 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. For the years ended June 30, 2016, we added: (1) the assumed proceeds from option exercises; (2) the tax benefit that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options and vesting of shares of restricted stock; and (3) the average unamortized compensation costs related to unvested shares of restricted stock and stock options. We then divided this sum by our average stock price to calculate shares 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.
Reclassifications
Certain items previously reported have been reclassified to conform with the current period'speriod’s reporting format.
68
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) 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 iswas authorized to repurchase up to 5% of the outstanding shares, or 2,205,451 shares. As ofDuring the twelve months ended June 30, 2018,2019, a total of 13,277,6811,888,851 shares werehad been acquired under the fourth repurchase programsplan at a weighted average cost of $13.30$15.20 per share. The timing ofWith these purchases, the repurchases depend on certain factors, including but not limited to, market conditions and prices, the Company's liquidity and capital requirements, and alternative uses of capital.fourth repurchase plan has been completed. Repurchased shares are held as treasury stock and will be available for general corporate purposes. The Company may also conduct repurchases through a Rule 10b5-1trading plan. At June 30, 2018, there are 1,888,851 shares yet to be purchased under the current repurchase plan.
(3) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand and in banks and federal funds sold and short term investments which are generally sold for one-dayone day-day periods. There are no restrictions on the Company's cash and cash equivalents.
(4) Loans
A comparative summary of loans at June 30, 20182019 and 20172018 is as follows:
| June 30, 2018 | June 30, 2017 | June 30, 2019 | June 30, 2018 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Residential | $ | 267,771 | $ | 253,310 | $ | 267,011 | $ | 267,771 | ||||||||
| Residential commercial real estate | 2,005,315 | 1,945,297 | 2,086,314 | 2,005,315 | ||||||||||||
| Grocery/credit retail commercial real estate | 497,708 | 535,567 | 482,831 | 497,708 | ||||||||||||
| Other commercial real estate | 796,589 | 866,826 | 683,739 | 796,589 | ||||||||||||
| Construction and land loans | 10,960 | 4,210 | 9,170 | 10,960 | ||||||||||||
| Total loans | 3,578,343 | 3,605,210 | 3,529,065 | 3,578,343 | ||||||||||||
| Less: | ||||||||||||||||
| Deferred loan fees, net | 6,878 | 8,235 | 9,147 | 6,878 | ||||||||||||
| Allowance for loan losses | 30,562 | 30,272 | 28,596 | 30,562 | ||||||||||||
| Net loans | $ | 3,540,903 | $ | 3,566,703 | $ | 3,491,322 | $ | 3,540,903 | ||||||||
At June 30, 20182019 and 2017,2018, the Company had fixed-rate mortgage commitments of $32.9$1.5 million and $2.2$32.9 million, respectively, and variable-rate mortgage commitments of $25.7$90.7 million and $65.5$25.7 million, respectively, which are not included in the accompanying consolidated financial statements. The rate range of the fixed rate commitments at June 30, 20182019 was 3.75%3.88% to 5.50%. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. There is no exposure to credit loss in the event the other party does not exercise its right to borrow under the commitment.
Our residential lending area generally encompasses northern New Jersey. Our market area for commercial lending, including residential CRE, is broader, generally including the state of New Jersey, eastern Pennsylvania, southern New York, New York City, Long Island, and Delaware. Our consumer lending is generally limited to the bank'sbank’s designated lending area which is considerably closer to our branch offices.
Collateral and/or guarantees are generally required for all loans. In underwriting a loan secured by real property, we require an appraisal of the property by an independent licensed appraiser approved by the Company'sCompany’s board of directors. The appraisal is subject to review by an independent third party hired by the Company. Generally, management obtains updated appraisals when a loan is deemed impaired. These appraisals may be more limited than those prepared for the underwriting of a new loan. In addition, when the Company acquires other real estate owned, it generally obtains a current appraisal to substantiate the net carrying value of the asset.
69
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The aggregate amount of loans to our executive officers, directors and their related entities was $21.5$20.7 million and $22.1$21.5 million at June 30, 20182019 and 2017,2018, respectively. We had $305,000 inno new loans in 2018.as of June 30, 2019. New loans to executive officers, directors and their related entities for the fiscal year ended June 30, 20172018 totaled $2.3 million.$305,000. Repayments from executive officers, directors and their related entities for the fiscal year ended June 30, 2019 and 2018, totaled $833,000 and 2017, totaled $864,000, and $13.6 million, respectively. These loans were performing according to their original terms at June 30, 2018.2019.
(5) Allowance for Loan Losses
The allowance for loan losses is the estimated amount considered necessary to cover probable and reasonably estimable incurred credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance for loan losses, we make significant estimates and, therefore, have identified the allowance as a critical accounting policy. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
The allowance for loan losses has been determined in accordance with U.S. generally accepted accounting principles. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations. Loan risk ratings are an important part of the evaluation of the adequacy of the allowance for loan losses. The Credit department classifies all loans within the following categories: Superior, Desirable, Pass, Low Pass, Watch, Special Mention, Substandard, Doubtful or Loss. The Company utilizes the services of a third party loan review firm to evaluate the loan ratings assigned by the Credit department and related file maintenance items. Reviews are performed quarterly and, on an annual basis, the third party firm reviews an aggregate of approximately 65% of the commercial real estate portfolios, including a sampling of both new and seasoned loans, a review of all "Regulation O" loans, construction loans with balances of $250,000 or more, and review of all criticized or classified CRE loans with balances of $250,000 or more. Their scope is determined by the Audit Committee. The firm prepares quarterly reports that include a rating for all loans reviewed over the period. There is typically a very high degree of correlation between the loan ratings assigned by the Credit department and the loan ratings determined by the third party loan review firm.
Specific allocations are made for loans that are impaired. Management will identify loans that have demonstrated issues that cause concern regarding full collectibility in the required time frame and classified certain loans with such characteristics as impaired. Delinquency and internal credit department reviews are key indicators of such issues. In general, loans that are classified as troubled debt restructurings and loans that are greater than $1.0 million and delinquent more than 90 days are considered impaired. Impaired values are determined by calculating the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Specific reserves are calculated by subtracting the impaired value of a loan from the book value of the loan. No reserve is necessary if the impaired value exceeds the book value. Impaired loans are included within the Substandard classification.
The Superior, Desirable, Pass, Low Pass and Watch ratings are all considered to be "Pass"“Pass” classification loans. A general reserve is determined for such loans by segregating the Pass classification loans by segment. The following issuesitems are evaluated and general reserve factors are calculated for each loan segment for each issue:item:
•Historical charge-offs,
•Lending policy and procedures,
•Economic and business conditions,
•Nature and volume of portfolio,
•Lending staff,
•Volume and severity of delinquent loans,
•Loan review system,
•Collateral values, and
•Concentrations of credit.
In the process of determining appropriate reserve factors regarding historical charge-offs, both a look back period and loss emergence periods were utilized. The look back period is the time frame used to measure historical charge-offs. The look back period utilized by the Company was eight years years. The loss emergence period represents the estimated average time between when a loss event occurs and when such loss is specifically reserved or charged off by the Company. The loss emergence period utilized by the Company varied by loan segment, and ranged from 12 to 33 months.
70
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The general reserve factors are totaled for each loan segment and applied to the appropriate period end balance. This process determines the general reserve for the Pass classification loans. The non-impaired loans that are rated Special Mention, Substandard or Doubtful are determined and a general reserve percentage is then applied to all such loans. The sum of the general reserves for the Special Mention, Substandard and Doubtful loans plus the general reserves for the Pass classification loans equals the total general reserves at period end.
On a quarterly basis, the Chief Financial Officer:
Reviews all impaired loans individually, determines the appropriate impaired loan balance and calculates any necessary specific reserves. The most current appraised value is generally used as the basis for the value of the collateral.
Summarizes by rating classification all remaining loans that are graded either "Special Mention," "Substandard" or "Doubtful,"“Doubtful,” determines the appropriate general reserve percentage and calculates the necessary general reserve. The reserve percentage utilized is increased as the classification severity increases.
Reviews and updates, as necessary, the general reserves appropriate for Pass classification loans, by segment. The appropriate general reserve factor is then applied to the balance in each loan segment and the necessary general reserve is calculated.
The results are summarized and an appropriate level of allowance for loan losses is determined. This level is compared to the "pre-analysis"“pre-analysis” level of allowance for loan losses and, if necessary, an adjustment is made through the provision for loan losses in order to reflect the appropriate level of allowance for loan losses.
The results of this quarterly process are summarized and processed accordingly. All supporting documentation is maintained by the Chief Financial Officer. A summary of loan loss allowances is presented to the Audit Committee on a quarterly basis for approval.
This evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
We have a concentration of loans secured by real property located in our lending area. Our residential lending area generally encompasses northern New Jersey. Our market area for commercial lending, including residential CRE, is broader, generally including the state of New Jersey, eastern Pennsylvania, southern New York, New York City, Long Island, and Delaware. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. In order to reduce the potential for undue influence on the appraisal process, we use an external appraisal firm as our Appraisal Manager. The Appraisal Manager generally does not perform any appraisals but obtains quotes for necessary appraisal work from one of our approved, qualified appraisal firms. The Appraisal Manager, in concert with our credit department, determines the firm to be utilized and orders the work. Completed appraisals are sent to the Appraisal Manager. The Appraisal Manager then reviews the appraisal addressing all key assumptions utilized in the appraisal. The completed appraisal and the written review are then forwarded to the Chief Credit Officer. Based on the composition of our loan portfolio, we believe the primary risks are increases in interest rates, a decline in the economy generally, and a decline in real estate market values in our lending area. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. We consider it important to maintain the ratio of our allowance for loan losses to total loans at an adequate level. Factors such as current economic conditions, interest rates, and the composition of the loan portfolio will affect our determination of the level of this ratio for any particular period.
Our allowance for loan losses in recent years reflects probable incurred losses resulting from the actual growth in our loan portfolio, ongoing local and regional economic conditions and our overall levels of charge-offs, delinquencies, impaired loans and nonaccrual loans. We believe the allowance for loan losses at June 30, 20182019 adequately reflects our portfolio credit risk, given our emphasis on commercial real estate lending and current market conditions.
Although we believe we have established and maintained the allowance for loan losses at adequate levels, adjustments may be necessary if future economic and other conditions differ substantially from the current operating environment. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the FDIC and the NJDOBI, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on its judgments about information available to them at the time of their examination. The most recent such examination was performed by the FDIC and NJDOBI as of March 31, 2017.June 30, 2018.
71
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Activity in the allowance for loan losses is summarized as follows:
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
| Balance at beginning of year | $ | 30,272 | $ | 29,951 | $ | 30,889 | $ | 30,562 | $ | 30,272 | $ | 29,951 | ||||||||||||
| Provisions charged to operations | — | — | — | |||||||||||||||||||||
| Reversal of provision for loan losses | (2,000 | ) | — | — | ||||||||||||||||||||
| Recoveries | 407 | 409 | 9 | 99 | 407 | 409 | ||||||||||||||||||
| Loans charged off | (117 | ) | (88 | ) | (947 | ) | (65 | ) | (117 | ) | (88 | ) | ||||||||||||
| Balance at end of year | $ | 30,562 | $ | 30,272 | $ | 29,951 | $ | 28,596 | $ | 30,562 | $ | 30,272 | ||||||||||||
The following tables provide the twelve month activity in the allowance for loan losses allocated by loan category. 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.
| Year ended June 30, 2018 | Year ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 1,261 | $ | 15,794 | $ | 3,000 | $ | 10,017 | $ | 200 | $ | 30,272 | $ | 1,990 | $ | 17,259 | $ | 3,015 | $ | 7,828 | $ | 470 | $ | 30,562 | ||||||||||||||||||||||||
| Charge-offs | (117 | ) | — | — | — | — | (117 | ) | (65 | ) | — | — | — | — | (65 | ) | ||||||||||||||||||||||||||||||||
| Recoveries | 150 | — | — | 225 | 32 | 407 | 41 | — | — | 58 | — | 99 | ||||||||||||||||||||||||||||||||||||
| Provisions | 696 | 1,465 | 15 | (2,414 | ) | 238 | — | |||||||||||||||||||||||||||||||||||||||||
| Provision/(reversal) for loan losses | 355 | (1,565 | ) | 234 | (918 | ) | (106 | ) | (2,000 | ) | ||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 1,990 | $ | 17,259 | $ | 3,015 | $ | 7,828 | $ | 470 | $ | 30,562 | $ | 2,321 | $ | 15,694 | $ | 3,249 | $ | 6,968 | $ | 364 | $ | 28,596 | ||||||||||||||||||||||||
| Year ended June 30, 2017 | Year ended June 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 1,300 | $ | 12,837 | $ | 3,646 | $ | 11,850 | $ | 318 | $ | 29,951 | $ | 1,261 | $ | 15,794 | $ | 3,000 | $ | 10,017 | $ | 200 | $ | 30,272 | ||||||||||||||||||||||||
| Charge-offs | (75 | ) | — | — | (13 | ) | — | (88 | ) | (117 | ) | — | — | — | — | (117 | ) | |||||||||||||||||||||||||||||||
| Recoveries | — | — | — | 409 | — | 409 | 150 | — | — | 225 | 32 | 407 | ||||||||||||||||||||||||||||||||||||
| Provisions | 36 | 2,957 | (646 | ) | (2,229 | ) | (118 | ) | — | |||||||||||||||||||||||||||||||||||||||
| Provision/(reversal) for loan losses | 696 | 1,465 | 15 | (2,414 | ) | 238 | — | |||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 1,261 | $ | 15,794 | $ | 3,000 | $ | 10,017 | $ | 200 | $ | 30,272 | $ | 1,990 | $ | 17,259 | $ | 3,015 | $ | 7,828 | $ | 470 | $ | 30,562 | ||||||||||||||||||||||||
| Year ended June 30, 2016 | Year ended June 30, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 1,521 | $ | 10,814 | $ | 4,042 | $ | 13,943 | $ | 569 | $ | 30,889 | $ | 1,300 | $ | 12,837 | $ | 3,646 | $ | 11,850 | $ | 318 | $ | 29,951 | ||||||||||||||||||||||||
| Charge-offs | (98 | ) | — | — | (849 | ) | — | (947 | ) | (75 | ) | — | — | (13 | ) | — | (88 | ) | ||||||||||||||||||||||||||||||
| Recoveries | — | — | — | 9 | — | 9 | — | — | — | 409 | — | 409 | ||||||||||||||||||||||||||||||||||||
| Provisions | (123 | ) | 2,023 | (396 | ) | (1,253 | ) | (251 | ) | — | ||||||||||||||||||||||||||||||||||||||
| Provision/(reversal) for loan losses | 36 | 2,957 | (646 | ) | (2,229 | ) | (118 | ) | — | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 1,300 | $ | 12,837 | $ | 3,646 | $ | 11,850 | $ | 318 | $ | 29,951 | $ | 1,261 | $ | 15,794 | $ | 3,000 | $ | 10,017 | $ | 200 | $ | 30,272 | ||||||||||||||||||||||||
72
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table details the amount of loans receivables that are evaluated individually, and collectively, for impairment, and the related portion of allowance for loan loss that is allocated to each loan portfolio segment at June 30, 20182019 and 2017.2018.
| At June 30, 2018 | At June 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
| Collectively evaluated for impairment | 1,990 | 17,259 | 3,015 | 7,828 | 470 | 30,562 | 2,321 | 15,694 | 3,249 | 6,968 | 364 | 28,596 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 1,990 | $ | 17,259 | $ | 3,015 | $ | 7,828 | $ | 470 | $ | 30,562 | $ | 2,321 | $ | 15,694 | $ | 3,249 | $ | 6,968 | $ | 364 | $ | 28,596 | ||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 5,022 | $ | — | $ | — | $ | 4,181 | $ | — | $ | 9,203 | $ | 5,580 | $ | — | $ | — | $ | 3,758 | $ | — | $ | 9,338 | ||||||||||||||||||||||||
| Collectively evaluated for impairment | 262,749 | 2,005,315 | 497,708 | 792,408 | 10,960 | 3,569,140 | 261,431 | 2,086,314 | 482,831 | 679,981 | 9,170 | 3,519,727 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 267,771 | $ | 2,005,315 | $ | 497,708 | $ | 796,589 | $ | 10,960 | $ | 3,578,343 | $ | 267,011 | $ | 2,086,314 | $ | 482,831 | $ | 683,739 | $ | 9,170 | $ | 3,529,065 | ||||||||||||||||||||||||
| June 30, 2017 | June 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | Residential | Residential commercial real estate | Grocery/credit retail commercial real estate | Other commercial real estate | Construction and land loans | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | ||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | 43 | $ | — | $ | 43 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
| Collectively evaluated for impairment | 1,261 | 15,794 | 3,000 | 9,974 | 200 | 30,229 | 1,990 | 17,259 | 3,015 | 7,828 | 470 | 30,562 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 1,261 | $ | 15,794 | $ | 3,000 | $ | 10,017 | $ | 200 | $ | 30,272 | $ | 1,990 | $ | 17,259 | $ | 3,015 | $ | 7,828 | $ | 470 | $ | 30,562 | ||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 3,684 | $ | — | $ | — | $ | 10,173 | $ | — | $ | 13,857 | $ | 5,022 | $ | — | $ | — | $ | 4,181 | $ | — | $ | 9,203 | ||||||||||||||||||||||||
| Collectively evaluated for impairment | 249,626 | 1,945,297 | 535,567 | 856,653 | 4,210 | 3,591,353 | 262,749 | 2,005,315 | 497,708 | 792,408 | 10,960 | 3,569,140 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 253,310 | $ | 1,945,297 | $ | 535,567 | $ | 866,826 | $ | 4,210 | $ | 3,605,210 | $ | 267,771 | $ | 2,005,315 | $ | 497,708 | $ | 796,589 | $ | 10,960 | $ | 3,578,343 | ||||||||||||||||||||||||
73
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company continuously monitors the credit quality of its loans receivable. In addition to internal staff, the Company utilizes the services of a third party loan review firm to review management's ratings on a selection of loans. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified as "Satisfactory"“Satisfactory” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as "Pass/Watch"“Pass/Watch” have generally acceptable asset quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such characteristics include strained liquidity, slow pay, stale financial statements or other circumstances requiring greater attention from bank staff. We classify an asset as "Special Mention"“Special Mention” if the asset has a potential weakness that warrants management'smanagement’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"“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"“Doubtful” have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Included in the Substandard caption are all loans that were past due 90 days (or more) and all impaired loans.
The following table provides information about the loan credit quality at June 30, 20182019 and 2017:2018:
| Credit Quality Indicators 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 | ||||||||||||
| Credit Quality Indicators at June 30, 2018 | ||||||||||||||||||||||||
| Satisfactory | Pass/Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Residential | $ | 242,534 | $ | 18,731 | $ | 171 | $ | 6,335 | $ | — | $ | 267,771 | ||||||||||||
| Residential commercial real estate | 1,981,781 | 21,952 | 1,582 | — | — | 2,005,315 | ||||||||||||||||||
| Grocery/credit retail commercial real estate | 494,723 | — | 2,985 | — | — | 497,708 | ||||||||||||||||||
| Other commercial real estate | 688,725 | 92,430 | 10,164 | 5,270 | — | 796,589 | ||||||||||||||||||
| Construction and land loans | 10,960 | — | — | — | — | 10,960 | ||||||||||||||||||
| Total | $ | 3,418,723 | $ | 133,113 | $ | 14,902 | $ | 11,605 | $ | — | $ | 3,578,343 | ||||||||||||
| Credit Quality Indicators at June 30, 2017 | ||||||||||||||||||||||||
| Satisfactory | Pass/Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Residential | $ | 229,481 | $ | 17,256 | $ | 1,571 | $ | 5,002 | $ | — | $ | 253,310 | ||||||||||||
| Residential commercial real estate | 1,915,526 | 27,778 | 1,753 | 240 | — | 1,945,297 | ||||||||||||||||||
| Grocery/credit retail commercial real estate | 532,472 | — | 3,095 | — | — | 535,567 | ||||||||||||||||||
| Other commercial real estate | 725,714 | 107,249 | 15,551 | 18,312 | — | 866,826 | ||||||||||||||||||
| Construction and land loans | 4,210 | — | — | — | — | 4,210 | ||||||||||||||||||
| Total | $ | 3,407,403 | $ | 152,283 | $ | 21,970 | $ | 23,554 | $ | — | $ | 3,605,210 | ||||||||||||
Included in loans are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The principal amount of nonaccrual loans at June 30, 2019, 2018 and 2017 and 2016 were $10.1 million, $7.9 million $10.2 million and $10.0$10.2 million, respectively. If the nonaccrual loans had performed in accordance with their original terms, interest income would have increased by $340,000 and $198,000 and $283,000 and $555,000 for the years ended June 30, 2019, 2018, 2017, and 20162017 respectively. The Company has no loans past due 90 days or more that are still accruing interest.
74
ORITANI FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements