03 31 2014 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-34786
Oritani Financial Corp.
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 30-0628335 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
370 Pascack Road, Township of Washington, New Jersey 07676
(Address of Principal Executive Offices)
(201) 664-5400
(Registrant’s telephone number)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.
YES ý NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES ý NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ¨ | | Accelerated filer | | x |
Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller Reporting company | | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
As of May 9, 2014, there were 56,245,065 shares of the Registrant’s common stock, par value $0.01 per share, issued and 45,754,076 shares outstanding.
Oritani Financial Corp.
FORM 10-Q
Index
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Item 1. | | |
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| Consolidated Balance Sheets as of March 31, 2014 (unaudited) and June 30, 2013 | |
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| Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2014 and 2013 (unaudited) | |
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| Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2014 and 2013 (unaudited) | |
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| Consolidated Statements of Stockholders’ Equity for the Nine Months Ended March 31, 2014 and 2013 (unaudited) | |
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| Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2014 and 2013 (unaudited) | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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Part I. Financial Information
Item 1. Financial Statements
Oritani Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
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| | | | | | | |
| March 31, 2014 | | June 30, 2013 |
| (unaudited) | | (audited) |
Assets | | | |
Cash on hand and in banks | $ | 14,247 |
| | $ | 4,181 |
|
Federal funds sold and short term investments | 345 |
| | 7,884 |
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Cash and cash equivalents | 14,592 |
| | 12,065 |
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Loans, net | 2,388,628 |
| | 2,275,782 |
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Securities available for sale, at fair value | 381,661 |
| | 318,290 |
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Securities held to maturity, market value of $31,356 and $41,855, respectively. | 31,730 |
| | 41,873 |
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Bank Owned Life Insurance (at cash surrender value) | 67,546 |
| | 59,996 |
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Federal Home Loan Bank of New York stock (“FHLB”), at cost | 45,116 |
| | 42,770 |
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Accrued interest receivable | 9,533 |
| | 10,114 |
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Investments in real estate joint ventures, net | 5,324 |
| | 4,635 |
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Real estate held for investment | 990 |
| | 1,070 |
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Real estate owned | 3,965 |
| | 1,742 |
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Office properties and equipment, net | 14,692 |
| | 15,060 |
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Deferred tax assets, net | 32,965 |
| | 30,300 |
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Other assets | 9,320 |
| | 18,225 |
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Total Assets | $ | 3,006,062 |
| | $ | 2,831,922 |
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Liabilities | | | |
Deposits | $ | 1,530,667 |
| | $ | 1,419,703 |
|
Borrowings | 885,892 |
| | 833,672 |
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Advance payments by borrowers for taxes and insurance | 16,192 |
| | 15,806 |
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Other liabilities | 47,144 |
| | 44,031 |
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Total Liabilities | 2,479,895 |
| | 2,313,212 |
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Stockholders’ Equity | | | |
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued; 45,737,316 shares outstanding at March 31, 2014 and 45,391,031 shares outstanding at June 30, 2013. | 562 |
| | 562 |
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Additional paid-in capital | 502,397 |
| | 499,961 |
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Unallocated common stock held by the employee stock ownership plan | (24,656 | ) | | (25,887 | ) |
Restricted Stock Awards | (11,956 | ) | | (15,730 | ) |
Treasury stock, at cost; 10,507,749 shares at March 31, 2014 and 10,854,034 shares at June 30, 2013. | (136,915 | ) | | (141,142 | ) |
Retained income | 193,540 |
| | 196,516 |
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Accumulated other comprehensive income, net of tax | 3,195 |
| | 4,430 |
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Total Stockholders’ Equity | 526,167 |
| | 518,710 |
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Total Liabilities and Stockholders’ Equity | $ | 3,006,062 |
| | $ | 2,831,922 |
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See accompanying notes to unaudited consolidated financial statements.
Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
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| | | | | | | | | | | | | | | |
| Three months ended March 31, | | Nine months ended March 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (unaudited) |
Interest income: | | | | | | | |
Interest on mortgage loans | $ | 29,770 |
| | $ | 30,229 |
| | $ | 89,819 |
| | $ | 88,390 |
|
Interest on securities available for sale | 1,728 |
| | 1,635 |
| | 4,651 |
| | 5,598 |
|
Interest on securities held to maturity | 190 |
| | 243 |
| | 621 |
| | 702 |
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Dividends on FHLB stock | 504 |
| | 472 |
| | 1,370 |
| | 1,316 |
|
Interest on federal funds sold and short term investments | 2 |
| | 1 |
| | 8 |
| | 3 |
|
Total interest income | 32,194 |
| | 32,580 |
| | 96,469 |
| | 96,009 |
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Interest expense: | | | | | | | |
Deposits | 2,140 |
| | 2,011 |
| | 6,219 |
| | 6,480 |
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Borrowings | 5,592 |
| | 5,273 |
| | 16,883 |
| | 15,972 |
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Total interest expense | 7,732 |
| | 7,284 |
| | 23,102 |
| | 22,452 |
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Net interest income before provision for loan losses | 24,462 |
| | 25,296 |
| | 73,367 |
| | 73,557 |
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Provision for loan losses | 200 |
| | 600 |
| | 700 |
| | 3,600 |
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Net interest income after provision for loan losses | 24,262 |
| | 24,696 |
| | 72,667 |
| | 69,957 |
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Other income: | | | | | | | |
Service charges | 241 |
| | 214 |
| | 870 |
| | 664 |
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Real estate operations, net | 241 |
| | 222 |
| | 919 |
| | 848 |
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Income (loss) from investments in real estate joint ventures | 53 |
| | (41 | ) | | 501 |
| | (29 | ) |
Bank-owned life insurance | 500 |
| | 460 |
| | 1,509 |
| | 1,320 |
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Net gain on sale of assets | — |
| | 87 |
| | 163 |
| | 131 |
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Net gain on sale of securities | — |
| | — |
| | 51 |
| | — |
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Other income | 67 |
| | 63 |
| | 216 |
| | 183 |
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Total other income | 1,102 |
| | 1,005 |
| | 4,229 |
| | 3,117 |
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Other expenses: | | | | | | | |
Compensation, payroll taxes and fringe benefits | 6,935 |
| | 7,110 |
| | 21,487 |
| | 20,991 |
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Advertising | 91 |
| | 91 |
| | 271 |
| | 271 |
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Office occupancy and equipment expense | 920 |
| | 737 |
| | 2,371 |
| | 2,119 |
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Data processing service fees | 463 |
| | 410 |
| | 1,336 |
| | 1,217 |
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Federal insurance premiums | 330 |
| | 385 |
| | 975 |
| | 986 |
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Net expense from real estate operations | 145 |
| | 189 |
| | 90 |
| | 299 |
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Other expenses | 949 |
| | 983 |
| | 2,949 |
| | 2,761 |
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Total operating expenses | 9,833 |
| | 9,905 |
| | 29,479 |
| | 28,644 |
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Income before income tax expense | 15,531 |
| | 15,796 |
| | 47,417 |
| | 44,430 |
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Income tax expense | 4,792 |
| | 5,879 |
| | 16,321 |
| | 16,556 |
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Net income | $ | 10,739 |
| | $ | 9,917 |
| | $ | 31,096 |
| | $ | 27,874 |
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Earnings per basic common share | $ | 0.25 |
| | $ | 0.23 |
| | $ | 0.73 |
| | $ | 0.66 |
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Earnings per diluted common share | $ | 0.25 |
| | $ | 0.23 |
| | $ | 0.71 |
| | $ | 0.65 |
|
See accompanying notes to unaudited consolidated financial statements.
Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
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| | | | | | | | | | | | | | | |
| Three months ended March 31, | | Nine months ended March 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (unaudited) |
Net income | $ | 10,739 |
| | $ | 9,917 |
| | $ | 31,096 |
| | $ | 27,874 |
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Other comprehensive income, net of tax: | | | | | | | |
Change in unrealized holding gain on securities available for sale | 1,271 |
| | (414 | ) | | (1,166 | ) | | (148 | ) |
Reclassification adjustment for security losses included in net income | — |
| | — |
| | 28 |
| | — |
|
Amortization related to post-retirement obligations | 9 |
| | 29 |
| | 35 |
| | 161 |
|
Change in unrealized gain on interest rate swaps | (705 | ) | | — |
| | (132 | ) | | — |
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Total other comprehensive (loss) income | 575 |
| | (385 | ) | | (1,235 | ) | | 13 |
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Total comprehensive income | $ | 11,314 |
| | $ | 9,532 |
| | $ | 29,861 |
| | $ | 27,887 |
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See accompanying notes to unaudited consolidated financial statements.
Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Nine months ended March 31, 2014 and 2013 (unaudited)
(In thousands, except share data)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, net of tax | | Total stock- holders’ equity |
Balance at June 30, 2012 | 45,198,765 |
| | $ | 562 |
| | $ | 495,704 |
| | $ | (19,146 | ) | | $ | (143,469 | ) | | $ | (27,582 | ) | | $ | 200,718 |
| | $ | 3,922 |
| | $ | 510,709 |
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Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 27,874 |
| | — |
| | 27,874 |
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Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
Cash dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (35,688 | ) | | — |
| | (35,688 | ) |
Purchase of treasury stock | (103,095 | ) | | — |
| | — |
| | — |
| | (1,524 | ) | | — |
| | — |
| | — |
| | (1,524 | ) |
Issuance of restricted stock awards | 45,000 |
| |
|
| |
|
| | (585 | ) | | 585 |
| |
|
| |
|
| |
|
| | — |
|
Compensation cost for stock options and restricted stock | — |
| | — |
| | 4,524 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,524 |
|
ESOP shares allocated or committed to be released | — |
| | — |
| | 1,043 |
| | — |
| | — |
| | 1,378 |
| | — |
| | — |
| | 2,421 |
|
Exercise of stock options | 244,361 |
| | — |
| | — |
| | — |
| | 3,176 |
| | — |
| | (589 | ) | | — |
| | 2,587 |
|
Vesting of restricted stock awards | — |
| | — |
| | (3,796 | ) | | 3,831 |
| | — |
| | — |
| | (35 | ) | | — |
| | — |
|
Forfeiture of restricted stock awards | (14,000 | ) | | | | | | 170 |
| | (170 | ) | | | | | | | | — |
|
Tax benefit from stock-based compensation | — |
| | — |
| | 650 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 650 |
|
Balance at March 31, 2013 | 45,371,031 |
| | $ | 562 |
| | $ | 498,125 |
| | $ | (15,730 | ) | | $ | (141,402 | ) | | $ | (26,204 | ) | | $ | 192,280 |
| | $ | 3,935 |
| | $ | 511,566 |
|
| | | | | | | | | | | | | | | | | |
Balance at June 30, 2013 | 45,391,031 |
| | $ | 562 |
| | $ | 499,961 |
| | $ | (15,730 | ) | | $ | (141,142 | ) | | $ | (25,887 | ) | | $ | 196,516 |
| | $ | 4,430 |
| | $ | 518,710 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31,096 |
| | — |
| | 31,096 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,235 | ) | | (1,235 | ) |
Cash dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32,954 | ) | | — |
| | (32,954 | ) |
Purchase of treasury stock | (99,401 | ) | | — |
| | — |
| | — |
| | (1,586 | ) | | — |
| | — |
| | — |
| | (1,586 | ) |
Issuance of restricted stock awards | 18,000 |
| | — |
| | — |
| | (234 | ) | | 234 |
| | — |
| | — |
| | — |
| | — |
|
Compensation cost for stock options and restricted stock | — |
| | — |
| | 4,528 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,528 |
|
ESOP shares allocated or committed to be released | — |
| | — |
| | 1,123 |
| | — |
| | — |
| | 1,231 |
| | — |
| | — |
| | 2,354 |
|
Exercise of stock options | 438,486 |
| | — |
| | — |
| | — |
| | 5,709 |
| | — |
| | (1,097 | ) | | — |
| | 4,612 |
|
Vesting of restricted stock awards | — |
| | — |
| | (3,857 | ) | | 3,878 |
| | — |
| | — |
| | (21 | ) | | — |
| | — |
|
Forfeiture of restricted stock awards | (10,800 | ) | | — |
| | — |
| | 130 |
| | (130 | ) | | — |
| | — |
| | — |
| | — |
|
Tax benefit from stock-based compensation | — |
| | — |
| | 642 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 642 |
|
Balance at March 31, 2014 | 45,737,316 |
| | $ | 562 |
| | $ | 502,397 |
| | $ | (11,956 | ) | | $ | (136,915 | ) | | $ | (24,656 | ) | | $ | 193,540 |
| | $ | 3,195 |
| | $ | 526,167 |
|
See accompanying notes to unaudited consolidated financial statements.
Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
| | | | | | | |
| Nine months ended March 31, |
| 2014 | | 2013 |
| (unaudited) |
Cash flows from operating activities: | |
Net income | $ | 31,096 |
| | $ | 27,874 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
ESOP and stock-based compensation expense | 6,882 |
| | 6,945 |
|
Depreciation of premises and equipment | 717 |
| | 733 |
|
Net amortization and accretion of premiums and discounts on securities | 934 |
| | 1,732 |
|
Provision for losses on loans | 700 |
| | 3,600 |
|
Amortization and accretion of deferred loan fees, net | (2,345 | ) | | (2,177 | ) |
Increase in deferred taxes | (1,864 | ) | | (3,215 | ) |
Loss (gain) on loans available for sale | 58 |
| | (80 | ) |
Gain on sale of investment securities | (51 | ) | | — |
|
Gain on sale of real estate owned | (221 | ) | | (51 | ) |
Writedown of real estate owned | 81 |
| | 150 |
|
Proceeds from sale of real estate owned | 1,191 |
| | 1,099 |
|
Increase in cash surrender value of bank owned life insurance | (1,509 | ) | | (1,320 | ) |
Decrease in accrued interest receivable | 581 |
| | 742 |
|
Decrease in other assets | 8,882 |
| | 2,069 |
|
Increase in other liabilities | 3,113 |
| | 4,966 |
|
Net cash provided by operating activities | 48,245 |
| | 43,067 |
|
Cash flows from investing activities: | | | |
Net increase in loans receivable | (114,609 | ) | | (237,659 | ) |
Proceeds from sale of mortgage loans | — |
| | 3,562 |
|
Purchase of securities available for sale | (156,670 | ) | | — |
|
Purchase of securities held to maturity | (1,658 | ) | | (10,629 | ) |
Proceeds from payments, calls and maturities of securities available for sale | 72,304 |
| | 137,949 |
|
Proceeds from payments, calls and maturities of securities held to maturity | 2,909 |
| | 3,363 |
|
Proceeds from sales of securities available for sale | 18,129 |
| | — |
|
Proceeds from sales of securities held to maturity | 8,938 |
| | — |
|
Purchase of Bank Owned Life Insurance | (6,040 | ) | | (10,600 | ) |
Net increase in Federal Home Loan Bank of New York stock | (2,346 | ) | | (6,064 | ) |
Net decrease in real estate held for investment | 26 |
| | 83 |
|
Net (increase) decrease in real estate joint ventures | (636 | ) | | 26 |
|
Purchase of fixed assets | (349 | ) | | (413 | ) |
Net cash used by investing activities | (180,002 | ) | | (120,382 | ) |
Cash flows from financing activities: | | | |
Net increase (decrease) in deposits | 110,964 |
| | (23,706 | ) |
Purchase of treasury stock | (1,586 | ) | | (1,524 | ) |
Dividends paid to shareholders | (32,954 | ) | | (35,688 | ) |
Exercise of stock options | 4,612 |
| | 2,587 |
|
Increase in advance payments by borrowers for taxes and insurance | 386 |
| | 1,084 |
|
Proceeds from borrowed funds | 182,970 |
| | 322,757 |
|
Repayment of borrowed funds | (130,750 | ) | | (191,550 | ) |
Tax benefit from stock based compensation | 642 |
| | 650 |
|
Net cash provided by financing activities | 134,284 |
| | 74,610 |
|
Net increase (decrease) in cash and cash equivalents | 2,527 |
| | (2,705 | ) |
Cash and cash equivalents at beginning of period | 12,065 |
| | 11,439 |
|
Cash and cash equivalents at end of period | $ | 14,592 |
| | $ | 8,734 |
|
Supplemental cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 23,075 |
| | $ | 22,627 |
|
Income taxes | $ | 9,321 |
| | $ | 17,270 |
|
Noncash transfer | | | |
Loans receivable transferred to real estate owned | $ | 3,350 |
| | $ | 3,304 |
|
See accompanying notes to unaudited consolidated financial statements.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements are composed of the accounts of Oritani Financial Corp. (the "Company"), 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, Ormon LLC (“Ormon”), and Oritani Investment Corp., as well as its wholly owned subsidiary, Oritani Asset Corporation (a real estate investment trust), collectively, the Company. Intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, all of the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the three and nine months period ended March 31, 2014 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2014.
Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of the Form 10-Q. The consolidated financial statements presented should be read in conjunction with the Company’s audited consolidated financial statements and notes to consolidated financial statements included in the Company’s June 30, 2013 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 13, 2013.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities presented in the Consolidated Balance Sheets at March 31, 2014 and June 30, 2013 and in the Consolidated Statements of Income for the three and nine months ended March 31, 2014 and 2013. Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant changes relates to the determination of the allowance for loan losses. The allowance for loan losses represents management’s best estimate of losses known and inherent in the portfolio that are both probable and reasonable to estimate. While management uses the most current information available to estimate losses on loans, actual losses are dependent on future events and, as such, increases in the allowance for loan losses may be necessary.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
2. Earnings Per Share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The weighted average common shares outstanding includes the average number of shares of common stock outstanding and allocated or committed to be released Employee Stock Ownership Plan shares.
Diluted earnings per share is computed using the same method as basic earnings per share, but reflects the potential dilution that could occur if stock options were exercised and converted into common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. When applying the treasury stock method, we add: (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 stock options. We then divide this sum by our average stock price to calculate shares assumed to be repurchased. The excess of the number of shares issuable over the number of shares assumed to be repurchased is added to basic weighted average common shares to calculate diluted EPS.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The following is a summary of the Company’s earnings per share calculations and reconciliation of basic to diluted earnings per share.
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | Nine months ended March 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands, except per share data) | | | | |
Net income | $ | 10,739 |
| | $ | 9,917 |
| | $ | 31,096 |
| | $ | 27,874 |
|
Weighted average common shares outstanding—basic | 42,729 |
| | 42,208 |
| | 42,583 |
| | 42,048 |
|
Effect of dilutive stock options outstanding | 1,033 |
| | 945 |
| | 1,112 |
| | 845 |
|
Weighted average common shares outstanding—diluted | 43,762 |
| | 43,153 |
| | 43,695 |
| | 42,893 |
|
Earnings per share-basic | $ | 0.25 |
| | $ | 0.23 |
| | $ | 0.73 |
| | $ | 0.66 |
|
Earnings per share-diluted | $ | 0.25 |
| | $ | 0.23 |
| | $ | 0.71 |
| | $ | 0.65 |
|
For the three months ended March 31, 2014 and 2013 there were 11,369 and 10,467 option shares, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for those periods.
For the nine months ended March 31, 2014 and 2013 there were 5,558 and 4,053 option shares, respectively, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for those periods.
3. Stock Repurchase Program
On June 27, 2011, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company repurchased 5,624,506 shares, representing approximately 10% of its then outstanding shares. A second stock repurchase plan, for 10% of the outstanding shares, or 5,062,056 shares, was announced on September 14, 2011 and a third repurchase plan for 5% of the outstanding shares, or 2,278,776 shares, was announced on November 14, 2011. At March 31, 2014, a total of 11,259,101 shares were acquired under these repurchase programs at a weighted average cost of $13.03 per share. The timing of the repurchases depend on certain factors, including but not limited to, market conditions and prices, the Company’s liquidity and capital requirements, and alternative uses of capital. Repurchased shares will be held as treasury stock and will be available for general corporate purposes. The Company may conduct repurchases in accordance with a Rule 10b5-1trading plan. At March 31, 2014, there are 1,701,980 shares yet to be purchased under the current plans.
4. Equity Incentive Plans
The 2007 Equity Incentive Plan (“the 2007 Equity Plan”) was approved by the Company’s stockholders on April 22, 2008, which authorized the issuance of up to 4,172,817 shares of Company common stock pursuant to grants of incentive and non-statutory stock options, stock appreciation rights, and restricted stock awards. The 2011 Equity Incentive Plan (“2011 Equity Plan”) was approved by the Company’s stockholders on July 26, 2011. The 2011 Equity Plan authorized the issuance of up to 5,790,849 shares of the Company’s common stock pursuant to grants of stock options, restricted stock awards and restricted stock units, with no more than 1,654,528 of the shares be issued as restricted stock awards or restricted stock units. Employees and outside directors of the Company or Oritani Bank are eligible to receive awards under the Equity Plans.
Stock options are granted at an exercise price equal to the market price of our common stock on the grant date, based on quoted market prices. Stock options generally vest over a five-year service period and expire ten years from issuance. The vesting of the options accelerate upon death or disability, retirement or a change in control and expire 90 days after termination of service, excluding disability or retirement. The Company recognizes compensation expense for all option grants over the awards’ respective requisite service periods. Management estimated the fair values of all option grants using the Black-Scholes option-pricing model. Management estimated the expected life of the options using the simplified method. The Treasury yield in effect at the time of
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
the grant provides the risk-free rate for periods within the contractual life of the option. The Company classified share-based compensation for employees and outside directors within “compensation, payroll taxes and fringe benefits” in the consolidated statements of income to correspond with the same line item as the cash compensation paid. The fair value of the options issued during the nine months ended March 31, 2014 and 2013 was estimated using the Black-Scholes options-pricing model with the following assumptions:
|
| | | | | |
| Nine months ended March 31, |
| 2014 | | 2013 |
Option shares granted | 36,000 |
| | 100,000 |
|
Expected dividend yield | 6.25 | % | | 5.38 | % |
Expected volatility | 31.57 | % | | 35.25 | % |
Risk-free interest rate | 1.87 | % | | 0.99 | % |
Expected option life | 6.5 |
| | 6.5 |
|
The following is a summary of the Company’s stock option activity and related information for its options plan as of March 31, 2014 and changes therein during the nine months then ended:
|
| | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Grant Date Fair Value | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (years) |
Outstanding at June 30, 2013 | 6,422,891 |
| | $ | 2.55 |
| | $ | 11.39 |
| | 6.9 |
Granted | 36,000 |
| | 2.40 |
| | 16.19 |
| | 10.0 |
Exercised | (438,486 | ) | | 2.32 |
| | 10.51 |
| | 4.9 |
Forfeited | (22,800 | ) | | 2.71 |
| | 11.95 |
| | 7.9 |
Expired | (12,371 | ) | | 2.29 |
| | 10.43 |
| | 4.3 |
Outstanding at March 31, 2014 | 5,985,234 |
| | $ | 2.57 |
| | $ | 11.48 |
| | 7.0 |
Exercisable at March 31, 2014 | 3,566,682 |
| | $ | 2.47 |
| | $ | 11.09 |
| | 5.5 |
The Company recorded $536,000 and $534,000 of share based compensation expense related to the options granted for the three months ended March 31, 2014 and 2013, respectively and $1.6 million and $1.6 million for the nine months ended March 31, 2014 and 2013, respectively. Expected future expense related to the non-vested options outstanding at March 31, 2014 is $5.2 million over a weighted average period of 2.4 years. Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.
Restricted stock shares vest over a five-year service period on the anniversary date of the grant. Vesting of the restricted stock shares accelerate upon death or disability, retirement or a change in control. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted shares under the Company’s restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.
The following is a summary of the status of the Company’s restricted stock shares as of March 31, 2014 and changes therein during the nine months then ended:
|
| | | | | | |
| Number of Shares Awarded | | Weighted Average Grant Date Fair Value |
Non-vested at June 30, 2013 | 1,301,480 |
| | $ | 12.02 |
|
Granted | 18,000 |
| | 16.19 |
|
Vested | (321,620 | ) | | 11.99 |
|
Forfeited | (10,800 | ) | | 11.95 |
|
Non-vested at March 31, 2014 | 987,060 |
| | $ | 12.11 |
|
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The Company recorded $974,000 and $982,000 of share based compensation expense related to the restricted stock shares granted for the three months ended March 31, 2014 and 2013, respectively and $2.9 million and $2.9 million for the nine months ended March 31, 2014 and 2013, respectively. Expected future expense related to the non-vested restricted shares at March 31, 2014 is $9.5 million over a weighted average period of 2.4 years.
5. Postretirement Benefits
The Company provides several post-retirement benefit plans to directors and to certain active and retired employees. The Company has a nonqualified Directors’ Retirement Plan (the Retirement Plan), a nonqualified Benefit Equalization Plan (BEP Plan) which provides benefits to employees who are disallowed certain benefits under the Company’s qualified benefit plans and a Post Retirement Medical Plan (the Medical Plan) for directors and certain eligible employees. Net periodic benefit costs for the three months and nine months ended March 31, 2014 and 2013 are presented in the following tables.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Plan | | BEP Plan | | Medical Plan |
| Three months ended March 31, |
| 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Service cost | $ | 32 |
| | $ | 38 |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 24 |
|
Interest cost | 51 |
| | 49 |
| | 10 |
| | 8 |
| | 41 |
| | 66 |
|
Amortization of unrecognized: | | | | | | | | | | | |
Prior service cost | 14 |
| | 15 |
| | — |
| | — |
| | — |
| | — |
|
Net loss | — |
| | 36 |
| | 5 |
| | 7 |
| | — |
| | (8 | ) |
Total | $ | 97 |
| | $ | 138 |
| | $ | 15 |
| | $ | 15 |
| | $ | 52 |
| | $ | 82 |
|
| | | | | | | | | | | |
| Nine months ended March 31, |
| 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
| (In thousands) |
Service cost | $ | 105 |
| | $ | 114 |
| | $ | — |
| | $ | — |
| | $ | 47 |
| | $ | 51 |
|
Interest cost | 160 |
| | 148 |
| | 32 |
| | 26 |
| | 137 |
| | 107 |
|
Amortization of unrecognized: | | | | | | | | | | | |
Prior service cost | 43 |
| | 45 |
| | — |
| | — |
| | — |
| | — |
|
Net loss | — |
| | 110 |
| | 16 |
| | 20 |
| | — |
| | 96 |
|
Total | $ | 308 |
| | $ | 417 |
| | $ | 48 |
| | $ | 46 |
| | $ | 184 |
| | $ | 254 |
|
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
6. Loans
Net Loans are summarized as follows:
|
| | | | | | | |
| March 31, 2014 | | June 30, 2013 |
| (In thousands) |
Residential | $ | 135,303 |
| | $ | 128,451 |
|
Multifamily | 872,729 |
| | 908,242 |
|
Commercial real estate | 1,348,586 |
| | 1,192,815 |
|
Second mortgage and equity loans | 22,534 |
| | 24,637 |
|
Construction and land loans | 34,634 |
| | 44,537 |
|
Other loans | 16,252 |
| | 18,472 |
|
Total loans | 2,430,038 |
| | 2,317,154 |
|
Less: | | | |
Deferred loan fees, net | 10,011 |
| | 9,991 |
|
Allowance for loan losses | 31,399 |
| | 31,381 |
|
Net loans | $ | 2,388,628 |
| | $ | 2,275,782 |
|
The Company’s allowance for loan losses is analyzed quarterly and many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other environmental factors. There have been no material changes to the allowance for loan loss methodology as disclosed in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 13, 2013.
The activity in the allowance for loan losses for the three and nine months ended March 31, 2014 and 2013 is summarized as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | Nine months ended March 31, |
| (In thousands) |
| 2014 | | 2013 | | 2014 | | 2013 |
Balance at beginning of period | $ | 30,640 |
| | $ | 31,909 |
| | $ | 31,381 |
| | $ | 31,187 |
|
Provisions for loan losses | 200 |
| | 600 |
| | 700 |
| | 3,600 |
|
Recoveries of loans previously charged off | 1,014 |
| | 35 |
| | 1,027 |
| | 152 |
|
Loans charged off | (455 | ) | | (582 | ) | | (1,709 | ) | | (2,977 | ) |
Balance at end of period | $ | 31,399 |
| | $ | 31,962 |
| | $ | 31,399 |
| | $ | 31,962 |
|
The following table provides the three and nine month activity in the allowance for loan losses allocated by loan category at March 31, 2014 and 2013. 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.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2014 |
| Residential | | Multifamily | | Commercial Real Estate | | Second mortgage and equity loans | | Construction and land loans | | Other loans | | Unallocated | | Total |
| (In thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Beginning balance | $ | 1,897 |
| | $ | 4,961 |
| | $ | 19,090 |
| | $ | 328 |
| | $ | 1,167 |
| | $ | 383 |
| | $ | 2,814 |
| | $ | 30,640 |
|
Charge-offs | — |
| | — |
| | (455 | ) | | — |
| | — |
| | — |
| | — |
| | (455 | ) |
Recoveries | — |
| | — |
| | 14 |
| | — |
| | 1,000 |
| | — |
| | — |
| | 1,014 |
|
Provisions | (55 | ) | | (339 | ) | | 1,863 |
| | (15 | ) | | (1,037 | ) | | (46 | ) | | (171 | ) | | 200 |
|
Ending balance | $ | 1,842 |
| | $ | 4,622 |
| | $ | 20,512 |
| | $ | 313 |
| | $ | 1,130 |
| | $ | 337 |
| | $ | 2,643 |
| | $ | 31,399 |
|
| | | | | | | | | | | | | | | |
| Nine months ended March 31, 2014 |
| Residential | | Multifamily | | Commercial Real Estate | | Second mortgage and equity loans | | Construction and land loans | | Other loans | | Unallocated | | Total |
| (In thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Beginning balance | $ | 2,224 |
| | $ | 5,175 |
| | $ | 19,339 |
| | $ | 394 |
| | $ | 1,233 |
| | $ | 406 |
| | $ | 2,610 |
| | $ | 31,381 |
|
Charge-offs | (3 | ) | | (1,226 | ) | | (459 | ) | | (21 | ) | | — |
| | — |
| | — |
| | (1,709 | ) |
Recoveries | — |
| | — |
| | 26 |
| | — |
| | 1,001 |
| | — |
| | — |
| | 1,027 |
|
Provisions | (379 | ) | | 673 |
| | 1,606 |
| | (60 | ) | | (1,104 | ) | | (69 | ) | | 33 |
| | 700 |
|
Ending balance | $ | 1,842 |
| | $ | 4,622 |
| | $ | 20,512 |
| | $ | 313 |
| | $ | 1,130 |
| | $ | 337 |
| | $ | 2,643 |
| | $ | 31,399 |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2013 |
| Residential | | Multifamily | | Commercial Real Estate | | Second mortgage and equity loans | | Construction and land loans | | Other loans | | Unallocated | | Total |
| (In thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Beginning balance | $ | 2,429 |
| | $ | 3,816 |
| | $ | 20,242 |
| | $ | 424 |
| | $ | 1,390 |
| | $ | 491 |
| | $ | 3,117 |
| | $ | 31,909 |
|
Charge-offs | — |
| | — |
| | (582 | ) | | — |
| | — |
| | — |
| | — |
| | (582 | ) |
Recoveries | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | — |
| | 35 |
|
Provisions | (162 | ) | | 491 |
| | 546 |
| | (15 | ) | | (284 | ) | | (25 | ) | | 49 |
| | 600 |
|
Ending balance | $ | 2,267 |
| | $ | 4,307 |
| | $ | 20,206 |
| | $ | 409 |
| | $ | 1,141 |
| | $ | 466 |
| | $ | 3,166 |
| | $ | 31,962 |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Nine months ended March 31, 2013 |
| Residential | | Multifamily | | Commercial Real Estate | | Second mortgage and equity loans | | Construction and land loans | | Other loans | | Unallocated | | Total |
| (In thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Beginning balance | $ | 2,343 |
| | $ | 3,113 |
| | $ | 20,087 |
| | $ | 475 |
| | $ | 2,498 |
| | $ | 348 |
| | $ | 2,323 |
| | $ | 31,187 |
|
Charge-offs | — |
| | — |
| | (1,151 | ) | | — |
| | (1,826 | ) | | — |
| | — |
| | (2,977 | ) |
Recoveries | — |
| | 115 |
| | — |
| | — |
| | 37 |
| | — |
| | — |
| | 152 |
|
Provisions | (76 | ) | | 1,079 |
| | 1,270 |
| | (66 | ) | | 432 |
| | 118 |
| | 843 |
| | 3,600 |
|
Ending balance | $ | 2,267 |
| | $ | 4,307 |
| | $ | 20,206 |
| | $ | 409 |
| | $ | 1,141 |
| | $ | 466 |
| | $ | 3,166 |
| | $ | 31,962 |
|
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 March 31, 2014 and June 30, 2013.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
| Residential | | Multifamily | | Commercial Real Estate | | Second mortgage and equity loans | | Construction and land loans | | Other loans | | Unallocated | | Total |
| (In thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 266 |
| | $ | 27 |
| | $ | 723 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,016 |
|
Collectively evaluated for impairment | 1,576 |
| | 4,595 |
| | 19,789 |
| | 313 |
| | 1,130 |
| | 337 |
| | 2,643 |
| | 30,383 |
|
Total | $ | 1,842 |
| | $ | 4,622 |
| | $ | 20,512 |
| | $ | 313 |
| | $ | 1,130 |
| | $ | 337 |
| | $ | 2,643 |
| | $ | 31,399 |
|
Loans receivable: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 4,703 |
| | $ | 2,936 |
| | $ | 10,466 |
| | $ | — |
| | $ | — |
| | $ | — |
| | | | $ | 18,105 |
|
Collectively evaluated for impairment | 130,600 |
| | 869,793 |
| | 1,338,120 |
| | 22,534 |
| | 34,634 |
| | 16,252 |
| | | | 2,411,933 |
|
Total | $ | 135,303 |
| | $ | 872,729 |
| | $ | 1,348,586 |
| | $ | 22,534 |
| | $ | 34,634 |
| | $ | 16,252 |
| | | | $ | 2,430,038 |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| At June 30, 2013 |
| Residential | | Multifamily | | Commercial Real Estate | | Second mortgage and equity loans | | Construction and land loans | | Other loans | | Unallocated | | Total |
| (In thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 303 |
| | $ | 787 |
| | $ | 720 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,810 |
|
Collectively evaluated for impairment | 1,921 |
| | 4,388 |
| | 18,619 |
| | 394 |
| | 1,233 |
| | 406 |
| | 2,610 |
| | 29,571 |
|
Total | $ | 2,224 |
| | $ | 5,175 |
| | $ | 19,339 |
| | $ | 394 |
| | $ | 1,233 |
| | $ | 406 |
| | $ | 2,610 |
| | $ | 31,381 |
|
Loans receivable: | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 2,192 |
| | $ | 7,139 |
| | $ | 11,473 |
| | $ | — |
| | $ | 4,852 |
| | $ | — |
| | | | $ | 25,656 |
|
Collectively evaluated for impairment | 126,259 |
| | 901,103 |
| | 1,181,342 |
| | 24,637 |
| | 39,685 |
| | 18,472 |
| | | | 2,291,498 |
|
Total | $ | 128,451 |
| | $ | 908,242 |
| | $ | 1,192,815 |
| | $ | 24,637 |
| | $ | 44,537 |
| | $ | 18,472 |
| | | | $ | 2,317,154 |
|
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 evaluate the credit quality ratings of its loan receivables. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified as “Satisfactory” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Pass/Watch” have generally acceptable asset quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such characteristics include strained liquidity, slow pay, stale financial statements or other circumstances requiring greater attention from bank staff. We classify an asset as “Special Mention” if the asset has a potential weakness that warrants management’s close attention. Such weaknesses, if left uncorrected may result in the deterioration of the repayment prospects of the asset. An asset is considered “Substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as “Doubtful” have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Included in the Substandard caption are all loans that were past due 90 days (or more) and all impaired loans. The following table provides information about the loan credit quality at March 31, 2014 and June 30, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Credit Quality Indicators at March 31, 2014 |
| Satisfactory | | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Total |
| (In thousands) |
Residential | $ | 123,526 |
| | $ | 5,624 |
| | $ | 618 |
| | $ | 5,535 |
| | $ | — |
| | $ | 135,303 |
|
Multifamily | 851,476 |
| | 15,776 |
| | 1,963 |
| | 3,514 |
| | — |
| | 872,729 |
|
Commercial real estate | 1,212,362 |
| | 75,995 |
| | 6,744 |
| | 53,485 |
| | — |
| | 1,348,586 |
|
Second mortgage and equity loans | 22,356 |
| | 154 |
| | 24 |
| | — |
| | — |
| | 22,534 |
|
Construction and land loans | 15,573 |
| | 18,526 |
| | — |
| | 535 |
| | — |
| | 34,634 |
|
Other loans | 16,182 |
| | 56 |
| | — |
| | 14 |
| | — |
| | 16,252 |
|
Total | $ | 2,241,475 |
| | $ | 116,131 |
| | $ | 9,349 |
| | $ | 63,083 |
| | $ | — |
| | $ | 2,430,038 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| Credit Quality Indicators at June 30, 2013 |
| Satisfactory | | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Total |
| (In thousands) |
Residential | $ | 117,061 |
| | $ | 6,424 |
| | $ | 646 |
| | $ | 4,320 |
| | $ | — |
| | $ | 128,451 |
|
Multifamily | 876,222 |
| | 16,626 |
| | 8,052 |
| | 7,342 |
| | — |
| | 908,242 |
|
Commercial real estate | 1,067,331 |
| | 58,767 |
| | 44,476 |
| | 22,241 |
| | — |
| | 1,192,815 |
|
Second mortgage and equity loans | 24,303 |
| | 92 |
| | 146 |
| | 96 |
| | — |
| | 24,637 |
|
Construction and land loans | 20,573 |
| | 18,500 |
| | — |
| | 5,464 |
| | — |
| | 44,537 |
|
Other loans | 18,411 |
| | — |
| | — |
| | 61 |
| | — |
| | 18,472 |
|
Total | $ | 2,123,901 |
| | $ | 100,409 |
| | $ | 53,320 |
| | $ | 39,524 |
| | $ | — |
| | $ | 2,317,154 |
|
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The following table provides information about loans past due at March 31, 2014 and June 30, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 days or More Past Due | | Total Past Due | | Current | | Total Loans | | Nonaccrual (1) |
| (In thousands) |
Residential | $ | 624 |
| | $ | 618 |
| | $ | 2,376 |
| | $ | 3,618 |
| | $ | 131,685 |
| | $ | 135,303 |
| | $ | 5,353 |
|
Multifamily | 1,123 |
| | — |
| | 3,013 |
| | 4,136 |
| | 868,593 |
| | 872,729 |
| | 3,514 |
|
Commercial real estate | 1,949 |
| | 615 |
| | 4,623 |
| | 7,187 |
| | 1,341,399 |
| | 1,348,586 |
| | 7,521 |
|
Second mortgage and equity loans | 154 |
| | 24 |
| | — |
| | 178 |
| | 22,356 |
| | 22,534 |
| | — |
|
Construction and land loans | — |
| | — |
| | 535 |
| | 535 |
| | 34,099 |
| | 34,634 |
| | 535 |
|
Other loans | — |
| | 14 |
| | — |
| | 14 |
| | 16,238 |
| | 16,252 |
| | 14 |
|
Total | $ | 3,850 |
| | $ | 1,271 |
| | $ | 10,547 |
| | $ | 15,668 |
| | $ | 2,414,370 |
| | $ | 2,430,038 |
| | $ | 16,937 |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| At June 30, 2013 |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 days or More Past Due | | Total Past Due | | Current | | Total Loans | | Nonaccrual (2) |
| (In thousands) |
Residential | $ | 1,425 |
| | $ | 1,384 |
| | $ | 3,088 |
| | $ | 5,897 |
| | $ | 122,554 |
| | $ | 128,451 |
| | $ | 4,044 |
|
Multifamily | 1,734 |
| | 203 |
| | 7,139 |
| | 9,076 |
| | 899,166 |
| | 908,242 |
| | 7,139 |
|
Commercial real estate | 4,165 |
| | 1,649 |
| | 7,963 |
| | 13,777 |
| | 1,179,038 |
| | 1,192,815 |
| | 9,478 |
|
Second mortgage and equity loans | 92 |
| | 146 |
| | — |
| | 238 |
| | 24,399 |
| | 24,637 |
| | — |
|
Construction and land loans | — |
| | — |
| | 3,188 |
| | 3,188 |
| | 41,349 |
| | 44,537 |
| | 3,188 |
|
Other loans | — |
| | 61 |
| | — |
| | 61 |
| | 18,411 |
| | 18,472 |
| | 61 |
|
Total | $ | 7,416 |
| | $ | 3,443 |
| | $ | 21,378 |
| | $ | 32,237 |
| | $ | 2,284,917 |
| | $ | 2,317,154 |
| | $ | 23,910 |
|
| |
(1) | Included in nonaccrual loans at March 31, 2014 are residential loans totaling $72,000 and commercial real estate loans totaling $1.0 million that were 30-59 days past due; other loans totaling $14,000 that were 60-89 days past due; residential loans totaling $2.9 million, multifamily loans totaling $501,000 and commercial real estate loans totaling $1.9 million that were less than 30 days past due. |
| |
(2) | Included in nonaccrual loans at June 30 ,2013 are residential loans totaling $739,000 and other loans totaling $61,000 that were 60-89 days past due; residential loans totaling $217,000 and commercial real estate loans totaling $1.5 million that were less than 30 days past due. |
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. At March 31, 2014 impaired loans were primarily collateral-dependent and totaled $18.1 million, of which $4.8 million had a specific allowance for credit losses of $1.0 million and $13.3 million of impaired loans had no related allowance for credit losses. At June 30, 2013 impaired loans were primarily collateral-dependent and totaled $25.7 million, of which $11.3 million had a related allowance for credit losses of $1.8 million and $14.3 million of impaired loans had no related allowance for credit losses.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The following table provides information about the Company’s impaired loans at March 31, 2014 and June 30, 2013:
|
| | | | | | | | | | | | | | | | | | | |
| Impaired Loans |
| At March 31, 2014 | | Nine months ended March 31, 2014 |
| Recorded Investment | | Unpaid Principal Balance | | Allowance | | Average Recorded Investment | | Interest Income Recognized |
| (In thousands) |
With no related allowance recorded; | | | | | | | | | |
Residential | $ | 2,887 |
| | $ | 2,887 |
| | $ | — |
| | $ | 3,028 |
| | $ | 429 |
|
Multifamily | 2,435 |
| | 2,435 |
| | — |
| | 2,445 |
| | 133 |
|
Commercial real estate | 8,003 |
| | 8,003 |
| | — |
| | 8,045 |
| | 154 |
|
| 13,325 |
| | 13,325 |
| | — |
| | 13,518 |
| | 716 |
|
With an allowance recorded: | | | | | | | | | |
Residential | $ | 1,550 |
| | $ | 1,816 |
| | $ | 266 |
| | $ | 1,552 |
| | $ | 4 |
|
Multifamily | 474 |
| | 501 |
| | 27 |
| | 406 |
| | 35 |
|
Commercial real estate | 1,740 |
| | 2,463 |
| | 723 |
| | 1,912 |
| | 12 |
|
| 3,764 |
| | 4,780 |
| | 1,016 |
| | 3,870 |
| | 51 |
|
Total: | | | | | | | | | |
Residential | $ | 4,437 |
| | $ | 4,703 |
| | $ | 266 |
| | $ | 4,580 |
| | $ | 433 |
|
Multifamily | 2,909 |
| | 2,936 |
| | 27 |
| | 2,851 |
| | 168 |
|
Commercial real estate | 9,743 |
| | 10,466 |
| | 723 |
| | 9,957 |
| | 166 |
|
| $ | 17,089 |
| | $ | 18,105 |
| | $ | 1,016 |
| | $ | 17,388 |
| | $ | 767 |
|
| | | | | | | | | |
| Impaired Loans |
| At June 30, 2013 | | Year ended June 30, 2013 |
| Recorded Investment | | Unpaid Principal Balance | | Allowance | | Average Recorded Investment | | Interest Income Recognized |
| (In thousands) |
With no related allowance recorded; | | | | | | | | | |
Multifamily | $ | 2,455 |
| | 2,455 |
| | — |
| | 2,457 |
| | 30 |
|
Commercial real estate | 7,000 |
| | 7,000 |
| | — |
| | 7,055 |
| | 202 |
|
Construction and land loans | 4,852 |
| | 4,852 |
| | — |
| | 4,893 |
| | — |
|
| 14,307 |
| | 14,307 |
| | — |
| | 14,405 |
| | 232 |
|
With an allowance recorded: | | | | | | | | | |
Residential | $ | 1,890 |
| | $ | 2,193 |
| | $ | 303 |
| | $ | 1,990 |
| | $ | 27 |
|
Multifamily | 3,897 |
| | 4,684 |
| | 787 |
| | 4,277 |
| | 142 |
|
Commercial real estate | 3,752 |
| | 4,472 |
| | 720 |
| | 4,133 |
| | 118 |
|
| 9,539 |
| | 11,349 |
| | 1,810 |
| | 10,400 |
| | 287 |
|
Total: | | | | | | | | | |
Residential | $ | 1,890 |
| | $ | 2,193 |
| | $ | 303 |
| | $ | 1,990 |
| | $ | 27 |
|
Multifamily | 6,352 |
| | 7,139 |
| | 787 |
| | 6,734 |
| | 172 |
|
Commercial real estate | 10,752 |
| | 11,472 |
| | 720 |
| | 11,188 |
| | 320 |
|
Construction and land loans | 4,852 |
| | 4,852 |
| | — |
| | 4,893 |
| | — |
|
| $ | 23,846 |
| | $ | 25,656 |
| | $ | 1,810 |
| | $ | 24,805 |
| | $ | 519 |
|
Troubled debt restructured loans (“TDRs”) are those loans whose terms have been modified because of deterioration in the financial condition of the borrower. The Company has selectively modified certain borrower’s loans to enable the borrower to emerge from delinquency and keep their loans current. The eligibility of a borrower for a TDR modification depends upon the facts and
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
circumstances of each transaction, which may change from period to period, and involve judgment by management regarding the likelihood that the modification will result in the maximum recovery by the Company. Modifications could include extension of the terms of the loan, reduced interest rates, and forgiveness of accrued interest and/or principal. Once an obligation has been restructured because of such credit problems, it continues to be considered restructured until paid in full or, if the obligation yields a market rate (a rate equal to or greater than the rate the Company was willing to accept at the time of the restructuring for a new loan with comparable risk), until the year subsequent to the year in which the restructuring takes place, provided the borrower has performed under the modified terms for a six month period. Management classifies all TDRs as impaired loans. Included in impaired loans at March 31, 2014 are $6.6 million of loans which are deemed TDRs. At June 30, 2013, TDRs totaled $3.8 million.
The following table presents additional information regarding the Company’s TDRs as of March 31, 2014 and June 30, 2013:
|
| | | | | | | | | | | |
| Troubled Debt Restructurings at March 31, 2014 |
| Performing | | Nonperforming | | Total |
| (In thousands) |
Residential | $ | — |
| | $ | 3,082 |
| | $ | 3,082 |
|
Multifamily | — |
| | 501 |
| | 501 |
|
Commercial real estate | 262 |
| | 2,749 |
| | 3,011 |
|
Total | $ | 262 |
| | $ | 6,332 |
| | $ | 6,594 |
|
Allowance | $ | — |
| | $ | 770 |
| | $ | 770 |
|
| | | | | |
| Troubled Debt Restructurings at June 30, 2013 |
| Performing | | Nonperforming | | Total |
| (In thousands) |
Residential | $ | 372 |
| | $ | 200 |
| | $ | 572 |
|
Multifamily | — |
| | 468 |
| | 468 |
|
Commercial real estate | — |
| | 1,087 |
| | 1,087 |
|
Construction and land loans | 1,664 |
| | — |
| | 1,664 |
|
Total | $ | 2,036 |
| | $ | 1,755 |
| | $ | 3,791 |
|
Allowance | $ | — |
| | $ | 379 |
| | $ | 379 |
|
The following tables present information about troubled debt restructurings for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, |
| 2014 | | 2013 |
| Number of Relationships | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Relationships | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (Dollars in thousands) | | (Dollars in thousands) |
Commercial real estate | 2 |
| | $ | 811 |
| | $ | 759 |
| | — |
| | — |
| | — |
|
Total | 2 |
| | $ | 811 |
| | $ | 759 |
| | — |
| | — |
| | $ | — |
|
One of the relationships in the table above was granted a short-term deferral of past due payments and a shortened maturity. The other relationship was granted a deferral of past due payments until maturity.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine months ended March 31, |
| 2014 | | 2013 |
| Number of Relationships | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Relationships | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (Dollars in thousands) | | (Dollars in thousands) |
Residential | 1 |
| | $ | 3,188 |
| | $ | 2,887 |
| | 1 |
| | $ | 187 |
| | $ | 180 |
|
Commercial real estate | 3 |
| | 1,779 |
| | 1,529 |
| | — |
| | — |
| | — |
|
Total | 4 |
| | $ | 4,967 |
| | $ | 4,416 |
| | 1 |
| | $ | 187 |
| | $ | 180 |
|
Two of the relationships in the table above were granted a reduced rate and extended maturity. One of the relationships in the table above was granted a short-term deferral of past due payments and a shortened maturity. The other relationship was granted a deferral of past due payments until maturity.
There have not been any loans that were modified as TDR during the last twelve months that have subsequently defaulted (90 days or more past due) during the current quarter ended March 31, 2014.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
7. Investment Securities
Securities Held to Maturity
The following is a comparative summary of securities held to maturity at March 31, 2014 and June 30, 2013:
|
| | | | | | | | | | | | | | | |
| March 31, 2014 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| (In thousands) |
Mortgage-backed securities: | | | | | | | |
FHLMC | $ | 2,661 |
| | $ | 182 |
| | $ | — |
| | $ | 2,843 |
|
FNMA | 26,675 |
| | 326 |
| | 987 |
| | 26,014 |
|
GNMA | 2,394 |
| | 105 |
| | — |
| | 2,499 |
|
| $ | 31,730 |
| | $ | 613 |
| | $ | 987 |
| | $ | 31,356 |
|
| | | | | | | |
| | | | | | | |
| June 30, 2013 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| (In thousands) |
Mortgage-backed securities: | | | | | | | |
FHLMC | $ | 4,310 |
| | $ | 287 |
| | $ | — |
| | $ | 4,597 |
|
FNMA | 33,388 |
| | 642 |
| | 1,095 |
| | 32,935 |
|
GNMA | 2,984 |
| | 109 |
| | — |
| | 3,093 |
|
CMO | 1,191 |
| | 39 |
| | — |
| | 1,230 |
|
| $ | 41,873 |
| | $ | 1,077 |
| | $ | 1,095 |
| | $ | 41,855 |
|
The contractual maturities of mortgage-backed securities held-to-maturity generally exceed 20 years ; however, the effective lives are expected to be shorter due to anticipated prepayments and, in the case of CMOs, cash flow priorities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
The Company did not sell any securities held to maturity during the three months ended March 31, 2014 and 2013. Proceeds from the sale of securities held to maturity for the nine months ended March 31, 2014 were $8.9 million on securities with an amortized cost of $8.8 million, resulting in gross gains and gross losses of $117,400 and $16,700, respectively. The held to maturity securities sold were mortgage-backed securities with 15% or less of their original purchased balances remaining. The Company did not sell any securities held to maturity during the nine months ended March 31, 2013. Securities with fair values of $29.7 million and $34.4 million at March 31, 2014 and June 30, 2013, respectively, were pledged as collateral for advances. The Company did not record other-than-temporary impairment charges on securities held to maturity during the three and nine months ended March 31, 2014 and 2013.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Gross unrealized losses on securities held to maturity and the fair value of the related securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2014 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
| Less than 12 months |
| Greater than 12 months |
| Total |
| Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| (In thousands) |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
FNMA | $ | 9,204 |
| | 365 |
| | 6,739 |
| | 622 |
| | 15,943 |
| | 987 |
|
| $ | 9,204 |
| | $ | 365 |
| | 6,739 |
| | 622 |
| | 15,943 |
| | 987 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| June 30, 2013 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| (In thousands) |
Mortgage-backed securities: | | | | | | | | | | | |
FNMA | $ | 19,354 |
| | 1,095 |
| | — |
| | — |
| | 19,354 |
| | 1,095 |
|
| $ | 19,354 |
| | $ | 1,095 |
| | — |
| | — |
| | 19,354 |
| | 1,095 |
|
Management evaluated the securities in the above tables and concluded that none of the securities with losses has impairments that are other-than-temporary. The unrealized losses on investments in mortgage-backed securities were caused by interest rate changes and market conditions. Because the decline in fair value is attributable to changes in interest rates and market conditions and not credit quality, and because the Company has no intent to sell and believes it is not more than likely than not that it will be required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Securities Available for Sale
The following is a comparative summary of securities available for sale at March 31, 2014 and June 30, 2013:
|
| | | | | | | | | | | | | | | |
| March 31, 2014 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| (In thousands) |
U.S. Government and federal agency obligations | | | | | | | |
Due in one to five years | $ | 4,996 |
| | $ | 105 |
| | $ | — |
| | $ | 5,101 |
|
Equity securities | 1,210 |
| | 799 |
| | — |
| | 2,009 |
|
Mortgage-backed securities: | | | | | | | |
FHLMC | 7,132 |
| | 221 |
| | — |
| | 7,353 |
|
FNMA | 56,116 |
| | 1,416 |
| | 255 |
| | 57,277 |
|
CMO | 308,226 |
| | 2,439 |
| | 744 |
| | 309,921 |
|
| $ | 377,680 |
| | $ | 4,980 |
| | $ | 999 |
| | $ | 381,661 |
|
| | | | | | | |
| June 30, 2013 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| (In thousands) |
U.S. Government and federal agency obligations | | | | | | | |
Due in one to five years | $ | 9,988 |
| | $ | 257 |
| | $ | — |
| | $ | 10,245 |
|
Equity securities | 1,210 |
| | 564 |
| | — |
| | 1,774 |
|
Mortgage-backed securities: |
| |
| |
| | |
FHLMC | 8,743 |
| | 276 |
| | — |
| | 9,019 |
|
FNMA | 43,152 |
| | 1,604 |
| | — |
| | 44,756 |
|
CMO | 249,278 |
| | 3,526 |
| | 308 |
| | 252,496 |
|
| $ | 312,371 |
| | $ | 6,227 |
| | $ | 308 |
| | $ | 318,290 |
|
The contractual maturities of mortgage-backed securities available for sale generally exceed 20 years ; however, the effective lives are expected to be shorter due to anticipated prepayments and, in the case of CMOs, cash flow priorities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
The Company did not sell any securities available for sale during the three months ended March 31, 2014. Proceeds from the sale of securities available for sale for the nine months ended March 31, 2014 were $18.1 million on securities available for sale with an amortized cost of $18.2 million, resulting in gross gains and gross losses of $136,300 and $185,600, respectively. The Company did not sell any securities available for sale during the three and nine months ended March 31, 2013. There were no other-than-temporary impairment charges on available for sale securities for the three and nine months ended March 31, 2014 and 2013. The Equity securities caption relates to holdings of shares in financial institutions common stock. Available for sale securities with fair values of $260.3 million and $263.1 million at March 31, 2014 and June 30, 2013, respectively, were pledged as collateral for advances.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2014 and June 30, 2013 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| (In thousands) |
Mortgage-backed securities: | | | | | | | | | | | |
FNMA | $ | 20,889 |
| | 255 |
| | — |
| | — |
| | 20,889 |
| | 255 |
|
CMO | 121,150 |
| | 744 |
| | — |
| | — |
| | 121,150 |
| | 744 |
|
| $ | 142,039 |
| | 999 |
| | — |
| | — |
| | 142,039 |
| | 999 |
|
|
| | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| (In thousands) |
Mortgage-backed securities: | | | | | | | | | | | |
CMO | $ | 11,813 |
| | 31 |
| | 13,273 |
| | 277 |
| | 25,086 |
| | 308 |
|
| $ | 11,813 |
| | 31 |
| | 13,273 |
| | 277 |
| | 25,086 |
| | 308 |
|
Management evaluated the securities in the above tables and concluded that none of the securities with losses has impairments that are other-than-temporary. The unrealized losses on investments in mortgage-backed securities were caused by interest rate changes and market conditions. Because the decline in fair value is attributable to changes in interest rates and market conditions and not credit quality, and because the Company has no intent to sell and believes it is not more than likely than not that it will be required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
8. Deposits
Deposits include checking (non-interest and interest-bearing demand deposits), money market, savings and time deposits. The Bank accepts brokered deposits on a limited basis, when deemed cost effective. At March 31, 2014 and June 30, 2013, we had brokered time deposits totaling $22.9 million with weighted average interest rates of 2.46% and weighted average maturities of 2.1 years and 2.8 years , respectively. Deposit balances are summarized as follows:
|
| | | | | | | |
| March 31, 2014 | | June 30, 2013 |
| Amount | | Amount |
| (In thousands) |
Checking accounts | $ | 429,184 |
| | $ | 361,131 |
|
Money market deposit accounts | 441,702 |
| | 422,878 |
|
Savings accounts | 162,972 |
| | 164,622 |
|
Time deposits | 496,809 |
| | 471,072 |
|
| $ | 1,530,667 |
| | $ | 1,419,703 |
|
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
9. Derivatives and Hedging Activities
Oritani is exposed to certain risks regarding its ongoing business operations. Derivative instruments are used to offset a portion of the Company's interest rate risk. Specifically, the Company has utilized interest rate swaps to partially offset the interest rate risk inherent in the Company's balance sheet. Oritani recognizes interest rate swaps as either assets or liabilities at fair value in the statement of financial condition with an offset recorded in Other Comprehensive Income and any ineffectiveness would be recorded in earnings. The interest rate swaps have been designed as cash flow hedges. The specific balance sheet item that is being hedged will be determined prior to the effective date of the transactions, though it is currently anticipated that the Company’s short term borrowing position is the item that will be hedged.
Oritani is exposed to credit-related losses in the event of nonperformance by the counterparties to the agreements. Oritani controls the credit risk through monitoring procedures and does not expect the counterparty to fail their obligations. Oritani only deals with primary dealers and believes that the credit risk inherent in these contracts was not significant during and at period end. Oritani has the right to demand that the counterparty post collateral to cover any market value shortfall of the counterparty regarding the transaction.
As of March 31, 2014, Oritani had entered into two interest rate swap agreements. Both of these agreements feature an extended period of time where no cash flows are exchanged, an “Effective Date” that indicates the commencement of the exchange of cash flows, followed by a seven year period where Oritani will receive 3 month LIBOR from the counterparty and pay interest to the counterparty at a fixed rate. The first agreement has a notional amount of $50 million at a fixed rate of 2.63% with an effective date of April 11, 2016 and a maturity date of April 11, 2023. The second agreement has a notional amount of $25 million at a fixed rate of 3.56% with an effective date of January 11, 2017 and a maturity date of January 11, 2024. The following table presents information regarding our derivative financial instruments at March 31, 2014 and June 30, 2013.
|
| | | | | | | | | | | | | | | | |
| | At March 31, 2014 | | At June 30, 2013 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Asset derivatives | | | | | | | | |
Interest rate swaps | | $ | 75,000 |
| | $ | 2,360 |
| | $ | 50,000 |
| | $ | 2,584 |
|
There was no collateral pledged from Oritani to the counterparty at March 31, 2014 and June 30, 2013. There is the possibility that Oritani may need to pledge collateral in the future.
10. Income Taxes
The Company files income tax returns in the United States federal jurisdiction and in New Jersey, Pennsylvania and New York state jurisdictions. On March 31, 2014, New York State signed into law a tax reform package which contained changes to the corporate tax law. The majority of the corporate tax provisions take effect in tax years beginning on and after January 1, 2015. The changes enacted increased future marginal tax rates resulting in an increase in the Company's state deferred tax assets. The change in the value of the deferred tax assets must be reflected in the current period. Accordingly, an $878,000 adjustment that decreased current period tax expense was recorded in March 2014.
The Company is no longer subject to federal and state income tax examinations by tax authorities for years prior to 2009. Currently, the Company is not under examination by any taxing authority. The Company did not have any uncertain tax positions at March 31, 2014 and June 30, 2013. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, where applicable, in income tax expense.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
11. Real Estate Joint Ventures, net and Real Estate Held for Investment
The Company accounts for investments in joint ventures under the equity method. The balance reflects the cost basis of investments, plus the Company’s share of income earned on the joint venture operations, less cash distributions, including excess cash distributions, and the Company’s share of losses on joint venture operations. Cash received in excess of the Company’s recorded investment in a joint venture is recorded as unearned revenue in other liabilities. The net book value of real estate joint ventures was $4.7 million and $4.1 million at March 31, 2014 and June 30, 2013, respectively.
Real estate held for investment includes the Company’s undivided interest in real estate properties accounted for under the equity method and properties held for investment purposes. Cash received in excess of the Company’s recorded investment for an undivided interest in real estate property is recorded as unearned revenue in other liabilities. The operations of the properties held for investment purposes are reflected in the financial results of the Company and included in the Other Income caption in the Income Statement. Properties held for investment purposes are carried at cost less accumulated depreciation. The net book value of real estate held for investment was $11,000 and $15,000 at March 31, 2014 and June 30, 2013, respectively.
12. Fair Value Measurements
The Company adopted ASC 820, “Fair Value Measurements and Disclosures”, on July 1, 2008. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below:
Basis of Fair Value Measurement:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted
assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for
substantially the full term of the asset or liability;
Level 3: Price or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e. supported with little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Following are descriptions of the valuation methodologies and key inputs used to measure assets recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. The descriptions include an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
Cash and Cash Equivalents
Due to their short-term nature, the carrying amount of these instruments approximates fair value.
Securities
The Company records securities held to maturity at amortized cost and securities available for sale at fair value on a recurring basis. The majority of the Company’s securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. The estimated fair values for securities are obtained from an independent nationally recognized third-party pricing service. Our independent pricing service provides us with prices which are primarily categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the majority of securities in our portfolio. Pricing services may employ modeling techniques in determining pricing. Inputs to these models include market spreads, dealer quotes, prepayment speeds, credit information and the instrument’s terms and conditions, among other things. Management compares the pricing to a second independent pricing source for reasonableness. Equity securities are reported at Level 1 based on quoted market prices for identical securities in active markets.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
FHLB of New York Stock
FHLB of New York Stock is recorded at cost (par value) and evaluated for impairment based on the ultimate recoverability of the par value. There is no active market for this stock and no significant observable market data is available for this instrument. The Company considers the profitability and asset quality of FHLB, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. The Company believes its investment in FHLB stock is ultimately recoverable at par. The carrying amount of FHLB stock approximates fair value, since this is the amount for which it could be redeemed.
Loans
The Company does not record loans at fair value on a recurring basis. However, periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements. The estimated fair value for significant nonperforming loans and impaired loans are valued utilizing independent appraisals of the collateral securing such loans that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. The appraisals are adjusted downward by management (0-20% adjustment rate and 0-10% risk premium rate), as necessary, for changes in relevant valuation factors subsequent to the appraisal date and the timing of anticipated cash flows (0-8% discount rate). The Company classifies impaired loans as Level 3.
Fair value for loans held for investment is estimated using portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential, multifamily, commercial real estate, construction, land and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming/impaired categories. Fair value of performing loans is estimated using a discounted cash flow model that employs a discount rate that reflects the current market pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value. The Company classifies the estimated fair value of loans held for investment as Level 3.
Real Estate Owned
Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at estimated fair value less estimated selling costs when acquired, thus establishing a new cost basis. Subsequently, real estate owned is carried at the lower of cost or fair value, less estimated selling costs. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered Level 3. When an asset is acquired, the excess of the loan balance over fair value, less estimated liquidation costs (5-20% discount rate), is charged to the allowance for loan losses. If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in the economic conditions.
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, such as checking, savings, and money market accounts, is equal to the amount payable on demand at the balance sheet date. The estimated fair value of term deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The Company classifies the estimated fair value of term deposits as Level 2.
Borrowings
The book value of overnight borrowings approximates the estimated fair value. The estimated fair value of term borrowings is calculated based on the discounted cash flow of contractual amounts due, using market rates currently available for borrowings of similar amount and remaining maturity. The Company classifies the estimated fair value of term borrowings as Level 2.
Derivatives
The fair value of our interest rate swaps was estimated using Level 2 inputs. The fair value was determined using third party prices that are based on discounted cash flow analyses using observed market interest rate curves and volatilities.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Commitments to Extend Credit and to Purchase or Sell Securities
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to purchase or sell securities is estimated based on bid quotations received from securities dealers. The fair value of off-balance-sheet commitments approximates book value.
Assets Recorded at Fair Value on a Recurring Basis
The following tables present the recorded amount of assets measured at fair value on a recurring basis as of March 31, 2014 and June 30, 2013 by level within the fair value hierarchy. There were no transfers between levels within the fair value hierarchy during the nine months ended March 31, 2014.
|
| | | | | | | | | | | | | | | |
| Fair Value as of March 31, 2014 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (In thousands) |
Assets: | | | | | | | |
U.S. Government and federal agency obligations | $ | 5,101 |
| | $ | — |
| | $ | 5,101 |
| | $ | — |
|
Equity Securities | 2,009 |
| | 2,009 |
| | — |
| | — |
|
Mortgage-backed securities available for sale | | | | | | | |
FHLMC | 7,353 |
| | — |
| | 7,353 |
| | — |
|
FNMA | 57,277 |
| | — |
| | 57,277 |
| | — |
|
CMO | 309,921 |
| | — |
| | 309,921 |
| | — |
|
Total securities available for sale | 381,661 |
| | 2,009 |
| | 379,652 |
| | — |
|
| | | | | | | |
Interest rate swaps | 2,360 |
| | — |
| | 2,360 |
| | — |
|
Total measured on a recurring basis | $ | 384,021 |
| | $ | 2,009 |
| | $ | 382,012 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| Fair Value as of June 30, 2013 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (In thousands) |
Assets: | | | | | | | |
U.S. Government and federal agency obligations | $ | 10,245 |
| | $ | — |
| | $ | 10,245 |
| | $ | — |
|
Equity Securities | 1,774 |
| | 1,774 |
| | — |
| | — |
|
Mortgage-backed securities available for sale | | | | | | | |
FHLMC | 9,019 |
| | — |
| | 9,019 |
| | — |
|
FNMA | 44,756 |
| | — |
| | 44,756 |
| | — |
|
CMO | 252,496 |
| | — |
| | 252,496 |
| | — |
|
Total securities available for sale | 318,290 |
| | 1,774 |
| | 316,516 |
| | — |
|
| | | | | | | |
Interest rate swap | 2,584 |
| | — |
| | 2,584 |
| | — |
|
Total measured on a recurring basis | $ | 320,874 |
| | $ | 1,774 |
| | $ | 319,100 |
| | $ | — |
|
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure the fair value of certain other financial assets on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. The adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following tables present the recorded amount of assets measured at fair value on a nonrecurring basis as of March 31, 2014 and June 30, 2013 by level within the fair value hierarchy.
|
| | | | | | | | | | | | | | | |
| Fair Value as of March 31, 2014 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (In thousands) |
Assets: | | | | | | | |
Impaired loans: | | | | | | | |
Residential | $ | 1,550 |
| | $ | — |
| | $ | — |
| | $ | 1,550 |
|
Multifamily | 474 |
| | — |
| | — |
| | 474 |
|
Commercial real estate | 4,670 |
| | — |
| | — |
| | 4,670 |
|
Total impaired loans | 6,694 |
| | — |
| | — |
| | 6,694 |
|
Real estate owned | | | | | | | |
Multifamily | 3,000 |
| | — |
| | — |
| | 3,000 |
|
Commercial real estate | 965 |
| | — |
| | — |
| | 965 |
|
Total real estate owned | 3,965 |
| | — |
| | — |
| | 3,965 |
|
Total measured on a non-recurring basis | $ | 10,659 |
| | $ | — |
| | $ | — |
| | $ | 10,659 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value as of June 30, 2013 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| (In thousands) |
Assets: | | | | | | | |
Impaired loans: | | | | | | | |
Residential | $ | 1,890 |
| | $ | — |
| | $ | — |
| | $ | 1,890 |
|
Multifamily | 3,897 |
| | — |
| | — |
| | 3,897 |
|
Commercial real estate | 3,752 |
| | — |
| | — |
| | 3,752 |
|
Construction and land loans | 1,664 |
| | — |
| | — |
| | 1,664 |
|
Total impaired loans | 11,203 |
| | — |
| | — |
| | 11,203 |
|
Real estate owned | | | | | | | |
Commercial real estate | 672 |
| | — |
| | — |
| | 672 |
|
Construction and land loans | 1,070 |
| | — |
| | — |
| | 1,070 |
|
Total real estate owned | 1,742 |
| | — |
| | — |
| | 1,742 |
|
Total measured on a non-recurring basis | $ | 12,945 |
| | $ | — |
| | $ | — |
| | $ | 12,945 |
|
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Estimated Fair Value of Financial Instruments
The following tables present the carrying amount, estimated fair value, and placement in the fair value hierarchy of financial instruments not recorded at fair values in their entirety on a recurring basis on the Company’s balance sheet at March 31, 2014 and June 30, 2013. These tables exclude financial instruments for which the carrying amount approximates fair value. Financial instruments for which the carrying amount approximates fair value include cash and cash equivalents, FHLB stock, non-maturity deposits, and overnight borrowings.
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2014 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| Carrying Amount | | Fair Value | |
| (In thousands) |
Financial assets: | | | | | | | | | |
Securities held to maturity | $ | 31,730 |
| | $ | 31,356 |
| | $ | — |
| | $ | 31,356 |
| | $ | — |
|
Loans, net (1) | 2,388,628 |
| | 2,402,532 |
| | — |
| | — |
| | 2,402,532 |
|
Financial liabilities: | | | | | | | | | |
Time deposits | 496,809 |
| | 500,839 |
| | — |
| | 500,839 |
| | — |
|
Term borrowings | 664,692 |
| | 688,423 |
| | — |
| | 688,423 |
| | — |
|
| |
(1) | Comprised of loans (including impaired loans), net of deferred loan fees and the allowance for loan losses. |
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2013 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| Carrying Amount | | Fair Value | |
| (In thousands) |
Financial assets: | | | | | | | | | |
Securities held to maturity | $ | 41,873 |
| | $ | 41,855 |
| | $ | — |
| | $ | 41,855 |
| | $ | — |
|
Loans, net (1) | 2,275,782 |
| | 2,333,382 |
| | — |
| | — |
| | 2,333,382 |
|
Financial assets: | | | | | | | | | |
Time deposits | 471,072 |
| | 473,652 |
| | — |
| | 473,652 |
| | — |
|
Term borrowings | 600,372 |
| | 635,520 |
| | — |
| | 635,520 |
| | — |
|
| |
(1) | Comprised of loans (including impaired loans), net of deferred loan fees and the allowance for loan losses. |
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, deferred tax assets, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
13. Other Comprehensive Income
The components of comprehensive income, both gross and net of tax, are presented for the periods below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | Nine months ended March 31, |
| 2014 | | 2013 | | 2014 | | 2013 |
Gross: | | | | | | | |
Net income | $ | 15,531 |
| | $ | 15,796 |
| | $ | 47,417 |
| | $ | 44,430 |
|
Other comprehensive (loss) income | | | | | | | |
Change in unrealized holding gain on securities available for sale | 2,154 |
| | (704 | ) | | (1,986 | ) | | (239 | ) |
Reclassification adjustment for security losses included in net income | — |
| | — |
| | 49 |
| | — |
|
Amortization related to post-retirement obligations | 19 |
| | 50 |
| | 59 |
| | 271 |
|
Change in unrealized gain on interest rate swaps | (1,199 | ) | | — |
| | (223 | ) | | — |
|
Total other comprehensive (loss) income | 974 |
| | (654 | ) | | (2,101 | ) | | 32 |
|
Total comprehensive income | 16,505 |
| | 15,142 |
| | 45,316 |
| | 44,462 |
|
Tax applicable to: | | | | | | | |
Net income | 4,792 |
| | 5,879 |
| | 16,321 |
| | 16,556 |
|
Other comprehensive (loss) income | | | | | | | |
Change in unrealized holding gain on securities available for sale | 883 |
| | (290 | ) | | (820 | ) | | (91 | ) |
Reclassification adjustment for security losses included in net income | — |
| | — |
| | 21 |
| | — |
|
Amortization related to post-retirement obligations | 10 |
| | 21 |
| | 24 |
| | 110 |
|
Change in unrealized gain on interest rate swaps | (494 | ) | | — |
| | (91 | ) | | — |
|
Total other comprehensive (loss) income | 399 |
| | (269 | ) | | (866 | ) | | 19 |
|
Total comprehensive income | 5,191 |
| | 5,610 |
| | 15,455 |
| | 16,575 |
|
Net of tax: | | | | | | | |
Net income | 10,739 |
| | 9,917 |
| | 31,096 |
| | 27,874 |
|
Other comprehensive (loss) income | | | | | | | |
Change in unrealized holding gain on securities available for sale | 1,271 |
| | (414 | ) | | (1,166 | ) | | (148 | ) |
Reclassification adjustment for security losses included in net income | — |
| | — |
| | 28 |
| | — |
|
Amortization related to post-retirement obligations | 9 |
| | 29 |
| | 35 |
| | 161 |
|
Change in unrealized gain on interest rate swaps | (705 | ) | | — |
| | (132 | ) | | — |
|
Total other comprehensive (loss) income | 575 |
| | (385 | ) | | (1,235 | ) | | 13 |
|
Total comprehensive income | $ | 11,314 |
| | $ | 9,532 |
| | $ | 29,861 |
| | $ | 27,887 |
|
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The following table presents the changes in the components of accumulated other comprehensive income (loss), net of tax, for the nine months ended March 31, 2014 and 2013 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Unrealized Holding Gains on Securities Available for Sale | | Post Retirement Obligations | | Unrealized Holding Gains on Interest Rate Swaps | | Accumulated Other Comprehensive Income, Net of Tax |
Balance at June 30, 2013 | | $ | 3,487 |
| | $ | (577 | ) | | $ | 1,520 |
| | $ | 4,430 |
|
Net change | | (1,138 | ) | | 35 |
| | (132 | ) | | (1,235 | ) |
Balance at March 31, 2014 | | $ | 2,349 |
| | $ | (542 | ) | | $ | 1,388 |
| | $ | 3,195 |
|
| | | | | | | | |
Balance at June 30, 2012 | | $ | 5,772 |
| | $ | (1,850 | ) | | $ | — |
| | $ | 3,922 |
|
Net change | | (148 | ) | | 161 |
| | — |
| | 13 |
|
Balance at March 31, 2013 | | $ | 5,624 |
| | $ | (1,689 | ) | | $ | — |
| | $ | 3,935 |
|
The following table sets forth information about the amount reclassified from accumulated other comprehensive income (loss) to the consolidated statement of income and the affected line item in the statement where net income is presented (in thousands).
|
| | | | | | | | | | |
Accumulated Other Comprehensive Income (Loss) Component | | Affected line item in the Consolidated Statement of Income | | Three months ended March 31, 2014 | | Nine months ended March 31, 2014 |
Reclassification adjustment for security losses included in net income | | Net gain on sale of assets | | $ | — |
| | $ | 49 |
|
| | | | | | |
Amortization related to post-retirement obligations (1) | | | | | | |
Prior service cost | | | | 14 |
| | 43 |
|
Net loss (gain) | | | | 5 |
| | 16 |
|
| | Compensation, payroll taxes and fringe benefits | | 19 |
| | 59 |
|
| | | | | | |
| | Total before tax | | 19 |
| | 108 |
|
| | Income tax benefit | | 10 |
| | 45 |
|
| | Net of tax | | 9 |
| | 63 |
|
(1) These accumulated other comprehensive income (loss) components are included in the computations of net periodic benefit cost. See Note 5. Postretirement Benefits.
Oritani Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
14. Recent Accounting Pronouncements
In January 2014, the FASB issued ASU No. 2014-04, "Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force), which clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 (July 1, 2015 for the Company). Early adoption is permitted. The adoption of this amendment is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)", which provides guidance on the presentation of unrecognized tax benefits and the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective for fiscal years, and interim reporting periods within those years, beginning after December 31, 2013 (July 1, 2014 for the Company). The adoption of this amendment is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In July 2013, the FASB issued ASU No. 2013-10, "Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force). The guidance permits the Fed Funds Effective Swap Rate to be used as a benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (“LIBOR”). We adopted this guidance on July 17,2013 with no significant impact on the Company’s financial statements.
In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income", which requires an entity to separately present the amount reclassified out of accumulated other comprehensive income ("AOCI") for each component of AOCI and to disclose, for each affected line item in the income statement, the amount of AOCI that has been reclassified into that line item. If the reclassification doesn't go directly to an income statement line it is acceptable to cross reference that amount to another footnote that provides the required disclosure. Public companies are required to comply with the requirements of ASU 2013-02 prospectively for fiscal years and interim periods within those fiscal years, beginning after December 15, 2012 (July 1, 2013 for the Company). Early adoption is permitted. We adopted the applicable requirements on July 1, 2013 and have provided the related disclosures as required with no significant impact on the Company’s financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report contains certain “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements may be identified by reference to a future period or periods, or by use of forward looking terminology, such as “may,” “will,” “believe,” ‘expect,” “estimate,” ‘anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward looking statements are subject to numerous risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2013, include, but are not limited to, those related to the economic environment, particularly in the market areas in which Oritani Financial Corp. (the “Company”) operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions, which may be made to any forward looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Overview
Oritani Financial Corp. (the "Company”) is a Delaware corporation that was incorporated in March 2010. The Company is the stock holding company of Oritani Bank. The Company owns 100% of the outstanding shares of common stock of the Bank. The Company has engaged primarily in the business of holding the common stock of the Bank and two limited liability companies that own a variety of real estate investments. In addition, the Company has engaged in limited lending to the real estate investment properties in which (either directly or through one of its subsidiaries) it maintains an ownership interest. The Bank’s principal business consists of attracting retail, commercial and municipal bank deposits from the general public and investing those deposits, together with funds generated from operations, in multi-family and commercial real estate loans, one- to four-family residential mortgage loans as well as in second mortgage and equity loans, construction loans, business loans, other consumer loans, and investment securities. The Bank originates loans primarily for investment and holds such loans in its portfolio. Occasionally, the Bank will also enter into loan participations. The Bank’s primary sources of funds are deposits, borrowings, investment maturities and principal and interest payments on loans and securities. The Bank’s revenues are derived principally from interest on loans and securities as well as our investments in real estate and real estate joint ventures. The Bank also generates revenue from fees and service charges and other income. The Bank’s results of operations depend significantly on its net interest income; which is the difference between the interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. The Bank’s net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on its mortgage-related assets. Provisions for loan losses and asset impairment charges can also have a significant impact on results of operations. Other factors that may affect the Bank’s results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities.
The Bank’s business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to its individual and business customers. The Bank’s primary focus has been, and will continue to be, growth in multi-family and commercial real estate lending.
Comparison of Financial Condition at March 31, 2014 and June 30, 2013
Total Assets. Total assets increased $174.1 million to $3.01 billion at March 31, 2014, from $2.83 billion at June 30, 2013.
Cash and Cash Equivalents. Cash and cash equivalents (which include fed funds and short term investments) increased $2.5 million to $14.6 million at March 31, 2014, from $12.1 million at June 30, 2013.
Net Loans. Loans, net increased $112.8 million to $2.39 billion at March 31, 2014, from $2.28 billion at June 30, 2013, an annualized growth rate of 6.61%. For the quarter ended March 31, 2014, net loan balances grew $20.5 million, an annualized growth rate of 3.46%. Loan originations totaled $121.0 million and $407.2 million for the three and nine months ended March 31, 2014, respectively. The growth rate of the loan portfolio continues to be negatively impacted by an elevated level of
prepayments. Prepayments and principal amortization totaled $101.0 million and $292.6 million for the three and nine months ended March 31, 2014, respectively.
Delinquency and non performing asset information is provided below:
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| | | | | | | | | | | | | | | | | | | |
| 3/31/2014 | | 12/31/2013 | | 9/30/2013 | | 6/30/2013 | | 3/31/2013 |
| (Dollars in thousands) |
Delinquency Totals | | | | | | | | | |
30—59 days past due | $ | 2,755 |
| | $ | 8,912 |
| | $ | 13,465 |
| | $ | 7,416 |
| | $ | 7,241 |
|
60—89 days past due | 1,256 |
| | 1,601 |
| | 1,105 |
| | 2,643 |
| | 3,948 |
|
Nonaccrual | 16,937 |
| | 19,866 |
| | 23,760 |
| | 23,910 |
| | 24,304 |
|
Total | $ | 20,948 |
| | $ | 30,379 |
| | $ | 38,330 |
| | $ | 33,969 |
| | $ | 35,493 |
|
Non Performing Asset Totals | | | | | | | | | |
Nonaccrual loans, per above | $ | 16,937 |
| | $ | 19,866 |
| | $ | 23,760 |
| | $ | 23,910 |
| | $ | 24,304 |
|
Real Estate Owned | 3,965 |
| | 4,033 |
| | 1,937 |
| | 1,742 |
| | 4,361 |
|
Total | $ | 20,902 |
| | $ | 23,899 |
| | $ | 25,697 |
| | $ | 25,652 |
| | $ | 28,665 |
|
Nonaccrual loans to total loans | 0.70 | % | | 0.82 | % | | 1.02 | % | | 1.03 | % | | 1.07 | % |
Delinquent loans to total loans | 0.86 | % | | 1.26 | % | | 1.65 | % | | 1.47 | % | | 1.57 | % |
Non performing assets to total assets | 0.70 | % | | 0.81 | % | | 0.91 | % | | 0.91 | % | | 1.02 | % |
Total delinquent loans continued a general trend that is evident since March 31, 2013 (and prior). Other than for the September 30, 2013 period, total delinquent loans have decreased steadily. The 30-59 days past due category showed particular improvement at March 31, 2014, and this decrease was the primary contributor to the 31% decrease in total delinquent loans during the quarter. As further described below, the metrics in the nonaccrual total continue to show improvement. Nonaccrual loans totaled $16.9 million at March 31, 2014 and $5.3 million of this total were fully current at that date.
At March 31, 2014, there are seven nonaccrual loans with balances greater than $1.0 million. These loans are discussed below:
| |
• | A $2.9 million construction loan for a luxury home in Morris County, New Jersey. The loan is classified as an impaired troubled debt restructuring ("TDR"). A modification/extension agreement was reached with the borrower during the quarter ended December 31, 2013. The loan has paid as agreed since the agreement. Principal payments totaling $300,000 have been received in conjunction with, and subsequent to, the modification. In accordance with the results of the impairment analysis for this loan, no reserve was required as of March 31, 2014, primarily due to a low estimated loan to value. The property was recently appraised for $5.8 million. If the loan continues to demonstrate satisfactory performance it will be returned to accrual status (although there can be no assurances that this will occur). |
| |
• | A $1.6 million residential loan on a single family residence in Bergen County, New Jersey. A foreclosure action was initiated when loan payments became delinquent. The loan is classified as impaired. In accordance with the results of the impairment analysis for this loan, a $246,000 impairment reserve remains against this loan as of March 31, 2014. Oritani is pursuing legal remedies. |
| |
• | A $1.0 million loan on a mixed use property in Bergen County, New Jersey. The loan is classified as an impaired TDR. In accordance with the results of the impairment analysis for this loan, a $265,000 impairment reserve remains against this loan as of March 31, 2014. A forbearance agreement had previously been executed and the borrower has generally complied with the payment demands of the Company but not to the extent where the Company believes long term issues with the loan have been resolved. The loan is classified as nonaccrual as of March 31, 2014 and was 30 days delinquent at that time. |
| |
• | A $2.4 million loan on a multifamily property in New York City. The loan is classified as impaired. In accordance with the results of the impairment analysis for this loan, no reserve was required as of March 31, 2014. The borrower is in bankruptcy. The bankruptcy court recently auctioned the property and the winning bid was for $4.65 million. The Company currently expects that this sale will close by September 30, 2014 and that all amounts due will be paid in full. Regular payments have resumed on this loan including a small amount toward the delinquent balance. |
| |
• | A $1.5 million loan on a retail building in Morris County, NJ. The loan is classified as impaired. The prior impairment reserve of $163,000 was charged off against this loan during the quarter ended March 31, 2014. In accordance with the results of the |
impairment analysis for this loan as of that date, no additional impairment reserve was necessary. The borrower reneged on the agreement to make certain payments toward amounts due on this loan and the Company has resumed its pursuit of legal remedies.
| |
• | A $1.4 million loan on an office building in Somerset County, NJ. The loan is classified as impaired. The prior impairment reserve of $292,000 was charged off against this loan during the quarter ended March 31, 2014. In accordance with the results of the impairment analysis for this loan as of that date, no additional impairment reserve was necessary. This loan and the loan described directly above have the same borrower. The borrower also reneged on the agreement regarding this loan, and the Company has resumed its pursuit of legal remedies. |
| |
• | A $1.2 million loan on a lot and auto showroom in Bergen County, NJ. The loan is classified as an impaired TDR. A modification/extension agreement was reached with the borrower during the quarter ended December 31, 2013. The loan has paid as agreed since the agreement. In accordance with the results of the impairment analysis for this loan, a $407,000 impairment reserve was maintained against this loan as of March 31, 2014. |
There are nine other multifamily/commercial real estate loans, totaling $4.0 million, classified as nonaccrual at March 31, 2014. The largest of these loans has a balance of $698,000 (and was fully current at March 31, 2014). There are seven other residential loans, totaling $845,000, classified as nonaccrual at March 31, 2014. The largest of these loans has a balance of $334,000.
Securities Available For Sale. Securities available for sale increased $68.3 million to $374.6 million at March 31, 2014, from $306.3 million at June 30, 2013. Purchases of $156.7 million were partially offset by sales, payments, calls and maturities of $90.4 million. During the nine months ended March 31, 2014, securities with an amortized cost of $18.2 million were sold, resulting in gross gains and gross losses of $136,300 and $185,600, respectively. The securities sold had low principal balances remaining.
Securities held to maturity. Mortgage-backed securities HTM decreased $10.1 million to $31.7 million at March 31, 2014, from $41.9 million at June 30, 2013. During the nine months ended March 31, 2014, securities with an amortized cost of $8.8 million were sold, resulting in gross gains and gross losses of $117,400 and $16,700, respectively. The securities sold had low principal balances remaining.
Bank Owned Life Insurance ("BOLI"). BOLI increased $7.6 million, or 12.6%, to $67.5 million at March 31, 2014, from $60.0 million at June 30, 2013, as additional BOLI investments have been made over the fiscal year.
Real Estate Owned. Real estate owned (“REO”) increased $2.2 million to $4.0 million at March 31, 2014, from $1.7 million at June 30, 2013. During the 2014 fiscal year, the Company has taken title to three properties and disposed of two properties. The $4.0 million balance at March 31, 2014 consists of 5 properties.
Deposits. Deposits increased $111.0 million to $1.53 billion at March 31, 2014, from $1.42 billion at June 30, 2013. For the quarter ended March 31, 2014, deposits grew $67.7 million, an annualized growth rate of 18.5%. The growth was achieved primarily in consumer and municipal deposits. Robust deposit growth is a strategic objective of the Company.
Borrowings. Borrowings increased $52.2 million to $885.9 million at March 31, 2014, from $833.7 million at June 30, 2013. For the quarter ended March 31, 2014, borrowings decreased $18.7 million.
Stockholders’ Equity. Stockholders' equity increased $7.5 million to $526.2 million at March 31, 2014, from $518.7 million at June 30, 2013. The increase was primarily due to net income and the proceeds from the exercise of stock options, partially offset by dividends, including a $0.25 special dividend paid in December, 2013. Based on our March 31, 2014 closing price of $15.81 per share, the Company stock was trading at 137.4% of book value.
Average Balance Sheet for the Three Months Ended March 31, 2014 and 2013
The following tables present certain information regarding Oritani Financial Corp.’s financial condition and net interest income for the three and nine months ended March 31, 2014 and 2013. The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we consider adjustments to yields, including prepayment penalties.
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| | | | | | | | | | | | | | | | | | | | | |
| Average Balance Sheet and Yield/Rate Information For the Three Months Ended (unaudited) |
| March 31, 2014 | | March 31, 2013 |
| Average Outstanding Balance | | Interest Earned/Paid | | Average Yield/Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/Rate |
| (Dollars in thousands) |
Interest-earning assets: | | | | | | | | | | | |
Loans (1) | $ | 2,386,440 |
| | $ | 29,770 |
| | 4.99 | % | | $ | 2,187,996 |
| | $ | 30,229 |
| | 5.53 | % |
Federal Home Loan Bank Stock | 44,838 |
| | 504 |
| | 4.50 | % | | 44,164 |
| | 472 |
| | 4.27 | % |
Securities available for sale | 7,073 |
| | 30 |
| | 1.70 | % | | 11,947 |
| | 53 |
| | 1.77 | % |
Mortgage backed securities held to maturity | 30,790 |
| | 190 |
| | 2.47 | % | | 40,308 |
| | 243 |
| | 2.41 | % |
Mortgage backed securities available for sale | 339,733 |
| | 1,698 |
| | 2.00 | % | | 373,844 |
| | 1,582 |
| | 1.69 | % |
Federal funds sold and short term investments | 3,200 |
| | 2 |
| | 0.25 | % | | 1,466 |
| | 1 |
| | 0.25 | % |
Total interest-earning assets | 2,812,074 |
| | 32,194 |
| | 4.58 | % | | 2,659,725 |
| | 32,580 |
| | 4.90 | % |
Non-interest-earning assets | 159,782 |
| | | | | | 138,491 |
| | | | |
Total assets | $ | 2,971,856 |
| | | | | | $ | 2,798,216 |
| | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Savings deposits | 168,051 |
| | 96 |
| | 0.23 | % | | 168,826 |
| | 97 |
| | 0.23 | % |
Money market | 432,735 |
| | 544 |
| | 0.50 | % | | 422,485 |
| | 512 |
| | 0.48 | % |
Checking accounts | 429,403 |
| | 441 |
| | 0.41 | % | | 269,308 |
| | 235 |
| | 0.35 | % |
Time deposits | 473,423 |
| | 1,059 |
| | 0.89 | % | | 494,394 |
| | 1,167 |
| | 0.94 | % |
Total deposits | 1,503,611 |
| | 2,140 |
| | 0.57 | % | | 1,355,013 |
| | 2,011 |
| | 0.59 | % |
Borrowings | 884,567 |
| | 5,592 |
| | 2.53 | % | | 875,740 |
| | 5,273 |
| | 2.41 | % |
Total interest-bearing liabilities | 2,388,179 |
| | 7,732 |
| | 1.30 | % | | 2,230,753 |
| | 7,284 |
| | 1.31 | % |
Non-interest-bearing liabilities | 58,832 |
| | | | | | 56,873 |
| | | | |
Total liabilities | 2,447,011 |
| | | | | | 2,287,626 |
| | | | |
Stockholders’ equity | 524,845 |
| | | | | | 510,590 |
| | | | |
Total liabilities and stockholders’ equity | $ | 2,971,856 |
| | | | | | $ | 2,798,216 |
| | | | |
Net interest income | | | $ | 24,462 |
| | | | | | $ | 25,296 |
| | |
Net interest rate spread (2) | | | | | 3.28 | % | | | | | | 3.59 | % |
Net interest-earning assets (3) | $ | 423,895 |
| | | | | | $ | 428,972 |
| | | | |
Net interest margin (4) | | | | | 3.48 | % | | | | | | 3.80 | % |
Average of interest-earning assets to interest-bearing liabilities | | | | | 117.75 | % | | | | | | 119.23 | % |
| |
(1) | Average Outstanding balance includes nonaccrual loans and interest earned includes prepayment income. |
| |
(2) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
| |
(3) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
| |
(4) | Net interest margin represents net interest income divided by average total interest-earning assets. |
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Average Balance Sheet and Yield/Rate Information For the Nine Months Ended (unaudited) |
| March 31, 2014 | | March 31, 2013 |
| Average Outstanding Balance | | Interest Earned/Paid | | Average Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Average Yield/ Rate |
| (Dollars in thousands) |
Interest-earning assets: | | | | | | | | | | | |
Loans (1) | $ | 2,324,546 |
| | $ | 89,819 |
| | 5.15 | % | | 2,107,814 |
| | $ | 88,390 |
| | 5.59 | % |
Federal Home Loan Bank Stock | 43,129 |
| | 1,370 |
| | 4.24 | % | | 41,509 |
| | 1,316 |
| | 4.23 | % |
Securities available for sale | 9,297 |
| | 118 |
| | 1.69 | % | | 14,706 |
| | 185 |
| | 1.68 | % |
Mortgage backed securities held to maturity | 34,148 |
| | 621 |
| | 2.42 | % | | 36,978 |
| | 702 |
| | 2.53 | % |
Mortgage backed securities available for sale | 313,887 |
| | 4,533 |
| | 1.93 | % | | 416,133 |
| | 5,413 |
| | 1.73 | % |
Federal funds sold and short term investments | 4,215 |
| | 8 |
| | 0.25 | % | | 1,478 |
| | 3 |
| | 0.25 | % |
Total interest-earning assets | 2,729,222 |
| | 96,469 |
| | 4.71 | % | | 2,618,618 |
| | 96,009 |
| | 4.89 | % |
Non-interest-earning assets | 152,195 |
| | | | | | 131,522 |
| | | | |
Total assets | $ | 2,881,417 |
| | | | | | 2,750,140 |
| | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Savings deposits | 168,280 |
| | 291 |
| | 0.23 | % | | 166,570 |
| | 292 |
| | 0.23 | % |
Money market | 420,432 |
| | 1,521 |
| | 0.48 | % | | 437,688 |
| | 1,622 |
| | 0.49 | % |
Checking accounts | 410,330 |
| | 1,386 |
| | 0.45 | % | | 234,424 |
| | 508 |
| | 0.29 | % |
Time deposits | 456,745 |
| | 3,021 |
| | 0.88 | % | | 522,649 |
| | 4,058 |
| | 1.04 | % |
Total deposits | 1,455,788 |
| | 6,219 |
| | 0.57 | % | | 1,361,331 |
| | 6,480 |
| | 0.63 | % |
Borrowings | 842,643 |
| | 16,883 |
| | 2.67 | % | | 817,620 |
| | 15,972 |
| | 2.60 | % |
Total interest-bearing liabilities | 2,298,432 |
| | 23,102 |
| | 1.34 | % | | 2,178,951 |
| | 22,452 |
| | 1.37 | % |
Non-interest-bearing liabilities | 56,789 |
| | | | | | 56,733 |
| | | | |
Total liabilities | 2,355,221 |
| | | | | | 2,235,684 |
| | | | |
Stockholders’ equity | 526,196 |
| | | | | | 514,456 |
| | | | |
Total liabilities and stockholders’ equity | $ | 2,881,417 |
| | | | | | $ | 2,750,140 |
| | | | |
Net interest income | | | $ | 73,367 |
| | | | | | $ | 73,557 |
| | |
Net interest rate spread (2) | | | | | 3.37 | % | | | | | | 3.52 | % |
Net interest-earning assets (3) | $ | 430,790 |
| | | | | | $ | 439,667 |
| | | | |
Net interest margin (4) | | | | | 3.58 | % | | | | | | 3.75 | % |
Average of interest-earning assets to interest-bearing liabilities | | | | | 118.74 | % | | | | | | 120.18 | % |
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(1) | Average Outstanding balance includes nonaccrual loans and interest earned includes prepayment income. |
| |
(2) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
| |
(3) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
| |
(4) | Net interest margin represents net interest income divided by average total interest-earning assets. |
Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013
Net Income. Net income increased $822,000 to $10.7 million for the three months ended March 31, 2014, from $9.9 million for the corresponding 2013 period. The primary cause of the increased net income in the period ended March 31, 2014, was a decreased effective tax rate. As further detailed under "Income Tax Expense," a change in New York state tax law caused an increase in the value of the Company's deferred tax assets and a non recurring $878,000 reduction in current period income tax expense was recognized. Our annualized return on average assets was 1.45% for the three months ended March 31, 2014, and 1.42% for the three months ended March 31, 2013.
Interest Income. Total interest income decreased $386,000, to $32.2 million for the three months ended March 31, 2014, from $32.6 million for the three months ended March 31, 2013. The components of interest income for the three months ended March 31, 2014 and 2013, changed as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | Increase / (decrease) |
| 2014 | | 2013 | | | | Average | | |
| $ | | Yield | | $ | | Yield | | $ | | Balance | | Yield |
| (Dollars in thousands) |
Interest on mortgage loans | $ | 29,770 |
| | 4.99 | % | | $ | 30,229 |
| | 5.53 | % | | $ | (459 | ) | | $ | 198,444 |
| | (0.54 | )% |
Dividends on FHLB stock | 504 |
| | 4.50 | % | | 472 |
| | 4.27 | % | | 32 |
| | 674 |
| | 0.23 | % |
Interest on securities AFS | 30 |
| | 1.70 | % | | 53 |
| | 1.77 | % | | (23 | ) | | (4,874 | ) | | (0.07 | )% |
Interest on MBS HTM | 190 |
| | 2.47 | % | | 243 |
| | 2.41 | % | | (53 | ) | | (9,518 | ) | | 0.06 | % |
Interest on MBS AFS | 1,698 |
| | 2.00 | % | | 1,582 |
| | 1.69 | % | | 116 |
| | (34,111 | ) | | 0.31 | % |
Interest on federal funds sold and short term investments | 2 |
| | 0.25 | % | | 1 |
| | 0.25 | % | | 1 |
| | 1,734 |
| | — | % |
Total interest income | $ | 32,194 |
| | 4.58 | % | | $ | 32,580 |
| | 4.90 | % | | $ | (386 | ) | | $ | 152,349 |
| | (0.32 | )% |
The Company continues to focus on organic growth of the multifamily and commercial real estate loan portfolios. The average balance of loans increased $198.4 million over the periods. On a linked quarter basis (March 31, 2014 versus December 31, 2013), the average balance of loans grew $74.1 million. The growth was primarily achieved through originations. Loan originations totaled $121.0 million for the three months ended March 31, 2014. On a linked quarter basis, there is an inconsistency between the growth in the average balance of loans ($74.1 million) versus the growth in the period end balance ($20.5 million). This occurred due to the timing of originations and prepayments. The yield on the loan portfolio decreased 54 basis points for the quarter ended March 31, 2014 versus the comparable 2013 period. The decreased yield was primarily due to the impact of current market rates on new originations, refinancings, prepayments and repricings. The market rates on new originations are higher than they were last year but are still below the average yield of the loan portfolio. A portion of the decrease in yield is also attributable to prepayment penalties, which significantly impacted both periods. Prepayment penalties totaled $1.2 million in the 2014 period versus $1.5 million in the 2013 period. Prepayment penalties boosted annualized loan yield by 20 basis points in the 2014 period and 28 basis points in the 2013 period. The average balance of MBS AFS decreased $34.1 million for the quarter ended March 31, 2014 versus the comparable 2013 period. For the two year period from approximately September 30, 2011 through September 30, 2013, the Company believed that the risk/reward profiles of permissible securities no longer warranted additional investment. The few purchases that occurred during that time period were primarily to satisfy regulatory needs and were classified as held to maturity. Purchases of MBS AFS resumed subsequent to September 30, 2013 as the returns on permissible securities had risen to the level where the Company believed a certain level of investment was warranted. This situation was the primary reason for the decrease in average balance of MBS AFS detailed in the table above.
Interest Expense. Total interest expense increased $448,000, to $7.7 million for the three months ended March 31, 2014, from $7.3 million for the three months ended March 31, 2013. The components of interest expense changed as follows:
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| Three months ended March 31, | | Increase / (decrease) |
| 2014 | | 2013 | | | | Average | | |
| $ | | Cost | | $ | | Cost | | $ | | Balance | | Cost |
| (Dollars in thousands) |
Savings deposits | $ | 96 |
| | 0.23 | % | | $ | 97 |
| | 0.23 | % | | $ | (1 | ) | | $ | (775 | ) | | — | % |
Money market | 544 |
| | 0.50 | % | | 512 |
| | 0.48 | % | | 32 |
| | 10,250 |
| | 0.02 | % |
Checking accounts | 441 |
| | 0.41 | % | | 235 |
| | 0.35 | % | | 206 |
| | 160,095 |
| | 0.06 | % |
Time deposits | 1,059 |
| | 0.89 | % | | 1,167 |
| | 0.94 | % | | (108 | ) | | (20,971 | ) | | (0.05 | )% |
Total deposits | 2,140 |
| | 0.57 | % | | 2,011 |
| | 0.59 | % | | 129 |
| | 148,598 |
| | (0.02 | )% |
Borrowings | 5,592 |
| | 2.53 | % | | 5,273 |
| | 2.41 | % | | 319 |
| | 8,827 |
| | 0.12 | % |
Total interest expense | $ | 7,732 |
| | 1.30 | % | | $ | 7,284 |
| | 1.31 | % | | $ | 448 |
| | $ | 157,426 |
| | (0.01 | )% |
Management has implemented strategies with a goal of increasing deposits. These strategies have generated success, and management expects these trends to continue. However, such strategies may negatively impact future interest expense. On a linked quarter basis (March 31, 2014 versus December 31, 2013), the average balance of deposits grew $56.5 million while the period end balance of deposits grew $67.7 million. The annualized growth rate based on the ending balances was 18.5%. On a linked quarter basis, the average cost of interest bearing deposits was stable.
The Company took additional steps during the quarter to further mitigate its interest rate risk position. On March 10, 2014, $23.3 million in short term advances were replaced with 6 year fixed rate advances with a rate of 2.25%. On March 14, 2014, the Company committed to a deferred interest rate hedge in a notional amount of $25.0 million. The Company will begin exchanging cash flows under this hedge in January 2017. The Company will receive Libor and pay 3.555%. Cash flows will be exchanged for seven years and cease in January 2024. On April 10, 2014, the Company committed to an additional deferred interest rate hedge in a notional amount of $25.0 million. The Company will begin exchanging cash flows under this hedge in July 2017. The Company will receive Libor and pay 3.665%. Cash flows will be exchanged for seven years and cease in July 2024.
Net Interest Income Before Provision for Loan Losses. Net interest income decreased $834,000, or 3.3%, to $24.5 million for the three months ended March 31, 2014, from $25.3 million for the three months ended March 31, 2013. The Company's net interest income, spread and margin over the period are detailed in the table below.
|
| | | | | | | | | | | | | | | | | | | | |
| | Including Prepayment Penalties | | Excluding Prepayment Penalties |
| | Net Interest | | | | | | Net Interest | | | | |
For the Three Months Ended | | Income Before | | | | | | Income Before | | | | |
| Provision | | Spread | | Margin | | Provision | | Spread | | Margin |
| | (Dollars in thousands) |
March 31, 2014 | | $ | 24,462 |
| | 3.28 | % | | 3.48 | % | | $ | 23,258 |
| | 3.11 | % | | 3.31 | % |
December 31, 2013 | | 24,312 |
| | 3.38 | % | | 3.60 | % | | 22,418 |
| | 3.10 | % | | 3.32 | % |
September 30, 2013 | | 24,593 |
| | 3.45 | % | | 3.67 | % | | 22,801 |
| | 3.18 | % | | 3.41 | % |
June 30, 2013 | | 23,873 |
| | 3.37 | % | | 3.58 | % | | 22,848 |
| | 3.22 | % | | 3.43 | % |
March 31, 2013 | | 25,296 |
| | 3.59 | % | | 3.80 | % | | 23,811 |
| | 3.37 | % | | 3.58 | % |
The Company's spread and margin have been significantly impacted by prepayment penalties. Due to this situation, the table above details results with and without the impact of prepayment penalties. Management believes a truer trend of the impact of the current environment on the Company's net interest income, spread and margin, is evident in the table above that excludes prepayment income. When viewed over the trailing year, both measurements essentially detail spread and margin erosion. Versus the prior quarter, spread and margin are relatively consistent when prepayment penalties are excluded. Spread and margin erosion is evident in the results that include prepayment penalties primarily because prepayment penalties were higher during the quarter ended December 31, 2013 ($1.9 million) versus the current quarter ($1.2 million). The Company's spread and margin are under pressure in the current interest rate environment due to several factors, including: rates on new loan originations and investment purchases; modifications of loans within the existing loan portfolio; prepayments of higher yielding loans and investments; limited ability to further reduce deposit and borrowing costs; promotional interest costs to attract new deposit customers and increases in
borrowing costs for the long term borrowings. Market rates of interest have risen over the past year and the yield curve has steepened. A steep yield curve generally provides a benefit to the Company. A portion of the increases have been captured in new loan origination rates, partially offsetting some of the pressures described above. The Company's largest interest rate risk exposure is to a flat or inverted yield curve.
The Company's net interest income and net interest rate spread were negatively impacted in both periods due to the reversal of accrued interest income on loans delinquent more than 90 days. The total of such income reversed was $99,000 and $223,000 for the three months ended March 31, 2014 and 2013, respectively.
Provision for Loan Losses. The Company recorded provisions for loan losses of $200,000 for the three months ended March 31, 2014 as compared to $600,000 for the three months ended March 31, 2013. A rollforward of the allowance for loan losses for the three months ended March 31, 2014 and 2013 is presented below:
|
| | | | | | | |
| Three months ended March 31, |
| 2014 | | 2013 |
| (Dollars in thousands) |
Balance at beginning of period | $ | 30,640 |
| | $ | 31,909 |
|
Provisions charged to operations | 200 |
| | 600 |
|
Recoveries of loans previously charged off | 1,014 |
| | 35 |
|
Loans charged off | 455 |
| | 582 |
|
Balance at end of period | $ | 31,399 |
| | $ | 31,962 |
|
Improving delinquency and nonaccrual trends, changes in loan risk ratings, loan growth, reduced levels of charge-offs and economic and business conditions continue to have a meaningful impact on the current level of provision for loan losses. The provision for loan losses was lower in the 2014 period partially due to these factors. In addition, improvements in general economic and business conditions have also impacted the level of provisioning by decreasing the necessary level of general allowances. One particular item that had an impact on the level of provision for loan losses for the quarter ended March 31, 2014 was the significant level of recoveries. A $947,000 recovery was realized when a loan, which had been partially charged off, paid in full during the quarter. See additional information regarding the allowance for loan losses in footnote 6 of the financial statements and “Comparison of Financial Condition at March 31, 2014 and June 30, 2013-Net Loans.”
Other Income. Other income increased $97,000 to $1.1 million for the three months ended March 31, 2014, from $1.0 million for the three months ended March 31, 2013. The increase is primarily due to a $94,000 increase on income from investments in joint ventures. This primarily relates to one commercial property that incurred flood damage and has underperformed for the majority of the past two fiscal years. A significant amount of repairs occurred during the three months ended March 31, 2013 and a loss was incurred in that time period. The property is expected to return to historical levels of profitability in fiscal 2015.
Other Expenses. Operating expenses decreased $72,000 to $9.8 million for the three months ended March 31, 2014, from $9.9 million for the three months ended March 31, 2013. Compensation, payroll taxes and fringe benefits decreased $175,000 to $6.9 million for the three months ended March 31, 2014, from $7.1 million for the three months ended March 31, 2013. The decrease was primarily due to decreased expenses associated with the Company's nonqualified benefit plans. Office occupancy and equipment expense increased $183,000 to $920,000 for the three months ended March 31, 2014, from $737,000 for the three months ended March 31, 2013, primarily due to increased maintenance expenses, particularly snow plowing costs.
Income Tax Expense. Income tax expense for the three months ended March 31, 2014 was $4.8 million on pre-tax income of $15.5 million, resulting in an effective tax rate of 30.9%. Income tax expense for the three months ended March 31, 2013 was $5.9 million on pre-tax income of $15.8 million, resulting in an effective tax rate of 37.2%. Due to a change in New York state tax law in March 2014, the future effective tax rate of the Company will likely increase. However, the value of the Company's deferred tax assets increased as a result of this change in law. The change in the value of the deferred tax assets must be reflected in the current period. Accordingly, an $878,000 adjustment that decreased current period tax expense was recorded in March 2014.
Comparison of Operating Results for the Nine Months Ended March 31, 2014 and 2013
Net Income. Net income increased $3.2 million, or 11.6%, to $31.1 million for the nine months ended March 31, 2014, from $27.9 million for the corresponding 2013 period. The primary cause of the increased net income in the nine month period ended March 31, 2014, was a decreased effective tax rate. As further detailed under "Income Tax Expense," a change in New York state tax law caused an increase in the value of the Company's deferred tax assets and a non recurring $878,000 reduction in current period income tax expense was recognized. The 2014 results were also impacted by decreased provision for loan losses and increased other income, partially offset by increased other expenses. Our annualized return on average assets was 1.44% for the nine months ended March 31, 2014, and 1.35% for the nine months ended March 31, 2013.
Interest Income. Total interest income increased $460,000, to $96.5 million for the nine months ended March 31, 2014, from $96.0 million for the nine months ended March 31, 2013. The components of interest income for the nine months ended March 31, 2014 and 2013, changed as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended March 31, | | Increase / (decrease) |
| 2013 | | 2012 | | | | Average | | |
| $ | | Yield | | $ | | Yield | | $ | | Balance | | Yield |
| (Dollars in thousands) |
Interest on mortgage loans | $ | 89,819 |
| | 5.15 | % | | $ | 88,390 |
| | 5.59 | % | | $ | 1,429 |
| | $ | 216,732 |
| | (0.44 | )% |
Dividends on FHLB stock | 1,370 |
| | 4.24 | % | | 1,316 |
| | 4.23 | % | | 54 |
| | 1,620 |
| | 0.01 | % |
Interest on securities AFS | 118 |
| | 1.69 | % | | 185 |
| | 1.68 | % | | (67 | ) | | (5,409 | ) | | 0.01 | % |
Interest on MBS HTM | 621 |
| | 2.42 | % | | 702 |
| | 2.53 | % | | (81 | ) | | (2,830 | ) | | (0.11 | )% |
Interest on MBS AFS | 4,533 |
| | 1.93 | % | | 5,413 |
| | 1.73 | % | | (880 | ) | | (102,246 | ) | | 0.20 | % |
Interest on federal funds sold and short term investments | 8 |
| | 0.25 | % | | 3 |
| | 0.25 | % | | 5 |
| | 2,737 |
| | — | % |
Total interest income | $ | 96,469 |
| | 4.71 | % | | $ | 96,009 |
| | 4.89 | % | | $ | 460 |
| | $ | 110,604 |
| | (0.18 | )% |
The explanations provided in “Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013, Interest Income” regarding changes for the three month period comparison are also applicable to the nine month period comparison. Prepayment penalties again significantly impacted both nine month periods, but were higher in the nine months ended March 31, 2014 versus the comparable 2013 period. Prepayment penalties totaled $4.9 million in the 2014 period versus $4.1 million in the 2013 period, and boosted annualized loan yield by 28 basis points in the 2014 period versus 26 basis points in the 2013 period. Loan originations for the nine months ended March 31, 2014 totaled $407.2 million versus $510.6 million for the 2013 period.
Interest Expense. Total interest expense increased $650,000, to $23.1 million for the nine months ended March 31, 2014, from $22.5 million for the nine months ended March 31, 2013. The components of interest expense for the nine months ended March 31, 2014 and 2013, changed as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended March 31, | | Increase / (decrease) |
| 2014 | | 2013 | | | | Average | | |
| $ | | Cost | | $ | | Cost | | $ | | Balance | | Cost |
| (Dollars in thousands) |
Savings deposits | $ | 291 |
| | 0.23 | % | | $ | 292 |
| | 0.23 | % | | $ | (1 | ) | | $ | 1,709 |
| | — | % |
Money market | 1,521 |
| | 0.48 | % | | 1,622 |
| | 0.49 | % | | (101 | ) | | (17,256 | ) | | (0.01 | )% |
Checking accounts | 1,386 |
| | 0.45 | % | | 508 |
| | 0.29 | % | | 878 |
| | 175,906 |
| | 0.16 | % |
Time deposits | 3,021 |
| | 0.88 | % | | 4,058 |
| | 1.04 | % | | (1,037 | ) | | (65,904 | ) | | (0.16 | )% |
Total deposits | 6,219 |
| | 0.57 | % | | 6,480 |
| | 0.63 | % | | (261 | ) | | 94,455 |
| | (0.06 | )% |
Borrowings | 16,883 |
| | 2.67 | % | | 15,972 |
| | 2.60 | % | | 911 |
| | 25,023 |
| | 0.07 | % |
Total interest expense | $ | 23,102 |
| | 1.34 | % | | $ | 22,452 |
| | 1.37 | % | | $ | 650 |
| | $ | 119,478 |
| | (0.03 | )% |
The explanations provided in “Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013, Interest Expense” regarding changes for the three month period comparison are also applicable to the nine month period comparison.
Net Interest Income Before Provision for Loan Losses. Net interest income decreased by $190,000, or 0.3%, to $73.4 million for the nine months ended March 31, 2014, from $73.6 million for the nine months ended March 31, 2013. The Company’s net interest rate spread and margin decreased to 3.37% and 3.58% for the nine months ended March 31, 2014, from 3.52% and 3.75% for the nine months ended March 31, 2013, respectively. The factors described in “Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013, Net Interest Income Before Provision for Loan Losses” also impacted the nine month periods. The Company’s net interest income and net interest rate spread were negatively impacted in both periods due to the reversal of accrued interest income on loans delinquent more than 90 days. The Company’s net interest income was reduced $457,000 and $1.5 million for the nine months ended March 31, 2014 and 2013, respectively, due to the impact of nonaccrual loans.
Provision for Loan Losses. The Company recorded provisions for loan losses of $700,000 for the nine months ended March 31, 2014 as compared to $3.6 million for the nine months ended March 31, 2013. A rollforward of the allowance for loan losses for the nine months ended March 31, 2014 and 2013 is presented below:
|
| | | | | | | |
| Nine months ended March 31, |
| 2014 | | 2013 |
| (Dollars in thousands) |
Balance at beginning of period | $ | 31,381 |
| | $ | 31,187 |
|
Provisions charged to operations | 700 |
| | 3,600 |
|
Recoveries of loans previously charged off | 1,027 |
| | 152 |
|
Loans charged off | (1,709 | ) | | (2,977 | ) |
Balance at end of period | $ | 31,399 |
| | $ | 31,962 |
|
See discussion of the allowance for loan losses in “Comparison of Financial Condition at March 31, 2014 and June 30, 2013” and footnote 6 of the financial statements.
Other Income. Other income increased $1.1 million to $4.2 million for the nine months ended March 31, 2014 from $3.1 million for the nine months ended March 31, 2013. The increase is primarily due to a $530,000 increase on income from investments in joint ventures. The nine month period was also impacted by the issue described in “Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013, Other Income” regarding the commercial property that incurred flood damage. Operations at this property were negatively impacted to a greater degree in the 2013 period as higher expenses were incurred as well as a writedown of expected insurance reimbursements. Service charges increased $206,000 to $870,000 for the nine months ended March 31, 2014 from $664,000 for the nine months ended March 31, 2013. The increase was primarily due to increases in late fees on loans, ATM fees and non sufficient funds fees. Bank-owned life insurance ("BOLI") income increased $189,000 to $1.5 million for the nine months ended March 31, 2014 from $1.3 million for the nine months ended March 31, 2013 and was primarily due to additional BOLI investment.
Other Expenses. Operating expenses increased $835,000 to $29.5 million for the nine months ended March 31, 2014, from $28.6 million for the nine months ended March 31, 2013. The increase was primarily due to compensation, payroll taxes and fringe benefits, which increased $496,000 to $21.5 million for the nine months ended March 31, 2014, from $21.0 million for the nine months ended March 31, 2013. The increase was primarily due to expenses associated with the Company's defined benefit plan. This plan is frozen but actuarial changes to the present value of future payment obligations along with changes to the estimated earnings on assets require ongoing expenses and likely future contributions. In the 2013 period, the valuation of the defined benefit plan allowed a reversal of an accrual that had existed at that time. There were also increases in direct compensation due to additional staffing and salary adjustments. These increases were partially offset by decreased expenses regarding other retirement plans. Office occupancy and equipment expense increased $252,000 primarily due to increased maintenance expenses, particularly snow plowing costs.
Income Tax Expense. Income tax expense for the nine months ended March 31, 2014, was $16.3 million, due to pre-tax income of $47.4 million, resulting in an effective tax rate of 34.4%. For the nine months ended March 31, 2013, income tax expense was $16.6 million, due to pre-tax income of $44.4 million, resulting in an effective tax rate of 37.3%. The decreased rate in 2014 was primarily due to a change in New York state tax law in March 2014. See discussion in "Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013, Income Tax expense for more information on the effect of the New York State tax law change.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank (“FHLB”) borrowings and investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including advances from the FHLB and Federal Reserve Bank of New York.
At March 31, 2014 and June 30, 2013, the Company had $46.2 million and $83.3 million in overnight borrowings from the FHLB, respectively. In addition, the Company had additional short term borrowings of $175.0 million and $150.0 million at March 31, 2014 and June 30, 2013, respectively. The Company had total borrowings of $885.9 million at March 31, 2014 and $833.7 million at June 30, 2013. The Company’s total borrowings at March 31, 2014 include $664.7 million in longer term borrowings with the FHLB. In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans. At March 31, 2014, outstanding commitments to originate loans totaled $158.9 million and outstanding commitments to extend credit totaled $32.7 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.
Time deposits scheduled to mature in one year or less totaled $335.4 million at March 31, 2014. Based upon historical experience, management estimates that a large portion of such deposits will remain with the Company. The portion that remains will be significantly impacted by the renewal rates offered by the Company.
In July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent and a common equity Tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0 percent to 6.0 percent and require a minimum leverage ratio of 4.0 percent. The final rule will become effective January 1, 2015, subject to a transition period.
As of March 31, 2014 and June 30, 2013, the Company and Bank exceeded all regulatory capital requirements as follows:
|
| | | | | | | | | | | | | |
| March 31, 2014 |
| Actual | | Required |
| Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
Company: | |
Total capital (to risk-weighted assets) | $ | 554,371 |
| | 21.4 | % | | $ | 207,666 |
| | 8.0 | % |
Tier I capital (to risk-weighted assets) | 522,972 |
| | 20.2 |
| | 103,833 |
| | 4.0 |
|
Tier I capital (to average assets) | 522,972 |
| | 17.6 |
| | 118,874 |
| | 4.0 |
|
| | | | | | | |
| Actual | | Required |
| Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
Bank: | |
Total capital (to risk-weighted assets) | $ | 464,581 |
| | 18.1 | % | | $ | 205,185 |
| | 8.0 | % |
Tier I capital (to risk-weighted assets) | 433,362 |
| | 16.9 |
| | 102,592 |
| | 4.0 |
|
Tier I capital (to average assets) | 433,362 |
| | 14.6 |
| | 118,972 |
| | 4.0 |
|
|
| | | | | | | | | | | | | |
| June 30, 2013 |
| Actual | | Required |
| Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
Company: | | | | | | | |
Total capital (to risk-weighted assets) | $ | 545,031 |
| | 22.16 | % | | $ | 196,772 |
| | 8.0 | % |
Tier I capital (to risk-weighted assets) | 514,280 |
| | 20.91 |
| | 98,386 |
| | 4.0 |
|
Tier I capital (to average assets) | 514,280 |
| | 18.30 |
| | 112,428 |
| | 4.0 |
|
| | | | | | | |
| Actual | | Required |
| Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
Bank: | | | | | | | |
Total capital (to risk-weighted assets) | $ | 465,301 |
| | 19.19 | % | | $ | 194,023 |
| | 8.0 | % |
Tier I capital (to risk-weighted assets) | 434,975 |
| | 17.93 |
| | 97,012 |
| | 4.0 |
|
Tier I capital (to average assets) | 434,975 |
| | 15.55 |
| | 111,908 |
| | 4.0 |
|
Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended June 30, 2013, included in the Company’s Annual Report on Form 10-K, as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated Balance Sheets at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodologies used to determine the allowance for loan losses and judgments regarding the valuation of securities as well as the valuation allowance against deferred tax assets are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations, involve a higher degree of complexity, and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors. For a further discussion of the critical accounting policies of the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K, for the year ended June 30, 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of 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.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:
| |
(i) | originating multifamily and commercial real estate loans that generally tend to have shorter interest duration and generally have interest rates that reset primarily at five years; |
| |
(ii) | investing in shorter duration securities and mortgage-backed securities; |
| |
(iii) | obtaining general financing through FHLB advances with a fixed long term: and |
| |
(iv) | utilizing interest rate swaps or other derivative instruments. |
Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of
our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. In addition, if changes occur that cause the estimated duration of a security to lengthen significantly, management will consider the sale of such security. By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.
Net Portfolio Value. We compute the amounts by which the net present value of cash flow from assets, liabilities and off balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The table below sets forth, as of March 31, 2014, 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.
|
| | | | | | | | | | | | | | | | | |
Change in Interest Rates (basis points) (1) | | Estimated NPV (2) | | Estimated Increase (Decrease) in NPV | | NPV as a Percentage of Present Value of Assets (3) |
NPV Ratio (4) | | Increase (Decrease) basis points |
Amount | | Percent | |
(Dollars in thousands) |
+200 | | $ | 482,044 |
| | $ | (74,152 | ) | | (13.3 | )% | | 16.6 | % | | (159 | ) |
+100 | | 524,085 |
| | (32,111 | ) | | (5.8 | ) | | 17.6 |
| | (63 | ) |
— | | 556,196 |
| | — |
| | — |
| | 18.2 |
| | — |
|
(100) | | 596,568 |
| | 40,372 |
| | 7.3 |
| | 19.1 |
| | 86 |
|
| |
(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 March 31, 2014, in the event of a 100 basis point decrease in interest rates, we would experience an 7.3% increase in net portfolio value. In the event of a 200 basis point increase in interest rates, we would experience a 13.3% decrease in net portfolio value. These changes in net portfolio value are within the limitations established in our asset and liability management policies.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
There were no changes made in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting during the period covered by this report.
Part II – Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes from those risk factors previously disclosed in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 13, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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(a) | Unregistered Sale of Equity Securities. There were no sales of unregistered securities during the period covered by this report. |
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(b) | Use of Proceeds. Not applicable. |
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(c) | Repurchase of Our Equity Securities. There were no repurchases of our equity securities during the period covered by this report. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The following exhibits are either filed as part of this report or are incorporated herein by reference:
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3.1 |
| | Certificate of Incorporation of Oritani Financial Corp. * |
3.2 |
| | Bylaws of Oritani Financial Corp. * |
4 |
| | Form of Common Stock Certificate of Oritani Financial Corp. * |
10.1 |
| | Employment Agreement between Oritani Financial Corp. and Kevin J. Lynch**, ***** |
10.2 |
| | Form of Employment Agreement between Oritani Financial Corp. and executive officers**,***** |
10.3 |
| | Oritani Bank Director Retirement Plan**, ***** |
10.4 |
| | Oritani Bank Benefit Equalization Plan**, ***** |
10.5 |
| | Oritani Bank Executive Supplemental Retirement Income Agreement**, ***** |
10.6 |
| | Form of Employee Stock Ownership Plan**, ***** |
10.7 |
| | Director Deferred Fee Plan**, ***** |
10.8 |
| | Oritani Financial Corp. 2007 Equity Incentive Plan**, ***** |
10.9 |
| | Oritani Financial Corp. 2011 Equity Incentive Plan***, ***** |
14 |
| | Code of Ethics**** |
21 |
| | Subsidiaries of Registrant** |
31.1 |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 |
| | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements |
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* | Incorporated by reference to the Registration Statement on Form S-1 of Oritani Financial Corp. (file no. 333-165226), originally filed with the Securities and Exchange Commission on March 5, 2011. |
** | Incorporated by reference to the Registration Statement on Form S-1 of Oritani Financial Corp. (file no. 333-137309), originally filed with the Securities and Exchange Commission on September 14, 2006. |
*** | Incorporated by reference to the Company’s Proxy Statement for the 2011 Special Meeting of Stockholders filed with the Securities and Exchange Commission on June 27, 2011 (file No. 001-34786). |
**** | Available on our website www.oritani.com |
***** | Management contract, compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | | | ORITANI FINANCIAL CORP. |
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Date: | May 9, 2014 | | | | | /s/ Kevin J. Lynch |
| | | | | | Kevin J. Lynch |
| | | | | | President and Chief Executive Officer |
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Date: | May 9, 2014 | | | | | /s/ John M. Fields, Jr. |
| | | | | | John M. Fields, Jr. |
| | | | | | Executive Vice President and Chief Financial Officer |