Business Strategy

Our business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to our individual and business customers. We cannot assure you that we will successfully implement our business strategy.

Highlights of our business strategy are discussed below:

Continuing to focus on multi-family, and commercial real estate lending. Our primary business focus over the past several years has been the origination of multi-family, commercial real estate, and construction loans. Although construction lending has been curtailed due to current market and economic conditions, we have focused on this type of lending because the interest rates earned for such loans are higher than the prevailing rates for residential loans, resulting in greater interest income potential. We are also able to generate significantly higher fee income on such loans. In addition, the repayment terms usually expose us to less interest rate risk than fixed-rate residential loans. We generally incorporate one or more of the following features into our terms for multi-family and commercial real estate loans, thereby decreasing their interest rate risk: interest rates reset after five years at a predetermined spread to treasury rates; minimum stated interest rates; balloon repayment date or maximum fixed-rate self-amortizing loan term of 20 years. Fixed-rate self-amortizing loans are generally only offered for loan amounts of $2.0 million or less. While we have expanded our involvement in these loans over the past few years, we have been involved in multi-family lending for over thirty years. Over the past six years, we have assembled a department exclusively devoted to the origination and administration of multi-family and commercial real estate loans. There are presently seven loan officers in the department as well as support staff. While our actual origination volume will depend upon market conditions, we intend to continue our emphasis on multi-family and commercial real estate loans. Management is currently applying stricter underwriting guidelines to these loans, particularity commercial real estate. These factors will also impact origination volume.

Reduce Problem Assets. While considered more of a focus than a strategy, management's primary objective for the 2010 fiscal year is to reduce our level of problem assets. Management's focus is to secure a method to dispose of the assets, and to maximize the economic return, considering the current environment, upon the disposal. While no assurances can be provided regarding results, management will focus a significant amount of its time on the resolution of problem assets.

Maintain and increase core deposits. We have recently experienced a period of unprecedented deposit growth. Much of the increase came in the areas of Certificates of Deposit and Money Market accounts. Our focus for 2010 will be to build upon this success. A portion of our 2009 growth was driven by the interest rates we offered on our deposit products. In addition to continuing to attract new customers to the Bank in 2010, we will also focus on cross-selling core accounts to customers who have limited deposit services with the Bank. Such strategy will make deposit retention less dependent on attractive interest rates.

In October, 2009, the Bank opened two de novo branches. These branches had combined deposit totals of $37.8 million at June 30, 2009. We intend to continue the strategy of opportunistic de novo branching. We intend to open at least one new branch location in 2010 and will continue to seek additional locations.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance for loan losses, we make significant estimates and, therefore, have identified the allowance as a critical accounting policy. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

The allowance for loan losses has been determined in accordance with U.S. generally accepted accounting principles, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components:
specific and general allocations. Specific allocations are made for loans that are classified. Management will identify loans that have demonstrated issues that cause concern regarding full collectibility in the required time frame. Delinquency is a key indicator of such issues. In addition, the Company utilizes the services of an external loan review firm. The loan review firm reviews a significant portion of new originations and the existing portfolio over the course of the year. Their scope is determined by the Audit Committee. This firm prepares quarterly reports that include recommendations for classification. Their services assist in identifying loans that should be classified prior to delinquency issues. Management summarizes all problem loans and classifies such loans within the following industry standard categories:
Special Mention; Substandard; Doubtful or Loss. In addition, a classified loan may be considered impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions, geographic concentrations, industry and peer comparisons. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocation. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

On a quarterly basis, the Chief Financial Officer reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. This process includes all loans, concentrating on non-accrual and classified loans. Each non-accrual or classified loan is evaluated for potential loss exposure. Any shortfall results in a charge to the allowance if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value available. This appraised value is then reduced to reflect estimated liquidation expenses.

The results of this quarterly process are summarized along with recommendations and presented to executive management for their review. Based on these recommendations, loan loss allowances are approved by executive management. All supporting documentation with regard to the evaluation process, loan loss experience, allowance levels and the schedules of classified loans are maintained by the Chief Financial Officer. A summary of loan loss allowances is presented to the Board of Directors on a quarterly basis.

We have a concentration of loans secured by real property located in New Jersey. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans. Based on the composition of our loan portfolio, we believe the primary risks are increases in interest rates, a decline in the economy generally, and a decline in real estate market values in New Jersey. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. We consider it important to maintain the ratio of our allowance for loan losses to total loans at an adequate level. Factors such as current economic conditions, interest rates, and the composition of the loan portfolio will effect our determination of the level of this ratio for any particular period.

Our allowance for loan losses in recent years reflects probable future losses resulting from the actual growth in our loan portfolio. We recognize that our overall delinquencies, impaired loans and nonaccrual loans have increased significantly over the past two years. We believe the ratio of the allowance for loan losses to total loans at June 30, 2009 adequately reflects our portfolio credit risk, given our emphasis on multi-family and commercial real estate lending and current market conditions.

Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the FDIC and the Department, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on its judgments about information available to them at the time of their examination.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.

Asset Impairment Judgments. Some of our assets are carried on our consolidated balance sheets at cost, fair value or at the lower of cost or fair value. Valuation allowances or write-downs are established when necessary to recognize impairment of such assets. We periodically perform analyses to test for impairment of such assets. In addition to the impairment analyses related to our loans discussed above, another significant impairment analysis is the determination of whether there has been an other-than-temporary decline in the value of one or more of our securities.

Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders' equity. Our held-to-maturity securities portfolio, consisting of debt securities for which we have a positive intent and ability to hold to maturity, is carried at amortized cost. We conduct a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, we would adjust the cost basis of the security by writing down the security to fair market value through a charge to current period operations.

Stock-Based Compensation. We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in accordance with SFAS No. 123(R).

We estimate the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets.

The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

At the Special Meeting of Stockholders of the Company held on April 22, 2008, the stockholders of the Company approved the Oritani Financial Corp. 2007 Equity Incentive Plan authorizing the issuance of 2,781,878 shares of Company common stock, of which 1,987,055 were authorized as incentive and non-statutory stock options. On May 7, 2008, stock options totaling 1,788,349 were granted. An additional 70,000 options were granted on November 21, 2008. The accounting uncertainty described above effects the remaining 128,706 options that have not yet been granted.

Comparison of Financial Condition at June 30, 2009 and June 30, 2008

Total Assets. Total assets increased $470.2 million, or 32.6%, to $1.914 billion at June 30, 2009, from $1.44 billion at June 30, 2008. Asset growth resulted from growth in loans, cash and securities available for sale ("AFS"), and was primarily funded through increased deposits and borrowings.

Cash And Cash Equivalents. Cash and cash equivalents (which includes fed funds and short term investments) increased $126.5 million to $135.4 million at June 30, 2009, from $8.9 million at June 30, 2008. The increase is primarily a result of deposit inflows and proceeds from repayments of loans and securities.

Loans, net. The largest asset increase occurred in loans, net. Loans, net has been the asset category with the largest annual increase for the past four years. Loans, net increased $271.5 million, or 27.0%, to $1.28 billion at June 30, 2009, from $1.01 billion at June 30, 2008. The Company continued its emphasis on loan originations, particularly multifamily and commercial real estate loans. Loan originations and purchases totaled $459.3 million for the year ended June 30, 2009.

Securities Available For Sale. Securities available for sale increased $122.1 million, or 548.1%, to $144.4 million at June 30, 2009, from $22.3 million at June 30, 2008. The increase was primarily due to purchases of $163.7 million partially offset by maturities and calls. During fiscal 2009 and 2008, the mutual funds and equity securities portfolio were deemed other-than-temporarily impaired. The Company recorded a non-cash impairment charge to earnings of $2.0 million and $998,000, for the years ended June 30, 2009 and 2008, respectively.

Mortgage-Backed Securities Held to Maturity. Mortgage backed securities held to maturity decreased $45.1 million, or 27.5% to $118.8 million at June 30, 2009, from $164.0 million at June 30, 2008. The decrease was due to prepayments and principal amortization.

Mortgage-Backed Securities Available For Sale. Mortgage backed securities available for sale decreased $20.6 million, or 13.8%, to $128.6 million at June 30, 2009, from $149.2 million at June 30, 2008. The decrease was due to prepayments and principal amortization partially offset by purchases.

Federal Home Loan Bank of New York ("FHLB-NY") stock. FHLB-NY stock increased $4.0 million, or 18.6% to $25.5 million at June 30, 2009, from $21.5 million at June 30, 2008. Additional purchases of this stock were required due to additional advances obtained from FHLB-NY.

Deposits. Deposits increased $428.7 million, or 61.3%, to $1.13 billion at June 30, 2009, from $698.9 million at June 30, 2008. The Bank implemented several initiatives designed to achieve deposit growth. These initiatives, combined with a favorable environment for deposit growth, greatly contributed to the 2009 results. Two new branch locations were opened during the year and another one is in development and expected to open in 2010.

Borrowings. Borrowings increased $75.3 million, or 17.4%, to $509.0 million at June 30, 2009, from $433.7 million at June 30, 2008. The Company committed to various advances from the FHLB-NY over the period primarily to fund asset growth.

Stockholders' equity. Stockholders' equity decreased $38.9 million, or 13.9%, to $240.1 million at June 30, 2009, from $279.0 million at June 30, 2008 primarily due to treasury stock repurchases. On March 18, 2009, the Company announced the completion of its third 10% repurchase program as well as the commencement of a fourth (967,828 shares) 10% repurchase program. As of June 30, 2009, the Company had repurchased a total of 3,577,437 shares at a total cost of $55.9 million and an average cost of $15.63 per share. Through September 11, 2009, the Company had repurchased a total of 3,648,637 shares at a total cost of $56.8 million and an average cost of $15.59 per share.

Comparison of Operating Results for the Years Ended June 30, 2009 and June 30, 2008

Net Income. Net income decreased $3.4 million, or 38.0%, to $5.6 million for the year ended June 30, 2009, versus $9.0 million for the corresponding 2008 period. The items primarily impacting the twelve month period ended June 30, 2009 were provision for loan losses totaling $9.9 million, a pre-tax charge of $2.0 million as a result of an other than temporary impairment in the value of investment securities available for sale, and increased FDIC expense of $1.7 million. The items primarily impacting the twelve month period ended June 30, 2008 were provision for loan losses totaling $4.7 million, a pre-tax charge of $998,000 as a result of an other than temporary impairment in the value of investment securities available for sale, and a $1.1 million gain on the sale of a Real Estate Held for Investment property.

Total interest income. For the year ended June 30, 2009, total interest income increased by $16.8 million, or 23.5%, to $88.4 million, from $71.6 million for the year ended June 30, 2008. The largest increase was in interest on mortgage loans. Interest on mortgage loans increased by $17.1 million, or 31.1%, to $72.2 million for the year ended June 30, 2009, from $55.1 million for the year ended June 30, 2008. A critical component of the Company's strategic plan continues to be sound loan growth. The average balance of loans, net increased $323.2 million while the yield on the portfolio decreased 31 basis points. The yield on the portfolio in 2009 was negatively impacted by interest on nonaccrual loans. On a normalized basis (inclusive of interest in nonaccrual loans), the yield remained stable. Interest on federal funds sold and short term investments decreased by $1.6 million to $73,000 million for the year ended June 30, 2009, from $1.7 million for the year ended June 30, 2008. The decrease is related to a $20.3 million decrease in the average balance and a decrease in yield of 347 basis points. The Federal Open Market Committee has significantly decreased the federal funds target rate over the period. While the Company seeks to prudently deploy cash inflows as quickly as possible, the significant growth in deposits has increased liquidity above an optimal level. The Company's primary asset investment has been loans. However, for this period, deposit growth outpaced loan growth. Excess cash flows were initially invested in MBS AFS. Over the course of the year, as the risk/reward profiles of the investment options changed, and the current and projected cash needs of the Company changed, the primary investment vehicle for the excess cash became securities AFS. Interest on MBS AFS increased by $2.3 million to $7.0 million for the year ended June 30, 2009, from $4.7 million for the year ended June 30, 2008. The average balance increased $54.7 million while the yield decreased 34 basis points. Interest on the other investment related captions of securities HTM, securities AFS and MBS HTM decreased by $972,000, or 9.6%, to $9.2 million for the year ended June 30, 2009, from $10.1 million for the year ended June 30, 2008. The decrease was primarily due to a decrease in the combined average balance of $10.8 million and a decreased yield.

Interest Expense. Total interest expense increased by $7.3 million, or 19.6%, to $44.5 million for the year ended June 30, 2009, from $37.2 million for the year ended June 30, 2008. The vast majority of the increase was due to borrowings as interest expense on deposits increased by $397,000 while interest expense on borrowings increased by $6.9 million. The average balance of deposits increased 27.0% to $880.8 million for the year ended June 30, 2009 from $693.3 million for the year ended June 30, 2008. The cost of deposits decreased to 2.75% for the year ended June 30, 2009 from 3.44% for the year ended June 30, 2008. The average balance of borrowings increased to $505.6 million for the year ended June 30, 2009 from $310.2 million for the year ended June 30, 2008. The cost of borrowings decreased to 4.00% for the year ended June 30, 2009 from 4.30% for the year ended June 30, 2008.

Net interest income. Net interest income increased by $9.5 million, or 27.8%, to $43.9 million for the year ended June 30, 2009, from $34.4 million for the year ended June 30, 2008. The Company's net interest income and net interest rate spread were both negatively impacted for the year ended June 30, 2009 due to the reversal of accrued interest income on loans delinquent more than 90 days. The total of such income reversed was $3.7 million for the year ended June 30, 2009 compared to $521,000 for the year ended June 30, 2008. The Company's net interest rate spreads for the years ended June 30, 2009 and June 30, 2008 were 2.36% and 2.06%, respectively.

Provision for Loan Losses. The Company recorded provisions for loan losses of $9.9 million for the year ended June 30, 2009 as compared to $4.7 million for the year ended June 30, 2008. The Company charged off a total of $2.7 million in loans during the year ended June 30, 2009 related to losses deemed probable. There were no recoveries in any of the periods. The Company's allowance for loan losses is analyzed quarterly and many factors are considered, including comparison to peer reserve levels. As in prior periods, loan growth was a component of the provision for loan losses in the 2009 periods. The delinquency and nonaccrual totals, however, were the primary contributors to the increased level of provision for loan losses

Delinquency information is provided below:

Delinquency Totals (in thousands)
                                    06/30/09      06/30/08      06/30/07

30 - 59 days past due               $   6,727     $  27,985     $     555
60 - 89 days past due                  17,825            18            39
90+ days past due                      47,839        13,876             -
Total                               $  72,391     $  41,879     $     594

Nonaccrual and total delinquent loan totals have been at an elevated level for the majority of the fiscal year. The Company has continued its aggressive posture toward delinquent borrowers. The Company has commenced legal action against virtually all borrowers who are more than 45 days delinquent. The Company has refused to extend the maturity date of any construction loan, even if the interest payments are current, unless the borrower agrees to reduce the Company's exposure through additional principal payments and/or additional collateral, and agrees to an additional fee if the loan is not paid in full on or before the new maturity date. The Company realizes that such actions contribute to the high level of delinquencies but believes this is the most prudent path to addressing problem loans.

Nonaccrual loans increased $38.3 million to $52.5 million at June 30, 2009 compared to $14.2 million at June 30, 2008. A brief summary of the loans that comprise a significant portion of this total follows:

• Two of these loans are to one borrower and totaled $18.0 million at June 30, 2009. The loans are secured by a condominium construction project and raw land with all building approvals, both of which are in Northern New Jersey. The borrower declared bankruptcy and Oritani has provided debtor in possession financing for the completion of the condominium construction project. While the construction is primarily completed, delays have been encountered in finalizing the project and obtaining certificates of occupancy. The individual unit sales process has commenced and several units are currently under contract. Closings are not expected until late September, 2009. Oritani charged off $2.0 million of the construction loan as of June 30, 2009, as this portion has been determined to be an incurred loss. Both loans are classified as impaired as of June 30, 2009. In accordance with the results of the Company's Statement of Financial . . .