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ORIT > SEC Filings for ORIT > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for ORITANI FINANCIAL CORP


9-May-2013

Quarterly Report


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, including, but 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 and commercial 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 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, 2013 and June 30, 2012 Total Assets. Total assets increased $114.2 million, or 4.2%, to $2.82 billion at March 31, 2013, from $2.70 billion at June 30, 2012. The primary investing activity was in loans funded by increases in short term borrowings and cash flows from the investment portfolio.
Cash and Cash Equivalents. Cash and cash equivalents (which include fed funds and short term investments) decreased $2.7 million to $8.7 million at March 31, 2013, from $11.4 million at June 30, 2012.
Net Loans. Loans, net increased $229.5 million, or 11.5%, to $2.22 billion at March 31, 2013, from $1.99 billion at June 30, 2012. The Company continues its emphasis on loan originations, particularly multifamily and commercial real estate loans. Loan originations totaled $510.6 million for the nine months ended March 31, 2013 versus $397.3 million for the nine months ended March 31, 2012.


Table of Contents

Delinquency and non performing asset information is provided below:

                              3/31/2013      12/31/2012       9/30/2012       6/30/2012       3/31/2012
                                                       (Dollars in thousands)
Delinquency Totals
30-59 days past due         $     7,241     $     8,169     $    15,544     $    13,783     $    11,325
60-89 days past due               3,948           7,005           7,363           8,555           7,900
Nonaccrual                       24,304          29,401          26,275          18,342          18,715
Total                       $    35,493     $    44,575     $    49,182     $    40,680     $    37,940
Non Performing Asset Totals
Nonaccrual loans, per above $    24,304     $    29,401     $    26,275     $    18,342     $    18,715
Real Estate Owned                 4,361           2,817           2,837           2,740           4,266
Total                       $    28,665     $    32,218     $    29,112     $    21,082     $    22,981
Nonaccrual loans to total
loans                              1.07 %          1.32 %          1.22 %          0.90 %          0.96 %
Delinquent loans to total
loans                              1.57 %          2.01 %          2.28 %          2.00 %          1.95 %
Non performing assets to
total assets                       1.02 %          1.15 %          1.04 %          0.78 %          0.87 %

All three categories of delinquent loans decreased from the December 31, 2012 total but, in management's opinion, remain at an elevated level. There was a net reduction in nonaccrual loans over the quarter. The title was obtained to a $2.0 million mixed use building and it was transferred to REO. In addition, a $2.5 million construction loan paid in full. While pleased with these developments, management was disappointed that further progress could not be reported at this time. Management continues to work diligently to remedy these matters.

At March 31, 2013, there are seven nonaccrual loans with balances greater than $1.0 million, as well as one related group of seven nonaccrual loans totaling $3.5 million. These loans are discussed below:

A $3.2 million construction loan for a luxury home in Morris County, New Jersey. 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, 2013, primarily due to a low estimated loan to value. The loan had paid as agreed, but the collateral for the loan remained unsold upon maturity. The borrower verbally agreed to extension terms acceptable to the Company in January, 2013. However, execution of this agreement did not occur, the borrower has not honored the negotiated terms and the Company has resumed pursuit of a legal remedy.

A $1.7 million construction loan for a luxury home in Morris County, New Jersey. The Company reached a settlement and forbearance agreement with the borrower on this matter during the quarter ended March 31, 2012. As part of the agreement, the borrower is completing the home with no additional funding from Oritani, which serves to further lower the loan to value on this loan. The loan is classified as a nonaccrual troubled debt restructuring ("TDR") as of March 31, 2013. As such, this loan is included in the nonaccrual loan total at March 31, 2013. However, the borrower has complied with all facets of the new agreement since its origination, including interest payments, and is fully current. The home is approximately 90% complete and will be marketed for sale shortly.

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 $205,000 impairment reserve remains against this loan as of March 31, 2013. Oritani is pursuing legal remedies.

A $1.1 million loan on a mixed use property in Bergen County, New Jersey. The loan is classified as impaired. 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, 2013. The borrower fully complied with the payment demands of the Company over the quarter; the loan is less than 60 days delinquent as of March 31, 2013. Subsequent to March 31, 2013, the borrower agreed to the forbearance terms demanded by the Company (including the pledge of additional collateral) and the foreclosure action is currently being held in abeyance.

A $2.5 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, 2013. There is a pending contract for sale of this property for $3.7 million. The closing is being delayed due to legal matters related to the seller, including bankruptcy.

A $2.4 million loan on a warehouse/light industrial building in Bergen County, NJ. 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, 2013, primarily due to a low estimated loan to value. Oritani is pursuing legal remedies as well as other avenues to secure repayment in full.


Table of Contents

A $2.3 million loan on a student housing facility in Luzerne County, Pennsylvania. The loan is classified as impaired. In accordance with the results of the impairment analysis for this loan, a $458,000 impairment reserve was established as of March 31, 2013. Oritani is pursuing legal remedies as well as other avenues to secure repayment in full.

A $3.5 million loan relationship encompassing seven loans on six properties. All of the properties are in Bergen County, New Jersey. Each of the loans comprising the relationship is classified as impaired. Five of the properties are commercial real estate buildings and one is a single family home. In accordance with the results of the impairment analysis for this loan, an $832,000 impairment reserve was established as of March 31, 2013. A rent receiver has been appointed and Oritani is receiving the net rents from the properties. Oritani is pursuing legal remedies as well as other avenues to secure repayment in full.

There are ten other multifamily/commercial real estate loans, totaling $3.6 million, classified as nonaccrual at March 31, 2013. The largest of these loans has a balance of $780,000.

There are ten other residential loans, totaling $2.6 million, classified as nonaccrual at March 31, 2013. The largest of these loans has a balance of $740,000. See additional information regarding the allowance for loan losses in footnote 6 of the financial statements.
Mortgage-backed Securities Available For Sale. Mortgage-backed securities AFS decreased $125.8 million to $348.1 million at March 31, 2013, from $473.9 million at June 30, 2012. Management continues to view mortgage-backed securities as an unappealing investment in the current climate. Real Estate Owned. Real estate owned ("REO") increased $1.6 million to $4.4 million at March 31, 2013, from $2.7 million at June 30, 2012. The balance consists of 6 properties, of which 5 are presently under contract for sale at amounts that exceed the current book value of the properties. The only property that is not under contract at this time has a book value of $552,000. Deposits. Deposits decreased $23.7 million, or 1.7%, to $1.37 billion at March 31, 2013, from $1.39 billion at June 30, 2012. Growth in core deposit accounts was offset by outflows of time deposits.
Borrowings. Borrowings increased $131.2 million, or 17.6%, to $877.1 million at March 31, 2013, from $745.9 million at June 30, 2012 to fund loan demand. Stockholders' Equity. Stockholders' equity increased $857,000 to $511.6 million at March 31, 2013, from $510.7 million at June 30, 2012. The increase was primarily due to net income plus the release of ESOP and Equity Plan shares, partially offset by dividends, including a $0.40 per share special dividend paid in December, 2012. Based on our March 31, 2013 closing price of $15.49 per share, the Company stock was trading at 137.4% of book value.

Average Balance Sheet for the Three and Nine Months Ended March 31, 2013 and 2012
The following table presents certain information regarding Oritani Financial Corp.'s financial condition and net interest income for the three and nine months ended March 31, 2013 and 2012. 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.


Table of Contents

                                                Average Balance Sheet and Yield/Rate Information
                                                     For the Three Months Ended (unaudited)
                                          March 31, 2013                                 March 31, 2012
                             Average                                          Average         Interest
                           Outstanding        Interest         Average      Outstanding       Earned/        Average
                             Balance         Earned/Paid     Yield/Rate       Balance           Paid       Yield/Rate
                                                             (Dollars in thousands)
Interest-earning assets:
Loans (1)                 $  2,187,996     $      30,229          5.53 %   $  1,850,300     $   27,273          5.90 %
Federal Home Loan Bank
Stock                           44,164               472          4.27 %         33,999            427          5.02 %
Securities available for
sale                            11,947                53          1.77 %         26,001             88          1.35 %
Mortgage backed
securities held to
maturity                        40,308               243          2.41 %         33,602            212          2.52 %
Mortgage backed
securities available for
sale                           373,844             1,582          1.69 %        548,729          2,490          1.82 %
Federal funds sold and
short term investments           1,466                 1          0.25 %          1,600              1          0.25 %
Total interest-earning
assets                       2,659,725            32,580          4.90 %      2,494,231         30,491          4.89 %
Non-interest-earning
assets                         138,491                                          111,570
Total assets              $  2,798,216                                     $  2,605,801
Interest-bearing
liabilities:
Savings deposits               168,826                97          0.23 %        160,732            156          0.39 %
Money market                   422,485               512          0.48 %        392,854            690          0.70 %
Checking accounts              269,308               235          0.35 %        218,296            213          0.39 %
Time deposits                  494,394             1,167          0.94 %        619,863          1,977          1.28 %
Total deposits               1,355,013             2,011          0.59 %      1,391,745          3,036          0.87 %
Borrowings                     875,740             5,273          2.41 %        675,792          5,157          3.05 %
Total interest-bearing
liabilities                  2,230,753             7,284          1.31 %      2,067,537          8,193          1.59 %
Non-interest-bearing
liabilities                     56,873                                           27,198
Total liabilities            2,287,626                                        2,094,735
Stockholders' equity           510,590                                          511,066
Total liabilities and
stockholders' equity      $  2,798,216                                     $  2,605,801
Net interest income                        $      25,296                                    $   22,298
Net interest rate spread
(2)                                                               3.59 %                                        3.30 %
Net interest-earning
assets (3)                $    428,972                                     $    426,694
Net interest margin (4)                                           3.80 %                                        3.58 %

Average of interest-earning assets to interest-bearing liabilities 119.23 % 120.64 %

(1) Includes nonaccrual loans.

(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.


Table of Contents

                                             Average Balance Sheet and Yield/Rate Information
                                                  For the Nine Months Ended (unaudited)
                                       March 31, 2013                                 March 31, 2012
                           Average                          Average        Average         Interest      Average
                         Outstanding        Interest         Yield/      Outstanding       Earned/        Yield/
                           Balance         Earned/Paid        Rate         Balance           Paid          Rate
                                                          (Dollars in thousands)
Interest-earning
assets:
Loans (1)               $  2,107,814     $      88,390         5.59 %   $  1,779,296     $   80,138         6.01 %
Federal Home Loan Bank
Stock                         41,509             1,316         4.23 %         31,948          1,007         4.20 %
Securities available
for sale                      14,706               185         1.68 %         55,557            774         1.86 %
Mortgage backed
securities held to
maturity                      36,978               702         2.53 %         35,386            687         2.59 %
Mortgage backed
securities available
for sale                     416,133             5,413         1.73 %        565,311          8,124         1.92 %
Federal funds sold and
short term investments         1,478                 3         0.25 %         15,251             31         0.25 %
Total interest-earning
assets                     2,618,618            96,009         4.89 %      2,482,749         90,761         4.87 %
Non-interest-earning
assets                       131,522                                         108,259
Total assets            $  2,750,140                                    $  2,591,008
Interest-bearing
liabilities:
Savings deposits             166,570               292         0.23 %        156,165            527         0.45 %
Money market                 437,688             1,622         0.49 %        386,309          2,208         0.76 %
Checking accounts            234,424               508         0.29 %        198,879            638         0.43 %
Time deposits                522,649             4,058         1.04 %        644,520          6,638         1.37 %
Total deposits             1,361,331             6,480         0.63 %      1,385,873         10,011         0.96 %
Borrowings                   817,620            15,972         2.60 %        624,173         15,428         3.30 %
Total interest-bearing
liabilities                2,178,951            22,452         1.37 %      2,010,046         25,439         1.69 %
Non-interest-bearing
liabilities                   56,733                                          42,540
Total liabilities          2,235,684                                       2,052,586
Stockholders' equity         514,456                                         538,422
Total liabilities and
stockholder's equity    $  2,750,140                                    $  2,591,008
Net interest income                      $      73,557                                   $   65,322
Net interest rate
spread (2)                                                     3.52 %                                       3.18 %
Net interest-earning
assets (3)              $    439,667                                    $    472,703
Net interest margin (4)                                        3.75 %                                       3.51 %

Average of interest-earning assets to interest-bearing liabilities 120.18 % 123.52 %

(1) Includes nonaccrual loans.

(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, 2013 and 2012
Net Income. Net income increased $1.5 million, or 17.8%, to $9.9 million for the quarter ended March 31, 2013, from $8.4 million for the corresponding 2012 quarter. The primary causes of the increased net income in the 2013 period were increased net interest income and decreased provision for loan losses, partially offset by decreased other income and increased other expenses.


Table of Contents

Interest Income. Total interest income increased $2.1 million, or 6.9%, to $32.6 million for the three months ended March 31, 2013, from $30.5 million for the three months ended March 31, 2012. The components of interest income changed as follows:

                                  Three Months Ended March 31                   Increase / (decrease)
                                 2013                    2012                          Average
                             $         Yield         $         Yield         $         Balance       Yield
                                                        (Dollars in thousands)
Interest on mortgage
loans                    $ 30,229       5.53 %   $ 27,273       5.90 %   $ 2,956     $ 337,696       (0.37 )%
Dividends on FHLB stock       472       4.27 %        427       5.02 %        45        10,165       (0.75 )%
Interest on securities
AFS                            53       1.77 %         88       1.35 %       (35 )     (14,054 )      0.42  %
Interest on MBS HTM           243       2.41 %        212       2.52 %        31         6,706       (0.11 )%
Interest on MBS AFS         1,582       1.69 %      2,490       1.82 %      (908 )    (174,885 )     (0.13 )%
Interest on federal
funds sold and short
term investments                1       0.25 %          1       0.25 %         -          (134 )         -  %
Total interest income    $ 32,580       4.82 %   $ 30,491       4.89 %   $ 2,089     $ 165,494        0.01  %

As discussed in previous filings, the evidence of the impact of two of the Company's strategic business decisions is provided in the average balance changes. The Company's primary focus is organic growth of multifamily and commercial real estate loans. The average balance of loans increased $337.7 million over the periods. On a linked quarter basis (March 31, 2013 versus December 31, 2012), the average balance of loans grew $70.3 million. The growth was primarily achieved through originations. Loan originations totaled $150.9 million for the three months ended March 31, 2013. The yield on the loan portfolio decreased 37 basis points for the quarter ended March 31, 2013 versus the comparable 2012 period. The decreased yield was primarily due to the impact of current market rates on new originations, refinancings, prepayments and modifications. The decrease would have been larger; however, prepayment penalties were higher in the 2013 period. Prepayment penalties are recognized as interest on loans. Prepayment penalties totaled $1.5 million in the 2013 period versus $219,000 in the 2012 period. Prepayment penalty provisions are incorporated into all of the Company's multifamily and commercial real estate loan documents. The penalties are intended to provide the Company with compensation if the loan is prepaid. Notwithstanding the prepayment penalties, the current interest rate environment provides an economic incentive for many of our existing loans to refinance. Prepayment penalties boosted annualized loan yield by 28 basis points in the 2013 period versus 5 basis points in the 2012 period. The second strategic business decision evidenced in the table was the determination to no longer deploy the cash flows from the investment portfolio back into new investments. This decision impacted the periods subsequent to September 30, 2012 and was made because the Company determined that the risk/reward profiles of permissible securities no longer warranted additional investment. The average balance of the primary investment category, mortgage-backed securities available for sale, decreased $174.9 million over the periods. The decision has aided overall yield on interest earning assets as the Company now has a lower percentage of its interest earning assets in lower yielding instruments like mortgage backed securities, investment securities and federal funds sold. The limited increase in yield on interest earnings assets that occurred in 2013 versus 2012 (1 basis point), despite a much lower interest rate environment, is partially attributable to these strategic decisions.

Interest Expense. Total interest expense decreased $909,000, or 11.1%, to $7.3 . . .

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