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ORIT > SEC Filings for ORIT > Form 10-K on 13-Sep-2013All Recent SEC Filings

Show all filings for ORITANI FINANCIAL CORP

Form 10-K for ORITANI FINANCIAL CORP


13-Sep-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 multifamily and commercial real estate lending. Unlike many traditional thrifts, we have focused on the origination of multifamily and commercial real estate loans. Such loans comprise 90.7% of our total loan portfolio at June 30, 2013. We have focused on this type of lending because the interest rates earned for such loans generally are higher than the prevailing rates for residential loans, resulting in a greater level of interest income potential. We are also able to generate significantly higher fee income on such loans, particularly prepayment fees. 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 multifamily and commercial real estate loans, thereby decreasing their interest rate risk: interest rates reset after five years at a predetermined spread to FHLB Advance rates; minimum stated interest rates; balloon repayment date or maximum fixed-rate self-amortizing loan term of 20 years. While our actual origination volume will depend on market conditions, we intend to continue our emphasis on multifamily and commercial real estate lending. The number of banks that have added or increased this type of lending, particularly multifamily lending, over the past few years has continued to increase. Consequently, the interest rate spreads on this type lending have come under pressure.


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We have experienced substantial growth in our combined multifamily and commercial real estate loan portfolio in recent years. The annual growth rate of the portfolio has been 17.0%; 30.5%; 22.9%; 33.4% and 40.6% for years ended June 30, 2013, 2012, 2011, 2010 and 2009, respectively. We have been involved in multifamily lending for over thirty years. Over the past ten years, we have assembled a department exclusively devoted to the origination and administration of multifamily and commercial real estate loans. Over the past five years, we have established a separate credit department to review all such originations and ensure compliance with our underwriting standards. There are presently 9 loan officers as well as support staff in the origination department and 3 officers as well as support staff in the credit department. Our business plan projects continued growth of the portfolio and continued additions to our staff to support such growth. In addition, due to current economic conditions and related risks, management has been applying stricter underwriting guidelines, including requiring higher debt service coverage ratios and lower loan to value ratios, to these loans.
Aggressively remedy remaining delinquent loans and such additional loans that may occur. One of management's objectives is to maintain a low level of problem assets and to achieve further reductions from our current level. Management's tactics toward delinquent borrowers are generally considered aggressive. We have commenced legal action against virtually all borrowers who are more than 45 days delinquent. Since June 30, 2009, our level of non-performing assets to total assets has declined from 2.74% to 0.91% at June 30, 2013. While no assurances can be provided regarding results, management will continue to focus on resolution of problem assets.
Maintaining and increasing core deposits. Since the beginning of fiscal 2009, we have devoted significant internal attention to growing our deposits. We hired key, experienced personnel and have implemented an incentive program that rewards branch personnel for attracting core deposit relationships. We emphasized obtaining deposits from our commercial borrowers, reexamined our pricing strategies, entered into the municipal deposit market and promoted our status as a local community bank. As a result of these efforts and external factors, we experienced a period of strong deposit growth. Our total deposit balances grew $720.8 million, or 103.1%, from June 30, 2008 to June 30, 2013. The focus of our deposit initiative has been to increase core deposits. Our core deposit account balances grew $668.5 million, or 238.6%, from June 30, 2008 to June 30, 2013. Overall deposit growth was muted in fiscal 2012 and, to some extent, in fiscal 2013 as an outflow of time deposits partially mitigated growth in core accounts. Our ongoing focus will be to build upon our successes in core deposit growth. In addition to continuing to attract new customers to Oritani Bank, we will also focus on cross-selling core deposit accounts to customers who have limited deposit services with Oritani Bank and seeking to further develop the relationship by providing quality customer service as well as continuing our de novo branch strategy.
Expanding our market share within our primary market area. Our deposit growth significantly boosted our market penetration in Bergen County, the primary county of our operations. We increased our percentage of Bergen County deposits from 1.8%, or the 14th ranked financial institution, at June 30, 2008 to 3.0%, or the 9th ranked financial institution, at June 30, 2012. We intend to continue the strategy of opportunistic de novo branching. We typically seek de novo branch locations in under-banked areas that are either a contiguous extension or fill-in of our existing branch network. We also have budgeted monies for infrastructure improvements in our existing branches. We may also consider the acquisition of branches from other financial institutions in our market area. We believe these strategies, along with continued growth, will help us achieve our goal of deposit growth and market expansion.
Continuing to emphasize operating efficiencies and cost control. One of the hallmarks of our operations has been expense control as evidenced by an efficiency ratio of 36.68% for the year ended June 30, 2013. Our efficiency ratio as well as numerous other expense measurement ratios, have consistently outperformed peers. We intend to maintain our posture on expense control while continuing to make prudent investments in our operations by effectively managing costs in a relation to revenues.

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, Impaired Loans And Real Estate Owned. The allowance for loan losses is the estimated amount considered necessary to cover probable and reasonably estimable 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.


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The allowance for loan losses has been determined in accordance with U.S. generally accepted accounting principles. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components:
specific and general allocations. Specific allocations are made for loans that are impaired. Management will identify loans that have demonstrated issues that cause concern regarding full collectibility in the required time frame. Delinquency and internal credit department reviews are key indicators of such issues. In addition, the Company utilizes the services of a third party loan review firm on an annual basis, the loan review firm reviews a significant portion of the existing portfolio over the course of the year, typically an aggregate of at least 60% of the commercial real estate, multifamily and construction loan portfolios, including a sampling of both new and seasoned loans, a review of all Regulation "O" loans and review of all delinquent loans. 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: Watch, 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, collateral category and internal credit risk rating. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic concentrations. 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 all impaired loans individually, determines the appropriate impaired loan balance and calculates any necessary specific reserves. The most current appraised value is generally used as the basis for the value of the collateral. In general, loans that are greater than $1.0 million and delinquent more than 90 days are considered impaired.

Summarizes by rating classification all remaining loans that are graded either "Watch," "Special Mention" or "Substandard." A general reserve percentage is then applied to all such loans. The percentage utilized is increased as the classification severity increases.

Summarizes by collateral type all remaining loans that are graded either "Desirable," "Pass" or "Low Pass." A general reserve factor is then applied to all such loans. The general reserve factors are analyzed and updated on a semiannual basis.

The results are summarized and an appropriate level of allowance for loan losses is determined. This level is compared to the "pre-analysis" level of allowance for loan losses and, if necessary, an adjustment is made through the provision for loan losses in order to reflect the appropriate level of allowance for loan losses.
The results of this quarterly process are summarized 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 our lending area. Our lending area generally extends approximately 150 miles from our headquarters. 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 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 our lending area. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. We consider it important to maintain the ratio of our allowance for loan losses to total loans at an adequate level. Factors such as current economic conditions, interest rates, and the composition of the loan portfolio will affect our determination of the level of this ratio for any particular period.


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Our allowance for loan losses in recent years reflects probable losses resulting from the actual growth in our loan portfolio, ongoing local and regional economic conditions and our overall levels of charge-offs, delinquencies, impaired loans and nonaccrual loans. We believe the ratio of the allowance for loan losses to total loans at June 30, 2013 adequately reflects our portfolio credit risk, given our emphasis on multifamily 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 NJDOBI, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on its judgments about information available to them at the time of their examination. The most recent such examination was performed by the NJDOBI as of September 30, 2012.
Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. When the Company acquires other real estate owned, it generally obtains a current appraisal to substantiate the net carrying value of the asset. The asset is recorded at the lower of cost or estimated fair value, establishing a new cost basis. Holding costs and declines in estimated fair value result in charges to expense after acquisition. 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. If management has the intent and the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity. 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. Any portion of unrealized loss on an individual equity security deemed to be other-than-temporarily impaired is recognized as a loss in operations in the period in which such determination is made. For debt investments securities (where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery of the security's amortized cost) deemed other than temporarily impaired, the investment is written down through current earnings by the impairment related to the estimated credit loss and the non-credit related impairment is recognized in other comprehensive income.
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 ASC 718.
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.


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At the Special Meeting of Stockholders of the Company held on July 26, 2011, the stockholders of the Company approved the Oritani Financial Corp. 2011 Equity Incentive Plan ("2011 Plan"). On August 18, 2011, certain officers and employees of the Company were granted in aggregate 3,033,750 stock options and 1,227,100 shares of restricted stock, and non-employee directors received in aggregate 932,500 stock options and 373,000 shares of restricted stock. The Company expenses the fair value of all share-based compensation granted over the requisite service periods.

Comparison of Financial Condition at June 30, 2013 and June 30, 2012 Total Assets. Total assets increased $130.9 million, or 4.8%, to $2.83 billion at June 30, 2013, from $2.70 billion at June 30, 2012. The primary investing activity was in loans funded by cash flows from the investment portfolio and increases in short term borrowings and deposits.
Cash and Cash Equivalents. Cash and cash equivalents (which include fed funds and short term investments) increased $626,000 to $12.1 million at June 30, 2013, from $11.4 million at June 30, 2012.
Loans, net. Loans, net increased $283.0 million, or 14.2%, to $2.28 billion at June 30, 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 for the twelve months ended June 30, 2013 totaled $653.8 million versus $543.8 million for the comparable 2012 period Mortgage-Backed Securities Available For Sale. Mortgage-backed securities AFS decreased $167.6 million to $306.3 million at June 30, 2013, from $473.9 million at June 30, 2012. Management continues to de-emphasize mortgage-backed securities as an investment in the current interest rate environment. Real Estate Owned. Real estate owned totaled $1.7 million at June 30, 2013 and consisted of four properties. Two of these properties are presently under contract for sale at amounts that exceed the current book value of the properties. The properties that are not under contract at this time have a book value of $672,000. For the year ended June 30, 2013, the Company disposed of five REO properties with a book value of $3.8 million and realized net proceeds of $4.4 million.
Deposits. Deposits increased $30.0 million, or 2.2%, to $1.42 billion at June 30, 2013, from $1.39 billion at June 30, 2012. Core deposits, consisting of checking, money market and savings accounts, increased $128.5 million, or 15.7%, to $948.6 million at June 30, 2013, from $820.2 million at June 30, 2012. Over that same period, time deposits decreased $98.5 million, or 17.29%. The time deposit runoff was primarily rate driven, as the cost for replacement funds was lower than the market rate for time deposits. Core deposit growth remains a strategic objective of the Company.
Borrowings. Borrowings increased $87.8 million, or 11.8%, to $833.7 million at June 30, 2013, from $745.9 million at June 30, 2012. The Company utilized borrowings, primarily overnight borrowings, to contribute to the funding of loan originations. Short-term borrowings totaled $233.3 million at June 30, 2013 compared to $161.6 million at June 30, 2012. During the year ended June 30, 2013, the Company committed to $56.1 million in long term advances from the FHLB. These borrowings had a weighted average term of 8.8 years and a weighted average cost of 1.81%. The Company will continue to obtain longer term borrowings and modify FHLB-NY advances opportunistically. In August 2013, the Company committed to $30.0 million in FHLB advances with an average term of 8 years and a weighted average cost of 2.73%.
Stockholders' Equity. Stockholders' equity increased $8.0 million to $518.7 million at June 30, 2013, from $510.7 million at June 30, 2012. The increase was primarily due to net income and stock option exercises plus the release of ESOP and Equity Plan shares, partially offset by dividends, including a $0.40 special dividend paid in December, 2012. Based on our June 30, 2013 closing price of $15.68 per share, the Company stock was trading at 137.2% of book value.

Comparison of Operating Results for the Years Ended June 30, 2013 and June 30, 2012
Net Income. Net income increased $7.9 million, or 24.9%, to $39.5 million for the twelve months ended June 30, 2013, from $31.7 million for the corresponding 2012 period. The primary causes of the increased net income were increased net interest income and decreased provision for loan losses. Return on average assets was 1.43% for the twelve months ended June 30, 2013. Return on average equity was 7.68% for the twelve months ended June 30, 2013.
Total interest income. Total interest income increased $5.2 million, or 4.3%, to $127.2 million for the twelve months ended June 30, 2013, from $122.0 million for the twelve months ended June 30, 2012. The largest increase occurred in interest on loans, which increased $9.0 million, or 8.3%, to $117.4 million for the twelve months ended June 30, 2013, from $108.4 million for the twelve months ended June 30, 2012. Over that same period, the average balance of loans increased $318.1 million or 17.5%. The Company's primary focus is organic growth of multifamily and commercial real estate loans. While growth was achieved throughout


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the year, the growth rate slowed slightly in the second half of the fiscal year. Management has been reluctant to offering the terms required to maintain our prior pace of growth, particularly loans with a fixed rate period longer than 5 years. The recent increase in market rates has made current loan terms more palatable, and management believes the Company can return to growth levels previously achieved. The growth was primarily achieved through originations which totaled $653.8 million for the twelve months ended June 30, 2013 versus $543.8 million for the comparable 2012 period. The yield on the loan portfolio decreased 46 basis points for the twelve months ended June 30, 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. Prepayment penalties are recognized as interest on loans and impacted the loan yield in both periods. Prepayment penalties totaled $5.1 million for the twelve months ended June 30, 2013 versus $1.5 million for the comparable 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. Although market interest rates have increased recently, the current interest rate environment continues to provide an economic incentive for many of our existing borrowers to refinance. Prepayment penalties boosted annualized loan yield by 24 basis points for the twelve months ended June 30, 2013 versus 8 basis points for the comparable 2012 period. Another strategic business decision 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, 2011 and was made because the Company determined that the risk/reward profiles of permissible securities no longer warranted additional investment. The few purchases that occurred subsequent to that date were primarily to satisfy regulatory needs and were classified as held to maturity. The average balance of the primary investment category, mortgage-backed securities available for sale, decreased $154.2 million over the period. 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 . . .

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