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ORIT > SEC Filings for ORIT > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for ORITANI FINANCIAL CORP

Form 10-Q for ORITANI FINANCIAL CORP


8-Nov-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 September 30, 2013 and June 30, 2013 Total Assets. Total assets were essentially stable over the quarter, decreasing $8.3 million to $2.82 billion at September 30, 2013, from $2.83 billion at June 30, 2013.
Cash and Cash Equivalents. Cash and cash equivalents (which include fed funds and short term investments) decreased $2.4 million to $9.7 million at September 30, 2013, from $12.1 million at June 30, 2013.
Net Loans. Loans, net increased $9.3 million to $2.29 billion at September 30, 2013, from $2.28 billion at June 30, 2013. The annualized growth rate for the quarter was 1.6%, which is far below the Company's internal growth targets. Loan originations for the quarter totaled $101.8 million and principal payments totaled $92.8 million. The Company's loan pipeline has increased and management believes that origination totals may increase during the remainder of the fiscal year. The Company's loan pipeline totaled $128.3 million; $147.5 million and $263.3 million at June 30, 2013, September 30, 2013 and October 31, 2013, respectively. However, management has little control over the level of prepayments and an elevated level of prepayments will negatively impact the growth rate of the loan portfolio.


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Delinquency and non performing asset information is provided below:

                              9/30/2013       6/30/2013       3/31/2013      12/31/2012       9/30/2012
                                                       (Dollars in thousands)
Delinquency Totals
30-59 days past due         $    13,465     $     7,416     $     7,241     $     8,169     $    15,544
60-89 days past due               1,105           2,643           3,948           7,005           7,363
Nonaccrual                       23,760          23,910          24,304          29,401          26,275
Total                       $    38,330     $    33,969     $    35,493     $    44,575     $    49,182
Non Performing Asset Totals
Nonaccrual loans, per above $    23,760     $    23,910     $    24,304     $    29,401     $    26,275
Real Estate Owned                 1,937           1,742           4,361           2,817           2,837
Total                       $    25,697     $    25,652     $    28,665     $    32,218     $    29,112
Nonaccrual loans to total
loans                              1.02 %          1.03 %          1.07 %          1.32 %          1.22 %
Delinquent loans to total
loans                              1.65 %          1.47 %          1.57 %          2.01 %          2.28 %
Non performing assets to
total assets                       0.91 %          0.91 %          1.02 %          1.15 %          1.04 %

Total delinquent loans had decreased steadily since September 30, 2012. There was a change to the trend in the September 30, 2013 totals. The primary reason for the change was an increase in loans 30-59 days past due. There is one $6.1 million loan in this category at September 30, 2013 that is the primary cause of the increase. At this point, management does not foresee any significant issues regarding the ultimate collectability of this particular loan. The loan was current at October 31, 2013. As further described below, the metrics in the nonaccrual total are improving. Nonaccrual loans totaled $23.8 million at September 30, 2013. However, $4.1 million of this total consisted of loans that were fully current at September 30, 2013 and were included in the nonaccrual total as they had not yet demonstrated sufficient recent satisfactory performance. In addition, an agreement was reached with the largest remaining nonaccrual loan ($3.2 million) and it currently appears that loan may be returned to an accrual status if it demonstrates six months of satisfactory performance. Similar agreements were reached regarding other September 30, 2013 nonaccrual loans.

At September 30, 2013, there are nine nonaccrual loans with balances greater than $1.0 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 September 30, 2013, primarily due to a low estimated loan to value. Subsequent to September 30, 2013, a modification and extension agreement, with terms satisfactory to Oritani, was reached. This agreement has been classified as a troubled debt restructuring ("TDR"). As stated above, if the loan demonstrates six months of 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 September 30, 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 September 30, 2013. A forbearance agreement had previously been executed and the borrower generally complied with the payment demands of the Company over the quarter. Although the loan is currently classified as nonaccrual, it was current as of September 30, 2013. The Company continues to monitor the performance of this loan to determine if it is appropriate to remove it from the nonaccrual classification (although there can be no assurances that this will occur).

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 September 30, 2013. The borrower is in bankruptcy and the bankruptcy court has approved a plan for the sale of the property, and such plan is in process. There is a pending contract for sale of this property for $3.7 million. Regular payments have resumed on this loan including a small amount toward the delinquent balance.

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 September 30, 2013, primarily due to a low estimated loan to value. During the quarter ended September 30, 2013, a modification and extension agreement, with terms satisfactory to Oritani, was reached. This agreement includes a new guarantor and other credit


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enhancements and carries a market rate of interest. It is not considered a TDR. If the loan demonstrates six months of satisfactory performance it will be returned to accrual status (although there can be no assurances that this will occur).
Two loans totaling $4.2 million on two student housing facilities in Luzerne County, Pennsylvania. The loans are classified as impaired. In accordance with the results of the impairment analysis for the loans, there was a $1.2 million impairment reserve against the loans as of September 30, 2013 (including an increase of $472,000 in the September, 2013 quarter). Oritani is pursuing legal remedies as well as other avenues to secure repayment in full.

A $1.7 million loan on a retail building in Morris County, NJ. The loan is classified as impaired. In accordance with the results of the impairment analysis for this loan, a $163,000 impairment reserve remains against this loan as of September 30, 2013. During the quarter ended September 30, 2013, an agreement was reached regarding the total late fees and legal fee reimbursement to be paid to the Bank in conjunction with the delinquency. The Company currently expects that the loan will be brought fully current during the quarter ending March 31, 2014 (although there can be no assurances that this will occur). If this occurs, the performance of the loan will then be monitored to see if it can appropriately be returned to accrual status.

A $1.7 million loan on an office building in Somerset County, NJ. The loan is classified as impaired. In accordance with the results of the impairment analysis for this loan, a $292,000 impairment reserve remains against this loan as of September 30, 2013. This loan and the loan described directly above have the same borrower, and the same agreement was reached for this loan.

A $1.2 million loan on a lot and auto showroom in Bergen County, NJ. There had been no payment issues with the loan until it matured and extension terms could not be agreed upon. Subsequent to September 30, 2013, an extension agreement, with terms satisfactory to Oritani, was reached with the borrower. The loan meets our definition of impaired and is classified as such as of September 30, 2013.

There are nine other multifamily/commercial real estate loans, totaling $3.6 million, classified as nonaccrual at September 30, 2013. The largest of these loans has a balance of $780,000.
There are six other residential loans, totaling $777,000, classified as nonaccrual at September 30, 2013. The largest of these loans has a balance of $335,000.
Securities Available For Sale. Securities available for sale decreased $10.4 million to $295.9 million at September 30, 2013, from $306.3 million at June 30, 2013. During the quarter ended September 30, 2013, securities with an amortized cost of $3.4 million were sold, resulting in gross gains and gross losses of $15,100 and $18,600, respectively. The securities sold had low principal balances remaining.
Mortgage-backed Securities held to maturity. Mortgage-backed securities HTM decreased $10.4 million to $31.5 million at September 30, 2013, from $41.9 million at June 30, 2013. During the quarter ended September 30, 2013, securities with an amortized cost of $8.8 million were sold, resulting in gross gains and gross losses of $117,000 and $17,000, respectively. The securities sold had low principal balances remaining.
Bank Owned Life Insurance ("BOLI"). BOLI increased $6.5 million, or 10.9%, to $66.5 million at September 30, 2013, from $60.0 million at June 30, 2013, as additional BOLI investments were made over the quarter.
Real Estate Owned. Real estate owned ("REO") increased $195,000 to $1.9 million at September 30, 2013, from $1.7 million at June 30, 2013. During the quarter ended September 30, 2013, the Company took title to one property and disposed of one property. The $1.9 million balance consists of 4 properties. Deposits. Deposits were essentially stable over the quarter. Growth over the quarter totaled $5.0 million and the ending balance was approximately $1.42 billion at both September 30, 2013 and June 30, 2013. Core deposit balances increased $27.5 million over the quarter but this growth was largely offset by $22.5 million of outflows of time deposits.
Borrowings. Borrowings decreased $18.7 million to $815.0 million at September 30, 2013, from $833.7 million at June 30, 2013.
Stockholders' Equity. Stockholders' equity increased $8.0 million to $526.7 million at September 30, 2013, from $518.7 million at June 30, 2013. The increase was primarily due to net income partially offset by dividends and the exercise of stock options. During the quarter ending September 30, 2013, the Company had stock repurchases of 98,270 shares. The shares repurchased were shares that had vested to employees on August 19, 2013 in conjunction with the 2011 Equity Plan, that were surrendered by the employees in exchange for the estimated taxes due on the vesting. The cost per share for the transaction was the closing market price on August 19, 2013, or $15.96. The total value of the shares repurchased was $1.6 million. At September 30, 2013, there are 1,703,111 shares yet to be purchased under the current stock repurchase plan. Based on our September 30, 2013 closing price of $16.46 per share, the Company stock was trading at 142.7% of book value.


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Average Balance Sheet for the Three Months Ended September 30, 2013 and 2012 The following table presents certain information regarding Oritani Financial Corp.'s financial condition and net interest income for the three months ended September 30, 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.

                                                      Average Balance Sheet and Yield/Rate Information
                                                           For the Three Months Ended (unaudited)
                                               September 30, 2013                             September 30, 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)                        $  2,276,193     $      30,061          5.28 %   $  2,019,479     $  29,082          5.76 %
Federal Home Loan Bank Stock           42,355               439          4.15 %         38,583           407          4.22 %
Securities available for sale          12,073                51          1.69 %         20,178            74          1.47 %
Mortgage backed securities held
to maturity                            40,475               242          2.39 %         35,830           234          2.61 %
Mortgage backed securities
available for sale                    297,604             1,341          1.80 %        458,944         2,024          1.76 %
Federal funds sold and short
term investments                        8,306                 5          0.25 %          1,577             1          0.25 %
Total interest-earning assets       2,677,006            32,139          4.80 %      2,574,591        31,822          4.94 %
Non-interest-earning assets           139,378                                          123,017
Total assets                     $  2,816,384                                     $  2,697,608
Interest-bearing liabilities:
Savings deposits                      168,690                98          0.23 %        165,280            97          0.23 %
Money market                          409,075               497          0.49 %        443,406           559          0.50 %
Checking accounts                     386,881               438          0.45 %        212,919           135          0.25 %
Time deposits                         453,060               991          0.87 %        552,143         1,543          1.12 %
Total deposits                      1,417,705             2,024          0.57 %      1,373,748         2,334          0.68 %
Borrowings                            824,325             5,522          2.68 %        753,221         5,298          2.81 %
Total interest-bearing
liabilities                         2,242,030             7,546          1.35 %      2,126,969         7,632          1.44 %
Non-interest-bearing liabilities       50,331                                           55,392
Total liabilities                   2,292,361                                        2,182,361
Stockholders' equity                  524,023                                          515,247
Total liabilities and
stockholders' equity             $  2,816,384                                     $  2,697,608
Net interest income                               $      24,593                                    $  24,190
Net interest rate spread (2)                                             3.45 %                                       3.50 %
Net interest-earning assets (3)  $    434,976                                     $    447,623
Net interest margin (4)                                                  3.67 %                                       3.76 %
Average of interest-earning
assets to interest-bearing
liabilities                                                            119.40 %                                     121.05 %

(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.


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Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012
Net Income. Net income increased $1.2 million to $10.4 million for the quarter ended September 30, 2013, from $9.2 million for the corresponding 2012 quarter. The primary cause of the increased income was a lower provision for loan losses as well as increased net interest income and increased other income, partially offset by increased other expenses. Our annualized return on average assets was 1.47% for the quarter ended September 30, 2013, and 1.37% for the quarter ended September 30, 2012.
Interest Income. Total interest income increased $317,000, to $32.1 million for the three months ended September 30, 2013, from $31.8 million for the three months ended September 30, 2012. The components of interest income changed as follows:

                                   Three Months Ended September 30.                    Increase / (decrease)
                                     2013                       2012                          Average
                                 $            Yield         $         Yield         $         Balance       Yield
                                                           (Dollars in thousands)
Interest on mortgage
loans                    $    30,061           5.28 %   $ 29,082       5.76 %   $   979     $ 256,714       (0.48 )%
Dividends on FHLB stock          439           4.15 %        407       4.22 %        32         3,772       (0.07 )%
Interest on securities
AFS                               51           1.69 %         74       1.47 %       (23 )      (8,105 )      0.22  %
Interest on MBS HTM              242           2.39 %        234       2.61 %         8         4,645       (0.22 )%
Interest on MBS AFS            1,341           1.80 %      2,024       1.76 %      (683 )    (161,340 )      0.04  %
Interest on federal
funds sold and short
term investments                   5           0.25 %          1       0.25 %         4         6,729           -  %
Total interest income    $    32,139           4.80 %   $ 31,822       4.94 %   $   317     $ 102,415       (0.14 )%

The changes above show the results of two of the Company's previously discussed strategic business decisions. The Company's primary focus continues to be the organic growth of multifamily and commercial real estate loans. Over the trailing twelve months, the average balance of loans grew $256.7 million. The largest component of the increase in total interest income was in interest on mortgage loans. Loan originations for the quarter ended September 30, 2013 were $101.8 million. The originations for the quarter were somewhat below the pace necessary to attain the Company's target goal for the fiscal year of $500 million. Management believes it has implemented the pricing changes necessary in order to achieve the target goal and recent loan activity has increased. The yield on the loan portfolio decreased 48 basis points for the quarter ended September 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 repricings. Prepayment penalties are recognized as interest on loans. These penalties, which significantly impacted both periods, were higher in the 2013 period. Prepayment penalties totaled $1.8 million in the 2013 period versus $1.4 million in the 2012 period. Prepayment penalties boosted the annualized loan yield by 31 basis points in the 2013 period and 28 basis points 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 protect the Company from the prepayment of loans and provide the Company with compensation if the loan is prepaid. Management had expected that the recent increases in market rates of interest on loans would decrease prepayment activity; however, this has not occurred. The second strategic business decision evidenced in the chart 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 decision aided overall yield on interest earning assets as the Company had a lower percentage of its interest earning assets in lower yielding assets like MBS, investment securities and federal funds sold. Consequently, there were significant decreases in the average balances of mortgage backed securities ("MBS") available for sale ("AFS") and investment securities AFS. FHLB stock increased due to required purchases in conjunction with borrowings and MBS held to maturity ("HTM") increased due to purchases necessitated by compliance with Community Reinvestment Act requirements. Prospectively, however, the Company will likely deploy the cash flows from the investment portfolio back into approved investments. Due to regulatory and liquidity considerations, management believes the current level of investments should be the approximate minimum for the Company. This decision will likely positively impact our asset growth rate but negatively impact our spread and margin.
Interest Expense. Total interest expense decreased $86,000, to $7.5 million for the three months ended September 30, 2013, from $7.6 million for the three months ended September 30, 2012. The components of interest expense changed as follows:


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                                Three Months Ended September 30,                 Increase / (decrease)
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