Oritani Financial Co

ORIT
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17.79USD
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ORITANI FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/11/2019 | 07:22 pm

Forward Looking Statements




This Quarterly Report on Form 10-Q contains certain "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Such forward looking statements may be
identified by reference to a future period or periods, or by use of forward
looking terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on those terms, or the
negative of those terms. Forward looking statements are subject to numerous
risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements in
addition to those risk factors disclosed in Oritani Financial Corp's (the
Company's) Annual Report on Form 10-K for the year ended June 30, 2018, include,
but are not limited to, those related to the economic environment, particularly
in the market areas in which 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




The Company is a Delaware corporation that was incorporated in March 2010. The
Company is the stock holding company of Oritani Bank (the "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. The
Company had previously engaged in limited lending to the real estate investment
properties in which (either directly or through a subsidiary) it maintained an
ownership interest. The Company no longer has any lending activities or
ownership of investment properties.

The Bank's principal business consists of attracting retail, commercial and
municipal bank deposits from the general public and investing those deposits,
together with funds generated from operations and borrowed funds, in multifamily
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 purchase loans or enter into loan
participations. The Bank's primary sources of funds are deposits, borrowings,
investment maturities and principal and interest payments on loans and
securities. The Bank's revenues are derived principally from interest on loans
and securities. The Bank also generates revenue from fees, 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 re-pricing of interest-earning assets and interest-bearing
liabilities, and the prepayment rate on its mortgage-related assets. Provisions
for loan losses and asset valuation 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, business, and municipal customers. The Bank's primary focus has
been, and will continue to be, organic growth in multifamily and commercial real
estate lending.


In December 2017, Oritani Bank (the "Bank"), the wholly owned subsidiary
of Oritani Financial Corp. (the "Company"), entered into an informal agreement
("Informal Agreement") with the Federal Deposit Insurance Corporation ("FDIC")
and the New Jersey Department of Banking and Insurance ("NJDOBI") with regard to
Bank Secrecy Act ("BSA") and Anti-Money Laundering ("AML") compliance matters.
The Company has incurred expenses associated with the remediation of these
matters of $400,000 and $1.5 million for the three and six months ended December
31, 2018
, respectively. There was minimal corresponding expense in the 2017
periods. The Company believes that significant progress has been made regarding
the remediation of these matters and that the majority of the associated costs
have been expended and expensed.

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Index



Comparison of Financial Condition at December 31, 2018 and June 30, 2018




Total Assets. Total assets decreased $77.0 million to $4.09 billion at December
31, 2018
, from $4.17 billion at June 30, 2018. The primary contributor to the
decreased asset level was the contraction in loan balances.

Cash and Cash Equivalents. Cash and cash equivalents (which include fed funds
and short term investments) decreased $15.7 million to $19.1 million at December
31, 2018
, from $34.8 million at June 30, 2018.

Net Loans. Loans, net decreased $57.7 million to $3.48 billion at December 31,
2018
, from $3.54 billion at June 30, 2018. Loans, net decreased $18.8 million
over the quarter ended December 31, 2018. The Company's primary strategic
business objective remains the organic growth of multifamily and commercial real
estate loans. As discussed in the Company's Form 10-Q for the period ended
September 30, 2018, the market to originate such loans has been particularly
challenging in recent periods. The market did not change significantly over the
past quarter and the Company continued to experience decreased loan balances, an
elevated level of loan prepayments and robust prepayment fee income.

Despite present conditions, the Company generated increased originations in the
December 2018 quarter versus the September 2018 quarter. However, loan
principal payments increased further over the elevated total for the September
quarter. The Company also purchased $114.4 million of loans in the December
quarter to partially mitigate the impact of the prepayment level. The loans
purchased were multifamily loans within its CRE lending area which fully
comported with the Company's underwriting standards. The Company will continue
to purchase loans opportunistically in order to maintain, and ultimately
increase, loan balances. The average balance of the loan portfolio decreased
$99.0 million for the three months ended December 31, 2018 versus the three
months ended September 30, 2018. Loan originations, purchases and principal
payments totaled $107.6 million, $114.4 million and $241.7 million,
respectively, for the three months ended December 31, 2018, versus $82.0
million
, $0 and $123.5 million, respectively, for the three months ended
September 30, 2018. There were no loan purchases in the September 2018
quarter. The decrease in the average balance ($99.0 million) was much greater
than the decrease in the period end balance ($18.8 million) as the loan
purchases occurred toward the end of the December period and the majority of the
originations also occurred in December. The Company's loan pipeline was $106.3
million
at December 31, 2018 versus $79.8 million as of September 30, 2018.

The average balance of the loan portfolio decreased $115.3 million, or 3.3%, for
the three months ended December 31, 2018 versus the comparable 2017 period.
Loan originations, purchases and principal payments totaled $109.3 million,
$52.8 million and $138.3 million, respectively, for the three months ended
December 31, 2017. The average balance of the loan portfolio decreased $76.7
million
for the six months ended December 31, 2018 versus the comparable 2017
period. Loan originations, purchases and principal payments for the six months
ended December 31, 2018 totaled $189.7 million, $114.4 million and $365.2
million
, respectively. Loan originations, purchases and principal payments for
the six months ended December 31, 2017 totaled $256.8 million, $52.8 million and
$291.3 million, respectively. Delinquency and non performing asset information
is provided below:

12/31/2018 9/30/2018


6/30/2018 3/31/2018 12/31/2017



(Dollars in thousands)
Delinquency Totals
30-59 days past due $ 2,890 $ 15,261 $ 5,253 $ 9,772 $ 3,166
60-89 days past due 8,431 356 171 472 142
Nonaccrual 10,706 9,083 7,877 11,887 14,489
Total $ 22,027 $ 24,700 $ 13,301 $ 22,131 $ 17,797
Non Performing Asset Totals
Nonaccrual loans, per above $ 10,706 $ 9,083 $ 7,877 $ 11,887 $ 14,489
Real Estate Owned 636 1,564 1,564 636 -
Total $ 11,342 $ 10,647 $ 9,441 $ 12,523 $ 14,489
Nonaccrual loans to total loans 0.30 % 0.26 % 0.22 % 0.33 % 0.40 %
Delinquent loans to total loans 0.63 % 0.70 % 0.37 % 0.61 % 0.49 %
Non performing assets to total
assets 0.28 % 0.26 % 0.23 % 0.30 % 0.35 %



Overall, non-performing asset totals and charge-offs continue to illustrate
minimal credit issues at the Company. Subsequent to December 31, 2018, an $8.1
million
loan included in the 60-89 days past due total above, was sold at par
plus accrued interest.

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Index



Debt Securities available for sale. Debt securities AFS decreased $7.4 million
to $37.3 million at December 31, 2018, from $44.7 million at June 30, 2018.



The



decrease is primarily due to principal payments.




Debt Securities held to maturity. Debt securities HTM increased $13.4 million
to $348.8 million at December 31, 2018, from $335.4 million at June 30, 2018.
The increase is primarily due to purchases of $43.5 million exceeding principal
payments of $30.1 million. The Company has been classifying the majority of new
purchases as held to maturity.

Federal Home Loan Bank of New York ("FHLB") stock. FHLB stock decreased $2.0
million
to $28.3 million at December 31, 2018, from $30.4 million at June 30,
2018
. FHLB stock holdings are required depending on several factors, including
the level of borrowings with the FHLB. As FHLB borrowings decreased over the
period, excess FHLB stock was redeemed.

Deposits. Deposits decreased $11.9 million to $2.90 billion at December 31,
2018
, from $2.92 billion at June 30, 2018. Strong deposit growth remains a
strategic objective of the Company. As discussed in the Company's Form 10-Q for
the period ended September 30, 2018, deposit growth has been particularly
difficult to attain in the current environment. The Company has increased the
rates of interest offered on various deposit products in order to maintain
balances. The Company has been largely successful in minimizing the outflow of
deposits, however sizeable growth was not obtained. As compared to the quarter
ended September 30, 2018, the average balance of deposits increased $10.8
million
and period end balances decreased $20.8 million. The period end
balances were impacted by a decrease in brokered funds of $41.6 million. Absent
the effect of brokered funds, period end balances increased $20.8 million. The
Company recently upwardly adjusted pricing on its municipal deposit checking
portfolio and offered a premium rate savings account. The Company's loan to
deposit ratio decreased to 120.0% at December 31, 2018.

Borrowings. Borrowings decreased $27.7 million to $568.7 million at December
31, 2018
, from $596.4 million at June 30, 2018. The decrease is primarily a
function of the Company's decreased total assets at December 31, 2018,
particularly decreased loan balances.

Stockholders' Equity. Stockholders' equity decreased $32.3 million to $527.1
million
at December 31, 2018, from $559.3 million at June 30, 2018. The
decrease was primarily due to dividends and stock repurchases, partially offset
by net income and the release of treasury shares in conjunction with stock
option exercises. During the quarter ended December 31, 2018, the Company
repurchased 1,871,979 shares of its common at a total cost of $28.5 million for
an average price of $15.20 per share. Based on our December 31, 2018 closing
price of $14.75 per share, the Company stock was trading at 125.2% of book
value.



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Index



Average Balance Sheet for the Three and Six Months ended December 31, 2018 and
2017




The following tables present certain information regarding Oritani Financial
Corp.'s
financial condition and net interest income for the three and six months
ended December 31, 2018 and 2017. 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)
December 31, 2018 December 31, 2017
Average Average Interest
Outstanding Interest Average Outstanding Earned/ Average
Balance Earned/Paid Yield/Rate Balance Paid Yield/Rate



Interest-earning assets: (Dollars in thousands)
Loans (1) $ 3,428,120 $ 36,085 4.21 % $ 3,543,438 $ 35,891 4.05 %
Federal Home Loan Bank
Stock 26,859 481 7.16 % 26,352 451 6.85 %
Equity securities 1,412 12 3.40 % 1,578 12 3.04 %
Securities available for
sale 38,708 222 2.29 % 84,968 445 2.09 %
Securities held to
maturity 335,958 2,002 2.38 % 241,852 1,145 1.89 %
Federal funds sold and
short term investments 48,914 280 2.29 % 33,437 108 1.29 %
Total interest-earning
assets 3,879,971 39,082 4.03 % 3,931,625 38,052 3.87 %
Non-interest-earning
assets 207,260 219,737
Total assets $ 4,087,231 $ 4,151,362
Interest-bearing
liabilities:
Savings deposits 284,417 641 0.90 % 179,194 104 0.23 %
Money market 680,221 1,863 1.10 % 843,671 2,354 1.12 %
Checking accounts 736,647 2,116 1.15 % 751,532 1,111 0.59 %
Time deposits 1,219,376 5,319 1.74 % 1,189,774 4,219 1.42 %
Total deposits 2,920,661 9,939 1.36 % 2,964,171 7,788 1.05 %
Borrowings 517,461 3,116 2.41 % 513,794 2,656 2.07 %
Total interest-bearing
liabilities 3,438,122 13,055 1.52 % 3,477,965 10,444 1.20 %
Non-interest-bearing
liabilities 103,617 104,699
Total liabilities 3,541,739 3,582,664
Stockholders' equity 545,492 568,698
Total liabilities and
stockholders' equity $ 4,087,231 $ 4,151,362
Net interest income $ 26,027 $ 27,608
Net interest rate spread
(2) 2.51 % 2.67 %
Net interest-earning
assets (3) $ 441,849 $ 453,660
Net interest margin (4) 2.68 % 2.81 %
Average of
interest-earning assets to
interest-bearing
liabilities 112.85 % 113.04 %




(1) Average Outstanding Balance includes nonaccrual loans and interest earned



includes prepayment income.



(2) Net interest rate spread represents the difference between the yield on



average interest-earning assets and the cost of average interest-bearing



liabilities.



(3) Net interest-earning assets represents total interest-earning assets less



total interest-bearing liabilities.



(4) Net interest margin represents net interest income divided by average total



interest-earning assets.


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Index

Average Balance Sheet and Yield/Rate Information
For the Six Months Ended (unaudited)
December 31, 2018 December 31, 2017



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) $ 3,477,602 $ 72,037 4.14 % 3,554,270 $ 71,728 4.04 %
Federal Home Loan Bank
Stock 27,253 929 6.82 % 28,170 936 6.65 %
Equity securities 1,470 22 2.99 % 1,535 24 3.13 %
Securities available for
sale 40,343 462 2.29 % 89,420 929 2.08 %
Securities held to
maturity 334,974 3,931 2.35 % 239,175 2,244 1.88 %
Federal funds sold and
short term investments 26,627 302 2.27 % 17,331 111 1.28 %
Total interest-earning
assets 3,908,269 77,683 3.98 % 3,929,901 75,972 3.87 %
Non-interest-earning
assets 206,004 207,554
Total assets $ 4,114,273 $ 4,137,455
Interest-bearing
liabilities:
Savings deposits 242,358 831 0.69 % 178,209 205 0.23 %
Money market 718,334 3,920 1.09 % 849,399 4,736 1.12 %
Checking accounts 730,026 3,775 1.03 % 733,283 2,083 0.57 %
Time deposits 1,224,558 10,450 1.71 % 1,162,669 8,117 1.40 %
Total deposits 2,915,276 18,976 1.30 % 2,923,560 15,141 1.04 %
Borrowings 544,237 6,385 2.35 % 553,400 5,579 2.02 %
Total interest-bearing
liabilities 3,459,513 25,361 1.47 % 3,476,960 20,720 1.19 %
Non-interest-bearing
liabilities 101,584 94,396
Total liabilities 3,561,097 3,571,356
Stockholders' equity 553,176 566,099
Total liabilities and
stockholders' equity $ 4,114,273 $ 4,137,455
Net interest income $ 52,322 $ 55,252
Net interest rate spread
(2) 2.51 % 2.68 %
Net interest-earning
assets (3) $ 448,756 $ 452,941
Net interest margin (4) 2.68 % 2.81 %
Average of
interest-earning assets
to interest-bearing
liabilities 112.97 % 113.03 %




(1) Average Outstanding Balance includes nonaccrual loans and interest earned



includes prepayment income.



(2) Net interest rate spread represents the difference between the yield on



average interest-earning assets and the cost of average interest-bearing



liabilities.



(3) Net interest-earning assets represents total interest-earning assets less



total interest-bearing liabilities.





(4) Net interest margin represents net interest income divided by average total
interest-earning assets.




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Index



Comparison of Operating Results for the Three Months ended December 31, 2018 and
2017

Net Income. Net income increased $9.5 million to $13.4 million for the quarter
ended December 31, 2018, from $4.0 million for the corresponding 2017 quarter.
The most significant factor regarding the increased income is changes in income
tax expense as pretax income was relatively consistent between the periods.
Results in the 2017 period were impacted by the Tax Cuts and Jobs Act (the
"Act") that was signed into law on December 22, 2017. The Act lowered the
Company's prospective tax rate. The Act also required the Company to revalue
its deferred tax assets and deferred tax liabilities to account for the future
impact of lower corporate tax rates on these deferred amounts. The revaluation
resulted in a one-time charge of $10.2 million in the December 31, 2017 period.
Excluding the impact of this non-recurring charge, net income for the quarter
ended December 31, 2017 was $12.9 million, or $0.29 per basic (and $0.28
diluted) common share.

Interest Income. Total interest income increased $1.0 million to $39.1 million
for the three months ended December 31, 2018, from $38.1 million for the three
months ended December 31, 2017. Interest income on loans increased $194,000 to
$36.1 million for the three months ended December 31, 2018, from $35.9 million
for the three months ended December 31, 2017. The decrease in the average
balance of loans, as discussed in "Comparison of Financial Condition at
December 31, 2018 and June 30, 2018, Net Loans," impacted loan interest income.

The yield on the loan portfolio increased 16 basis points for the quarter ended
December 31, 2018 versus the comparable 2017 period. On a linked quarter basis
(December 31, 2018 versus September 30, 2018), the yield on the loan portfolio
increased 13 basis points. The level of prepayment income impacted these
results. Exclusive of prepayment penalties, the yield on the loan portfolio
increased 14 basis points versus the quarter ended December 31, 2017 and 6 basis
points versus the September 30, 2018 quarter. Prepayment penalties totaled $1.7
million
, $1.2 million and $1.6 million for the quarters ended December 31, 2018,
September 30, 2018 and December 31, 2017, respectively. In addition to
prepayment penalties, the prepayment level also impacted the loan yield through
the realization of deferred loan fees. While loan fees are regularly amortized
into income, loan prepayments accelerate the recognition of these fees as
income. Deferred loan fees recognized as interest income totaled $687,000,
$468,000 and $496,000 for the quarters ended December 31, 2018, September 30,
2018
and December 31, 2017, respectively.

Interest income on debt securities AFS decreased $223,000 to $222,000 for the
three months ended December 31, 2018, from $445,000 for the three months ended
December 31, 2017. Interest income on debt securities HTM increased $857,000 to
$2.0 million for the three months ended December 31, 2018, from $1.1 million for
the three months ended December 31, 2017. The average balance of debt
securities available for sale decreased $46.3 million for the three months ended
December 31, 2018 versus the comparable 2017 period, while the average balance
of debt securities held to maturity increased $94.1 million over the same
period. The Company has been classifying the majority of new purchases as held
to maturity.
Interest Expense. Total interest expense increased $2.6 million to $13.1 million
for the three months ended December 31, 2018, from $10.4 million for the three
months ended December 31, 2017. The average balance of deposits, as discussed
in "Comparison of Financial Condition at December 31, 2018 and June 30, 2018,
Deposits," impacted interest expense on deposits. The overall cost of deposits
increased 31 basis points for the quarter ended December 31, 2018 versus the
comparable 2017 period. The increased costs are primarily due to the impact of
market pressures. In response to market pressures, the Company recently
upwardly adjusted pricing on its municipal deposit checking portfolio and
offered a premium rate savings account.
Interest expense on borrowings increased $460,000 to $3.1 million for the three
months ended December 31, 2018, from $2.7 million for the three months ended
December 31, 2017. The cost of borrowings increased 34 basis points. The cost
of borrowings has been impacted by the overall increase in interest rates,
particularly overnight and short term borrowings.




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Index



Net Interest Income Before Provision for Loan Losses. Net interest income
decreased by $1.6 million to $26.0 million for the three months ended December
31, 2018
, from $27.6 million for the three months ended December 31, 2017.
The Company's net interest income, spread and margin over the period are
detailed in the chart below.

Net Interest
Income
Before
Provision,
Net Interest Prepayment Excluding
Income Before Penalty Prepayment Including Prepayment Penalties Excluding Prepayment Penalties
Quarter
Ended Provision Income Penalties Spread Margin Spread Margin
(Dollars in thousands)
December 31,
2018 $ 26,027 $ 1,727 $ 24,300 2.51 % 2.68 % 2.33 % 2.51 %
September
30, 2018 26,295 1,154 25,141 2.51 % 2.67 % 2.40 % 2.55 %
June 30,
2018 27,721 1,836 25,885 2.65 % 2.81 % 2.47 % 2.63 %
March 31,
2018 26,953 553 26,400 2.60 % 2.74 % 2.54 % 2.68 %
December 31,
2017 27,608 1,638 25,970 2.67 % 2.81 % 2.50 % 2.64 %




The Company's spread and margin have been significantly impacted by prepayment
penalties. Due to this situation, the chart above details results with and
without the impact of prepayment penalties. Net interest income before
provision for loan losses, excluding prepayment penalties, is a non-GAAP
financial measure since it excludes a component (prepayment penalty income) of
net interest income and therefore differs from the most directly comparable
measure calculated in accordance with GAAP. The Company believes the
presentation of this non-GAAP financial measure is useful because it provides
information to assess the underlying performance of the loan portfolio since
prepayment penalty income can be expected to change as interest rates change.
While prepayment penalty income is expected to continue, fluctuations in the
level of prepayment income are also expected. The level of prepayment income is
generally expected to decrease as external interest rates increase since
borrowers would have less of an incentive to refinance existing loans. However,
the time period when these events could occur may not align, and the specific
behavior of borrowers is difficult to predict. Borrowers can be driven to
prepay their loans based on factors other than interest rates. The level of
loan prepayments and prepayment income experienced by the Company has been
elevated (versus historical levels) despite generally increased interest rates
during the majority of the period.

The Company's spread and margin have been under pressure due to several factors,
including a flattening treasury yield curve, modifications of loans within the
existing loan portfolio, prepayments of higher yielding loans and investments,
and increased funding costs. The Company executed a previously disclosed balance
sheet restructuring partially to counter a portion of the spread and margin
compression resulting from these factors. While spread and margin have been
under pressure for an extended period, the competitive market for deposits
increased substantially in fiscal 2019. As described above, the Company has
recently realized increases in both the cost of funds and the yield on interest
earning assets. The level of loan prepayments contributed to the increase in
the yield on interest earning assets.


The Company's net interest income and net interest rate spread were both
negatively impacted due to the reversal of accrued interest income on loans
delinquent 90 days or more. The total of such income reversed was $62,000 and
$128,000 for the three months ended December 31, 2018 and 2017, respectively.



43



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Index



Provision for Loan Losses. The Company recorded no provision for loan losses for
the three months ended December 31, 2018 and December 31, 2017. A rollforward of
the allowance for loan losses for the three months ended December 31, 2018 and
2017 is presented below:

Three months ended December 31,
2018 2017
(Dollars in thousands)
Balance at beginning of period $ 28,565 $ 30,402
Provisions charged to operations - -
Recoveries of loans previously charged off 74 -
Loans charged off - -
Balance at end of period $ 28,639 $ 30,402
Allowance for loan losses to total loans 0.81 % 0.84 %
Net charge-offs (annualized) to average loans outstanding (0.01 )% -




Non-interest Income. Non-interest income increased $1.0 million to $1.6 million
for the three months ended December 31, 2018, from $623,000 for the three months
ended December 31, 2017. The increase is primarily due to a gain of $855,000 on
the sale of a foreclosed property. This increase was partially offset by a
$155,000 decrease in fair value of equity securities held by the Company. The
2017 period includes a loss of $324,000 on the sale of certain AFS investment
securities. There were no sales of securities in the 2018 period.

Non-interest Expenses. Non-interest expenses decreased $465,000 to $9.7 million
for the three months ended December 31, 2018, from $10.2 million for the three
months ended December 31, 2017. The decrease was primarily due to compensation,
payroll taxes and fringe benefits, which decreased $1.7 million to $5.5 million
for the three months ended December 31, 2018, from $7.1 million for the three
months ended December 31, 2017. The decrease was primarily due to decreased
ESOP related expenses as well as decreased costs associated with the incentive
and non-qualified benefit plans. These decreases were partially offset by an
increase in other expenses, which increased $1.2 million to $2.6 million for the
three months ended December 31, 2018, from $1.4 million for the three months
ended December 31, 2017. The increase in other expenses was due to increased
pension contribution costs and costs associated with Bank Secrecy Act ("BSA")
and Anti-Money Laundering ("AML") compliance matters as discussed in previous
releases. The Company incurred expenses associated with the remediation of
these matters of $400,000 for the three months ended December 31, 2018. There
was minimal corresponding expense in the 2017 period.

Income Tax Expense. Income tax expense for the three months ended December 31,
2018
was $4.5 million on pre-tax income of $17.9 million, resulting in an
effective tax rate of 25.1%. Income tax expense for the three months ended
December 31, 2017 was $14.0 million. Income tax expense for the 2017 period was
significantly impacted by the Act, as previously discussed in "Comparison of
Operating Results for the Three months ended December 31, 2018 and 2017, Net
Income." The decrease in effective tax rate in the 2018 period was the result
of the enactment of the Act. The benefit of the lower federal tax rate in 2018
was partially offset by the impact of New Jersey ("NJ") tax legislation enacted
on July 1, 2018 that imposes a temporary surtax of 2.5% for tax years beginning
on or after January 1, 2018 through December 31, 2019, and 1.5% for tax years
beginning on or after January 1, 2020 through December 31, 2021. The
legislation also requires mandatory unitary combined filing for members of an
affiliated group for tax years beginning on or after January 1, 2019. The
Company reports earnings on a fiscal year basis and the increased income tax
implications of the NJ legislation are partially recognized by the Company
ratably over the course of the fiscal year ending June 30, 2019. The full
impact of the legislation will be recognized in the fiscal year ending June 30,
2020
. The Company's estimated effective tax rate for the fiscal year ending
June 30, 2019 is 25.0%. The Company's estimated effective tax rate is expected
to increase subsequent to the fiscal year ending June 30, 2019. The legislation
required a revaluation of our deferred tax assets/liabilities based on the rates
at which they are expected to reverse in the future.

44



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Index



Comparison of Operating Results for the Six Months ended December 31, 2018 and
2017




Net Income. Net income increased $10.9 million to $26.8 million for the six
months ended December 31, 2018, from $16.0 million for the corresponding 2017
period. Results for the 2017 period were also significantly impacted by the Act,
as discussed in "Comparison of Operating Results for the Three Months ended
December 31, 2018 and 2017, Net Income."

Interest Income. Total interest income increased $1.7 million to $77.7 million
for the six months ended December 31, 2018, from $76.0 million for the six
months ended December 31, 2017. The explanations provided in "Comparison of
Operating Results for the Three Months ended December 31, 2018 and 2017,
Interest Income" are also largely applicable to the six month period comparison.
Loan originations, purchases and principal payments for the six months ended
December 31, 2018 totaled $189.7 million, $114.4 million and $365.2 million,
respectively. Loan originations, purchases and principal payments for the six
months ended December 31, 2017 totaled $256.8 million, $52.8 million and $291.3
million
, respectively. Prepayment penalties totaled $2.9 million for both the
six months ended December 31, 2018 and 2017. Prepayment penalties boosted
annualized loan yield by 16 basis points in the 2018 period versus 17 basis
points in the 2017 period.

Interest Expense. Total interest expense increased $4.6 million to $25.4 million
for the six months ended December 31, 2018, from $20.7 million for the six
months ended December 31, 2017. The explanations provided in "Comparison of
Operating Results for the Three Months ended December 31, 2018 and 2017,
Interest Expense" regarding deposits and borrowings are also largely applicable
to the six month period comparison.

Net Interest Income Before Provision for Loan Losses. Net interest income
decreased by $2.9 million to $52.3 million for the six months ended December 31,
2018
, from $55.3 million for the six months ended December 31, 2017. The
explanations and information contained in "Comparison of Operating Results for
the Three Months ended December 31, 2018 and 2017, Net Interest Income Before
Provision for Loan Losses" are also applicable to the six month comparison. The
total reversal of accrued interest income on loans delinquent 90 days or more
was $135,000 and $206,000 for the six months ended December 31, 2018 and 2017,
respectively.

Provision for Loan Losses. The Company recorded a reversal of provision for loan
losses of $2.0 million for the six months ended December 31, 2018 and no
provision for loan losses for the six months ended December 31, 2017. A
rollforward of the allowance for loan losses for the six months ended December
31, 2018
and 2017 is presented below:

Six Months ended December 31,
2018 2017
(Dollars in thousands)
Balance at beginning of period $ 30,562 $ 30,272
Provisions charged to operations (2,000 ) -
Recoveries of loans previously charged off 77 152
Loans charged off - (22 )
Balance at end of period $ 28,639 $ 30,402
Allowance for loan losses to total loans 0.81 % 0.84 %
Net charge-offs (annualized) to average loans outstanding - (0.01 )%



The $2.0 million reversal of provision for loan losses recorded for the 2018
period was due primarily to loan portfolio contraction and reduced qualitative
factors within the allowance calculation as determined as part of our quarterly
reassessment.


See also delinquency information contained in "Comparison of Financial Condition
at December 31, 2018 and June 30, 2018, Net Loans" and footnote 6 of the
consolidated financial statements.




Non-interest Income. Non-interest income increased $870,000 to $2.5 million for
the six months ended December 31, 2018 from $1.6 million for the six months
ended December 31, 2017. Results were impacted by the factors described in
"Comparison of Operating Results for the Three Months ended December 31, 2018
and 2017, Non-interest Income." The decrease in fair value of equity securities
was more pronounced in the six month period, totaling $274,000.

Non-interest Expense. Non-interest expenses increased $651,000 to $20.4 million
for the six months ended December 31, 2018, from $19.7 million for the six
months ended December 31, 2017. Results were impacted by the factors described
in "Comparison of Operating Results for the Three Months ended December 31, 2018
and 2017, Non-interest Expense." The increase in other expenses was more
pronounced in the six month period. The Company has incurred expenses
associated with BSA and AML matters of $1.5 million for the six months ended
December 31, 2018. There was no corresponding expense in the 2017 period. The
Company believes that significant progress has been made regarding the
remediation of these matters and that the majority of the associated costs have
been expended and expensed.

Income Tax Expense. Income tax expense for the six months ended December 31,
2018
, was $9.6 million, due to pre-tax income of $36.4 million, resulting in an
effective tax rate of 26.3%. Income tax expense for the six months ended
December 31, 2017 was $21.2 million. Please see "Comparison of Operating
Results for the Three Months ended December 31, 2018 and 2017, Net Income and
Income Tax Expense" for commentary on items that impacted both the six month
periods. In addition, the NJ tax legislation enacted on July 1, 2018 required a
revaluation of the Company's deferred tax balances which resulted in a one-time
non-cash charge of $477,000 and is included in income tax expense for the six
months ended December 31, 2018.
45



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Index



Liquidity and Capital Resources




The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB borrowings and investment
maturities. While scheduled amortization of loans is a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Company has other
sources of liquidity if a need for additional funds arises, including advances
from the FHLB and Federal Reserve Bank of New York.

At December 31, 2018 and June 30, 2018, the Company had $39.0 million and $99.0
million
in overnight borrowings, respectively. The Company had total
borrowings of $568.7 million at December 31, 2018 and $596.4 million at June 30,
2018
. The Company's total borrowings at December 31, 2018 include $529.7 million
in longer term borrowings, $500.6 million with the FHLB and $29.0 million with
another financial institution.

In the normal course of business, the Company routinely enters into various
commitments, primarily relating to the origination of loans. At December 31,
2018
, outstanding commitments to originate loans totaled $30.3 million and
outstanding commitments to extend credit totaled $30.4 million. The Company
expects to have sufficient funds available to meet current commitments in the
normal course of business.

Time deposits scheduled to mature in one year or less totaled $860.4 million at
December 31, 2018. Based upon historical experience, management estimates that a
large portion of such deposits will remain with the Company. The portion that
remains will be significantly impacted by the renewal rates offered by the
Company.

The management of liquidity described in the above paragraphs primarily pertains
to Oritani Bank. The Company, on an unconsolidated basis, also has liquidity
sources and uses. The Company's primary, recurring source of funds has been
dividends from Oritani Bank. As a wholly owned subsidiary of the Company, the
Bank will typically distribute its net income to the Company as a dividend.
Under the New Jersey Banking Act, a stock savings bank may declare and pay a
dividend on its capital stock only to the extent that the payment of the
dividend would not impair the capital stock of the savings bank. In addition, a
stock savings bank may not pay a dividend unless the savings bank would, after
the payment of the dividend, have a surplus of not less than 50% of its capital
stock, or alternatively, the payment of the dividend would not reduce the
surplus. Additionally, Oritani Bank must notify the Federal Reserve Board
thirty days before declaring any dividend to the Company. The Federal Reserve
Board
may object to the payment of the dividend if it deems it to be unsafe or
unsound or a violation of a law, regulation or order or if the institution will
be undercapitalized after the dividend. An inability of Oritani Bank to pay
dividends may restrict the Company's ability to pay dividends.

The Company's primary use of funds has been dividends to shareholders and
repurchases of common stock. The declarations of such dividends are at the
discretion of the Company and the dividend amount could be reduced or eliminated
if the payment of a dividend to shareholders would result in a liquidity
concern. At December 31, 2018 and June 30, 2018, the Company, on an
unconsolidated basis, had cash and cash equivalents of $1.8 million and $56.6
million
, respectively.

46



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Index



In July 2013, the Federal Reserve Board and the FDIC issued final rules
implementing the Basel III regulatory capital framework and related Dodd-Frank
Act changes. The rules revise minimum capital requirements and adjust prompt
corrective action thresholds. Under the final rules, minimum requirements will
increase for both the quantity and quality of capital held by the Company and
the Bank. The rules include a new common equity Tier 1 capital to risk-weighted
assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of
2.5% of risk-weighted assets. The final rules also raise the minimum ratio of
Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum
leverage ratio of 4.0%. The final rule became effective January 1, 2015,
subject to a transition period for various components of the rule that require
full compliance for the Company by January 1, 2019, including a capital
conservation buffer of 2.5% of risk-weighted assets for which the transitional
period began on January 1, 2016.


As of December 31, 2018 and June 30, 2018, the Company and Bank exceeded all
regulatory capital requirements, including the currently applicable capital
conservation buffer of 1.88%, as follows:




December 31, 2018
Actual Required
Amount Ratio Amount Ratio
(Dollars in thousands)
Company:
Common Equity Tier 1 (CET1) (to
risk-weighted assets) $ 520,309 14.31 % $ 163,672 4.50 %
Tier 1capital (to risk-weighted assets) 520,309 14.31 % 218,229 6.00 %
Total capital (to risk-weighted assets) 548,949 15.09 % 290,972 8.00 %
Tier 1 leverage capital (to average
assets) 520,309 12.76 % 163,055 4.00 %
Capital Conservation Buffer 257,976 7.09 % 68,197 1.88 %




June 30, 2018
Actual Required
Amount Ratio Amount Ratio
(Dollars in thousands)
Company:
Common Equity Tier 1 (CET1) (to
risk-weighted assets) $ 555,703 15.02 % $ 166,443 4.50 %
Tier 1 capital (to risk-weighted assets) 555,703 15.02 % 221,924 6.00 %
Total capital (to risk-weighted assets) 585,975 15.84 % 295,898 8.00 %
Tier 1 leverage capital (to average
assets) 555,703 13.51 % 164,562 4.00 %
Capital Conservation Buffer 290,077 7.84 % 46,234 1.25 %




December 31, 2018
Actual Required Well-Capitalized
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Bank:
Common Equity Tier 1
("CET1") (to risk
weighted assets) $ 499,356 13.73 % $ 163,648 4.50 % $ 236,380 6.50 %
Tier 1 capital (to
risk-weighted assets) 499,356 13.73 % 218,197 6.00 % 290,930 8.00 %
Total capital (to
risk-weighted assets) 527,994 14.52 % 290,930 8.00 % 363,662 10.00 %
Tier 1 Leverage
capital (to average
assets) 499,356 12.25 % 163,029 4.00 % 203,786 5.00 %
Capital conservation
buffer 237,064 6.52 % 68,187 1.88 %



June 30, 2018
Actual Required Well-Capitalized
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Bank:
Common Equity Tier 1
("CET1") (to risk
weighted assets) $ 521,414 14.10 % $ 166,440 4.50 % $ 240,413 6.50 %
Tier 1 capital (to
risk-weighted assets) 521,414 14.10 % 221,919 6.00 % 295,893 8.00 %
Total capital (to
risk-weighted assets) 551,686 14.92 % 295,893 8.00 % 369,866 10.00 %
Tier 1 Leverage
capital (to average
assets) 521,414 12.68 % 164,533 4.00 % 205,666 5.00 %
Capital conservation
buffer 255,793 6.92 % 46,233 1.25 %



47



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Index



Critical Accounting Policies

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