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Section 1: 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________

FORM 10-Q
______________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2018
 
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to
Commission File No. 001-34786
   
Oritani Financial Corp.
(Exact name of registrant as specified in its charter)
   

Delaware
 
30-0628335
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
370 Pascack Road, Township of Washington, New Jersey 07676
(Address of Principal Executive Offices) (Zip Code)
 
(201) 664-5400
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address, and former fiscal year, if changed since last report)
   
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.
 
    YES      NO  
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
    YES      NO  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
 
Accelerated filer
 
 
Non-accelerated filer
 
  
 
Smaller Reporting company
 
  
 
 
 
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
    YES       NO   
 
As of February 11, 2019, there were 56,245,065 shares of the Registrant’s common stock, par value $0.01 per share, issued and 44,985,539 shares outstanding.




Oritani Financial Corp.
FORM 10-Q
 
Index

 
 
 
 
  Page
 
 
 
Item 1.
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
8
 
 
 
 
9
 
 
 
Item 2.
37
 
 
 
Item 3.
48
 
 
 
Item 4.
50
 
 
 
 
 
 
 
 
Item 1.
50
 
 
 
Item 1A.
50
 
 
 
Item 2.
50
 
 
 
Item 3.
50
 
 
 
Item 4.
50
 
 
 
Item 5.
50
 
 
 
Item 6.
51
 
 
 
 
52
 

Part I. Financial Information
Item 1. Financial Statements
 
Oritani Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

 
 
December 31, 2018
   
June 30, 2018
 
 
 
(unaudited)
   
(audited)
 
Assets
           
Cash on hand and in banks
 
$
18,660
   
$
23,613
 
Federal funds sold and short term investments
   
457
     
11,235
 
Cash and cash equivalents
   
19,117
     
34,848
 
Loans, net
   
3,483,174
     
3,540,903
 
Equity securities
   
1,291
     
 
Debt securities available for sale, at market value
   
37,294
     
44,691
 
Debt securities held to maturity, fair value of $343,166 and $326,511, respectively
   
348,768
     
335,374
 
Bank Owned Life Insurance (at cash surrender value)
   
99,672
     
98,438
 
Federal Home Loan Bank of New York (“FHLB”) stock at cost
   
28,325
     
30,365
 
Accrued interest receivable
   
11,491
     
11,261
 
Real estate owned
   
636
     
1,564
 
Office properties and equipment, net
   
13,143
     
13,455
 
Deferred tax assets, net
   
27,437
     
25,864
 
Other assets
   
19,725
     
30,276
 
Total Assets
 
$
4,090,073
   
$
4,167,039
 
Liabilities
               
Deposits
 
$
2,903,205
   
$
2,915,128
 
Borrowings
   
568,654
     
596,372
 
Advance payments by borrowers for taxes and insurance
   
22,312
     
24,169
 
Other liabilities
   
68,847
     
72,024
 
Total Liabilities
   
3,563,018
     
3,607,693
 
Stockholders’ Equity
               
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued;
44,751,879 shares outstanding at December 31, 2018 and 46,616,646 shares outstanding at June 30, 2018.
   
562
     
562
 
Additional paid-in capital
   
514,744
     
514,002
 
Non-vested restricted stock awards
   
(241
)
   
(176
)
Treasury stock, at cost; 11,493,186 shares at December 31, 2018 and 9,628,419 shares at June 30, 2018.
   
(157,831
)
   
(129,433
)
Unallocated common stock held by the employee stock ownership plan
   
(15,789
)
   
(16,631
)
Retained earnings
   
178,865
     
179,799
 
Accumulated other comprehensive income, net of tax
   
6,745
     
11,223
 
Total Stockholders’ Equity
   
527,055
     
559,346
 
Total Liabilities and Stockholders’ Equity
 
$
4,090,073
   
$
4,167,039
 

See accompanying notes to unaudited consolidated financial statements.
3


Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)

 
 
Three months ended December 31,
   
Six Months ended December 31,
 
 
 
2018
   
2017
   
2018
   
2017
 
 
 
(unaudited)
 
Interest income:
                       
Interest on loans
 
$
36,085
   
$
35,891
   
$
72,037
   
$
71,728
 
Dividends on FHLB stock
   
481
     
451
     
929
     
936
 
Equity securities
   
12
     
12
     
22
     
24
 
Interest on debt securities available for sale
   
222
     
445
     
462
     
929
 
Interest on debt securities held to maturity
   
2,002
     
1,145
     
3,931
     
2,244
 
Interest on federal funds sold and short term investments
   
280
     
108
     
302
     
111
 
Total interest income
   
39,082
     
38,052
     
77,683
     
75,972
 
Interest expense:
                               
Deposits
   
9,939
     
7,788
     
18,976
     
15,141
 
Borrowings
   
3,116
     
2,656
     
6,385
     
5,579
 
Total interest expense
   
13,055
     
10,444
     
25,361
     
20,720
 
Net interest income before provision for loan losses
   
26,027
     
27,608
     
52,322
     
55,252
 
Reversal of provision for loan losses
   
     
     
(2,000
)
   
 
Net interest income after provision for loan losses
   
26,027
     
27,608
     
54,322
     
55,252
 
Non-interest income:
                               
Fees and service charges
   
327
     
313
     
639
     
635
 
Bank-owned life insurance
   
610
     
630
     
1,234
     
1,276
 
Gains (losses) on sale of OREO
   
855
     
     
855
     
 
Change in fair value of equity securities
   
(155
)
   
     
(274
)
   
 
Net losses on sale of debt securities available for sale
   
     
(324
)
   
     
(324
)
Other income
   
5
     
4
     
9
     
6
 
Total non-interest income
   
1,642
     
623
     
2,463
     
1,593
 
Non-interest expense:
                               
Compensation, payroll taxes and fringe benefits
   
5,471
     
7,134
     
11,512
     
13,341
 
Advertising
   
142
     
143
     
285
     
286
 
Office occupancy and equipment expense
   
735
     
780
     
1,495
     
1,529
 
Data processing service fees
   
519
     
420
     
1,018
     
964
 
Federal insurance premiums
   
285
     
300
     
585
     
600
 
Other expenses
   
2,596
     
1,436
     
5,480
     
3,004
 
Total non-interest expense
   
9,748
     
10,213
     
20,375
     
19,724
 
Income before income tax expense
   
17,921
     
18,018
     
36,410
     
37,121
 
Income tax expense
   
4,492
     
14,048
     
9,584
     
21,155
 
Net income
 
$
13,429
   
$
3,970
   
$
26,826
   
$
15,966
 
Earnings per basic common share
 
$
0.31
   
$
0.09
   
$
0.61
   
$
0.36
 
Earnings per diluted common share
 
$
0.31
   
$
0.09
   
$
0.60
   
$
0.35
 
 
See accompanying notes to unaudited consolidated financial statements.
4


Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)

 
 
Three months ended December 31,
   
Six months ended December 31,
 
 
 
2018
   
2017
   
2018
   
2017
 
 
 
(unaudited)
 
Net of tax:
                       
Net income
 
$
13,429
   
$
3,970
   
$
26,826
   
$
15,966
 
Other comprehensive income:
                               
Change in unrealized holding gain (loss) on debt securities available for sale
   
279
     
(361
)
   
160
     
(365
)
Reclassification adjustment for security loss included in net income
   
     
184
     
     
184
 
Amortization related to post-retirement obligations
   
5
     
5
     
13
     
10
 
Net change in unrealized (loss) gain on interest rate swaps
   
(4,867
)
   
1,847
     
(3,993
)
   
1,737
 
Total other comprehensive (loss) income
   
(4,583
)
   
1,675
     
(3,820
)
   
1,566
 
Total comprehensive income
 
$
8,846
   
$
5,645
   
$
23,006
   
$
17,532
 
 
See accompanying notes to unaudited consolidated financial statements.
5


Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2018 and 2017 (unaudited)
(In thousands, except share data)

 
 
Shares Outstanding
   
Common stock
   
Additional paid-in capital
   
Non-vested restricted stock awards
   
Treasury stock
   
Unallocated common stock held by ESOP
   
Retained earnings
   
Accumulated other comprehensive income (loss), net of tax
   
Total stockholders' equity
 
Balance at June 30, 2017
   
45,992,366
   
$
562
   
$
512,337
   
$
(458
)
 
$
(136,517
)
 
$
(18,407
)
 
$
198,186
   
$
3,520
   
$
559,223
 
Net income
   
     
     
     
     
     
     
15,966
     
     
15,966
 
Other comprehensive income , net of tax
   
     
     
     
     
     
     
     
1,566
     
1,566
 
Cash dividends declared ($0.80 per share)
   
     
     
     
     
     
     
(35,159
)
   
     
(35,159
)
Purchase of treasury stock
   
(4,787
)
   
     
     
     
(81
)
   
     
     
     
(81
)
Compensation cost for stock options and restricted stock
   
     
     
101
     
     
     
     
     
     
101
 
ESOP shares allocated or committed to be released
   
     
     
1,088
     
     
     
1,076
     
     
     
2,164
 
Exercise of stock options
   
323,971
     
     
     
     
4,314
     
     
(549
)
   
     
3,765
 
Forfeiture of restricted stock awards
   
(7,000
)
   
     
     
87
     
(87
)
   
     
     
     
 
Vesting of restricted stock awards
   
     
     
(210
)
   
170
     
     
     
40
     
     
 
Balance at December 31, 2017
   
46,304,550
   
$
562
   
$
513,316
   
$
(201
)
 
$
(132,371
)
 
$
(17,331
)
 
$
178,484
   
$
5,086
   
$
547,545
 

Continued on next page
6

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2018 and 2017 (unaudited)
(In thousands, except share data)

 
 
Shares Outstanding
   
Common stock
   
Additional paid-in capital
   
Non-vested restricted stock awards
   
Treasury stock
   
Unallocated common stock held by ESOP
   
Retained earnings
   
Accumulated other comprehensive income (loss), net of tax
   
Total stockholders' equity
 
Balance at June 30, 2018
   
46,616,646
   
$
562
   
$
514,002
   
$
(176
)
 
$
(129,433
)
 
$
(16,631
)
 
$
179,799
   
$
11,223
   
$
559,346
 
Net income
   
     
     
     
     
     
     
26,826
     
     
26,826
 
Other comprehensive loss, net of tax
   
     
     
     
     
     
     
     
(3,820
)
   
(3,820
)
Cash dividends declared ($0.65 per share)
   
     
     
     
     
     
     
(28,425
)
   
     
(28,425
)
Purchase of treasury stock
   
(1,890,767
)
   
     
     
     
(28,747
)
   
     
     
     
(28,747
)
Issuance of restricted stock awards
   
10,000
     
     
     
(134
)
   
134
     
     
     
     
 
Compensation cost for stock options and restricted stock
   
     
     
86
     
     
     
     
     
     
86
 
ESOP shares allocated or committed to be released
   
     
     
742
     
     
     
842
     
     
     
1,584
 
Exercise of stock options
   
16,000
     
     
     
     
215
     
     
(10
)
   
     
205
 
Vesting of restricted stock awards
   
     
     
(86
)
   
69
     
     
     
17
     
     
 
Reclassification due to the adoption of ASU No. 2016-01
   
     
     
     
     
     
     
658
     
(658
)
   
 
Balance at December 31, 2018
   
44,751,879
   
$
562
   
$
514,744
   
$
(241
)
 
$
(157,831
)
 
$
(15,789
)
 
$
178,865
   
$
6,745
   
$
527,055
 
 
See accompanying notes to unaudited consolidated financial statements.
7


Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)

 
 
Six Months ended December 31,
 
 
 
2018
   
2017
 
 
 
(unaudited)
 
Cash flows from operating activities:
     
Net income
 
$
26,826
   
$
15,966
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
ESOP and stock-based compensation expense
   
1,670
     
2,265
 
Tax benefit from stock-based compensation
   
4
     
331
 
Depreciation of premises and equipment
   
383
     
388
 
Net amortization and accretion of premiums and discounts on securities
   
629
     
584
 
Reversal of provision for loan losses
   
(2,000
)
   
 
Amortization and accretion of deferred loan fees, net
   
(1,308
)
   
(1,246
)
Decrease in deferred taxes
   
98
     
11,198
 
Net losses on sale of debt securities available for sale
   
     
324
 
Fair value adjustment for equity securities
   
274
     
 
Gain on sale of real estate owned
   
(855
)
   
 
Increase in cash surrender value of bank owned life insurance
   
(1,234
)
   
(1,276
)
Increase in accrued interest receivable
   
(230
)
   
(248
)
Decrease (increase) in other assets
   
4,819
     
(6,375
)
(Decrease) increase in other liabilities
   
(3,151
)
   
10,670
 
Net cash provided by operating activities
   
25,925
     
32,581
 
Cash flows from investing activities:
               
Net decrease in loans receivable
   
175,476
     
34,472
 
Purchase of mortgage loans
   
(114,439
)
   
(52,766
)
Purchase of debt securities held to maturity
   
(43,508
)
   
(34,134
)
   Purchase of Federal Home Loan Bank stock
   
(14,315
)
   
(19,890
)
Proceeds from payments, calls and maturities of debt securities available for sale
   
6,021
     
14,735
 
Proceeds from payments, calls and maturities of debt securities held to maturity
   
29,537
     
22,067
 
Proceeds from sales of debt securities available for sale
   
-
     
29,506
 
Proceeds from redemption of Federal Home Loan Bank stock
   
16,355
     
24,875
 
   Proceeds from sale of real estate owned
   
1,783
     
138
 
Purchase of fixed assets
   
(71
)
   
(100
)
Net cash provided by investing activities
   
56,839
     
18,903
 
Cash flows from financing activities:
               
Net (decrease) increase in deposits
   
(11,923
)
   
89,115
 
Purchase of treasury stock
   
(28,747
)
   
(81
)
Dividends paid to shareholders
   
(28,425
)
   
(35,159
)
Exercise of stock options
   
205
     
3,765
 
Decrease in advance payments by borrowers for taxes and insurance
   
(1,857
)
   
(1,107
)
Proceeds from borrowed funds
   
70,627
     
32,870
 
Repayment of borrowed funds
   
(98,345
)
   
(135,413
)
Payment of employee taxes withheld from shared-based awards
   
(30
)
   
(81
)
Net cash used in financing activities
   
(98,495
)
   
(46,091
)
Net (decrease) increase in cash and cash equivalents
   
(15,731
)
   
5,393
 
Cash and cash equivalents at beginning of period
   
34,848
     
33,578
 
Cash and cash equivalents at end of period
 
$
19,117
   
$
38,971
 
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
 
$
25,193
   
$
20,650
 
Income taxes
 
$
8,709
   
$
8,787
 
                 

See accompanying notes to unaudited consolidated financial statements.

8



Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements are composed of the accounts of Oritani Financial Corp., its wholly owned subsidiary, Oritani Bank (the “Bank”) and the wholly owned subsidiaries of Oritani Bank; Oritani Finance Company, Ormon LLC (“Ormon”), and Oritani Investment Corp., as well as its wholly owned subsidiary, Oritani Asset Corporation (a real estate investment trust), (collectively, the "Company").  Intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all of the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included.  The results of operations and other data presented for the six month period ended December 31, 2018 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2019.

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of the Form 10-Q.  The consolidated financial statements presented should be read in conjunction with the Company’s audited consolidated financial statements and notes to consolidated financial statements included in the Company’s June 30, 2018 Annual Report on Form 10-K, filed with the SEC on August 29, 2018.

The consolidated financial statements have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities presented in the Consolidated Balance Sheets at December 31, 2018 and June 30, 2018 and in the Consolidated Statements of Income for the Three and Six Months Ended December 31, 2018 and 2017.  Actual results could differ significantly from those estimates.

A material estimate that is particularly susceptible to significant changes relates to the determination of the allowance for loan losses. The allowance for loan losses represents management’s best estimate of losses known and incurred in the portfolio that are both probable and reasonable to estimate. While management uses the most current information available to estimate losses on loans, actual losses are dependent on future events and, as such, increases in the allowance for loan losses may be necessary.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
9



2. Earnings Per Share ("EPS")

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The weighted average common shares outstanding includes the average number of shares of common stock outstanding and allocated or committed to be released Employee Stock Ownership Plan shares.
 
Diluted earnings per share is computed using the same method as basic earnings per share, but reflects the potential dilution that could occur if stock options were exercised and converted into common stock.  These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method.  When applying the treasury stock method, we add the assumed proceeds from option exercises and the average unamortized compensation costs related to stock options.  We then divide this sum by our average stock price to calculate shares assumed to be repurchased.  The excess of the number of shares issuable over the number of shares assumed to be repurchased is added to basic weighted average common shares to calculate diluted EPS.

The following is a summary of the Company’s earnings per share calculations and reconciliation of basic to diluted earnings per share.

 
 
Three months ended December 31,
   
Six months ended December 31,
 
 
 
2018
   
2017
   
2018
   
2017
 
 
 
(In thousands, except per share data)
 
Net income
 
$
13,429
   
$
3,970
   
$
26,826
   
$
15,966
 
Weighted average common shares outstanding—basic
   
43,464
     
44,104
     
44,052
     
44,000
 
Effect of dilutive stock options outstanding
   
505
     
1,052
     
571
     
1,054
 
Weighted average common shares outstanding—diluted
   
43,969
     
45,156
     
44,623
     
45,054
 
Earnings per share-basic
 
$
0.31
   
$
0.09
   
$
0.61
   
$
0.36
 
Earnings per share-diluted
 
$
0.31
   
$
0.09
   
$
0.60
   
$
0.35
 
 
For the three months ended December 31, 2018 there were 12,181 option shares that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for those periods. There were no anti-dilutive shares for the three months ended December 31, 2017. Anti-dilutive shares for the six months ended December 31, 2018 and 2017 were 6,345 and 489, respectively.

3. Stock Repurchase Program
 
On March 4, 2015, the Board of Directors of the Company authorized a fourth stock repurchase plan pursuant to which the Company is authorized to repurchase up to 5% of the outstanding shares, or 2,205,451 shares. During the six months ended December 31, 2018, a total of 1,888,851  shares had been acquired under the fourth repurchase plan at a weighted average cost of  $15.20 per share.  With these purchases, the fourth repurchase plan has been completed.  Repurchased shares are held as treasury stock and will be available for general corporate purposes.  
  
10


4. Equity Incentive Plans
 
The 2007 Equity Incentive Plan (“the 2007 Equity Plan”) was approved by the Company’s stockholders on April 22, 2008, which authorized the issuance of up to 4,172,817 shares of Company common stock pursuant to grants of incentive and non-statutory stock options, stock appreciation rights, and restricted stock awards.  The 2011 Equity Incentive Plan (“2011 Equity Plan”) was approved by the Company’s stockholders on July 26, 2011.  The 2011 Equity Plan authorized the issuance of up to 5,790,849 shares of the Company’s common stock pursuant to grants of stock options, restricted stock awards and restricted stock units, with no more than 1,654,528 of the shares issued as restricted stock awards or restricted stock units.  Employees and outside directors of the Company or Oritani Bank are eligible to receive awards under the Equity Plans.
 
Stock options are granted at an exercise price equal to the market price of our common stock on the grant date, based on quoted market prices. Stock options generally vest over a five-year service period and expire ten years from issuance.  The vesting of the options accelerate upon death or disability, retirement or a change in control and expire 90 days after termination of service, excluding disability or retirement.  The Company recognizes compensation expense for all option grants over the awards’ respective requisite service periods.  Management estimated the fair values of all option grants using the Black-Scholes option-pricing model.   Management estimated the expected life of the options using the simplified method.  The Treasury yield in effect at the time of the grant provides the risk-free rate for periods within the contractual life of the option.  The Company classified share-based compensation for employees and outside directors within “compensation, payroll taxes and fringe benefits” in the consolidated statements of income to correspond with the same line item as the cash compensation paid.

There were no options granted during the six months ended December 31, 2017. The fair value of options granted during the six months ended December 31, 2018 was estimated using the Black-Scholes options-pricing model with the assumptions in the following table.

 
       
 
 
Six months ended December 31, 2018
 
Option shares granted
 
20,000
 
Expected dividend yield
 
7.47%
 
Expected volatility
 
17.68%
 
Risk-free interest rate
 
2.82%
 
Expected option life (in years)
 
6.5
 


The following is a summary of the Company’s stock option activity and related information as of December 31, 2018 and changes therein during the six months then ended:

 
 
Number of Stock Options
   
Weighted Average Grant Date Fair Value
   
Weighted Average Exercise Price
   
Weighted Average Remaining Contractual Life (years)
 
Outstanding at June 30, 2018
   
2,599,864
   
$
2.64
   
$
12.16
     
3.4
 
Granted
   
20,000
     
0.78
     
16.15
     
10.0
 
Exercised
   
(16,000
)
   
2.61
     
12.82
     
3.6
 
Forfeited
   
(10,000
)
   
0.89
     
15.40
     
9.4
 
Expired
   
(10,000
)
   
2.69
     
12.99
     
3.6
 
Outstanding at December 31, 2018
   
2,583,864
   
$
2.64
   
$
12.19
     
2.9
 
Exercisable at December 31, 2018
   
2,486,264
   
$
2.70
   
$
12.06
     
2.7
 
 
The Company recorded $9,000 and $11,000 of share based compensation expense related to options for the three months ended December 31, 2018 and 2017, respectively. The Company recorded $20,000 and $23,000 of share based compensation expense related to options for the six months ended December 31, 2018 and 2017, respectively. Expected future expense related to the non-vested options outstanding at December 31, 2018 is $81,000 over a weighted average period of 3.9 years.  Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.



11

Restricted stock shares vest over a five-year service period on the anniversary date of the grant. Vesting of the restricted stock shares accelerate upon death or disability, retirement or a change in control. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted shares under the Company’s restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period. 

The following is a summary of the status of the Company’s restricted stock shares as of December 31, 2018 and changes therein during the six months then ended:

 
 
Number of Shares Awarded
   
Weighted Average Grant Date Fair Value
 
Non-vested at June 30, 2018
   
14,200
   
$
15.78
 
Granted
   
10,000
     
16.15
 
Vested
   
(5,400
)
   
15.99
 
Non-vested at December 31, 2018
   
18,800
   
$
15.91
 
 
The Company recorded $34,000 and $39,000 of share based compensation expense related to the restricted stock shares for the three months ended December 31, 2018 and 2017, respectively.  The Company recorded $66,000 and $79,000 of share based compensation expense related to the restricted stock shares for the six months ended December 31, 2018 and 2017, respectively. Expected future expense related to the non-vested restricted shares at December 31, 2018 is $259,000 over a weighted average period of 3.4 years.

5. Post-retirement Benefits
 
The Company provides several post-retirement benefit plans to directors and to certain active and retired employees. The Company has a nonqualified Directors’ Retirement Plan ("Retirement Plan"), a nonqualified Benefit Equalization Plan ("BEP Plan"), which provides benefits to employees who are disallowed certain benefits under the Company’s qualified benefit plans, and a Post Retirement Medical Plan ("Medical Plan") for directors and certain eligible employees.

Net periodic benefit costs for the three and six months ended December 31, 2018 and 2017 are presented in the following tables.

 
Retirement Plan
   
BEP Plan
   
Medical Plan
 
 
Three months ended December 31,
 
 
2018
   
2017
   
2018
   
2017
   
2018
   
2017
 
 
(In thousands)
 
Service cost
 
$
31
   
$
33
   
$
   
$
   
$
12
   
$
15
 
Interest cost
   
54
     
52
     
13
     
11
     
58
     
52
 
Amortization of unrecognized:
                                               
Net loss
   
     
     
9
     
9
     
     
 
Total
 
$
85
   
$
85
   
$
22
   
$
20
   
$
70
   
$
67
 

 
 
Retirement Plan
   
BEP Plan
   
Medical Plan
 
 
Six months ended December 31,
 
 
2018
   
2017
   
2018
   
2017
   
2018
   
2017
 
 
(In thousands)
 
Service cost
 
$
61
   
$
65
   
$
   
$
   
$
23
   
$
30
 
Interest cost
   
109
     
104
     
26
     
22
     
117
     
105
 
Amortization of unrecognized:
                                               
Net loss
   
     
     
17
     
18
     
     
 
Total
 
$
170
   
$
169
   
$
43
   
$
40
   
$
140
   
$
135
 

The service cost component of net periodic benefit cost is included in compensation and employee benefits on the Statements of Income. The other components of net periodic benefit cost, including interest cost and amortization of actuarial gain/loss are included in other expenses on the Statements of Income.


12

6. Loans, net
 
Loans, net are summarized as follows:

 
 
December 31, 2018
   
June 30, 2018
 
 
 
(In thousands)
 
Residential
 
$
268,644
   
$
267,771
 
Residential commercial real estate
   
2,033,679
     
2,005,315
 
Grocery/credit retail commercial real estate
   
495,442
     
497,708
 
Other commercial real estate
   
715,350
     
796,589
 
Construction and land loans
   
8,489
     
10,960
 
Total loans
   
3,521,604
     
3,578,343
 
Less:
               
Unearned deferred fees and discounts, net
   
9,791
     
6,878
 
Allowance for loan losses
   
28,639
     
30,562
 
Loans, net
 
$
3,483,174
   
$
3,540,903
 
 
The Company’s allowance for loan losses is analyzed quarterly and many factors are considered, including changes in the portfolio, delinquencies, nonaccrual loan levels, and other environmental factors.  There have been no material changes to the allowance for loan loss methodology as disclosed in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on August 29, 2018.

The activity in the allowance for loan losses for the three and six months ended December 31, 2018 and 2017 is summarized as follows:

 
Three months ended December 31,
 
Six Months ended December 31,
 
 
(In thousands)
 
 
2018
 
2017
 
2018
 
2017
 
Balance at beginning of period
 
$
28,565
   
$
30,402
   
$
30,562
   
$
30,272
 
Reversal of provision for loan losses
   
     
     
(2,000
)
   
 
Recoveries of loans previously charged off
   
74
     
     
77
     
152
 
Loans charged off
   
     
     
     
(22
)
Balance at end of period
 
$
28,639
   
$
30,402
   
$
28,639
   
$
30,402
 
 
13


The following tables provide the three and six month activity in the allowance for loan losses allocated by loan category at December 31, 2018 and 2017.  The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
Three months ended December 31, 2018
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit retail commercial real estate
 
Other commercial real estate
 
Construction and land loans
 
Total
 
 
(In thousands)
 
Allowance for loan losses:
                       
Beginning balance
 
$
2,100
   
$
15,434
   
$
3,133
   
$
7,776
   
$
122
   
$
28,565
 
Charge-offs
   
     
     
     
     
     
 
Recoveries
   
15
     
     
     
59
     
     
74
 
Provisions (reversal)
   
(113
)
   
(175
)
   
141
     
(55
)
   
202
     
 
Ending balance
 
$
2,002
   
$
15,259
   
$
3,274
   
$
7,780
   
$
324
   
$
28,639
 

 
Six Months ended December 31, 2018
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit retail commercial real estate
 
Other commercial real estate
 
Construction and land loans
 
Total
 
 
(In thousands)
 
Allowance for loan losses:
                       
Beginning balance
 
$
1,990
   
$
17,259
   
$
3,015
   
$
7,828
   
$
470
   
$
30,562
 
Charge-offs
   
     
     
     
     
     
 
Recoveries
   
18
     
     
     
59
     
     
77
 
Provisions (reversal)
   
(6
)
   
(2,000
)
   
259
     
(107
)
   
(146
)
   
(2,000
)
Ending balance
 
$
2,002
   
$
15,259
   
$
3,274
   
$
7,780
   
$
324
   
$
28,639
 

 
Three months ended December 31, 2017
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit retail commercial real estate
 
Other commercial real estate
 
Construction and land loans
 
Total
 
 
(In thousands)
 
Allowance for loan losses:
                       
Beginning balance
 
$
1,286
   
$
15,762
   
$
3,196
   
$
9,937
   
$
221
   
$
30,402
 
Charge-offs
   
     
     
     
     
     
 
Recoveries
   
     
     
     
     
     
 
Provisions (reversal)
   
616
     
713
     
(296
)
   
(1,154
)
   
121
     
 
Ending balance
 
$
1,902
   
$
16,475
   
$
2,900
   
$
8,783
   
$
342
   
$
30,402
 

 
Six Months ended December 31, 2017
 
 
Residential
 
Residential commercial real estate
 
Grocery/credit retail commercial real estate
 
Other commercial real estate
 
Construction and land loans
 
Total
 
 
(In thousands)
 
Allowance for loan losses:
                       
Beginning balance
 
$
1,261
   
$
15,794
   
$
3,000
   
$
10,017
   
$
200
   
$
30,272
 
Charge-offs
   
(22
)
   
     
     
     
     
(22
)
Recoveries
   
120
     
     
     
     
32
     
152
 
Provisions (reversal)
   
543
     
681
     
(100
)
   
(1,234
)
   
110
     
 
Ending balance
 
$
1,902
   
$
16,475
   
$
2,900
   
$
8,783
   
$
342
   
$
30,402
 

14


The following tables detail the amount of loans receivables that are evaluated individually, and collectively, for impairment, and the related portion of allowance for loan loss that is allocated to each loan portfolio segment at December 31, 2018 and June 30, 2018.

   
At December 31, 2018
 
 
 
Residential
   
Residential commercial real estate
   
Grocery/credit retail commercial real estate
   
Other commercial real estate
   
Construction and land loans
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                   
Individually evaluated for impairment
 
$
65
   
$
   
$
   
$
   
$
   
$
65
 
Collectively evaluated for impairment
   
1,937
     
15,259
     
3,274
     
7,780
     
324
     
28,574
 
Total
 
$
2,002
   
$
15,259
   
$
3,274
   
$
7,780
   
$
324
   
$
28,639
 
Loans receivable:
                                               
Individually evaluated for impairment
 
$
5,821
   
$
   
$
   
$
3,842
   
$
   
$
9,663
 
Collectively evaluated for impairment
   
262,823
     
2,033,679
     
495,442
     
711,508
     
8,489
     
3,511,941
 
Total
 
$
268,644
   
$
2,033,679
   
$
495,442
   
$
715,350
   
$
8,489
   
$
3,521,604
 
 
                                               

   
At June 30, 2018
 
 
 
Residential
   
Residential commercial real estate
   
Grocery/credit retail commercial real estate
   
Other commercial real estate
   
Construction
and land loans
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                   
Individually evaluated for impairment
 
$
   
$
   
$
   
$
   
$
   
$
 
Collectively evaluated for impairment
   
1,990
     
17,259
     
3,015
     
7,828
     
470
     
30,562
 
Total
 
$
1,990
   
$
17,259
   
$
3,015
   
$
7,828
   
$
470
   
$
30,562
 
Loans receivable:
                                               
Individually evaluated for impairment
 
$
5,022
   
$
   
$
   
$
4,181
   
$
   
$
9,203
 
Collectively evaluated for impairment
   
262,749
     
2,005,315
     
497,708
     
792,408
     
10,960
     
3,569,140
 
Total
 
$
267,771
   
$
2,005,315
   
$
497,708
   
$
796,589
   
$
10,960
   
$
3,578,343
 
 
15


The Company continuously monitors the credit quality of its loan portfolio.  In addition to internal staff, the Company utilizes the services of a third party loan review firm to evaluate the credit quality ratings of its loan receivables.  Credit quality is monitored by reviewing certain credit quality indicators.  Assets classified as “Satisfactory” are deemed to possess average to superior credit quality, requiring no more than normal attention.  Assets classified as “Pass/Watch” have generally acceptable asset quality yet possess higher risk characteristics/circumstances than satisfactory assets.  Such characteristics may include strained liquidity, slow pay, stale financial statements or other circumstances requiring greater attention from bank staff.  We classify an asset as “Special Mention” if the asset has a potential weakness that warrants management’s close attention.  Such weaknesses, if left uncorrected, may result in the deterioration of the repayment prospects of the asset.  An asset is considered “Substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as “Doubtful” have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  Included in the Substandard caption are all loans that were past due 90 days (or more) and all impaired loans.

The following tables provide information about the loan credit quality at December 31, 2018 and June 30, 2018:

 
 
At December 31, 2018
 
 
 
Satisfactory
   
Pass/Watch
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(In thousands)
 
Residential
 
$
244,573
   
$
16,730
   
$
356
   
$
6,985
   
$
   
$
268,644
 
Residential commercial real estate
   
2,014,401
     
17,713
     
1,565
     
     
     
2,033,679
 
Grocery/credit retail commercial real estate
   
492,514
     
2,928
     
     
     
     
495,442
 
Other commercial real estate
   
621,785
     
77,411
     
11,707
     
4,447
     
     
715,350
 
Construction and land loans
   
8,489
     
     
     
     
     
8,489
 
Total
 
$
3,381,762
   
$
114,782
   
$
13,628
   
$
11,432
   
$
   
$
3,521,604
 

 
 
At June 30, 2018
 
 
 
Satisfactory
   
Pass/Watch
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(In thousands)
 
Residential
 
$
242,534
   
$
18,731
   
$
171
   
$
6,335
   
$
   
$
267,771
 
Residential commercial real estate
   
1,981,781
     
21,952
     
1,582
     
     
     
2,005,315
 
Grocery/credit retail commercial real estate
   
494,723
     
     
2,985
     
     
     
497,708
 
Other commercial real estate
   
688,725
     
92,430
     
10,164
     
5,270
     
     
796,589
 
Construction and land loans
   
10,960
     
     
     
     
     
10,960
 
Total
 
$
3,418,723
   
$
133,113
   
$
14,902
   
$
11,605
   
$
   
$
3,578,343
 

16


The following tables provide information about loans past due at December 31, 2018 and June 30, 2018:

 
 
At December 31, 2018
 
 
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90 days or More Past Due
   
Total Past Due
   
Current
   
Total Loans
   
Nonaccrual (1)
 
 
 
(In thousands)
 
Residential
 
$
1,239
   
$
719
   
$
6,223
   
$
8,181
   
$
260,463
   
$
268,644
   
$
6,984
 
Residential commercial real estate
   
1,565
     
     
     
1,565
     
2,032,114
     
2,033,679
     
 
Grocery/credit retail commercial real estate
   
     
     
     
     
495,442
     
495,442
     
 
Other commercial real estate
   
409
     
8,074
     
2,491
     
10,974
     
704,376
     
715,350
     
3,721
 
Construction and land loans
   
     
     
     
     
8,489
     
8,489
     
 
Total
 
$
3,213
   
$
8,793
   
$
8,714
   
$
20,720
   
$
3,500,884
   
$
3,521,604
   
$
10,705
 

 
 
At June 30, 2018
 
 
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90 days or More Past Due
   
Total Past Due
   
Current
   
Total Loans
   
Nonaccrual (2)
 
 
 
(In thousands)
 
Residential
 
$
2,696
   
$
753
   
$
5,213
   
$
8,662
   
$
259,109
   
$
267,771
   
$
6,335
 
Residential commercial real estate
   
1,582
     
     
     
1,582
     
2,003,733
     
2,005,315
     
 
Grocery/credit retail commercial real estate
   
     
     
     
     
497,708
     
497,708
     
 
Other commercial real estate
   
1,009
     
     
136
     
1,145
     
795,444
     
796,589
     
1,542
 
Construction and land loans
   
     
     
     
     
10,960
     
10,960
     
 
Total
 
$
5,287
   
$
753
   
$
5,349
   
$
11,389
   
$
3,566,954
   
$
3,578,343
   
$
7,877
 


(1)
Included in nonaccrual loans at December 31, 2018 are residential loans totaling $202,000 and other commercial real estate loans totaling $121,000 that were 30-59 days past due; and residential loans totaling $362,000 that were 60-89 days past due; and residential loans totaling $197,000 and other commercial real estate loans totaling $1.1 million that were less than 30 days past due.
(2)
Included in nonaccrual loans at June 30, 2018 are residential loans totaling $35,000 that were 30-59 days past due; residential loans totaling $582,000 that were 60-89 days past due; and residential loans totaling $504,000 and other commercial real estate loans totaling $1.4 million that were less than 30 days past due.
 
17


The Company defines an impaired loan as a loan for which it is probable, based on current information, that the Company will not collect all amounts due under the contractual terms of the loan agreement.  Loans we individually classify as impaired include multifamily, commercial mortgage and construction loans with balances of $1.0 million or more, unless a condition exists for loans less than $1.0 million that would increase the Bank’s potential loss exposure.  At December 31, 2018 impaired loans were primarily collateral-dependent and totaled $9.7 million, of which $65,000 had a related allowance for credit losses of $65,000 and $9.6 million of impaired loans had no related allowance for credit losses. At June 30, 2018 impaired loans were primarily collateral-dependent and totaled $9.2 million, with no related allowance for credit losses.

The following table provides information about the Company’s impaired loans at December 31, 2018 and June 30, 2018:

   
At December 31, 2018
   
At June 30, 2018
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Allowance
   
Recorded Investment
   
Unpaid Principal Balance
   
Allowance
 
   
(In thousands)
 
With no related allowance recorded:
                                   
Residential
 
$
5,763
   
$
5,756
   
$
   
$
5,021
   
$
5,022
   
$
 
Other commercial real estate
   
3,680
     
3,842
     
     
4,018
     
4,181
     
 
                    Total
   
9,443
     
9,598
     
     
9,039
     
9,203
     
 
With an allowance recorded:
                                               
Residential
 
$
   
$
65
   
$
65
   
$
   
$
   
$
 
 
                                               
Residential
 
$
5,763
   
$
5,821
   
$
65
   
$
5,021
   
$
5,022
   
$
 
Other commercial real estate
   
3,680
     
3,842
     
     
4,018
     
4,181
     
 
                    Total
 
$
9,443
   
$
9,663
   
$
65
   
$
9,039
   
$
9,203
   
$
 
18


The following tables present the average recorded investment and interest income recognized on impaired loans for the three and six months ended December 31, 2018 and 2017:

   
Three months ended December 31,
 
   
2018
   
2017
 
   
Average Recorded Investment
   
Interest Income Recognized
   
Average Recorded Investment
   
Interest Income Recognized
 
   
(In thousands)
 
With no related allowance recorded:
                       
Residential
 
$
5,767
   
$
57
   
$
3,639
   
$
1
 
Other commercial real estate
   
3,736
     
51
     
8,189
     
126
 
 
   
9,503
     
108
     
11,828
     
127
 
With an allowance recorded:
                               
Residential
   
     
     
1,107
     
13
 
                                 
Total:
                               
Residential
   
5,767
     
57
     
4,746