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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

 

FORM 10-Q

 

For the quarterly period ended September 30, 2016

OR

For the transition period from                to               

Commission File No.  001-36390

 

 

CLIFTON BANCORP INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

(973) 473-2200

(Registrant’s telephone number, including area code)

 

 

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 filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) 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, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐    No ☒

The number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2016: 23,046,435 shares outstanding.

 

 

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Share and Per Share Data)

 

 

See notes to consolidated financial statements.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Share and Per Share Data, Unaudited)

 

 

See notes to consolidated financial statements.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Unaudited)

 

 

See notes to consolidated financial statements.

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Data, Unaudited)

 

 

See notes to consolidated financial statements.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Data, Unaudited)

 

 

See notes to consolidated financial statements.

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Unaudited)

 

 

See notes to consolidated financial statements.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT’D)

(In Thousands, Unaudited)

 

 

See notes to consolidated financial statements.

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Clifton Bancorp Inc. (the “Company”), the Company’s wholly-owned subsidiary, Clifton Savings Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Botany Inc. (“Botany”). The Company’s principal business is the ownership and operation of the Bank.  Botany’s business consists solely of holding investment and mortgage-backed securities, and Botany is treated under New Jersey tax law as a New Jersey Investment Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, or cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the six month period ended September 30, 2016 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended March 31, 2016, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 8, 2016.

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of September 30, 2016 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

2. EARNINGS PER SHARE (EPS)

Basic EPS is based on the weighted average number of common shares actually outstanding, and is adjusted for employee stock ownership plan shares not yet committed to be released and deferred compensation obligations required to be settled in shares of Company stock. Unvested restricted stock awards, which contain rights to non-forfeitable dividends, are considered participating securities and the two-class method of computing basic and diluted EPS is applied. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable (such as stock options) or which could be converted into common stock, if dilutive, using the treasury stock method. Basic and diluted EPS have been determined based on the adjusted numbers of weighted average shares. The calculation of diluted EPS for the three and six months ended September 30, 2016 includes incremental shares related to outstanding stock options of 60,310 and 60,073, respectively.  The calculation of diluted EPS for the three and six months ended September 30, 2015 includes incremental shares related to outstanding stock options of 54,038 and 64,304, respectively. Shares issued or retired during any period are weighted for the portion of the period they were outstanding. During the three and six months ended September 30, 2016,  the average number of options which were antidilutive were 1,035,635 and 1,046,640, respectively.  During the three and six months ended September 30, 2015,  the average number of options which were antidilutive were 360,564 and 186,752, respectively.

3. STOCK REPURCHASE AND STOCK BASED COMPENSATION

On March 11, 2015, the Company announced that the Board of Directors authorized a stock repurchase plan, that became effective on April 2, 2015, to acquire up to 2,731,000 shares, or 10%, of the Company’s outstanding common stock. On October 28, 2015, the Company announced that the Board of Directors authorized an extension of the stock repurchase plan to acquire an additional 2,569,000 shares, or 10%, of the Company’s outstanding common stock. On September 8, 2016 the Company announced that the Board of Directors authorized an extension of the stock repurchase plan to acquire up to an additional 1,155,000 shares, or 5%, of the Company’s outstanding common stock.

During the six months ended September 30, 2016 and 2015, approximately 888,900 and 2,270,000 shares were repurchased, respectively, under the repurchase plan at an aggregate cost of approximately $13.3 million, or $14.93 per share, and $31.3 million, or $13.81 per share, respectively.  

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

3. STOCK REPURCHASE AND STOCK BASED COMPENSATION (CONT’D)

 

At the Company’s annual meeting of stockholders held on August 6, 2015, stockholders of the Company approved the Clifton Bancorp Inc. 2015 Equity Incentive Plan (“the Plan”). Under the Plan, the Company may grant options to purchase up to 1,705,944 shares of Company common stock and may grant up to 682,377 shares of Company common stock as restricted stock awards.

On September 2, 2015, 511,784 shares of restricted stock were awarded, with a grant date fair value of $13.84 per share. To fund the grants of restricted common stock, the Company issued 511,784 shares from authorized shares. All shares of restricted stock granted on this date vest in equal installments over a five-year period beginning one year from the date of grant.

On April 6, 2016, 8,000 shares of restricted stock were awarded, with a grant date fair value of $14.89 per share. To fund the grants of restricted common stock, the Company issued 8,000 shares from authorized shares. All shares of restricted stock granted on this date vest one year from the date of grant.

On August 31, 2016, effective on September 12, 2016, 9,000 shares of restricted stock were awarded, with a grant date fair value of $15.16 per share. To fund the grants of restricted common stock, the Company issued 9,000 shares from authorized shares. All shares of restricted stock granted on this date vest in equal installments over a three-year period beginning one year from the date of grant.

Management recognizes expense for the fair value of these awards on a straight line basis over the requisite service period. During the six months ended September 30, 2016 and 2015, $683,000 and $129,000, respectively, in expense was recognized in regard to these restricted stock awards. The Company recognized approximately $279,000 and $53,000 of income tax benefits resulting from this expense for six months ended September 30, 2016 and 2015, respectively. The expected future compensation expense relating to the 400,532 non-vested restricted shares outstanding at September 30, 2016 is $5.4 million over a weighted average period of 3.8 years.

The following is summary of the status of the Company’s non-vested restricted shares:

 

 

Under the 2015 Equity Incentive Plan, on September 2, 2015, stock options to purchase 1,108,868 shares of Company common stock were awarded, with a grant date fair value of $1.63 per share and an expiration date of September 2, 2025. All of these stock options granted vest in equal installments over a five-year period beginning one year from the date of grant. Stock options were granted at an exercise price of $13.84 equal to the fair value of the Company’s common stock on the grant date based on quoted market prices. The fair value of the stock options of $1.63 was estimated utilizing the Black-Scholes option pricing model using the following assumptions: an expected life of 6.5 years, risk-free rate of return of 1.92%, volatility of 12.50% and a dividend yield of 1.73%.

 

Under the 2015 Equity Incentive Plan, on April 6, 2016, stock options to purchase 10,000 shares of Company common stock were awarded, with a grant date fair value of $1.79 per share and an expiration date of April 6, 2026. All of these stock options granted vest one year from the date of grant. Stock options were granted at an exercise price of $14.89 equal to the fair value of the Company’s common stock on the grant date based on quoted market prices. The fair value of the stock options was estimated utilizing the Black-Scholes option pricing model using the following assumptions: an expected life of 5.5 years, risk-free rate of return of 1.28%, volatility of 14.92% and a dividend yield of 1.61%.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

3. STOCK REPURCHASE AND STOCK BASED COMPENSATION (CONT’D)

 

Under the 2015 Equity Incentive Plan, effective on September 12, 2016, stock options to purchase 10,000 shares of Company common stock were awarded, with a grant date fair value of $1.92 per share and an expiration date of September 12, 2026. All of these stock options granted vest one year from the date of grant. Stock options were granted at an exercise price of $15.16 equal to the fair value of the Company’s common stock on the grant date based on quoted market prices. The fair value of the stock options was estimated utilizing the Black-Scholes option pricing model using the following assumptions: an expected life of 5.5 years, risk-free rate of return of 1.28%, volatility of 15.63% and a dividend yield of 1.58%.

The expected option life was estimated as the mid-point between the vesting period and ten year life of the options. The risk-free rate of return was based on the rate on the grant date of a U.S. Treasury Note with a term equal to the expected option life. Expected volatility was based on the historical stock price activity of the Company over the year prior to the grant date. The dividend rate was based on the cash dividends paid by the Company over the year prior to the grant date on its common stock.

 

Management recognizes expense for the fair value of these awards on a straight line basis over the requisite service period. During the six months ended September 30, 2016 and 2015, $166,000 and $35,000, respectively, in stock option expense was recorded net of income tax benefits of $47,000 and $10,000 respectively. The expected future compensation expense relating to the 847,676 non-vested options outstanding at September 30, 2016 is $1.3 million over the weighted average period of 3.8 years.

A summary of stock option activity follows:

 

 

 

4. RETIREMENT PLAN-COMPONENTS OF NET PERIODIC PENSION COST

 

Periodic pension expense for the directors’ retirement plan and a former president’s post-retirement health care plan were as follows:

 

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale and held to maturity for the dates indicated are as follows:

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. SECURITIES (CONT’D)

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. SECURITIES (CONT’D)

Contractual maturity data for securities are as follows:

 

 

The amortized cost and carrying values shown above are by contractual final maturity.  Actual maturities will differ from contractual final maturities due to scheduled monthly payments related to mortgage-backed securities and due to the borrowers having the right to prepay obligations with or without prepayment penalties. The Company’s mortgage-backed securities are generally secured by residential mortgage loans with contractual maturities of 15 years or greater, and multi-family loans with maturities of five to 10 years. However, the effective lives of those securities are generally shorter than their contractual maturities due to principal amortization and prepayment of the loans within those securities. Investors in pass-through securities generally share in the receipt of principal repayments on a pro-rata basis as paid by the borrowers.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. SECURITIES (CONT’D)

The age of gross unrealized losses and the fair value of related securities at September 30 and March 31, 2016 were as follows:

 

 

Management does not believe that any of the unrealized losses at September 30, 2016 (one corporate bond and two municipal bonds included in debt securities, and five FNMA mortgage-backed securities and two GNMA mortgage-backed securities) represent an other-than-temporary impairment as they are primarily related to market interest rates and not related to the underlying credit quality of the issuers of the securities.  Additionally, the Company and its subsidiaries have the ability, and management has the intent, to hold such securities for the time necessary to recover amortized cost and does not have the intent to sell the securities, and it is more likely than not that it will not have to sell the securities before recovery of their amortized cost.

 

During the six months ended September 30, 2016 and 2015, the proceeds from sales of securities available for sale totaled $3.7 million and $1.9 million, respectively, resulting in gross realized gains of $84,000 and $72,000, respectively.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The following is a summary of loans by segment and the classes within those segments:

 

 

The allowance for loan losses consists of general and unallocated components. For loans that are classified as impaired, a valuation allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component of the allowance covers pools of loans by loan class not considered impaired, as well as smaller balance homogeneous loans, such as one- to four-family real estate, construction real estate, second mortgage loans, home equity lines of credit and passbook loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors to reflect current conditions. The qualitative risk factors include:

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating losses in the portfolio.

The evaluation of the adequacy of the allowance is based on an analysis which categorizes the entire loan portfolio by certain risk characteristics. The loan portfolio segments are further disaggregated into the following loan classes, where the risk level for each type is analyzed when determining the allowance for loan losses.

Real Estate:

1. One- to Four-Family Loans - consists of loans secured by first liens on either owner occupied or investment properties.  These loans can be affected by economic conditions and the value of the underlying properties. The risk is considered relatively low as the Bank has always had conservative underwriting standards and does not have sub-prime loans in its loan portfolio.

2. Multi-Family Loans - consists of loans secured by multi-family real estate which generally involve a greater degree of risk than one- to four-family residential mortgage loans. These loans can be affected by economic conditions and the value of the underlying properties.

3. Commercial Loans - consists of loans secured by commercial real estate which generally involve a greater degree of risk than one- to four-family residential mortgage loans. These loans can be affected by economic conditions and the value of the underlying properties. These loans are affected by economic conditions to a greater degree than one- to four-family and multi-family loans.

4. Construction Loans - consists primarily of the financing of construction of one- to four-family properties or construction/permanent loans for the construction of one- to four-family homes to be occupied by the borrower. Construction loans generally are considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate due to uncertainty of construction costs. Independent inspections are performed prior to disbursement of loan proceeds as construction progresses to mitigate these risks. These loans are also affected by economic conditions.

Commercial and Industrial Loans:

Consists of commercial lines of credit and term loans which can be either secured or unsecured. Commercial and industrial loans are generally considered to involve a higher degree of risk of loss due to the concentration of principal in a limited number of loans and/or borrowers and the effects of general economic conditions on the business and/or the value of the underlying properties, if applicable. Commercial and industrial loans generally have shorter terms and higher interest rates than other forms of lending.

Consumer:

1. Second Mortgage and Equity Lines of Credit - consists of one- to four-family loans secured by first, second or third liens (when the Bank has the two other lien positions). These loans are affected by the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. The credit risk is considered slightly higher than one- to four-family first lien loans as these loans are also dependent on the value of underlying properties, but in many instances, have the added risk of a subordinate collateral position.

2. Passbook or Certificate and Other Loans - consists of loans secured by passbook accounts and certificates of deposits and unsecured loans. The passbook or certificate loans have low credit risk as they are fully secured by their collateral. Unsecured loans, included in other loans, are two loans in a New Jersey loan fund and they also are considered a low credit risk.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss.  Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Non-classified assets are rated as a pass or pass-watch. Pass-watch loans require current oversight or tracking by management generally due to incomplete documentation or monitoring due to previous delinquent status.

In addition, the Office of the Comptroller of the Currency (the “OCC”), as an integral part of its examination process, periodically reviews the Bank’s loan portfolio and the related allowance for loan losses. The OCC may require the allowance for loan losses to be increased based on its review of information available at the time of the examination.

The change in the allowance for loan losses for the three and six months ended September 30, 2016 and 2015 is as follows:

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

The following table presents the allocation of the allowance for loan losses and related loans by loan class at September 30 and March 31, 2016. 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

The aggregate amount of classified loan balances are as follows at September 30 and March 31, 2016:

 

 

The following table provides information with respect to the Bank’s nonaccrual loans at September 30 and March 31, 2016. Loans are generally placed on nonaccrual status when they become more than 90 days delinquent, or when the collection of principal and/or interest become doubtful. Nonaccrual loans differed from the amount of total loans past due greater than 90 days due to some previously delinquent loans that are currently not more than 90 days delinquent which are maintained on nonaccrual status for a minimum of six months until the borrower has demonstrated the ability to satisfy the loan terms. A loan is returned to accrual status when there is sustained period of repayment performance (generally six consecutive months) by the borrower in accordance with the contractual terms of the loan, or in some circumstances, when the factors indicating doubtful collectability no longer exist and the Bank expects repayment of the remaining contractual amounts due.

 

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

The following table provides information about delinquencies in the Bank’s loan portfolio at September 30 and March 31, 2016.

 

 

There were no loans that are past due greater than 90 days that were accruing as of September 30 and March 31, 2016.

We may obtain physical possession of real estate collateralizing a residential mortgage loan via foreclosure on an in-substance repossession. As of September 30, 2016, we hold four foreclosed residential real estate properties with a carrying value of $943,000 as a result of obtaining physical possession. In addition, as of September 30, 2016, we have six residential mortgage loans with a carrying value of $705,000 collateralized by residential real estate property for which formal foreclosure proceedings are in process.

A loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. The Company considers one- to four-family mortgage loans and consumer installment loans to be homogeneous and, therefore, does not generally evaluate them individually for impairment, unless they are considered troubled debt restructurings.  All other loans are evaluated for impairment on an individual basis.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

Impaired loans, none of which had a related allowance at or for the three and six months ending September 30, 2016 and 2015, and at or for the year ended March 31, 2016, were as follows:

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

 

 

The recorded investment in loans modified in a troubled debt restructuring totaled $1.4 million and $994,000, respectively, at September 30 and March 31, 2016, of which $194,000 and $0, respectively, were 90 days or more past due, $17,000 and $0, respectively, were 60 to 89 days past due, and $55,000 and $213,000, respectively, were 30 to 59 days past due. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreements at September 30 and March 31, 2016. Loans that were modified in a troubled debt restructuring represent concessions made to borrowers experiencing financial difficulties. The Bank works with these borrowers to modify existing loan terms usually by extending maturities or reducing interest rates. The Bank records an impairment loss, if any, based on the present value of expected future cash flows discounted at the original loan’s effective interest rate. Subsequently, these loans are individually evaluated for impairment.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT’D)

The following table presents troubled debt restructurings by class during the period indicated.

 

 

There were no new troubled debt restructurings during the three month periods ended September 30, 2016 and 2015.

There were no defaults that occurred within twelve months of restructuring during the three and six months ended September 30, 2016 and 2015.      

 

7. FAIR VALUE

Accounting guidance on fair value measurement establishes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

In addition, the guidance requires the Company to disclose the fair value for certain assets and liabilities on both a recurring and non-recurring basis.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

7. FAIR VALUE (CONT’D)

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30 and March 31, 2016 are as follows: 

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30 and March 31, 2016 are as follow:

 

 

There were no liabilities measured at fair value on a recurring or non-recurring basis at September 30 and March 31, 2016.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

7. FAIR VALUE (CONT’D)

The following information should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of certain of the Company’s assets and liabilities at September 30 and March 31, 2016:

Cash and Cash Equivalents, Interest Receivable, and Interest Payable (Carried at Cost)

The carrying amounts reported in the consolidated statements of financial condition for cash and cash equivalents, interest receivable, and interest payable approximate their fair values.

Securities

The fair value of all securities, whether classified as available for sale (carried at fair value) or held to maturity (carried at cost), is determined by reference to quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Securities are measured on a recurring basis. The fair values of these securities are obtained from quotes received from an independent broker. The Company’s broker provides it with prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available. As the Company is responsible for the determination of fair value, it performs monthly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to a secondary pricing source. The Company’s internal price verification procedures and review of fair value methodology documentation provided by third-party pricing services has not historically resulted in adjustment in the prices obtained from the pricing service.

Loans Receivable (Carried at Cost)

Fair value is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans.

Impaired Loans (Carried based on Collateral Fair Value or Discounted Cash Flows)

Impaired loans are those accounted for under ASC Topic 310 “Accounting by Creditors for Impairment of a Loan” in which the Company has measured impairment generally based on either the fair value of the loan’s collateral or discounted cash flows. These assets are included as Level 3 assets.

Federal Home Loan Bank of New York Stock (Carried at Cost)

Fair value approximates cost basis as these instruments are redeemable only with the issuing agency at face value.

Deposits (Carried at Cost)

The fair value of non-interest-bearing demand, interest-bearing demand, and Savings and Club accounts is the amount payable on demand at the reporting date. For fixed-maturity certificates of deposit, fair value is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities.

Advances from Federal Home Loan Bank of New York (Carried at Cost)

The fair value is estimated by discounting future cash flows using rates currently offered for liabilities of similar remaining maturities, or when available, quoted market prices.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

7. FAIR VALUE (CONT’D)

Commitments to Extend Credit

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

As of September 30 and March 31, 2016, the fair value of the commitments to extend credit were not considered to be material.

The carrying amounts and fair values of financial instruments are as follows: 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

8. RECENT ACCOUNTING PRONOUNCEMENTS

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) issued their final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09 by the FASB and as IFRS 152 by the IASB, and amended by ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The goals of the revenue recognition project are to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements while also providing “a more robust framework for addressing revenue issues.” The boards believe that the standard will improve the consistency of requirements, comparability of revenue recognition practices, and usefulness of disclosures. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this standard effective April 1, 2018 is not expected to have a material impact on the Company’s consolidated financial statements.

On January 5, 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to improve the recognition and measurement of financial instruments. The ASU significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this standard effective April 1, 2018 is not expected to have a material impact on the Company’s consolidated financial statements.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.  New disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases are also required. These disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements. For a public entity, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is evaluating the standard’s impact, and the adoption of this standard, effective April 1, 2019, is not expected to have a material impact on the Company’s consolidated financial statements.

On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The amendment simplifies several aspects of the accounting for employee share-based payment transactions including the following: Accounting for income taxes; Classification of excess tax benefits on the statement of cash flow; Forfeitures; Statutory tax withholding requirements; Classification of awards as either equity or liabilities; Classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The ASU is aimed at reducing the cost and complexity of accounting for share-based payments, that will likely result in significant changes to net income and earnings per share, including the effect of the exclusion of windfall tax benefits from the hypothetical proceeds used to calculate the repurchase of shares under the treasury stock method. For a public entity, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption will be permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company has adopted the standard effective April 1, 2016 on a prospective basis. Prior periods have not been retrospectively adjusted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The ASU also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ALLL. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. For a public entity, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. While the standard’s ultimate impact on the Company’s financial statements remains unknown today, we are preparing to implement this standard on April 1, 2020.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

8. RECENT ACCOUNTING PRONOUNCEMENTS (CONT’D)

On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance addresses eight classification issues related to the statement of cash flows, which include proceeds from settlement of corporate-owned life insurance policies and bank-owned life insurance policies. For a public entity, ASU 2016-15 is effective annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard effective April 1, 2018 is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Form 10-Q may include, and from time to time the Company may disclose, certain forward-looking statements based on current management expectations. The Company’s actual results could differ materially from those management expectations.  Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, and for financial services, competition, changes in the quality or composition of loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices. (See Part II - “Item 1A: Risk Factors.”) Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2016 under Part I - “Item 1A. Risk Factors”.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Overview of Financial Condition and Results of Operations

The Company’s results of operations depend primarily on its net interest income, which is a function of the interest rate environment.  Net interest income is the difference between the interest earned on interest-earning assets and the interest paid on interest-bearing liabilities. It is a function of the average balances of loans and securities versus deposits and borrowed funds outstanding in any one period and the yields earned on those loans and securities and the costs of those deposits and borrowed funds.

Interest-earning assets consist primarily of investment and mortgage-backed securities and net loans, which comprised 24.2% and 67.2%, respectively, of total assets at September 30, 2016, as compared to 28.5% and 62.3%, respectively, of total assets at March 31, 2016. Cash and cash equivalents decreased to 1.7% of total assets at September 30, 2016, as compared to 2.5% at March 31, 2016. The Company’s mortgage-backed securities portfolio at September 30, 2016 consists solely of U.S. government-sponsored or guaranteed enterprises and the investment portfolio consists of approximately 48% U.S. government-sponsored or guaranteed enterprises, 38% corporate bonds and 14% municipal bonds.

Interest-bearing liabilities consist of deposits, and borrowings from the Federal Home Loan Bank of New York (the “FHLB”).  Deposits increased $77.6 million, or 11.2%, between March 31, 2016 and September 30, 2016. Borrowed funds decreased $7.0 million, or 3.0% as new borrowings of $175.0 million were partially offset by repaid borrowings of $182.0 million. The balance at September 30, 2016 was $224.5 million, down from $231.5 million at March 31, 2016.

Net interest income increased $529,000, or 8.1%, during the three months ended September 30, 2016, when compared with the same 2015 period. The increase in net interest income was mostly due to a $1.2 million increase in total interest income, partially offset by a $648,000 increase in total interest expense. Average interest-earning assets increased $133.5 million, or 12.4%, compared with the same 2015 period, while average interest-bearing liabilities increased $171.5 million, or 21.9%, when compared with the same 2015 period. The $38.0 million decrease in average net interest-earning assets was mainly attributable to decreases of $5.8 million in the average balance of mortgage-backed securities, and $57.3 million in the average balance of investment securities, coupled with an increase of $109.6 million in the average balance of FHLB advances and $61.8 million in average interest bearing deposits, partially offset by an increase of $189.4 million in the average balance of loans, and $7.1 million in average other interest-earning assets.

The net interest rate spread decreased to 2.08% from 2.12% for the three months ended September 30, 2016 when compared with the same 2015 period. The increase of 3 basis points in the yield on interest-earning assets was more than offset by the increase of 7 basis points in the cost of interest-bearing liabilities. Results of operations also depend, to a lesser extent, on non-interest income generated, any provision for loan losses recorded, and non-interest expenses incurred. During the three months ended September 30, 2016, non-interest income increased $49,000, or 10.8%, as compared to the comparable period in 2015. Provision for loan losses increased $405,000, or 405.0%, and non-interest expenses increased $731,000, or 16.0%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Changes in Financial Condition

Assets at September 30, 2016 totaled $1.31 billion, which represents an increase of $59.1 million, or 4.7%, as compared with $1.25 billion at March 31, 2016. The increase in total assets was primarily due to an increase of $101.4 million in net loans.

Cash and cash equivalents decreased $8.3 million, or 26.8%, to $22.8 million at September 30, 2016 as compared to $31.1 million at March 31, 2016. Cash and cash equivalents were redeployed into higher yielding assets.

Securities available for sale at September 30, 2016 decreased $4.5 million, or 47.0%, to $5.1 million from $9.6 million at March 31, 2016, resulting primarily from principal repayments of $794,000, $3.7 million in proceeds from the sale of a security, and a decrease of $73,000 in the unrealized gain on the portfolio.

Securities held to maturity at September 30, 2016 decreased $35.8 million, or 10.3%, to $312.1 million from $347.9 million at March 31, 2016, resulting primarily from maturities, calls and repayments totaling $58.7 million, partially offset by purchases of securities totaling $23.1 million.

Net loans at September 30, 2016 increased $101.4 million, or 13.0%, to $881.6 million when compared with $780.2 million at March 31, 2016.  The increase in the loan portfolio was mainly in multi-family and commercial loans which increased $94.1 million, or 61.3%, due to the Bank’s continued emphasis on the growth of its loan portfolio. Repayment levels remained relatively stable during the three months ended September 30, 2016.

Total liabilities increased $71.5 million, or 7.6%, to $1.01 billion at September 30, 2016 from $937.9 million at March 31, 2016.  Deposits at September 30, 2016 increased $77.6 million, or 11.2%, to $772.3 million when compared with $694.7 million at March 31, 2016. From March 31, 2016 to September 30, 2016, borrowed funds decreased $7.0 million, to $224.5 million, with an outstanding weighted average interest rate of 1.63% at September 30, 2016, compared to 1.53% at March 31, 2016.

Total stockholders’ equity decreased $12.4 million, or 3.9%, to $302.9 million at September 30, 2016 from $315.3 million at March 31, 2016. The decrease resulted primarily from cash dividends paid of $2.7 million and repurchases of common stock of $13.3 million, partially offset by net income of $2.3 million.

Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015

Average Balances and Yields.  The following table presents information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income and dividends from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of month-end balances, and nonaccrual loans are included in average balances; however, accrued interest income has been excluded from these loans. Loan fees (costs) are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax equivalent basis are insignificant.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015 (Cont’d.)

 

 

Net income decreased $299,000, or 19.4%, to $1.24 million for the three months ended September 30, 2016 compared with $1.54 million for the same 2015 period. The decrease in net income resulted primarily from increases of $731,000, or 16.0%, in non-interest expenses and $405,000, or 405.0%, in provision for loan losses, partially offset by increases of $529,000, or 8.1%, in net interest income and $49,000, or 10.8%, in non-interest income, as well as a decrease of $259,000, or 33.6%, in income taxes.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015 (Cont’d.)

Interest income on loans increased by $1.7 million, or 27.2%, to $7.8 million during the three months ended September 30, 2016, when compared with $6.1 million for the same 2015 period. The increase mainly resulted from an increase of $189.4 million, or 28.4%, in the average balance when compared to the same period in 2015, partially offset by a decrease of 4 basis points in the yield earned on the loan portfolio, to 3.62% from 3.66%. Interest income on mortgage-backed securities decreased $165,000, or 8.7%, to $1.7 million during the three months ended September 30, 2016, when compared with $1.9 million for the same 2015 period. The decrease during the 2016 period resulted from a decrease of 19 basis points in the yield earned on mortgage-backed securities to 2.59% from 2.78%, coupled with a decrease of $5.8 million, or 2.1%, in the average balance of mortgage-backed securities outstanding. Interest earned on investment securities decreased by $395,000, or 58.3%, to $283,000 during the three months ended September 30, 2016, when compared to $678,000 for the same 2015 period, due to a decrease in the average balance of $57.3 million, or 49.2%, coupled with a decrease of 41 basis point in the yield earned on investment securities to 1.92% from 2.33%. Interest earned on other interest-earning assets increased by $79,000, or 109.7%, to $151,000 during the three months ended September 30, 2016, when compared to $72,000 during the same 2015 period. The increase was due to a 78 basis point increase in the yield to 2.13% from 1.35%, coupled with an increase of $7.1 million, or 33.5%, in the average balance of these assets.  The decrease in the yields on loans, mortgage-backed securities and investment securities was the result of continued overall lower market interest rates, and the maturities of higher yielding investment securities. The yield on other interest-earning assets increased as the balance was mainly comprised of relatively higher yielding FHLB stock.

Interest expense on deposits increased $336,000, or 21.2%, to $1.9 million during the three months ended September 30, 2016, when compared to $1.6 million during the same 2015 period. The increase was primarily attributable to an increase of $61.8 million, or 9.3%, in the average balance of interest-bearing deposits, coupled with a 10 basis points increase in the cost of interest-bearing deposits to 1.05% from 0.95%. The increase in balance was the result of the Bank’s continued efforts to emphasize deposit taking through business relationships. Interest expense on borrowed money increased approximately $312,000, or 51.0%, to $924,000 during the three months ended September 30, 2016 when compared with $612,000 during the same 2015 period. The increase was primarily attributable to an increase of $109.6 million, or 94.0%, in the average balance of borrowings, partially offset by a 47 basis point decrease in the cost of borrowings to 1.63% from 2.10%. The $171.4 million increase in average interest-bearing liabilities was due to an increase of $61.8 million in interest-bearing deposits coupled with an increase of $109.6 million in the average balance of borrowings. Borrowings were used in part to fund loan demand. Net interest income increased $529,000, or 8.1%, during the three months ended September 30, 2016, to $7.1 million when compared to $6.5 million for the same 2015 period. The net interest rate spread decreased to 2.08% from 2.12% for the three months ended September 30, 2016 when compared the same 2015 period, due to a 7 basis point increase in the cost of interest-bearing liabilities, partially offset by a 3 basis point increase in the yield earned on interest-earning assets.

 

The provision for loan losses increased $405,000, or 405.0%, to $505,000 for the three months ended September 30, 2016 as compared to $100,000 for the same period in 2015. The increase in the provision for the 2016 period was mainly due to the result of the significant increase in the balance of outstanding loans, partially offset by more favorable trends in qualitative factors related to delinquencies considered in the periodic review of the general valuation allowance. The allowance for loan losses is based on management’s qualitative analysis, which includes an evaluation of economic and other factors to determine the adequacy of the allowance for loan loss balance. The Bank continually evaluates the need for a provision for loan losses based on its periodic review of the loan portfolio and general market conditions. At September 30, 2016 and 2015, the Bank’s non-accrual loans totaled $2.8 million and $4.3 million, respectively, representing 0.32% and 0.64%, respectively, of total gross loans, and 0.29% and 0.38%, respectively, of total assets. At March 31, 2016, nonaccrual loans totaled $3.7 million, or 0.47% and 0.29% of total gross loans and total assets, respectively. During the three months ended September 30, 2016, $80,000 in net charge-offs were recorded on a one- to four-family residential real estate loan. During the three months ended September 30, 2015, no charge-offs were recorded. At September 30, 2016, non-accrual loans consisted of fourteen loans secured by one- to four-family residential real estate and one loan secured by commercial real estate, while at September 30, 2015 non-accrual loans consisted of nineteen loans secured by one- to four-family residential real estate, one loan secured by commercial real estate, one loan secured by multi-family real estate, one second mortgage loan secured by one- to four-family residential real estate and one second mortgage loan secured by commercial real estate and one construction loan secured by multi-family real estate. Included in non-accrual loans at September 30, 2016 are four loans totaling $568,000 that were current or less than ninety days delinquent. At September 30, 2015, there were seven loans totaling $1.2 million that were current or less than ninety days delinquent included in non-accrual loans. All non-accrual loans included above are secured by properties located in the state of New Jersey. Impaired loans totaled $1.8 million, $1.6 million and $2.1 million at September 30, 2016, March 31, 2016 and September 30, 2015, respectively. The allowance for loan losses amounted to $5.20 million, $4.36 million, and $3.63 million, respectively, at September 30, 2016, March 31, 2016, and September 30, 2015, representing 0.59%, 0.56%, and 0.53% of total gross loans, respectively.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015 (Cont’d.)

Non-interest income increased $49,000, or 10.8%, to $501,000 for the three months ended September 30, 2016 as compared to $452,000 for the three months ended September 30, 2015, mainly due to an increase of $45,000, or 90.0%, in fees and service charge on loans and deposits.

 

Non-interest expenses increased $731,000, or 16.0%, to $5.31 million for the three months ended September 30, 2016, as compared to $4.58 million for the three months ended September 30, 2015. The increase was driven by increases of $653,000, or 24.0%, in salaries and employee benefits, $83,000, or 23.7%, in occupancy expense of premises, and $68,000, or 18.4%, in equipment expense, partially offset by a decrease of $89,000, or 19.8%, in other expenses. The increase in salaries and employee benefits includes the addition of a chief operating officer, and business development, compliance, lending and Hoboken Banking Center personnel, as well as typical annual increases in compensation and benefits expenses, employee stock ownership plan expense due to an increase in the price of the Company’s common stock, and the expense related to the granting of equity awards under the Company’s 2015 Equity Incentive Plan. The increases in occupancy and equipment expenses were mainly related to the costs of the newly opened Hoboken Banking Center, along with the costs associated with new customer products and services. Other expenses decreased mainly due to decreases in consulting and personnel search costs.

Income taxes totaled $513,000 and $772,000 during the three months ended September 30, 2016 and 2015, respectively. The decrease of $259,000, or 33.6%, resulted from lower pre-tax income, coupled with a decrease in the effective income tax rate. The overall effective income tax rate was 29.3% for the 2016 period compared with 33.4% for the 2015 period. The reduced effective tax rate is attributable to the increased investment in bank owned life insurance and the tax benefit resulting from the adoption of ASU 2016-09, which amends the treatment for accounting for income taxes on certain employee share-based payment transactions.

Comparison of Operating Results for the Six Months Ended September 30, 2016 and 2015

Average Balances and Yields.  The following table presents information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income and dividends from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of month-end balances, and nonaccrual loans are included in average balances; however, accrued interest income has been excluded from these loans. Loan fees (costs) are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax equivalent basis are insignificant.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Comparison of Operating Results for the Six Months Ended September 30, 2016 and 2015 (Cont’d.)

 

 

Net income decreased $941,000, or 29.4%, to $2.3 million for the six months ended September 30, 2016 compared with $3.2 million for the same 2015 period. The decrease in net income during the 2016 period resulted primarily from an increase of $1.7 million, or 18.6%, in non-interest expense, an increase of $858,000, or 496.0%, in provision for loan losses, partially offset by an increase of $894,000, or 6.8%, in net-interest income and $62,000, or 6.4%, in non-interest income, coupled with a decrease of $656,000, or 40.6%, in income taxes.  

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Comparison of Operating Results for the Six Months Ended September 30, 2016 and 2015 (Cont’d.)

 

Interest income on loans increased by $2.9 million, or 24.0%, to $15.0 million during the six months ended September 30, 2016, when compared with $12.1 million for the same 2015 period.  The increase during the 2016 period mainly resulted from an increase of $171.8 million, or 26.2%, in the average balance of loans when compared to the same period in 2015, partially offset by a decrease of 7 basis points in the yield earned on the loan portfolio to 3.61% from 3.68%. Interest income on mortgage-backed securities decreased $264,000, or 6.9%, to $3.6 million during the six months ended September 30, 2016, when compared with $3.8 million for the same 2015 period. The decrease during the 2016 period resulted from a decrease of 14 basis points in the yield earned on mortgage-backed securities to 2.64% from 2.78%, coupled with a decrease of $5.5 million, or 2.0%, in the average balance of mortgage-backed securities outstanding. Interest earned on investment securities decreased by $696,000, or 50.2%, to $691,000 during the six months ended September 30, 2016, when compared to $1.4 million during the same 2015 period, due to a decrease of 15 basis point in yield to 2.11% from 2.26%, coupled with a decrease of $57.5 million, or 46.8%, in the average balance of investment securities.  Interest earned on other interest-earning assets increased by $124,000, or 83.2% to $273,000 during the six months ended September 30, 2016, when compared to $149,000 during the same 2015 period primarily due to an increase of $593,000, or 2.1%, in the average balance of loans, coupled with an increase of 83 basis points in yield to 1.86% from 1.03%.  The increase in the balance of loans resulted from the Bank’s continued emphasis on growth in its loan portfolio. The decrease in the yield on loans, mortgage-backed securities and investment securities was the result of overall lower market interest rates and maturities of higher yielding investment securities. The yield on other interest earning assets increased as the balance was mainly comprised of relatively higher yielding FHLB stock.

 

Interest expense on deposits increased $524,000, or 16.6%, to $3.7 million during the six months ended September 30, 2016, when compared to $3.2 million during the same 2015 period. The increase was primarily attributable to an increase of $38.4 million, or 5.7% in the average balance of interest-bearing deposits, while the cost of interest-bearing deposits increased 10 basis points to 1.04% from 0.94%. The increase in the balance was the result of the Bank’s continued efforts to emphasize deposit taking through business relationships. Interest expense on borrowed money increased approximately $638,000, or 54.3%, to $1.8 million during the six months ended September 30, 2016 when compared with $1.2 million during the same 2015 period. The increase was primarily attributable to an increase of $113.6 million, or 100.8%, in the average balance of borrowings, partially offset by a decrease of 48 basis points in the cost of borrowings to 1.60% from 2.08%. Borrowings were used in part of fund loan demand. Net interest income increased $894,000, or 6.8%, during the six months ended September 30, 2016, to $14.0 million when compared to $13.1 million for the same 2015 period. The $152.0 million increase in average interest-bearing liabilities was due to increases of $113.6 million in borrowings and of $38.4 million in interest-bearing deposits. The net interest rate spread decreased 2 basis points due to a 7 basis points increase in the average cost of interest-bearing liabilities, partially offset by a 5 basis point increase in the average yield earned on interest-bearing assets.

 

The provision for loan losses increased $858,000, or 496.0%, to $1.03 million during the six months ended September 30, 2016 as compared to $173,000 for the same period in 2015. The increase in the provision for the 2016 period was mainly due to the result of the significant increase in the balance of outstanding loans, partially offset by more favorable trends in qualitative factors related to delinquencies considered in the periodic review of the general valuation allowance. The allowance for loan losses is based on management’s qualitative analysis, which includes an evaluation of economic and other factors. The Bank continually evaluates the need for a provision for loan losses based on its periodic review of the loan portfolio and general market conditions. See “Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015” for a discussion of non-performing and impaired loans as of September 30, 2016, March 31, 2016 and September 30, 2015.

 

Non-interest income increased $62,000, or 6.4%, to $1.03 million for the six months ended September 30, 2016, as compared to $966,000 for the comparable period in 2015, mainly due to an increase of 64,000, or 61.0%, in fees and service charges on loans and deposits.

 

Non-interest expenses increased $1.7 million, or 18.6%, to $10.8 million for the six months ended September 30, 2016 as compared to $9.1 million for the six months ended September 30, 2015. The increase was primarily the result of increases of $1.4 million, or 25.1%, in salaries and employee benefits, $104,000, or 13.9%, in occupancy expense of premises, $91,000, or 12.5%, in equipment expense, and $87,000, or 52.7%, in advertising and marketing expense, partially offset by a decrease of $95,000, or 20.3%, in professional services. The increase in salaries and employee benefits includes typical annual increases in compensation and benefits expenses and costs related to the hiring of additional personnel, as well as a related increase in employee stock ownership plan expense and expenses related to the granting of equity awards under the 2015 Equity Incentive Plan. The increases in occupancy, equipment, and advertising and marketing expenses were mainly related to the costs of the newly opened Hoboken Banking Center, along with the costs associated with new customer products and services. Professional services decreased due to a decrease in legal fees.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Comparison of Operating Results for the Six Months Ended September 30, 2015 and 2015 (Cont’d.)

Income taxes totaled $961,000 and $1.62 million during the six months ended September 30, 2016 and 2015, respectively.  The decrease of $656,000, or 40.6%, during the 2016 period resulted from lower pre-tax income, coupled with an overall decrease in the effective income tax rate which was 29.9% in the 2016 period compared with 33.6% for 2015. The reduced effective tax rate is attributable to the increased investment in bank owned life insurance and the tax benefit resulting from the adoption of ASU 2016-09, which amends the treatment for accounting for income taxes on certain employee share-based payment transactions

Liquidity and Capital Resources

The Company maintains levels of liquid assets sufficient to ensure the Bank’s safe and sound operation. The Company adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, and loan funding commitments. The Company also adjusts its liquidity level as appropriate to meet its asset/liability objectives. Liquid assets, which include cash and cash equivalents and securities available for sale, totaled $27.8 million, or 2.1% of total assets at September 30, 2016, as compared to $40.7 million, or 3.2% of total assets at March 31, 2016. The Company’s liquidity is a product of its operating and financing activities.

The Company is a separate legal entity from the Bank and must provide for its own liquidity.  In addition to its operating expenses, the Company alone is responsible for paying any dividends declared to its shareholders. The Company also has consistently repurchased shares of its common stock. Its primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the OCC but with prior notice to the OCC, cannot exceed net income for that year to date plus retained net income for the preceding two calendar years. On a stand-alone basis, at September 30, 2016, the Company had liquid assets of $44.1 million, which included $39.0 million in cash and cash equivalents and $5.1 million in securities available for sale.

Cash was generated by operating and financing activities and used by investing activities during the six months ended September 30, 2016. The primary sources of cash were net income, an increase in deposits, and proceeds from principal repayments, maturities and calls of securities and principal repayments on loans. The primary uses of funds were purchases of securities and loans, net loan originations, and the repurchase of common stock. Dividends declared and paid totaled $2.7 million during the six months ended September 30, 2016.

The Company’s primary investing activities are the origination, participation, and purchase of loans, and the purchase of securities. Net loans amounted to $881.6 million and $780.2 million at September 30, 2016 and March 31, 2016, respectively. Securities, including available for sale and held to maturity issues, totaled $317.1 million and $357.5 million at September 30, 2016 and March 31, 2016, respectively. In addition to funding new loan production through operating and financing activities, such activities were funded by principal repayments, maturities, and calls on existing loans and securities.

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Liquidity and Capital Resources (Cont’d)

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short to intermediate-term investments. If the Bank requires funds beyond its ability to generate them internally, it can borrow funds from the FHLB under an overnight advance program up to the Bank’s maximum borrowing capacity based on its ability to collateralize such borrowings. Members in good standing can borrow up to 50% of their assets as long as they have qualifying collateral to support the advance and purchase of FHLB capital stock. At September 30, 2016, advances from the FHLB amounted to $224.5 million at a weighted average rate of 1.63%. Additionally, the Bank has the ability to borrow funds of up to an aggregate of $58.0 million at two large financial institutions under established, unsecured, overnight lines of credit at a daily adjustable interest rate.

The Bank anticipates that it will have sufficient funds available to meet its current commitments. At September 30, 2016, the Bank had outstanding commitments to originate one- to four-family mortgage loans totaling approximately $15.4 million which included $11.4 million for fixed rate loans and $4.0 million for adjustable rate loans.

At September 30, 2016, the Bank also had outstanding commitments to purchase one- to four-family fixed rate mortgage loans totaling approximately $5.3 million.

In addition, at September 30, 2016, the Bank had outstanding commitments to originate adjustable rate multi-family real estate loans of $15.0 million and commitments to originate adjustable rate commercial real estate loans of $26.4 million.

At September 30, 2016, undisbursed funds from customer approved unused lines of credit under a homeowners’ equity lending program amounted to approximately $5.8 million. In addition, there were unused funds from commercial lines of credit of $2.7 million at rates that adjust to the Wall Street Journal Prime Rate. Unless they are specifically cancelled by notice from the Bank, these funds represent firm commitments available to the respective borrowers on demand. At September 30, 2016, the Bank also had a commitment to originate a $2.0 million adjustable rate commercial line of credit, and a commitment of $85,000 to originate an adjustable rate equity line of credit.  

Certificates of deposit due within one year at September 30, 2016 totaled $199.1 million, or 39.3% of total certificates of deposit. Management believes that, based on past experience and the Bank’s deposit history, a significant portion of such deposits will remain with the Bank.  FHLB advances due within one year at September 30, 2016 totaled $93.0 million.

The Company and the Bank are subject to regulatory capital requirements promulgated by the federal banking agencies. The Federal Reserve establishes capital requirements, including well capitalized standards, for the consolidated financial holding company, and the OCC has similar requirements for the Bank.

Effective January 1, 2015, the Company adopted the Basel III final rule. Based on the Company’s capital levels and statement of condition composition, the implementation of the new rule had no material impact on the Bank’s regulatory capital level or ratios. The new rule establishes limits at the Company level and increased the minimum Tier 1 capital to risk based assets requirement from 4% to 6% of risk-weighted assets; established a new common equity Tier 1 capital; and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new rule has a capital conservation buffer requirement that phased in beginning January 1, 2016 at 0.625% percent of risk-weighted assets and increases each subsequent year by an additional 0.625 percent until reaching its final level of 2.5 percent of risk-weighted assets on January 1, 2019, when the full capital conservation buffer requirement will be effective. Management believes, as of September 30, 2016 that the Company and the Bank met all capital adequacy requirements to which it was subject.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Liquidity and Capital Resources (Cont’d)

The following table sets forth the Company’s and the Bank’s capital position at September 30 and March 31, 2016, as compared to the minimum regulatory capital requirements:

 

 

In December 2015, the most recent notification from the OCC categorized the Bank as well capitalized as of September 30, 2015, under the regulatory framework for prompt corrective action. There are no conditions existing or events which have occurred since notification that management believes have changed the Bank’s category.

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative Analysis

The majority of the Bank’s assets and liabilities are monetary in nature. Consequently, one of our most significant forms of market risk is interest rate risk. The Bank’s assets consist primarily of residential and commercial real estate loans, and investment and mortgage-backed securities that have longer maturities than the Bank’s liabilities, which consist primarily of deposits. As a result, a principal part of the Bank’s business strategy is to manage interest rate risk and reduce the exposure of net interest income to change in market interest rates. Accordingly, our Board of Directors, through its Enterprise Risk Management Committee, has established an Asset/Liability Management Committee that is responsible for evaluating the interest rate risk inherent in assets and liabilities, for determining the level of risk that is appropriate given the Bank’s business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset/Liability Management Committee, which consists of senior management and one outside director, operates under a policy adopted by the Board of Directors, and meets as needed to review the Bank’s asset/liability policies and interest rate risk position.

The Bank retains an independent, nationally recognized consulting firm that specializes in asset and liability management to complete the quarterly interest rate risk reports. This firm uses a combination of analyses to monitor the Bank’s exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of instantaneously shocked interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. In calculating changes in NPV, assumptions estimating loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes are used.

The net interest income analysis uses data derived from asset and liability analyses and applies several additional elements, including actual interest rate indices and margins, contractual limitations and the U.S. Treasury yield curve as of the balance sheet date. In addition, the model uses consistent parallel yield curve ramps (in both directions) to determine possible changes in net interest income if the theoretical yield curve ramps occurred gradually. Net interest income analysis also adjusts the asset and liability repricing analyses based on changes in prepayment rates resulting from the parallel yield curve shifts.

The asset and liability analyses determine the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). These asset and liability analyses include expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. These analyses identify mismatches in the timing of asset and liability repricing but do not necessarily provide an accurate indicator of interest rate risk because the assumptions used may not reflect the actual response to market changes.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Quantitative Analysis (Cont’d)

The table below sets forth, as of June 30, 2016, the most recent date the Bank’s interest rate risk was measured, the estimated changes in the Bank’s NPV and net interest income that would result from the designated changes in interest rates. Given the current economic environment, the Bank expects that these changes as of September 30, 2016 will not materially differ from the results presented. This data is for the Bank and its subsidiary only and does not include any assets of Company. Such changes to interest rates are calculated as an immediate and permanent change for the purposes of computing NPV and a gradual change over a one-year period for the purposes of computing net interest income. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. We estimate changes in NPV or net interest income for an interest rate decrease of 100 basis points or an increase of 200 basis points.

 

 

The table set forth above indicates that at June 30, 2016, in the event of a 200 basis point increase in interest rates, we would be expected to experience a 20.9% decrease in NPV and a $1.3 million, or 4.6%, decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would be expected to experience a 1.5% increase in NPV and a $237,000, or 0.8%, decrease in net interest income. NPV is a theoretical liquidation calculation that assumes the Bank is no longer a going concern and that the net interest income simulation is built upon a static (no growth or attrition) balance sheet. Accordingly, this data does not reflect any future actions management may take in response to changes in interest rates.

Certain shortcomings are inherent in any methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income require certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV and net interest income table presented above assumes the composition of the Bank’s interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions we may take in response to changes in interest rates such as changing the mix of assets and liabilities, which could change the results of the NPV and net interest income calculations. The table also assumes a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of the Bank’s sensitivity to interest rate changes at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effects of changes in market interest rates on the Bank’s NPV and net interest income and will differ from actual results.

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

ITEM 4:

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s  rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely  decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

PART II

Periodically, there have been various claims and lawsuits against the Company and Bank, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under the section “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2016, as filed with the SEC on June 8, 2016, which could materially affect our business, financial condition and/or operating results.  As of September 30, 2016, the risk factors of the Company have not changed materially from those reported in the Form 10-K. The risks described in the Form 10-K are not the only risks that we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

__________________________________________

None.

Not applicable.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

PART II

 

None.

The following Exhibits are filed as part of this report.

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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