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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

 

FORM 10-Q

 

For the quarterly period ended June 30, 2017

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of July 31, 2017: 22,299,036 shares outstanding.

 

 

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

INDEX

 

 

 

 

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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Share and Per Share Data)

 

 

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME

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

 

 

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Unaudited)

 

 

See notes to consolidated financial statements.

 

 

 

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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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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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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Unaudited)

 

 

See notes to consolidated financial statements.

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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 three month period ended June 30, 2017 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, 2017, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 8, 2017.

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of June 30, 2017 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. The calculation of diluted EPS for the three months ended June 30, 2017 and 2016 includes incremental shares related to outstanding stock options of 155,753 and 59,768, respectively.  Shares issued or retired during any period are weighted for the portion of the period they were outstanding. During the three months ended June 30, 2017 and 2016, the average number of options which were antidilutive were 0 and 1,060,953, 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, which 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 again authorized an extension of the stock repurchase plan to acquire an additional 1,155,000 shares, or 5%, of the Company’s outstanding common stock.

During the three months ended June 30, 2017 and 2016, approximately 246,400 and 404,500 shares were repurchased, respectively, under the repurchase plan at aggregate costs of approximately $4.0 million, or $16.18 per share, and $6.0 million, or $14.90 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 2015 Equity Incentive Plan”). Under the 2015 Equity Incentive Plan, the Company may grant options to purchase up to 1,705,944 of Company common stock and may grant up to 682,377 shares of common stock as restricted stock awards. At June 30, 2017, there were 716,964 shares and 220,466 shares, respectively, remaining for future option grants and restricted stock awards under the 2015 Equity Incentive Plan.

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 grant of restricted common stock, the Company issued 8,000 shares from authorized shares. All shares of restricted stock granted on this date vested on April 6, 2017. 

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 grant 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 three months ended June 30, 2017 and 2016, $315,000 and $317,000, respectively, in expense was recognized in regard to these restricted stock awards. The Company recognized approximately $129,000 and $130,000 of income tax benefits resulting from this expense for three months ended June 30, 2017 and 2016, respectively. The expected future compensation expense relating to the 359,427 non-vested restricted shares outstanding at June 30, 2017 is $3.9 million over a weighted average period of 3.2 years.

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

 

 

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 vested on April 6, 2017. The stock options were granted at an exercise price of $14.89 equal to the 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%.

 

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. The stock options were granted at an exercise price of $15.16 equal to the value of the Company’s common stock on the grant date based on quoted market prices. The 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%.

For all grants noted above, the expected option lives were estimated as the mid-point between the respective vesting periods and ten year life of the options. The risk-free rate of return was based on the rates on the grant dates 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

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

the grant date. The dividend rate was based on the cash dividends paid by the Company on its common stock over the year prior to the grant date.

 

Management recognizes expense for the fair value of these awards on a straight line basis over the requisite service period. During the three months ended June 30, 2017 and 2016, $83,000 and $76,000, respectively, in stock option expense, was recorded net of income tax benefits of $25,000 and $21,000 respectively. The expected future compensation expense relating to the 1,136,775 non-vested options outstanding at June 30, 2017 is $1.0 million over the weighted average period of 3.2 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 contractual maturities of five to ten 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 June 30 and March 31, 2017 were as follows:

 

 

Management does not believe that any of the unrealized losses at June 30, 2017 (four bonds of Government-sponsored enterprise, two corporate bonds, and seven municipal bonds included in debt securities, and twenty-nine FNMA mortgage-backed securities, eleven FHLMC mortgage-backed securities, and four 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.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. SECURITIES (CONT’D)

During the three months ended June 30, 2017 and 2016, the proceeds from sales of securities available for sale totaled $0 and $3.7 million, respectively, resulting in gross realized gains of $0 and $84,000, respectively.

 

 

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, specific 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, second mortgage loans and equity lines of credit and passbook or certificate and other 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. There were no construction loans outstanding as of June 30 and March 31, 2017.

 

Commercial and Industrial:

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 comprise two loans in a New Jersey loan fund, which 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 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.

Management performs a classification of assets review, including the regulatory classification of assets, generally on a monthly basis. The results of the classification of assets review are validated by the Company’s third party loan review firm during its semi-annual independent review. In the event of difference in rating or classification between those assigned by the internal and external resources, management and third parties confer to determine the appropriate rating or classification. Final loan ratings and regulatory classifications are presented quarterly to the Board of Directors and are reviewed by regulators during the examination process.

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.

 

 

 

 

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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 change in the allowance for loan losses for the three months ended June 30, 2017 and 2016 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)

The following table presents the allocation of the allowance for loan losses and related loans by loan class at June 30 and March 31, 2017. 

 

 

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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 June 30 and March 31, 2017:

 

 

The following table provides information with respect to the Bank’s nonaccrual loans at June 30 and March 31, 2017. 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 differ 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 consecutive 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 June 30 and March 31, 2017.

 

 

 

 

Loans with a carrying value of $397,000 and $483,000, respectively, were past due greater than 90 days and accruing as of June 30 and March 31, 2017.

We may obtain physical possession of real estate collateralizing a residential mortgage loan via foreclosure or an in-substance repossession. As of June 30, 2017, we hold two foreclosed residential real estate properties with a carrying value of $837,000 as a result of obtaining physical possession. In addition, as of June 30, 2017, we had six residential mortgage loans with a carrying value of $919,000 collateralized by residential real estate for which formal foreclosure proceedings were 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 Bank 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 months ending June 30, 2017 and 2016, and at or for the year ended March 31, 2017, were as follows:

 

 

 

The recorded investment in loans modified in a troubled debt restructuring totaled $1.5 million and $1.5 million respectively, at June 30 and March 31, 2017, of which $329,000 and $331,000, respectively, were over 90 days past due, $54,000 and $14,000, respectively, were 60-89 days past due, and $13,000 and $55,000, respectively, were 30-59 days past due. The remaining loans modified were current at the time of the restructuring and had complied with the terms of their restructure agreements at June 30 and March 31, 2017. 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 months ended June 30, 2017.

 

 

There were no defaults that occurred within twelve months of restructuring during the three months ended June 30, 2017 and 2016.      

 

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 June 30 and March 31, 2017 are as follows: 

There were no assets measured at fair value on a non-recurring basis at June 30, 2017. For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2017 are as follow:

 

 

There were no liabilities measured at fair value on a recurring or non-recurring basis at June 30 and March 31, 2017.

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. 

 

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 June 30 and March 31, 2017:

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

7. FAIR VALUE (CONT’D)

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 of such loans, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

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.

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 June 30 and March 31, 2017, the fair value of the commitments to extend credit was not considered to be material.

 

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

7. FAIR VALUE (CONT’D)

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

 

 

 

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, ASU 2016-12, ASU 2016-20 and ASU 2017-05, 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, as management has not identified any material changes in the timing of revenue recognition.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

8. RECENT ACCOUNTING PRONOUNCEMENTS (CONT’D)

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. Management is in the process of reviewing its existing lease portfolios to evaluate the impact of the new accounting guidance on the financial statements, as well as the impact to regulatory capital and risk-weighted assets. The Company expects a gross-up of its consolidated statements of financial condition as a result of recognizing operating lease liabilities and right of use assets; the extent of such gross-up is under evaluation. The Company does not expect material changes to the recognition of operating lease expense in its consolidated statements of income. This standard, effective April 1, 2019, is not expected to have a material impact on its overall 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. The new guidance is effective on April 1, 2020, with early adoption permitted on January 1, 2019. The Company is in the process of identifying and evaluating the impact of this new accounting guidance, which at the date of adoption is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.

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 bank-owned life insurance policies. For a public entity, ASU 2016-15 is effective for 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

8. RECENT ACCOUNTING PRONOUNCEMENTS (CONT’D)

On March 10, 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. The service cost must be presented in the same line item(s) as other employee compensation costs. These costs are generally included within income from continuing operations, but in some cases may be eligible for capitalization. All other components of net benefit cost must be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. The changes, which respond to input from financial statement users, are intended to classify costs according to their natures, and better align the effect of defined benefit plans on operating income with International Financial Reporting Standards. For a public entity, ASU 2017-07 is effective for 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.

On March 30, 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. The ASU is intended to enhance “the accounting for the amortization of premiums for purchased callable debt securities.” Specifically, the ASU shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The ASU’s amendments are effective for public business entities for interim and annual periods beginning after December 15, 2018. The adoption of this standard, effective April 1, 2019, 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, 2017 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 mortgage-backed and investment securities and net loans, which comprised 19.9% and 70.5%, respectively, of total assets at June 30, 2017, as compared to 22.0% and 70.4%, respectively, of total assets at March 31, 2017. Cash and cash equivalents increased to 3.2% of total assets at June 30, 2017, as compared to 1.0% at March 31, 2017. The Company’s mortgage-backed securities portfolio at June 30, 2017 consists solely of U.S. government-sponsored or guaranteed enterprises and the investment portfolio consists of approximately 53% U.S. government-sponsored or guaranteed enterprises, 36% corporate bonds and 11% municipal bonds.

Interest-bearing liabilities consist of deposits, and borrowings from the Federal Home Loan Bank of New York (the “FHLB”).  Deposits increased $47.6 million, or 5.6%, between March 31, 2017 and June 30, 2017. Borrowed funds increased $49.0 million, or 17.8%, which resulted from new borrowings of $56.5 million partially offset by repaid borrowings of $7.5 million. The balance at June 30, 2017 increased to $324.8 million as compared to $275.8 million at March 31, 2017.

Net interest income increased $947,000, or 13.6%, during the three months ended June 30, 2017, when compared with the same 2016 period. The increase in net interest income was primarily due to a $1.9 million increase in total interest income, partially offset by a $948,000 increase in total interest expense. Average interest-earning assets increased $209.0 million, or 17.8%, compared with the same 2016 period, while average interest-bearing liabilities increased $215.7 million, or 23.4%, when compared with the same 2016 period. The $6.7 million decrease in average net interest-earning assets was mainly attributable to decreases of $21.1 million in the average balance of mortgage-backed securities and $15.8 million in the average balance of investment securities, coupled with increases of $71.2 million in the average balance of FHLB advances and $144.6 million in average interest bearing deposits, partially offset by an increase of $236.9 million in the average balance of loans and $9.1 million in other interest-earning assets.

The net interest rate spread decreased to 2.05% from 2.11% for the three months ended June 30, 2017 when compared with the same 2016 period. The increase of 11 basis points in the cost of interest-bearing liabilities was partially offset by an increase of 5 basis points in the yield on interest-earning assets. 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 June 30, 2017, non-interest income decreased $80,000, or 15.2%, as compared to the comparable period in 2016. Provision for loan losses increased $64,000, or 12.2%, and non-interest expenses increased $133,000, or 2.4%, for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016.

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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 June 30, 2017 totaled $1.5 billion, which represents an increase of $93.2 million, or 6.5%, as compared with $1.4 billion at March 31, 2017. The increase in total assets was primarily due to an increase of $33.6 million in cash and cash equivalents and $66.9 million in net loans.

Cash and cash equivalents increased $33.6 million, or 229.5%, to $48.3 million at June 30, 2017 as compared to $14.7 million at March 31, 2017 as a portion of cash flows from deposits and borrowed funds were not yet redeployed into higher yielding assets.

Securities available for sale at June 30, 2017 decreased $244,000, or 5.5%, to $4.2 million from $4.4 million at March 31, 2017, resulting primarily from principal repayments of $234,000 and a decrease of $10,000 in the unrealized gain on the portfolio.

Securities held to maturity at June 30, 2017 decreased $11.0 million, or 3.6%, to $299.9 million from $310.9 million at March 31, 2017, resulting primarily from maturities and repayments totaling $10.9 million.

Net loans at June 30, 2017 increased $66.9 million, or 6.6%, to $1.07 billion when compared with $1.0 billion at March 31, 2017.  The increase in the loan portfolio was mostly in multi-family and commercial loans, which increased $52.5 million or 17.8%. The Bank continues to emphasize the growth of this loan portfolio. Repayment levels remained relatively stable during the three months ended June 30, 2017.

Total liabilities increased $101.7 million, or 9.0%, to $1.24 billion at June 30, 2017 from $1.14 billion at March 31, 2017.  Deposits at June 30, 2017 increased $47.6 million, or 5.6%, to $892.4 million when compared with $844.8 million at March 31, 2017. A new, high yielding checking account launched by the Bank in May 2017 was responsible for a significant percentage of the deposit growth.  During the three months ended June 30, 2017, borrowed funds increased $49.0 million to $324.8 million with an outstanding weighted average interest rate of 1.77% at June 30, 2017.

Total stockholders’ equity decreased $8.5 million, or 2.9%, to $288.1 million at June 30, 2017 from $296.6 million at March 31, 2017. The decrease resulted primarily from cash dividends of $6.6 million and repurchases of common stock of $4.0 million, partially offset by net income of $1.4 million. Cash dividends included the impact of a $0.25 special dividend declared during the quarter totaling $5.3 million.

Comparison of Operating Results for the Three Months Ended June 30, 2017 and 2016

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 June 30, 2017 and 2016 (Cont’d.)

 

 

Net income increased $385,000, or 37.9%, to $1.4 million for the three months ended June 30, 2017 compared with $1.0 million for the same 2016 period. The increase in net income resulted primarily from increases of $947,000, or 13.6%, in net interest income, partially offset by increases of $133,000, or 2.4%, in non-interest expenses, $64,000, or 12.2%, in provision for loan losses, $285,000, or 63.6%, in income taxes, as well as a decrease of $80,000, or 15.2%, in non-interest income.

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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 June 30, 2017 and 2016 (Cont’d.)

Interest income on loans increased by $2.2 million, or 30.1%, to $9.4 million during the three months ended June 30, 2017, when compared with $7.2 million for the same 2016 period. The increase mainly resulted from an increase of $236.9 million, or 29.6%, in the average balance when compared to the same period in 2016, coupled with an increase of 1 basis point in the yield earned on the loan portfolio, to 3.62% from 3.61%. Interest income on mortgage-backed securities decreased $226,000, or 12.3%, to $1.6 million during the three months ended June 30, 2017, when compared with $1.8 million for the same 2016 period. The decrease during the 2017 period resulted from a decrease of 14 basis points in the yield earned on mortgage-backed securities to 2.56% from 2.70%, coupled with a decrease of $21.1million, or 7.7%, in the average balance of mortgage-backed securities outstanding. Interest earned on investment securities decreased by $137,000, or 33.6%, to $271,000 during the three months ended June 30, 2017, when compared to $408,000 during the same 2016 period, due to a decrease in the average balance of $15.8 million, or 21.8%, coupled with a 34 basis point decrease in the yield earned to 1.91% from 2.25%. Interest earned on other interest-earning assets increased by $87,000, or 71.3%, to $209,000 during the three months ended June 30, 2017, when compared to $122,000 during the same 2016 period. The increase was due to a 52 basis points increase in the yield to 2.09% from 1.57%, coupled with an increase of $9.1 million, or 29.2%, in the average balance of these assets.  The increase in the balance of loans resulted from the Bank’s continued emphasis on growth in its loan portfolio. The decreases in the yields on mortgage-backed securities and investment securities were the result of the maturity and repayment of high yielding 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 $537,000, or 30.5%, to $2.3 million during the three months ended June 30, 2017, when compared to $1.8 million during the same 2016 period. The increase was primarily attributable to an increase of $144.6 million, or 20.9%, in the average balance of interest-bearing deposits, coupled with an 8 basis point increase in the cost of interest-bearing deposits to 1.10% from 1.02%. Interest expense on borrowed money increased $411,000, or 46.3%, to $1.3 million during the three months ended June 30, 2017 when compared with $888,000 during the same 2016 period. The increase was primarily attributable to an increase of $71.2 million, or 30.8%, in the average balance of borrowings, coupled with an 18 basis point increase in the cost of borrowings to 1.72% from 1.54%. The $215.8 million increase in average interest-bearing liabilities was due to an increase of $144.6 million in interest-bearing deposits coupled with an increase of $71.2 million in the average balance of borrowings. Net interest income increased $947,000, or 13.6%, during the three months ended June 30, 2017, to $7.9 million when compared to $6.9 million for the same 2016 period. The net interest rate spread decreased 6 basis points due to an 11 basis point increase in the cost of interest-bearing liabilities, which was partially offset a 5 basis point increase in the yield earned on interest-earning assets.

The provision for loan losses increased $64,000, or 12.2%, to $590,000 for the three months ended June 30, 2017 as compared to $526,000 for the same period in 2016. 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. The increase in the provision for the 2017 period was mainly due to the significant growth in the balance of outstanding loans, partially offset by slightly more favorable trends in qualitative factor considered in these reviews. At June 30, 2017 and 2016, the Bank’s nonperforming loans totaled $4.3 million and $3.1 million, respectively, representing 0.40% and 0.38%, respectively, of total gross loans, and 0.28% and 0.24%, respectively, of total assets. At March 31, 2017, nonperforming loans totaled $4.2 million, or 0.41% and 0.29% of total gross loans and total assets, respectively. During the three months ended June 30, 2017, a $10,000 net recovery was recorded on two one- to four-family residential real estate loans. During the three months ended June 30, 2016, the Bank recorded $111,000 in net charge-offs on a one- to four-family residential real estate loan. At June 30, 2017, nonperforming loans consisted of twenty-one loans secured by one- to four-family residential real estate and one loan secured by commercial real estate, while at June 30, 2016 nonperforming loans consisted of fourteen loans secured by one- to four-family residential real estate and one loan secured by commercial real estate. Included in nonperforming loans at June 30, 2017 are five loans totaling $1.0 million that were current or less than ninety days delinquent. At June 30, 2016, there were five loans totaling $569,000 that were current or less than ninety days delinquent included in nonperforming loans. All nonperforming loans included above are secured by properties located in the state of New Jersey. Impaired loans totaled $1.8 million, $2.1 million and $1.8 million at June 30, 2017, March 31, 2017 and June 30, 2016, respectively. The allowance for loan losses amounted to $6.7 million, $6.1 million, and $4.8 million, respectively, at June 30, 2017, March 31, 2017, and June 30, 2016, representing 0.62%, 0.60%, and 0.58% of total gross loans, respectively.

Non-interest income decreased $80,000, or 15.2%, to $447,000 for the three months ended June 30, 2017 as compared to $527,000 for the three months ended June 30, 2016, as the 2016 period included an $84,000 in gain on the sale of securities.

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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 June 30, 2017 and 2015 (Cont’d.)

 

Non-interest expenses increased $133,000, or 2.4%, to $5.6 million for the three months ended June 30, 2017, as compared to $5.5 million for the three months ended June 30, 2016. The increase consisted primarily of increases in advertising and marketing expenses of $81,000, or 52.9%, and occupancy expenses of $43,000, or 10.3%, partially offset by a decrease in federal deposit insurance premium of $43,000, or 31.2%. The increase in advertising and marketing expenses was mainly related to the costs to promote the Bank’s recently opened Hoboken and Montclair banking centers, as well as the new checking account product discussed above.  The increase in occupancy expenses was mainly related to operational costs of the Hoboken and Montclair banking centers. The decrease in federal deposit insurance premium in the 2017 period was due to the revision of the FDIC assessment system, which began on July 1, 2016 and is not reflected in the 2016 period expenses.  Revisions for “small institutions” (under $10 billion in assets) resulted in, among other things, a change in the financial ratios method used to determine assessment rates.

Income taxes totaled $733,000 and $448,000 during the three months ended June 30, 2017 and 2016, respectively. The increase of $285,000, or 63.6%, resulted from higher pre-tax income, coupled with an increase in the effective income tax rate. The overall effective income tax rate was 34.3% for the 2017 period compared with 30.6% for the 2016 period, as non-taxable interest from municipal and bank owned life insurance represented a smaller portion of overall income.

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 real estate secured 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 $52.5 million, or 3.4% of total assets, at June 30, 2017, as compared to $19.1 million, or 1.3% of total assets at March 31, 2017. The Company’s liquidity is a product of its operating, investing 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 stockholders. 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 Office of the Comptroller of the Currency (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 June 30, 2017, the Company had liquid assets of $28.7 million, which included $24.5 million in cash and cash equivalents and $4.2 million in securities available for sale.

Cash was generated by operating and financing activities and used by investing activities during the three months ended June 30, 2017. The primary sources of cash were net income, an increase in deposits, and an increase in borrowings. The primary uses of funds were purchases of loans, net loan originations, and the repurchase of common stock. Dividends declared and paid totaled $6.6 million during the three months ended June 30, 2017.

The Company’s primary investing activities are the origination, participation, and purchase of loans. Net loans amounted to $1.07 billion and $1.01 billion at June 30, 2017 and March 31, 2017, respectively. Securities, including available for sale and held to maturity issues, totaled $304.1 million and $315.3 million at June 30, 2017 and March 31, 2017, respectively. In addition to funding new loan production through operating and financing activities, such activities were funded by principal repayments and maturities 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, which is 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 June 30, 2017, advances from the FHLB amounted to $324.8 million at a weighted average rate of 1.77%. Additionally, the Bank has the ability to borrow funds of up to an aggregate of $65.0 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 June 30, 2017, the Bank had outstanding commitments to originate one- to four-family mortgage loans totaling approximately $5.5 million, which included $2.7 million for fixed rate loans and $2.8 million for adjustable rate loans. At June 30, 2017, the Bank also had outstanding commitments to purchase adjustable rate one- to four-family mortgage loans totaling approximately $1.8 million.

In addition, at June 30, 2017, the Bank had outstanding commitments to originate adjustable rate multi-family real estate loans of $24.3 million and commitments to originate adjustable rate commercial real estate loans of $4.0 million.

At June 30, 2017, undisbursed funds from customer approved unused lines of credit under a homeowners’ equity lending program amounted to approximately $5.6 million. In addition, there were undisbursed funds from commercial lines of credit of $1.5 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 June 30, 2017, the Bank also had commitments to originate a $1.0 million adjustable rate commercial line of credit, a $110,000 adjustable rate equity line of credit, and $102,000 fixed rate second mortgage loans.  

Certificates of deposit due within one year at June 30, 2017 totaled $263.9 million, or 46.1% 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 June 30, 2017 totaled $123.5 million.

The Company and its subsidiary 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 Company’s subsidiary 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. As of June 30, 2017, the Company and the Bank met all capital adequacy requirements to which they were 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 positions at June 30 and March 31, 2017, as compared to the minimum regulatory capital requirements:

 

 

 

In December 2016, the most recent notification from the OCC categorized the Bank as well capitalized as of September 30, 2016, 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 mortgage loans and investment and mortgage-backed securities that have longer maturities than the Bank’s liabilities, which consist primarily of deposits and borrowings. 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 analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). This asset and liability analysis includes 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. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because the assumptions used in the analysis may not reflect the Bank’s actual response to market changes.

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CLIFTON BANCORP INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Quantitative Analysis

The table below sets forth, as of March 31, 2017, the most recent date the Bank’s interest rate risk was measured, 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, as well as the Federal Reserve Board’s decision to raise interest rates in June 2017,  these changes as of June 30, 2017 may materially differ from the results presented. This data is for the Bank and its subsidiary only and does not include any assets of the 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 March 31, 2017, in the event of a 200 basis point increase in interest rates, we would be expected to experience a 28.2% decrease in NPV and a 3.9% decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would be expected to experience a 10.0% increase in NPV and 0.4% decrease in net interest income. NPV is a theoretical liquidation calculation that assumes the Bank is no longer a going concern and the net interest income simulation is built upon a static (no growth or attrition) balance sheet. Accordingly, the data do 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 do 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 likely 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 June 30, 2017 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 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.  Neither the Company nor the Bank is 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, 2017, as filed with the SEC on June 8, 2017, which could materially affect our business, financial condition and/or operating results.  As of June 30, 2017, 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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