CSBK Clifton Bancorp Inc. (MM)

General

Clifton Bancorp is a Maryland corporation that was incorporated in November 2013 to be the successor corporation to Clifton Savings Bancorp, Inc. (“Clifton Savings Bancorp”), the former stock holding company for Clifton Savings Bank, upon completion of the mutual-to-stock conversion of Clifton MHC, the former mutual holding company for Clifton Savings Bank.

The mutual-to-stock conversion was completed on April 1, 2014. In connection with the conversion, Clifton Bancorp sold a total of 17,059,448 shares of common stock at $10.00 per share in a related subscription offering. Concurrent with the completion of the offering, each share of Clifton Savings Bancorp’s common stock owned by public stockholders was exchanged for 0.9791 shares of Clifton Bancorp common stock. In lieu of fractional shares, Clifton Savings Bancorp shareholders were paid cash at a rate of $10.00 per share. Additionally, as part of the mutual-to-stock conversion, Clifton Savings Bank’s employee stock ownership plan (the “ESOP”) acquired 1,023,566 shares, or 6.0%, of Clifton Bancorp’s issued shares, at $10.00 per share. Net proceeds from the conversion and offering, after the loan made to the ESOP, were approximately $157.0 million.

Clifton Bancorp’s business activities consist of the ownership of Clifton Savings Bank’s capital stock and investment in securities. Clifton Bancorp does not own or lease any property. Instead, it uses the premises, equipment and other property of Clifton Savings Bank. Accordingly, the information set forth in this annual report, including the consolidated financial statements and related financial data, relates primarily to Clifton Savings Bank. Clifton Bancorp is subject to the regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Clifton Savings Bank has served its customers since 1928. We operate as a community-oriented financial institution offering traditional financial services and products to consumers and businesses in our market area. We attract deposits from the general public and primarily use those funds to originate one- to four-family, multi-family and commercial real estate and, to a much lesser extent, commercial and industrial and consumer loans, all of which we currently hold for investment.

Subsidiary Activities

Clifton Bancorp’s sole subsidiary is Clifton Savings Bank. Clifton Savings Bank has one wholly owned subsidiary, Botany Inc., a New Jersey investment company. At March 31, 2017, Botany Inc. had total assets of $205.9 million.

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Available Information

Clifton Bancorp’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on our website, www.cliftonbancorp.com , as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The information on our website shall not be considered as incorporated by reference into this Form 10-K.

Market Area

We are headquartered in Clifton, New Jersey, which is located in northeast New Jersey and situated approximately 15 miles west of New York City. In addition to our main and loan offices located in Passaic County, we currently operate twelve banking centers in Bergen, Passaic, Essex and Hudson Counties in New Jersey, which, along with Morris and Union Counties in New Jersey, comprise our market area. We make loans, however, throughout New Jersey and in New York.

The economy in our market area has benefited from being varied and diverse. It is both urban and suburban with a broad economic base. As a result of its proximity to New York City, our market area is also home to a significant number of commuters working in the greater New York City metropolitan area. New Jersey and New York, with populations of approximately 8.8 million and 19.4 million, respectively, are considered amongst the most attractive banking markets in the United States.    As of March 2017, the unemployment rates for New Jersey and New York were 4.2% and 4.3%, respectively, which was lower than the national rate of 4.5%.

Competition

Deposits. There are a large number of financial institutions in our market area, and our competition includes larger regional and money center banks, local community banks, money market funds and the stock market. We have traditionally focused primarily on retail savings products, but have begun to emphasize business deposits. During the year ended March 31, 2017, the balance of deposits increased from $694.7 million at March 31, 2016 to $844.8 million at March 31, 2017. Certificates of deposit and all savings and checking deposits were 66% and 34%, respectively, of total deposits at March 31, 2017.

Loans. We face stiff competition for one- to four-family residential loans from other financial service providers, including large national residential lenders and local community banks. Other competitors for one- to four-family residential loans include credit unions and mortgage brokers, which keep overhead costs and mortgage rates down by selling loans and not holding or servicing them. Our competition for multi-family and commercial real estate loans is similarly intense and includes national, regional and community bank commercial lenders, many of which are larger than us and have more established networks and programs than we do.

Lending Activities

General. Our loan portfolio consists primarily of owner-occupied, one- to four-family mortgage loans secured by properties located in New Jersey. Our residential portfolio also includes investor owned, one- to four family properties in New Jersey and New York. To an increasing degree our loan portfolio includes multi-family and commercial real estate loans secured by properties located in New Jersey and New York and commercial lines of credit (secured and unsecured) to borrowers in those states. Clifton Savings Bank holds the loans it originates in its own portfolio. At March 31, 2017, Clifton Savings Bank had no loans that were held for sale.

One- to Four-Family Residential Loans . The origination of mortgage loans to enable borrowers to purchase or refinance existing homes remains the largest portion of our portfolio. We offer fixed-rate and adjustable-rate mortgage loans with terms of up to 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. We manage the amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that we originate at any time; however, the relative percentages are largely determined by the

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demand for each in a competitive environment. The loan fees charged, interest rates and other terms are determined by us on the basis of our own pricing criteria, but is affected by competitive market conditions. At March 31, 2017, the average balance of our one- to four-family loans was $278,000 and we had twenty one- to four-family loans with outstanding balances in excess of $1.0 million.

We offer fixed-rate loans with terms of either 15, 20 or 30 years. Our adjustable-rate mortgage loans are based on a 30-year amortization schedule and interest rates and payments adjust annually after a three, five, seven or ten-year initial fixed period. Interest rates on our adjustable-rate loans generally are adjusted to a rate typically equal to 2.75% above either the one-year or three-year constant maturity Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.

For investor-owned one- to four-family residential loans, we offer three, five, seven and ten year adjustable-rate loans based on up to a 30-year amortization schedule. Interest rates and payments adjust every five years after the initial term. Most loans adjust from 2.50% to 2.75% above the five-year constant maturity Treasury index. There are no lifetime interest rate ceilings; the floor is capped at the closing interest rate. Loan amounts do not exceed 75% of the original appraised value. We generally require an assignment of rents on these loans. With respect to loans on investor-owned properties, we typically increase the rate we charge over loans secured by owner-occupied, one- to four-family properties, as these loans involve a greater degree of risk than owner occupied properties. Approximately 9% of our one- to four-family loan portfolio consists of investor-owned properties.

We do not make conventional loans with loan-to-value ratios exceeding 90% (except for special programs outlined in the following paragraph) and generally make loans with a loan-to-value ratio in excess of 80% only when secured by first liens on owner-occupied, one- to four-family residences. Loans with loan-to-value ratios in excess of 80% require private mortgage insurance. We require all properties securing mortgage loans to be appraised by independent appraisers approved by our Board of Directors. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance (and flood insurance for loans on property located in a flood zone) prior to closing the loan. We only originate full document loans and do not offer any one to four-family residential loans on an interest only or negative amortization basis. We do not offer FHA or VA loans.

In an effort to provide financing for first-time buyers, we offer a first-time home buyers’ program. We offer residential mortgage loans through this program to qualified individuals and originate the loans using modified underwriting guidelines. All of these loans have private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property at origination. We also offer a program for low and moderate-income mortgagors, and for properties located within a low- or moderate-income geography.

We also lend to borrowers for second homes, but charge higher rates than on primary residences. The maximum loan-to-value ratio on a mortgage for a borrower’s second home is 80%.

As we originate all loans for our portfolio, we are able to offer loan modifications for borrowers who request them to receive a lower interest rate. Upon the request of the borrower, and based on the circumstances presented, we will reduce the interest rate on a loan to the rate we are offering new customers on the same product in exchange for the payment of up to one point on the borrower’s outstanding loan balance. We will not modify loans that are not performing in accordance with their original terms under this program.

Multi-Family and Commercial Real Estate Loans . To an increasingly greater degree, we offer adjustable-rate mortgage loans secured by multi-family and commercial real estate. Our multi-family real estate loans are generally secured by a variety of small and mid-size apartment buildings and complexes. Our commercial real estate loans are generally secured by real estate such as strip malls, small retail locations, mixed-use properties and other non-residential buildings. At March 31, 2017, we had $123.9 million in multi-family loans and $170.5 million in commercial real estate loans. At March 31, 2017, the portfolio included participations in $55.4 million of loans with financial institutions in our market area. The properties are secured by multi-family and commercial real estate.

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We generally originate adjustable-rate multi-family and commercial real estate loans for initial adjustment periods of up to 10 years based on an amortization schedule of up to 25 or 30 years. Interest rates and payments on our adjustable-rate loans historically were adjusted every five, seven or ten years after their initial fixed period, or every year after a 10-year initial fixed period. Most loans adjust from 2.00% to 3.25% above the one-year, five-year or 10-year constant maturity Treasury index. There are no lifetime interest rate caps. Loan amounts do not exceed 75% of the original appraised value. We generally require an assignment of leases and rents, UCC-1 filings and generally personal guarantees.

Since March 31, 2016, our multi-family and commercial real estate loan portfolio has increased $140.8 million, or 91.6%, and at March 31, 2017 was 29.1% of our total loan portfolio. We have also begun offering commercial and industrial loans, which include commercial lines of credit and term loans, and have expanded our one- to four-family investor owned real estate. We believe the expansion of our lending activities will help diversify our balance sheet, improve our interest rate risk exposure, increase our presence in our market area and establish strong relationships with new and existing customers. We intend to continue these efforts. Further, we expect to pursue larger lending relationships and selected additional purchases and participations within New Jersey and New York.

At March 31, 2017, the average balance of our multi-family and commercial loans were $1.5 million and $1.6 million, respectively, and we had 75 loans in these categories that exceeded $1.0 million. Our largest multi-family loan was a $10.0 million participation in a loan secured by a multifamily property in Queens, New York, and our largest commercial loan was a $15.4 million loan secured by a shopping center in Passaic County, New Jersey. At March 31, 2017, these loans were performing in accordance with their terms.

Residential Construction Loans . To a much lesser extent, we originate loans to finance the construction of residential dwellings. We currently offer construction/permanent loans for the construction of one- to four-family homes to be occupied by the borrower. Construction loans generally have a maximum loan-to-value ratio of 70%. Loan proceeds are disbursed in increments as construction progresses and as independent inspections warrant. We use independent fee appraisers for construction disbursement purposes. At March 31, 2017, there were no outstanding construction loans in the loan portfolio.

Commercial and Industrial . We offer commercial lines of credit that are unsecured or secured by commercial real estate as well as term loans. The commercial lines of credit are usually indexed from 1.00% to 1.50% above the prime rate, are generally originated with a 1-year term and draw period, and are interest only during the draw period, with a required annual clean up.

Consumer Loans. Our consumer loans include second mortgage loans and home equity lines of credit, as well as loans secured by passbook accounts and certificates of deposit.

We offer second mortgage loans and home equity lines of credit with combined loan-to-value ratios not to exceed 80%. All second mortgage loans and home equity lines of credit are full documentation loans. Our second mortgage loans are originated with terms of five, ten, fifteen and twenty years and we charge higher rates for longer-term loans. Our home equity lines of credit are originated with a 15-year draw period and 20-year payment period.

Loan Underwriting Risks.

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a higher interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits on such loans.

While one- to four-family residential real estate loans can be originated with terms up to 30 years, such loans typically remain outstanding for substantially shorter periods because borrowers prepay their loans in full upon

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sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

Multi-Family and Commercial Real Estate Loans. Loans secured by multi-family and commercial real estate generally involve a greater degree of risk than one- to four-family, owner occupied residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s and, if applicable, the guarantor’s creditworthiness and the feasibility and cash flow potential of the property that secures the loan. Payments on loans secured by income properties are typically dependent on the income provided by the property, and the successful operation or management of the property. As a result, the repayment ability of borrowers may be subject to adverse conditions in the real estate market or the economy to a greater extent than residential real estate loan borrowers. We attempt to monitor the cash flows for an income-producing property through annual financial statements and rent rolls revision. Management performs annual reviews and prepares evaluations on most loans where the loan is secured by multi-family and commercial real estate.

Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the dwelling. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment.

Commercial and Industrial. Consists of secured and unsecured commercial lines of credit and term loans, which are considered to involve a higher degree of risk of loss than long-term financing due to the concentration of principal in a limited number of borrowers and the effects of general economic conditions on the business and/or the value of the underlying collateral, if any. Unsecured lines have a greater risk than those secured by real estate.

Consumer Loans. Consumer home equity loans and equity lines of credit are loans secured by one- to four-family residential real estate where we may be in a first or second lien position. In each instance, the value of the property is determined and the loan is made against identified equity in the market value of the property. When a residential mortgage is not present on the property, a first lien position is secured against the property. In cases where a mortgage is present on the property, a second lien position is established, subordinated to the mortgage. As these subordinated liens represent higher risk, loan collection becomes more influenced by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Loan Originations and Purchases. Our loan originations come from a number of sources. The customary sources include internet mortgage loan marketers, mortgage brokers, direct solicitation by Clifton Savings Bank’s loan originators, advertising, referrals from customers, personal contacts by our staff and, in some instances, other lenders. We retain for our portfolio all of the loans that we originate. We purchase real estate loans on properties located within the state of New Jersey and New York from banks and mortgage brokers to supplement our own originations. We generally service our purchased one- to four-family residential loans. Each purchased loan is subject to our underwriting review and we review every loan file we purchase.    

Loan Approval Procedures and Authority . Our policies and loan approval limits are established and approved by the Board of Directors. Most residential mortgage loans and consumer loans require the approval of senior management and are ratified by the Loan Committee of the Board of Directors. All other residential loans require the approval of the Loan Committee of the Board of Directors. All multi-family, commercial and investor-owned real estate loans, including lines of credit, require approval of the Commercial Loan Committee of the Board of Directors. The Loan Committee and Commercial Loan Committee typically meet weekly.

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Loans to One Borrower . The maximum amount that we may lend to one borrower and the borrower’s related entities is limited by regulation. At March 31, 2017, our regulatory limit on loans to one borrower was $38.6 million. At that date, our largest lending relationship was $17.4 million and consisted of two loans, one secured by a participation in a 79 unit multi-family property in Queens, New York and another loan secured by a 9 unit commercial property in New York, New York, which were performing according to their original repayment terms at March 31, 2017.

Loan Commitments . We issue commitments for multi-family and commercial real estate loans conditioned upon the occurrence of certain events. Commitments to originate one- to four-family real estate loans, including investor-owned real estate, and excluding lines of credit and loan purchases, at March 31, 2017 totaled $5.4 million. Commitments to purchase one- to four-family real estate loans totaled $7.7 million at March 31, 2017. Commitments to originate multi-family and commercial real estate loans totaled $23.1 million and $14.1 million, respectively, at March 31, 2017.

Non-Performing and Problem Assets . When a loan is over 15 days delinquent, we generally send the borrower a late charge notice. When the loan is 30 days past due, we generally mail the borrower a letter reminding the borrower of the delinquency and we attempt personal, direct contact with the borrower to determine the reason for the delinquency, to ensure that the borrower correctly understands the terms of the loan and to emphasize the importance of making payments on or before the due date. If payment is not received by the 45th day of delinquency additional late charges and delinquency notices are issued. We will continue our collection efforts through the 60th and 90th days of delinquency. After the 120th day of delinquency, if we are not engaged in collection efforts, we will send the borrower a final demand for payment and refer the loan to legal counsel to commence foreclosure proceedings.

We consider repossessed assets and loans that have been 90 days or more past due to be nonperforming assets. Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is so acquired, it is recorded at the fair market value less estimated costs to sell at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.

Under current accounting guidelines, 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. We consider one- to four-family mortgage loans and consumer installment loans to be homogeneous and, therefore, we are not required to evaluate them individually for impairment unless they are considered troubled debt restructurings, as discussed herein. All other loans are evaluated for impairment on an individual basis.

For economic reasons and to maximize the recovery of a loan, we work with borrowers experiencing financial difficulties and consider modifications to borrowers’ existing loan terms and conditions that we would not otherwise consider, commonly referred to as troubled debt restructurings. We record an impairment loss, if any, based on the present value of expected future cash flows under the restructured terms discounted at the original loan’s effective interest rate. We report the loan as a troubled debt restructuring until the borrower has performed for twelve consecutive months in accordance with the terms of the restructuring.

Investment Activities

We invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, deposits at the Federal Home Loan Bank of New York and certificates of deposit and other deposit accounts of federally insured institutions. We also invest a portion of our assets in corporate debt securities. In addition, we maintain an investment in Federal Home Loan Bank of New York stock. We had no investments in derivative securities at March 31, 2017.    

Historically, our investment portfolio has consisted of a mix of both available for sale and held to maturity securities. Currently, most of our securities are held to maturity. We expect to continue to purchase short-term investments, such as U.S. treasury and government agency securities, and to a lesser extent, corporate and municipal securities.

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At March 31, 2017, our investment portfolio consisted of federal agency debt securities with remaining maturities of 6 years or less, mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 15 years or more, corporate debt securities with maturities of 7 years or less and municipal bonds with maturities of 13 years or less. Our federal agency debt securities are issued by Freddie Mac, Fannie Mae, the Federal Home Loan Bank and the Federal Farm Credit Agency, all of which are U.S. government or government-sponsored entities. During the year ended March 31, 2017, we mostly purchased shorter-term callable agency securities for interest rate risk management purposes and some mortgage-backed securities for cash flow purposes. Changes in general interest rates and market conditions may result in calls of certain securities, which may cause actual maturities to differ from contractual maturities.

Our investment objectives are to provide and maintain liquidity, to balance and minimize risk, to provide collateral for pledging requirements, to manage interest rate risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a competitive return. Clifton Savings Bank’s Investment Committee of the Board of Directors has the overall responsibility for Clifton Savings Bank’s investment portfolio, including approval of its investment policy. The Investment Committee consists of five members of our Board of Directors and is responsible for approval of investment strategies and monitoring of investment performance. Clifton Savings Bank’s Chief Financial Officer is the designated investment officer and, in conjunction with the President and Chief Executive Officer, is responsible for the daily investment activities, and is authorized to make investment decisions consistent with Clifton Savings Bank’s investment policy. The Investment Committee meets regularly with the President and Chief Executive Officer and Chief Financial Officer to review investment strategies and transactions.

Deposit Activities and Other Sources of Funds

General . Deposits, loan repayments, investment cash flows and borrowings are the major sources of our funds for lending and other investment purposes. We have the ability to participate in the brokered deposit network. Loan repayments and borrowings are relatively stable source of funds, while deposit inflows and outflows and investment cash flows are significantly influenced by general interest rates and money market conditions.

Deposit Accounts . Substantially all of our depositors are residents of the State of New Jersey. Deposits are attracted from within our market area through the offering of a broad selection of liquid and term deposit instruments, including checking accounts, business checking, high-yield checking, passbook and statement savings accounts, club accounts and certificates of deposit. As noted above, we may utilize brokered funds to a limited degree. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and interest rates, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, profitability to us, matching deposit and loan products, and customer preferences. We review our deposit flows, mix and pricing weekly. Our current strategy is to build non maturity deposits through competitive rates and relationship and business banking.

Borrowings . The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of New York and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States government), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 50% of an institution’s assets, and limits short-term borrowings of less than one year to 10% of the institution’s assets. The Federal Home Loan Bank determines specific lines of credit for each member institution. Additionally, Clifton Savings Bank has the ability to borrow funds of up to an aggregate of $63 million at two large financial institutions under established unsecured overnight lines of credit at a daily adjustable rate. There were no outstanding drawings on either of these lines at March 31, 2017.

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Personnel

As of March 31, 2017, we had 119 full-time employees and eight part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Regulation and Supervision

General

Clifton Savings Bank, as a federal savings bank, is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, as its primary federal regulator, and by the Federal Deposit Insurance Corporation as the insurer of its deposits. Clifton Savings Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Clifton Savings Bank must file reports with the Office of the Comptroller of the Currency concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions, such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the Office of the Comptroller of the Currency to evaluate Clifton Savings Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for loan losses for regulatory purposes. Any change in such policies, whether by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on Clifton Bancorp and Clifton Savings Bank and their operations.

Federal Banking Regulation

Business Activities. The activities of Clifton Savings Bank are governed by federal laws and regulations. Those laws and regulations delineate the nature and extent of the business activities in which federal savings banks may engage. In particular, certain lending authority for Clifton Savings Bank, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the Bank’s capital or assets.

Capital Requirements. The minimum capital level requirements applicable to Clifton Bancorp and Clifton Savings Bank are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The capital adequacy rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

The Office of the Comptroller of the Currency also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances.

Prompt Corrective Regulatory Action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept broker deposits. The Office of the Comptroller of the Currency is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become

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immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The Office of the Comptroller of the Currency could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

Insurance of Deposit Accounts. Clifton Savings Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Deposit insurance per account owner is currently $250,000. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by Federal Deposit Insurance Corporation regulations. Institutions deemed less risky pay lower assessments. The Federal Deposit Insurance Corporation may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment. The Federal Deposit Insurance Corporation has set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would have an adverse effect on the operating expenses and results of operations of Clifton Savings Bank. Management cannot predict what insurance assessment rates will be in the future.

Loans to One Borrower. Federal law provides that savings banks are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

Qualified Thrift Lender Test. Federal law requires savings banks to meet a qualified thrift lender test. Under the test, a savings bank is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, but also including education, credit card and small business loans) in at least nine months out of each 12-month period.

A savings bank that fails the qualified thrift lender test is subject to certain operating restrictions and may face enforcement action and dividend limitations. As of March 31, 2017, Clifton Savings Bank maintained 80.6% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

Limitation on Capital Distributions. Federal regulations restrict capital distributions by savings banks, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings bank. A federal savings bank must file an application with the Office of the Comptroller of the Currency for approval of the capital distribution if: (i) the total capital distributions for the applicable calendar year exceeds the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years that is still available for dividend; (ii) the savings bank would not be at least adequately capitalized following the distribution; (iii) the distribution would violate any applicable statute, regulation, agreement or written regulatory condition; or (iv) the savings bank is not eligible for expedited review of its filings (i.e., generally, institutions that do not have safety and soundness, compliance and Community Reinvestment Act ratings in the top two categories or fail a capital requirement).

A savings bank that is a subsidiary of a holding company, such as Clifton Savings Bank, must file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution and receive the Federal Reserve Board’s non-objection to the payment of the dividend. Applications or notices may be denied if the savings bank will be undercapitalized after the dividend, the proposed dividend raises safety and soundness concerns or the proposed dividend would violate a law, regulation enforcement order or regulatory condition. In the event that a savings bank’s capital falls below its regulatory requirements or it

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is notified by the regulatory agency that it is in need of more than normal supervision, its ability to make capital distributions would be restricted. In addition, any proposed capital distribution could be prohibited if the regulatory agency determines that the distribution would constitute an unsafe or unsound practice.

Community Reinvestment Act. All federal savings banks have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to satisfactorily comply with the provisions of the Community Reinvestment Act could result in denials of regulatory applications. Clifton Savings Bank received a “satisfactory” Community Reinvestment Act rating in its most recently completed examination.

Transactions with Related Parties. Federal law limits Clifton Savings Bank’s authority to engage in transactions with “affiliates” ( e.g ., any entity that controls or is under common control with Clifton Savings Bank, including Clifton Bancorp and its other subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings bank. The aggregate amount of covered transactions with all affiliates is limited to 20% of Clifton Savings Bank’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings banks are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings bank may purchase the securities of any affiliate other than a subsidiary.

Clifton Bancorp is generally prohibited from making loans to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Clifton Savings Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited based, in part, on Clifton Savings Bank’s capital level and compliance with certain Board approval procedures. Loans to insiders are required to be made on terms substantially the same as those offered to unaffiliated individuals and cannot involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to executive officers and directors over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.

Enforcement. The Office of the Comptroller of the Currency currently has primary enforcement responsibility over savings banks and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings bank. If action is not taken by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Federal Home Loan Bank System. Clifton Savings Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Clifton Savings Bank, as a member of the Federal Home Loan Bank of New York, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Clifton Savings Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at March 31, 2017 of $13.7 million.

Federal Reserve System. The Federal Reserve Board regulations require savings banks to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). For 2017, the regulations provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including

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$115.1 million; and a 10% reserve ratio is applied above $115.1 million. The first $15.5 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. Clifton Savings Bank is in compliance with the foregoing requirements.

Other Regulations

Clifton Savings Bank’s operations are also subject to federal laws applicable to credit transactions, such as, but not limited to, the:

The operations of Clifton Savings Bank also are subject to the:

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Holding Company Regulation

General. Clifton Bancorp is subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations regarding its activities. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to Clifton Savings Bank.

Pursuant to federal law and regulations and policy, Clifton Bancorp may generally engage in the activities permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act and certain other activities that have been authorized for savings and loan holding companies by regulation.

Federal law prohibits a savings and loan holding company from, directly or indirectly or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings association, or savings and loan holding company thereof, without prior written approval of the Federal Reserve Board or from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than those authorized by federal law or acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings associations, the Federal Reserve Board must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings association in another state if the laws of the state of the target savings association specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Capital Requirements. As a savings and loan holding company, Clifton Bancorp is subject to consolidated regulatory capital requirements that are similar to those that apply to Clifton Savings Bank. See “Regulation and Supervision-Federal Banking Regulation-Capital Requirements.”

Source of Strength. The Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Dividends and Stock Repurchases. The Federal Reserve Board has the power to prohibit dividends by savings and loan holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which also applies to savings and loan holding companies and which expresses the Federal Reserve Board’s view that a holding company should pay cash dividends only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for consultation with a holding company’s Federal Reserve Bank as to capital distributions in certain circumstances such as where net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the overall rate of earnings retention is inconsistent with capital needs and overall financial condition. The Federal Reserve Board has also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

Federal Reserve Board policy also provides that a holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding

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company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.

Acquisition of Clifton Bancorp. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings bank. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Federal Reserve Board has found that the acquisition will not result in a change of control. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

Federal Securities Laws

Clifton Bancorp’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. As a result, Clifton Bancorp files quarterly and annual reports with the Securities and Exchange Commission and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Federal and State Taxation

Federal Income Taxation

General. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. We report our income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. Our federal income tax returns have been either audited or closed under the statute of limitations through tax year 2013. For its 2017 fiscal year, Clifton Bancorp’s maximum federal income tax rate was 34%.

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, savings institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. Clifton Savings Bank’s reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $6.4 million of our accumulated bad debt reserves would not be recaptured into taxable income unless Clifton Savings Bank makes a “non-dividend distribution” to Clifton Bancorp as described below.

Distributions. If Clifton Savings Bank makes non-dividend distributions to Clifton Bancorp, the distributions will be considered to have been made from Clifton Savings Bank’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the non-dividend distributions, and then from Clifton Savings Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Clifton Savings Bank’s taxable income. Non-dividend distributions include distributions in excess of Clifton Savings Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of Clifton Savings Bank’s current or accumulated earnings and profits will not be included in Clifton Savings Bank’s taxable income.

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The amount of additional taxable income triggered by a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Clifton Savings Bank makes a non-dividend distribution to Clifton Bancorp, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Clifton Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

State Taxation

New Jersey State Taxation. Clifton Savings Bank and Clifton Bancorp are subject to New Jersey’s Corporation Business Tax at the rate of 9% on their taxable income, before net operating loss deductions and special deductions for federal income tax purposes. For this purpose, “taxable income” generally means federal taxable income subject to certain adjustments (including addition of interest income on state and municipal obligations). Botany Inc. is eligible to be taxed as a New Jersey Investment Company at a rate of 3.6%.

New York State Taxation. Clifton Savings Bank and Clifton Bancorp are subject to New York’s corporate franchise tax, which is based on the combined entire net income of the Company and its affiliates allocable and apportionable to New York State and taxed at a rate of 6.5% beginning January 1, 2016. In addition, the Company and its affiliates are subject to the Metropolitan Transportation Authority (“MTA”) Surcharge allocable to business activities carried on in the Metropolitan Commuter Transportation District. The MTA surcharge rate is 28% of the New York State franchise tax calculated using a 6.5% tax rate on allocated and apportioned entire net income for tax years beginning on or after January 1, 2016.

Maryland State Taxation. As a Maryland holding company not earning income in Maryland, Clifton Bancorp Inc. is exempt from Maryland corporate income tax but is required to file an annual return to the State of Maryland.

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Below is information regarding the executive officers of Clifton Bancorp and Clifton Savings Bank who are not also directors. Unless otherwise stated, each executive officer has held his or her current position for at least the last five years. Ages presented are as of March 31, 2017.

Stephen A. Hoogerhyde has been Executive Vice President of Clifton Bancorp since April 2014, and Executive Vice President and Chief Residential Loan Officer of Clifton Savings Bank since March 2003 and April 2002, respectively. Mr. Hoogerhyde served as Senior Vice President from April 2002 until March 2003. Prior to April 2002, Mr. Hoogerhyde served Clifton Savings Bank as Vice President and Mortgage Officer. Mr. Hoogerhyde has served with Clifton Savings Bank for over 30 years. Age 62.

Christine R. Piano , a certified public accountant, has been Executive Vice President of Clifton Bancorp since April 2014, Chief Financial Officer and Treasurer of Clifton Bancorp since 2013 and Executive Vice President and Chief Financial Officer of Clifton Savings Bank since April 2003 and March 1999, respectively. Ms. Piano served as Vice President from March 2000 to April 2003. Ms. Piano has served with Clifton Savings Bank for over 18 years. Ms. Piano has been Director, Chief Financial Officer, Treasurer and Secretary of Botany Inc. since its inception in December 2004. Age 53.

Patricia C. Hrotko has been Executive Vice President of Clifton Bancorp and Executive Vice President and Chief Revenue Officer of Clifton Savings Bank since April 2014. From September 2007 to February 2014, Ms. Hrotko served as Senior Vice President - Marketing and Corporate Communications of Sterling National Bank in New York, New York. Prior to that time, Ms. Hrotko held a similar role at First Morris Bank and Trust, a community bank headquartered in Morristown, New Jersey (merged into Provident Bank of New Jersey). Age 53.

Michael Lesler has been Executive Vice President and Chief Operating Officer of Clifton Bancorp and Clifton Savings Bank since April 2016. From December 2013 to April 2016, Mr. Lesler served as President and Chief Executive Officer of Bancorp of New Jersey, Inc. and its wholly owned subsidiary, Bank of New Jersey. From June 2009 to December 2013, Mr. Lesler served as President and Chief Operating Officer of Bancorp of New Jersey, Inc. and Bank of New Jersey. Prior to that time, Mr. Lesler was the Executive Vice President and Chief Financial Officer of Bancorp of New Jersey, Inc. and Bank of New Jersey. Age 46.

Diane Scriveri has been Executive Vice President of Clifton Bancorp and Executive Vice President and Chief Commercial Loan Officer of Clifton Savings Bank since September 2016. From January 2007 to September 2016, Ms. Scriveri served as Executive Vice President and Chief Lending Officer of Bogota Savings Bank. Age 55.