Shares of Clifton Savings Bancorp Inc. in New Jersey tumbled a day after it said its regulator would not approve its second-step conversion.

The $1.1 billion-asset company said late Monday that it postponed its planned offering after the Office of Thrift Supervision downgraded the bank's Community Reinvestment Act rating to "needs to improve," and said it could not approve the conversion.

Clifton is adamant that the move is a delay. It will not appeal, but it expects to submit an improvement plan asking regulators to review the decision later this year. "We hope to get approval and go forward with the second step in six months, and [hope] that they will see enough progress in six months that they will approve it," Bart D'Ambra, the chief operating officer, said in an interview Tuesday.

Clifton expected its Clifton Savings Bank unit to receive a "satisfactory" rating as it has for the past three exams, D'Ambra said. Clifton received a "needs to improve" rating once before, in November 2001.

D'Ambra said regulators found that the unit's direct lending activity in low- and moderate-income communities did not measure up to a peer group. He said an improvement plan would include benchmarks that Clifton and regulators would monitor. "We will hit those numbers," he said.

An OTS spokesman said he would not comment.

Kip Weissman, a partner at Luse, Gorman, Pomerenck & Schick, said it's an "almost unprecedented" circumstance. He could think of only one time, nearly 20 years ago, when a conversion was rejected because of a CRA rating.

Still, OTS policy is clear: It will not approve a conversion for a company with such a poor rating, Weissman said. A "needs to improve" rating "is pretty bad … especially in this day and age, when regulators are emphasizing safety and soundness in residential lending," he said.

It also means Clifton may not be able to complete its conversion before July 21, when the Office of the Comptroller of the Currency absorbs the OTS. Many thrifts have filed to convert to take advantage of the certainty of the OTS, versus uncertainty with the OCC.

Clifton "just lost that, as well as spent a lot of money," Weissman said. "It's not a good day for them." He said it's also concerning to stockholders, who will want to know when Clifton was aware of problems.

Clifton's stock had climbed 20% since Dec. 15, when it filed to convert. After Monday's announcement, shares fell 7.2%, to close at $11.24 Tuesday.

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