-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CwXcly3fHsIihmIlB4+QD/DfmmefB9gI1jB8ilF1PU3zqeOibve1kvS41Pg++WeL HsOf5/VQFsOIwQvTFuTZsw== 0000909654-06-001382.txt : 20060614 0000909654-06-001382.hdr.sgml : 20060614 20060613174825 ACCESSION NUMBER: 0000909654-06-001382 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060614 DATE AS OF CHANGE: 20060613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLIFTON SAVINGS BANCORP INC CENTRAL INDEX KEY: 0001240581 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341983738 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-50358 FILM NUMBER: 06903241 MAIL ADDRESS: STREET 1: C/O CLIFTON SAVINGS BANCORP INC STREET 2: 1433 VAN HOUTEN AVE CITY: CLIFTON STATE: NJ ZIP: 07015 10-K 1 clifton10kjune-06.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number: 0-50358 ------- CLIFTON SAVINGS BANCORP, INC. ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) UNITED STATES 34-1983738 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1433 VAN HOUTEN AVENUE, CLIFTON, NEW JERSEY 07015 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (973) 473-2200 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE --------------------------------------- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes|_| No |X| 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 |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one) Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2g of the Exchange Act). Yes|_| No |X| As of September 30, 2005, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $132,252,876, based upon the closing price of $10.30 as quoted on the Nasdaq National Market. The number of shares outstanding of the registrant's common stock as of April 30, 2006 was 30,103,787. Of such shares outstanding, 16,791,758 shares were held by Clifton MHC. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE 2006 ANNUAL REPORT TO STOCKHOLDERS AND OF THE PROXY STATEMENT FOR THE 2006 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PARTS II AND III, RESPECTIVELY, OF THIS FORM 10-K.
CLIFTON SAVINGS BANCORP, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page ---- PART I Item 1. Business..........................................................................................1 Item 1A. Risk Factors.....................................................................................18 Item 1B. Unresolved Staff Comments........................................................................19 Item 2. Properties.......................................................................................20 Item 3. Legal Proceedings................................................................................20 Item 4. Submission of Matters to a Vote of Security Holders..............................................20 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............................................................................20 Item 6. Selected Financial Data..........................................................................21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.............21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................21 Item 8. Financial Statements and Supplementary Data......................................................21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............21 Item 9A. Controls and Procedures..........................................................................22 Item 9B. Other Information................................................................................23 PART III Item 10. Directors and Executive Officers of the Registrant...............................................23 Item 11. Executive Compensation...........................................................................23 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.............................................................................23 Item 13. Certain Relationships and Related Transactions...................................................24 Item 14. Principal Accounting Fees and Services...........................................................24 PART IV Item 15. Exhibits and Financial Statement Schedules.......................................................24
NOTE ON FORWARD-LOOKING STATEMENTS THIS REPORT CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THESE STATEMENTS ARE NOT HISTORICAL FACTS, BUT, RATHER ARE STATEMENTS BASED ON CLIFTON SAVINGS BANCORP, INC.'S CURRENT EXPECTATIONS REGARDING ITS BUSINESS STRATEGIES, INTENDED RESULTS AND FUTURE PERFORMANCE. FORWARD-LOOKING STATEMENTS ARE PRECEDED BY TERMS SUCH AS "EXPECTS," "BELIEVES," "ANTICIPATES," "INTENDS" AND SIMILAR EXPRESSIONS. MANAGEMENT'S ABILITY TO PREDICT RESULTS OR THE EFFECT OF FUTURE PLANS OR STRATEGIES IS INHERENTLY UNCERTAIN. FACTORS WHICH COULD AFFECT ACTUAL RESULTS INCLUDE INTEREST RATE TRENDS, THE GENERAL ECONOMIC CLIMATE IN THE MARKET AREA IN WHICH CLIFTON SAVINGS BANCORP OPERATES, AS WELL AS NATIONWIDE, CLIFTON SAVINGS BANCORP'S ABILITY TO CONTROL COSTS AND EXPENSES, COMPETITIVE PRODUCTS AND PRICING, LOAN DELINQUENCY RATES AND CHANGES IN FEDERAL AND STATE LEGISLATION AND REGULATION. THESE FACTORS SHOULD BE CONSIDERED IN EVALUATING THE FORWARD-LOOKING STATEMENTS AND UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. CLIFTON SAVINGS BANCORP ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. PART I ITEM 1. BUSINESS -------- GENERAL Clifton Savings Bancorp, Inc. was organized as a federal corporation at the direction of Clifton Savings Bank, S.L.A. in connection with the mutual holding company reorganization of Clifton Savings. The reorganization was completed on March 3, 2004. In the reorganization, Clifton Savings Bancorp sold 45% of its outstanding shares of common stock to the public and issued 55% of its outstanding shares of common stock to Clifton MHC, the mutual holding company parent of Clifton Savings. So long as Clifton MHC exists, it will own at least a majority of Clifton Savings Bancorp's common stock. Clifton Savings Bancorp's business activity is the ownership of the outstanding capital stock of Clifton Savings and management of the investment of offering proceeds retained from the reorganization. Clifton Savings Bancorp neither owns nor leases any property but instead uses the premises, equipment and other property of Clifton Savings with the payment of appropriate rental fees, as required by applicable law and regulations. In the future, Clifton Savings Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so. Clifton Savings Bancorp has no significant assets, other than all of the outstanding shares of Clifton Savings, and no significant liabilities. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to Clifton Savings. Clifton Savings is a New Jersey state chartered savings and loan association, and has served its customers in New Jersey since 1928. We operate as a community-oriented financial institution offering traditional financial services to consumers and businesses in our market area. We attract deposits from the general public and use those funds to originate one- to four-family, multi-family and commercial real estate, and consumer loans, which we hold for investment. SUBSIDIARY ACTIVITIES Clifton Savings Bancorp's sole subsidiary is Clifton Savings. Clifton Savings has one wholly owned subsidiary, Botany Inc., a New Jersey corporation that was formed in December 2004. Botany Inc. is treated under New Jersey tax law as a New Jersey investment company. At March 31, 2006, Botany Inc. held assets totaling $170.2 million. AVAILABLE INFORMATION Clifton Savings Bancorp's annual report 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.cliftonsavings.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. 1 MARKET AREA We are headquartered in Clifton, New Jersey, which is located in northeast New Jersey and situated approximately 20 miles west of New York City. In addition to our main office located in Passaic County, we operate nine branch offices in Bergen and Passaic Counties, which, along with Essex, Morris, Hudson and Union Counties, we consider our primary market area. The economy in our market area is primarily oriented to the service, manufacturing, medical and retail industries. The area is also home to commuters working in the greater New York City metropolitan area. COMPETITION We face significant competition for the attraction of deposits and origination of loans. DEPOSITS. There are more competitors for deposits than ever before. We no longer compete exclusively with local area commercial banks and savings institutions. Today we also face competition from the stock market and in particular money market funds and other corporate and government securities which tend to attract investors' funds away from deposit accounts when the public perceives that the market is strong. In addition, locally we face direct competition for funds from foreign, national and state commercial banks and savings institutions, as well as credit unions. We also compete with regional banks with out-of-state headquarters that now operate branch offices in New Jersey. These larger regional banks often have significantly greater resources, more sophisticated marketing tools and newer deposit products. LOANS. Local financial institutions, which historically originated most mortgage loans, now face significant competition from other financial service providers. National real estate brokers now are typically affiliated with a mortgage broker who is often located in the real estate broker's office. Other competitors include credit unions and mortgage brokers who keep overhead costs down, and therefore the mortgage rates they offer down, by selling the loans and not holding or servicing them. INCREASING COMPETITION. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing immediate access to services and rates over the Internet, as opposed to relying on newspaper, radio and billboard advertising, and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans have been intense and could limit our growth in the future. LENDING ACTIVITIES GENERAL. Our loan portfolio consists primarily of one- to four-family mortgage loans. To a much lesser extent, our loan portfolio includes multi-family and commercial real estate loans, construction and consumer loans. Clifton Savings historically and currently only originates loans for investment purposes. At March 31, 2006, Clifton Savings had no loans that were held for sale. ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new residential dwellings. We offer fixed-rate and adjustable-rate mortgage loans with terms 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, 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. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on our interest rate risk. The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions. 2 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 on our adjustable-rate mortgage loans adjust annually after a one, five, seven or ten year initial fixed period. In addition, we offer adjustable-rate mortgage loans that adjust every three years after a three year initial fixed period. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate typically equal to 2.75% above either the one- 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. 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 high 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. While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon 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. We generally do not make conventional loans with loan-to-value ratios exceeding 95% 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% generally require private mortgage insurance or additional collateral. We require all properties securing mortgage loans to be appraised by a board-approved appraiser. 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. In an effort to provide financing for moderate income 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. MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. We offer adjustable-rate mortgage loans secured by multi-family and commercial real estate. Our multi-family and commercial real estate loans are generally secured by mixed-use properties with residential units as well as retail space. We intend to continue to grow this segment of our loan portfolio. We originate five year adjustable-rate multi-family and commercial real estate loans for terms up to 25 years. Interest rates and payments on our adjustable-rate mortgage loans adjust every five years after a five year initial fixed period. Interest rates and payment on our adjustable rate loans generally are adjusted to a rate typically equal to 3.25% above the five-year constant maturity treasury index. There are no adjustment period or lifetime interest rate caps. Loan amounts generally do not exceed 75% of the appraised value. Loans secured by multi-family and commercial real estate generally involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. In order to monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family and commercial real estate loans. We also perform annual reviews and prepare write-ups on all loans where the loan is secured by commercial or multi-family real estate. 3 At March 31, 2006, we had sixty six loans with principal balances in excess of $500,000. These loans included one loan secured by a mixed-use building that includes retail stores and two apartments totaling $576,000, or 4.5% of multi-family and commercial real estate loans and one loan secured by a mixed-use building that includes a retail space and three office units totaling $744,000, or 5.8% of multi-family and commercial real estate loans. In addition, we had one loan secured by a multi-family property totaling $582,000, or 4.5% of multi-family and commercial real estate loans. At March 31, 2006, all of 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. Construction/permanent loans generally provide for interest-only payments at fixed-rates of interest and have construction terms of six to twelve months. At the end of the construction period, the loan generally converts into a permanent loan. Construction loans generally provide for interest-only payments at variable rates of interest and have terms of twelve months. At the end of the construction period, the loan is generally due and payable in full. Construction loans generally may be considered for loan-to-value ratios of up to 70%. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. We generally use independent fee appraisers for construction disbursement purposes. 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 development. 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. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. CONSUMER LOANS. We offer a variety of consumer loans, including second mortgage loans, loans secured by passbook or certificate accounts, and home equity lines of credit. The procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by 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 which can be recovered on such loans. LOAN ORIGINATIONS AND PURCHASES. Loan originations come from a number of sources. The customary sources of loan originations include internet mortgage loan marketers, local mortgage brokers, advertising, referrals from customers, and personal contacts by our staff. We generally retain for our portfolio all of the loans that we originate. We occasionally purchase participation interests in real estate loans in our market area. We occasionally purchase real estate loans to supplement our own originations on properties located primarily within the state of New Jersey; a smaller portion of such purchases may be of loans on properties located within fifteen states on the Eastern Seaboard. 4 LOAN APPROVAL PROCEDURES AND AUTHORITY. Our policies and loan approval limits are established and approved by the Board of Directors. All residential mortgage loans and all consumer loans require the approval of senior management and are ratified by the Board of Directors. All other loans require the approval of our Board of Directors. The Board of Directors meets weekly to review mortgage loans. 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, 2006, our regulatory limit on loans to one borrower was $20.6 million. At that date, our largest lending relationship was $1.9 million and included eight loans, all of which were performing according to the original repayment terms at March 31, 2006. DELINQUENCIES. When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. The following describes our general collection procedures. We make initial contact with the borrower when the loan becomes 30 days past due. If payment is not then received by the 45th day of delinquency, additional letters and phone calls generally are made. When the loan becomes 90 days past due, we send a letter notifying the borrower that we will commence foreclosure proceedings if the loan is not brought current within 30 days. When the loan becomes 120 days past due, we will commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. We may consider loan workout arrangements with certain borrowers under certain circumstances. INVESTMENT ACTIVITIES We have legal authority to 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 of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities. We also are required to maintain an investment in Federal Home Loan Bank of New York stock. While we maintain the authority under applicable law and our investment policies to invest in derivative securities, we had no such investments at March 31, 2006. At March 31, 2006, our investment portfolio consisted of Federal agency debt securities with maturities of 5 years or less and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less. During the year, we purchased short term callable agency securities in an effort to increase yield while managing our interest rate sensitivity. The majority of these securities have one time call options that generally range from one to three years with final maturities of no longer than five years. Our investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate risk, to provide an alternate source of low-risk investments when demand for loans is weak, and to generate a favorable return. Clifton Savings' Board of Directors has the overall responsibility for Clifton Savings' investment portfolio, including approval of Clifton Savings' investment policy and appointment of Clifton Savings' Investment Committee. The Investment Committee is responsible for approval of investment strategies and monitoring of the investment performance of Clifton Savings. Clifton Savings' President is the designated investment officer and is responsible for the daily investment activities and is authorized to make investment decisions consistent with Clifton Savings' investment policy. The Investment Committee meets regularly with the President in order to review and determine investment strategies and transactions. 5 DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS GENERAL. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments 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 primary market area through the offering of a broad selection of liquid and term deposit instruments. These instruments consist of free checking accounts, NOW accounts which includes high yield (Crystal) checking, money market accounts, passbook and statement savings accounts, club and certificates of deposit. We do not utilize brokered funds. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, 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 and concerns. We review our deposit flows, mix and pricing weekly. Our current strategy is to attract and retain deposits by offering competitive rates, and occasionally offering a premium rate on selected account types depending on our cash flow needs. We have also altered our marketing strategy to link selected premium rate certificates to the establishment of a transaction account in keeping with our goal of shifting our deposit mix toward a larger transaction type base. BORROWINGS. Historically, we have not relied upon advances from the Federal Home Loan Bank of New York to supplement our supply of lendable funds or to meet deposit withdrawal requirements; however, as part of our leveraging strategy implemented during the year ended March 31, 2005, we began to borrow from the Federal Home Loan Bank. 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), 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 25% of a member's assets, and short-term borrowings of less than one year may not exceed 10% of the institution's assets. The Federal Home Loan Bank determines specific lines of credit for each member institution. Historically, we have not borrowed short-term from correspondent banks to cover temporary cash needs. PERSONNEL As of March 31, 2006, we had 87 full-time employees and 11 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 is subject to extensive regulation, examination and supervision by the New Jersey Commissioner of Banking and Insurance and the New Jersey Department of Banking and Insurance, as its chartering agency, the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as its deposits insurer. Clifton Savings is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund managed by the Federal Deposit Insurance Corporation. Clifton Savings must file reports with the New Jersey Department of Banking and Insurance, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the New Jersey Department of Banking and Insurance, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation to evaluate Clifton Savings' safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and 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 adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the New Jersey Department of Banking and Insurance, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or the New Jersey legislature or Congress, could have a material adverse impact on Clifton Savings Bancorp and Clifton Savings and their operations. 6 Clifton Savings Bancorp and Clifton MHC as savings and loan holding companies, are also required to file certain reports with, are subject to examination by, and otherwise comply with the rules and regulations of the New Jersey Department of Banking and Insurance and the Office of Thrift Supervision. Clifton Savings Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws. Certain of the regulatory requirements that are applicable to Clifton Savings, Clifton Savings Bancorp and Clifton MHC are described below. This description of statutory provisions and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Clifton Savings, Clifton Savings Bancorp and Clifton MHC and is qualified in its entirety by reference to the actual statutes and regulations. REGULATION OF NEW JERSEY SAVINGS ASSOCIATIONS GENERAL. New Jersey law and the New Jersey Department of Banking and Insurance regulate, among other things, Clifton Savings' internal corporate governance procedures as well as its deposits, lending and investment activities and its ability to declare and pay dividends. The New Jersey Department of Banking and Insurance must approve changes to a savings association's certificate of incorporation, the establishment or relocation of branch offices, mergers and the issuance of additional stock. As primary federal regulator, the Office of Thrift Supervision also regulates some of these areas and must approve certain corporate transactions such as mergers. BUSINESS ACTIVITIES. The activities of New Jersey-chartered, Federal Deposit Insurance Corporation insured savings associations are governed by the New Jersey Savings and Loan Act (1963), as amended, the Home Owners' Loan Act, as amended and, the Federal Deposit Insurance Act and the regulations issued by the agencies to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which savings associations may engage. In particular, under the New Jersey Savings and Loan Act, specific lending activities of New Jersey savings associations may be limited to a specified percentage of the association's assets or capital. Also, certain activities or investments of a state savings association allowable under New Jersey law may be constrained by federal law or regulation. New Jersey law contains a "parity" provision which provides state savings associations with authority that may be exercised by national banks, federally chartered savings associations, out of state banks or savings banks and bank and financial holding companies upon approval by the New Jersey Department of Banking and Insurance. BRANCHING. New Jersey law provides that, upon satisfaction of certain specified conditions, as determined by the New Jersey Department of Banking and Insurance, savings associations located in a state which has reciprocal legislation in effect on substantially the same terms and conditions as New Jersey law may acquire, or be acquired by, New Jersey savings associations or holding companies. Further, New Jersey's parity provision would permit interstate de novo branching by savings associations to the same extent Office of Thrift Supervision permits interstate branching for federal savings associations. Office of Thrift Supervision regulations generally authorize nationwide branching by federal savings association. ACTIVITIES AND INVESTMENT. The Federal Deposit Insurance Act imposes certain restrictions on the activities and investments of state savings associations such as Clifton Savings. No state savings association may engage as principal in any activity that is not permitted for federally chartered savings associations unless the association is in compliance with federal regulatory capital requirements and the Federal Deposit Insurance Corporation has determined that the activity does not pose a significant risk to the deposit insurance fund. A state savings association may engage in an activity that is permissible for a federal savings association, but in a greater amount, only if the institution is in capital compliance and the Federal Deposit Insurance Corporation has not determined that engaging in that amount of activity poses a risk to the affected deposit insurance fund. Also, a state savings association may not acquire directly an equity investment of a type or in an amount that is not permissible for federal associations. Generally, service corporations of state savings associations may not engage in activities not permissible for service corporations of federal savings associations unless the association is in capital compliance and the Federal Deposit Insurance Corporation determines that the activity poses no significant risk to the deposit insurance fund. 7 LOANS-TO-ONE BORROWER. Under the Home Owners Loan Act and New Jersey law, savings associations are subject to limits on loans-to-one borrower. Generally, this limit is 15% of the association's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include financial instruments and bullion. QTL TEST. The Home Owners Loan Act requires all savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to 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 mortgage-backed and related securities) in at least 9 months out of each 12-month period. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered as "qualified thrift investments." A savings association that fails the qualified thrift lender test must either convert to a commercial bank charter or operate under certain restrictions. As of March 31, 2006, Clifton Savings met the qualified thrift lender test. LIMITATION ON CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings association, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. Under the regulations, application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the association does not meet the criteria for "expedited treatment" of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if it is a subsidiary of a holding company. In the event Clifton Savings' capital fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of increased supervision, Clifton Savings' ability to make capital distributions could be restricted. Following the reorganization, Clifton Savings may not make a distribution that would constitute a return of capital during the three-year term of the business plan submitted in connection with the reorganization. Additionally, the Office of Thrift Supervision could prohibit a proposed capital distribution by any savings association, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice. No insured depository institution may make a capital distribution if, after making the distribution, the institution would be undercapitalized. TRANSACTIONS WITH RELATED PARTIES. Clifton Savings' authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including Clifton Savings Bancorp and any non-savings institution subsidiaries that Clifton Savings Bancorp may establish) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally requires that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. Also, savings associations are prohibited from lending to any affiliate that is engaged in activities not permitted for bank holding companies and no savings association may purchase the securities of an affiliate (other than a subsidiary). 8 The Sarbanes-Oxley Act generally prohibits loans by a company to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution, such as Clifton Savings, to its executive officers and directors in compliance with federal banking laws. Under such laws, Clifton Savings' authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is restricted. The law limits both the individual and aggregate amount of loans that Clifton Savings may make to insiders based, in part, on Clifton Savings capital position and requires certain board approval procedures to be followed. Such loans are required to be made in terms substantially the same as those offered to unaffiliated individuals and not 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 insiders over other employees. STANDARDS FOR SAFETY AND SOUNDNESS. The Federal Deposit Insurance Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency will require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. CAPITAL REQUIREMENTS. Office of Thrift Supervision and New Jersey Department of Banking and Insurance capital regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) which compares Tier 1 capital to total adjusted assets, and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. A savings institution also must maintain risk-based capital for recourse obligations, direct credit substitutes and residual interests. The amount of risk-based capital required for a residual interest generally depends on whether it has been assigned a credit rating by a nationally recognized statistical rating organization. Core (Tier 1) capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The Office of Thrift Supervision and the New Jersey Department of Banking and Insurance also have authority to establish individual minimum capital requirements in appropriate cases upon a determination that an association's capital level is or may become inadequate in light of the particular circumstances, including where an association has a high degree of exposure to interest rate risk or is experiencing growth that presents supervisory problems. 9 At March 31, 2006, Clifton Savings met each of its capital requirements. PROMPT CORRECTIVE REGULATORY ACTION Under the prompt corrective action statute, the Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized savings associations, the severity of which depends upon the institution's degree of capitalization. Generally, a savings association that has total risk-based capital of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a Tier 1 leverage capital ratio of 5% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure is considered to be "well capitalized." A savings institution that has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a Tier 1 leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of "well capitalized" is considered to be "adequately capitalized." A savings institution that has a total risk-based capital of less than 8% or a leverage ratio or a Tier 1 capital or risk-based assets ratio that is less than 4% is considered to be "undercapitalized." A savings association that has a total risk-based capital less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator within specified time frames for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." The Office of Thrift Supervision will not accept a capital restoration plan unless it determines that the plan contains all of the required elements, is based on realistic assumptions and is likely to succeed in restoring the institution's capital, and would not appreciably increase the risk to which the institution is exposed. Compliance with the plan must be guaranteed by any parent holding company, which may include a financial commitment. This guarantee may prevent the holding company from making any capital distributions to shareholders, repurchasing any of its own stock, or incurring additional debt. In addition, numerous mandatory supervisory actions may become immediately applicable to the institution depending upon its category, including, but not limited to, increased monitoring by regulators, restrictions on growth and capital distributions and limitations on expansion. The Office of Thrift Supervision 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. INSURANCE OF DEPOSIT ACCOUNTS FEDERAL DEPOSIT INSURANCE REFORM ACT OF 2005. The Federal Deposit Insurance Reform Act of 2005 (the "Act"), signed by the President on February 8, 2006, revised the laws governing the federal deposit insurance system. The Act provides for the consolidation of the Bank and Savings Association Insurance Funds into a combined "Deposit Insurance Fund." Under the Act, insurance premiums are to be determined by the Federal Deposit Insurance Corporation (the "FDIC") based on a number of factors, primarily the risk of loss that insured institutions pose to the Deposit Insurance Fund. The legislation eliminates the current minimum 1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio fall below 1.25% and the prohibition on assessing the highest quality banks when the ratio is above 1.25%. The Act provides the FDIC with flexibility to adjust the new insurance fund's reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year. The Act increased deposit insurance coverage limits from $100,000 to $250,000 for certain types of Individual Retirement Accounts, 401(k) plans and other retirement savings accounts. While it preserved the $100,000 coverage limit for individual accounts and municipal deposits, the FDIC was furnished with the discretion to adjust all coverage levels to keep pace with inflation beginning in 2010. Also, institutions that become undercapitalized will be prohibited from accepting certain employee benefit plan deposits. Pursuant to the Act, the consolidation of the Bank and Savings Association Insurance Funds into the Deposit Insurance Fund occurred on March 31, 2006. The Act also states that the FDIC must promulgate final regulations implementing the remainder of its provisions not later than 270 days after its enactment. 10 Effective March 31, 2006, Clifton Savings is a member of the Deposit Insurance Fund. At this time, management cannot predict the effect, if any, that the Act will have on insurance premiums paid by Clifton Savings. Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The management of Clifton Savings does not know of any practice, condition or violation that might lead to termination of deposit insurance. ENFORCEMENT. The New Jersey Department of Banking and Insurance has extensive enforcement authority over New Jersey savings associations and, under certain circumstances, affiliated parties, insiders, and agents. This enforcement authority includes: cease and desist orders, receivership, conservatorship, restraining orders, removal of officers and directors, emergency closures, dissolution and liquidation. Fines for violations can range from $100 to $5,000 per day. The Office of Thrift Supervision has primary federal enforcement responsibility over federally-insured savings associations and has the authority to bring actions against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a savings association. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership or conservatorship. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings association. If action is not taken by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. The Federal Deposit Insurance Corporation also has authority to terminate deposit insurance. Federal and state law also establishes criminal penalties for certain violations. COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act, as implemented by Office of Thrift Supervision regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift Supervision, in connection with its examination of a savings association, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. New Jersey law similarly requires the New Jersey Department of Banking and Insurance to consider an association's Community Reinvestment Act rating in connection with evaluating applications. The Community Reinvestment Act requires public disclosure of an institution's rating and requires the Office of Thrift Supervision to provide a written evaluation of an association's Community Reinvestment Act performance utilizing a four-tiered descriptive rating system. Clifton Savings' latest Community Reinvestment Act rating, received from the Office of Thrift Supervision in November 2005, was "Satisfactory." FEDERAL HOME LOAN BANK SYSTEM Clifton Savings is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Clifton Savings, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. Clifton Savings was in compliance with this requirement at March 31, 2006. 11 The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, Clifton Savings' net interest income would likely also be reduced. Further, there can be no assurance that the impact of future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the Federal Home Loan Bank stock held by Clifton Savings. FEDERAL RESERVE SYSTEM Federal Reserve Board regulations require savings associations to maintain non-interest-earning reserves against their transaction accounts. The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $48.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3.0% and for amounts greater than $48.3 million, the reserve requirement is 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%). The first $7.0 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) are exempted from the reserve requirements. Clifton Savings is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce Clifton Savings' interest-earning assets. HOLDING COMPANY REGULATION GENERAL. Clifton Savings Bancorp and Clifton MHC are savings and loan holding companies within the meaning of federal law. As such, they are registered with the Office of Thrift Supervision and are subject to Office of Thrift Supervision regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the Office of Thrift Supervision has enforcement authority over Clifton Savings Bancorp and Clifton MHC and their non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to Clifton Savings. New Jersey law provides the New Jersey Department of Banking and Insurance with authority to examine savings and loan holding companies that control state associations and to secure certain reports from such companies. RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. According to federal law and Office of Thrift Supervision regulations, a mutual holding company, such as Clifton MHC, may generally engage in the following activities: (1) investing in the stock of insured depository institutions and acquiring them by means of a merger or acquisition; (2) investing in a corporation the capital stock of which may be lawfully purchased by a savings association under federal law; (3) furnishing or performing management services for a savings association subsidiary of a savings and loan holding company; (4) conducting an insurance agency or escrow business; (5) holding, managing or liquidating assets owned or acquired from a savings association subsidiary of the savings and loan holding company; (6) holding or managing properties used or occupied by a savings association subsidiary of the savings and loan holding company; (7) acting as trustee under deed or trust; (8) any activity permitted for multiple savings and loan holding companies by Office of Thrift Supervision regulations; (9) any activity permitted by the Board of Governors of the Federal Reserve System for bank holding companies and financial holding companies; and (10) any activity permissive for service corporations. Recent legislation, which authorized mutual holding companies to engage in activities permitted for financial holding companies, expanded the authorized activities. Financial holding companies may engage in a broad array of financial services activities, including insurance and securities. Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings institution, or its holding company, without prior written approval of the Office of Thrift Supervision. Federal law also prohibits a savings and loan holding company from 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 institutions, the Office of Thrift Supervision 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. 12 The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. If the savings institution subsidiary of a savings and loan holding company fails to meet the qualified thrift lender test set, the holding company must register with the Federal Reserve Board as a bank holding company within one year of the savings institution's failure to so qualify. STOCK HOLDING COMPANY SUBSIDIARY REGULATION. The Office of Thrift Supervision has adopted regulations governing the two-tier mutual holding company form of organization and subsidiary stock holding companies that are controlled by mutual holding companies. We have this two-tier form of organization. Clifton Savings Bancorp is the stock holding company subsidiary of Clifton MHC. Clifton Savings Bancorp is only permitted to engage in activities that are permitted for Clifton MHC subject to the same restrictions and conditions. WAIVERS OF DIVIDENDS BY CLIFTON MHC. Office of Thrift Supervision regulations require Clifton MHC to notify the Office of Thrift Supervision if it proposes to waive receipt of our dividends from Clifton Savings Bancorp. The Office of Thrift Supervision reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the waiver would not be detrimental to the safe and sound operation of the savings association; (ii) the mutual holding company's Board of Directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (iii) for as long as the savings association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company is considered as a restriction on the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iv) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability; and (v) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any proposed subsequent dividend under Office of Thrift Supervision capital distribution regulations. Clifton MHC has waived all dividends that Clifton Savings Bancorp has paid through March 31, 2006 and we anticipate that Clifton MHC will continue to waive dividends that Clifton Savings Bancorp may pay, if any, in the future. CONVERSION OF CLIFTON MHC TO STOCK FORM. Office of Thrift Supervision regulations permit Clifton MHC to convert from the mutual form of organization to the capital stock form of organization. There can be no assurance when, if ever, a conversion transaction will occur, and the Board of Directors has no current intention or plan to undertake a conversion transaction. In a conversion transaction a new holding company would be formed as our successor, Clifton MHC's corporate existence would end, and certain depositors of Clifton Savings would receive the right to subscribe for additional shares of the new holding company. In a conversion transaction, each share of common stock held by stockholders other than Clifton MHC would be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio determined at the time of conversion that ensures that stockholders other than Clifton MHC own the same percentage of common stock in the new holding company as they owned in us immediately before conversion. Under Office of Thrift Supervision regulations, stockholders other than Clifton MHC would not be diluted because of any dividends waived by Clifton MHC (and waived dividends would not be considered in determining an appropriate exchange ratio), in the event Clifton MHC converts to stock form. The total number of shares held by stockholders other than Clifton MHC after a conversion transaction also would be increased by any purchases by stockholders other than Clifton MHC in the stock offering conducted as part of the conversion transaction. 13 ACQUISITION OF CONTROL. Under the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire "control" of a savings and loan holding company or savings association. An acquisition of "control" can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision. Under the Change in Bank Control Act, the Office of Thrift Supervision 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 so acquires control would then be subject to regulation as a savings and loan holding company. REMUTUALIZATION TRANSACTIONS. Current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. However, the Office of Thrift Supervision has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and as raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the Office of Thrift Supervision intends to give these issues special scrutiny and reject applications for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervision's concerns are not warranted in the particular case. FEDERAL SECURITIES LAWS Clifton Savings Bancorp's common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Clifton Savings Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934. SARBANES-OXLEY ACT OF 2002 The Sarbanes-Oxley Act of 2002 implemented legislative reforms intended to address corporate and accounting fraud. The Sarbanes-Oxley Act restricts the scope of services that may be provided by accounting firms to their public company audit clients and any non-audit services being provided to a public company audit client will require preapproval by the company's audit committee. In addition, the Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. The legislation accelerates the time frame for disclosures by public companies and changes in ownership in a company's securities by directors and executive officers. The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company's "registered public accounting firm." Among other requirements, companies must disclose whether at least one member of the committee is a "financial expert" (as such term is defined by the Securities and Exchange Commission) and if not, why not. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. PRIVACY REQUIREMENTS OF THE GLBA The Gramm-Leach-Bliley Act of 1999 provided for sweeping financial modernization for commercial banks, savings banks, securities firms, insurance companies, and other financial institutions operating in the United States. Among other provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of consumer financial information with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution's privacy policy and provide such customers the opportunity to "opt out" of the sharing of personal financial information with unaffiliated third parties. 14 ANTI-MONEY LAUNDERING The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the "USA PATRIOT Act") significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities. Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime. Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. We have established policies and procedures to ensure compliance with the USA PATRIOT Act's provisions, and the impact of the USA PATRIOT Act on our operations has not been material. OTHER REGULATIONS Interest and other charges collected or contracted for by Clifton Savings are subject to state usury laws and federal laws concerning interest rates. Clifton Savings' loan operations are also subject to federal laws applicable to credit transactions, including, but not limited to: o Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; o Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; o Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; o Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; o Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and o rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of Clifton Savings also are subject to the: o Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; o Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services; and o Check Clearing for the 21st Century Act (also known as "Check 21"), which gives "substitute checks," such as digital check images and copies made from that image, the same legal standing as the original paper check. 15 FEDERAL AND STATE TAXATION FEDERAL INCOME TAXATION GENERAL. We report our income on a fiscal 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. 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. Our federal income tax returns have been either audited or closed under the statute of limitations through tax year 1995. For its 2006 fiscal year, Clifton Savings' maximum federal income tax rate was 34%. BAD DEBT RESERVES. For fiscal years beginning before June 30, 1996, thrift 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. The 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 requires 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 makes a "non-dividend distribution" to Clifton Savings Bancorp as described below. DISTRIBUTIONS. If Clifton Savings makes "non-dividend distributions" to Clifton Savings Bancorp, the distributions will be considered to have been made from Clifton Savings' 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' 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' taxable income. Non-dividend distributions include distributions in excess of Clifton Savings' 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' current or accumulated earnings and profits will not be so included in Clifton Savings' taxable income. The amount of additional taxable income triggered by a non-dividend 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 makes a non-dividend distribution to Clifton Savings 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 does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. STATE TAXATION NEW JERSEY TAXATION. Clifton Savings, Clifton Savings Bancorp and Clifton MHC 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%. 16
EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Clifton Savings Bancorp, Clifton MHC, Clifton Savings, and Botany Inc. are elected annually by the Board of Directors and serve at the Board's discretion. The executive officers of Clifton Savings Bancorp, Clifton MHC, Clifton Savings, and Botany Inc. are: NAME POSITION - ------------ -------------- John A. Celentano, Jr. ................ Chairman of the Board and Chief Executive Officer of Clifton Savings Bancorp and Clifton MHC and Chairman of the Board of Clifton Savings Walter Celuch.......................... President and Corporate Secretary of Clifton Savings Bancorp and Clifton MHC, President, Chief Executive Officer and Secretary of Clifton Savings, and Director and Investment Officer of Botany Inc. Bart D'Ambra........................... Executive Vice President and Chief Operating Officer of Clifton Savings and President and Chief Executive Officer of Botany Inc. Stephen A. Hoogerhyde.................. Executive Vice President and Chief Lending Officer of Clifton Savings Christine R. Piano, CPA................ Chief Financial Officer and Treasurer of Clifton Savings Bancorp and Clifton MHC, Executive Vice President and Chief Financial Officer of Clifton Savings and Director, Chief Financial Officer, Treasurer and Secretary of Botany Inc.
Below is information regarding the executive officers of Clifton Savings Bancorp and Clifton Savings 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, 2006. WALTER CELUCH has been President and Corporate Secretary of Clifton Savings Bancorp and Clifton MHC since 2004 and has been President and Chief Executive Officer of Clifton Savings since January 1999. From October 1987 until December 1998, Mr. Celuch served as the Senior Vice President and Chief Financial Officer of Clifton Savings. Mr. Celuch has served with Clifton Savings for over 18 years. Mr. Celuch has been Director and Investment Officer of Botany Inc. since inception in December 2004. Age 58. BART D'AMBRA has been Executive Vice President and Chief Operating Officer of Clifton Savings since March 2003. Mr. D'Ambra served as Senior Vice President from April 2002 until March 2003. Prior to April 2002, Mr. D'Ambra served Clifton Savings as a Vice President. Mr. D'Ambra has served with Clifton Savings for over 13 years. Mr. D'Ambra has been President and Chief Executive Officer of Botany Inc. since inception in December 2004. Age 57. STEPHEN A. HOOGERHYDE has been Executive Vice President and Chief Lending Officer of Clifton Savings 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 as Vice President and Mortgage Officer. Mr. Hoogerhyde has served with Clifton Savings for over 19 years. Age 51. CHRISTINE R. PIANO, a certified public accountant, has been Chief Financial Officer and Treasurer of Clifton Savings Bancorp and Clifton MHC since 2004 and has been Executive Vice President and Chief Financial Officer of Clifton Savings since April 2003 and March 1999, respectively. Ms. Piano served as Vice President from March 2000 to April 2003 and as Assistant Vice President from March 1999 to March 2000. Ms. Piano has served with Clifton Savings for over 7 years. Ms. Piano has been Director, Chief Financial Officer, Treasurer and Secretary of Botany Inc. since inception in December 2004. Age 42. 17 ITEM 1A. RISK FACTORS ------------ AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES VARIOUS RISKS. BEFORE DECIDING TO INVEST IN OUR COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW IN CONJUNCTION WITH THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K AND INFORMATION INCORPORATED BY REFERENCE INTO THIS ANNUAL REPORT ON FORM 10-K, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED BY ANY OF THE FOLLOWING RISKS OR BY OTHER RISKS THAT HAVE NOT BEEN IDENTIFIED OR THAT WE MAY BELIEVE ARE IMMATERIAL OR UNLIKELY. THE VALUE OR MARKET PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THE RISKS DISCUSSED BELOW ALSO INCLUDE FORWARD-LOOKING STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. RISING INTEREST RATES MAY HURT OUR PROFITS AND ASSET VALUE. Interest rates were recently at historically low levels. However, since June 30, 2004, the U.S. Federal Reserve has increased its target for the federal funds rate sixteen times to 5.0%. If interest rates continue to rise, and if rates on our deposits and borrowings reprice upwards faster than the rates on our loans and investments, we would experience compression of our interest rate spread and net interest margin, which would have a negative effect on our profitability. STRONG COMPETITION WITHIN OUR MARKET AREA COULD HURT OUR PROFITS AND SLOW GROWTH. Although we consider ourselves competitive in Bergen and Passaic Counties, New Jersey, which we consider our core market area, we face intense competition both in making loans and attracting deposits. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area. A DECLINE IN OUR RETURN ON EQUITY AS A RESULT OF THE CAPITAL WE RAISED IN OUR MARCH 2004 STOCK OFFERING MAY NEGATIVELY IMPACT OUR STOCK PRICE. Return on equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. Our return on average equity for the year ended March 31, 2006 was 1.83%. Over time, we intend to use the net proceeds from our March 2004 stock offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is competitive with other publicly held subsidiaries of mutual holding companies. This goal could take a number of years to achieve, and we cannot assure you that it will be attained. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on equity. ADDITIONAL EXPENSES FROM OUR STOCK-BASED BENEFIT PLANS WILL ADVERSELY AFFECT OUR PROFITABILITY. Our noninterest expenses in fiscal 2007 are likely to increase as a result of the additional annual employee compensation and benefit expenses stemming from the shares that may be purchased or granted to employees and executives under our benefit plans. These additional expenses would adversely affect our profitability. We recognize expenses for our employee stock ownership plan when shares are committed to be released to participants' accounts and recognize expenses for restricted stock awards and stock options over the vesting period of awards made to recipients. 18 CLIFTON MHC'S MAJORITY CONTROL OF OUR COMMON STOCK ENABLES IT TO EXERCISE VOTING CONTROL OVER MOST MATTERS PUT TO A VOTE OF STOCKHOLDERS, INCLUDING PREVENTING SALE OR MERGER TRANSACTIONS YOU MAY LIKE OR A SECOND-STEP CONVERSION BY CLIFTON MHC. Clifton MHC owns a majority of our common stock and, through its Board of Directors, is able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers manage Clifton Savings Bancorp, Clifton Savings and Clifton MHC. As a federally chartered mutual holding company, the Board of Directors of Clifton MHC must ensure that the interests of depositors of Clifton Savings are represented and considered in matters put to a vote of stockholders of Clifton Savings Bancorp. Therefore, the votes cast by Clifton MHC may not be in your personal best interests as a stockholder. For example, Clifton MHC may exercise its voting control to defeat a stockholder nominee for election to the board of directors of Clifton Savings Bancorp. In addition, stockholders will not be able to force a merger or second-step conversion transaction without the consent of Clifton MHC. Some stockholders may desire a sale or merger transaction, since stockholders typically receive a premium for their shares, or a second-step conversion transaction, since fully converted institutions tend to trade at higher multiples than mutual holding companies. THE OFFICE OF THRIFT SUPERVISION'S POLICY ON REMUTUALIZATION TRANSACTIONS COULD PROHIBIT THE MERGER OR AN ACQUISITION OF US, WHICH MAY LOWER OUR STOCK PRICE. Current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. The possibility of a remutualization transaction has recently resulted in a degree of takeover speculation for mutual holding companies which is reflected in the stock prices of mutual holding companies. However, the Office of Thrift Supervision has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and as raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the Office of Thrift Supervision intends to give these issues special scrutiny and reject applications for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervision's concerns are not warranted in the particular case. Should the Office of Thrift Supervision prohibit or otherwise restrict these transactions in the future, our stock price may be adversely affected. WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT AND WE MAY BE ADVERSELY AFFECTED BY CHANGES IN LAWS AND REGULATIONS. We are subject to extensive government regulation, supervision and examination. Such regulation, supervision and examination govern the activities in which we may engage, and is intended primarily for the protection of the deposit insurance fund and our depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. ITEM 1B. UNRESOLVED STAFF COMMENTS ------------------------- None. 19 ITEM 2. PROPERTIES ---------- We conduct our business through our main office and branch offices. The following table sets forth certain information relating to these facilities as of March 31, 2006.
NET BOOK VALUE YEAR AS OF SQUARE OWNED/ LOCATION OPENED MARCH 31, 2006 FOOTAGE LEASED ----------- ------------ ----------------- ----------- ---------- (DOLLARS IN THOUSANDS) MAIN OFFICE: 1433 Van Houten Avenue 1981 2,584 10,460 Owned BRANCHES: CLIFTON: 1055 Clifton Avenue 1956 757 2,484 Owned 1 Village Square West 1928 190 1,550 Owned 319 Lakeview Avenue 1970 486 3,311 Owned 646 Van Houten Avenue 1968 137 1,081 Owned 387 Valley Road 1971 1 995 Leased(1) GARFIELD: 247 Palisade Avenue(2) 2004 1,157 3,130 Owned 369 Lanza Avenue 1977 1,031 2,174 Owned WALLINGTON: 55 Union Boulevard 2004 1,352 2,806 Owned WAYNE: 1158 Hamburg Turnpike 2003 104 1,617 Leased(3)
- --------------------------- (1) The lease which expired in May 2006 was renewed for an additional 5 years. (2) This branch replaced a previously leased facility which was opened in 1975. (3) The current lease expires in 2008 with an option for an additional 5 years. ITEM 3. LEGAL PROCEEDINGS ----------------- Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ---------------------------------------------------------------- PURCHASES OF EQUITY SECURITIES ------------------------------ The information regarding the market for Clifton Savings Bancorp's common equity and related stockholder matters is incorporated herein by reference to the section captioned "Investor and Corporate Information" in Clifton Savings Bancorp's 2006 Annual Report to Stockholders. 20 The following table sets forth information regarding the Company's repurchases of its common stock during the quarter ended March 31, 2006.
TOTAL NUMBER OF SHARES PURCHASED MAXIMUM AS PART OF NUMBER OF SHARES TOTAL PUBLICLY THAT MAY YET BE NUMBER OF AVERAGE ANNOUNCED PLANS PURCHASED UNDER SHARES PRICE PAID OR THE PLANS OR PERIOD PURCHASED (1) PER SHARE PROGRAMS PROGRAMS - -------------------------------- ----------------- ---------------- ------------------------- --------------------- January 1, 2006 through 0 $ 0 - - January 31, 2006 February 1, 2006 through 69,119 $10.41 69,119 610,881 February 28, 2006 March 1, 2006 through 75,652 $10.46 144,771 535,229 March 31, 2006
- ------------------------- (1) On February 1, 2006, the Company announced that the Board of Directors had approved its second stock repurchase program authorizing the Company to repurchase up to 680,000 shares of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA ----------------------- The information required by this item is incorporated herein by reference to the section captioned "Selected Consolidated Financial and Other Data" in the 2006 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATION -------------------- The information required by this item is incorporated herein by reference to the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2006 Annual Report to Stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2006 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA ------------------------------------------ The information regarding financial statements is incorporated herein by reference to the section captioned "Consolidated Financial Statements" in the 2006 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. 21 ITEM 9A. CONTROLS AND PROCEDURES ----------------------- (a) 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 for the purpose of ensuring that the 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. (b) Internal Controls Over Financial Reporting Management's annual report on internal control over financial reporting and the attestation report of the registered public accounting firm are incorporated herein by reference to the section captioned "Consolidated Financial Statements" in the 2006 Annual Report to Stockholders. Changes to Internal Control Over Financial Reporting As reported in the Company's 2005 10-K's Report, management concluded that, as of March 31, 2005, the Company's internal control over financial reporting was not effective due to the existence of the following material weaknesses: o As of March 31, 2005, the Company's internal audit program was not sufficient to provide management a basis to assess the quality of the Company's internal control performance over time. Accordingly, management concluded that the monitoring component of the Company's internal control over financial reporting was not effective. Internal control monitoring involves assessing the design and operation of internal control on a timely basis and taking necessary corrective actions. o The Company's policies and procedures manuals that pertain to maintenance of records in reasonable detail were not updated and/or completed. During the three months ended March 31, 2006, management of the Company completed remediation of the material weaknesses identified in the 2005 10-K Report through the implementation of a variety of changes to the Company's internal control over financial reporting. Specifically, the Company has implemented the following modifications to its internal controls and procedures in the internal control monitoring and policies and procedures: o We engaged an outside firm to assist in completion of the compliance/internal audit program established by the Board of Directors. As a result, in April 2006, we engaged outside firms to perform all such ongoing compliance/internal audit functions. o We trained employees and officers and will continue such training as part of our regular program. 22 As of March 31, 2006, these modifications were finalized, and as such, a material weakness in internal controls over financial reporting no longer existed at March 31, 2006. Except as indicated herein, there were no changes in the Company's internal control over financial reporting during the three months ended March 31, 2006 that have materially affected, or are reasonable likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION ----------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information relating to the directors and officers of Clifton Savings Bancorp is incorporated herein by reference to the section captioned "Proposal 1 -- Election of Directors" in Clifton Savings Bancorp's Proxy Statement for the 2006 Annual Meeting of Stockholders and to Part I, Item 1, "Business -- Executive Officers of the Registrant." The information regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned "Other Information Relating to Directors and Executive Officers -- Section 16(a) Beneficial Ownership Reporting Compliance" in Clifton Savings Bancorp's Proxy Statement for the 2006 Annual Meeting of Stockholders. Clifton Savings Bancorp has adopted a Code of Ethics and Business Conduct. See Exhibit 14.1 to this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information regarding executive and director compensation is incorporated herein by reference to the sections captioned "Executive Compensation" and "Corporate Governance -- Directors' Compensation," respectively, in Clifton Savings Bancorp's Proxy Statement for the 2006 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND ------------------------------------------------------------------ RELATED STOCKHOLDER MATTERS --------------------------- (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Stock Ownership" in Clifton Savings Bancorp's Proxy Statement for the 2006 Annual Meeting of Stockholders. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Stock Ownership" in Clifton Savings Bancorp's Proxy Statement for the 2006 Annual Meeting of Stockholders. (c) Changes in Control Management of Clifton Savings Bancorp knows of no arrangements, including any pledge by any person or securities of Clifton Savings Bancorp, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Equity Compensation Plan Information The following table sets forth information as of March 31, 2006 about Company common stock that may be issued under the Clifton Savings Bancorp, Inc. 2005 Equity Incentive Plan. The plan was approved by the Company's stockholders. 23
NUMBER OF SECURITIES REMAINING AVAILABLE NUMBER OF SECURITIES OR FUTURE ISSUANCE TO BE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY THE EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN THE FIRST COLUMN) ------------------------------------ ------------------------ ----------------------- ------------------------------- Equity compensation plans approved by security holders 1,483,510 $10.24 12,483 Equity compensation plans not approved by security holders n/a n/a n/a ------------------------ ------------------------- --------------------------- Total 1,483,510 $10.24 12,483
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the section captioned "Other Information, Relating to Director and Executive Officers -- Transaction with Management" of Clifton Savings Bancorp's Proxy Statement for the 2006 Annual Meeting of Stockholders. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES -------------------------------------- The information relating to the principal accountant fees and expenses is incorporated herein by reference to the section captioned "Proposal 2 -- Ratification of Independent Registered Public Accountants" of Clifton Savings Bancorp's Proxy Statement for the 2006 Annual Meeting of Stockholders. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ------------------------------------------ (a) (1) The following are filed as a part of this report by means of incorporation of Clifton Savings Bancorp's 2006 Annual Report to Stockholders: o Report of Independent Registered Public Accounting Firm o Consolidated Statements of Financial Condition as of March 31, 2006 and 2005 o Consolidated Statements of Income for Each of the Years in the Three-Year Period Ended March 31, 2006 o Consolidated Statements of Changes in Stockholders' Equity for Each of the Years in the Three-Year Period Ended March 31, 2006 o Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended March 31, 2006 o Notes to Consolidated Financial Statements (2) All schedules are omitted as required information is either not applicable, or is presented in the consolidated financial statements. 24
(3) Exhibits 3.1 Charter of Clifton Savings Bancorp, Inc. (1) 3.2 Bylaws of Clifton Savings Bancorp, Inc. (1) 4.1 Specimen Stock Certificate of Clifton Savings Bancorp, Inc. (1) 10.1 Clifton Savings Bank, S.L.A. Employee Stock Ownership Plan and Trust (1) 10.2 ESOP Loan Commitment Letter and ESOP Loan Documents (1) 10.3 Employment Agreement between Clifton Savings Bancorp, Inc. and John A. Celentano, Jr. (1) 10.4 Employment Agreement between Clifton Savings Bancorp, Inc. and Walter Celuch (1) 10.5 Employment Agreement between Clifton Savings Bank, S.L.A. and John A. Celentano, Jr. (1) 10.6 Employment Agreement between Clifton Savings Bank, S.L.A. and Walter Celuch (1) 10.7 Change in Control Agreement between Clifton Savings Bank, S.L.A. and Bart D'Ambra (1) 10.8 Change in Control Agreement between Clifton Savings Bank, S.L.A. and Stephen A. Hoogerhyde (1) 10.9 Change in Control Agreement between Clifton Savings Bank, S.L.A. and Christine R. Piano (1) 10.10 Clifton Savings Bank, S.L.A. Directors' Retirement Plan (1) 10.11 Clifton Savings Bank, S.L.A. 401(k) Savings Plan (2) 10.12 Clifton Savings Bank, S.L.A. Supplemental Executive Retirement Plan (1) 10.13 Clifton Savings Bancorp, Inc. 2005 Equity Incentive Plan (3) 13.0 Annual Report to Stockholders 14.1 Code of Ethics and Business Conduct (1) 21.0 List of Subsidiaries 23.0 Consent of Beard Miller Company LLP 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.0 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
- --------------------------- (1) Incorporated by reference to the Company's 2004 Annual Report on Form 10-K filed on June 29, 2004. (2) Incorporated by reference to the Registration Statement on Form S-8 (No. 333-113302) filed on March 5, 2004. (3) Incorporated by reference to the Company's Proxy Statement filed on June 10, 2005. 25 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLIFTON SAVINGS BANCORP, INC. Date: June 9, 2006 By: /s/ John A. Celentano, Jr. ------------------------------------------------- John A. Celentano, Jr. Chairman of the Board and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ John A. Celentano, Jr. Chairman of the Board and June 9, 2006 - ---------------------------- Chief Executive Officer John A. Celentano, Jr. (principal executive officer) /s/ Christine R. Piano Chief Financial Officer and June 9, 2006 - ---------------------------- Treasurer (principal financial Christine R. Piano and accounting officer) /s/ Frank J. Hahofer Director June 9, 2006 - ---------------------------- Frank J. Hahofer /s/ Thomas A. Miller Director June 9, 2006 - ---------------------------- Thomas A. Miller /s/ John H. Peto Director June 9, 2006 - ---------------------------- John H. Peto /s/ Raymond L. Sisco Director June 9, 2006 - ---------------------------- Raymond L. Sisco /s/ Joseph C. Smith Director June 9, 2006 - ---------------------------- Joseph C. Smith /s/ John Stokes Director June 9, 2006 - ---------------------------- John Stokes EX-13.0 2 clifton10kjune06ex13-0.txt ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.0 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth certain consolidated summary historical financial information concerning the financial position of Clifton Savings Bancorp, Inc. including its subsidiaries, Clifton Savings Bank, S.L.A., and Botany Inc. for the dates indicated. The financial data is derived in part from, and should be read in conjunction with, the consolidated financial statements and related notes of Clifton Savings Bancorp, Inc. appearing later in this annual report.
AT MARCH 31, ----------------------------------------------------------------- 2006 2005 2004 2003 2002 ------------ ------------ ------------ ------------- ------------ (DOLLARS IN THOUSANDS) FINANCIAL CONDITION DATA: Total assets.................................. $ 834,880 $ 841,877 $ 742,308 $ 576,055 $ 543,917 Loans receivable, net......................... 403,682 354,162 249,459 214,219 251,021 Cash and cash equivalents..................... 22,623 31,121 144,657 76,251 55,028 Securities.................................... 387,850 435,854 330,887 271,362 225,515 Deposits...................................... 571,962 556,453 537,002 497,495 471,318 FHLB advances................................. 57,874 75,263 - - - Total equity.................................. 197,748 203,173 199,907 73,020 67,804 YEAR ENDED MARCH 31, ----------------------------------------------------------------- 2006 2005 2004 2003 2002 ------------ ------------ ------------ ------------- ------------ (DOLLARS IN THOUSANDS) OPERATING DATA: Interest income............................... $ 35,352 $ 31,369 $ 25,698 $ 29,253 $ 31,290 Interest expense.............................. 17,572 12,397 11,716 14,856 19,136 ------ ------ ------ ------ ------ Net interest income........................... 17,780 18,972 13,982 14,397 12,154 Provision for (recovery of) loan losses....... 160 260 (100) - 55 ------ ------ ------ ------ ------ Net interest income after provision for (recovery of) loan losses... 17,620 18,712 14,082 14,397 12,099 Noninterest income........................... 265 361 291 296 284 Noninterest expense.......................... 12,094 10,279 8,183 5,926 5,478 ------ ------ ------ ------ ------ Earnings before income taxes................. 5,791 8,794 6,190 8,767 6,905 Total income taxes........................... 2,124 3,514 2,501 3,546 2,476 ------ ------ ------ ------ ------ Net earnings................................. $ 3,667 $ 5,280 $ 3,689 $ 5,221 $ 4,429 ====== ====== ====== ====== ====== Basic and diluted earnings per share (1)..... $ 0.13 $ 0.18 $ 0.13 N/A N/A ====== ====== ====== ====== ======
- ------------------- (1) Prior to March 3, 2004, Clifton Savings operated as a mutual institution and, accordingly, had no per share data. 2
AT OR FOR THE YEAR ENDED MARCH 31, --------------------------------------------------------------------------- 2006 2005 2004 2003 2002 -------------- --------------- ------------- ------------- -------------- PERFORMANCE RATIOS: Return on average assets................ 0.43% 0.67% 0.57% 0.94% 0.86% Return on average equity................ 1.83% 2.62% 4.37% 7.41% 6.75% Interest rate spread (1)................ 1.52% 1.96% 2.01% 2.34% 1.94% Net interest margin (2)................. 2.16% 2.48% 2.23% 2.67% 2.41% Noninterest expense to average assets... 1.43% 1.30% 1.25% 1.07% 1.06% Efficiency ratio (3).................... 67.02% 53.35% 57.33% 40.33% 43.98% Average interest-earning assets to average interest-bearing liabilities. 1.30x 1.32x 1.11x 1.12x 1.13x Average equity to average assets........ 23.76% 25.48% 12.94% 12.68% 12.67% Earnings per share...................... $ 0.13 $ 0.18 $ 0.13 N/A N/A Dividends per share..................... $ 0.20 $ 0.14 N/A N/A N/A Dividend payout ratio................... 67.96% 33.52% N/A N/A N/A CAPITAL RATIOS: Tangible capital........................ 17.28% 17.52% 17.83% 12.69% 12.47% Core capital............................ 17.34% 17.56% 17.90% 12.69% 12.47% Risk-based capital...................... 47.02% 50.83% 57.71% 40.47% 35.64% ASSET QUALITY RATIOS: Allowance for loan losses as a percent of total gross loans.................... 0.31% 0.31% 0.34% 0.44% 0.37% Allowance for loan losses as a percent of nonperforming loans.................. 12600.00% 110000.00% 688.52% 537.14% 186.51% Net charge-offs to average outstanding loans during the period.............. 0.00% 0.00% 0.00% 0.00% 0.00% Nonperforming loans as a percent of total loans.......................... 0.00% 0.00% 0.05% 0.08% 0.20% Nonperforming assets as a percent of total assets......................... 0.00% 0.00% 0.02% 0.03% 0.09% OTHER DATA: Number of: Real estate loans outstanding........ 2,266 2,173 1,886 1,905 2,263 Deposit accounts..................... 35,658 34,709 34,916 35,171 37,005 Full service customer service facilities.............................. 10 10 10 8 8
- --------------------------------- (1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. (2) Represents net interest income as a percent of average interest-earning assets. (3) Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of assets. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The objective of this section is to help you understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear later in this annual report. OVERVIEW INCOME. We have two primary sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest income (which is the income that we earn on our loans and investments) and interest expense (which is the interest that we pay on our deposits and borrowings). To a much lesser extent, we also recognize pre-tax income from fee and service charge income - the compensation we receive from providing products and services. Most of our fee and service charge income comes from service charges on deposit accounts and fees for late loan payments. We also earn fee and service charge income from ATM charges and other fees and charges. EXPENSES. The expenses we incur in operating our business consist of salary and employee benefits expenses, occupancy expenses, equipment, directors' compensation, advertising expenses, legal, federal insurance premiums, and other miscellaneous expenses. Salary and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes and expenses for retirement and other employee benefits. Occupancy expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and costs of utilities. Equipment expenses include fees paid to our third-party data processing service, telephone expense and expenses and depreciation charges related to office and banking equipment. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets. Estimated lives are five to 40 years for building and improvements, five to 20 years for land improvements and two to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of the useful life of the asset or term of the lease. Directors' compensation expense includes restricted stock expense, retirement benefits and directors' fees. Advertising expenses include costs relating to marketing, promotional items and related expenses. Legal expense includes attorneys' fees related to litigation, corporate, securities, regulatory and other legal matters. Federal insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts. Other expenses include expenses for accountants and consultants, franchise taxes, charitable contributions, insurance, office supplies, printing, postage and other miscellaneous operating expenses. CRITICAL ACCOUNTING POLICIES We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and the assessment of prepayment risks associated with mortgage-backed securities. 4 ALLOWANCE FOR LOAN LOSSES. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. MORTGAGE-BACKED SECURITIES. Assessments of prepayment risks related to mortgage-backed securities are based upon current market conditions, which are subject to frequent change. We believe that the prepayment risks associated with mortgage-backed securities are properly recognized. DEFERRED INCOME TAXES. We use the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. OTHER-THAN-TEMPORARY IMPAIRMENT. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and Staff Accounting Bulletin 59, "Noncurrent Marketable Equity Securities," require companies to perform periodic reviews of individual securities in their investment portfolios to determine whether decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company's intent and ability to hold the security. Pursuant to these requirements, we assess valuation declines to determine the extent to which such changes are attributable to (1) fundamental factors specific to the issuer, such as financial condition, business prospects or other factors or (2) market-related factors, such as interest rates or equity market declines. OPERATING STRATEGY Our mission is to continue to operate and grow a profitable community-oriented financial institution serving primarily retail customers in our market area. We plan to achieve this by: o operating as an independent community-oriented financial institution; o expanding our branch network and upgrading our existing branches; o pursuing opportunities to increase our loan portfolio by purchasing New Jersey and out-of-state loans; o continuing to use conservative underwriting practices to maintain the high quality of our loan portfolio; o managing our investment and borrowings portfolios; and 5 o increasing deposits. OPERATING AS AN INDEPENDENT COMMUNITY-ORIENTED FINANCIAL INSTITUTION We have a long tradition of focusing on the needs of consumers in our community and being an active corporate citizen. Unlike some large banks, our decisions are made locally, we have many long time branch employees, and customers have access to senior management. In recent years, we have expanded our customer service initiatives. In addition to standard conveniences such as ATMs, we offer extended hours and telephone banking. We deliver personalized service and respond with flexibility to customer needs. We believe our community orientation is attractive to our customers and distinguishes us from the large regional banks that operate in our market area, and we intend to maintain this focus as we grow. EXPANDING OUR BRANCH NETWORK AND UPGRADING OUR EXISTING BRANCHES We intend to continue to pursue opportunities to upgrade our current branch facilities and to pursue expansion in our market area in future years through de novo branching and branch acquisitions, and we also may consider exploring expansion opportunities in surrounding counties. PURSUING OPPORTUNITIES TO INCREASE OUR LOAN PORTFOLIO BY PURCHASING NEW JERSEY AND OUT-OF-STATE LOANS We will pursue the purchase of New Jersey and out-of-state (in particular states on the Eastern Seaboard) loans originated by national brokers while continuing to originate any such loans in accordance with our conservative underwriting guidelines. Purchased loan packages are subject to the same guidelines established for our own origination process. By purchasing loans we supplement loan demand in our lending areas while minimizing overhead costs. CONTINUING TO USE CONSERVATIVE UNDERWRITING PRACTICES TO MAINTAIN THE HIGH QUALITY OF OUR LOAN PORTFOLIO We believe that high asset quality is a key to long-term financial success. We have sought to maintain a high level of asset quality and moderate credit risk by using underwriting standards which we believe are conservative. At March 31, 2006, our nonperforming loans (loans which are 90 or more days delinquent) were 0.0% of our total loan portfolio and 0.0% of our total assets. Although we intend to increase our multi-family and commercial real estate lending, we intend to continue our philosophy of managing large loan exposures through our conservative approach to lending. MANAGING OUR INVESTMENT AND BORROWINGS PORTFOLIOS Our liquidity, income and interest rate risk are affected by the management of our investment and borrowings portfolios. During the year ended March 31, 2006, we purchased short term callable agency securities in an effort to increase yield while managing our interest rate sensitivity. The majority of these securities have one time call options that generally range from one to three years with final maturities of no longer than five years. We will continue to monitor market conditions to determine the best method of generating a favorable return without incurring additional risk. During the year, market conditions were not favorable for implementing our leverage strategy, but we will continue to look for leveraging opportunities as market conditions improve. INCREASING DEPOSITS Our primary source of funds is our deposit accounts. Deposits increased $15.5 million, or 2.8%, since March 31, 2005 primarily due to competitive interest rates. We intend to continue to increase our deposits by continuing to offer exceptional customer service, as well as enhancing and expanding products and services offered to our customers. 6
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2006, 2005 AND 2004 OVERVIEW. % CHANGE % CHANGE 2006 2005 2004 2006/2005 2005/2004 -------------- -------------- -------------- -------------- --------------- (DOLLARS IN THOUSANDS) Net earnings....................... $3,667 $5,280 $3,689 (30.55)% 43.13% Return on average assets........... 0.43% 0.67 % 0.57% (35.82)% 17.54% Return on average equity........... 1.83% 2.62 % 4.37% (30.15)% (40.05)%
2006 V. 2005. Net earnings decreased primarily due to the effects of the increasing short-term interest rate environment on the Company's net interest margin and spread, and the expense associated with the granting of stock awards in December 2005, of which 20% were immediately vested. 2005 V. 2004. Net earnings increased primarily due to a significant increase in net interest income. During the year, cash received in our initial stock offering was redeployed into higher yielding securities and loans, which accounted for the increase in interest income, offset by a modest increase in interest expense. NET INTEREST INCOME. 2006 V. 2005. Net interest income decreased $1.2 million, or 6.3%, to $17.8 million for 2006. The decrease in net interest income for 2006 was attributable to a significant decrease in the net interest spread which was due to a substantial increase in the cost of interest bearing liabilities. Total interest income increased $4.0 million, or 12.7%, to $35.4 million for 2006, resulting from an increase in both the average volume and rate earned on interest earning assets. During 2006, the average yield on interest-earning assets increased 20 basis points to 4.29%, while average interest-earning assets increased by $56.8 million, or 7.4%, to $823.1 million. The composition of interest-earning assets generally consists of loans, securities and interest-bearing deposits. The increase in average interest-earning assets was primarily due to increases of $79.4 million in loans and $31.8 million in investment securities partially offset by decreases of $29.7 million in mortgage-backed securities and $24.7 million in other interest-earning assets. Interest on loans, investment securities and other interest-earning assets increased due primarily to increases in volume. Interest income on mortgage-backed securities decreased by 9.9% due to a decrease in volume which more than offset the 12 basis point increase in yield to 4.01%. Total interest expense increased $5.2 million, or 41.7%, to $17.6 million for 2006 due primarily to a 66 basis point increase in the cost of interest-bearing deposit accounts to 2.66%. Overall, the average interest rate paid on interest-bearing liabilities increased 64 basis points to 2.77%, while the average balances increased only 9.0%. 2005 V. 2004. Net interest income increased $5.0 million, or 35.7%, to $19.0 million for 2005. The increase in net interest income for 2005 was attributable to a substantial increase in average interest earning assets partially offset by a marginal decrease in the net interest income margin. Total interest income increased $5.7 million, or 22.2%, to $31.4 million for 2005, resulting from an increase of $138.5 million or 22.1% in the volume of interest earnings assets, while the average yield remained constant at 4.09%. The composition of interest-earning assets generally consists of loans, securities, and interest-bearing deposits. The increase in average interest-earning assets was primarily due to the increases in the average balance of loans, mortgage-backed securities and investment securities partially offset by the decrease in other interest-earning assets. Interest income on loans and mortgage-backed securities increased by 29.4% and 19.9% respectively, due primarily to increases in volume. The average yield on loans decreased 53 basis points to 5.26% while the average yield on mortgage-backed securities increased 2 basis points to 3.89%. Interest income on investment securities increased 9.4% due to a 26.8% increase in volume partially offset by a 47 basis point decrease in average yield to 2.97%. Interest income on other interest-earning assets decreased 0.9% due to a 40.4% decrease in volume partially offset by a 60 basis point increase in yield to 1.49%. 7 Total interest expense increased $681,000, or 5.8% to $12.4 for 2005 due primarily to the addition of interest expense on FHLB borrowings which were part of an income enhancement strategy implemented during the year. The average interest rate paid on interest-bearing liabilities increased 5 basis points to 2.13% while the average balances increased only 3.4%. 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.
YEAR ENDED MARCH 31, ------------------------------------------------------------------------------------------- 2006 2005 2004 ----------------------------- ---------------------------- ------------------------------ INTEREST INTEREST INTEREST AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/ BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST --------- ----------- ------- --------- ----------- ------ --------- ----------- ------- (DOLLARS IN THOUSANDS) Assets: Interest-earning assets: Loans receivable............... $ 388,915 $ 19,874 5.11% $ 309,548 $ 16,280 5.26% $ 217,098 $ 12,580 5.79% Mortgage-backed securities..... 207,500 8,315 4.01% 237,177 9,225 3.89% 198,677 7,695 3.87% Investment securities.......... 207,670 6,370 3.07% 175,860 5,215 2.97% 138,652 4,768 3.44% Other interest-earning assets.. 19,023 793 4.17% 43,703 649 1.49% 73,342 655 0.89% ----------- --------- --------- -------- --------- -------- Total interest-earning assets.................... 823,108 35,352 4.29% 766,288 31,369 4.09% 627,769 25,698 4.09% --------- -------- -------- Noninterest-earning assets........ 20,577 24,964 25,135 ----------- --------- --------- Total assets................ $ 843,685 $ 791,252 $ 652,904 =========== ========= ========= Liabilities and equity: Interest-bearing liabilities: Demand accounts................ $ 43,405 708 1.63% $ 36,774 308 0.84% $ 74,150 612 0.83% Savings and Club accounts...... 146,583 1,859 1.27% 176,895 2,317 1.31% 155,902 2,129 1.37% Certificates of deposit........ 376,185 12,505 3.32% 326,202 8,177 2.51% 333,487 8,975 2.69% ----------- --------- --------- -------- --------- -------- Total interest-bearing deposits................... 566,173 15,072 2.66% 539,871 10,802 2.00% 563,539 11,716 2.08% ----------- --------- --------- -------- --------- -------- FHLB Advances.................. 68,533 2,500 3.65% 42,600 1,595 3.74% - - 0.00% ----------- --------- --------- -------- --------- -------- Total interest-bearing liabilities................ 634,706 17,572 2.77% 582,471 12,397 2.13% 563,539 11,716 2.08% ----------- --------- --------- -------- --------- -------- Noninterest-bearing liabilities: Noninterest-bearing deposits... 2,142 1,292 283 Other noninterest-bearing liabilities.................. 6,370 5,889 4,618 ----------- --------- --------- Total noninterest-bearing liabilities................ 8,512 7,181 4,901 ----------- --------- --------- Total liabilities............ 643,218 589,652 568,440 Stockholders' equity......... 200,467 201,600 84,464 ----------- --------- --------- Total liabilities and equity..................... $ 843,685 $ 791,252 $ 652,904 =========== ========= ========= Net interest income............... $ 17,780 $ 18,972 $ 13,982 ========= ======== ======== Interest rate spread.............. 1.52% 1.96% 2.01% Net interest margin............... 2.16% 2.48% 2.23% Average interest-earning assets to average interest-bearing liabilities.................... 1.30x 1.32x 1.11x
8 RATE/VOLUME ANALYSIS. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
2006 COMPARED TO 2005 2005 COMPARED TO 2004 ---------------------------------- ---------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ---------------------------------- ---------------------------------- VOLUME RATE NET VOLUME RATE NET ---------- -------- ------------ ---------- -------- ------------ (IN THOUSANDS) Interest income: Loans receivable............... $ 4,070 $ (476) $ 3,594 $ 4,939 $ (1,239) $ 3,700 Mortgage-backed securities..... (1,187) 277 (910) 1,490 40 1,530 Investment securities.......... 974 181 1,155 1,160 (713) 447 Other interest-earning assets.. (525) 669 144 (332) 326 (6) --------- ------- -------- ------- -------- ------- Total interest income... 3,332 651 3,983 7,257 (1,586) 5,671 --------- ------- -------- ------- -------- ------- Interest expense: Demand deposits............... 64 336 400 (311) (7) (304) Savings and Club accounts..... (389) (69) (458) 283 (95) 188 Certificates of deposit....... 1,393 2,935 4,328 (196) (602) (798) --------- ------- -------- ------- -------- ------- Total deposit expense...... 1,068 3,202 4,270 (224) (690) (914) --------- ------- -------- ------- -------- ------- FHLB advances................. 944 (39) 905 1,595 - 1,595 --------- ------- -------- ------- -------- ------- Total interest expense.. 2,012 3,163 5,175 1,371 (690) 681 --------- ------- -------- ------- -------- ------- Net interest income........... $ 1,320 $(2,512) $ (1,192) $ 5,886 $ (896) $ 4,990 ========= ======= ======== ======= ======== =======
PROVISION FOR LOAN LOSSES. 2006 V.2005. We recorded a provision for loan losses of $160,000 during the year ended March 31, 2006. The need for this provision was due to an increase in the loan portfolio balance. Gross loans increased 14.3% during the period. The additional provision needed was not the result of a decline in the quality of the portfolio as nonperforming loans increased from one loan totaling approximately $1,000, to two loans totaling approximately $10,000 during the period. 2005 V.2004. We recorded a provision for loan losses of $260,000 during the year ended March 31, 2005. The need for an increase in the allowance for loan losses was the result of a substantial increase in the loan portfolio balance. Gross loans increased 41.5% during the period. The additional provision needed was not the result of a decline in the quality of the portfolio as nonperforming loans decreased 99.2% during the period. An analysis of the changes in the allowance for loan losses is presented under "ALLOWANCE FOR LOAN LOSSES AND ASSET QUALITY." 9 NON-INTEREST INCOME. The following table shows the components of noninterest income and the percentage changes from 2006 to 2005 and from 2005 to 2004.
% CHANGE % CHANGE 2006 2005 2004 2006/2005 2005/2004 ---------- ----------- ---------- -------------- ------------ (DOLLARS IN THOUSANDS) Fees and service charges..................... $231 $245 $239 (5.71)% 2.51% Loss on sale of mortgage-backed securities held to maturity................ - (26) - (100.00) ND Gain on sale of premises and equipment.................................. - 93 - (100.00) ND Other........................................ 34 49 52 (30.61) (5.77) ---- ---- ---- -------- ------ Total................................... $265 $361 $291 (26.59)% 24.05% ==== ==== ==== ======== =====
- ------------------- ND - Not determinable. 2006 V.2005. Non-interest income decreased primarily due to the effect of not recording a net gain on the sale of assets during the period. 2005 V.2004. Non-interest income increased due to the effect of a net gain on the sale of assets of approximately $67,000. NON-INTEREST EXPENSE. The following table shows the components of noninterest expense and the percentage changes from 2006 to 2005 and from 2005 to 2004.
% CHANGE %CHANGE 2006 2005 2004 2006/2005 2005/2004 ---------- ----------- ---------- -------------- ------------ (DOLLARS IN THOUSANDS) Salaries and employee benefits......... $ 6,704 $ 5,502 $4,208 21.85% 30.75% Net occupancy expense of premises...... 987 947 785 4.22 20.64 Equipment.............................. 978 905 836 8.07 8.25 Directors' compensation................ 1,021 555 474 83.96 17.09 Advertising............................ 335 406 372 (17.49) 9.14 Legal.................................. 268 363 271 (26.17) 33.95 Federal insurance premium.............. 76 82 79 (7.32) 3.80 Other.................................. 1,725 1,519 1,158 13.56 31.17 ------- ------- ------ ----- ----- Total............................ $12,094 $10,279 $8,183 17.66% 25.61% ======= ======= ====== ===== =====
2006 V.2005. Salaries and employee benefits and directors' compensation increased mainly due to the granting of stock awards in December 2005, of which 20% were immediately vested. The expense for these awards totaled $1.1 million and $489,000 respectively. Expenses related to advertising decreased due to the additional expenses related to branch openings and promotions during the year ended March 31, 2005. Legal fees decreased as a result of decreased litigation expense in 2006 as compared to the previous year. Most costs related to any continuing litigation are being paid by the Company's insurance company. Other expenses increased primarily from the expensing of previously capitalized costs relating to potential branch sites, and expenses related to the internal control evaluation and testing required to comply with the Sarbanes-Oxley Act. 2005 V.2004. Salaries and employee benefits increased due to the cost of stock compensation plans implemented following the Company's initial stock offering, along with the additional personnel added to staff new and expanded branch locations and the newly created controller and internal auditor positions. Net occupancy expenses increased due to the additional costs associated with the expanded branch network. Legal fees increased due to the continuation of the litigation brought against Clifton Savings in connection with the reorganization and legal fees associated with being a public company. Other expenses increased due to the additional miscellaneous costs associated with being a public entity. 10 INCOME TAXES. 2006 V. 2005. Income taxes decreased due to a decrease in pre-tax income coupled with a decrease in the effective tax rate, primarily due to the Bank's investment company, Botany, Inc., which commenced operations in January 2005, being taxed at a lower state income tax rate than the Bank and Bancorp. The overall effective tax rate for 2006 was 36.7%, compared to 40.0% for 2005. 2005 V. 2004. Income taxes increased due to a higher level of pre-tax income. The effective tax rate for 2005 was 40.0% compared to 40.4% for 2004. BALANCE SHEET LOANS. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by one- to four-family homes, and to a much lesser extent, multi-family and commercial real estate and construction loans. At March 31, 2006, real estate loans totaled $395.1 million, or 97.5% of total loans compared to $346.7 million, or 97.8% of total loans at March 31, 2005, and $244.6 million, or 97.6% of total loans, at March 31, 2004. Loans increased in the year ended March 31, 2006 due to strong origination volume, which more than offset repayment levels. Loans increased in the year ended March 31, 2005 due to continued strong original volume as pricing of loan products continued to be competitive, along with the purchase of $46.9 million in loans. The loans purchased were primarily related to New Jersey properties with $14.1 million representing properties in several other eastern states. The largest segment of our mortgage loans is one- to four-family loans. At March 31, 2006, one- to four-family loans totaled $378.5 million and represented 95.8% of mortgage loans and 93.4% of total loans. One- to four-family loans increased $43.6 million, or 13.0%, in the year ended March 31, 2006 as a result of a large volume of originations due to our continued competitive rates, coupled with an expansion of the variety of products offered. One-to four-family mortgage loans increased $100.9 million, or 43.1%, in the year ended March 31, 2005 as a result of the aforementioned origination volume and purchases. Multi-family and commercial real estate loans are the second largest segment of our mortgage loan portfolio. This portfolio was $12.9 million, and represented 3.2% of total loans as of March 31, 2006. Multi-family and commercial real estate loans increased $2.0 million, or 18.3%, in the year ended March 31, 2006 and increased $1.4 million, or 14.7%, in the year ended March 31, 2005. We also originate consumer loans which include second mortgage loans, loans secured by passbook or certificate accounts and home equity lines of credit. Consumer loans totaled $10.3 million and represented 2.5% of total loans at March 31, 2006, compared to $8.0 million, or 2.2% of total loans, at March 31, 2005. 11
The following table sets forth the composition of our loan portfolio at the dates indicated. AT MARCH 31, ---------------------------------------------------------------------- 2006 2005 2004 ---------------------- ----------------------- ----------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- ---------- ---------- ----------- ---------- ----------- (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family................. $ 378,500 93.36% $ 334,902 94.43% $ 233,977 93.34% Multi-family and commercial......... 12,877 3.17 10,932 3.08 9,521 3.80 Construction........................ 3,769 0.93 845 0.24 1,148 0.46 --------- ------ --------- ------ --------- ------ Total real estate loans....... 395,146 97.46 346,679 97.75 244,646 97.60 --------- ------ --------- ------ --------- ------ Consumer loans: Second mortgage loans............... 7,567 1.87 4,874 1.38 3,464 1.38 Passbook or certificate loans....... 996 0.25 894 0.25 1,086 0.43 Equity lines of credit.............. 1,430 0.35 1,912 0.54 1,443 0.58 Other consumer loans................ 290 0.07 290 0.08 35 0.01 --------- ------ --------- ------ --------- ------ Total consumer loans.......... 10,283 2.54 7,970 2.25 6,028 2.40 --------- ------ --------- ------ --------- ------ Total gross loans............. 405,429 100.00% 354,649 100.00% 250,674 100.00% ====== ====== ====== Loans in process....................... (1,512) (159) (354) Net premiums (discounts) and deferred loan costs (fees).......... 1,025 772 (21) Allowance for loan losses.............. (1,260) (1,100) (840) --------- --------- --------- Total loans receivable, net... $ 403,682 $ 354,162 $ 249,459 ========= ========= =========
AT MARCH 31, ----------------------------------------------------- 2003 2002 --------------------------- ------------------------- AMOUNT PERCENT AMOUNT PERCENT ------------ ------------- ------------ ------------ (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family................. $ 198,884 92.25% $ 236,887 93.93% Multi-family and commercial......... 10,127 4.70 8,753 3.47 Construction........................ 382 0.18 450 0.18 ---------- ------ --------- ------ Total real estate loans....... 209,393 97.13 246,090 97.58 ---------- ------ --------- ------ Consumer loans: Second mortgage loans............... 3,319 1.54 3,828 1.52 Passbook or certificate loans....... 1,188 0.55 976 0.39 Equity lines of credit.............. 1,639 0.76 1,256 0.50 Other consumer loans................ 35 0.02 35 0.01 ---------- ------ --------- ------ Total consumer loans.......... 6,181 2.87 6,095 2.42 ---------- ------ --------- ------ Total gross loans............. 215,574 100.00% 252,185 100.00% ====== ====== Loans in process....................... (252) (80) Net premiums (discounts) and deferred loan costs (fees).......... (163) (144) Allowance for loan losses.............. (940) (940) ---------- --------- Total loans receivable, net... $ 214,219 $ 251,021 ========== =========
12 The following table sets forth certain information at March 31, 2006 regarding the dollar amount of principal repayments becoming due during the periods indicated for loans. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
ONE- TO FOUR- MULTI-FAMILY FAMILY AND COMMERCIAL CONSUMER TOTAL REAL ESTATE REAL ESTATE CONSTRUCTION LOANS LOANS ------------ -------------- ------------ -------- ---------- (IN THOUSANDS) Amounts due in: One year or less..................... $ 53 $ - $3,769 $ 1,279 $ 5,101 More than one to three years......... 2,377 96 - 153 2,626 More than three to five years........ 1,820 56 - 404 2,280 More than five to ten years.......... 11,017 306 - 2,135 13,458 More than ten to fifteen years....... 124,798 1,761 - 2,544 129,103 More than fifteen years.............. 238,435 10,658 - 3,768 252,861 -------- ------- ------ ------- -------- Total............................. $378,500 $12,877 $3,769 $10,283 $405,429 ======== ======= ====== ======= ========
The following table sets forth the dollar amount of all loans at March 31, 2006 that are due after March 31, 2007 and have either fixed interest rates or floating or adjustable interest rates. The amounts shown below exclude applicable loans in process and net premiums (discounts) and deferred loan costs (fees), and includes $10,000 of nonperforming loans.
FIXED- FLOATING OR RATES ADJUSTABLE-RATES TOTAL ----------- ------------------ ---------- (IN THOUSANDS) Real estate loans: One- to four-family.............................. $229,095 $149,352 $378,447 Multi-family and commercial...................... 1,242 11,635 12,877 Construction..................................... - - - Consumer loans...................................... 7,559 1,445 9,004 -------- -------- -------- Total......................................... $237,896 $162,432 $400,328 ======== ======== ========
13 The following table shows loan origination activity during the periods indicated.
YEAR ENDED MARCH 31, --------------------------------------- 2006 2005 2004 ----------- ------------ ------------ (IN THOUSANDS) Total loans at beginning of period............... $ 354,649 $ 250,674 $ 215,574 ---------- ----------- ---------- Loans originated: Real estate................................... 92,887 99,006 114,149 Consumer...................................... 5,787 4,597 4,186 ---------- ----------- ---------- Total loans originated.................. 98,674 103,603 118,335 ---------- ----------- ---------- Loans purchased.................................. 5,018 46,933 4,635 ---------- ----------- ---------- Deduct: Principal payments: Real estate.................................. (49,545) (43,906) (83,531) Consumer..................................... (3,367) (2,655) (4,339) ---------- ----------- ---------- Total principal payments..................... (52,912) (46,561) (87,870) ---------- ----------- ---------- Transfers to foreclosed real estate.......... - - - ---------- ----------- ---------- Net loan activity................................ 50,780 103,975 35,100 ---------- ----------- ---------- Total gross loans at end of period............... $ 405,429 $ 354,649 $ 250,674 ========== =========== ==========
SECURITIES. Our securities portfolio consists primarily of Federal agency debt securities with maturities of five years or less and mortgage-backed securities with stated final maturities of thirty years or less. Securities decreased $48.0 million, or 11.0%, in the year ended March 31, 2006 mainly as a result of redeploying repayments on mortgage-backed securities into higher yielding loans. All of our mortgage-backed securities were issued by either Ginnie Mae, Fannie Mae or Freddie Mac. The following table sets forth the carrying values (fair value for available for sale issues and amortized cost for held to maturity issues) of our securities portfolio at the dates indicated. We had no trading securities at such dates.
AT MARCH 31, ---------------------------------------------------------------- 2006 2005 2004 --------------------- -------------------- --------------------- AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE ---------- ---------- ---------- --------- ---------- --------- (IN THOUSANDS) Securities available-for-sale: Federal agency debt securities.................... $ 39,993 $ 39,555 $ 59,987 $ 59,015 $ 5,000 $ 5,028 Federal National Mortgage Association (1)......... 25,475 24,500 31,465 30,846 - - Federal Home Loan Mortgage Corporation (1)........ 30,912 29,901 37,575 37,355 130 138 ---------- ---------- ---------- --------- ---------- --------- 96,380 93,956 129,027 127,216 5,130 5,166 ---------- ---------- ---------- --------- ---------- --------- Securities held-to-maturity: Federal agency debt securities.................... 169,985 166,762 137,979 135,617 120,933 122,252 Federal National Mortgage Association (1)......... 36,539 35,958 52,952 52,661 76,010 76,823 Federal Home Loan Mortgage Corporation (1)........ 68,003 65,911 88,565 87,616 98,556 99,681 Governmental National Mortgage Association (1).... 19,367 18,876 29,142 28,792 30,222 30,150 ---------- ---------- ---------- --------- ---------- --------- 293,894 287,507 308,638 304,686 325,721 328,906 ---------- ---------- ---------- --------- ---------- --------- Total.......................... $ 390,274 $ 381,463 $ 437,665 $ 431,902 $ 330,851 $ 334,072 ========== ========== ========== ========= ========== =========
- ------------------------ (1) Mortgage-backed securities. 14 At March 31, 2006, we did not own any securities, other than U.S. Government and agency securities that had an aggregate book value in excess of 10% of our total capital at that date. The following table sets forth the maturities and weighted average yields of securities at March 31, 2006. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At March 31, 2006, the amortized cost of mortgage-backed securities with adjustable rates totaled $74.4 million. We had no tax-exempt securities at March 31, 2006.
MORE THAN MORE THAN LESS THAN ONE YEAR TO FIVE YEARS TO MORE THAN ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL ---------------------------------------- ---------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD ---------- -------- --------- ---------- ---------- -------- ---------- --------- ----------- -------------- (DOLLARS IN THOUSANDS) Securities available for sale: Federal agency securities (1)..... $35,000 2.42% $ 4,993 3.44% $ - -% $ - -% $ 39,993 2.54% Fannie Mae (1)(2).... - - - - - - 25,475 4.34 25,475 4.34 Freddie Mac(1)(2).... - - 27 8.63 - - 30,885 4.98 30,912 4.98 ------- -------- ------- -------- --------- 35,000 2.42 5,020 3.46 - - 56,360 4.69 96,380 3.80 ------- -------- ------- -------- --------- Securities held to maturity: Federal agency securities......... 45,000 2.37 124,985 4.05 - - - - 169,985 3.60 Fannie Mae (2)....... 50 6.00 3,891 4.65 318 6.77 32,280 3.60 36,539 3.74 Freddie Mac (2)...... 77 6.00 2,519 5.28 499 6.19 64,908 4.03 68,003 4.10 Ginnie Mae (2)....... 5 7.55 141 6.64 - - 3.72 19,367 3.75 ------- -------- ------- -------- --------- 45,132 2.38 131,536 4.09 817 6.54 116,409 3.86 293,894 3.75 ------- -------- ------- -------- --------- Total.................. $80,132 2.40% $136,556 4.07% $ 817 6.54% $172,769 4.13% $ 390,274 3.76% ======= ======== ======= ======== =========
(1) Weighted average yield for available for sale securities based upon amortized cost. The weighted average yield based upon the portfolio's carrying value of $94.0 million was 3.90%. (2) Mortgage-backed securities. PREMISES AND EQUIPMENT. Premises and equipment decreased approximately $389,000 in the year ended March 31, 2006. OTHER ASSETS. Other assets increased approximately $903,000 in the year ended March 31, 2006. The increase in other assets is primarily due to increases of $665,000 in deferred taxes, $180,000 in refundable state income taxes, and $108,000 in the balance of intangible pension assets partially offset by a decrease of $98,000 in miscellaneous prepaid expenses. DEPOSITS. Our primary source of funds is our deposit accounts. The deposit base is comprised of non-interest bearing demand, NOW accounts, which include high yield (Crystal) checking, passbook and statement savings, money market and time deposits. These deposits are provided primarily by individuals within our market area. We do not use brokered deposits as a source of funding. Deposits increased $15.5 million, or 2.8%, in the year ended March 31, 2006. 15 The following table sets forth the balances of our deposit products at the dates indicated. AT MARCH 31, --------------------------------------- 2006 2005 2004 ------------- ----------- ------------- (IN THOUSANDS) Non-interest bearing demand accounts........ $ 2,132 $ 1,402 $ 1,437 NOW accounts................................ 30,375 33,747 26,667 Super NOW accounts.......................... 214 183 260 Money market deposit accounts............... 17,679 7,479 10,707 Savings and club accounts................... 126,143 173,331 178,892 Certificates of deposit..................... 395,419 340,311 319,039 ----------- --------- --------- Total................................. $ 571,962 $ 556,453 $ 537,002 =========== ========= ========= The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of March 31, 2006. Jumbo certificates of deposit require minimum deposits of $100,000. CERTIFICATES MATURITY PERIOD OF DEPOSIT ----------------------------------------------------------------------------- (IN THOUSANDS) Three months or less .................................. $ 9,288 Over three through six months.......................... 25,702 Over six through twelve months......................... 13,941 Over twelve months..................................... 20,236 -------- Total............................................. $ 69,167 ======== The following table sets forth the time deposits classified by rates at the dates indicated. AT MARCH 31, ------------------------------------ 2006 2005 2004 ---------- ----------- ----------- (IN THOUSANDS) 1.00 - 1.99%............................ $ 3,243 $ 63,362 $136,618 2.00 - 2.99%............................ 38,217 152,961 90,117 3.00 - 3.99%............................ 192,274 99,474 73,021 4.00 - 4.99%............................ 161,671 21,042 14,517 5.00 - 5.99%............................ 14 3,456 3,708 6.00 - 6.99%............................ - 16 1,058 -------- -------- -------- Total.............................. $395,419 $340,311 $319,039 ======== ======== ======== 16 The following table sets forth the amounts and maturities of time deposits at March 31, 2006.
AMOUNT DUE -------------------------------------------------------- PERCENT OF TOTAL ONE YEAR AFTER 1-2 AFTER 2-3 AFTER 3-4 AFTER 4 CERTIFICATE OR LESS YEARS YEARS YEARS YEARS TOTAL ACCOUNTS ----------- ----------- ---------- ---------- --------- ---------- ------------- (DOLLARS IN THOUSANDS) 1.00 - 1.99%..................... $ 3,243 $ - $ - $ - $ - $ 3,243 0.82% 2.00 - 2.99%..................... 35,130 3,087 - - - 38,217 9.66% 3.00 - 3.99%..................... 156,537 30,431 5,306 - - 192,274 48.63% 4.00 - 4.99%..................... 83,988 58,662 14,152 4,669 200 161,671 40.89% 5.00 - 5.99%..................... 14 - - - - 14 -% --------- ------- ------- ------ ---- -------- ------ Total....................... $ 278,912 $92,180 $19,458 $4,669 $200 $395,419 100.00% ========= ======= ======= ====== ==== ======== ======
The following table sets forth the savings activities for the periods indicated. YEAR ENDED MARCH 31, ----------------------------------------- 2006 2005 2004 ------------- ------------- ------------- (IN THOUSANDS) Beginning balance..................... $556,453 $537,002 $497,495 -------- -------- -------- Increase before interest credited..... 454 8,652 27,773 Interest credited..................... 15,055 10,799 11,734 -------- -------- -------- Net increase in savings deposits...... 15,509 19,451 39,507 -------- -------- -------- Ending balance........................ $571,962 $556,453 $537,002 ======== ======== ======== BORROWINGS. Historically, we have not relied upon advances from the Federal Home Loan Bank of New York to supplement our supply of lendable funds or to meet deposit withdrawal requirements; however, as part of our leveraging strategy implemented during the year ended March 31, 2005, we began to borrow from the Federal Home Loan Bank. The following table presents certain information regarding our Federal Home Loan Bank advances during the periods and at the dates indicated. We had no other borrowing arrangements at March 31, 2006.
YEAR ENDED MARCH 31, --------------------------------------------------- 2006 2005 2004 ------------ -------------- -------------- (DOLLARS IN THOUSANDS) Maximum amount of advances outstanding at any month end during the period....................... $ 80,617 $ 75,539 $ - Average advances outstanding during the period....... 68,533 42,600 - Weighted average interest rate during the period..... 3.65% 3.74% -% Balance outstanding at end of period................. $ 57,874 $ 75,263 $ - Weighted average interest rate at end of period...... 3.74% 3.55% -%
17 ALLOWANCE FOR LOAN LOSSES AND ASSET QUALITY ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. The loan portfolio is segregated first between classified and unclassified assets. The classified assets are individually evaluated by both management and an independent party and allowance percentages are assigned. The unclassified assets are further segregated by loan category and percentages are assigned based on inherent losses associated with each type of lending. A random selection of these loans is made, individually evaluated, and, if required, will be assessed a higher percentage allocation. The allowance for each loan category is calculated by assigning both a "low range" and "high range" percentage and multiplying those percentages by the actual loan balance in that loan category. The totals in the low range and high range are averaged and, provided that the current booked allowance does not exceed the total at the higher range, if the average is less than the current booked allowance for that loan category, the difference is deemed unallocated to the loan category. The loss factors we currently apply were established in 1999 based on various risk factors, such as loan type, underlying collateral and payment status, and are reevaluated annually to ensure their relevance in the current real estate environment. Clifton Savings' methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: specific allowances for identified problem loans and a general valuation allowance on the remainder of the loan portfolio. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred. Clifton Savings identifies loans which may require a specific allowance by reviewing all delinquent loans, significant credits, problem loans as identified by Clifton Savings' internal grading system, loans classified as substandard, doubtful, loss, or special mention by Clifton Savings' internal classification system, and other loans which management may have concerns about collectibility, such as loans in a particular industry. For individually reviewed loans, a borrower's inability to service a credit according to the contractual terms based on the borrower's cash flow and/or a shortfall in collateral value would result in the recording of a specific allowance. Clifton Savings did not have any specific allowances at March 31, 2006, 2005 and 2004. The general valuation allowance represents a loss allowance which has been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. Risk factors are based on our historical loss experience and industry averages and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours. At March 31, 2006, our allowance for loan losses represented 0.31% of total gross loans and 12600.00% of nonperforming loans. The allowance for loan losses increased to $1.26 million at March 31, 2006 from $1.1 million at March 31, 2005. We recorded a provision of $160,000 to the allowance for loan losses for the year ended March 31, 2006 primarily due to an increase in the overall balance of the loan portfolio. At March 31, 2005, our allowance for loan losses represented 0.31% of total gross loans and 110,000.0% of nonperforming loans. The allowance for loan losses increased to $1.10 million at March 31, 2005 from $840,000 at March 31, 2004. We recorded a provision of $260,000 to the allowance for loan losses for the year ended March 31, 2005 primarily due to a significant increase in the balance of loans receivable. 18 Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. SUMMARY OF LOAN LOSS EXPERIENCE. The following table sets forth an analysis of the allowance for loan losses for the periods indicated. Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to current income.
YEAR ENDED MARCH 31, ------------------------------------------------------------- 2006 2005 2004 2003 2002 --------- --------- --------- --------- ---------- (DOLLARS IN THOUSANDS) Allowance at beginning of period............ $ 1,100 $ 840 $ 940 $ 940 $ 885 --------- ---------- --------- --------- ------- Provision for (recovery of) loan losses..... 160 260 (100) - 55 --------- ---------- --------- --------- ------- Recoveries.................................. - - - - - Charge-offs................................. - - - - - --------- ---------- --------- --------- ------- Net charge-offs............................. - - - - - --------- ---------- --------- --------- ------- Allowance at end of period............... $ 1,260 $ 1,100 $ 840 $ 940 $ 940 ========= ========== ========= ========= ======= Allowance to nonperforming loans............ 12600.00% 110000.00% 688.52% 537.14% 186.51% Allowance to total gross loans outstanding at the end of the period..... 0.31% 0.31% 0.34 0.44% 0.37%
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
AT MARCH 31, ------------------------------------------------------------------------------------------------- 2006 2005 2004 ------------------------------- ------------------------------ ------------------------------- % OF % OF % OF % OF LOANS IN % OF LOANS IN % OF LOANS IN ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS ------- ----------- ---------- -------- ---------- --------- ------- ---------- ------------- (DOLLARS IN THOUSANDS) One- to four-family.............. $1,152 91.43% 93.36% $1,007 91.55% 94.43% $764 90.95% 93.34% Multi-family and commercial real estate................... 61 4.84 3.17 56 5.09 3.08 50 5.95 3.80 Construction..................... 7 0.56 0.93 2 0.18 0.24 2 0.24 0.46 Consumer......................... 40 3.17 2.54 35 3.18 2.25 24 2.86 2.40 Unallocated...................... - - - - - - - - - ------ ------ ------ ------ ------ ------ ---- ------ ------ Total allowance for loan losses..................... $1,260 100.00% 100.00% $1,100 100.00% 100.00% $840 100.00% 100.00% ====== ====== ====== ====== ====== ====== ==== ====== ======
19
AT MARCH 31, ----------------------------------------------------------------- 2003 2002 ------------------------------- -------------------------------- % OF % OF % OF LOANS IN % OF LOANS IN ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS -------- ----------- --------- -------- ----------- ---------- (DOLLARS IN THOUSANDS) One- to four-family................. $737 78.40% 92.25% $818 87.02% 93.93% Multi-family and commercial real estate...................... 58 6.17 4.70 93 9.89 3.47 Construction........................ 1 0.11 0.18 1 0.11 0.18 Consumer............................ 31 3.30 2.87 27 2.87 2.42 Unallocated......................... 113 12.02 - 1 0.11 - ---- ------ ------ ---- ------ ------ Total allowance for loan losses...................... $940 100.00% 100.00% $940 100.00% 100.00% ==== ====== ====== ==== ====== ======
NONPERFORMING AND CLASSIFIED ASSETS. When a loan becomes 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. We consider repossessed assets and loans that are 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 acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income. Nonperforming assets totaled $10,000, or 0.0% of total assets, at March 31, 2006, which is an increase of $9,000 , or 900.0%, from March 31, 2005. Nonaccrual loans accounted for all the total nonperforming assets at March 31, 2006. At March 31, 2006, nonaccrual loans were comprised of two one-to-four family residential real estate loans. At March 31, 2006, $2,000 of the allowance for loan losses related to these nonaccrual loans. Nonperforming assets totaled $1,000, or 0.0% of total assets, at March 31, 2005, which is a decrease of $121,000, or 99.2%, from March 31, 2004. Nonaccrual loans accounted for all the total nonperforming assets at March 31, 2005. At March 31, 2005, nonaccrual loans were comprised solely of one residential mortgage loan. At March 31, 2005, less than $1,000 of the allowance for loan losses related to this nonaccrual real estate loan. 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, do not separately evaluate them for impairment. All other loans are evaluated for impairment on an individual basis. At March 31, 2006 and 2005, we had no loans that were considered impaired. 20 The following table provides information with respect to our nonperforming assets at the dates indicated. We did not have any troubled debt restructurings at the dates presented.
AT MARCH 31, ------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------------------------------------------- (DOLLARS IN THOUSANDS) Nonaccrual loans: Real estate.............................. $ 10 $ 1 $ 122 $ 175 $ 504 ----- ----- ----- ----- ----- Total............................. 10 1 122 175 504 ----- ----- ----- ----- ----- Accruing loans past due 90 days or more: Consumer................................. - - - - - ----- ----- ----- ----- ----- Total............................. - - - - - ----- ----- ----- ----- ----- Total of nonaccrual and 90 days or more past due loans......... 10 1 122 175 504 ----- ----- ----- ----- ----- Real estate owned.......................... - - - - - ----- ----- ----- ----- ----- Total nonperforming assets........ $ 10 $ 1 $ 122 $ 175 $ 504 ===== ===== ===== ===== ===== Total nonperforming loans to total loans... 0.00% 0.00% 0.05% 0.08% 0.20% Total nonperforming loans to total assets.. 0.00% 0.00% 0.02% 0.03% 0.09% Total nonperforming assets to total assets................................... 0.00% 0.00% 0.02% 0.03% 0.09%
Interest income that would have been recorded for the years ended March 31, 2006 and 2005 had nonaccruing loans been current according to their original terms amounted to $1,000 and $-0-, respectively. The amount of interest related to these loans included in interest income was $1,000 for the year ended March 31, 2006 and $-0- for the year ended March 31, 2005. Pursuant to federal regulations, we review and classify our assets on a regular basis. In addition, the Office of Thrift Supervision has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. "Substandard assets" must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a "special mention" category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify an asset as substandard or doubtful we must establish a general allowance for loan losses. If we classify an asset as loss, we must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. The following table shows the aggregate amounts of our classified assets at the dates indicated. AT MARCH 31, --------------------------------- 2006 2005 --------------- --------------- (IN THOUSANDS) Special mention assets................... $2,541 $1,657 Substandard assets ...................... 13 2 Doubtful assets.......................... - - Loss assets.............................. - - ------ ------ Total classified assets............... $2,554 $1,659 ====== ====== 21 At each of the dates in the above table, substandard assets consisted of all nonperforming assets and included negative escrow amounts. At March 31, 2006, we had nine current loans totaling $738,000 included in the $2.54 million in special mention assets. DELINQUENCIES. The following table provides information about delinquencies in our loan portfolio at the dates indicated. AT MARCH 31, ------------------------------------------------ 2006 2005 ------------------------ ----------------------- 30-59 60-89 30-59 DAYS 60-89 DAYS DAYS DAYS PAST DUE PAST DUE PAST DUE PAST DUE ---------- ----------- ---------- ----------- (IN THOUSANDS) Real estate loans............. $659 $137 $ 986 $ 3 Consumer loans................ 98 74 226 34 ---- ---- ------ --- Total..................... $757 $211 $1,212 $37 ==== ==== ====== === At each of the dates in the above table, delinquent real estate loans consisted solely of loans secured by residential real estate. MARKET RISK ANALYSIS QUALITATIVE ASPECTS OF MARKET RISK. Our most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, we originate adjustable-rate mortgage loans for retention in our loan portfolio. The ability to originate adjustable-rate loans depends to a great extent on market interest rates and borrowers' preferences. As an alternative to adjustable-rate mortgage loans, we offer fixed-rate mortgage loans with maturities of fifteen years or less. This product enables us to compete in the fixed-rate mortgage market while maintaining a shorter maturity. Fixed-rate mortgage loans typically have an adverse effect on interest rate sensitivity compared to adjustable-rate loans. In recent years we have used investment securities with terms of three years or less and adjustable-rate mortgage-backed securities to help manage interest rate risk. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments. We have a Risk Management Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume and mix of assets and funding sources with the objective of managing assets and funding sources. QUANTITATIVE ASPECTS OF MARKET RISK. We use an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 100 to 200 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, this analysis is not performed for decreases of more than 200 basis points. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table, which is based on information that we provide to the Office of Thrift Supervision, presents the change in our net portfolio value at December 31, 2005, the most recent date Clifton Savings' net portfolio value was calculated by the Office of Thrift Supervision, that would 22 occur in the event of an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change. Clifton Savings expects that its net portfolio value at March 31, 2006 is consistent with the table below.
BASIS POINT ("BP") NET PORTFOLIO VALUE AS % OF CHANGE IN RATES NET PORTFOLIO VALUE PRESENT VALUE OF ASSETS - -------------------------------------- ------------------------------------------ --------------------------------- $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE -------------- -------------- ----------- ----------------- --------------- (DOLLARS IN THOUSANDS) 300 bp $ 96,188 $(52,093) -35% 13.12% -540bp 200 114,379 (33,901) -23 15.13 -339 100 131,981 (16,300) -11 16.94 -158 0 148,280 18.52 (100) 160,315 12,035 +8 19.59 +107 (200) 164,239 15,959 +11 19.83 +131
The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and calls of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations. Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2006, cash and cash equivalents totaled $22.6 million, including interest-bearing deposits of $18.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $94.0 million at March 31, 2006. On March 31, 2006, we had $57.9 million in Federal Home Loan Bank advances outstanding. In addition, we had arranged the ability to borrow a total of approximately $78.6 million under an overnight line of credit from the Federal Home Loan Bank of New York. At March 31, 2006, we had $9.2 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $2.4 million in unused lines of credit. Certificates of deposit due within one year of March 31, 2006 totaled $278.9 million, or 48.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2007. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. 23 We have historically remained highly liquid, with our liquidity position increasing substantially over the past two fiscal years. We have no material commitments or demands that are likely to affect our liquidity other than set forth below. Consequently, the Board intends to make additional investments in intermediate-term mortgage-backed securities and government agency securities to decrease liquidity and increase interest income. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our line of credit with the Federal Home Loan Bank of New York. The following table presents certain of our contractual obligations as of March 31, 2006.
PAYMENTS DUE BY PERIOD ------------------------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS - ------------------------------------------ -------------- ------------- ------------- -------------- -------------- (IN THOUSANDS) Equity line of credit.................... $ 2,400 $ - $ - $ - $ 2,400 Operating lease obligations (1).......... 233 76 97 56 4 Certificates of deposit.................. 251,752 135,245 111,638 4,869 - FHLB advances............................ 57,874 12,528 37,496 6,136 1,714 --------- --------- --------- -------- ------- Total............................. $ 312,259 $ 147,849 $ 149,231 $ 11,061 $ 4,118 ========= ========= ========= ======== =======
- ------------------------ (1) Payments are for lease of real property. Our primary investing activities are the origination of loans and the purchase of securities. In fiscal 2006, we originated $98.7 million of loans, purchased $5.0 million of loans, and purchased $45.0 million of securities. In fiscal 2005, we originated $103.6 million of loans, purchased $46.9 million of loans and purchased $237.3 million of securities. In fiscal 2004, we originated $118.3 million of loans, purchased $4.6 million of loans, and purchased $239.3 million of securities. Financing activities consist primarily of activity in deposit accounts and in Federal Home Loan Bank advances. We experienced a net increase in total deposits of $15.5 million, $19.5 million and $39.5 million for the years ended March 31, 2006, 2005 and 2004, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we introduce new products or offer promotional rates on certain deposit products in order to attract deposits. We experienced a decrease in Federal Home Loan Bank advances of $17.4 million for the year ended March 31, 2006. We had $57.9 million and $75.3 million in Federal Home Loan Bank advances outstanding at March 31, 2006 and 2005, respectively, and had no Federal Home Loan Bank advances outstanding at March 31, 2004. We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2006, we exceeded all of our regulatory capital requirements. We are considered "well capitalized" under regulatory guidelines. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, lines of credit and letters of credit. We do not have any off-balance sheet arrangements, as defined by Securities and Exchange Commission rules, and have not had any such arrangements during the year ended March 31, 2006. 24 In June 2005, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and Error Corrections," a replacement of Accounting Principles Board ("APB") Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 applies to all voluntary changes in the Company's accounting principles, and changes the requirements that pertain to accounting for, and reporting, a change in its accounting principles. SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in an accounting principle unless it is impracticable. APB Opinion No. 20, "Accounting Changes," previously required that most voluntary changes in an accounting principle be recognized by including in net income for the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In December 2004, the FASB issued SFAS No. 123R. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions, including employee stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans, be recognized as an expense in the Company's consolidated financial statements. Under SFAS No. 123R, the related compensation cost will be measured based on the fair value of the award at the date of grant. In March 2005, the SEC released Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment," which expresses views of the SEC staff about the application of SFAS No. 123R. While SFAS No. 123R was originally to have been effective for interim and annual reporting periods beginning after June 15, 2005, the SEC, in April 2005, deferred the compliance date to the first annual reporting period beginning after June 15, 2005. Effective February 2006, our Board of Directors accelerated by five months the vesting of certain stock options granted under the Clifton Savings Bancorp, Inc. 2005 Equity Incentive Plan (the "Acceleration"). A total of 296,702 stock options had their vesting date accelerated to March 31, 2006 from August 31, 2006 (the original vesting date). All other terms and conditions of the accelerated options remained unchanged. In accordance with FASB Interpretation No. 44, we did not record any compensation expense as of the date of the Acceleration. In addition, as a result of the Acceleration, we were able to avoid recognizing after-tax employee and directors' compensation expense of approximately $209,000 that we otherwise would have had to have recognized in 2006 and 2007 in connection with SFAS No. 123R. On November 3, 2005, the FASB issued the final version of FASB Staff Position ("FSP") 115-1, which addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss. FSP 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment loss on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 replaces the impairment guidance in FASB Emerging Issues Task Force Issue 03-1 with references to existing authoritative literature concerning other-than-temporary determinations (principally SFAS No. 115 and SAB No. 59). Under FSP 115-1, impairment losses must be recognized in earnings equal to the entire difference between the security's cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP 115-1 also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. We do not expect that the application of FSP 115-1 will have a material impact on our consolidated financial statements or on our financial statement disclosures. EFFECT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related consolidated financial data presented in this report have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 25 MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Clifton Savings Bancorp, Inc. and Subsidiaries (collectively the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system is a process designed to provide reasonable assurance to the management and board of directors regarding the preparation and fair presentation of published consolidated financial statements. The Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our consolidated financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company's management assessed the effectiveness of internal control over financial reporting as of March 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in INTERNAL CONTROL-INTEGRATED FRAMEWORK. Based on its assessment, management believes that, as of March 31, 2006, the Company's internal control over financial reporting is effective based on those criteria. The Company's independent registered public accounting firm that audited the consolidated financial statements has issued an audit report on our assessment of, and the effective operation of, the Company's internal control over financial reporting as of March 31, 2006, a copy of which is included in this annual report. 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Clifton Savings Bancorp, Inc. and Subsidiaries We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Clifton Savings Bancorp, Inc. (the "Company") and Subsidiaries maintained effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 27 To the Board of Directors and Stockholders Clifton Savings Bancorp, Inc. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Clifton Savings Bancorp, Inc. and Subsidiaries maintained effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Clifton Savings Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of the Company as of March 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders' equity, and cash flows of the Company for each of the years in the three-year period ended March 31, 2006, and our report dated May 26, 2006, expressed an unqualified opinion thereon. /s/ Beard Miller Company, LLP Beard Miller Company, LLP Pine Brook, New Jersey May 26, 2006 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Clifton Savings Bancorp, Inc. and Subsidiaries Clifton, New Jersey We have audited the accompanying consolidated statements of financial condition of Clifton Savings Bancorp, Inc. and Subsidiaries (collectively the "Company") as of March 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Clifton Savings Bancorp, Inc. and Subsidiaries as of March 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2006, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Clifton Savings Bancorp, Inc. and Subsidiaries internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 26, 2006 expressed an unqualified opinion on management's assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ Beard Miller Company LLP Beard Miller Company LLP Pine Brook, New Jersey May 26, 2006 29
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, ------------------------------------- 2006 2005 ---------------- ---------------- ASSETS Cash and due from banks $ 4,561,894 $ 7,777,760 Interest-bearing deposits in other banks 12,511,134 13,472,798 Federal funds sold 5,550,000 9,870,000 ---------------- ---------------- Cash and Cash Equivalents 22,623,028 31,120,558 Securities available for sale: Investment 39,554,500 59,015,350 Mortgage-backed 54,401,020 68,201,115 Securities held to maturity: Investment 169,985,390 137,978,660 Mortgage-backed 123,908,717 170,659,368 Loans receivable 404,941,556 355,261,611 Allowance for loan losses (1,260,000) (1,100,000) ---------------- ---------------- Net Loans 403,681,556 354,161,611 Premises and equipment 8,833,150 9,221,719 Federal Home Loan Bank of New York stock 3,780,200 4,370,800 Interest receivable 4,523,789 4,461,484 Other assets 3,588,946 2,686,246 ---------------- ---------------- TOTAL ASSETS $ 834,880,296 $ 841,876,911 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $ 571,962,103 $ 556,452,668 Advances from Federal Home Loan Bank of New York 57,874,218 75,262,830 Advance payments by borrower for taxes and insurance 3,833,311 3,359,354 Other liabilities and accrued expenses 3,462,338 3,628,848 ---------------- ---------------- TOTAL LIABILITIES 637,131,970 638,703,700 ---------------- ---------------- STOCKHOLDERS' EQUITY Preferred stock, ($0.01 par value); 1,000,000 shares authorized; shares issued or outstanding - none - - Common stock, ($0.01 par value); 75,000,000 shares authorized; 30,530,470 shares issued; 30,284,480 shares outstanding at March 31, 2006; 30,530,470 shares outstanding at March 31, 2005 305,305 305,305 Paid-in capital 133,859,581 133,928,604 Deferred compensation obligation under Rabbi Trust 105,860 - Retained earnings - substantially restricted 81,275,666 80,101,378 Treasury stock, at cost, 245,990 shares at March 31, 2006 (2,559,207) - Common stock acquired by Employee Stock Ownership Plan ("ESOP") (9,342,322) (10,075,054) Unearned common stock held by the Equity Incentive Plan (4,386,114) - Accumulated other comprehensive loss (1,456,072) (1,087,022) Stock held by Rabbi Trust (54,371) - ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 197,748,326 203,173,211 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 834,880,296 $ 841,876,911 ================ ================ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - ----------------------------------------------------------------------------------------------------------------------------
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CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- INTEREST INCOME - ---------------------------------------------------------------------------------------------------------------------------- Loans $ 19,874,182 $ 16,279,495 $ 12,580,122 Mortgage-backed securities 8,315,185 9,224,911 7,694,210 Investment securities 6,369,469 5,215,201 4,768,150 Other interest-earning assets 793,357 649,380 654,974 ---------------- ---------------- --------------- TOTAL INTEREST INCOME 35,352,193 31,368,987 25,697,456 ---------------- ---------------- --------------- INTEREST EXPENSE Deposits 15,072,441 10,802,392 11,715,889 Advances 2,499,894 1,595,101 - ---------------- ---------------- --------------- TOTAL INTEREST EXPENSE 17,572,335 12,397,493 11,715,889 ---------------- ---------------- --------------- NET INTEREST INCOME 17,779,858 18,971,494 13,981,567 PROVISION FOR (RECOVERY OF) LOAN LOSSES 160,000 260,000 (100,000) ---------------- ---------------- --------------- NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES 17,619,858 18,711,494 14,081,567 ---------------- ---------------- --------------- NON-INTEREST INCOME Fees and service charges 231,213 245,438 238,585 Loss on sale of mortgage-backed securities held to maturity - (26,322) - Other 33,817 142,194 52,293 ---------------- ---------------- --------------- TOTAL NON-INTEREST INCOME 265,030 361,310 290,878 ---------------- ---------------- --------------- NON-INTEREST EXPENSES Salaries and employee benefits 6,704,259 5,502,217 4,208,338 Net occupancy expense of premises 987,108 947,379 784,842 Equipment 977,741 904,830 836,215 Directors' compensation 1,021,542 555,276 473,474 Advertising 334,932 405,561 371,745 Legal 268,225 363,038 270,687 Federal insurance premium 76,021 81,866 79,026 Other 1,724,655 1,519,003 1,158,250 ---------------- ---------------- --------------- TOTAL NON-INTEREST EXPENSES 12,094,483 10,279,170 8,182,577 ---------------- ---------------- --------------- INCOME BEFORE INCOME TAXES 5,790,405 8,793,634 6,189,868 INCOME TAXES 2,123,633 3,513,720 2,500,635 ---------------- ---------------- --------------- NET INCOME $ 3,666,772 $ 5,279,914 $ 3,689,233 ================ ================ =============== NET INCOME PER COMMON SHARE Basic $ 0.13 $ 0.18 $ 0.13 ================ ================ =============== Diluted $ 0.13 $ 0.18 $ 0.13 ================ ================ =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 29,151,942 29,486,327 29,440,532 ================ ================ =============== Diluted 29,157,274 29,486,327 29,440,532 ================ ================ =============== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - ----------------------------------------------------------------------------------------------------------------------------
31
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ==================================================================================================================================== CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 2006, 2005 AND 2004 DEFERRED UNEARNED COMPENSATION RETAINED COMMON STOCK OBLIGATION EARNINGS - COMMON STOCK HELD BY THE COMMON PAID-IN UNDER RABBI SUBSTANTIALLY TREASURY ACQUIRED BY EQUITY STOCK CAPITAL TRUST RESTRICTED STOCK ESOP INCENTIVE PLAN ------------- ------------ ------------- ------------- ----------- ------------- --------------- BALANCE - MARCH 31, 2003 $ - $ - $ - $ 73,001,777 $ - $ - $ - Comprehensive income: Net income - - - 3,689,233 - - - Unrealized gain on securities available for sale, net of income taxes of $2,503 - - - - - - - TOTAL COMPREHENSIVE INCOME Net proceeds of initial public stock offering 305,305 133,731,936 - - - - - Common stock acquired by ESOP - - - - - (10,990,970) - ESOP shares committed to be released - 64,480 - - - 183,183 - Initial capitalization of mutual holding company - - - (100,000) - - - ------------- ------------ ------------- ------------- ----------- ------------- --------------- BALANCE - MARCH 31, 2004 305,305 133,796,416 - 76,591,010 - (10,807,787) - Comprehensive income: Net income - - - 5,279,914 - - - Unrealized loss on securities available for sale, net of income taxes of $737,272 - - - - - - - TOTAL COMPREHENSIVE INCOME ESOP shares committed to be released - 132,188 - - - 732,733 - Cash dividends declared - - - (1,769,546) - - - ------------- ------------ ------------- ------------- ----------- ------------- --------------- BALANCE - MARCH 31, 2005 305,305 133,928,604 - 80,101,378 - (10,075,054) - Comprehensive income: Net income - - - 3,666,772 - - - Unrealized loss on securities available for sale, net of income taxes of $245,418 - - - - - - - TOTAL COMPREHENSIVE INCOME ESOP shares committed to be released - 26,280 - - - 732,732 - Purchase of treasury stock - 835,696 shares - - - - (8,689,942) - - Funding of Restricted Stock Awards - (104,285) - - 6,085,346 - (5,981,061) Vesting of Restricted Stock Awards - - - - - - 1,594,947 Funding of Supplemental Executive Retirement Plan - 8,982 105,860 - 45,389 - - Cash dividends declared - - - (2,492,484) - - - ------------- ------------ ------------- ------------- ----------- ------------- --------------- BALANCE - MARCH 31, 2006 $ 305,305 $133,859,581 $ 105,860 $ 81,275,666 $(2,559,207) $ (9,342,322) $ (4,386,114) ============= ============ ============= ============= =========== ============= ===============
ACCUMULATED OTHER STOCK HELD COMPREHENSIVE BY RABBI INCOME (LOSS) TRUST TOTAL ----------------- ------------ ------------- BALANCE - MARCH 31, 2003 $ 17,847 $ - $ 73,019,624 ------------- Comprehensive income: Net income - - 3,689,233 Unrealized gain on securities available for sale, net of income taxes of $2,503 3,808 - 3,808 ------------- TOTAL COMPREHENSIVE INCOME 3,693,041 ------------- Net proceeds of initial public stock offering - - 134,037,241 Common stock acquired by ESOP - - (10,990,970) ESOP shares committed to be released - - 247,663 Initial capitalization of mutual holding company - - (100,000) ----------------- ------------ ------------- BALANCE - MARCH 31, 2004 21,655 - 199,906,599 ------------- Comprehensive income: Net income - - 5,279,914 Unrealized loss on securities available for sale, net of income taxes of $737,272 (1,108,677) - (1,108,677) ------------- TOTAL COMPREHENSIVE INCOME 4,171,237 ------------- ESOP shares committed to be released - - 864,921 Cash dividends declared - - (1,769,546) ----------------- ------------ ------------- BALANCE - MARCH 31, 2005 (1,087,022) - 203,173,211 ------------- Comprehensive income: Net income - - 3,666,772 Unrealized loss on securities available for sale, net of income taxes of $245,418 (369,050) - (369,050) ------------- TOTAL COMPREHENSIVE INCOME 3,297,722 ------------- ESOP shares committed to be released - - 759,012 Purchase of treasury stock - 835,696 shares - - (8,689,942) Funding of Restricted Stock Awards - - - Vesting of Restricted Stock Awards - - 1,594,947 Funding of Supplemental Executive Retirement Plan - (54,371) 105,860 Cash dividends declared - - (2,492,484) ----------------- ------------ ------------- BALANCE - MARCH 31, 2006 $ (1,456,072) $ (54,371) $197,748,326 ================= ============ ============= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - ------------------------------------------------------------------------------------------------------------------------------------
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CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, ---------------------------------------------------------- 2006 2005 2004 ---------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,666,772 $ 5,279,914 $ 3,689,233 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 708,816 635,465 467,323 Net amortization of deferred fees, premiums and discounts 666,159 527,311 435,037 Provision for (recovery of) loan losses 160,000 260,000 (100,000) Loss on sale of mortgage-backed securities held to maturity - 26,322 - Gain on sale of premises and equipment - (92,834) - Loss on disposal of premises and equipment 7,527 - - Deferred income taxes (419,465) (233,129) (248,088) ESOP shares committed to be released 759,012 864,921 247,663 Stock incentive plan expense 1,594,947 - - Increase in deferred compensation obligation under Rabbi Trust 34,203 - - (Increase) decrease in assets: Interest receivable (62,305) (1,393,556) (57,026) Other assets (35,994) 68,097 (245,850) Increase (decrease) in liabilities: Accrued interest payable (28,210) 231,450 (18,218) Other liabilities (66,643) 863,024 (315,720) ---------------- --------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,984,819 7,036,985 3,854,354 ---------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from calls, maturities, and repayments of: Investment securities available for sale 20,000,000 - 5,000,000 Mortgage-backed securities available for sale 12,638,803 5,908,061 116,722 Investment securities held to maturity 13,000,000 58,000,000 95,000,000 Mortgage-backed securities held to maturity 46,105,338 63,601,238 79,161,181 Proceeds from sales of: Mortgage-backed securities held to maturity - 2,357,517 - Premises and equipment - 209,625 - Redemptions of Federal Home Loan Bank of New York stock 2,250,100 - - Purchases of: Investment securities available for sale - (54,985,000) (5,000,000) Mortgage-backed securities available for sale - (74,819,627) - Investment securities held to maturity (45,000,000) (74,978,125) (95,000,000) Mortgage-backed securities held to maturity - (32,486,996) (139,319,899) Loans receivable (5,017,827) (46,933,211) (4,635,228) Premises and equipment (529,596) (1,160,549) (2,744,325) Federal Home Loan Bank of New York stock (1,659,500) (731,400) (256,500) Net change in loans receivable (44,682,021) (57,993,338) (30,416,872) ---------------- --------------- --------------- NET CASH USED IN INVESTING ACTIVITIES (2,894,703) (214,011,805) (98,094,921) ---------------- --------------- --------------- SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -----------------------------------------------------------------------------------------------------------------------------
33
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, ---------------------------------------------------------- 2006 2005 2004 ---------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 15,509,435 $ 19,450,571 $ 39,506,870 Net decrease in short-term borrowed funds (5,000,000) - - Proceeds from advances from Federal Home Loan Bank of New York - 80,000,000 - Principal repayments on advances from Federal Home Loan Bank of New York (12,388,612) (4,737,170) - Net increase in payments by borrowers for taxes and insurance 473,957 494,491 193,395 Net proceeds from initial public stock offering - - 134,037,241 Common stock acquired by ESOP - - (10,990,970) Initial capitalization of mutual holding company - - (100,000) Dividends paid (2,492,484) (1,769,546) - Purchase of treasury stock (8,689,942) - - ---------------- --------------- --------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (12,587,646) 93,438,346 162,646,536 ---------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,497,530) (113,536,474) 68,405,969 CASH AND CASH EQUIVALENTS - BEGINNING 31,120,558 144,657,032 76,251,063 ---------------- --------------- --------------- CASH AND CASH EQUIVALENTS - ENDING $ 22,623,028 $ 31,120,558 $ 144,657,032 ================ =============== =============== SUPPLEMENTARY CASH FLOWS INFORMATION Interest on deposits and borrowings $ 17,600,545 $ 12,166,042 $ 11,734,107 ================ =============== =============== Income taxes paid $ 3,133,133 $ 2,891,469 $ 3,315,000 ================ =============== =============== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -----------------------------------------------------------------------------------------------------------------------------
34 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of the Company, the Company's wholly-owned subsidiary, Clifton Savings Bank, S.L.A. (the "Savings Bank"), and the Savings Bank's wholly-owned subsidiary, Botany Inc. ("Botany"). All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the consolidated statement of financial condition dates and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and the assessment of prepayment risks associated with mortgage-backed securities. Management believes that the allowance for loan losses is adequate and prepayment risks associated with mortgage-backed securities are properly recognized. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area. Additionally, assessments of prepayment risks related to mortgage-backed securities are based upon current market conditions, which are subject to frequent change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Savings Bank's allowance for loan losses. Such agencies may require the Savings Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations. BUSINESS OF THE COMPANY AND SUBSIDIARIES The Company's primary business is the ownership and operation of the Savings Bank. The Savings Bank is principally engaged in the business of attracting deposits from the general public at its ten locations in northern New Jersey and using these deposits, together with other funds, to invest in securities and to make loans collateralized by residential and commercial real estate and, to a lesser extent, consumer loans. The Savings Bank's subsidiary, Botany, was organized in December 2004 under New Jersey law as a New Jersey Investment Company primarily to hold investment and mortgage-backed securities. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and amounts due from banks, interest-bearing deposits in other banks with original maturities of three months or less, and federal funds sold. Generally, federal funds sold are sold for one-day periods. 35 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SECURITIES Investments in debt securities over which there exists a positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities nor as held to maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of applicable deferred income taxes, reported in the accumulated other comprehensive income component of stockholders' equity. On a quarterly basis, the Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss. Discounts and premiums on all securities are accreted or amortized to maturity by use of the level-yield method. Gain or loss on sales of securities is based on the specific identification method. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company, Savings Bank and Botany to concentrations of credit risk consist of cash and cash equivalents, investment and mortgage-backed securities and loans. Cash and cash equivalents include amounts placed with highly rated financial institutions. Investment securities include securities backed by the U.S. Government and other highly rated instruments. The Savings Bank's lending activity is primarily concentrated in loans collateralized by real estate in the State of New Jersey. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in the State. LOANS RECEIVABLE Loans receivable are stated at unpaid principal balances, plus premiums and net deferred loan costs, less an allowance for loan losses. Interest is calculated by use of the simple interest method. Recognition of interest by the accrual method is generally discontinued when interest or principal payments are ninety days or more in arrears, or when other factors indicate that the collection of such amounts is doubtful. At the time a loan is placed on nonaccrual status, an allowance for uncollected interest is recorded in the current period for previously accrued and uncollected interest. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to accrual status when factors indicating doubtful collectibility no longer exist. 36 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ALLOWANCE FOR LOAN LOSSES An allowance for loan losses is maintained at a level considered necessary to provide for loan losses based upon an evaluation of known and inherent losses in the loan portfolio. Management of the Savings Bank, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the local economic and real estate market conditions. The Savings Bank utilizes a two-tier approach: (1) identification of impaired loans and establishment of specific loss allowances on such loans; and (2) establishment of a general valuation allowance on the remainder of its loan portfolio. The Savings Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of impaired loans. Such a system takes into consideration, among other things, delinquency status, size of loans, types of collateral and financial condition of borrowers. A loan is deemed to be impaired when, based on current information and events, it is probable that the Savings Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. The Savings Bank does not aggregate such loans for evaluation purposes. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are applied first to accrued interest receivable and then to principal. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment. Regardless of the extent of the analysis of customer performance, portfolio evaluations, trends or risk management processes established, certain inherent, but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer's financial condition or changes in their conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends, and the sensitivity of assumptions utilized to establish allocated allowances for homogeneous groups of loans among other factors. An unallocated allowance is maintained to recognize the existence of these exposures. These other risk factors are continuously reviewed and revised by management where conditions indicate that the estimates initially applied are difference from actual results. LOAN ORIGINATION FEES The Savings Bank defers loan origination fees and certain direct loan origination costs and amortizes such amounts, using the interest method, as an adjustment of yield over the contractual lives of the related loans. The Savings Bank anticipates prepayments within its loan portfolio and adjusts the amortization of origination fees and costs accordingly using an annually adjusted prepayment factor. 37 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PREMISES AND EQUIPMENT Premises and equipment are comprised of land, at cost, and land improvements, buildings and improvements, furnishings and equipment and leasehold improvements, at cost, less accumulated depreciation and amortization. Depreciation and amortization charges are computed on the straight-line method over the following estimated useful lives: YEARS ------------ Land improvements 5 - 20 Buildings and improvements 5 - 40 Furnishings and equipment 2 - 10 Leasehold improvements Shorter of useful life or term of lease Significant renewals and betterments are charged to the premises and equipment account. Maintenance and repairs are charged to operations in the year incurred. INCOME TAXES The Company, Savings Bank and Botany file a consolidated federal income tax return. Income taxes are allocated based on the contribution of income to the consolidated federal income tax return. Separate state income tax returns are filed. The asset and liability method is used to account for deferred income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable tax rate to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of any such tax law change. INTEREST RATE RISK The potential for interest-rate risk exists as a result of the shorter duration of interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing net interest income. Management regularly monitors the maturity structure of assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility. 38 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE (EPS) Basic EPS is based on the weighted average number of common shares actually outstanding adjusted for Employee Stock Ownership Plan ("ESOP") shares not yet committed to be released, unvested restricted stock awards and deferred compensation obligations required to be settled in shares of Company stock. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as unvested restricted stock awards and 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 or which could be converted into common stock, if dilutive, using the treasury stock method. The calculation of diluted EPS for the year ended March 31, 2006, includes incremental shares related to outstanding stock options and unvested restricted stock awards of 4,187 and 1,146, respectively. There were no contracts or securities exercisable or which could be converted into common stock at or prior to March 31, 2005. Shares issued and reacquired during any period are weighted for the portion of the period they were outstanding. For the year ended March 31, 2004, such amounts were calculated based upon income for the entire year, although the Savings Bank converted to stock form on March 3, 2004, and the weighted average number of shares outstanding since March 3, 2004, as if such shares were outstanding during the entire year. STOCK-BASED COMPENSATION At the Company's annual stockholders' meeting held on July 14, 2005, stockholders of the Company approved the Clifton Savings Bancorp, Inc. 2005 Equity Incentive Plan. See Note 13 for additional information regarding grants of stock options and restricted stock under this plan. Through March 31, 2006, the Company has accounted for compensation expense related to stock options using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no stock-based compensation cost related to stock options is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if stock option expense was measured using the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement No. 123, "Share-Based Payment":
YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Net income, as reported $ 3,667 $ 5,280 $ 3,689 Add: Expense recognized for the Equity Incentive Plan, net of related tax effect of $637,000 958 - - Deduct: Equity Incentive Plan expense determined under fair value based method, net of related tax effect of $1,173,000 (2,279) - - ---------------- ---------------- --------------- Pro forma net income $ 2,346 $ 5,280 $ 3,689 ================ ================ =============== Basic/diluted earnings per share as reported $ 0.13 $ 0.18 $ 0.13 ================ ================ =============== Pro forma basic/diluted earnings per share $ 0.08 $ 0.18 $ 0.13 ================ ================ ===============
39 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used in estimating the fair value of financial instruments: CASH AND CASH EQUIVALENTS AND INTEREST RECEIVABLE The carrying amounts reported in the statements of financial condition for cash and cash equivalents and interest receivable approximates their fair value. SECURITIES The fair value of all securities, whether classified as trading, available for sale or held to maturity, 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. LOANS RECEIVABLE Fair value is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans. FEDERAL HOME LOAN BANK OF NEW YORK STOCK Fair value approximates cost basis as these instruments are redeemable only with the issuing agency at face value. DEPOSITS The fair value of non-interest-bearing demand, NOW, Super NOW, Money Market, 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 The fair value is estimated using rates currently offered for liabilities of similar remaining maturities, or when available, quoted market prices. 40 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) COMMITMENTS TO EXTEND CREDIT The fair value of commitments 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 March 31, 2006 and 2005, the fair value of the commitments to extend credit were not considered to be material. RECLASSIFICATION Certain amounts for prior periods have been restated to conform to the current year's presentation. RECENT ACCOUNTING PRONOUNCEMENTS Accounting for Stock-Based Payments: In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) replaces Statement No. 123 and supercedes APB Opinion No. 25. Statement No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method. Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method. Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies' footnotes. Also, in the period of adoption and after, companies record compensation cost based on the modified prospective method. On April 14, 2005, the Securities and Exchange Commission (the "SEC") adopted a new rule that amends the compliance dates for Statement No. 123(R). Under the new rule, we are required to adopt Statement No. 123(R) in the first annual period beginning after September 15, 2005. Early application of Statement No. 123(R) is encouraged, but not required. Accordingly, we are required to record compensation expense for all new awards granted and any awards modified on or after April 1, 2006. In addition, the transition rules under SFAS No. 123(R) will require that, for all awards outstanding at April 1, 2006, for which the requisite service has not yet been rendered, compensation cost be recorded as such service is rendered after April 1, 2006. The pronouncement related to stock-based payments will not have any effect on our existing historical consolidated financial statements as restatements of previously reported periods will not be required. Effective April 1, 2006, the Company adopted SFAS No. 123(R) using the modified-prospective transition method and, therefore, began to expense the fair value of all outstanding options over their remaining vesting periods to the extent the options were not fully vested as of the adoption date and instituted a procedure to expense the fair value of all options granted subsequent to March 31, 2006, over their requisite service periods. In regard to non-vested options outstanding on April 1, 2006, we presently expect to record expenses, net of taxes, during the years ending March 31, 2007 through 2010, totaling $541,000, $395,000, $194,000 and $52,000, respectively. 41 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - REORGANIZATION AND STOCKHOLDERS' EQUITY The Company is a business corporation formed at the direction of the Savings Bank under the laws of the United States on March 3, 2004. On March 3, 2004: (i) The Savings Bank reorganized from a New Jersey State chartered mutual savings bank to a New Jersey State chartered stock savings bank in the mutual holding company form of organization; (ii) the Savings Bank issued all of its outstanding capital stock to the Company, a federally chartered stock holding company, and (iii) the Company consummated its initial public offering of common stock, par value $.01 per share (the "Common Stock") by selling, at a price of $10.00 per share, 12,639,615 shares of its Common Stock to certain eligible account holders of the Savings Bank who had subscribed for such shares and 1,099,097 shares of its Common Stock to the Savings Bank's Employee Stock Ownership Plan ("ESOP") and by issuing 16,791,758 shares of its Common Stock to Clifton MHC ("MHC"), a federally chartered mutual holding company formed at the direction of the Savings Bank (collectively, the "Reorganization and Offering"). The MHC was initially funded with $100,000 received from the Savings Bank. The Reorganization and Offering resulted in net proceeds of $134.0 million, after expenses of $3.3 million. In addition to the 75,000,000 authorized shares of Common Stock, the Company authorized 1,000,000 shares of preferred stock with a par value of $0.01 per share (the "Preferred Stock"). The Board of Directors is authorized, subject to any limitations by law, to provide for the issuance of the shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restriction thereof. As of March 31, 2006 and 2005, there were no shares of Preferred Stock issued. On March 10, 2005, the Company's Board of Directors authorized the repurchase of up to 686,936 shares of the Company's outstanding stock, representing 5% of the outstanding shares owned by entities other than MHC. On February 1, 2006, the Board authorized an additional repurchase of up to 680,000 shares. During the year ended March 31, 2006, 831,707 shares were repurchased under the repurchase plans at a total cost of $8,649,000, or $10.40 per share. No shares had been repurchased prior to March 31, 2005. Additionally, in December 2005, 3,989 shares were purchased at a total cost of $41,000 or $10.22 per share, representing the withholding of shares subject to restricted stock awards under the Clifton Savings Bancorp, Inc. 2005 Equity Incentive Plan for payment of taxes due upon the vesting of restricted stock awards. During the years ended March 31, 2006 and 2005, the MHC waived its right to receive cash dividends of approximately $3,358,000 and $2,351,000, respectively, on the shares of Company common stock it owns. The cumulative amount of dividends waived by the MHC through March 31, 2006 was $5,709,000. 42
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - INVESTMENT SECURITIES MARCH 31, 2006 ------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------- ---------------- ---------------- --------------- AVAILABLE FOR SALE: Debt securities: U.S. Government (including agencies) maturing: Within one year $ 35,000,000 $ - $ 348,650 $ 34,651,350 After one year but within five years 4,992,617 - 89,467 4,903,150 --------------- ---------------- ---------------- --------------- $ 39,992,617 $ - $ 438,117 $ 39,554,500 =============== ================ ================ =============== HELD TO MATURITY: Debt securities: U.S. Government (including agencies) maturing: Within one year $ 45,000,000 $ - $ 523,850 $ 44,476,150 After one year but within five years 124,985,390 - 2,699,290 122,286,100 --------------- ---------------- ---------------- --------------- $ 169,985,390 $ - $ 3,223,140 $ 166,762,250 =============== ================ ================ =============== MARCH 31, 2005 ------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------- ---------------- ---------------- --------------- AVAILABLE FOR SALE: Debt securities: U.S. Government (including agencies) maturing: Within one year $ 20,000,000 $ - $ 254,450 $ 19,745,550 After one year but within five years 39,986,714 - 716,914 39,269,800 --------------- ---------------- ---------------- --------------- $ 59,986,714 $ - $ 971,364 $ 59,015,350 =============== ================ ================ =============== HELD TO MATURITY: Debt securities: U.S. Government (including agencies) maturing: Within one year $ 12,996,928 $ 19,962 $ 125,000 $ 12,891,890 After one year but within five years 124,981,732 - 2,256,682 122,725,050 --------------- ---------------- ---------------- --------------- $ 137,978,660 $ 19,962 $ 2,381,682 $ 135,616,940 =============== ================ ================ ===============
43
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - INVESTMENT SECURITIES (CONTINUED) The age of unrealized losses and the fair value of related investment securities were as follows: LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL ------------------------------ ------------------------------ ----------------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES -------------- -------------- -------------- -------------- -------------- -------------- MARCH 31, 2006: U.S. Government (including agencies): Available for sale $ - $ - $ 39,554,500 $ 438,117 $ 39,554,500 $ 438,117 Held to maturity 44,436,300 563,700 122,325,950 2,659,440 166,762,250 3,223,140 -------------- -------------- -------------- -------------- -------------- ------------- $ 44,436,300 $ 563,700 $ 161,880,450 $ 3,097,557 $ 206,316,750 $ 3,661,257 ============== ============== ============== ============== ============== ============= MARCH 31, 2005: U.S. Government (including agencies): Available for sale $ 59,015,350 $ 971,364 $ - $ - $ 59,015,350 $ 971,364 Held to maturity 122,904,800 2,076,932 9,695,250 304,750 132,600,050 2,381,682 ------------- -------------- -------------- -------------- -------------- ------------- $ 181,920,150 $ 3,048,296 $ 9,695,250 $ 304,750 $ 191,615,400 $ 3,353,046 ============== ============== ============== ============== ============== ============= Management does not believe that any of the unrealized losses at March 31, 2006 and 2005, 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 Subsidiaries have the ability, and management has the intent, to hold such securities for the time necessary to recover amortized cost. There were no sales of investment securities available for sale or held to maturity during the years ended March 31, 2006, 2005, and 2004.
44
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - MORTGAGE-BACKED SECURITIES MARCH 31, 2006 ------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------- ---------------- ---------------- --------------- AVAILABLE FOR SALE: Federal Home Loan Mortgage Corporation $ 30,911,968 $ 1,061 $ 1,012,399 $ 29,900,630 Federal National Mortgage Association 25,475,297 - 974,907 24,500,390 --------------- -------------- --------------- --------------- $ 56,387,265 $ 1,061 $ 1,987,306 $ 54,401,020 =============== ============== =============== =============== HELD TO MATURITY: Federal Home Loan Mortgage Corporation $ 68,002,523 $ 103,734 $ 2,195,126 $ 65,911,131 Federal National Mortgage Association 36,539,465 100,847 682,197 35,958,115 Governmental National Mortgage Association 19,366,729 5,598 496,152 18,876,175 --------------- -------------- --------------- --------------- $ 123,908,717 $ 210,179 $ 3,373,475 $ 120,745,421 =============== ============== =============== =============== MARCH 31, 2005 ------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------- --------------- --------------- --------------- AVAILABLE FOR SALE: Federal Home Loan Mortgage Corporation $ 37,574,425 $ 61,497 $ 280,712 $ 37,355,210 Federal National Mortgage Association 31,465,219 - 619,314 30,845,905 --------------- --------------- --------------- -------------- $ 69,039,644 $ 61,497 $ 900,026 $ 68,201,115 =============== =============== =============== ============== HELD TO MATURITY: Federal Home Loan Mortgage Corporation $ 88,565,295 $307,552 $ 1,256,504 $ 87,616,343 Federal National Mortgage Association 52,952,151 272,325 563,926 52,660,550 Governmental National Mortgage Association 29,141,922 28,894 378,717 28,792,099 --------------- --------------- --------------- -------------- $ 170,659,368 $ 608,771 $ 2,199,147 $ 169,068,992 =============== =============== =============== ==============
45
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - MORTGAGE-BACKED SECURITIES (CONTINUED) Contractual maturity data for mortgage-backed securities held to maturity is as follows: MARCH 31, ------------------------------------------------------------------------- 2006 2005 ----------------------------------- ----------------------------------- AMORTIZED ESTIMATED FAIR AMORTIZED ESTIMATED COST VALUE COST FAIR VALUE --------------- ---------------- ---------------- --------------- (IN THOUSANDS) AVAILABLE FOR SALE: Due after one through five years $ 27 $ 28 $ 67 $ 70 Due after ten years 56,360 54,373 68,973 68,131 --------------- ---------------- ---------------- --------------- $ 56,387 $ 54,401 $ 69,040 $ 68,201 =============== ================ ================ =============== HELD TO MATURITY: Due within one year $ 132 $ 133 $ - $ - Due after one through five years 6,551 6,423 9,436 9,424 Due after five through ten years 817 832 1,501 1,552 Due after ten years 116,409 113,357 159,722 158,093 --------------- ---------------- ---------------- --------------- $ 123,909 $ 120,745 $ 170,659 $ 169,069 =============== ================ ================ ===============
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 age of gross unrealized losses and the fair value of related mortgage-backed securities were as follows:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL ------------------------------ ------------------------------ ----------------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES -------------- -------------- -------------- -------------- -------------- -------------- MARCH 31, 2006: Available for sale $ 16,090,257 $ 376,626 $ 38,282,401 $ 1,610,679 $ 54,372,658 $ 1,987,305 Held to maturity 6,023,270 49,528 104,151,153 3,323,948 110,174,423 3,373,476 -------------- -------------- -------------- -------------- -------------- -------------- $ 22,113,527 $ 426,154 $ 142,433,554 $ 4,934,627 $ 164,547,081 $ 5,360,781 ============== ============== ============== ============== ============== ============== MARCH 31, 2005: Available for sale $ 47,001,622 $ 900,026 $ - $ - $ 47,001,622 $ 900,026 Held to maturity 89,838,272 1,398,289 53,744,319 800,858 143,582,591 2,199,147 -------------- -------------- -------------- -------------- -------------- -------------- $ 136,839,894 $ 2,298,315 $ 53,744,319 $ 800,858 $ 190,584,213 $ 3,099,173 ============== ============== ============== ============== ============== ==============
46
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - MORTGAGE-BACKED SECURITIES (CONTINUED) Management does not believe that any of the unrealized losses at March 31, 2006 and 2005, 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 Subsidiaries have the ability, and management has the intent, to hold such securities for the time necessary to recover amortized cost. During the year ended March 31, 2005, proceeds from the sale of mortgage-backed securities held to maturity totaled $2,358,000 resulting in gross gains of $27,879 and gross losses of $54,201. The remaining principal balance for each of the mortgage-backed securities held to maturity sold was less than 15% of the original principal purchased. There were no sales of mortgage-backed securities available for sale during the years ended March 31, 2006, 2005, and 2004 and no sales of mortgage-backed securities held to maturity during the years ended March 31, 2006 and 2004. NOTE 5 - LOANS RECEIVABLE MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- Real estate mortgage: One-to-four family $ 378,500,437 $ 334,901,925 Multi-family and commercial 12,876,988 10,932,238 ---------------- --------------- 391,377,425 345,834,163 ---------------- --------------- Real estate construction 3,769,119 845,115 ---------------- --------------- Consumer: Second mortgage 7,567,174 4,873,608 Passbook or certificate 996,191 894,272 Equity line of credit 1,429,549 1,912,014 Other 290,000 290,000 ---------------- --------------- 10,282,914 7,969,894 ---------------- --------------- TOTAL LOANS 405,429,458 354,649,172 ---------------- --------------- Less: Loans in process (1,512,122) (159,000) Net premiums and deferred loan costs 1,024,220 771,439 ---------------- --------------- (487,902) 612,439 ---------------- --------------- $ 404,941,556 $ 355,261,611 ================ ===============
47
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - LOANS RECEIVABLE (CONTINUED) At March 31, 2006, 2005, and 2004, nonaccrual loans for which interest has been discontinued totaled approximately $10,000, $1,000, and $122,000, respectively. During the years ended March 31, 2006, 2005, and 2004, interest income of approximately $1,000, $ -0-, and $9,000, respectively, was recognized on these loans. Interest income that would have been recorded, had the loans been on accrual status and performing in accordance with the original terms of the contracts, amounted to approximately $1,000, $ -0-, and $11,000, for the years ended March 31, 2006, 2005, and 2004, respectively. As of March 31, 2006 and 2005, and during each of the years in the three-year period ended March 31, 2006, there were no impaired loans as defined by Statement of Financial Accounting Standards No. 114. The Savings Bank has granted loans to certain officers and directors of the Company and Savings Bank and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The activity with respect to loans to directors, officers and associates of such persons, is as follows: YEARS ENDED MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- Balance, beginning $ 1,575,000 $ 1,453,000 Loans originated 256,000 783,000 Persons no longer associated (645,000) - Collection of principal (129,000) (661,000) ---------------- --------------- Balance, ending $ 1,057,000 $ 1,575,000 ================ ===============
The following is an analysis of the allowance for loan losses:
YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- Balance - beginning $ 1,100,000 $ 840,000 $ 940,000 Provision charged (recovery credited) to operations 160,000 260,000 (100,000) ---------------- ---------------- --------------- Balance - ending $ 1,260,000 $ 1,100,000 $ 840,000 ================ ================ ===============
48
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - PREMISES AND EQUIPMENT MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- Land and land improvements $ 3,216,225 $ 3,180,426 Buildings and improvements 6,892,732 6,432,374 Furnishings and equipment 2,415,602 2,286,536 Leasehold improvements 261,998 261,998 Construction in progress 4,250 326,937 ---------------- --------------- 12,790,807 12,488,271 Accumulated depreciation and amortization (3,957,657) (3,266,552) ---------------- --------------- $ 8,833,150 $ 9,221,719 ================ ===============
Included in land and land improvements at March 31, 2006 and 2005 is $177,000 of land which is being held for future branch expansion. Rental expenses related to the occupancy of leased premises totaled approximately $77,000, $111,000 and $97,000 for the years ended March 31, 2006, 2005 and 2004, respectively. The minimum obligation under the lease agreements, which expire through May 31, 2011, for each of the years ended March 31 is as follows: 2007 $ 76,000 2008 69,000 2009 28,000 2010 28,000 2011 28,000 Thereafter 4,000 ---------- $ 233,000 ========== NOTE 7 - INTEREST RECEIVABLE
MARCH 31, ----------------------------------- 2006 2005 --------------- --------------- Loans $ 1,784,830 $ 1,580,640 Mortgage-backed securities 753,684 984,110 Investment securities 1,985,518 1,896,820 --------------- --------------- 4,524,032 4,461,570 Allowance for uncollected interest on loans (243) (86) --------------- --------------- $ 4,523,789 $ 4,461,484 =============== ===============
49
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - DEPOSITS MARCH 31, ---------------------------------------------------------------------------------------------- 2006 2005 --------------------------------------------- ---------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AMOUNT PERCENT RATE AMOUNT PERCENT ----------- ---------------- ------------ ----------- --------------- ------------ Demand accounts: Non-interest bearing 0.00 % $ 2,132,281 0.37 % 0.00 % $ 1,402,027 0.25 % NOW 1.45 30,375,205 5.31 1.27 33,746,208 6.07 Super NOW 0.74 213,925 0.04 0.74 182,836 0.03 Money market 3.39 17,678,893 3.09 0.98 7,479,002 1.34 ---------------- ------------ --------------- ------------ 2.07 50,400,304 8.81 1.18 42,810,073 7.69 Savings and club accounts 1.19 126,142,941 22.06 1.33 173,331,190 31.15 Certificates of deposit 3.65 395,418,858 69.13 2.73 340,311,405 61.16 ---------------- ------------ --------------- ------------ TOTAL DEPOSITS 2.96 % $ 571,962,103 100.00 % 2.17 % $ 556,452,668 100.00 % ================ ============ =============== ============
Certificates of deposit with balances of $100,000 or more at March 31, 2006 and 2005 totaled approximately $69,167,000 and $49,990,000, respectively. The scheduled maturities of certificates of deposit are as follows:
MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- (IN THOUSANDS) One year or less $ 278,912 $ 214,675 After one to two years 92,180 88,721 After two to three years 19,458 23,701 After three to four years 4,669 11,359 After four years 200 1,855 ---------------- --------------- $ 395,419 $ 340,311 ================ ===============
Interest expense on deposits consists of the following:
YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- Demand $ 708,164 $ 308,402 $ 611,931 Savings and club 1,858,750 2,317,207 2,128,853 Certificates of deposits 12,505,527 8,176,783 8,975,105 ---------------- ---------------- --------------- $ 15,072,441 $ 10,802,392 $ 11,715,889 ================ ================ ===============
50
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK ("FHLB") The maturities weighted average interest rates of FHLB advances were as follows: MARCH 31, ------------------------------------------------------------------------- 2006 2005 ----------------------------------- ----------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE MATURING DURING INTEREST INTEREST YEAR ENDING MARCH 31, BALANCE RATE BALANCE RATE -------------------------- --------------- ---------------- ---------------- --------------- 2006 $ - - % $ 17,388,612 2.94 % 2007 12,527,737 3.37 12,527,737 3.37 2008 18,672,590 3.64 18,672,590 3.64 2009 18,823,405 3.94 18,823,405 3.94 2010 3,144,518 4.09 3,144,518 4.09 2011 2,991,416 4.11 2,991,416 4.11 Thereafter 1,714,552 4.05 1,714,552 4.05 --------------- ---------------- ---------------- --------------- $ 57,874,218 3.74 % $ 75,262,830 3.55 % =============== ================ ================ ===============
The carrying value of collateral pledged for the above advances was as follows:
MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- (IN THOUSANDS) U.S. Government Agency bonds: Available for sale $ - $ 4,930 Held to maturity 5,000 11,000 ---------------- --------------- 5,000 15,930 ---------------- --------------- Mortgage-backed securities: Available for sale 56,360 68,131 Held to maturity 329 - ---------------- --------------- 56,689 68,131 ---------------- --------------- $ 61,689 $ 84,061 ================ ===============
51
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - REGULATORY CAPITAL The Savings Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Savings Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices must be met. Capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk-weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Savings Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined by regulations) to risk-weighted assets (as defined), and of Tier 1 and tangible capital to adjusted total assets (as defined). Management believes, as of March 31, 2006, that the Savings Bank met all capital adequacy requirements to which it was subject. The most recent notification from the Office of Thrift Supervision, as of September 30, 2004, categorized the Savings Bank as "Well Capitalized" under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Savings Bank must maintain minimum total, risk-based and Tier 1 leverage ratios as set forth in the following table. In the opinion of management, no conditions or events have occurred since that notification that would have changed the Savings Bank's category. The actual capital amounts and ratios of the Savings Bank are as follows: TO BE WELL CAPITALIZED UNDER FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTION ACTUAL PURPOSES PROVISIONS ----------------------- ----------------------- -------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------- ---------- ----------- ---------- ----------- ------------- (DOLLARS IN THOUSANDS) AS OF MARCH 31, 2006: Total capital (to risk-weighted assets) $139,243 47.02% $>23,689 >8.00% $>29,611 >10.00% Tier 1 capital (to risk-weighted - - - - assets) 137,983 46.60 >11,844 >4.00 >17,767 > 6.00 Tier 1 capital (to adjusted total - - - - assets) 137,983 17.34 >31,839 >4.00 >39,798 > 5.00 Tangible capital (to adjusted total - - - - assets) 137,420 17.28 >11,931 >1.50 > - > - - - - - AS OF MARCH 31, 2005: Total capital (to risk-weighted assets) $139,483 50.83% $>21,952 >8.00% $>27,441 >10.00% Tier 1 capital (to risk-weighted - - - - assets) 138,383 50.43 >10,976 >4.00 >16,464 > 6.00 Tier 1 capital (to adjusted total - - - - assets) 138,383 17.56 >31,513 >4.00 >39,392 > 5.00 Tangible capital (to adjusted total - - - - assets) 137,929 17.52 >11,811 >1.50 > - > - - - - -
52
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - REGULATORY CAPITAL (CONTINUED) The following table presents a reconciliation of the Savings Bank's capital per GAAP to regulatory capital: MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- (IN THOUSANDS) GAAP capital $ 136,616 $ 137,574 Unrealized loss on securities available for sale 1,367 809 ---------------- --------------- 137,983 138,383 General valuation allowance 1,260 1,100 ---------------- --------------- TOTAL RISK-BASED CAPITAL $ 139,243 $ 139,483 ================ ===============
NOTE 11 - INCOME TAXES The components of income taxes are summarized as follows:
YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- Current tax expense: Federal income $ 2,236,829 $ 2,958,651 $ 2,107,568 State income 306,269 788,198 641,155 ---------------- ---------------- --------------- TOTAL CURRENT INCOME TAXES 2,543,098 3,746,849 2,748,723 ---------------- ---------------- --------------- Deferred tax (benefit): Federal income (325,702) (172,922) (171,518) State income (93,763) (60,207) (76,570) ---------------- ---------------- --------------- TOTAL DEFERRED INCOME TAX (BENEFIT) (419,465) (233,129) (248,088) ---------------- ---------------- --------------- $ 2,123,633 $ 3,513,720 $ 2,500,635 ================ ================ ===============
53
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - INCOME TAXES (CONTINUED) The following table presents a reconciliation between the reported income tax expense and the income tax expense which would be computed by applying the normal federal income tax rate of 34% to income before income taxes: YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- Federal income tax at the statutory rate $ 1,968,738 $ 2,989,836 $ 2,104,555 Increase in income taxes resulting from: New Jersey income tax, net of federal income tax effect 140,254 480,474 372,626 Other, net 14,641 43,410 23,454 ---------------- ---------------- --------------- TOTAL INCOME TAX EXPENSE $ 2,123,633 $ 3,513,720 $ 2,500,635 ================ ================ =============== Effective income tax rate 36.7% 40.0% 40.4% ================ ================ ===============
Botany commenced operations in January 2005. As a New Jersey Investment Company, Botany is subject to a 3.6% state income tax rate as compared to the 9.0% rate to which the Company and Savings Bank are subject. By virtue of the lower tax rate to which Botany is subject, income tax expenses were reduced during the years ended March 31, 2006 and 2005, by approximately $204,000 and $49,000, respectively. Absent these reductions, the Company's consolidated effective income tax rates for the years ended March 31, 2006 and 2005, would have been approximately 40.2% and 40.5%, respectively. Deferred tax assets and liabilities consisted of the following:
MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- Deferred income tax assets: Unrealized loss on securities available for sale $ 968,290 $ 722,872 Pension costs 577,321 521,197 Allowance for loan losses 503,244 439,340 Benefit plans 159,255 - Loan fees 5,066 7,394 Employee Stock Ownership Plan 136,349 79,276 Supplemental Executive Retirement Plan 47,106 31,624 Other 13,518 19,207 ---------------- --------------- TOTAL DEFERRED TAX ASSETS 2,410,149 1,820,910 Deferred income tax liabilities - depreciation 18,802 94,446 ---------------- --------------- NET DEFERRED TAX ASSET INCLUDED IN OTHER ASSETS $ 2,391,347 $ 1,726,464 ================ ===============
54 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - INCOME TAXES (CONTINUED) Retained earnings at March 31, 2006 and 2005, includes approximately $6,378,000 of tax bad debt deductions for which no provision for income tax has been made. Reduction of such amount for purposes other than bad debt losses will result in income for tax purposes only, and will be subject to income tax at the then current rate. NOTE 12 - EMPLOYEE BENEFIT PLANS ESOP Effective upon the consummation of the Savings Bank's reorganization, an ESOP was established for all eligible employees who had completed a twelve-month period of employment with the Savings Bank and at least 1,000 hours of service and had attained the age of 21. The ESOP used $10,990,970 in proceeds from a term loan obtained from the Company to purchase 1,099,097 shares of Company common stock. The term loan principal is payable over fifteen equal annual installments through December 31, 2018. Interest on the term loan is fixed at a rate of 4.00%. Each year, the Savings Bank intends to make discretionary contributions to the ESOP which will be equal to principal and interest payments required on the term loan. The loan is further paid down by the amount of dividends paid, if any, on the common stock owned by the ESOP. Shares purchased with the loan proceeds are initially pledged as collateral for the term loan and are held in a suspense account for future allocation among participants. Contributions to the ESOP and shares released from the suspense account will be allocated among the participants on the basis of compensation, as described by the Plan, in the year of allocation. The ESOP is accounted for in accordance with Statement of Position 93-6 "Accounting for Employee Stock Ownership Plans," which was issued by the American Institute of Certified Public Accountants. Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As shares are committed to be released from collateral, the Savings Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for basic net income per common share computations. ESOP compensation expense was approximately $759,000, $865,000, and $248,000 for the years ended March 31, 2006, 2005, and 2004, respectively. The ESOP shares were as follows: MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- Allocated shares 153,546 81,072 Shares committed to be released 10,154 10,519 Unearned shares 934,235 1,007,506 ---------------- --------------- TOTAL ESOP SHARES 1,097,935 1,099,097 ================ =============== Fair value of unearned shares $ 9,986,972 $ 11,284,067 ================ =============== 55 CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - EMPLOYEE BENEFIT PLANS (CONTINUED) SECTION 401(K) PLAN The Savings Bank sponsors a Plan pursuant to Section 401(k) of the Internal Revenue Code ("IRC"), for all eligible (attainment of age 21 and one year of service) employees. Employees may elect to save up to 25% of their compensation, subject to IRC limits. For each dollar up to 4.5% of compensation, the Savings Bank will match 50% of the employee's contribution. The Plan expense for the years ended March 31, 2006, 2005, and 2004, was approximately $63,000, $51,000 and $45,000, respectively. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") Effective upon the consummation of the Savings Bank's reorganization, a SERP was established. The plan provides participating executives with benefits otherwise limited by certain provisions of the Internal Revenue Code or the terms of the employee stock ownership plan loan. Specifically, the plan provides benefits to eligible officers (those designated by the Board of Directors of the Savings Bank) that cannot be provided under the Section 401(k) plan or the ESOP as a result of limitations imposed by the Internal Revenue Code, but that would have been provided under the plans, but for these Internal Revenue Code limitations. In addition to providing for benefits lost under tax-qualified plans as a result of the Internal Revenue Code limitations, the new plan also provides supplemental benefits upon a change of control prior to the scheduled repayment of the ESOP loan. Generally, upon a change in control, the SERP provides participants with a benefit equal to what they would have received under the ESOP, had they remained employed throughout the term of the loan, less the benefits actually provided under the plan on the participant's behalf. A participant's benefits generally become payable upon a change in control of the Savings Bank and the Company. The SERP expense for the years ended March 31, 2006, 2005, and 2004, was approximately $39,000, $68,000 and $11,000, respectively. At March 31, 2006 and 2005, the accrued SERP liability was $118,000 and $79,000, respectively. NOTE 13 - STOCK-BASED COMPENSATION At the Company's annual stockholders' meeting held on July 14, 2005, stockholders of the Company approved the Clifton Savings Bancorp, Inc. 2005 Equity Incentive Plan. Under this plan, the Company may grant options to purchase up to 1,495,993 shares of Company common stock and may grant up to 598,397 shares of common stock as restricted stock awards. On December 7, 2005, 585,231 shares of restricted stock were awarded. The restricted shares awarded had a grant date fair value of $10.22 per share. 20% of the shares awarded were immediately vested, with an additional 20% becoming vested annually thereafter. During the year ended March 31, 2006, $1,595,000 in expense was recognized in regard to these restricted stock awards. 56
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - STOCK-BASED COMPENSATION (CONTINUED) On August 31, 2005, options to purchase 1,483,510 shares of common stock at $10.24 per share were awarded. Immediately upon grant, 20% of the options awarded were vested, with an additional 20% becoming vested annually thereafter. In February 2006, the Company's Board of Directors approved the acceleration of the second 20% of the option grants so that those options became fully vested as of March 31, 2006. A summary of stock option activity follows: NUMBER OF OPTION SHARES EXERCISE PRICE --------------------------------------------------- -------------------------- VESTED AND WEIGHTED EXERCISABLE NON-VESTED TOTAL RANGE AVERAGE ---------------- ---------------- ---------------- ------------ ------------ Granted August 31, 2005 296,702 1,186,808 1,483,510 $10.24 $10.24 Vesting during the period 296,702 (296,702) - $10.24 $10.24 ---------------- ---------------- ---------------- Outstanding at March 31, 2006 593,404 890,106 1,483,510 $10.24 $10.24 ================ ================ ================
During the year ended March 31, 2006, no options were exercised or forfeited and no options expired. At March 31, 2006, the weighted average remaining contractual life of all outstanding options, both vested and non-vested, was 9.4 years. The fair value of the options granted on August 31, 2005, as computed using the Black-Scholes option-pricing model, was determined to be $2.38 per option based upon the following underlying assumptions: a risk-free interest rate, expected option life, expected stock price volatility, and dividend yield of 4.11%, 6.0 years, 21.56%, and 1.95%, respectively. NOTE 14 - DIRECTORS' RETIREMENT PLAN The Directors' Retirement Plan is a nonqualified, unfunded pension plan with benefits based on fees paid to directors while still active. The funding policy is to pay directors on a pay-as-you-go basis. The measurement dates used to value the plan were January 1, 2006 and 2005, respectively. 57
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - DIRECTORS' RETIREMENT PLAN (CONTINUED) The following table sets forth the funded status for the Directors' Retirement Plan and amounts recognized in the consolidated statements of financial condition. MARCH 31, ----------------------------------- 2006 2005 --------------- --------------- Accumulated benefit obligation $ 1,731,776 $ 1,441,322 =============== =============== Change in projected benefit obligation Benefit obligation - beginning $ 1,858,731 $ 1,767,468 Service cost 15,492 49,052 Interest cost 102,368 112,296 Actuarial (gain) loss 257,558 (46,085) Benefits paid (24,000) (24,000) Plan amendments - - --------------- --------------- Benefit obligation - ending 2,210,149 1,858,731 --------------- --------------- Changes in plan assets Fair value of plan assets - beginning - - Employer contribution 24,000 24,000 Benefits paid (24,000) (24,000) --------------- --------------- Fair value of plan assets - ending - - --------------- --------------- Funded status (2,210,149) (1,858,731) Unrecognized prior service cost 579,712 665,768 Unrecognized net loss 467,401 212,051 Additional minimum pension liability (562,740) (454,410) --------------- --------------- (Accrued) pension cost included in other liabilities $ (1,725,776) $ (1,435,322) =============== =============== Assumptions: Discount rate 5.875% 6.125% Rate of increase in compensation 4.000% 4.000%
58
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - DIRECTORS' RETIREMENT PLAN (CONTINUED) At March 31, 2006 and 2005, an intangible pension asset of $562,740 and $454,410, respectively, which is the result of the recording of the additional minimum pension liability, is included in other assets. The Savings Bank expects to make contributions to the plan during the year ending March 31, 2007, totaling approximately $67,000. At March 31, 2006, benefit payments expected to be paid under the plan are as follows (in thousands): Year ending March 31: 2007 $ 67 2008 57 2009 60 2010 62 2011 84 2012 - 2016 623 ---------- $ 953 ========== Net periodic pension cost for the plan included the following components: YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- Service cost of benefits earned during the period $ 15,492 $ 49,052 $ 42,086 Interest cost on projected benefit obligation 102,368 112,296 98,504 Net amortization and deferral 88,264 93,096 89,615 ---------------- ---------------- --------------- NET PERIODIC PENSION COST INCLUDED IN DIRECTORS' COMPENSATION $ 206,124 $ 254,444 $ 230,205 ================ ================ =============== Assumptions: Discount rate 6.125% 6.375% 6.25% Rate of increase in compensation 4.000% 4.000% 4.00%
Net amortization and deferral consists of (i) amortization of the liability which existed at the date the plan was established, (ii) amortization of unrecognized net gains and losses, and (iii) deferral of subsequent net gains and losses. 59
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - FORMER PRESIDENT'S RETIREMENT PLAN The Former President's Retirement Plan is a nonqualified, unfunded pension plan with the only participant the former president of the Savings Bank. The plan was established on July 24, 1996, with a commencement date of January 1, 1999. The funding policy is to pay the former president $35,000 annually for his life or for a ten year minimum payment period commencing October 1, 1998, to his surviving spouse. Due to the death of the former president in February 2005, his surviving spouse has begun and will continue to receive annual payments of $35,000 through December 31, 2008. The plan shall also provide coverage under a health insurance plan for the former president's spouse for life. The annual costs associated with these benefits are accrued on the basis of actuarial assumptions and included in salaries and employee benefits. The measurement dates used to value the plan were January 1, 2006 and 2005, respectively. The following table sets forth the funded status for the Former President's Retirement Plan and amounts recognized in the consolidated statements of financial condition: MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- Accumulated benefit obligation $ 161,885 $ 188,752 ================ =============== Change in projected benefit obligation Benefit obligation - beginning $ 188,752 $ 404,217 Interest cost 11,024 25,076 Actuarial (gain) loss 1,938 (196,797) Benefits paid (39,829) (43,744) ---------------- --------------- Benefit obligation - ending 161,885 188,752 ---------------- --------------- Changes in plan assets Fair value of plan assets - beginning - - Employer contributions 39,829 (43,744) Benefits paid (39,829) (43,744) ---------------- --------------- Fair value of plan assets - ending - - ---------------- --------------- Funded status (161,885) (188,752) Unrecognized net gain (120,550) (135,284) ---------------- --------------- (Accrued) pension cost included in other liabilities $ (282,435) $ (324,036) ================ =============== Assumed discount rate 5.875% 6.125% ================ ===============
60
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - FORMER PRESIDENT'S RETIREMENT PLAN (CONTINUED) The Savings Bank expects to make contributions to the Plan during the year ending March 31, 2007, totaling approximately $40,000. At March 31, 2006, benefit payments expected to be paid under the Plan are as follows (in thousands): Year ending March 31: 2007 $ 40 2008 39 2009 30 2010 6 2011 6 2012 - 2016 30 -------- $ 151 ======== Net periodic pension cost for the Plan included the following components: YEARS ENDED MARCH 31, ------------------------------------------------------ 2006 2005 2004 ---------------- ---------------- --------------- Interest cost on projected benefit obligation $ 11,024 $ 25,076 $ 24,678 Net amortization and deferral (12,796) 1,672 1,229 ---------------- ---------------- --------------- NET PERIODIC COST (BENEFIT) $ (1,772) $ 26,748 $ 25,907 ================ ================ =============== Assumed discount rate 6.125% 6.375% 6.25% ================ ================ ===============
61
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial instruments are as follows: MARCH 31, -------------------------------------------------------------------- 2006 2005 ------------------------------ --------------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ------------- ------------ --------------- ----------- (IN THOUSANDS) Financial assets: Cash and cash equivalents $ 22,623 $ 22,623 $ 31,121 $ 31,121 Securities available for sale: Investment 39,555 39,555 59,015 59,015 Mortgage-backed 54,401 54,401 68,201 68,201 Securities held to maturity: Investment 169,985 166,762 137,979 135,617 Mortgage-backed 123,909 120,745 170,659 169,069 Loans receivable 403,682 395,626 354,162 352,893 Federal Home Loan Bank of New York stock 3,780 3,780 4,371 4,371 Interest receivable 4,524 4,524 4,461 4,461 Financial liabilities: Deposits 571,962 572,539 556,453 556,731 FHLB advances 57,874 56,268 75,263 73,690
NOTE 17 - COMMITMENTS AND CONTINGENCIES The Company, Savings Bank and Botany are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet investment needs and the financing needs of the Savings Bank's customers. These financial instruments include commitments to originate loans and purchase securities. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement in particular classes of financial statements. Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Savings Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Savings Bank, upon extension of credit is based on management's credit evaluation of the counterparty. The Savings Bank, at March 31, 2006, had outstanding commitments to originate loans totaling approximately $9,216,000, which included $3,652,000 for fixed-rate mortgage loans with interest rates ranging from 5.375% to 6.75%, $5,564,000 for adjustable rate mortgage loans with initial rates ranging from 4.375% to 7.125%, and $427,000 for fixed rate second mortgage loans with interest rates ranging from 5.75% to 6.25%. Outstanding loan commitments at March 31, 2005 totaled $12,413,000. These commitments generally expire in three months or less. 62
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================= NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - COMMITMENTS AND CONTINGENCIES (CONTINUED) At March 31, 2006 and 2005, undisbursed funds from approved lines of credit under a homeowners' equity lending program amounted to approximately $2,400,000 and $2,209,000, respectively. Unless they are specifically cancelled by notice from the Savings Bank, these funds represent firm commitments available to the respective borrowers on demand. At March 31, 2006 and 2005, the Savings Bank had commitments related to the construction of new branches and the renovation of existing branches totaling approximately $-0- and $398,000, respectively. Management does not anticipate losses on any of the foregoing transactions. Periodically, there have been various claims and lawsuits against the Company and Savings Bank, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our consolidated financial condition, results of operations or cash flows. NOTE 18 - PARENT ONLY FINANCIAL INFORMATION The following are the condensed financial statements for Clifton Savings Bancorp, Inc. (Parent company only) as of March 31, 2006 and 2005 and for the periods then ended. STATEMENTS OF CONDITION MARCH 31, ----------------------------------- 2006 2005 ---------------- --------------- ASSETS Cash and due from banks $ 15,954,672 $ 9,952,167 Investment securities: Available for sale 14,851,300 24,537,600 Held to maturity 19,985,390 19,981,732 Loans receivable 9,953,316 10,524,542 Investment in subsidiary 136,616,230 137,574,184 Interest receivable 529,591 591,594 Other assets 136,167 267,912 ---------------- --------------- TOTAL ASSETS $ 198,026,666 $ 203,429,731 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 278,340 $ 256,520 Stockholders' equity 197,748,326 203,173,211 ---------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 198,026,666 $ 203,429,731 ================ ===============
63
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ==================================================================================================================================== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - PARENT ONLY FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF INCOME FROM INCEPTION (MARCH 3, 2004) YEARS ENDED MARCH 31, TO MARCH 31, 2006 2005 2004 ---------------- ---------------- ----------------- Interest income: Loans $ 405,348 $ 432,572 $ 33,726 Securities 1,171,977 1,117,362 - Other 191,184 159,926 - ----------------- --------------- ----------------- 1,768,509 1,709,860 33,726 Non-interest expenses 597,455 599,175 55,405 ----------------- --------------- ----------------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 1,171,054 1,110,685 (21,679) Income tax expense (benefit) 466,813 445,205 (9,000) ----------------- --------------- ----------------- INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 704,241 665,480 (12,679) Equity in undistributed earnings of subsidiary 2,962,531 4,614,434 135,913 ----------------- --------------- ----------------- NET INCOME $ 3,666,772 $ 5,279,914 $ 123,234 ================= =============== =================
64
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ==================================================================================================================================== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - PARENT ONLY FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF CASH FLOW YEARS ENDED MARCH 31, FROM INCEPTION ------------------------------------ (MARCH 3, 2004) TO 2006 2005 MARCH 31, 2004 ---------------- ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,666,772 $ 5,279,914 $ 123,234 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of discounts (3,658) (3,607) - (Increase) decrease in interest receivable 62,003 (557,868) (33,726) (Increase) decrease in other assets 6,454 (83,229) - Increase in other liabilities 21,821 221,020 35,500 Increase in deferred compensation obligation under Rabbi Trust 45,389 - - Equity in undistributed earnings of subsidiary (2,962,531) (4,614,434) (135,913) ---------------- ---------------- ----------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 836,250 241,796 (10,905) ---------------- ---------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Savings Bank stock - - (67,043,752) Proceeds of repayment of investment securities available for sale 10,000,000 - - Purchases of investment securities: Available for sale - (25,000,000) - Held to maturity - (19,978,125) - Loan to Clifton MHC - (250,000) - Loan to Savings Bank - - (10,990,970) Repayment of loan receivable from Savings Bank 571,226 716,428 - Cash dividends paid on unallocated ESOP shares used to repay loan receivable from Savings Bank (203,605) - - ---------------- ---------------- ----------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,367,621 (44,511,697) (78,034,722) ---------------- ---------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid (2,492,484) (1,769,546) - Net proceeds from issuance of common stock - - 134,037,241 Purchase of treasury stock (8,689,942) - - Sale of treasury stock to Savings Bank to fund Restricted Stock Awards 5,981,060 - - ---------------- ---------------- ----------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,201,366) (1,769,546) 134,037,241 ---------------- ---------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH 6,002,505 (46,039,447) 55,991,614 EQUIVALENTS CASH AND CASH EQUIVALENTS - BEGINNING 9,952,167 55,991,614 - ---------------- ---------------- ----------------- CASH AND CASH EQUIVALENTS - ENDING $ 15,954,672 $ 9,952,167 $ 55,991,614 ================ ================ =================
65
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED) QUARTER ENDED --------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 2005 2005 2005 2006 ---------------- ---------------- ---------------- --------------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income $ 8,627 $ 8,885 $ 8,804 $ 9,036 Interest expense 3,874 4,376 4,623 4,699 ---------------- ---------------- ---------------- --------------- NET INTEREST INCOME 4,753 4,509 4,181 4,337 Provision for loan losses 100 50 10 - Non-interest income 78 62 60 65 Non-interest expenses 2,682 2,564 3,846 3,002 Income taxes 771 734 101 518 ---------------- ---------------- ---------------- --------------- NET INCOME $ 1,278 $ 1,223 $ 284 $ 882 ================ ================ ================ =============== Net income per common share - basic and diluted $ 0.04 $ 0.04 $ 0.01 $ 0.03 ================ ================ ================ =============== Dividends per common share $ 0.05 $ 0.05 $ 0.05 $ 0.05 ================ ================ ================ =============== Weighted average number of common shares outstanding - basic 29,477 29,247 28,932 28,972 ================ ================ ================ =============== Weighted average number of common shares outstanding - diluted 29,477 29,248 28,936 28,990 ================ ================ ================ ===============
66
CLIFTON SAVINGS BANCORP, INC. AND SUBSIDIARIES ============================================================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED) QUARTER ENDED --------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 2004 2004 2004 2005 ---------------- ---------------- ---------------- --------------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income $ 6,896 $ 7,567 $ 8,291 $ 8,615 Interest expense 2,576 2,844 3,460 3,517 ---------------- ---------------- ---------------- --------------- NET INTEREST INCOME 4,320 4,723 4,831 5,098 Provision for loan losses 75 125 35 25 Non-interest income 78 73 139 71 Non-interest expenses 2,644 2,420 2,546 2,669 Income taxes 688 909 970 947 ---------------- ---------------- ---------------- --------------- NET INCOME $ 991 $ 1,342 $ 1,419 $ 1,528 ================ ================ ================ =============== Net income per common share, basic and diluted $ 0.03 $ 0.05 $ 0.05 $ 0.05 ================ ================ ================ =============== Dividends per common share $ 0.03 $ 0.03 $ 0.03 $ 0.05 ================ ================ ================ =============== Weighted average number of common shares outstanding - basic and diluted 29,459 29,477 29,495 29,514 ================ ================ ================ ===============
67 INVESTOR AND CORPORATE INFORMATION ANNUAL MEETING The annual meeting of stockholders will be held at 9:00 a.m., on August 17, 2006 at the Valley Regency located at 1129 Valley Road, Clifton, New Jersey 07013. STOCK LISTING Clifton Savings Bancorp, Inc. common stock is listed on the Nasdaq National Market under the symbol "CSBK." PRICE RANGE OF COMMON STOCK
2006 2005 -------------------------------- --------------------------------- DIVIDEND DIVIDEND QUARTER ENDED HIGH LOW DECLARED HIGH LOW DECLARED - ------------- ---- --- -------- ---- --- -------- June 30 $11.10 $10.01 $0.05 $13.45 $11.61 $0.03 September 30 10.82 10.18 0.05 12.02 11.22 0.03 December 31 10.45 10.06 0.05 12.90 11.31 0.03 March 31 10.69 10.06 0.05 12.15 11.00 0.05
At April 30, 2006 there were 1,742 holders of record of Clifton Savings Bancorp common stock. STOCKHOLDERS AND GENERAL INQUIRIES Bart D'Ambra Clifton Savings Bancorp, Inc. 1433 Van Houten Avenue Clifton, New Jersey 07015 (973) 473-2200 ANNUAL AND OTHER REPORTS A copy of the Clifton Savings Bancorp Annual Report on Form 10-K without exhibits for the year ended March 31, 2006, as filed with the Securities and Exchange Commission, may be obtained without charge by contacting Bart D'Ambra, Clifton Savings Bancorp, Inc., 1433 Van Houten Avenue, Clifton, New Jersey 07015. INDEPENDENT AUDITORS Beard Miller Company LLP 55 U.S. Highway 46 Pine Brook, New Jersey 07058 CORPORATE COUNSEL Muldoon Murphy & Aguggia LLP 5101 Wisconsin Avenue, NW Washington, DC 20016 TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 68
DIRECTORS AND OFFICERS DIRECTORS OF CLIFTON SAVINGS BANCORP, INC., EXECUTIVE OFFICERS OF CLIFTON MHC AND CLIFTON SAVINGS BANCORP, INC. OFFICERS OF CLIFTON SAVINGS BANK S.L.A. AND CLIFTON MHC CLIFTON SAVINGS BANK, S.L.A. - ------------------------------------- ---------------------------------- -------------------------------------- JOHN A. CELENTANO, JR. JOHN A. CELENTANO, JR. JOHN A. CELENTANO, JR. CHAIRMAN OF THE BOARD AND CHAIRMAN OF THE BOARD AND CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER - CHIEF EXECUTIVE OFFICER CLIFTON SAVINGS BANCORP, INC. WALTER CELUCH AND CLIFTON MHC WALTER CELUCH PRESIDENT, CHIEF EXECUTIVE CHAIRMAN OF THE BOARD - PRESIDENT AND CORPORATE OFFICER AND SECRETARY CLIFTON SAVINGS BANK, S.L.A. SECRETARY FRANK J. HAHOFER CHRISTINE R. PIANO, CPA BART D'AMBRA PRIVATE INVESTOR CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT AND TREASURER CHIEF OPERATING OFFICER THOMAS A. MILLER STEPHEN A. HOOGERHYDE OWNER - THE T.A. MILLER & EXECUTIVE VICE PRESIDENT AND CO., INC. CHIEF LENDING OFFICER JOHN H. PETO CHRISTINE R. PIANO, CPA REAL ESTATE INVESTOR EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER RAYMOND L. SISCO SUSAN L. HORANT VICE CHAIRMAN OF THE BOARD - VICE PRESIDENT AND SECURITY CLIFTON SAVINGS BANCORP, INC., OFFICER CLIFTON MHC AND CLIFTON SAVINGS BANK, S.L.A. ELEANOR BAKELAAR-MENNITI PRESIDENT - CIN RAY REALTY, VICE PRESIDENT AND N.O.W. INC. ADMINISTRATOR JOSEPH C. SMITH JOSEPHINE T. SCAVONE PRESIDENT - SMITH-SONDY VICE PRESIDENT AND HUMAN ASPHALT CONSTRUCTION CO. RESOURCE ADMINISTRATOR JOHN STOKES LINDA FISHER GENERAL PARTNER - O.I.R. VICE PRESIDENT AND LOAN REALTY CO. OFFICER COLEEN KELLEY VICE PRESIDENT AND IRA ADMINISTRATOR TED MUNLEY VICE PRESIDENT AND BRANCH COORDINATOR NANCY NA ASSISTANT VICE PRESIDENT AND CONTROLLER BERNADETTE MCDONALD ASSISTANT VICE PRESIDENT AND TREASURER 69 OFFICE LOCATIONS MAIN OFFICE - ----------- MONTCLAIR HEIGHTS 1433 Van Houten Avenue Clifton, New Jersey 07015 (973) 473-2200/(973) 473-2020 BRANCH OFFICES - -------------- RICHFIELD PALISADE AVENUE 1055 Clifton Avenue 247 Palisade Avenue Clifton, New Jersey 07013 Garfield, New Jersey 07026 (973) 473-2323 (973) 478-5050 BOTANY VILLAGE LANZA AVENUE 1 Village Square West 369 Lanza Avenue Clifton, New Jersey 07011 Garfield, New Jersey 07026 (973) 546-3320 (973) 478-1200 LAKEVIEW AVENUE WALLINGTON 319 Lakeview Avenue 55 Union Boulevard Clifton, New Jersey 07011 Wallington, New Jersey 07057 (973) 478-1260 (973) 779-7306 ATHENIA WAYNE 646 Van Houten Avenue 1158 Hamburg Turnpike Clifton, New Jersey 07013 Wayne, New Jersey 07470 (973) 473-0025 (973) 628-1611 VALLEY ROAD 387 Valley Road Clifton, New Jersey 07013 (973) 279-1505
EX-21 3 clifton10kjune06ex21-0.txt LIST OF SUBSIDIARIES EXHIBIT 21.0 LIST OF SUBSIDIARIES
Registrant Clifton Savings Bancorp, Inc. ---------- Percentage Jurisdiction or Subsidiaries Ownership State of Incorporation - ------------------------------------------- ----------------------------- ------------------------------------- Clifton Savings Bank, S.L.A 100% New Jersey Botany Inc. (1) 100% New Jersey
____________________________________________________________ (1) Wholly owned subsidiary of Clifton Savings Bank, S.L.A. EX-23.0 4 clifton10kjune06ex23-0.txt CONSENT OF BEARD MILLER COMPANY LLP EXHIBIT 23.0 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference into the previously filed Registration Statements on Form S-8 (Nos. 333-106116 and 333-113302) of Clifton Savings Bancorp, Inc. (the "Company") of our reports dated May 26, 2006, included in the Company's Annual Report on Form 10-K for the year ended March 31, 2006. /s/ Beard Miller Company LLP Beard Miller Company LLP Pine Brook, New Jersey June 12, 2006 EX-31.1 5 clifton10kjune06ex31-1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION I, John A. Celentano, Jr. Chairman of the Board and Chief Executive Officer of Clifton Savings Bancorp, Inc. certify that: 1. I have reviewed this annual report of Clifton Savings Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 9, 2006 /s/ John A. Celentano, Jr. ------------------------------------------------- John A. Celentano, Jr. Chairman of the Board and Chief Executive Officer (principal executive officer) EX-31.2 6 clifton10kjune06ex31-2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION I, Christine R. Piano, Chief Financial Officer and Treasurer of Clifton Savings Bancorp, Inc., certify that: 1. I have reviewed this annual report of Clifton Savings Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (e) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 9, 2006 /s/ Christine R. Piano -------------------------------------------- Christine R. Piano Chief Financial Officer and Treasurer (principal financial and accounting officer) EX-32.0 7 clifton10kjune06ex32-0.txt SECTION 1350 CERTIFICATION OF CEO AND CFO EXHIBIT 32.0 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADDED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Clifton Savings Bancorp, Inc. (the "Company") on Form 10-K for the period ended March 31, 2006 as filed with the Securities and Exchange Commission (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. ss.1350, as added by ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ John A. Celentano, Jr. ------------------------------------------------- John A. Celentano, Jr. Chairman of the Board and Chief Executive Officer /s/ Christine R. Piano ------------------------------------------------- Christine R. Piano Chief Financial Officer and Treasurer Dated: June 9, 2006 -----END PRIVACY-ENHANCED MESSAGE-----