UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
|_| TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21855
Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
New Jersey 22-3351447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
630 Godwin Avenue, Midland Park, NJ 07432
(Address of principal executive offices) (Zip Code)
(201) 444-7100
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Issuer's Common Stock, no par
value, as of August 13, 2003 was 3,000,023.
Stewardship Financial Corporation
INDEX
PAGE
NUMBER
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at June 30, 2003 (Unaudited) and December 31, 2002 .......... 1
Consolidated Statements of Income for the Six
Months ended June 30, 2003 and 2002 (Unaudited) ............. 2
Consolidated Statements of Income for the Three
Months ended June 30, 2003 and 2002 (Unaudited) ............. 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2003 and 2002 (Unaudited) ............. 4
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended June 30, 2003 and
June 30, 2002 (Unaudited) ................................... 5
Notes to Consolidated Financial Statements (Unaudited) ...... 6 - 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................. 13 - 23
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK .......................................... 23
ITEM 4 - CONTROLS AND PROCEDURES ..................................... 24
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 25
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ............................ 25
SIGNATURES ........................................................... 26
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
June 30, December 31,
2003 2002
-------------------------------
(Unaudited)
Assets
Cash and due from banks $ 15,529,000 $ 14,039,000
Other interest-earning assets 16,603,000 9,854,000
Federal funds sold 10,750,000 9,525,000
-------------------------------
Cash and cash equivalents 42,882,000 33,418,000
Securities available for sale 15,609,000 12,812,000
Securities held to maturity; estimated fair value
of $ 57,138,000 (2003) and $62,273,000 (2002) 55,431,000 60,887,000
FHLB-NY stock, at cost 1,322,000 1,059,000
Loans, net of allowance for loan losses of
of $ 2,885,000 (2003) and $2,689,000 (2002) 233,010,000 213,579,000
Mortgage loans held for sale 1,589,000 2,099,000
Premises and equipment, net 3,392,000 3,733,000
Accrued interest receivable 1,645,000 1,640,000
Intangible assets, net of accumulated amortization of
$507,000 (2003) and $486,000 (2002) 242,000 264,000
Other assets 1,672,000 1,596,000
-------------------------------
Total assets $356,794,000 $331,087,000
===============================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 72,002,000 $ 69,344,000
Interest-bearing 252,349,000 233,391,000
-------------------------------
Total deposits 324,351,000 302,735,000
Securities sold under agreements to repurchase 4,961,000 2,435,000
Accrued expenses and other liabilities 1,986,000 2,100,000
-------------------------------
Total liabilities 331,298,000 307,270,000
-------------------------------
Commitments and contingencies -- --
Stockholders' equity
Common stock, no par value; 5,000,000 shares authorized;
2,991,832 and 2,963,156 shares issued outstanding at
June 30, 2003 and December 31, 2002, respectively 15,464,000 15,058,000
Retained earnings 9,919,000 8,600,000
Accumulated other comprehensive income 113,000 159,000
-------------------------------
Total stockholders' equity 25,496,000 23,817,000
-------------------------------
Total liabilities and stockholders' equity $356,794,000 $331,087,000
===============================
See notes to unaudited consolidated financial statements.
1
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Six Months Ended
June 30,
---------------------------
2003 2002
---------------------------
Interest income:
Loans $7,870,000 $7,146,000
Securities held to maturity
Taxable 721,000 638,000
Non-taxable 354,000 351,000
Securities available for sale 182,000 349,000
Other interest-earning assets 109,000 156,000
---------------------------
Total interest income 9,236,000 8,640,000
---------------------------
Interest expense:
Deposits 2,321,000 2,611,000
Borrowed money 34,000 13,000
---------------------------
Total interest expense 2,355,000 2,624,000
---------------------------
Net interest income before provision for loan losses 6,881,000 6,016,000
Provision for loan losses 225,000 70,000
---------------------------
Net interest income after provision for loan losses 6,656,000 5,946,000
---------------------------
Noninterest income:
Fees and service charges 1,027,000 859,000
Gain on sales of mortgage loans 238,000 133,000
Miscellaneous 209,000 137,000
---------------------------
Total noninterest income 1,474,000 1,129,000
---------------------------
Noninterest expenses:
Salaries and employee benefits 2,597,000 2,255,000
Occupancy, net 356,000 328,000
Equipment 365,000 313,000
Data processing 416,000 332,000
Advertising 125,000 137,000
FDIC insurance premium 24,000 21,000
Amortization of intangible assets 21,000 23,000
Charitable contributions 234,000 207,000
Stationery and supplies 102,000 116,000
Miscellaneous 1,248,000 1,091,000
---------------------------
Total noninterest expenses 5,488,000 4,823,000
---------------------------
Income before income tax expense 2,642,000 2,252,000
Income tax expense 927,000 763,000
---------------------------
Net income $1,715,000 $1,489,000
===========================
Basic earnings per share $ 0.58 $ 0.51
===========================
Diluted earnings per share $ 0.57 $ 0.51
===========================
Weighted average number of common shares outstanding 2,978,438 2,908,291
===========================
Weighted average number of diluted common
shares outstanding 3,008,993 2,932,675
===========================
Share data has been restated to reflect a 5% stock dividend paid November, 2002
and a 3 for 2 stock split paid July 1, 2003.
See notes to unaudited consolidated financial statements.
2
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three Months Ended
June 30,
---------------------------
2003 2002
---------------------------
Interest income:
Loans $3,988,000 $3,591,000
Securities held to maturity
Taxable 326,000 337,000
Non-taxable 176,000 182,000
Securities available for sale 79,000 177,000
Other interest-earning assets 63,000 87,000
---------------------------
Total interest income 4,632,000 4,374,000
---------------------------
Interest expense:
Deposits 1,154,000 1,299,000
Borrowed money 21,000 7,000
---------------------------
Total interest expense 1,175,000 1,306,000
---------------------------
Net interest income before provision for loan losses 3,457,000 3,068,000
Provision for loan losses 110,000 30,000
---------------------------
Net interest income after provision for loan losses 3,347,000 3,038,000
---------------------------
Noninterest income:
Fees and service charges 542,000 427,000
Gain on sales of mortgage loans 142,000 61,000
Miscellaneous 94,000 111,000
---------------------------
Total noninterest income 778,000 599,000
---------------------------
Noninterest expenses:
Salaries and employee benefits 1,310,000 1,120,000
Occupancy, net 173,000 163,000
Equipment 186,000 162,000
Data processing 206,000 172,000
Advertising 71,000 74,000
FDIC insurance premium 12,000 10,000
Amortization of intangible assets 10,000 12,000
Charitable contributions 117,000 112,000
Stationery and supplies 59,000 58,000
Miscellaneous 650,000 564,000
---------------------------
Total noninterest expenses 2,794,000 2,447,000
---------------------------
Income before income tax expense 1,331,000 1,190,000
Income tax expense 469,000 406,000
---------------------------
Net income $ 862,000 $ 784,000
===========================
Basic earnings per share $ 0.29 $ 0.27
===========================
Diluted earnings per share $ 0.29 $ 0.27
===========================
Weighted average number of common shares outstanding 2,986,047 2,920,696
===========================
Weighted average number of diluted common
shares outstanding 3,021,367 2,945,611
===========================
Share data has been restated to reflect a 5% stock dividend paid November, 2002
and a 3 for 2 stock split paid July 1, 2003.
See notes to unaudited consolidated financial statements.
3
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------------------------------
2003 2002
--------------------------------
Cash flows from operating activities:
Net income $ 1,715,000 $ 1,489,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 333,000 278,000
Amortization of premiums and accretion of discounts, net 417,000 116,000
Accretion of deferred loan fees (81,000) (21,000)
Provision for loan losses 225,000 70,000
Originations of mortgage loans held for sale (20,090,000) (12,544,000)
Proceeds from sale of mortgage loans 20,838,000 13,853,000
Gain on sale of mortgage loans held for sale (238,000) (133,000)
Gain on sale of fixed assets (54,000) --
Gain on sale of securities available for sale (27,000) --
Deferred income tax benefit (119,000) (141,000)
Amortization of intangibles 21,000 23,000
Increase in accrued interest receivable (5,000) (85,000)
Decrease in other assets 156,000 137,000
(Decrease) increase in other liabilities (114,000) 15,000
--------------------------------
Net cash provided by operating activities 2,977,000 3,057,000
--------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (8,396,000) (1,997,000)
Proceeds from maturities and principal repayments
on securities available for sale 2,731,000 987,000
Proceeds from calls and sales of securities available for sale 2,756,000 1,403,000
Purchase of securities held to maturity (15,005,000) (16,428,000)
Proceeds from maturities and principal repayments
on securities held to maturity 8,731,000 1,992,000
Proceeds from call on securities held to maturity 11,375,000 3,150,000
Purchase of FHLB-NY stock (263,000) (173,000)
Net increase in loans (19,574,000) (8,986,000)
Sales of premises and equipment 227,000 19,000
Additions to premises and equipment (166,000) (140,000)
--------------------------------
Net cash used in investing activities (17,584,000) (20,173,000)
--------------------------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits 2,658,000 3,332,000
Net increase in interest-bearing deposits 18,958,000 17,091,000
Net increase in securities sold under agreements
to repurchase 2,526,000 150,000
Purchase of treasury stock -- (164,000)
Cash dividends paid on common stock (396,000) (331,000)
Options exercised 48,000 318,000
Common stock issued under stock plans 277,000 242,000
--------------------------------
Net cash provided by financing activities 24,071,000 20,638,000
--------------------------------
Net increase in cash and cash equivalents 9,464,000 3,522,000
Cash and cash equivalents - beginning 33,418,000 34,074,000
--------------------------------
Cash and cash equivalents - ending $ 42,882,000 $ 37,596,000
================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 2,427,000 $ 2,480,000
Cash paid during the year for income taxes 1,076,000 844,000
See notes to unaudited consolidated financial statements.
4
Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
For the Period Ended June 30, 2003
----------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Retained Income,
Shares Amount Earnings Net Total
----------------------------------------------------------------------------
Balance -- December 31, 2002 2,963,156 $15,058,000 $ 8,600,000 $ 159,000 $ 23,817,000
Dividends Paid -- -- (396,000) -- (396,000)
Common stock issued under stock plans 22,645 277,000 -- -- 277,000
Exercise of stock options 6,031 48,000 48,000
Tax Benefit - exercise of stock options 81,000 81,000
Comprehensive income:
Net income for the six months
ended June 30, 2003 -- -- 1,715,000 -- 1,715,000
Unrealized holding losses on securities
available for sale arising during the period
(net tax benefit of $30,000) -- -- -- (46,000) (46,000)
------------
Total comprehensive income, net of tax 1,669,000
----------------------------------------------------------------------------
Balance -- June 30, 2003 2,991,832 $15,464,000 $ 9,919,000 $ 113,000 $ 25,496,000
============================================================================
For the Period Ended June 30, 2002
-------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Treasury Stock Retained Income,
Shares Amount Shares Amount Earnings Net Total
-------------------------------------------------------------------------------------------
Balance -- December 31, 2001 2,743,847 $ 12,638,000 -- $ -- $ 7,886,000 $ 29,000 $ 20,553,000
Dividends Paid -- -- -- -- (331,000) -- (331,000)
Treasury Stock (8,832) (164,000) (164,000)
Common stock issued under stock plans 19,999 234,000 411 8,000 -- -- 242,000
Exercise of stock options 45,230 318,000 318,000
Comprehensive income:
Net income for the six months
ended June 30, 2002 -- -- -- -- 1,489,000 -- 1,489,000
Unrealized holding gains on
securities available for sale
arising during the period
(net tax of $58,000) -- -- -- -- -- 93,000 93,000
------------
Total comprehensive income, net of tax 1,582,000
-------------------------------------------------------------------------------------------
Balance -- June 30, 2002 2,809,076 $ 13,190,000 (8,421) $ (156,000) $ 9,044,000 $ 122,000 $ 22,200,000
===========================================================================================
Share data has been restated to reflect a 5% stock dividend paid November, 2002
and a 3 for 2 stock split paid July 1, 2003.
See notes to unaudited consolidated financial statements.
5
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Certain information and footnote disclosures normally included in the unaudited
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2002.
Principles of consolidation
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, (the "Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank (the "Bank"). The Bank includes its wholly owned
subsidiary, Stewardship Investment Corp. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Certain prior period amounts have been reclassified to conform to the current
presentation. The consolidated financial statements of the Corporation have been
prepared in conformity with accounting principles generally accepted in the
United States of America. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the statements of financial condition
and revenues and expenses during the reporting periods. 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. Management
believes that the allowance for loan losses is adequate. 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.
Stock-Based Compensation
The Corporation has two stock-based employee compensation plans and two director
compensation plans. The Corporation accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
6
Six Months Ended Three Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------------------- ----------------------
Net Income:
Net income as reported $1,715,000 $1,489,000 $ 862,000 $ 784,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (29,000) (15,000) (14,000) (11,000)
---------- ---------- --------- ---------
Pro forma net income $1,686,000 $1,474,000 $ 848,000 $ 773,000
========== ========== ========= =========
Earnings per share:
As reported Basic earnings per share $ 0.58 $ 0.51 $ 0.29 $ 0.27
As reported Diluted earnings per share 0.57 0.51 0.29 0.27
Pro forma Basic earnings per share 0.57 0.51 0.28 0.26
Pro forma Diluted earnings per share 0.56 0.50 0.28 0.26
Note 2. Basis of presentation
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-Q and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary for a fair
presentation of the consolidated financial statements, have been included. The
results of operations for the three months and six months ended June 30, 2003
are not necessarily indicative of the results which may be expected for the
entire year.
7
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 3. Securities Available for Sale
The following table sets forth the amortized cost and carrying value of
the Corporation's securities available for sale as of June 30, 2003 and December
31, 2002. In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
securities available for sale are carried at estimated fair value.
June 30, 2003
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
--------------------------------------------------------
U.S. Treasury securities $ 505,000 $ 2,000 $ -- $ 507,000
U.S. Government agencies 7,348,000 34,000 -- 7,382,000
Obligations of state and political
subdivisions 929,000 19,000 -- 948,000
Mortgage-backed securities 6,644,000 128,000 -- 6,772,000
--------------------------------------------------------
$15,426,000 $183,000 $ -- $15,609,000
========================================================
December 31, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
--------------------------------------------------------
U.S. Government agencies 2,706,000 27,000 -- 2,733,000
Obligations of state and political
subdivisions 797,000 24,000 -- 821,000
Mortgage-backed securities 9,050,000 208,000 -- 9,258,000
--------------------------------------------------------
$12,553,000 $259,000 $ -- $12,812,000
========================================================
Note 4. Securities Held to Maturity
The following table sets forth the carrying value and estimated fair value
of the Corporation's securities held to maturity as June 30, 2003 and December
31, 2002. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
June 30, 2003
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------------------------------------------------------
U.S. Treasury securities $ 1,012,000 $ 91,000 $ -- $ 1,103,000
U.S. Government agencies 12,945,000 203,000 -- 13,148,000
Obligations of state and political
subdivisions 19,112,000 966,000 -- 20,078,000
Mortgage-backed securities 22,362,000 448,000 1,000 22,809,000
----------------------------------------------------------
$55,431,000 $1,708,000 $ 1,000 $57,138,000
==========================================================
December 31, 2002
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------------------------------------------------------
U.S. Treasury securities $ 1,514,000 $ 70,000 $ -- $ 1,584,000
U.S. Government agencies 13,125,000 182,000 13,307,000
Obligations of state and political
subdivisions 20,060,000 712,000 -- 20,772,000
Mortgage-backed securities 26,188,000 462,000 40,000 26,610,000
----------------------------------------------------------
$60,887,000 $1,426,000 $ 40,000 $62,273,000
==========================================================
8
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 5. Loans
The Corporation's primary market area for lending is the small and medium
sized business and professional community, as well as the individuals residing,
working and shopping in Bergen, Passaic and Morris counties, New Jersey. The
following table set forth the composition of loans as of the periods indicated.
June 30, December 31,
2003 2002
----------------------------------
Mortgage
Residential $ 40,602,000 $ 39,705,000
Commercial 99,495,000 88,593,000
Commercial 40,639,000 38,228,000
Equity 14,674,000 12,471,000
Installment 40,165,000 37,293,000
Other 620,000 241,000
----------------------------------
Total loans 236,195,000 216,531,000
----------------------------------
Less: Deferred loan fees 300,000 263,000
Allowance for loan losses 2,885,000 2,689,000
----------------------------------
3,185,000 2,952,000
----------------------------------
Loans, net $ 233,010,000 $ 213,579,000
==================================
Note 6. Allowance for loan losses
Six Months Ended June 30,
2003 2002
----------------------------------
Balance, beginning of period $ 2,689,000 $ 2,602,000
Provision charged to operations 225,000 70,000
Recoveries of loans charged off -- 9,000
Loans charged off (29,000) (18,000)
----------------------------------
Balance, end of period $ 2,885,000 $ 2,663,000
==================================
9
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 7. Loan Impairment
The Corporation has defined the population of impaired loans to include all
nonaccrual loans, loans more than 90 days past due and restructured loans. The
following table sets forth information regarding the impaired loans as of the
periods indicated.
June 30, December 31,
2003 2002
-------------------------
Impaired loans
With related allowance for loan losses $1,066,000 $ 499,000
Without related allowance for loan losses 192,000 848,000
---------- ----------
Total impaired loans $1,258,000 $1,347,000
========== ==========
Related allowance for loan losses $ 208,000 $ 189,000
========== ==========
10
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 8. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued. Potential dilutive securities totaled 30,555
and 24,384 shares for the six months ended June 30, 2003 and 2002, respectively.
All share and per share amounts have been restated to reflect a 5% stock
dividend paid November 15, 2002 and a 3 for 2 stock split that occurred on July
1, 2003.
Note 9. Comprehensive Income
Total comprehensive income includes net income and other comprehensive income
which is comprised of unrealized holding gains and losses on securities
available for sale, net of taxes. The Corporation's total comprehensive income
for the six months ended June 30, 2003 and 2002 was $1.7 million and $1.6
million, respectively. The difference between the Corporation's net income and
total comprehensive income for these periods relates to the change in the net
unrealized holding gains and losses on securities available for sale during the
applicable period of time.
Note 10. Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
("SFAS No. 150") was issued in May 2003. SFAS No. 150 requires instruments
within its scope to be classified as a liability (or, in some cases, as an
asset). SFAS No. 150 is generally effective for financial instruments entered
into or modified after May 31,2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003 (i.e. July 1, 2003 for
calendar year entities). For financial instruments created before June 1, 2003
and still existing at the beginning of the interim period of adoption,
transition generally should be applied by reporting the cumulative effect of a
change in an accounting principle by initially measuring the financial
instruments at fair value or other measurement attributes of the Statement. The
adoption of SFAS No. 150 did not have a significant effect on the Corporation's
consolidated financial statements.
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," ("SFAS No. 149") was issued
on April
11
30, 2003. The statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
adoption of this Statement is not expected to have a significant effect on the
Corporation's consolidated financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," was
issued in January, 2003. The interpretation provides guidance on the
identification of entities controlled through means other than voting rights.
The Interpretation specifies how a business enterprise should evaluate its
interests in a variable interest entity to determine whether to consolidate that
entity. A variable interest entity must be consolidated by its primary
beneficiary if the entity does not effectively disperse risks among the parties
involved. The adoption of the interpretation did not have a significant effect
on the Corporation's consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 addresses disclosures to
be made by a guarantor in its financial statements about its obligations under
guarantees. The Corporation met the disclosure requirements as required by FIN
45. The interpretation also requires the recognition, at estimated fair value,
of a liability by the guarantor at the inception of certain guarantees issued or
modified after December 31, 2002. This recognition requirement did not have a
material impact on the Corporation's consolidated financial statements.
12
Stewardship Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-Q contains certain "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, and may be identified
by the use of such words as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential." Examples of forward looking statements
include, but are not limited to, estimates with respect to the financial
condition, results of operations and business of the Corporation that are
subject to various factors which could cause actual results to differ materially
from these estimates. These factors include: changes in general, economic, and
market conditions, legislative and regulatory conditions, or the development of
an interest rate environment that adversely affects the Corporation's interest
rate spread or other income anticipated from operations and investments. As used
in this Form 10-Q, "we" and "us" and "our" refer to Stewardship Financial
Corporation and its consolidated subsidiary, Atlantic Stewardship Bank,
depending on the context.
Critical Accounting Policies and Estimates
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," as well as disclosures found elsewhere in this Form 10-Q, are based
upon the Corporation's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Corporation to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. Note 1 to the Corporation's
Audited Consolidated Financial Statements for the year ended December 31, 2002
included in our Annual Report on Form 10-KSB for the year ended December 31,
2002, as supplemented by this report, contains a summary of the Corporation's
significant accounting policies. Management believes the Corporation's policy
with respect to the methodology for the determination of the allowance for loan
losses involves a higher degree of complexity and requires management to make
difficult and subjective judgments which often require assumptions or estimates
about highly uncertain matters. Changes in these judgments, assumptions or
estimates could materially impact results of operations. This critical policy
and its application are periodically reviewed the Audit Committee and the
Board of Directors.
The allowance for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's allowance
for loan losses. Such agencies may require the Corporation to make additional
provisions for loan losses based upon information available to them at the time
of their
13
examination. Furthermore, the majority of the Corporation's loans are secured by
real estate in the State of New Jersey. Accordingly, the collectibility of a
substantial portion of the carrying value of the Corporation's loan portfolio is
susceptible to changes in local market conditions and may be adversely affected
should real estate values decline or the northern New Jersey area experience an
adverse economic shock. Future adjustments to the allowance for loan losses may
be necessary due to economic, operating, regulatory and other conditions beyond
the Corporation's control.
Financial Condition
Total assets increased by $25.7 million, or 7.8%, from $331.1 million at
December 31, 2002 to $356.8 million at June 30, 2003. Net loans increased $19.4
million, cash and cash equivalents increased $9.5 million and securities
available for sale increased $2.8 million, offset by decreases of $5.5 million
in securities held to maturity. The composition of the loan portfolio is
basically unchanged at June 30, 2003 when compared with the portfolio at
December 31, 2002.
Total deposits totaled $324.4 million at June 30, 2003, an increase of $21.6
million, or 7.1%, from $302.7 million at December 31, 2002. Interest-bearing
deposits increased $19.0 million, or 8.1%, to $252.3 million at June 30, 2003
and noninterest-bearing deposits increased $2.7 million, or 3.8%, to $72.0
million at June 30, 2003. The net increase in deposits can be attributed to the
continued return of customers to banking products from stock related products.
The Corporation's main focus during the first six months was to redeploy
principal repayments, maturities, and calls on securities available for sale.
The Corporation continues to enhance the product line of the Bank. Management
developed an escrow product during the first quarter of 2003 which provides for
tracking and accounting for transactions on a subaccount basis. Management
completed a conversion to check imaging which provides customers with images of
paid checks instead of returning original checks. In addition to creating an
efficient research system, the imaging system was integrated into our Online
Banking system in June 2003. This provides online customers access to images of
paid checks simply by clicking on the detail of their online transaction
statement. Management believes that these new products continue to enhance the
delivery channels and products being offered to existing and new customers.
Results of Operations
Six Months Ended June 30, 2003 and 2002
General
The Corporation reported net income of $1.7 million, or $0.57 diluted earnings
per share for the six months ended June 30, 2003, compared to $1.5 million, or
$0.51 diluted earnings per share for the same period in 2002. The $226,000
increase was primarily caused by increases in net interest income and
noninterest income, partially offset by increases in noninterest expense and an
increase in the provision for loan loss.
14
Net interest income
Net interest income increased $865,000, or 14.4%, for the six months ended June
30, 2003 as compared with the corresponding period in 2002. The increase was
primarily due to an increase in average net interest-earning assets, partially
offset by a decrease in the net interest margin.
Total interest income on a tax equivalent basis increased $603,000, or 6.9%,
primarily due to an increase in the average earning assets, offset by a decrease
in yields on interest-earning assets. Due to the low interest rate environment
experienced since the fourth quarter of 2001, tax equivalent yields on interest
earning assets continued to fall 77 basis points from 6.61% for the six months
ended June 30, 2002 to 5.84% for the same period in 2003. The average balance on
interest-earning assets increased $56.1 million, or 20.9%, from $268.5 million
for the six months ended June 30, 2002 to $324.6 million for the same period in
2003, primarily caused by an increase to the Corporation's average deposit base.
The Corporation continued to experience an increase in loan demand which caused
loans on average to increase $39.0 million to an average $232.1 million for the
six months ended June 30, 2003, from an average $193.1 million for the
comparable period in 2002. The Corporation also increased its investment
portfolio $15.8 million to an average $71.6 million at June 30, 2003.
Interest paid on deposits and borrowed money decreased by $269,000, or 10.3%,
due primarily to a decrease in cost of funds related to the general low interest
rate environment. The average balance of total interest-bearing deposits
increased to $247.6 million for the six months ended June 30, 2003 from $205.0
million for the comparable 2002 period, primarily as a result of the
Corporation's expanding customer base and the overall flight to quality with
investors seeking safe investment alternatives to the stock market. Yields on
deposits and borrowed money decreased from 2.58% for the six month period ended
June 30, 2002 to 1.92% for the comparable period in 2003.
15
Analysis of Net Interest Income (Unaudited)
For the Six Months Ended June 30,
2003 2002
--------------------------------- ---------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) $ 232,072 $7,870 6.84% $ 193,059 $7,146 7.46%
Taxable investment securities (1) 51,434 890 3.49 36,755 964 5.29
Tax-exempt investment securities (1) (2) 20,185 528 5.27 19,102 531 5.61
Other interest-earning assets 20,924 109 1.05 19,609 156 1.60
--------- ------ --------- ------
Total interest-earning assets 324,615 9,397 5.84 268,525 8,797 6.61
------ ------
Non-interest-earning assets:
Allowance for loan losses (2,789) (2,639)
Other assets 20,729 18,907
--------- ---------
Total assets $ 342,555 $ 284,793
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 109,394 $ 602 1.11% $ 93,220 $ 622 1.35%
Savings deposits 39,909 167 0.84 28,673 145 1.02
Time deposits 94,322 1,552 3.32 82,387 1,844 4.51
Borrowing 3,928 34 1.75 694 13 3.78
--------- ------ --------- ------
Total interest-bearing liabilities 247,553 2,355 1.92 204,974 2,624 2.58
------ ------
Non-interest-bearing liabilities:
Demand deposits 68,198 56,650
Other liabilities 1,988 1,758
Stockholders' equity 24,816 21,411
--------- ---------
Total liabilities and stockholders' equity $ 342,555 $ 284,793
========= =========
Net interest income (taxable equivalent basis) $7,042 $6,173
====== ======
Net interest spread (taxable equivalent basis) 3.92% 4.02%
==== ====
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.37% 4.64%
==== ====
- ----------
(1) For purpose of these calculations, nonaccruing loans are included in
the average balance. Fees are included in loan interest. Loans and
total interest-earning assets are net of unearned income. Securities
are included at amortized cost.
(2) The tax equivalent adjustments are based on a marginal tax rate of
34% and the provisions of Section 291 of the Internal Revenue Code.
(3) Net interest income (taxable equivalent basis) divided by average
interest-earning assets.
2003 2002
(Dollars in thousands)
Reconciliation of net interest
income (tax equivalent basis):
Net interest income 6,881 6,016
Tax equivalent basis adjustment 161 157
----- -----
Net interest income (tax equivalent basis) 7,042 6,173
===== =====
Provision for loan losses
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and ultimate losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $225,000 and $70,000 during the six
months ended June 30, 2003 and 2002, respectively. The increase in the provision
was primarily due to the strong growth in loans experience during the first six
months of 2003. See "Asset Quality" section for summary of allowance for loan
losses and nonperforming assets. The Corporation monitors its loan portfolio and
intends to continue to provide for loan loss reserves based on its ongoing
periodic review of the loan portfolio and general market conditions.
16
Noninterest income
Noninterest income increased $345,000, or 30.6%, from $1.1 million for the six
month period ending June 30, 2002 to $1.5 million for the comparable period in
2003. Deposit related fees increased $168,000 due to an increase in the deposit
base and income derived from the merchant credit card processing and debit card
programs. Increases in mortgage activity and the volume of mortgage loans sold
attributed to an increase of $105,000 in the gain on sales of mortgage loans.
During the first quarter of 2003, the Corporation sold a property located in
Hawthorne, New Jersey and realized a profit of $54,000. This property had been
originally purchased in December 2000 as a strategy to improve our branch
facility on Lafayette Avenue, Hawthorne New Jersey. This strategy did not
materialize, the Corporation opened a branch on Goffle Road, Hawthorne New
Jersey, and management found it no longer could utilize the additional property.
Noninterest expense
Noninterest expense increased by approximately $665,000, or 13.8%, to $5.5
million for the six months ended June 30, 2003, compared to $4.8 million for the
same 2002 period. Salaries and employee benefits, the major component of
noninterest expense, increased $342,000, or 15.2%, during the six months ended
June 30, 2003. This increase was due to increases in staffing in the lending
department and deposit and branch operations areas and general increases for
merit and performance. Occupancy and equipment increased $80,000, or 12.5%,
primarily due to the increase in the Corporation's branch facilities. Data
processing expense increased $84,000, or 25.3%, due to the increase in the
Corporation's deposit base, the enhancements to the online banking and bill
payment functions and the implementation of the check imaging upgrade.
Miscellaneous expenses increased $157,000, or 14.4% to provide for the general
growth of the Corporation.
Income taxes
Income tax expense totaled $927,000 for the six months ended June 30, 2003, for
an effective tax rate of 35.1%. For the six months ended June 30, 2002, income
tax expense totaled $763,000, for an effective tax rate of 33.9%.
Results of Operations
Three Months Ended June 30, 2003 and 2002
General
The Corporation reported net income of $862,000, or $0.29 diluted earnings per
share for the three months ended June 30, 2003, compared to $784,000, or $0.27
diluted earnings per share for the same period in 2002. The $78,000 increase was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense and an increase in the
provision for loan loss.
17
Net interest income
Net interest income increased $389,000, or 12.7%, for the three months ended
June 30, 2003 as compared with the corresponding period in 2002. The increase
was primarily due to an increase in average net interest-earning assets,
partially offset by a decrease in the net interest margin.
Total interest income on a tax equivalent basis increased $260,000, or 5.8%,
primarily due to an increase in the average earning assets, offset by a decrease
in the yields on interest-earning assets. Due to the low interest rate
environment experienced since the fourth quarter of 2001, tax equivalent yields
on interest earning assets continued to fall 79 basis points from 6.49% for the
three months ended June 30, 2002 to 5.70% for the same period in 2003. The
average balance on interest-earning assets increased $56.0 million, or 20.3%,
from $275.6 million for the three months ended June 30, 2002 to $331.6 million
for the same period in 2003, primarily caused by an increase to the
Corporation's average deposit base. The Corporation continued to experience an
increase in loan demand which caused loans on average to increase $42.7 million
to an average $237.2 million for the three months ended June 30, 2003, from an
average $194.6 million for the comparable period in 2002. The Corporation also
increased its investment portfolio $11.0 million to an average $70.3 million at
June 30, 2003.
Interest paid on deposits and borrowed money decreased by $131,000, or 10.0%,
due primarily to a decrease in cost of funds related to the general low interest
rate environment. The average balance of total interest-bearing deposits
increased to $252.9 million for the three months ended June 30, 2003 from $210.2
million for the comparable 2002 period, primarily as a result of the
Corporation's expanding customer base. Yields on deposits and borrowed money
decreased from 2.49% for the three month period ended June 30, 2002 to 1.86% for
the comparable period in 2003.
18
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended June 30,
2003 2002
-------------------------------- ---------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) $ 237,229 $3,988 6.74% $ 194,561 $3,591 7.40%
Taxable investment securities (1) 50,385 399 3.18 39,459 502 5.10
Tax-exempt investment securities (1) (2) 19,944 263 5.29 19,875 275 5.55
Other interest-earning assets 24,037 63 1.05 21,699 88 1.63
--------- ------ --------- ------
Total interest-earning assets 331,595 4,713 5.70 275,594 4,456 6.49
------ ------
Non-interest-earning assets:
Allowance for loan losses (2,846) (2,656)
Other assets 20,853 19,100
--------- ---------
Total assets $ 349,602 $ 292,038
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 112,563 $ 308 1.10% $ 94,263 $ 314 1.34%
Savings deposits 41,615 89 0.86 29,985 77 1.03
Time deposits 93,889 757 3.23 85,291 908 4.27
Borrowing 4,865 21 1.73 710 7 3.95
--------- ------ --------- ------
Total interest-bearing liabilities 252,932 1,175 1.86 210,249 1,306 2.49
------ ------
Non-interest-bearing liabilities:
Demand deposits 69,718 58,166
Other liabilities 1,732 1,771
Stockholders' equity 25,220 21,852
--------- ---------
Total liabilities and stockholders' equity $ 349,602 $ 292,038
========= =========
Net interest income (taxable equivalent basis) $3,538 $3,150
====== ======
Net interest spread (taxable equivalent basis) 3.84% 3.99%
==== ====
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.28% 4.58%
==== ====
- ----------
(1) For purpose of these calculations, nonaccruing loans are included in
the average balance. Fees are included in loan interest. Loans and
total interest-earning assets are net of unearned income. Securities
are included at amortized cost.
(2) The tax equivalent adjustments are based on a marginal tax rate of
34% and the provisions of Section 291 of the Internal Revenue Code.
(3) Net interest income (taxable equivalent basis) divided by average
interest-earning assets.
2003 2002
(Dollars in thousands)
Reconciliation of net interest
income (tax equivalent basis):
Net interest income 3,457 3,068
Tax equivalent basis adjustment 81 82
----- -----
Net interest income (tax equivalent basis) 3,538 3,150
===== =====
Provision for loan losses
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and ultimate losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $110,000 and $30,000 during the
three months ended June 30, 2003 and 2002, respectively. The increase in the
provision was due primarily to the continued growth in the loan portfolio. See
"Asset Quality" section for summary of allowance for loan losses and
nonperforming assets. The Corporation monitors its loan portfolio and intends to
continue to provide for loan loss reserves based on its ongoing periodic review
of the loan portfolio and general market conditions.
19
Noninterest income
Noninterest income increased $179,000, or 29.9% from $599,000 for the three
month period ending June 30, 2002 to $778,000 for the comparable period in 2003.
Deposit related fees increased $115,000 due to an increase in the deposit base
and income derived from the merchant credit card processing and debit card
programs. Increases in mortgage activity and the volume of mortgage loans sold
attributed to an increase of $81,000 in the gain on sales of mortgage loans.
Noninterest expense
Noninterest expense increased by approximately $347,000, or 14.2%, to $2.8
million for the three months ended June 30, 2003, compared to $2.4 million for
the same 2002 period. Salaries and employee benefits, the major component of
noninterest expense, increased $190,000, or 17.0%, during the three months ended
June 30, 2003. This increase was due to increases in staffing in the lending
department and deposit and branch operations areas and general increases for
merit and performance. Occupancy and equipment increased $34,000, or 10.5%,
primarily due to the increase in the Corporation's branch facilities. Data
processing expense increased $34,000, or 19.8%, due to the increase in the
Corporatin's deposit base, the enhancements to online banking and bill payment
functions and the implementation of a check imaging upgrade. Miscellaneous
expenses increased $86,000, or 15.2%, primarily caused by increased costs
associated with the general growth of the Corporation.
Income taxes
Income tax expense totaled $469,000 for the three months ended June 30, 2003,
for an effective tax rate of 35.2%. For the three months ended June 30, 2002,
income tax expense totaled $406,000, for an effective tax rate of 34.1%.
20
Asset Quality
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrower's ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
06/30/03 03/31/03 12/31/02 09/30/02
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 407 $ 409 $ 495 $ 231
Loans past due 90 days or more: (2) 19 4 4 20
Restructured loans: 832 854 848 769
------ ------ ------ ------
Total nonperforming loans $1,258 $1,304 $1,347 $1,020
====== ====== ====== ======
Allowance for loan losses $2,885 $2,788 $2,689 $2,693
====== ====== ====== ======
Nonaccrual loans to total loans 0.17% 0.18% 0.23% 0.11%
Nonperforming loans to total loans 0.53% 0.56% 0.62% 0.50%
Nonperforming loans to total assets 0.35% 0.39% 0.41% 0.32%
Allowance for loan losses to total loans 1.22% 1.19% 1.24% 1.32%
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing income
at the contractually stated rates. A determination is made to continue accruing
income on those loans which are sufficiently collateralized and on which
management believes all interest and principal owed will be collected.
There were no loans at June 30, 2003 other than those included in the above
table, where the Corporation was aware of any credit conditions of any borrowers
that would indicate a strong possibility of the borrowers not complying with the
present terms and conditions of repayment and which may result in such loans
being included as non-accrual, past due or restructured at a future date.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey. Accordingly, the collectibility of a
substantial portion of the Corporation's loan portfolio is susceptible to
changes in real estate market conditions in northern New Jersey.
Market Risk
The Corporation's primary exposure to market risk arises from changes in market
interest rates ("interest rate risk"). The Corporation's profitability is
largely dependent upon its ability to manage interest rate risk. Interest rate
risk can be defined as the exposure of the Corporation's net interest income to
adverse movements in interest rates. Although the Corporation manages other
risks, as in credit and liquidity risk, in the normal course of its business,
management considers interest rate risk to be its most significant market risk
and could potentially have the
21
largest material effect on the Corporation's financial condition. The
Corporation manages its interest rate risk by utilizing an asset/liability
simulation model and by measuring and managing its interest sensitivity gap.
Interest sensitivity gap is determined by analyzing the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within the same period of time. The Asset Liability Committee of the Board of
Directors reviews and discusses these measurements on a monthly basis.
The Corporation does not have any material exposure to foreign currency exchange
rate risk or commodity price risk. The Corporation did not enter into any market
sensitive instruments for trading purposes nor did it engage in any hedging
transactions utilizing derivative financial instruments during the six months
ended June 30, 2003.
The Corporation is, however, a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These instruments, which include commitments to extend credit and
standby letters of credit, involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statement of condition. Commitments to extend credit 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 and may require
collateral from the borrower if deemed necessary by the Corporation. Standby
letters of credit are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party up to a stipulated
amount and with specified terms and conditions. Commitments to extend credit and
standby letters of credit are not recorded on the Corporation's consolidated
balance sheet until the instrument is exercised.
Capital Adequacy
The Corporation is subject to capital adequacy guidelines promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The Bank is subject to
similar capital adequacy requirements imposed by the Federal Deposit Insurance
Corporation. The FRB has issued regulations to define the adequacy of capital
based upon the sensitivity of assets and off-balance sheet exposures to risk
factors. Four categories of risk weights (0%, 20%, 50%, and 100%) were
established to be applied to different types of balance sheet assets and
off-balance sheet exposures. The aggregate of the risk weighted items
(risk-based assets) is the denominator of the ratio, the numerator is risk-based
capital. Under the regulations, risk-based capital has been classified into two
categories. Tier 1 capital includes common and qualifying perpetual preferred
stockholders' equity less goodwill. Tier 2 capital includes mandatory
convertible debt, allowance for loan losses, subject to certain limitations, and
certain subordinated and term debt securities. Total qualifying capital consists
of Tier 1 capital and Tier 2 capital; however; the amount of Tier 2 capital may
not exceed the amount of Tier 1 capital. At June 30, 2003, the minimum
risk-based capital requirements to be considered adequately capitalized were 4%
for Tier 1 capital and 8% for total capital.
Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determine by dividing
Tier 1 capital as defined under the risk-based guidelines by average total
assets (non risk-adjusted) for the preceding quarter. At
22
June 30, 2003 the minimum leverage ratio requirement to be considered well
capitalized was 4%. The following table reflects the Corporation's capital
ratios at June 30, 2003.
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 10.60% 6.60%
Total 8.00% 11.81% 3.81%
Leverage Ratio 4.00% 7.19% 3.19%
Liquidity and Capital Resources
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
are a relatively predictable source of funds, deposit flow and prepayments on
loans and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition. The Corporation's liquidity,
represented by cash and cash equivalents, is a product of its operating,
investing and financing activities.
The primary source of cash from operating activities is net income. Liquidity
management is both a daily and long-term function of business management. Excess
liquidity is generally invested in short-term investments, such as federal funds
sold. The Corporation anticipates that it will have sufficient funds available
to meet its current loan commitments. At June 30, 2003, the Corporation has
outstanding loan commitments of $56.2 million and unused lines and letters of
credit totaling $32.4 million. Certificates of deposit scheduled to mature in
one year or less, at June 30, 2003, totaled $52.2 million. Management believes
that a significant portion of such deposits will remain with the Corporation.
Cash and cash equivalents increased $9.5 million during the first six months of
2003. Operating activities and financing activities provided $3.0 million and
$24.1 million, respectively. Investing activities amounting to $17.6 million
offset these amounts.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure about quantitative and qualitative market risk is located in the
Market Risk section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
23
ITEM 4. Controls and Procedures
The Corporation's Management, with the participation of the Corporation's Chief
Executive Officer and principal Accounting Officer, has evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of June
30, 2003. Based on this evaluation, the Corporation's Chief Executive Officer
and principal Accounting Officer concluded that the Corporation disclosure
controls and procedures are effective for recording, processing, summarizing and
reporting the information the Corporation is required to disclose in the reports
it files under the Securities Exchange Act of 1934, within the time periods
specified in the SEC's rules and forms. Such evaluation did not identify any
change in the Corporation's internal control over financial reporting that
occurred during the quarter ended June 30, 2000 that has materially affected, or
is reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
24
Stewardship Financial Corporation
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Corporation held an Annual Meeting of Shareholders on May 13, 2003. At
that meeting, the Corporation's shareholders elected three directors for a three
year term that will expire in May 2006, or until their successors are duly
elected and qualified. The voting results were as follows:
Votes For Votes Withheld
--------- --------------
Election of Director
Robert J. Turner 1,587,439 -
William J. Vander Eems 1,587,202 236
Paul Van Ostenbridge 1,587,439 -
There were no broker non-votes on any of the above matters. The following
individuals whose terms expire in either 2004 or 2005, or until their successors
are duly elected and qualified, continue to serve as directors: William Almroth,
Harold Dyer, Abe Van Wingerden, William C. Hanse, Margo Lane, Arie Leegwater and
John L. Steen.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
(1) On April 23, 2003, the Corporation filed a current
report on Form 8-K , attaching a press release reporting
results for the quarter ended March 31, 2003.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Stewardship Financial Corporation
Date: August 14, 2003 By:
---------------- ---------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
(authorized officer on behalf
of registrant)
Date: August 14, 2003 By:
---------------- ---------------------------------
Julie E. Holland
Vice President and Treasurer
(principal accounting officer)
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
99.1 Exhibit 31.1 -- Certification of Paul Van Ostenbridge required by Rule
13a-14(a) or Rule 15d-14(a)
99.2 Exhibit 31.2 -- Certification of Julie Holland required by Rule 13a-14(a)
or Rule 15d-14(a)
99.3 Exhibit 32.1 -- Certification of Paul Van Ostenbridge and Julie Holland
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350