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 September 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 a 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 November 12, 2003 was 3,005,418.
Stewardship Financial Corporation
INDEX
PAGE
NUMBER
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at September 30, 2003 (Unaudited) and December 31, 2002 ..... 1
Consolidated Statements of Income for the Nine
Months ended September 30, 2003 and 2002 (Unaudited) ........ 2
Consolidated Statements of Income for the Three
Months ended September 30, 2003 and 2002 (Unaudited) ........ 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2003 and 2002 (Unaudited) ........ 4
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended September 30, 2003 and
September 30, 2002 (Unaudited) .............................. 5
Notes to Consolidated Financial Statements (Unaudited) ...... 6 - 14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................. 15 - 25
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK .......................................... 25
ITEM 4 - CONTROLS AND PROCEDURES ..................................... 25 - 26
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS................... 27
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ............................ 27
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
September 30, December 31,
2003 2002
---------------------------------
(Unaudited)
Assets
Cash and due from banks $ 16,783,000 $ 14,039,000
Other interest-earning assets 596,000 9,854,000
Federal funds sold 9,150,000 9,525,000
---------------------------------
Cash and cash equivalents 26,529,000 33,418,000
Securities available for sale 35,511,000 12,812,000
Securities held to maturity; estimated fair value
of $54,764,000 (2003) and $62,273,000 (2002) 53,641,000 60,887,000
FHLB-NY stock, at cost 1,322,000 1,059,000
Loans, net of allowance for loan losses of
of $2,791,000 (2003) and $2,689,000 (2002) 249,696,000 213,579,000
Mortgage loans held for sale 863,000 2,099,000
Premises and equipment, net 3,409,000 3,733,000
Accrued interest receivable 1,704,000 1,640,000
Intangible assets, net of accumulated amortization of
$518,000 (2003) and $486,000 (2002) 231,000 264,000
Other assets 2,527,000 1,596,000
---------------------------------
Total assets $ 375,433,000 $ 331,087,000
=================================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 78,938,000 $ 69,344,000
Interest-bearing 257,171,000 233,391,000
---------------------------------
Total deposits 336,109,000 302,735,000
Securities sold under agreements to repurchase 4,139,000 2,435,000
Trust preferred securities 7,000,000 --
Accrued expenses and other liabilities 2,081,000 2,100,000
---------------------------------
Total liabilities 349,329,000 307,270,000
---------------------------------
Commitments and contingencies -- --
Stockholders' equity
Common stock, no par value; 5,000,000 shares authorized;
3,151,979 and 1,975,437 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively 19,079,000 15,058,000
Retained earnings 7,152,000 8,600,000
Accumulated other comprehensive (loss) income (127,000) 159,000
---------------------------------
Total stockholders' equity 26,104,000 23,817,000
---------------------------------
Total liabilities and stockholders' equity $ 375,433,000 $ 331,087,000
=================================
See notes to unaudited consolidated financial statements.
1
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
2003 2002
--------------------------------
Interest income:
Loans $ 11,931,000 $ 10,908,000
Securities held to maturity
Taxable 968,000 998,000
Non-taxable 526,000 534,000
Securities available for sale 361,000 496,000
Other interest-earning assets 155,000 271,000
--------------------------------
Total interest income 13,941,000 13,207,000
--------------------------------
Interest expense:
Deposits 3,359,000 3,929,000
Borrowed money 66,000 19,000
--------------------------------
Total interest expense 3,425,000 3,948,000
--------------------------------
Net interest income before provision for loan losses 10,516,000 9,259,000
Provision for loan losses 315,000 100,000
--------------------------------
Net interest income after provision for loan losses 10,201,000 9,159,000
--------------------------------
Noninterest income:
Fees and service charges 1,563,000 1,296,000
Gain on sales of mortgage loans 402,000 191,000
Miscellaneous 286,000 175,000
--------------------------------
Total noninterest income 2,251,000 1,662,000
--------------------------------
Noninterest expenses:
Salaries and employee benefits 3,990,000 3,426,000
Occupancy, net 537,000 491,000
Equipment 544,000 477,000
Data processing 667,000 498,000
Advertising 197,000 188,000
FDIC insurance premium 36,000 32,000
Amortization of intangible assets 32,000 34,000
Charitable contributions 351,000 327,000
Stationery and supplies 171,000 175,000
Miscellaneous 1,898,000 1,631,000
--------------------------------
Total noninterest expenses 8,423,000 7,279,000
--------------------------------
Income before income tax expense 4,029,000 3,542,000
Income tax expense 1,419,000 1,217,000
--------------------------------
Net income $ 2,610,000 $ 2,325,000
================================
Basic earnings per share $ 0.83 $ 0.76
================================
Diluted earnings per share $ 0.82 $ 0.75
================================
Weighted average number of common shares outstanding 3,134,131 3,066,623
================================
Weighted average number of diluted common
shares outstanding 3,173,463 3,092,527
================================
Share data has been restated to reflect a 3 for 2 stock split
that occured on July 1, 2003 and a 5% stock dividend declared
September 16, 2003 and payable November 15, 2003.
See notes to unaudited consolidated financial statements.
2
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three Months Ended
September 30,
------------------------------
2003 2002
------------------------------
Interest income:
Loans $ 4,061,000 $ 3,762,000
Securities held to maturity
Taxable 247,000 360,000
Non-taxable 172,000 183,000
Securities available for sale 179,000 147,000
Other interest-earning assets 46,000 115,000
------------------------------
Total interest income 4,705,000 4,567,000
------------------------------
Interest expense:
Deposits 1,038,000 1,318,000
Borrowed money 32,000 6,000
------------------------------
Total interest expense 1,070,000 1,324,000
------------------------------
Net interest income before provision for loan losses 3,635,000 3,243,000
Provision for loan losses 90,000 30,000
------------------------------
Net interest income after provision for loan losses 3,545,000 3,213,000
------------------------------
Noninterest income:
Fees and service charges 536,000 437,000
Gain on sales of mortgage loans 164,000 58,000
Miscellaneous 77,000 38,000
------------------------------
Total noninterest income 777,000 533,000
------------------------------
Noninterest expenses:
Salaries and employee benefits 1,393,000 1,171,000
Occupancy, net 181,000 163,000
Equipment 179,000 164,000
Data processing 251,000 166,000
Advertising 72,000 51,000
FDIC insurance premium 12,000 11,000
Amortization of intangible assets 11,000 11,000
Charitable contributions 117,000 120,000
Stationery and supplies 69,000 59,000
Miscellaneous 650,000 540,000
------------------------------
Total noninterest expenses 2,935,000 2,456,000
------------------------------
Income before income tax expense 1,387,000 1,290,000
Income tax expense 492,000 454,000
------------------------------
Net income $ 895,000 $ 836,000
==============================
Basic earnings per share $ 0.28 $ 0.27
==============================
Diluted earnings per share $ 0.28 $ 0.27
==============================
Weighted average number of common shares outstanding 3,147,443 3,092,036
==============================
Weighted average number of diluted common
shares outstanding 3,197,693 3,118,138
==============================
Share data has been restated to reflect a 3 for 2 stock split that occured on
July 1, 2003 and a 5% stock dividend declared September 16, 2003 and
payable November 15, 2003.
See notes to unaudited consolidated financial statements.
3
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-----------------------------------
2003 2002
-----------------------------------
Cash flows from operating activities:
Net income $ 2,610,000 $ 2,325,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 499,000 421,000
Amortization of premiums and accretion of discounts, net 637,000 229,000
Accretion of deferred loan fees (126,000) (35,000)
Provision for loan losses 315,000 100,000
Originations of mortgage loans held for sale (32,317,000) (16,986,000)
Proceeds from sale of mortgage loans 33,955,000 19,151,000
Gain on sale of mortgage loans held for sale (402,000) (191,000)
Gain on sale of fixed assets (54,000) --
Gain on sale of securities available for sale (49,000) --
Deferred income tax benefit (63,000) (154,000)
Amortization of intangibles 32,000 34,000
Increase in accrued interest receivable (64,000) (99,000)
(Increase) decrease in other assets (599,000) 57,000
(Decrease) increase in other liabilities (18,000) 291,000
-----------------------------------
Net cash provided by operating activities 4,356,000 5,143,000
-----------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (31,643,000) (3,208,000)
Proceeds from maturities and principal repayments
on securities available for sale 4,138,000 2,344,000
Proceeds from calls and sales of securities available for sale 4,271,000 2,903,000
Purchase of securities held to maturity (21,027,000) (27,318,000)
Proceeds from maturities and principal repayments
on securities held to maturity 14,374,000 4,600,000
Proceeds from call on securities held to maturity 13,375,000 6,630,000
Purchase of FHLB-NY stock (263,000) (173,000)
Net increase in loans (36,306,000) (18,297,000)
Sales of premises and equipment 227,000 19,000
Additions to premises and equipment (350,000) (321,000)
-----------------------------------
Net cash used in investing activities (53,204,000) (32,821,000)
-----------------------------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits 9,594,000 6,444,000
Net increase in interest-bearing deposits 23,779,000 33,326,000
Net increase in securities sold under agreements
to repurchase 1,704,000 576,000
Issuance of Trust Preferred Securities 7,000,000 --
Purchase of treasury stock -- (164,000)
Cash dividends paid on common stock (606,000) (499,000)
Options exercised 59,000 344,000
Common stock issued under stock plans 429,000 369,000
-----------------------------------
Net cash provided by financing activities 41,959,000 40,396,000
-----------------------------------
Net (decrease) increase in cash and cash equivalents (6,889,000) 12,718,000
Cash and cash equivalents - beginning 33,418,000 34,074,000
-----------------------------------
Cash and cash equivalents - ending $ 26,529,000 $ 46,792,000
===================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 3,560,000 $ 3,700,000
Cash paid during the year for income taxes 1,482,000 1,351,000
See notes to unaudited consolidated financial statements.
4
Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
For the Nine Months Ended September 30, 2003
-----------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Retained Income,
Shares Amount Earnings Net Total
-----------------------------------------------------------------------
Balance -- December 31, 2002 1,975,437 $ 15,058,000 $ 8,600,000 $ 159,000 $ 23,817,000
Dividends paid -- -- (606,000) -- (606,000)
Stock split - 3 for 2 997,129 -- -- -- --
5% stock dividend (payable
November 15, 2003) 150,094 3,452,000 (3,452,000) -- --
Common stock issued under stock plans 23,863 429,000 -- -- 429,000
Exercise of stock options 5,456 59,000 -- -- 59,000
Tax Benefit - exercise of stock options -- 81,000 -- -- 81,000
Comprehensive income:
Net income for the nine months
ended September 30, 2003 -- -- 2,610,000 -- 2,610,000
Unrealized holding losses on
securities available for sale
arising during the period
(net tax benefit of $184,000) -- -- -- (286,000) (286,000)
------------
Total comprehensive income, net of tax 2,324,000
-----------------------------------------------------------------------
Balance -- September 30, 2003 3,151,979 $ 19,079,000 $ 7,152,000 $ (127,000) $ 26,104,000
=======================================================================
For the Nine Months Ended September 30, 2002
--------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Treasury Stock Retained Income,
Shares Amount Shares Amount Earnings Net Total
--------------------------------------------------------------------------------------------
Balance -- December 31, 2001 1,829,231 $ 12,638,000 -- $ -- $ 7,886,000 $ 29,000 $ 20,553,000
Dividends paid -- -- -- -- (499,000) -- (499,000)
Treasury stock (8,832) (164,000) (164,000)
5% stock dividend (payable
November 15, 2002) 93,730 1,734,000 (56) (1,000) (1,733,000) --
Common stock issued under stock plans 13,333 234,000 7,723 135,000 -- -- 369,000
Exercise of stock options 32,035 344,000 344,000
Comprehensive income:
Net income for the nine months
ended September 30, 2002 -- -- -- -- 2,325,000 -- 2,325,000
Unrealized holding gains on
securities available for sale
arising during the period
(net tax of $83,000) -- -- -- -- -- 130,000 130,000
------------
Total comprehensive income, net of tax 2,455,000
--------------------------------------------------------------------------------------------
Balance -- September 30, 2002 1,968,329 $ 14,950,000 (1,165) $ (30,000) $ 7,979,000 $ 159,000 $ 23,058,000
============================================================================================
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
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
------------------------------ ----------------------------
Net Income:
Net income as reported $ 2,610,000 $ 2,325,000 $ 895,000 $ 836,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (43,000) (29,000) (15,000) (15,000)
------------- ------------- ------------- -------------
Pro forma net income $ 2,567,000 $ 2,296,000 $ 880,000 $ 821,000
============= ============= ============= =============
Earnings per share:
As reported Basic earnings per share $ 0.83 $ 0.76 $ 0.28 $ 0.27
As reported Diluted earnings per share 0.82 0.75 0.28 0.27
Pro forma Basic earnings per share 0.82 0.75 0.28 0.27
Pro forma Diluted earnings per share 0.81 0.74 0.28 0.26
The fair value of options granted for employees and directors is estimated on
the date of the grant using the Black-Scholes option pricing model with the
following assumptions used:
Directors Employee Employee Employee Employee
Stock Options Stock Options Stock Options Stock Options Stock Options
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------
Dividend yield 1.62% 1.57% 1.25% 1.12% 1.15%
Expected volatility 39.76% 20.27% 23.63% 16.24% 14.07%
Risk-free interest rate 5.07% 5.16% 6.65% 5.58% 6.64%
Expected Life 7 years 7 years 7 years 7 years 7 years
Fair value at grant date $ 4.04 $ 2.96 $ 3.46 $ 2.03 $ 1.92
7
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 nine months ended September 30,
2003 are not necessarily indicative of the results which may be expected for the
entire year. All share and per share amounts have been restated for stock splits
and stock dividends.
8
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 September 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.
September 30, 2003
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-----------------------------------------------------------------------
U.S. Treasury securities $ 505,000 $ -- $ 5,000 $ 500,000
U.S. Government agencies 17,024,000 29,000 94,000 16,959,000
Obligations of state and political
subdivisions 1,163,000 15,000 5,000 1,173,000
Mortgage-backed securities 17,031,000 62,000 214,000 16,879,000
-----------------------------------------------------------------------
$35,723,000 $106,000 $ 318,000 $35,511,000
=======================================================================
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 September 30, 2003 and
December 31, 2002. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
September 30, 2003
-------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------------------------------------------------------------------------
U.S. Treasury securities $ 1,012,000 $ 60,000 $ -- $ 1,072,000
U.S. Government agencies 13,123,000 106,000 23,000 13,206,000
Obligations of state and political
subdivisions 19,600,000 281,000 58,000 19,823,000
Mortgage-backed securities 19,906,000 757,000 -- 20,663,000
-------------------------------------------------------------------------
$53,641,000 $1,204,000 $ 81,000 $54,764,000
=========================================================================
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
=========================================================================
9
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.
September 30, December 31,
2003 2002
----------------------------------------
Mortgage
Residential $ 43,805,000 $ 39,705,000
Commercial 106,195,000 88,593,000
Commercial 43,903,000 38,228,000
Equity 16,673,000 12,471,000
Installment 42,009,000 37,293,000
Other 221,000 241,000
----------------------------------------
Total loans 252,806,000 216,531,000
----------------------------------------
Less: Deferred loan fees 319,000 263,000
Allowance for loan losses 2,791,000 2,689,000
----------------------------------------
3,110,000 2,952,000
----------------------------------------
Loans, net $ 249,696,000 $ 213,579,000
========================================
Note 6. Allowance for loan losses
Nine Months Ended September 30,
2003 2002
----------------------------------------
Balance, beginning of period $ 2,689,000 $ 2,602,000
Provision charged to operations 315,000 100,000
Recoveries of loans charged off -- 9,000
Loans charged off (213,000) (18,000)
----------------------------------------
Balance, end of period $ 2,791,000 $ 2,693,000
========================================
10
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.
September 30, December 31,
2003 2002
------------- ------------
Impaired loans
With related allowance for loan losses $ 906,000 $ 499,000
Without related allowance for loan losses 202,000 848,000
------------ ------------
Total impaired loans $ 1,108,000 $ 1,347,000
============ ============
Related allowance for loan losses $ 70,000 $ 189,000
============ ============
11
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.
The following is a reconciliation of the calculation of basic and diluted
earnings per share.
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 895 $ 836 $2,610 $2,325
Weighted average shares 3,147 3,092 3,134 3,067
Effect of dilutive stock options 51 26 39 26
------ ------ ------ ------
Total weighted average dilutive shares 3,198 3,118 3,173 3,093
Basic earnings per share $ 0.28 $ 0.27 $ 0.83 $ 0.76
Diluted earnings per share $ 0.28 $ 0.27 $ 0.82 $ 0.75
All share and per share amounts have been restated to reflect a 5% stock
dividend payable November 15, 2003 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 nine months ended September 30, 2003 and 2002 was $2.3 million and $2.5
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
12
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 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 did not have a significant effect on the
Corporation's consolidated financial statements.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN
46") was issued in January 2003. FIN 46 applies immediately to enterprises that
hold a variable interest in variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003 to enterprises that hold a variable interest in variable interest
entities created before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period, and it applies
to nonpublic enterprises no later than the end of the applicable annual period.
FIN 46 may be applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative-effect adjustment
as of the beginning of the first year restated. FIN 46 provides guidance on the
identification of entities controlled through means other than voting rights.
FIN 46 specifies how a business enterprise should evaluate its interest 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.
In its current form, FIN 46 may require the Corporation to de-consolidate its
investment in Stewardship Statutory Trust I in future financial statements. The
potential de-consolidation of subsidiary trusts of bank holding companies formed
in connection with the issuance of trust preferred securities, like Stewardship
Statutory Trust I, appears to be an unintended consequence of FIN 46. In July
2003, the Board of Governors of the Federal Reserve System instructed bank
holding companies to continue to include the trust preferred securities in their
Tier 1 capital for regulatory capital purposes until notice is given to the
contrary. There can be no assurance that the Federal Reserve will continue to
allow institutions to include trust preferred securities in Tier 1 capital for
regulatory capital purposes. As of September 30, 2003, assuming the Corporation
was not allowed to include the $7.0 million in trust preferred securities issued
by Stewardship Statutory Trust I in Tier 1 capital, the Corporation would remain
"well capitalized."
On October 9, 2003, the effective date of FIN 46 was deferred until the end of
the first interim or annual period ending after December 15, 2003, for certain
interests held by a public entity in certain variable interest entities or
potential variable interest entities created before February 1, 2003.
13
The adoption of FIN 46 is not expected to 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.
14
Stewardship Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This quartely report on 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 quarterly report on 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 quarterly report on
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. The Audit Committee and the Board of Directors periodically review
this critical policy and its application.
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 that 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
15
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 $44.3 million, or 13.4%, from $331.1 million at
December 31, 2002 to $375.4 million at September 30, 2003. Net loans increased
$36.1 million and securities available for sale increased $22.7 million,
partially offset by a decrease of $7.2 million in securities held to maturity
and a decrease of $6.9 million in cash and cash equivalents. The composition of
the loan portfolio is basically unchanged at September 30, 2003 when compared
with the portfolio at December 31, 2002.
Total deposits totaled $336.1 million at September 30, 2003, an increase of
$33.4 million, or 11.0%, from $302.7 million at December 31, 2002.
Interest-bearing deposits increased $23.8 million, or 10.2%, to $257.2 million
at September 30, 2003 and noninterest-bearing deposits increased $9.6 million,
or 13.8%, to $78.9 million at September 30, 2003. The net increase in deposits
can be attributed to customers being attracted to the safety and liquidity of
banking products.
The Corporation's main focus during the first nine months was to manage its
liquidity position by redeploying principal repayments, maturities and calls in
the investment portfolio into the loan portfolio and securities held 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 that 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.
On September 17, 2003, the Corporation, through a newly formed, wholly-owned
subsidiary, Stewardship Statutory Trust I, a Connecticut statutory business
trust, completed a private issuance of $7.0 million in trust-preferred
securities as part of a pooled re-securitization transaction with several other
financial institutions. The trust-preferred securities bear a fixed rate of
interest of 6.75% until September 15, 2008, and then convert to a floating rate
of LIBOR plus 2.95% reset quarterly until maturity. Under the current capital
guidelines of the Federal Reserve, these preferred securities qualify for
inclusion in Tier 1 capital. The securities are callable at par value beginning
September 2008. Following this transaction, the Corporation completed a capital
contribution of $3.0 million to Atlantic Stewardship Bank to be used to support
the Bank's growth strategies.
16
The Corporation has also announced the future opening of the ninth branch of the
Bank. It is anticipated that this branch will open for operations in November
2003. It is located in Wayne, Passaic County, New Jersey and represents the
third branch location in this town. The branch will also house the commercial
and consumer lending operations for the organization.
Results of Operations
Nine Months Ended September 30, 2003 and 2002
General
The Corporation reported net income of $2.6 million, or $0.82 diluted earnings
per share for the nine months ended September 30, 2003, compared to $2.3
million, or $0.75 diluted earnings per share for the same period in 2002. The
$285,000 increase was primarily the result of increases in net interest income
and noninterest income, partially offset by increases in noninterest expense and
an increase in the provision for loan loss.
Net interest income
Net interest income increased $1.3 million, or 13.6%, for the nine months ended
September 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 $736,000, or 5.5%,
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 80 basis points from 6.50% for the nine months
ended September 30, 2002 to 5.70% for the same period in 2003. The average
balance on interest-earning assets increased $56.2 million, or 20.3%, from
$276.5 million for the nine months ended September 30, 2002 to $332.7 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 $41.4 million
to an average $237.0 million for the nine months ended September 30, 2003, from
an average $195.5 million for the comparable period in 2002. The Corporation
also increased its taxable investment portfolio by $15.8 million to an average
of $74.2 million at September 30, 2003.
Interest paid on deposits and borrowed money decreased by $523,000, or 13.2%,
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 $252.7 million for the nine months ended September 30, 2003 from
$211.3 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 2.50% for the nine month period ended
September 30, 2002 to 1.81% for the comparable period in 2003.
17
Analysis of Net Interest Income (Unaudited)
For the Nine Months Ended September 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) $236,958 $ 11,931 6.73% $195,509 $10,908 7.46%
Taxable investment securities(1) 53,992 1,309 3.24 38,767 1,461 5.04
Tax-exempt investment securities(1)(2) 20,205 788 5.21 19,560 807 5.52
Other interest-earning assets 21,549 155 0.96 22,663 271 1.60
-------- --------- -------- -------
Total interest-earning assets 332,704 14,183 5.70 276,499 13,447 6.50
--------- -------
Non-interest-earning assets:
Allowance for loan losses (2,833) (2,652)
Other assets 20,918 19,129
-------- --------
Total assets $350,789 $292,976
======== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $113,290 $ 839 0.99% $ 95,947 $ 976 1.36%
Savings deposits 40,924 243 0.79 29,629 225 1.02
Time deposits 93,995 2,277 3.24 85,001 2,728 4.29
Borrowing 4,447 66 1.98 772 19 3.29
-------- --------- -------- -------
Total interest-bearing liabilities 252,656 3,425 1.81 211,349 3,948 2.50
--------- -------
Non-interest-bearing liabilities:
Demand deposits 70,911 57,929
Other liabilities 2,062 1,857
Stockholders' equity 25,160 21,841
-------- --------
Total liabilities and stockholders' equity $350,789 $292,976
======== ========
Net interest income(taxable equivalent basis) $ 10,758 $ 9,499
========= =======
Net interest spread(taxable equivalent basis) 3.89% 4.00%
==== ====
Net yield on interest-earning
assets(taxable equivalent basis)(3) 4.32% 4.59%
==== ====
- ----------
(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 10,516 9,259
Tax equivalent basis adjustment 242 240
------ -----
Net interest income (tax equivalent basis) 10,758 9,499
====== =====
18
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 $315,000 and $100,000 during the
nine months ended September 30, 2003 and 2002, respectively. The increase in the
provision was primarily due to the strong growth in loans experienced during the
first nine months of 2003 and a chargeoff in the amount of $163,000. 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.
Noninterest income
Noninterest income increased $589,000, or 35.4%, from $1.7 million for the nine
month period ending September 30, 2002 to $2.3 million for the comparable period
in 2003. Deposit related fees increased $267,000 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 contributed to an increase of $211,000 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. In addition, the Corporation realized gains on sales of securities
available for sale in the amount of $49,000.
Noninterest expense
Noninterest expense increased by approximately $1.1 million, or 15.7%, to $8.4
million for the nine months ended September 30, 2003, compared to $7.3 million
for the same period in 2002 . Salaries and employee benefit expense, the major
component of noninterest expense, increased $564,000, or 16.5%, during the nine
months ended September 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 expense increased
$113,000, or 11.7%, primarily due to the increase in the Corporation's branch
facilities. Data processing expense increased $169,000, or 33.9%, due to the
increase in the Corporation's deposit base, the enhancements to our online
banking and bill payment functions and the implementation of the check imaging
upgrade. Miscellaneous expenses increased $267,000, or 16.4% to provide for the
general growth of the Corporation.
19
Income taxes
Income tax expense totaled $1.4 million for the nine months ended September 30,
2003, for an effective tax rate of 35.2%. For the nine months ended September
30, 2002, income tax expense totaled $1.2 million, for an effective tax rate of
34.4%.
Results of Operations
Three Months Ended September 30, 2003 and 2002
General
The Corporation reported net income of $895,000, or $0.28 diluted earnings per
share, for the three months ended September 30, 2003, compared to $836,000, or
$0.27, diluted earnings per share for the same period in 2002. The $59,000
increase was primarily the result of increases in net interest income and
noninterest income, partially offset by increases in noninterest expense and an
increase in the provision for loan loss.
Net interest income
Net interest income increased $392,000, or 12.1%, for the three months ended
September 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 $135,000, or 2.9%,
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 86 basis points from 6.31% for the
three months ended September 30, 2002 to 5.45% for the same period in 2003. The
average balance on interest-earning assets increased $56.4 million, or 19.3%,
from $292.2 million for the three months ended September 30, 2002 to $348.6
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 $46.2 million
to an average $246.6 million for the three months ended September 30, 2003, from
an average $200.3 million for the comparable period in 2002. The Corporation
also increased its investment portfolio by $16.1 million to an average $79.3
million at September 30, 2003.
Interest paid on deposits and borrowed money decreased by $254,000, or 19.2%,
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 $262.7 million for the three months ended September 30, 2003 from
$223.9 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 2.35% for the three month period ended September 30, 2002 to
1.62% for the comparable period in 2003.
20
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended September 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) $ 246,572 $ 4,061 6.53% $ 200,331 $ 3,762 7.45%
Taxable investment securities(1) 59,025 419 2.82 42,724 496 4.61
Tax-exempt investment securities(1)(2) 20,245 259 5.08 20,461 277 5.37
Other interest-earning assets 22,778 46 0.80 28,671 115 1.59
--------- --------- --------- ---------
Total interest-earning assets 348,620 4,785 5.45 292,187 4,650 6.31
--------- ---------
Non-interest-earning assets:
Allowance for loan losses (2,920) (2,679)
Other assets 21,289 19,565
--------- ---------
Total assets $ 366,989 $ 309,073
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 120,954 $ 237 0.78% $ 101,314 $ 353 1.38%
Savings deposits 42,919 76 0.70 31,507 80 1.01
Time deposits 93,354 725 3.08 90,143 885 3.90
Borrowing 5,469 32 2.32 925 6 2.57
--------- --------- --------- ---------
Total interest-bearing liabilities 262,696 1,070 1.62 223,889 1,324 2.35
--------- ---------
Non-interest-bearing liabilities:
Demand deposits 76,249 60,482
Other liabilities 2,208 2,015
Stockholders' equity 25,836 22,687
--------- ---------
Total liabilities and stockholders' equity $ 366,989 $ 309,073
========= =========
Net interest income(taxable equivalent basis) $ 3,715 $ 3,326
========= =========
Net interest spread(taxable equivalent basis) 3.83% 3.97%
==== ====
Net yield on interest-earning
assets(taxable equivalent basis)(3) 4.23% 4.52%
==== ====
- ----------
(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 3,635 3,243
Tax equivalent basis adjustment 80 83
----- -----
Net interest income(tax equivalent basis) 3,715 3,326
===== =====
21
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 $90,000 and $30,000 during the three
months ended September 30, 2003 and 2002, respectively. The increase in the
provision was due primarily to the continued growth in the loan portfolio. In
addition, the Corporation experienced a charge off of $163,000. 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.
Noninterest income
Noninterest income increased $244,000, or 45.8%, from $533,000 for the three
month period ended September 30, 2002 to $777,000 for the comparable period in
2003. Deposit related fees increased $99,000 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 $106,000 in the gain on sales of mortgage loans.
Noninterest expense
Noninterest expense increased by approximately $479,000, or 19.5%, to $2.9
million for the three months ended September 30, 2003, compared to $2.5 million
for the same period in 2002. Salaries and employee benefit expense, the major
component of noninterest expense, increased $222,000, or 19.0%, during the three
months ended September 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 expense increased
$33,000, or 10.1%, primarily due to the increase in branch facilities. Data
processing expense increased $85,000, or 51.2% due to the increase in the
Corporation's deposit base, the enhancements to online banking and bill payment
functions and the implementation of a check imaging upgrade. Miscellaneous
expenses increased $110,000, or 20.4%, primarily caused by increased costs
associated with the general growth of the Corporation.
Income taxes
Income tax expense totaled $492,000 for the three months ended September 30,
2003, for an effective tax rate of 35.5%. For the three months ended September
30, 2002, income tax expense totaled $454,000, for an effective tax rate of
35.2%.
22
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 ability of borrowers 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:
09/30/03 06/30/03 03/31/03 12/31/02
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans:(1) $ 245 $ 407 $ 409 $ 495
Loans past due 90 days or more:(2) 22 19 4 4
Restructured loans: 841 832 854 848
-------- -------- -------- --------
Total nonperforming loans $ 1,108 $ 1,258 $ 1,304 $ 1,347
======== ======== ======== ========
Allowance for loan losses $ 2,791 $ 2,885 $ 2,788 $ 2,689
======== ======== ======== ========
Nonaccrual loans to total loans 0.10% 0.17% 0.18% 0.23%
Nonperforming loans to total loans 0.44% 0.53% 0.56% 0.62%
Nonperforming loans to total assets 0.30% 0.35% 0.39% 0.41%
Allowance for loan losses to total loans 1.10% 1.22% 1.19% 1.24%
(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 September 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
23
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 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 nine months
ended September 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 for application 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 September 30, 2003, the minimum
risk-based capital requirements to be considered adequately capitalized were 4%
for Tier 1 capital and 8% for total capital.
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Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determined by dividing
Tier 1 capital as defined under the risk-based guidelines by average total
assets (non risk-adjusted) for the preceding quarter. At September 30, 2003 the
minimum leverage ratio requirement to be considered well capitalized was 4%. The
following table reflects the Corporation's capital ratios at September 30, 2003.
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 13.11% 9.11%
Total 8.00% 14.22% 6.22%
Leverage Ratio 4.00% 9.00% 5.00%
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 September 30, 2003, the Corporation has
outstanding loan commitments of $32.5 million and unused lines and letters of
credit totaling $56.1 million. Certificates of deposit scheduled to mature in
one year or less, at September 30, 2003, totaled $52.3 million. Management
believes that a significant portion of such deposits will remain with the
Corporation. Cash and cash equivalents decreased $6.9 million during the first
nine months of 2003. Operating activities and financing activities provided $4.4
million and $42.0 million, respectively. These amounts were offset by $53.2
million in investing activities.
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.
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
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disclosure controls and procedures as of September 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 September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
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Stewardship Financial Corporation
Part II -- Other Information
Item 2. Changes in Securities and Use of Proceeds
On September 17, 2003, the Corporation, through a newly formed, wholly-owned
subsidiary, Stewardship Statutory Trust I (the "Trust"), a Connecticut statutory
business trust, completed a private placement of $7.0 million of Fixed/Floating
Rate Capital Securities (the "Trust Preferred Securities"). An aggregate of
7,000 Trust Preferred Securities were issued at $1,000.00 per Trust Preferred
Security. FTN Financial Capital Markets and Keefe Bruyette & Woods, Inc. were
placement agents of the Trust Preferred Securities. The Trust issued and sold
the Trust Preferred Securities to Preferred Term Securities XI, Ltd. The Trust
Preferred Securities were aggregated with other similar securities for resale to
institutional and retail investors. These securities were exempt from
registration under Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K
1) On July 21, 2003, the Corporation filed a current report on
Form 8-K, attaching a press release reporting results for the
quarter ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Stewardship Financial Corporation
Date: November 14, 2003 By:/s/ Paul Van Ostenbridge
--------------------- -----------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
(authorized officer on behalf
of registrant)
Date: November 14, 2003 By: /s/ Julie E. Holland
--------------------- -----------------------------------
Julie E. Holland
Vice President and Treasurer
(principal accounting officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 Placement Agreement dated September 9, 2003.
31.1 Certification of Paul Van Ostenbridge required
by Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of Julie Holland required by
Rule 13a-14(a) or Rule 15d-14(a)
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
29