================================================================================
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) 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
- -------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
NEW JERSEY 22-3351447
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
630 GODWIN AVENUE, MIDLAND PARK, NJ 07432
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(201) 444-7100
-----------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
The number of shares outstanding of the Issuer's Common Stock, no par
value, outstanding as of November 10, 1997, was 931,307.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
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<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
------
PART I -- CONSOLIDATED FINANCIAL INFORMATION
ITEM I -- CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at September 30, 1997 and December 31, 1996 (Unaudited) .. 1
Consolidated Statements of Income for the Nine
Months ended September 30, 1997 and 1996 (Unaudited) ..... 2
Consolidated Statements of Income for the Three
Months ended September 30, 1997 and 1996 (Unaudited) ..... 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1997 and 1996 (Unaudited) ..... 4
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended
September 30, 1997 (Unaudited) ........................... 5
Notes to Consolidated Financial Statements (Unaudited) ..... 6-11
ITEM II -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................. 12-18
PART II -- OTHER INFORMATION
ITEM 1 THRU ITEM 6 .................................................. 19
SIGNATURES .......................................................... 20
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks ............................. $ 5,371,000 $ 4,786,000
Interest-bearing due from banks ..................... 110,000 219,000
Federal funds sold .................................. 4,150,000 5,950,000
------------ ------------
Cash and cash equivalents .................... 9,631,000 10,955,000
Securities available for sale ....................... 10,179,000 11,434,000
Securities held to maturity; estimated fair value
of $ 20,253,000 (1997) and $20,196,000 (1996) ..... 20,022,000 20,003,000
FHLB-NY stock, at cost .............................. 510,000 451,000
Loans, net of allowance for loan losses
of $ 1,428,000 (1997) and $1,353,000 (1996) ....... 94,751,000 80,848,000
Mortgage loans held for sale ........................ 191,000 237,000
Premises and equipment, net ......................... 2,508,000 2,306,000
Accrued interest receivable ......................... 963,000 881,000
Intangible assets, net of accumulated amortization of
$205,000 (1997) and $155,000 (1996) ............... 545,000 595,000
Other real estate owned, net ........................ 229,000 229,000
Other assets ........................................ 695,000 682,000
------------ ------------
Total assets ................................. $140,224,000 $128,621,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ............................... $ 28,136,000 $ 25,136,000
Interest-bearing .................................. 98,725,000 90,689,000
------------ ------------
Total deposits .............................. 126,861,000 115,825,000
Securities sold under agreements to repurchase ...... 881,000 1,711,000
Accrued expenses and other liabilities .............. 962,000 678,000
------------ ------------
Total liabilities ........................... 128,704,000 118,214,000
------------ ------------
Commitments and contingencies ....................... -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares
authorized; 931,144 and 920,505 shares issued
outstanding at September 30, 1997 and
December 31, 1996, respectively ................... 5,213,000 4,991,000
Retained earnings ................................... 6,249,000 5,395,000
Net unrealized gain on securities available for sale 58,000 21,000
------------ ------------
Total stockholders' equity .................. 11,520,000 10,407,000
------------ ------------
Total liabilities and stockholders' equity .. $140,224,000 $128,621,000
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------
1997 1996
------------ -----------
Interest income:
Loans ......................................... $5,865,000 $5,114,000
Securities held to maturity
Taxable ..................................... 555,000 557,000
Non-taxable ................................. 348,000 331,000
Securities available for sale ................. 523,000 455,000
Other interest-earning assets ................. 202,000 225,000
---------- ----------
Total interest income .................... 7,493,000 6,682,000
---------- ----------
Interest expense:
Deposits ...................................... 2,684,000 2,413,000
Borrowed money ................................ 71,000 61,000
---------- ----------
Total interest expense ................... 2,755,000 2,474,000
---------- ----------
Net interest income ............................. 4,738,000 4,208,000
Provision for loan losses ....................... 90,000 110,000
---------- ----------
Net interest income after provision for
loan losses ................................... 4,648,000 4,098,000
---------- ----------
Noninterest income:
Fees and service charges ...................... 421,000 376,000
Loss on call of investment securities ......... -- (4,000)
Gain on sales of mortgage loans ............... 24,000 42,000
Miscellaneous ................................. 186,000 93,000
---------- ----------
Total noninterest income ................ 631,000 507,000
---------- ----------
Noninterest expenses:
Salaries and employee benefits ................ 1,808,000 1,548,000
Occupancy, net ................................ 237,000 215,000
Equipment ..................................... 270,000 182,000
Data processing ............................... 186,000 164,000
Advertising ................................... 124,000 64,000
FDIC insurance premium ........................ 13,000 49,000
Amortization of intangible assets ............. 50,000 61,000
Other real estate owned expense ............... (16,000) 13,000
Charitable contributions ...................... 165,000 163,000
Stationery and supplies ....................... 125,000 143,000
Miscellaneous ................................. 745,000 627,000
---------- ----------
Total noninterest expenses ............... 3,707,000 3,229,000
---------- ----------
Income before income taxes ...................... 1,572,000 1,376,000
Income taxes .................................... 497,000 425,000
---------- ----------
Net income ...................................... $1,075,000 $ 951,000
========== ==========
Net income per common share ..................... $ 1.16 $ 1.04
Dividends per common share ...................... $ 0.24 $ 0.21
Weighted average number of common shares
outstanding ................................... 924,672 913,368
Per share data has been restated to reflect a 2 for 1 stock split in
September, 1997
See notes to unaudited consolidated financial statements.
2
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
September 30,
------------------------
1997 1996
---------- ----------
Interest income:
Loans ........................................ $2,083,000 $1,749,000
Securities held to maturity
Taxable .................................... 181,000 186,000
Non-taxable ................................ 116,000 108,000
Securities available for sale ................ 165,000 177,000
Other interest-earning assets ................ 86,000 92,000
---------- ----------
Total interest income ................... 2,631,000 2,312,000
---------- ----------
Interest expense:
Deposits ..................................... 964,000 841,000
Borrowed money ............................... 19,000 18,000
---------- ----------
Total interest expense .................. 983,000 859,000
---------- ----------
Net interest income ............................ 1,648,000 1,453,000
Provision for loan losses ...................... 30,000 30,000
---------- ----------
Net interest income after provision for
loan losses .................................. 1,618,000 1,423,000
---------- ----------
Noninterest income:
Fees and service charges ..................... 132,000 128,000
Gain on sales of mortgage loans .............. 12,000 9,000
Miscellaneous ................................ 123,000 53,000
---------- ----------
Total noninterest income ............... 267,000 190,000
---------- ----------
Noninterest expenses:
Salaries and employee benefits ............... 615,000 542,000
Occupancy, net ............................... 83,000 69,000
Equipment .................................... 106,000 55,000
Data processing .............................. 62,000 51,000
Advertising .................................. 50,000 31,000
FDIC insurance premium ....................... 4,000 41,000
Amortization of intangible assets ............ 14,000 21,000
Other real estate owned expense .............. (6,000) (3,000)
Charitable contributions ..................... 55,000 52,000
Stationery and supplies ...................... 41,000 53,000
Miscellaneous ................................ 264,000 224,000
---------- ----------
Total noninterest expenses .............. 1,288,000 1,136,000
---------- ----------
Income before income taxes ..................... 597,000 477,000
Income taxes ................................... 205,000 136,000
---------- ----------
Net income ..................................... $ 392,000 $ 341,000
========== ==========
Net income per common share .................... $ 0.42 $ 0.37
========== ==========
Weighted average number of common shares
outstanding .................................. 926,641 915,748
========== ==========
Per share data has been restated to reflect a 2 for 1 stock split in
September, 1997
See notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 1,075,000 $ 951,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment .. 240,000 178,000
Loss on call of investment securities .................... -- 4,000
Amortization of premiums and accretion of discounts, net . 39,000 43,000
Accretion of deferred loan fees .......................... (38,000) (48,000)
Provision for loan losses ................................ 90,000 110,000
Provision for losses on other real estate ................ -- 20,000
Originations of mortgage loans held for sale ............. (2,256,000) (4,079,000)
Proceeds from sale of mortgage loans ..................... 2,326,000 4,475,000
Gain on sale of loans .................................... (24,000) (42,000)
Issuance of stock options at discount .................... 38,000 --
Loss on sale of fixed assets ............................. 2,000 --
Deferred income tax benefit .............................. (90,000) (100,000)
Amortization of intangibles .............................. 50,000 61,000
Increase in accrued interest receivable .................. (82,000) (10,000)
Decrease in other assets ................................. 91,000 80,000
Increase in other liabilities ............................ 284,000 287,000
----------- ------------
Net cash provided by operating activities .............. 1,745,000 1,930,000
----------- ------------
Cash flows from investing activities:
Purchase of securities available for sale ..................... (250,000) (2,298,000)
Proceeds from maturities and principal repayments
on securities available for sale ........................... 1,548,000 749,000
Purchase of securities held to maturity ....................... (2,687,000) (3,660,000)
Proceeds from maturities and principal repayments
on securities held to maturity ............................. 2,095,000 4,041,000
Proceeds from call on securities held to maturity ............. 550,000 969,000
Purchase of FHLB-NY stock ..................................... (59,000) (114,000)
Net increase in loans ......................................... (13,955,000) (6,150,000)
Additions to premises and equipment ........................... (480,000) (248,000)
----------- ------------
Net cash used in investing activities .................. (13,238,000) (6,711,000)
----------- ------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits .................. 3,000,000 263,000
Net increase in interest-bearing deposits ..................... 8,036,000 8,595,000
Net decrease in securities sold under agreements to repurchase. (830,000) (158,000)
Cash dividends paid on common stock ........................... (221,000) (192,000)
Sale of common stock .......................................... 184,000 118,000
----------- ------------
Net cash provided by financing activities .............. 10,169,000 8,626,000
----------- ------------
Net (decrease) increase in cash and cash equivalents ............ (1,324,000) 3,845,000
Cash and cash equivalents - beginning ........................... 10,955,000 7,465,000
----------- ------------
Cash and cash equivalents - ending .............................. $ 9,631,000 $ 11,310,000
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ........................ $ 2,815,000 $ 1,745,000
Cash paid during the year for income taxes .................... 550,000 285,000
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
For the Period Ended September 30, 1997
---------------------------------------------------------------------
Net Unrealized
Gain on
Common Stock Securities
---------------------- Retained Available for
Shares Amount Earnings Sale Total
----------- ------- -------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1996 .......... 920,505 $4,991,000 $5,395,000 $21,000 $10,407,000
Dividends paid ........................ -- -- (221,000) -- (221,000)
Issuance of common stock .............. 10,639 184,000 -- -- 184,000
Issuance of stock options at discount.. -- 38,000 -- -- 38,000
Net income for the nine months
ended September 30, 1997 .......... -- -- 1,075,000 -- 1,075,000
Net unrealized gain on securities
available for sale ............... -- -- -- 37,000 37,000
------- ---------- ---------- ------- -----------
Balance -- September 30, 1997 ......... 931,144 $5,213,000 $6,249,000 $58,000 $11,520,000
======= ========== ========== ======= ===========
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. 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"). Atlantic Stewardship 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 generally accepted
accounting principles. 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.
NOTE 2. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements included herein
have been prepared in accordance with instructions for Form 10-QSB 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 generally accepted accounting principles. 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 nine
months ended September 30, 1997 are not necessarily indicative of the results
which may be expected for the entire year.
6
<PAGE>
<TABLE>
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, 1997 and
December 31, 1996. 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.
<CAPTION>
September 30, 1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ......... $ 2,961,000 $ 6,000 $ -- $ 2,967,000
U.S. Government agencies ......... 801,000 5,000 2,000 804,000
Mortgage-backed securities ....... 6,052,000 104,000 23,000 6,133,000
Obligations of state and
political subdivisions ......... 273,000 2,000 -- 275,000
----------- -------- ------- -----------
$10,087,000 $117,000 $25,000 $10,179,000
=========== ======== ======= ===========
<CAPTION>
December 31, 1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ......... $ 3,583,000 $ 7,000 $ 4,000 $ 3,586,000
U.S. Government agencies ......... 1,052,000 4,000 7,000 1,049,000
Mortgage-backed securities ....... 6,492,000 76,000 37,000 6,531,000
Obligations of state and
political subdivisions ......... 274,000 -- 6,000 268,000
----------- ------- ------- -----------
$11,401,000 $87,000 $54,000 $11,434,000
=========== ======= ======= ===========
<CAPTION>
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, 1997 and
December 31, 1996. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
<CAPTION>
September 30, 1997
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ......... $ 1,947,000 $ 4,000 $ 1,000 $ 1,950,000
U.S. Government agencies ......... 6,320,000 32,000 10,000 6,342,000
Mortgage-backed securities ....... 2,221,000 80,000 -- 2,301,000
Obligations of state and
political subdivisions ......... 9,534,000 129,000 3,000 9,660,000
----------- -------- ------- -----------
$20,022,000 $245,000 $14,000 $20,253,000
=========== ======== ======== ===========
<CAPTION>
December 31, 1996
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ......... $ 2,193,000 $ 3,000 $ 2,000 $ 2,194,000
U.S. Government agencies ......... 6,356,000 24,000 31,000 6,349,000
Mortgage-backed securities ....... 2,523,000 68,000 1,000 2,590,000
Obligations of state and
political subdivisions ......... 8,931,000 148,000 16,000 9,063,000
----------- -------- ------- -----------
$20,003,000 $243,000 $50,000 $20,196,000
=========== ======== ======= ===========
</TABLE>
7
<PAGE>
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 the Bergen and Passaic counties, New Jersey
area. The following table sets forth the composition of loans as of the periods
indicated.
September 30, December 31,
1997 1996
------------- ------------
Mortgage
Residential ............................... $19,479,000 $15,257,000
Commercial ................................ 33,447,000 26,797,000
Commercial .................................. 17,011,000 17,403,000
Equity ...................................... 3,822,000 3,838,000
Installment ................................. 21,969,000 18,892,000
Other ....................................... 574,000 136,000
----------- -----------
Total loans ......................... 96,302,000 82,323,000
=========== ===========
Less: Deferred loan fees .................... 123,000 122,000
Allowance for loan losses ........... 1,428,000 1,353,000
----------- -----------
1,551,000 1,475,000
----------- -----------
Loans, net .......................... $94,751,000 $80,848,000
=========== ===========
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Nine Months Ended September 30,
-------------------------------
1997 1996
---------- -------------
Balance, beginning of period ................ $1,353,000 $1,177,000
Provision charged to operations ............. 90,000 110,000
Recoveries of loans charged off ............. 4,000 11,000
Loans charged off ........................... (19,000) (6,000)
---------- ----------
Balance, end of period ...................... $1,428,000 $1,292,000
========== ==========
8
<PAGE>
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 and loans more than 90 days past due. The following table sets
forth information regarding the impaired loans as of the periods indicated.
September 30, December 31,
1997 1996
------------- ------------
Impaired loans
With related allowance for loan loss ........ $40,000 $774,921
Without related allowance for loan loss ..... 4,000 --
------- --------
Total impaired loans .......................... $44,000 $774,921
------- --------
Related allowance for loan losses ............. $40,000 $155,742
======= ========
9
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 8. NET INCOME PER SHARE
Net income per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Per
share data has been restated to reflect a 2 for 1 stock split completed in
September, 1997. Common stock equivalents are not included in the calculation
due to immateriality.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
FASB Statement No. 128, Earnings Per Share (SFAS No. 128) supersedes APB
Opinion No. 15, Earnings Per Share, and specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. SFAS No. 128 was issued to
simplify the computation of EPS and to make the U.S. standard more compatible
with the EPS standards of other countries and that of the International
Accounting Standards Committee (IASC). It replaces Primary EPS and Fully Diluted
EPS with Basic EPS and Diluted EPS, respectively. It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the Basic EPS computation to the numerator
and denominator of the Diluted EPS computation.
Basic EPS, unlike primary EPS, excludes all dilution while Diluted EPS,
like Fully Diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. For many entities Basic EPS will be higher than
Primary EPS and Diluted EPS will be approximately the same as Fully Diluted EPS.
SFAS No. 128 is applicable to all entities that have issued common stock or
potential common stock (e.g. options, warrants, convertible securities,
contingent stock agreements, etc.) if those securities trade in a public market
either on a stock exchange (domestic or foreign) or in the over-the-counter
market, including securities quoted locally or regionally. This Statement also
applies to an entity that has made a filing or is in the process of filing with
a regulatory agency in preparation for the sale of those securities in a public
market. However, SFAS No. 128 does not require presentation of EPS for
investment companies or in statements of wholly-owned subsidiaries.
SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted (although pro forma EPS disclosure in the footnotes for periods prior
to required adoption is permitted). After adoption, all prior period EPS data
presented shall be restated
10
<PAGE>
(including interim financial statements summaries of earnings and selected
financial date) to conform with SFAS No. 128. Management does not believe that
the adoption of SFAS No. 128 will have a significant effect on the Corporation's
EPS calculation.
FASB Statement No. 130, Reporting Comprehensive Income (SFAS No. 130)
established standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 does not require
a specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required.
11
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased by $11.6 million, or 9.02%, from $128.6 million at
December 31, 1996 to $140.2 million at September 30, 1997. The increase in
assets reflects, among other things, increases in net loans of $13.9 million,
partially offset by a $1.8 million decrease in federal funds sold and a $1.3
million decrease in securities available for sale. The composition of the loan
portfolio is basically unchanged at September 30, 1997 when compared with the
portfolio at December 31, 1996.
Total deposits increased $11.0 million, or 9.5%, to $126.9 million at September
30, 1997 from $115.8 million at December 31, 1996. Interest-bearing deposits
increased $8.0 million, or 8.9%, to $98.7 million at September 30, 1997, and
noninterest-bearing deposits, increased $3.0 million, or 11.9%, to $28.1 million
at September 30, 1997. The increase in noninterest-bearing deposits resulted
primarily from a general increase in balances being maintained in existing
accounts, the popularity of the Corporation's century checking account, which
offers service charge free checking through the year 2000, and increased
activity with the Corporation's business advantage account which offers free
checking to low maintenance business accounts. The increase in interest-bearing
deposits resulted from the popularity of the Corporation's new Premier Growth
Account. This is a new money market product designed to be competitive with
brokerage money market accounts. It is designed for the larger balance customer
and offers tiered rates based on the balance maintained within the account. It
is anticipated that this product will continue to bring in both new customers
and new money from existing customers looking for higher yields on investments.
The Corporation's primary focus during the past nine months was to begin to
implement a plan to install Automated Teller Machines (ATM) at each of its
branch locations and to open two new branch locations in Waldwick and Ridgewood,
Bergen County, New Jersey, bringing the Corporation's total number of offices to
five. The Corporation has successfully installed ATM machines at three branch
locations and provides both customers and noncustomers with convenient access to
banking 24 hours a day with no fees. The Waldwick branch held its grand opening
celebration on May 16, 1997 and has shown strong core deposit growth. The
Ridgewood branch is scheduled to open on November 13, 1997.
The Corporation entered into a joint venture with Diversified Tax Shelters,
Inc., a division of the Turner Group, to offer Deferred Annuities, Long Term
Care Insurance, and Life Insurance. The Corporation will receive commissions for
all contracts sold at the branches. The Corporation also introduced a Discount
Brokerage Service Program offered through U.S. Clearing Corp. It is anticipated
that these offerings will provide the Corporation with additional noninterest
income
12
<PAGE>
and continue to provide a full service and wide mix of products to our existing
and potential customers.
The Corporation is also beginning to install a telephone banking product which
is anticipated to be available to customers in the fourth quarter of 1997. This
product is being made available to customers to provide them the flexibility of
making loan payments, transferring funds between existing accounts, and
providing account balance and history inquiry twenty four hours a day. It is
currently being tested by the Corporation's employee base and marketing is being
developed.
In September, 1997 the Corporation issued a two for one stock split to its
shareholders. All pertinent data has been restated. In addition, a market maker
was selected for the stock to establish a stronger market for the stock. The
Corporation is now listed on the NASDAQ Bulletin Board. In September 1997, the
Corporation also issued stock options to the nonemployee members of the board of
directors under a plan approved by the shareholders in April, 1995. There were
4,090 shares issued to each director to be exercised by August 19, 2002 at
$17.58 per share. This represented a 5% discount from the market price at grant
date and resulted in a $38,000 expense.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
General
The Corporation reported net income of $1.1 million, or $1.16 per share for the
nine months ended September 30, 1997 compared to $1.0 million, or $1.04 per
share for the same period in 1996. The $124,000 increase in net income was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense.
Net interest income
Net interest income increased $530,000, or 12.6%, for the nine months ended
September 30, 1997 as compared with the corresponding period in 1996. The
increase was primarily due to an increase in average net interest-earning
assets.
Total interest income increased $811,000, or 12.1%, primarily due to an increase
in the average volume of interest-earning assets. The average balance of
interest-earning assets increased $13.6 million, or 12.2%, from $111.4 million
for the nine months ended September 30, 1996 to $125.0 million for the same
period in 1997, primarily being funded by an increase to the Corporation's
average deposit base. The Corporation continued to experience an increase in
loan demand which allowed loans on average to increase $12.4 million to an
average $88.5 million for the nine months ended September 30, 1997, from an
average $76.1 million for the comparable period in 1996.
13
<PAGE>
Interest paid on deposits and borrowed money increased $281,000, or 11.4%, due
primarily to an increase in the average volume of total interest-bearing
deposits as yields remained relatively steady. The average balance of total
interest-bearing deposits increased to $93.2 million for the nine months ended
September 30, 1997 from $84.5 million for the comparable 1996 period, primarily
as a result of the Corporation's expanding customer base.
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 may vary from the
current estimates. Additions to the allowance for loan losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $90,000 and $110,000 during the nine
months ended September 30, 1997 and 1996, respectively. 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 by $124,000, or 24.4%, to $631,000 during the nine
months ended September 30, 1997 when compared with $507,000 during the 1996
period. Contributing to this increase was a $102,000 federal tax refund received
for the years ended 1994, 1995, and 1996 and a $45,000 increase in
deposit-related fees and service charges caused by an increased deposit base,
offset by a decrease of $18,000 in gain on sales of mortgage loans due primarily
to the decrease in the volume of loans sold during the first half of 1997
compared to the similar period in 1996. The Corporation continues to originate
mortgage loans for sale to investors.
Noninterest expenses
Noninterest expenses increased by approximately $478,000, or 14.8%, to $3.7
million for the nine months ended September 30, 1997, compared to $3.2 million
for the same 1996 period. Salaries and employee benefits, the major component of
noninterest expenses, increased $260,000, or 16.8%, during the nine months ended
September 30, 1997. This increase was due primarily to additions to staff in the
operations area, new business development and the new Waldwick branch and
general increases for merit and performance. Data processing and equipment
expense increased $110,000, or 31.8%, due to computer system enhancements
installed during the second quarter of 1996, the ATM network installation in the
second quarter of 1997, and the new branch expansion. Increases in advertising
of $60,000 resulted primarily from the marketing costs of new products and the
opening of the new Waldwick branch. Partially offsetting these expenses, other
real estate expense decreased $29,000 as the first quarter of 1996 contained an
additional $20,000 expense to an established valuation reserve
14
<PAGE>
to reduce the carrying value of the other real estate property.
Income taxes
Income tax expense totaled $497,000 and $425,000 during the nine months ended
September 30, 1997 and 1996, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
General
The Corporation reported net income of $392,000, or $.42 per share for the three
months ended September 30, 1997 compared to $341,000 or $.37 per share for the
same period in 1996. The $51,000 increase in net income was primarily caused by
increases in net interest income and noninterest income, partially offset by
increases in noninterest expense.
Net interest income
Net interest income increased $195,000, or 13.4%, for the three months ended
September 30, 1997 as compared with the corresponding period in 1996. The
increase was primarily due to an increase in average net interest-earning
assets.
Total interest income increased $319,000, or 13.8%, primarily due to an increase
in the average volume of interest-earning assets. The average balance of
interest-earning assets increased $15.8 million, or 13.8%, from $115.2 million
for the three months ended September 30, 1996 to $131.0 million for the same
period in 1997, primarily being funded by an increase to the Corporation's
average deposit base. The Corporation continued to experience an increase in
loan demand which allowed loans on average to increase $16.1 million to an
average $94.1 million for the three months ended September 30, 1997, from an
average $78.0 million for the comparable period in 1996.
Interest paid on deposits and borrowed money increased $124,000, or 14.4%, due
primarily to an increase in the average volume of total interest-bearing
deposits and to higher rates paid on the new money market product. The average
balance of total interest-bearing deposits increased to $98.1 million for the
three months ended September 30, 1997 from $87.4 million for the comparable 1996
period, primarily as a result of the Corporation's expanding customer base.
Provision for loan losses
The provision charged to operations totaled $30,000 during each of the three
months ended September 30, 1997 and 1996. See "Asset Quality" section for
summary of allowance for loan losses and nonperforming assets.
15
<PAGE>
Noninterest income
Noninterest income increased by $77,000, or 40.5%, to $267,000 during the three
months ended September 30, 1997 when compared with $190,000 during the 1996
period. Contributing to this increase was a $102,000 credit to miscellaneous
income for a refund on tax amendments filed for the years ended 1994, 1995, and
1996.
Noninterest expenses
Noninterest expenses increased by approximately $152,000, or 13.4%, to $1.3
million for the three months ended September 30, 1997, compared to $1.1 million
for the same 1996 period. Salaries and employee benefits, the major component of
noninterest expenses, increased $73,000, or 13.5%, during the three months ended
September 30, 1997. This increase was due primarily to additions to staff in the
new business development department and the new Waldwick branch and general
increases for merit and performance. Data processing and equipment expenses
increased $62,000, or 58.5%, due to the increased cost of maintaining the
computer system enhancements installed in 1996 and the ATM network installed
during the first half of 1997. With the establishment of the Waldwick office,
net occupancy expense increased $14,000, or 20.2%. Increases in advertising
totaling $19,000 resulted primarily from the marketing costs of new products and
the opening of the new Waldwick branch.
Income taxes
Income tax expense totaled $205,000 and $136,000 during the three months ended
September 30, 1997 and 1996, respectively.
16
<PAGE>
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:
<TABLE>
<CAPTION>
09/30/97 06/30/97 03/31/97 12/31/96
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans(1) ........................................ $ 40 $ 40 $ 40 $ 95
Loans past due 90 days or more(2) .......................... 5 532 540 550
Restructured loans ......................................... 701 246 253 261
------ ------ ------ ------
Total nonperforming loans ............................. 746 818 833 906
Other real estate owned .................................... 229 229 229 229
------ ------ ------ ------
Total nonperforming assets ............................ $ 975 $1,047 $1,062 $1,135
====== ====== ====== ======
Allowance for loan losses .................................. $1,428 $1,398 $1,372 $1,353
====== ====== ====== ======
Nonaccrual loans to total loans ............................ 0.04% 0.04% 0.05% 0.12%
Nonperforming loans to total loans ......................... .77% .90% .99% 1.10%
Nonperforming loans to total assets ........................ .53% .59% .65% .70%
Nonperforming assets to total assets ....................... .70% .75% .82% .88%
Allowance for loan losses to total loans ................... 1.48% 1.54% 1.63% 1.64%
Allowance for loan losses to non-performing loans ......... 191.49% 170.90% 164.74% 149.27%
</TABLE>
(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, 1997, 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 within the Corporation's New Jersey
market area.
17
<PAGE>
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. Cash and cash
equivalents decreased $1.3 million during the first nine months of 1997, as
financing activities and operating activities provided $10.2 million and $1.7
million, respectively, offset by investing activities using $13.2 million.
Liquidity management is a daily and long-term function of business management.
Excess liquidity is generally invested in short-term investments, such as
federal funds.
As of September 30, 1997 the Bank's capital ratios were as follows:
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 ............................. 4.00% 12.03% 8.03%
Total .............................. 8.00% 13.28% 5.28%
Leverage Ratio ....................... 3.00% 7.88% 4.88%
18
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to litigation which arises primarily in the
ordinary course of business. In the opinion of management the ultimate
disposition of such litigation should not have a material adverse
effect on the financial position of the Corporation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports
Form 8-K filed August 20, 1997
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STEWARDSHIP FINANCIAL CORPORATION
DATE: November 13, 1997 BY: /s/ PAUL VAN OSTENBRIDGE
----------------- ----------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
DATE: November 13, 1997 BY: /s/ JULIE E. HOLLAND
----------------- -----------------------------------
Julie E. Holland
Vice President and Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the registrant's
unaudited September 30, 1997 interim financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,371,000
<INT-BEARING-DEPOSITS> 110,000
<FED-FUNDS-SOLD> 4,150,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,179,000
<INVESTMENTS-CARRYING> 20,022,000
<INVESTMENTS-MARKET> 20,253,000
<LOANS> 96,302,000
<ALLOWANCE> 1,551,000
<TOTAL-ASSETS> 140,224,000
<DEPOSITS> 126,861,000
<SHORT-TERM> 881,000
<LIABILITIES-OTHER> 962,000
<LONG-TERM> 0
0
0
<COMMON> 5,213,000
<OTHER-SE> 6,307,000
<TOTAL-LIABILITIES-AND-EQUITY> 140,224,000
<INTEREST-LOAN> 5,865,000
<INTEREST-INVEST> 1,426,000
<INTEREST-OTHER> 202,000
<INTEREST-TOTAL> 7,493,000
<INTEREST-DEPOSIT> 2,684,000
<INTEREST-EXPENSE> 71,000
<INTEREST-INCOME-NET> 4,738,000
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,707,000
<INCOME-PRETAX> 1,572,000
<INCOME-PRE-EXTRAORDINARY> 1,075,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,075,000
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 5.27
<LOANS-NON> 40,000
<LOANS-PAST> 5,000
<LOANS-TROUBLED> 701,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,353,000
<CHARGE-OFFS> 19,000
<RECOVERIES> 4,000
<ALLOWANCE-CLOSE> 1,428,000
<ALLOWANCE-DOMESTIC> 1,428,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
