SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________________
Commission file number 0-21855
Stewardship Financial Corporation
- --------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
New Jersey 22-3351447
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
630 Godwin Avenue, Midland Park, NJ 07432
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (201) 444-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
- --------------------------------------------------------------------------------
(Title of class)
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(Title of class)
Indicate by check mark whether the Issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ( )
The aggregate market value of the voting stock held by non-affiliates of
the Issuer as of February 28, 1997, was $15,206,209.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of February 28, 1997, was 460,795.
For the fiscal year ended December 31, 1996, the Issuer had total revenues
of $9,717,118.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
10-KSB Item Document Incorporated
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<S> <C> <C>
Item 6 Management's Discussion Registrant's Annual Report to
and Analysis or Plan of Shareholders under the
Operation caption "Management's
Discussion and Analysis
of Financial Condition and
Results of Operations"
Item 7 Financial Statements Registrant's Annual Report to
Shareholders under the
caption "Consolidated
Statements of Financial
Condition"
Item 9 Directors and Executive Proxy Statement for 1997
Officers of the Company; Annual Meeting of
Compliance with Section Shareholders to be filed no
16(a) of the Exchange Act later than April 29, 1997
Item 10 Executive Compensation Proxy Statement for 1997
Annual Meeting of
Shareholders to be filed no
later than April 29, 1997
Item 11 Security Ownership of Proxy Statement for 1997
Certain Beneficial Owners Annual Meeting of
and Management Shareholders to be filed no
later than April 29, 1997
Item 12 Certain Relationships and Proxy Statement for 1997
Related Transactions Annual Meeting of
Shareholders to be filed no
later than April 29, 1997
</TABLE>
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PART I
Item 1. Description of Business
General
Stewardship Financial Corporation (the "Company" or "Registrant") is a
one-bank holding company incorporated under the laws of the State of New Jersey
in January, 1995 to serve as a holding company for Atlantic Stewardship Bank
(the "Bank"). The Company was organized at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock of
the Bank (the "Acquisition"). Pursuant to the New Jersey Banking Act of 1948, as
amended, (the "Banking Act"), and pursuant to approval of the shareholders of
the Bank, the Company acquired the Bank and became its holding company on
November 22, 1996. As part of the Acquisition, shareholders of the Bank received
one share of common stock, no par value ("Common Stock") of the Company for each
outstanding share of the common stock of the Bank. The only significant activity
of the Company is ownership and supervision of the Bank. The Company's main
office is located at 630 Godwin Avenue, Midland Park, Bergen County, New Jersey
07432.
The Bank is a commercial bank formed under the laws of the State of New
Jersey on April 26, 1984. The Bank operates from its main office at 630 Godwin
Avenue, Midland Park, New Jersey, and its two branch offices located at 386
Lafayette Avenue, Hawthorne, New Jersey and 87 Berdan Avenue, Wayne, New Jersey.
The Bank has received all regulatory approvals necessary to open and is
anticipating opening its third branch office, located at 30 Franklin Turnpike,
Waldwick, New Jersey, in the second quarter of 1997. In addition, the Bank is
committed to installing ATM machines at each of its locations and anticipates
the services to be available during 1997. The Bank is also in the process of
implementing a Telephone Banking System, to be introduced during 1997, which
will enable customers to access account information 24 hours a day, 7 days a
week.
The Company is subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits. The operations of the Company and
the Bank are subject to the supervision and regulation of the FRB, FDIC and the
New Jersey Department of Banking and Insurance (the "Department"). The principal
executive offices of the Company are located at 630 Godwin Avenue, Midland Park,
New Jersey 07432, and the telephone number is (201) 444-7100.
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Business of the Company
The Company's primary business is ownership and supervision of the Bank.
The Company, through the Bank, conducts a traditional commercial banking
business, and offers services including personal and business checking accounts
and time deposits, money market accounts and regular savings accounts. The
Company structures its specific services and charges in a manner designed to
attract the business of the small and medium sized business and professional
community as well as that of individuals residing, working and shopping in its
Bergen and Passaic County, New Jersey trade area. The Company engages in a wide
range of lending activities and offers commercial, consumer, mortgage, home
equity and personal loans. Stewardship Investment Corp. is a wholly-owned
nonbank subsidiary of the Bank, whose primary business is to own and manage the
Bank's investment portfolio.
In addition, in forming the Bank, the members of the Board of Directors
envisioned a community-based institution which would serve the local communities
surrounding its branches, while also providing a return to its shareholders.
This vision has been reflected in the Bank's tithing policy, under which the
Bank tithes 10% of its pre-tax profits to worthy Christian charities.
Service Area
The Company's service area primarily consists of the Bergen and Passaic
County, New Jersey market, although the Company makes loans throughout New
Jersey. The Company operates its main office in Midland Park, New Jersey and two
branch offices in Hawthorne and Wayne, New Jersey.
Competition
The Company operates in a highly competitive environment competing for
deposits and loans with commercial banks, thrifts and other financial
institutions, many of which have greater financial resources than the Company.
Many large financial institutions in New York City and other parts of New Jersey
compete for the business of New Jersey residents located in the Company's
service area. Certain of these institutions have significantly higher lending
limits than the Company and provide services to their customers which the
Company does not offer.
Management believes the Company is able to compete on a substantially equal
basis with its competitors because it provides responsive personalized services
through managements' knowledge and awareness of the Company's service area,
customers and business.
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Employees
At December 31, 1996, the Company employed 44 full-time employees and 33
part-time employees. None of these employees is covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
Bank Holding Company Regulation
GENERAL. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), the Company is subject to the
regulation and supervision of the FRB. The Company is required to file with the
FRB annual reports and other information regarding its business operations and
those of its subsidiaries. Under the BHCA, the Company's activities and those of
its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the FRB determines to be so closely related to
banking or managing or controlling banks as to be properly incident thereto.
The BHCA requires, among other things, the prior approval of the FRB in any
case where a bank holding company proposes to (i) acquire all or substantially
all of the assets of any other bank, (ii) acquire direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any bank (unless
it owns a majority of such bank's voting shares), or (iii) merge or consolidate
with any other bank holding company. The FRB will not approve any acquisition,
merger, or consolidation that would have a substantially anti-competitive
effect, unless the anti-competitive impact of the proposed transaction is
clearly outweighed by a greater public interest in meeting the convenience and
needs of the community to be served. The FRB also considers capital adequacy and
other financial and managerial resources and future prospects of the companies
and the banks concerned, together with the convenience and needs of the
community to be served, when reviewing acquisitions or mergers.
Additionally, the BHCA prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct
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or indirect ownership or control of more than 5% of the outstanding voting stock
of any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries; unless such
non-banking business is determined by the FRB to be so closely related to
banking or managing or controlling banks as to be properly incident thereto. In
making such determinations, the FRB is required to weigh the expected benefits
to the public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions and
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under the BHCA to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the FRB's determination that such activity
or control constitutes a serious risk to the financial soundness and stability
of any bank subsidiary of the bank holding company.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The FRB has adopted
risk-based capital guidelines for bank holding companies. The risk-based capital
guidelines are designed to make regulatory capital requirements more sensitive
to differences in risk profiles among banks and bank holding companies, to
account for off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Under these guidelines, assets and off-balance sheet
items are assigned to broad risk categories each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less than $150 million in consolidated assets, the guidelines
will be applied on a bank-only basis unless: (a) the parent bank holding company
is engaged in non-bank activity involving significant leverage, or (b) the
parent company has a significant amount of outstanding debt that is held by the
general public. The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities,
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such as standby letters of credit) is 8%. At least 4% of the total capital is
required to be "Tier I" capital, consisting of common stockholders' equity and
certain preferred stock, less certain goodwill items and other intangible
assets. The remainder, "Tier II Capital," may consist of (a) the allowance for
loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying
preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory
convertible securities, and (f) qualifying subordinated debt. Total capital is
the sum of Tier I and Tier II capital less reciprocal holdings of other banking
organizations' capital instruments, investments in unconsolidated subsidiaries
and any other deductions as determined by the FRB (determined on a case-by-case
basis or as a matter of policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighing. Most investment securities (including, primarily,
general obligation claims of states or other political subdivisions of the
United States) are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations, are given a 100% risk-weighing.
Transaction related contingencies such as bid bonds, standby letters of credit
backing nonfinancial obligations, and undrawn commitments (including commercial
credit lines with an initial maturity or more than one year) have a 50%
risk-weighing. Short term commercial letters of credit have a 20% risk-weighing
and certain short-term unconditionally cancelable commitments have a 0%
risk-weighing.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
Bank Regulation
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As
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an FDIC-insured institution, the Bank is subject to regulation, supervision and
control of the FDIC, an agency of the federal government. The regulations of the
FDIC and the Department impact virtually all activities of the Bank, including
the minimum level of capital the Bank must maintain, the ability of the Bank to
pay dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
INSURANCE OF DEPOSITS. The Bank's deposits are insured up to a maximum of
$100,000 per depositor under the BIF. The FDIC has established a risk-based
assessment system for all insured depository institutions. Under this system,
the FDIC has established an insurance premium assessment system based upon: (i)
the probability that the insurance fund will incur a loss with respect to the
institution; (ii) the likely amount of the loss; and (iii) the revenue needs of
the insurance fund. In compliance with this mandate, FDIC has developed a matrix
that sets the assessment premium for a particular institution in accordance with
its capital level and overall rating by the primary regulator. Under the matrix
as currently in effect, the assessment date ranges from 0 to 31 basis points of
assessed deposits.
DIVIDEND RIGHTS. Under the Banking Act, a bank may declare and pay
dividends only if, after payment of the dividend, the capital stock of the bank
will be unimpaired and either the bank will have a surplus of not less than 50%
of its capital stock or the payment of the dividend will not reduce the bank's
surplus.
RECENT REGULATORY ENACTMENTS. On September 30, 1996, the Deposit Insurance
Funds Act of 1996 (the "Deposit Act") became law. The primary purpose of the
Deposit Act is to recapitalize the Savings Association Insurance Fund of the
FDIC (the "SAIF") by charging all SAIF member institutions a one-time special
assessment. The Deposit Act will lead to equalization of the deposit insurance
assessments between BIF and SAIF insured institutions, and will also separate
out from insurance assessments payments required for debt service and principal
repayment on bonds issued by the Federal Finance Corporation ("FICO") in the
mid-1980s to fund a portion of the thrift bailout. Under the Deposit Act,
BIF-insured institutions like the Bank will, for the first time, be required to
pay a portion of the obligations owed under the FICO bonds. SAIF institutions
will be required to pay 6.4 basis points on assessed deposits while BIF
institutions will only be required to pay 1.3 basis points on assessed deposits.
This disparity will stay in effect until such time as the Federal thrift and
commercial bank charters are merged and the deposit insurance funds are
thereafter merged. Under the Deposit Act, this may occur by January 1, 1999. At
that time, all federally insured institutions should have the same total FDIC
assessment.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act (the "Interstate Act") was enacted. The
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Interstate Act generally enhances the ability of bank holding companies to
conduct their banking business across state borders. The Interstate Act has two
main provisions. The first provision generally provides that, commencing on
September 29, 1995, bank holding companies may acquire banks located in any
state regardless of the provisions of state law. These acquisitions are subject
to certain restrictions, including caps on the total percentage of deposits that
a bank holding company may control both nationally and in any single state. New
Jersey law currently allows interstate acquisitions by bank holding companies
whose home state has "reciprocal" legislation which would allow acquisitions by
New Jersey-based bank holding companies.
The second major provision of the Interstate Act permits, beginning on June
1, 1997, banks located in different states to merge and continue to operate as a
single institution in more than one state. States may, by legislation passed
before June 1, 1997, opt out of the interstate bank merger provisions of the
Interstate Act. In addition, states may elect to opt in and allow interstate
bank mergers prior to June 1, 1997.
A final provision of the Interstate Act permits banks located in one state
to establish new branches in another state without obtaining a separate bank
charter in that state, but only if the state in which the branch is located has
adopted legislation specifically allowing interstate de novo branching.
In April, 1996, the New Jersey legislature passed legislation which would
permit interstate bank mergers prior to June 1, 1997, provided that the home
state of the institution acquiring the New Jersey institution permits interstate
mergers prior to June 1, 1997. In addition, the legislation permits an
out-of-state institution to acquire an existing branch of a New Jersey-based
institution, and thereby conduct a business in New Jersey. The legislation does
not permit interstate de novo branches. This legislation is likely to enhance
competition in the New Jersey marketplace as bank holding companies located
outside of New Jersey become freer to acquire institutions located within the
state of New Jersey.
Item 2. Description of Property
The Company conducts its business through its main office located at 630
Godwin Avenue, Midland Park, New Jersey, and its two branch offices. The
following table sets forth certain information regarding the Company's
properties as of December 31, 1996.
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<TABLE>
<CAPTION>
Leased Date of Lease
Location or Owned Expiration
- -------- -------- ----------
<S> <C> <C>
630 Godwin Avenue Owned ---
Midland Park, NJ
386 Lafayette Avenue Owned ---
Hawthorne, NJ
87 Berdan Avenue Leased 08/31/99
Wayne, NJ
</TABLE>
Item 3. Legal Proceedings
The Company and the Bank are periodically parties to or otherwise involved
in legal proceedings arising in the normal course of business, such as claims to
enforce liens, claims involving the making and servicing of real property loans,
and other issues incident to the Bank's business. Management does not believe
that there is any pending or threatened proceeding against the Company or the
Bank which, if determined adversely, would have a material effect on the
business or financial position of the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the Registrant's shareholders
during the Fourth Quarter of fiscal 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There is currently no established pubic market for the Common Stock. The
Common Stock is not currently traded on any recognized exchange or trading
market. As of December 31, 1996, there were approximately 622 holders of record
of Common Stock.
The Company may pay dividends as declared from time to time by the
Company's Board of Directors out of funds legally available therefor, subject to
certain restrictions. Since dividends from the Bank will be the Company's sole
source of income, any restriction on the Bank's ability to pay dividends will
act as a restriction on the Company's ability to pay dividends. Under the
Banking Act, no cash dividend may be paid by the Bank unless, following the
payment of such dividend, the capital stock of the Bank will be unimpaired and
the Bank will have a surplus of no less than 50% of its capital stock or, if
not, the payment of such
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dividend will not reduce the surplus of the Bank. In addition, the Bank cannot
pay dividends in such amounts as would reduce its capital below the regulatorily
imposed minimums.
During fiscal 1996, the Company paid semi-annual cash dividends of $0.21
per share for an annual dividend payout ratio of 14.6%. During fiscal 1995, the
Company paid semi-annual cash dividends of $0.18 per share for an annual
dividend payout ratio of 14.2%.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information required by this item is incorporated by reference from the
Registrant's Annual Report to Shareholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 7. Financial Statements
The information required by this item is incorporated by reference from the
Registrant's Annual Report to Shareholders under the caption "Consolidated
Statements of Financial Condition."
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors and Executive Officers of the Company; Compliance with Section
16(a) of the Exchange Act
Information concerning directors and executive officers is included in the
definitive Proxy Statement for the Company's 1997 Annual Meeting of Shareholders
under the captions "Proposal I Election of Directors" and information concerning
compliance with Section 16(a) of the Exchange Act is included under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934," each of
which is incorporated herein by reference. It is expected that such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than April 29, 1997.
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The following table sets forth certain information about each executive
officer of the Company who is not also a director.
<TABLE>
<CAPTION>
Principal Occupation
Name, Age and Position Officer Since (1) During Past Five Years
- ---------------------- ----------------- ----------------------
<S> <C> <C>
M. Bernard Joustra, 60, 1991 Vice President,
Vice President Commercial Lending,
Atlantic Stewardship
Bank
</TABLE>
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(1) Includes prior service as an officer of the Bank.
Item 10. Executive Compensation
Information concerning executive compensation is included in the definitive
Proxy Statement for the Company's 1997 Annual Meeting of Shareholders under the
caption "Executive Compensation," which is incorporated herein by reference. It
is expected that such Proxy Statement will be filed with the Securities and
Exchange Commission no later than April 29, 1997.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is included in the definitive Proxy Statement for the Company's 1997
Annual Meeting of Shareholders under the caption "Security Ownership of Certain
Beneficial Owners and Management," which is incorporated herein by reference. It
is expected that such Proxy Statement will be filed with the Securities and
Exchange Commission no later than April 29, 1997.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Company's 1997 Annual Meeting
of Shareholders under the caption "Certain Transactions with Management," which
is incorporated herein by reference. It is expected that such Proxy
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Statement will be filed with the Securities and Exchange Commission no later
than April 29, 1997.
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<C> <S>
3(i) Certificate of Incorporation of the Company(1)
3(ii) Bylaws of the Company(1)
10(i) 1995 Incentive Stock Option Plan(1)
10(ii) 1995 Stock Option Plan for Non-Employee
Directors(1)
10(iii) 1995 Employee Stock Purchase Plan(2)
10(iv) Stock Bonus Plan(2)
10(v) Stewardship Financial Corporation Dividend
Reinvestment Plan(3)
13 Annual Report to Shareholders for the year ended
December 31, 1996
21 Subsidiaries of the Registrant(1)
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
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(1) Incorporated by reference from Exhibits 5(B)(1) to 5(B)(27)
from the Company's Registration Statement on Form 8-B,
Registration No. 0-21855, filed December 10, 1996.
(2) Incorporated by reference from Exhibits 4(a) to 23(b) from
the Company's Registration Statement on Form S-8,
Registration No. 333-20793, filed January 31, 1997.
(3) Incorporated by reference from Exhibit 4(a) from the
Company's Registration Statement on Form S-3, Registration
No. 333-20699, filed January 30, 1997.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /S/ PAUL VAN OSTENBRIDGE
--------------------------------
Paul Van Ostenbridge
Chief Executive Officer
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/S/ PAUL VAN OSTENBRIDGE
- ----------------------- Chief Executive Officer March 28, 1997
Paul Van Ostenbridge
/S/ JULIE HOLLAND Principal Financial
- ----------------------- Officer and Principal
Julie Holland Accounting Officer March 28, 1997
/S/ WILLIAM ALMROTH
- ----------------------- Director March 28, 1997
William Almroth
/S/ HERMAN deWAAL MALEFYT
- ----------------------- Director March 28, 1997
Herman deWaal Malefyt
/S/ HAROLD DYER
- ----------------------- Director March 28, 1997
Harold Dyer
/S/ EDWARD FYLSTRA
- ----------------------- Secretary and Director March 28, 1997
Edward Fylstra
/S/ WILLIAM HANSE
- ----------------------- Director March 28, 1997
William Hanse
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/S/ MARGO LANE
- ----------------------- Director March 28, 1997
Margo Lane
/S/ ARIE LEEGWATER
- ----------------------- Chairman of the Board and March 28, 1997
Arie Leegwater Director
/S/ JOHN L. STEEN
- ----------------------- Vice Chairman of the March 28, 1997
John L. Steen Board and Director
/S/ ROBERT J. TURNER
- ----------------------- Director March 28, 1997
Robert J. Turner
/S/ WILLIAM J. VANDER EEMS
- ----------------------- Director March 28, 1997
William J. Vander Eems
</TABLE>
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------ -----------------------
3(i) Certificate of Incorporation of the Company(1)
3(ii) Bylaws of the Company(1)
10(i) 1995 Incentive Stock Option Plan(1)
10(ii) 1995 Stock Option Plan for Non-Employee Directors(1)
10(iii) 1995 Employee Stock Purchase Plan(2)
10(iv) Stock Bonus Plan(2)
10(v) Stewardship Financial Corporation Dividend Reinvestment
Plan(3)
13 Annual Report to Shareholders for the year ended
December 31, 1996.
21 Subsidiaries of the Registrant(1)
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
- ------------------
(1) Incorporated by reference from Exhibits 5(B)(1) to 5(B)(27) from the
Company's Registration Statement on Form 8-B, Registration No. 0-21855,
filed December 10, 1996.
(2) Incorporated by reference from Exhibits 4(a) to 23(b) from the Company's
Registration Statement on Form S-8, Registration No. 333-20793, filed
January 31, 1997.
(3) Incorporated by reference from Exhibit 4(a) from the Company's
Registration Statement on Form S-3, Registration No. 333-20699, filed
January 30, 1997.
(b) Reports on Form 8-K
None.
SFC
STEWARDSHIP FINANCIAL CORPORATION
Annual Report 1996
(front cover)
<PAGE>
SHAREHOLDER INFORMATION
The Annual Shareholders' Meeting for Stewardship Financial Corporation will be
held at the main office, 630 Godwin Avenue, Midland Park, New Jersey, on Monday,
May 12, 1997, at 7:00 P.M.
The Corporation has 622 shareholders of record on December 31, 1996.
DIVIDEND REINVESTMENT PLAN
A total of 356 shareholders currently participate in the Corporation's
Shareholder Reinvestment Plan representing 285,956 or 63 percent of all shares
outstanding. Participants in the Plan reinvest dividends to purchase new shares
of stock at 95 percent of the market value, based on the most recent trade.
Shareholders interested in signing up for the Dividend Reinvestment Plan may
request the Plan Membership Form from Corporate Services at (201) 441-7100,
extension 118.
Stewardship Financial Corporation will provide a copy of the Annual Report on
Form 10K, free of charge, to any shareholders upon written request, including
the financial statements and schedules which have been filed with the Securities
and Exchange Commission. Requests should be addressed to Stewardship Financial
Corporation, Attn: Ellie King, Assistant Secretary, 630 Godwin Avenue, Midland
Park, NJ 07432-1405.
DIVIDEND
The Stewardship Financial Corporation Board of Directors declared a cash
dividend in the amount of $.24 per common share payable March 28, 1997, to
shareholders of record date February 28, 1997. This represents a $.03 increase,
or a 14.3 percent increase, over the previous six month dividend.
RECENT HISTORY OF DIVIDENDS PAID
September 30, 1996 $.21
March 29, 1996 $.21
September 29, 1995 $.18
March 31, 1995 $.18
September 30, 1994 $.15
March 31, 1994 $.15
<PAGE>
"The fundraiser was exceptionally successful because of friends like you . . .
Thanks to your generosity, we have an excellent "foundation" for this exciting
project."
Eileen Brouwer
Director of Marketing and Development
Christian Health
Care Center, Wyckoff
OUR CHARACTER AND IDENTITY
We are an independent commercial bank dedicated to meeting the financial needs
of the northern New Jersey community. Our associates work together as a team,
offering superior customer service. We recognize the value of all our customers
and we recognize our responsibility to treat each one fairly and with respect.
We invest in a prudent manner to safeguard assets, provide adequate capital
growth and recognize shareholders with a proper return. As a responsible
employer, we provide a caring, professional environment where our associates can
be productive and are encouraged to grow.
We are pleased to tithe or share ten percent of our pre-tax profits with
Christian and local charities.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Shareholder Information ...................................Inside Front Cover
Character and Identity .....................................................1
Vision Statement ...........................................................2
Holding Company ............................................................3
Shareholders' Message ......................................................4
Board of Directors .........................................................5
Officers of the Bank .......................................................6
Departments ................................................................7
BEACH Committee ........................................................8 - 9
1996 Tithing .........................................................10 - 11
Partners in Stewardship ...................................................12
Commercial Customers .................................................13 - 14
Growth History of the Bank ................................................15
Tithe Distribution ........................................................16
Selected Financial Data....................................................17
Management's Discussion and Analysis..................................18 - 31
Independent Auditor's Report...............................................32
Management Responsibility Statement........................................33
Consolidated Statements of Financial Condition.............................34
Consolidated Statements of Income..........................................35
Consolidated Statements of Changes in Stockholders' Equity.................36
Consolidated Statements of Cash Flows......................................37
Notes to Consolidated Financial Statements............................38 - 54
</TABLE>
<PAGE>
"The Lord has used your organization to be a blessing to many other Christian
groups like ours. Your gift will make it possible for us to touch the lives of
many young people for the Lord."
Gilbert P. Kitchen,
Supt., Dir. of Advancement
Eastern Christian School Association, North Haledon
OUR VISION STATEMENT
Within the next five years, we will be the highest regarded community bank in
our market, as a result of the dedication and motivation of our associates. We
will work together as a team, continually striving to improve our high level of
service while improving operating efficiencies.
Seeking to expand our customer base, we will establish three new branches,
strategically placed to develop new commercial and retail, as well as deposit
and lending business.
We will place high emphasis on training our associates and providing them with a
proper work environment so they can excel. We will empower Managers to make
decisions and assist customers quickly.
Commitment to service quality is paramount and new associates will be groomed to
offer our high level of customer service.
We will dedicate the proper resources to develop the services required by our
next generation of customers; including telephone banking, personal computer
banking, and electronic services. In addition to these services, we will explore
non-traditional banking products.
Within one year, we will be offering our own ATMs to complement our ATM
ACCESS/CHECK CARD Program.
2
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION, A HOLDING COMPANY, FORMED IN 1996
At the end of 1996, Stewardship Financial Corporation (SFC), a holding company,
was formed as sole owner of Atlantic Stewardship Bank.
Our Shareholders maintain the same number of shares in the new holding company
as in Atlantic Stewardship Bank. The Bank is a separate subsidiary of
Stewardship Financial Corporation.
This move by your Board will help protect our independence while opening windows
of opportunity for new business.
[PHOTO]
Setting aside some time for informal conversation are Arie Leegwater (left),
Chairman of the Board, and Paul Van Ostenbridge, President and Chief Executive
Officer.
3
<PAGE>
MESSAGE TO THE SHAREHOLDERS
Dear Shareholders and Friends:
We are pleased to report our highest earnings ever in the amount of $1,317,317,
for the year ended December 31, 1996. This represents a 15.1% increase over the
previous year. The Return on Average Shareholders' Equity at year end was
13.62%, compared with 13.54% for the same period a year ago. The Return on
Average Assets was 1.09% for the year ended 1996 and 1.10% for the same period a
year ago. Cash Dividends paid per share increased 16.7% in 1996 to $.42 per
share. Shareholders' Equity increased to $10,407,000, representing a 13.7%
increase over the previous year end total of $9,151,000. Total Assets grew 13.7%
to $128,621,000 at year end. Loan growth was once again exceptional at 13.8%
over the previous year. Loan balances were $82,322,000 as of December 31, 1996.
In addition, your Bank has been very successful in working with the Federal Home
Loan Bank to obtain grants to be used for low to moderate income housing in
neighboring Paterson, New Jersey. Grants for 1996 and 1997 totaled $605,480,
which were used for two separate projects.
New Branch to Open
We are pleased to announce we will be opening a new branch in May at 30 Franklin
Turnpike, Waldwick, New Jersey. This storefront branch is located in the busiest
center in Waldwick, presenting a great opportunity for your Bank as well as the
Borough, because we will be the only local, community bank in Waldwick. Please
recommend your friends, family, and any businesses you know in the Waldwick area
to transfer their banking to this new branch.
New Products and Services
Another valuable service to be introduced is our own Automatic Teller Machines.
As you know, we currently issue ATM ACCESS/CHECK CARDS which will now be
enhanced by our own ATMs. The first installations will be in our Wayne and
Waldwick offices, and we anticipate offering ATM service in Midland Park and
Hawthorne later in the year. Our customers will further appreciate the added
convenience of a new Telephone Banking Service, to be introduced this year,
enabling them to access account information by telephone during banking hours
and, more importantly, after hours, evenings and weekends.
We also look forward to introducing the Premium Growth Account (PGA). The PGA is
an FDIC-insured tiered money market account, with three tiers paying increased
rates for higher balances. This account is ideal for investors wishing to
deposit substantial balances, yet wanting to stay liquid while earning a proper
return. There is a limited check writing feature on this account and there is no
brokerage fee to establish a PGA.
We have much to look forward to and be thankful for now, as well as in the
coming year. And, given today's changing banking environment, we are
well-positioned to attract the many individuals, families, and businesses whose
needs are best served by a local, community bank.
We sincerely appreciate the support of our Shareholders and commend all of the
Bank's Associates for an outstanding year. We look forward to building on this
success in 1997.
Arie Leegwater Paul Van Ostenbridge
Chairman of the Board of Directors President and Chief Executive Officer
4
<PAGE>
OUR BOARD OF DIRECTORS
[PHOTO]
Seated, left to right: Paul Van Ostenbridge, President and Chief Executive
Officer; Arie Leegwater, Chairman of the Board; John L. Steen, Vice Chairman of
the Board
Standing, left to right: Margo Lane; William C. Hanse; William Almroth; Herman
deWaal Malefyt; Harold Dyer; Robert J. Turner; William J. Vander Eems; Edward
Fylstra, Secretary of the Board
"Because of your compassion... we are able to continue to be the only shelter to
serve families of any configuration..." Lyn Headley-Moore Executive Director
St. Peter's Haven, Shelter for Homeless Families, Clifton
OUR BOARD OF DIRECTORS
William Almroth
Retired
Herman deWaal Malefyt
President, Skyline Greenhouses, Inc.
Harold Dyer
Retired
Edward Fylstra, Secretary
Managing Partner, Fylstra, Wright & Co.
William C. Hanse
Partner, Hanse & Hanse
Margo Lane
Corporate Communications Manager
Garden State Paper
Corporate Secretary, Lane Electric, Inc.
Arie Leegwater, Chairman
Owner, Arie Leegwater Associates
John L. Steen, Vice Chairman
President, Steen Sales, Inc.
President, Dutch Valley Throwing Co., Inc.
Robert J. Turner
President, The Turner Group
William J. Vander Eems
President, William Van Der Eems, Inc.
Paul Van Ostenbridge
President and Chief Executive Officer
Atlantic Stewardship Bank
OUR BUSINESS
DEVELOPMENT BOARD
Samuel Braen
William Braunius
William R. Cook
Donald De Bruin
Paul D. Heerema
Garret Hoogerhyde
Ruth Kuiken
Bartel Leegwater
Samuel J. Steen
Abe Van Wingerden
Ralph Wiegers
5
<PAGE>
"We consider it a special privilege to be included among the charities who
benefit from your commitment to stewardship. Our hope is to also be responsible
stewards of the gifts we receive."
OFFICERS OF ATLANTIC STEWARDSHIP BANK
E. Patricia Geurkink
Executive Director,
Eastern Christian Children's Retreat,
Wyckoff
Paul Van Ostenbridge
President and Chief Executive Officer
M. Bernard Joustra
Vice President
Julie E. Holland
Assistant Vice President and Treasurer
James S. Donado
Assistant Vice President
Elizabeth M. Lamb
Assistant Vice President
Dennis R. Murley
Assistant Vice President
Cynthia Perrotta
Assistant Vice President
Raymond J. Santhouse
Assistant Vice President
Gail K. Tilstra
Assistant Vice President
David Van Lenten
Assistant Vice President
Alma M. Baxter
Assistant Secretary
Robert A. Giannetti
Assistant Secretary
Ellie King
Assistant Secretary
Nancy Lystash
Assistant Secretary
Kristine Rasile
Assistant Secretary
David A. Struck
Assistant Secretary
Mary E. Ishman
Assistant Treasurer
Marie E. McCall
Assistant Treasurer
Louise H. Rohner
Administrative Assistant
Jean M. Schaver
Administrative Assistant
6
<PAGE>
MORTGAGE/LENDING DEPARTMENT
[PHOTO]
Liz Lamb (seated center), Assistant Vice President, and Jean M. Schaver (second
from right), Administrative Assistant, oversee our active Mortgage and Lending
Departments. They are pictured with their 'team' of able assistants, including
(left to right): Mary Russell, Kathy Gonzalez, Sarah Raney, and Judy Van Grouw.
OPERATIONS
The Bank will introduce its own ATMs in 1997. Plans are underway to bring the
first Drive-in ATM to the Wayne Branch in April.
[PHOTO]
Talking with a customer, Nancy Lystash, Assistant Secretary and head of the
Bank's Operations Department, outlines the many benefits of 24-hour ATM banking
with NYCE.
Administration and Human Resources
[PHOTO]
Ellie King, (left) Assistant Secretary/Administration and Gail K. Tilstra,
Assistant Vice President/Human Resources are representative of teamwork in
action at Atlantic Stewardship Bank.
7
<PAGE>
UNDER THE BEACH UMBRELLA - 1996
Since 1992, Atlantic Stewardship Bank's BEACH (Bank Employees Assisting
CHarities) Committee is living proof that 'Stewardship' is not simply a concept,
but a way of life for our staff. Our 25 bank associates who comprise the BEACH
Committee, bring the practice of 'Stewardship' into their communities with their
heads, their hands, and above all, their hearts.
[PHOTO]
Our BEACH Executive Committee:
(seated, left to right): Elaine Booth, Chairperson and Jennifer Heller,
Secretary with the BEACH Committee team:
(standing, left to right): Liz Lamb, Julie Holland, Carolyn Stokes, and Jean
Schaver
8
<PAGE>
Employee service projects sponsored by the BEACH Committee in 1996 included the
following:
Used Clothing Drive for Star of Hope Ministries and The Corner Closet; Christmas
and All Occasion Card Collection to benefit St. Jude's Ranch for Children and
Meals for the Homeless.
Shared customer and employee projects sponsored by the BEACH Committee in 1996
included the following:
Baby Bundles with the Midland Park, Hawthorne, and Wayne Girl Scouts to benefit
Several Sources Foundation, Bethany Christian Services, and Life Advocates. The
Fourth Annual Holland Christian Home Tea, the Thanksgiving Food Drive, and the
Christmas Wish Tree (which realized more than 150 gifts), to benefit Star of
Hope and Bethlehem Ministries.
"Please know that your donation... will help continue our efforts to provide
substance-free activities to the teenagers of Midland Park."
Gail Harmon PACT (People Assisting Community Teens)
A highlight of the BEACH Committee's efforts for 1996 was an Employee Cookbook.
More than 250 recipes were gathered from bank employees and compiled by
Committee members. The result is a 100-page volume entitled Atlantic Stewardship
Bank's Cookin'. Through cookbook sales, the BEACH Committee donated $2,141.00 to
the Eastern Christian Children's Retreat.
9
<PAGE>
GIVING BACK: OUR TITHING PROGRAM FOR 1996
In addition to supporting local civic and charitable organizations, we also
practice tithing, which means we give back ten percent of our pre-tax earnings
to Christian charities, hospitals, missions, and schools. Our 1996 tithe
distribution to 132 organizations totaled $151,000, surpassing our 1995 tithe
distribution to 116 organizations which totaled $142,000.
"We are grateful to (your) board for choosing to share part of (your) 1996 tithe
with us. This gift will help us provide services and support to our missionaries
in Africa and here in the United States."
Ted Barnett, Ed.D.
Africa Inland
Mission International, Inc.,
Pearl River, NY
10
<PAGE>
[PHOTO]
Arie Leegwater (3rd from right), Chairman of the Board of Atlantic Stewardship
Bank, presents checks to (left to right) Gil Kitchen, Interim Superintendent,
Eastern Christian School, North Haledon; Patricia Geurkink, Executive Director,
Eastern Christian Children's Retreat, Wyckoff; Claire Brunetti, Director of
Development, Wyckoff Family YMCA; Betty Sullivan, Chairman, The Love Fund, Inc.,
Midland Park; and Douglas Struyk, President and CEO, Christian Health Care
Center, Wyckoff.
[PHOTO]
Arie Leegwater (4th from right), Chairman of the Board and John Steen (4th from
left), Vice Chairman of the Board of Atlantic Stewardship Bank present checks to
(left to right) Joseph Scillieri, Administrator, Holland Christian Home, North
Haledon; Marie S. Macioci, Board of Directors, Paterson Habitat for Humanity;
Sister Alice Matthew, OP, Director, Siena Village, Wayne; Susan C. Bucci,
Principal and Tammy LeFevre, School Board Secretary, Calvary Christian Academy,
Wayne; and Bob Buchanan, Executive Assistant, Eva's Kitchen, Paterson.
11
<PAGE>
"It is on behalf of our patients that we thank you for your support."
Shirley Friedlander
Deborah Hospital Foundation
Browns Mills
PARTNERS IN STEWARDSHIP
"This award results from the successful partnership between the Federal Home
Loan Bank, Atlantic Stewardship Bank, and the Paterson Coalition for Housing,"
said former Governor of New Jersey, Jim Florio (3rd from right). "It
demonstrates how a caring neighborhood, working with a community non-profit
group, can meet the fundamental needs of decent housing; home by home, family by
family.
As Director of the Federal Home Loan Bank, Mr. Florio presented a check for
$100,000 to Therese Tolomeo, Executive Director of the Paterson Coalition for
Housing, Inc. Pictured with Ms. Tolomeo and Mr. Florio, left to right, are:
Lissette Garcia, Paterson Coalition for Housing; Paul Van Ostenbridge, ASB
President and Chief Executive Officer; Mark Sisco, Paterson Coalition for
Housing; and David A. Struck, ASB Community Development Officer and Assistant
Secretary.
[PHOTO]
12
<PAGE>
CUSTOMER RELATIONSHIPS
An important part of our service to commercial customers involves understanding
their specific financial needs and working to develop the right products and
services that help meet those needs. One example of this synergy is WriteLine,
an account developed for businesses who need a revolving line of credit for
working capital in the course of their normal business operations. Customers
access WriteLine by check, which can be written to any payee, such as a
supplier. WriteLine checks may also be deposited directly into a business
account.
In addition, our Business Advantage Account was developed for businesses with
limited checking account transactions. This account offers all the benefits of a
major commercial checking account without the usual large balance requirements.
Business Advantage also does not assess typical commercial account fees.
Proven cost effective for both the well-established and the newly-formed
business, this account is available to Sole Proprietors, Partnerships, and
Corporations.
More business services available to our commercial customers include:
o Commercial Checking Accounts
o Business Term Loans
o Commercial Mortgages
o Time Loans
o SBA Loans
o Business Credit Cards
o Merchant Credit Card Program
o Treasury, Tax & Loan
o Night Depository
13
<PAGE>
BOGRAD'S, RIVERDALE
[PHOTO]
Bernard Joustra, Vice President of Atlantic Stewardship Bank, congratulates
Bograd's owners, Joseph and Marcia Bograd, on the opening of their newly
relocated fine furniture and accessories retail store in Riverdale, just off
Route 287.
COMMERCE REGISTER, MIDLAND PARK
[PHOTO]
Raymond J. Santhouse (second from left), Atlantic Stewardship Bank Assistant
Vice President and Midland Park Branch Manager, visits Commerce Register, a data
base firm in Midland Park. Pictured with him are (left to right) Commerce
Register principals: Frank Castellvi; George Slingland; and Joel Rosano.
JP HOME ARAMA, HAWTHORNE
[PHOTO]
Principals of large, retail hardware store, JP Home Arama, are John (second from
right) and Joseph Psota (right). They visit with Atlantic Stewardship Bank's
Hawthorne Assistant Branch Manager and Assistant Secretary, Alma Baxter and
Louise Rohner, Administrative Assistant.
14
<PAGE>
GROWTH HISTORY
The following data represents growth patterns for Atlantic Stewardship Bank over
the past five years:
<TABLE>
<CAPTION>
At December 31 1996 1995 1994 1993 1992
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Assets ................................... 128,621 113,120 91,978 83,798 75,499
Liabilities .............................. 118,214 103,969 84,144 76,989 70,282
Stockholders' Equity ..................... 10,407 9,151 7,834 6,809 5,217
Total Liabilities and Stockholders' Equity 128,621 113,120 91,978 83,798 75,499
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
At December 31 ............ 1996 1995 1994 1993 1992
History of Stock Value
Book value per common share 22.61 20.09 17.41 15.92 13.65
</TABLE>
Corporate Services
Ellie King, Assistant Secretary
Stewardship Financial Corporation
630 Godwin Avenue
Midland Park, New Jersey 07432
(201)444-7100
Bank Counsel
William C. Hanse
Hanse & Hanse
2035 Hamburg Turnpike, Suite E
Wayne, New Jersey 07470
(201)831-8700
Branch Locations
MIDLAND PARK
630 Godwin Avenue
Raymond J. Santhouse, Branch Manager & Assistant Vice President
Dennis R. Murley, Assistant Branch Manager & Assistant Vice President
HAWTHORNE
386 Lafayette Avenue
James S. Donado, Branch Manager & Assistant Vice President
Alma M. Baxter, Assistant Branch Manager & Assistant Secretary
WAYNE
87 Berdan Avenue
Robert A. Giannetti, Branch Manager & Assistant Secretary
15
<PAGE>
TITHE DISTRIBUTION - 1996
WE ARE PLEASED TO BE OF ASSISTANCE TO
THE FOLLOWING CHARITIES THROUGH OUR 1996 TITHE DISTRIBUTION:
Africa Inland Mission, Pearl River, NY
Bessie Green Community, Inc., Newark
Bethany Christian Services, Hawthorne
Bethlehem Ministries - Mission in Paterson
Calvary Temple School, Wayne
Calvin College, Grand Rapids, MI
Christian Health Care Center, Wyckoff
Christian Reformed World Relief Committee,
Grand Rapids, MI
Christian School International Foundation, Chicago, IL
CLEAR - Counseling Center, Wyckoff
CUMAC-ECHO - Mission in Paterson
Eastern Christian Children's Retreat, Wyckoff
Eastern Christian School Association, North Haledon
Eastern Home Mission Board, Ridgewood
Elim Christian School - for handicapped children,
Palos Heights IL.
Eva's Kitchen - Mission in Paterson
Fellowship Homes, Wayne
Florence Christian Home, Wayne
Foundation for the Handicapped, Wayne
Friendship Ministries, Midland Park
Gideons International Paterson Camp
Gideons International Ramapo Camp
Goshen Christian School, Goshen, NY
Habitat for Humanity Bergen County, Hackensack
Hawthorne Christian Academy, Hawthorne
Holland Christian Home, North Haledon
Homebound Pilots, Wyckoff
Lord's Day Alliance, Wayne
Operation Double Harvest -
Food & Medical Relief Program, Haiti
Paterson Habitat for Humanity, Paterson
Ron Hutchcraft Ministries, Wayne
Siena Village - Senior Living Center, Wayne
Star of Hope Ministries - Mission in Paterson
The Love Fund, Inc., Midland Park
Wyckoff Family YMCA, Wyckoff
IN ADDITION, THE BANK HAS PROVIDED SUPPORT THROUGHOUT 1996 TO THE FOLLOWING
ORGANIZATIONS:
American Cancer Society
American Red Cross
Bergen Pines County
Hospital Bergen - Passaic Multiple Sclerosis Society
Boy Scouts of America - Bergen Passaic Council
Boys & Girls Club of Hawthorne
Calvin Coolidge School
Calvin Theological Seminary
Cathedral Choir
Center for Food Action in NJ
Cerebral Palsy Center, Bergen County
Chabad Center
Christian Homes for Children
Christian Overcomers
Community Learning Center of Wyckoff
Community Options
Corner Closet
Covenant CRC Boosters
Cystic Fibrosis Foundation
Fig Orchard
Foundation for Free Enterprise
Friends of the Louis Bay 2nd Library
Friends of the Midland Park Library
Friends of the Reformed Church Home
Girl Scout Council of Bergen County
Good Shepherd Mission
Grace Counseling Ministries
Greater Paterson Chamber of Commerce
Hawthorne's Committee on Disability Concerns
Hawthorne's Connie Mack Baseball Association
Hawthorne Caballeros
Hawthorne Chamber of Commerce
Hawthorne Chamber Symphony
Hawthorne Community Library Foundation
Hawthorne Cubs
Hawthorne Education Foundation
Hawthorne Volunteer Fire Department
Hawthorne High School
Hawthorne Lions Club
Hawthorne PBA
Hawthorne PTO Council
Hawthorne Special Rec
Hawthorne Volunteer Fire Department
Hawthorne Women's Softball
Hugh O'Brian Youth Foundation
Interchurch Softball League
Keith Van Hook Fund
Leukemia Society of New Jersey
Little Sisters of the Poor
Metropolitan Youth for Christ
Midland Park Ambulance Corps
Midland Park Volunteer Fire Company
Midland Park Education Foundation
Midland Park High School
Midland Park/Ho-Ho-Kus PBA
Midland Park PTA
New Jersey Citizens Action
North Jersey Male Chorus
Order of Rainbow for Girls
Our Lady of Consolation School
Parish Nursing Home
Paterson Adult and Continuing Education
People First, Inc.
Pompton Falls Fire Department #3
Prison Fellowship Ministries
Roosevelt School PTO
Saint Anthony School & Parish
St. Peter's Haven
Special Olympics Fund
STARS Vocational Program
Strategic Prayer Command
Summer Singers
Thomas Jefferson School
Touch the World
Unity Christian Reformed Church After School Program
Valley Hospital
Waldwick High School & Home Association
Wayne Adult Community Center, Inc.
Wayne First Aid Squad
Wayne General Hospital
Wayne Hills High School
Wayne Library
Wayne Lions Charities, Inc.
Wayne Little League
Wayne PBA
Wayne Police Athletic League
Wayne Volunteer Fire Company
Westminster Theological Seminary
William B. Mawhinney Ambulance Corp.
Wyckoff Family YMCA
Wyckoff/Midland Park Rotary
YM-YWHA of North Jersey
16
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(Dollars in thousands, except per share amounts)
EARNINGS SUMMARY:
<S> <C> <C> <C> <C> <C>
Net interest income ............................. $ 5,703 $ 5,203 $ 4,597 $ 3,943 $ 2,983
Provision for loan losses ....................... (155) (150) (295) (398) (275)
-------- -------- ------- ------- -------
Net interest income after provision for
loan losses .................................... 5,548 5,053 4,302 3,545 2,708
Noninterest income .............................. 664 466 369 474 348
Noninterest expense ............................. 4,327 3,904 3,187 2,736 2,265
-------- -------- ------- ------- -------
Income before income tax expense ................ 1,885 1,615 1,484 1,283 791
Income tax expense .............................. 568 471 482 375 271
-------- -------- ------- ------- -------
Net income ...................................... $ 1,317 $ 1,144 $ 1,002 $ 908 $ 520
======== ======== ======= ======= =======
PER SHARE DATA:
Net income ...................................... $ 2.88 $ 2.53 $ 2.27 $ 2.33 $ 1.43
Cash dividends declared ......................... 0.42 0.36 0.30 0.20 0.15
Book Value ...................................... 22.61 20.09 17.41 15.92 13.65
FINANCIAL RATIOS
Return on average assets ........................ 1.09% 1.10% 1.13% 1.16% 0.77%
Return on average Stockholders' equity .......... 13.62% 13.54% 13.51% 15.66% 1.07%
Average Stockholders' equity as a percentage
of average total assets ........................ 8.02% 8.14% 8.39% 7.40% 6.95%
Tier 1 capital leverage (1) ..................... 7.80% 7.57% 8.64% 8.15% 6.91%
Tier 1 risk-based capital (2) ................... 12.41% 12.13% 13.79% 12.77% 11.50%
Total risk-based capital (2) .................... 13.66% 13.38% 15.04% 14.27% 12.70%
Dividend ratio .................................. 14.56% 14.20% 13.17% 8.52% 10.15%
SELECTED YEAR-END BALANCE:
Total assets .................................... $128,621 $113,120 $91,978 $83,798 $75,499
Total deposits .................................. 115,825 101,789 82,576 76,195 68,985
Stockholders' equity ............................ 10,407 9,151 7,834 6,809 5,217
Shares outstanding .............................. 460 455 450 428 382
- -------------------
(1) As a percentage of average quarterly assets.
(2) As a percentage of total risk-weighted assets.
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section provides an analysis of the Stewardship Financial Corporation's
(the "Corporation") consolidated financial condition and results of operations
for the years ended December 31, 1996, 1995 and 1994. The analysis should be
read in conjunction with the related audited consolidated financial statements
and the accompanying notes presented elsewhere herein.
BUSINESS OF STEWARDSHIP FINANCIAL CORPORATION
The Corporation, organized in January, 1995, as a business corporation under the
laws of the State of New Jersey, was established by the Board of Directors of
Atlantic Stewardship Bank (the "Bank") to become a holding company for the Bank.
The shareholders of the Bank approved the holding company formation at the
annual meeting in 1996. After obtaining approval and submitting appropriate
applications, the Corporation, on November 22, 1996, acquired all of the shares
of the Bank in exchange for its own shares, on a share per share basis. The
Bank, and its subsidiary, Stewardship Investment Corp., is now the wholly-owned
subsidiary of the Corporation.
The Corporation has its main office located in Midland Park, Bergen County, New
Jersey and operates two branches located in Hawthorne and Wayne, Passaic County,
New Jersey. The Corporation conducts a general commercial and retail banking
business encompassing a wide range of traditional deposit and lending functions
along with the other customary banking services. Stewardship Investment Corp. is
a wholly-owned nonbank subsidiary of Atlantic Stewardship Bank, whose primary
business is to own and manage the Bank's investment portfolio.
EARNINGS SUMMARY
The Corporation reported net income of $1.3 million, or $2.88 per share, for the
year ended December 31, 1996, an increase of $173,000, or 15.1%, above the $1.1
million recorded for 1995. Earnings for 1995 had increased $142,000, or 14.2%,
over the 1994 earnings of $1.0 million. Earnings have increased in both years as
a result of increases in net interest income and noninterest income offset by
increases in noninterest expense.
The return on average assets decreased slightly in 1996 to 1.09% from 1.10% in
1995 and 1.13% in 1994. The return on average equity increased to 13.62% in 1996
from 13.54% in 1995 and 13.51% in 1994.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Corporation's principal source of revenue is the net interest income derived
from the Bank, which represents the difference between the interest earned on
assets and interest paid on funds acquired to support those assets. Net interest
income is affected by the balances and mix of interest-earning assets and
interest-bearing liabilities, changes in their corresponding yields and costs,
and by the volume of interest-earning assets funded by noninterest-bearing
deposits. The Corporation's principal interest-earning assets are loans made to
businesses and individuals, investment securities, and federal funds sold.
In 1996, net interest income increased to $5.7 million from $5.2 million in
1995, an increase of $500,000, or 9.6%. This was caused by an increase of $4.7
million, or 23.3%, in net average interest-earning assets (average
interest-earning assets less average interest-bearing liabilities) partially
offset by a decrease in interest rates on interest-earning assets (22 basis
points) and an increase in interest rates on interest-bearing liabilities (20
basis points).
18
<PAGE>
Interest income, on a tax equivalent basis, increased $1.1 million, or 13.1%,
during 1996 to $9.2 million from $8.2 million earned during 1995. The increase
was due to an increase in the average volume of interest-earning assets offset
by a decrease in yields on interest-earning assets. Yields decreased primarily
due to market pressure on loan and investment rates. Average interest-earning
assets increased $15.7 million in 1996, or 16.2%, over the 1995 amount with
average loans attributing to $12.1 million of the increase due primarily to the
Corporation's increased competitiveness within the market place.
Interest expense increased $579,000, or 20.9%, during 1996 to $3.4 million. The
increase was due to an increase in average interest-bearing liabilities of $11.0
million, or 14.3%, to $87.8 million during 1996 and to a rise in interest rates
paid on interest-bearing liabilities. Yields on interest-bearing liabilities
increased to 3.81% during 1996 from 3.61% during 1995. Contributing to this
increase was a general rise in interest rates paid on term instruments as well
as a change in the mix of interest-bearing products. Depositors, attracted by
more competitive term interest rates, continued to redeploy funds from
interest-bearing demand and savings deposits to higher yielding term deposits.
Despite this move toward higher yielding instruments, the Corporation was able
to maintain its balances in noninterest-bearing demand deposits. Average
noninterest-bearing demand deposits increased $3.6 million, or 20.0%, to $21.6
million during 1996.
In 1995, net interest income increased to $5.2 million from $4.6 million in
1994, an increase of $606,000, or 13.2%. Interest income, on a tax equivalent
basis, increased $1.6 million, or 23.5%, during 1995 to $8.2 million from $6.6
million earned in 1994. The increase was due primarily to an increase in the
average volume of interest-earning assets and an increase in yields on
interest-earning assets. Average interest-earning assets increased $14.7 million
in 1995, or 17.7%, over the 1994 amount. Interest expense increased $972,000, or
54.0%, during 1995. This increase can be attributed to an increase in rates on
interest-bearing liabilities and an increase in average volume of
interest-bearing liabilities. Average demand deposits continued to grow during
1995 and increased $2.6 million, or 17.0%, over the 1994 average balances.
The following table reflects the components of the Corporation's net interest
income for the years ended December 31, 1996, 1995 and 1994 presented herein,
(1) average assets, liabilities, and stockholders' equity,(2) interest income
earned on interest-earning assets and interest expense paid on interest-bearing
liabilities,(3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, and(4) net yield on interest-earning
assets. Nontaxable income from investment securities and loans is presented on a
tax-equivalent basis assuming a statutory tax rate of 34% and compliance with
Section 291 of the Internal Revenue Code for 1996, 1995 and 1994. This was
accomplished by adjusting this income upward to make it equivalent to the level
of taxable income required to earn the same amount after taxes.
19
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ ------------------------------ --------------------------
AVERAGE AVERAGE AVERAGE
INTEREST RATES INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID
------- ------- ------- ------- -------- ------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) ...................... $ 76,751 $6,926 9.02% $ 64,612 $6,040 9.35% $55,371 $4,960 8.96%
Taxable investment securities .. 20,650 1,319 6.39 17,575 1,120 6.37 13,883 803 5.78
Tax-exempt investment
securities (2) ................ 8,896 631 7.09 8,992 648 7.21 9,505 694 7.30
Other interest-earning assets .. 6,633 360 5.43 6,032 355 5.89 3,801 152 4.00
-------- ------ -------- ------ ------- ------
Total interest-earning assets .. 112,930 9,236 8.18 97,211 8,163 8.40 82,560 6,609 8.01
------ ------ ------
Net interest-earning assets:
Allowance for loan losses ...... (1,249) (1,127) (989)
Other assets ................... 8,161 7,711 6,887
-------- -------- -------
Total assets ................... $119,842 $103,795 $88,458
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits ...................... $ 23,150 $ 485 2.10% $ 20,813 $ 446 2.14% $21,363 $ 441 2.06%
Savings deposits ............... 20,353 458 2.25 19,839 448 2.26 19,667 440 2.24
Time deposits .................. 42,625 2,329 5.46 34,552 1,797 5.20 23,544 892 3.79
Borrowing ...................... 1,695 78 4.60 1,645 80 4.86 721 26 3.61
-------- ------ -------- ------ ------- ------
Total interest-bearing
liabilities ................... 87,823 3,350 3.81 76,849 2,771 3.61 65,295 1,799 2.76
------ ------ ------
Noninterest-bearing liabilities:
Demand deposits ................ 21,626 18,028 15,408
Other liabilities .............. 668 468 335
Stockholders' equity ........... 9,725 8,450 7,420
-------- -------- -------
Total liabilities and
stockholders' equity .......... $119,842 $103,795 $88,458
======== ======== =======
Net interest income
(taxable equivalent basis) .... $5,886 $5,392 $4,810
====== ====== ======
Net interest spread
(taxable equivalent basis) .... 4.37% 4.79% 5.25%
==== ==== ====
Net yield on interest-earning
assets (taxable equivalent
basis) (3) .................... 5.21% 5.55% 5.83%
==== ==== ====
</TABLE>
- -----------------
(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. Tax equivalent
adjustments are based on a marginal tax rate of 34% and the provisions of
Section 291 of the Internal Revenue Code.
(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.
20
<PAGE>
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields earned and rates paid on such assets and liabilities on a tax
equivalent basis. The table reflects the extent to which changes in the
Corporation's interest income and interest expense are attributable to changes
in volume (changes in volume multiplied by prior rate) and changes in rate
(changes in rate multiplied by prior year volume). Changes attributable to the
combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
1996 VERSUS 1995 1995 VERSUS 1994
------------------------- -----------------------------
(In thousands)
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------- ---------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans ............................................... $1,102 $(216) $ 886 $ 856 $224 $1,080
Taxable investment securities ....................... 196 3 199 229 88 317
Tax-exempt investment
securities ......................................... (7) (10) (17) (29) (17) (46)
Federal funds sold .................................. 34 (29) 5 113 90 203
------ ----- ------ ------ ---- ------
Total interest-earning assets ...................... 1,325 (252) 1,073 1,169 385 1,554
------ ----- ------ ------ ---- ------
Interest expense:
Interest-bearing demand
deposits ........................................... $ 49 $ (10) $ 39 $ (12) $ 17 $ 5
Savings deposits ................................... 12 (2) 10 4 4 8
Time deposits ...................................... 437 95 532 504 401 905
Borrowings ......................................... 2 (4) (2) 42 12 54
------ ----- ------ ------ ---- ------
Total interest-bearing
liabilities ....................................... 500 79 579 538 434 972
------ ----- ------ ------ ---- ------
Net change in net interest income $ 825 $(331) $ 494 $ 631 $(49) $ 582
====== ===== ====== ====== ==== ======
</TABLE>
PROVISION FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses considered by management
to be adequate to cover the inherent risk of loss associated with its loan
portfolio. On an ongoing basis, management analyzes the adequacy of this
allowance by considering the nature and volume of the Corporation's loan
activity, financial condition of the borrower, fair market value of underlying
collateral, and changes in general market conditions. Additions to the allowance
for loan losses are charged to operations in the appropriate period. Actual loan
losses, net of recoveries, serve to reduce the allowance. The appropriate level
of the allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates.
The loan loss provision totaled $155,000 in 1996 representing a 3.3% increase
from the 1995 provision of $150,000. The 1995 provision declined 49.2% from the
1994 provision of $295,000.
NONINTEREST INCOME
Noninterest income increased $198,000, or 42.4%, to $664,000 during the year
ended December 31, 1996, when compared with $466,000 during the 1995 period. The
increase in noninterest income resulted primarily from an increase in fees and
service charges on deposit accounts of $147,000 to $512,000 for the year ended
December 31, 1996 due to the expanding customer base. Gain on sales of mortgage
loans increased $28,000 to $52,000 for 1996 due to an increase in the volume of
loans originated for sale.
Noninterest income increased by $97,000, or 26.1%, to $466,000 during the year
ended December 31,1995, when compared with $370,000 during the 1994 period. The
increase resulted primarily from an increase in fees and service charges offset
by a volume related decline in gain on sales of mortgage loans.
21
<PAGE>
NONINTEREST EXPENSE
Although management is committed to containing noninterest expense, the
continued growth of the Corporation has caused noninterest expense to increase
by $423,000, or 10.8%, to $4.3 million for the year ended December 31, 1996,
compared to $3.9 million for the same period in 1995. Salaries and employee
benefits, the major component of noninterest expense, increased $207,000, or
10.9%. The increase was due primarily to additions to staff in the accounting
and operations areas of the Corporation and general merit and salary increases.
Increases in equipment, data processing, and stationery and supplies totaling
$115,000 were due to a full core computer system conversion which was completed
in April, 1996. Miscellaneous expense increased $98,000 due primarily to the
general growth of the deposit base.
In accordance with its By-laws to tithe ten percent (10%) of its pre-tax profits
to various charities, the Corporation had charitable contributions totaling
$151,000 for the year ended December 31, 1996, an increase of $9,000, or 6.2%,
over the same period in 1995.
Offsetting these increases in noninterest expense was a reduction in FDIC
insurance premium of $54,000 to $49,000 for the year ended December 31, 1996,
compared with $103,000 for the same period in 1995. This was a result of the
reduction in premiums assessed by the FDIC partially offset by the Corporation
being assessed a special Savings Association Insurance Fund (SAIF) Assessment of
$37,000 on September 30, 1996. The SAIF assessment, incurred under the Deposit
Insurance Funds Act of 1996, was calculated based on the deposits purchased from
the Resolution Trust Corporation in March, 1995.
Noninterest expense increased $717,000, or 22.5%, to $3.9 million for the year
ended December 31, 1995, compared to $3.2 million for the same period in 1994.
Increases in salaries and employee benefits, occupancy, equipment, advertising,
and miscellaneous expense were caused primarily by the full year of operations
of the Wayne, New Jersey branch, the deposit acquisition from the Resolution
Trust Company (RTC) in March, 1995 and general growth of the Corporation. The
acquisition of deposits from the RTC caused the Corporation to record expense of
$74,000 for the amortization of goodwill and core deposit intangibles for the
first time in 1995. Offsetting these increases in noninterest expense was a
reduction in FDIC insurance premiums of $69,000.
The efficiency ratio measures gross operating expense as a percentage of
fully-taxable equivalent net interest income and other noninterest income
without taking into account security gains and losses and other nonrecurring
items. The Corporation's efficiency ratio increased to 69.9% for the year ended
December 31, 1996, compared with 69.2% and 67.0% for the years ended December
31, 1995 and 1994, respectively. This increase was due primarily to the
additional expenses incurred due to the core computer conversion. Management
believes that this conversion was necessary for the Corporation to continue to
provide services and products to an expanded customer base. The Corporation
continues to monitor the efficiency ratio and looks for ways to control expenses
while continuing to provide quality products and services to customers.
FINANCIAL CONDITION
Total assets at December 31, 1996 were $128.6 million, an increase of $15.5
million, or 13.7%, over the $113.1 million at December 31, 1995. This increase
in assets reflects, among other things, a $9.9 million increase in net loans
held for portfolio, a $2.9 million increase in federal funds sold and a $1.6
million increase in securities available for sale.
LOAN PORTFOLIO
The Corporation's loan portfolio at December 31, 1996, net of allowance for loan
losses, totaled $80.8 million, an increase of $9.9 million, or 13.9%, over the
$71.0 million at December 31, 1995. During 1996, the Corporation experienced a
steady volume of new loan originations. Increases continued to occur in most
loan categories and were caused by the commitment to competitively price
products, and the "fallout" of the small business customer from the mergers of
other financial institutions in the Corporation's market area. Commercial real
estate mortgage loans consisting of $26.8 million, or 32.6% of the total
portfolio, comprised the largest portion of the
22
<PAGE>
loan portfolio. This represented an increase of $3.5 million from $23.3 million,
or 32.2% of the total portfolio at December 31, 1995. Installment loans and
commercial loans increased $4.1 million and $1.8 million, respectively. Mortgage
loans held for sale totaled $237,000 at December 31, 1996 and consisted of 1-4
family mortgage loans. It is the policy of the Corporation to offer certain
competitive mortgage products which are immediately sold to specific investors,
servicing released. This allows the Corporation to continue to maintain a
competitive mortgage product line, recognize other fee income, and maintain
liquidity requirements. The Corporation's loans are made primarily to businesses
and individuals located in the State of New Jersey. The Corporation has not made
loans to borrowers outside the United States.
At December 31, 1996, there were no concentrations of loans exceeding 10% of
total loans outstanding. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
related conditions. The Corporation's lending activities are concentrated in
loans secured by real estate located in northern New Jersey and therefore
collectibility of the loan portfolio is susceptible to changes in real estate
market conditions in the northern New Jersey market.
The following table sets forth the classification of the Corporation's loans by
major category at the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- -------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential ..................... $15,257 18.5% $14,422 19.9% $10,793 17.8%
Commercial ...................... 26,797 32.6% 23,264 32.2% 19,585 32.2%
Commercial loans ................. 17,403 21.1% 15,597 21.6% 13,899 22.9%
Consumer loans:
lnstallment(1) .................. 18,892 22.9% 14,783 20.4% 12,922 21.3%
Home equity ..................... 3,838 4.7% 4,100 5.7% 3,479 5.7%
Other ........................... 136 0.2% 142 0.2% 50 0.1%
------- ----- ------- ----- ------- ------
Total loans ...................... 82,323 100.0% 72,308 100.0% 60,728 100.0%
Less: Allowance for loan losses .. 1,353 1,177 1,088
Deferred fees ................... 122 155 150
------- ------- -------
Net loans ........................ $80,848 $70,976 $59,490
======= ======= =======
</TABLE>
- ------------------
(1) Includes automobile, home improvement, second mortgages and unsecured loans.
The following table sets forth certain categories of loans as of December 31,
1996 by contractual maturity:
AFTER 1 YEAR
WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
-------- ------------ ------- ------
(In thousands)
Real estate mortgage ........ $2,885 $14,991 $24,178 $42,054
Commercial .................. 5,489 10,227 1,687 17,403
Consumer .................... 792 6,844 15,230 22,866
------ ------- ------- -------
Total ....................... $9,166 $32,062 $41,095 $82,323
====== ======= ======= =======
23
<PAGE>
The following table sets forth the dollar amount of all loans due one year or
more after December 31, 1996, which have predetermined interest rates or
floating or adjustable interest rates:
FLOATING OR
PREDETERMINED ADJUSTABLE
RATES RATES TOTAL
------------- ----------- --------
(In thousands)
Real estate mortgage ........ $25,323 $13,846 $39,169
Commercial .................. 6,222 5,692 11,914
Consumer .................... 18,258 3,816 22,074
------- ------- -------
Total ....................... $49,803 $23,354 $73,157
======= ======= =======
ASSET QUALITY
The Corporation's principal earning asset is its loan portfolio. Inherent in the
lending function is the risk of deterioration in a borrower's ability to repay
loans under existing loan agreements. Management realizes that because of this
risk, reserves are maintained to absorb potential loan losses. In determining
the adequacy of the allowance for loan losses, management of the Corporation
considers the risks inherent in its loan portfolio and changes in the nature and
volume of its loan activities, along with general economic and real estate
market conditions. Although management attempts to establish a reserve
sufficient to offset potential losses in the portfolio, changes in economic
conditions, regulatory policies and borrower's performance could require future
changes to the allowance.
The Corporation utilizes a two tier approach by (1) identifying problem loans
and allocating specific loss allowances on such loans and (2) establishing a
general valuation allowance on the remainder of its loan portfolio. The
Corporation maintains a loan review system which allows for a periodic review of
its loan portfolio and the early identification of potential problem loans. Such
a system takes into consideration, among other things, delinquency status, size
of loans, type of collateral and financial condition of the borrowers.
Allocation of specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, restructured loans, loans past
due 90 days or more and accruing, other real estate owned and nonaccrual
investments. The Corporation's loans are generally placed in a nonaccrual status
when they become past due in excess of 90 days as to payment of principal and
interest. Interest previously accrued on these loans and not yet paid is charged
against income during the current period. Interest earned thereafter is only
included in income to the extent that it is received in cash. Loans past due 90
days or more and accruing represent those loans which are sufficiently
collateralized and management believes all interest and principal owed will be
collected. Restructured loans are loans which have been renegotiated to permit a
borrower, who has incurred adverse financial circumstances, to continue to
perform. Management can reduce the contractual interest rates to below market
rates or make significant concessions to the terms of the loan in order for the
borrower to continue to make payments. Other real estate owned at December 31,
1996 consists of one property which the Corporation acquired by deed in lieu of
foreclosure. Other real estate owned is carried at lower of cost or fair value
less estimated selling costs. Fair value is defined as the amount reasonably
expected to be received in a current sale between a willing seller (the
Corporation) and a willing buyer. Nonaccrual investments consisted of a taxable
municipal bond which has been written off during 1996.
24
<PAGE>
The following table sets forth certain information regarding the Corporation's
nonperforming assets as of December 31 of each of the preceding three years:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1995 1994
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans: (1)
Commercial real estate .................................. $ - $ 194 $ 194
Commercial .............................................. 95 139 203
Consumer ................................................ - - 6
------ ------ ------
Total nonaccrual loans ................................. 95 333 403
------ ------ ------
Loans past due ninety days or more and accruing:
Commercial real estate .................................. - 174 -
Commercial .............................................. 550 590 230
------ ------ ------
Total loans past due ninety days or more and accruing .. 550 764 230
------ ------ ------
Restructured loans:
Commercial .............................................. 131 6 54
Consumer ................................................ 130 63 116
------ ------ ------
Total restructured loans ............................... 261 69 170
------ ------ ------
Total nonperforming loans ................................ $ 906 $1,166 $ 803
====== ====== ======
Nonaccrual investments ................................... $ - $ 8 $ 14
Other real estate owned, net ............................. 229 249 269
------ ------ ------
Total nonperforming assets ............................... $1,135 $1,423 $1,086
====== ====== ======
Nonaccrual loans to total gross loans .................... 0.12% 0.46% 0.66%
Nonperforming loans to total gross loans ................. 1.10% 1.61% 1.32%
Nonperforming loans to total assets ...................... 0.70% 1.03% 0.87%
Nonperforming assets to total assets ..................... 0.88% 1.26% 1.18%
Allowance for possible loan losses to
nonperforming loans ..................................... 149.27% 100.90% 135.58%
</TABLE>
- -----------------
(1) At December 31, 1996, there were no restructured loans classified as
nonaccrual. Approximately $238,000 and $302,000 restructured loans were
classified as nonaccrual at December 31, 1995 and 1994, respectively.
There were no loans 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 nonaccrual, past due or restructured at a future date.
25
<PAGE>
The following table sets forth, for the years ended December 31, 1996, 1995 and
1994, the historical relationships among the amount of loans outstanding, the
allowance for loan losses, the provision for loan losses, the amount of loans
charged off and the amount of loan recoveries:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995 1994
----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period ........................... $1,177 $1,088 $ 994
Loans charged off:
Commercial .............................................. 2 59 201
Consumer ................................................ 10 2 -
------ ------ ------
Total loans charged off ................................ 12 61 201
------ ------ ------
Recoveries of loans previously charged off:
Commercial real estate .................................. 5 - -
Commercial .............................................. 28 - -
------ ------ ------
Total recoveries of loans previously charged off ....... 33 - -
------ ------ ------
Net loans charged off (recovered) ........................ (21) 61 201
Provisions charged to operations ......................... 155 150 295
------ ------ ------
Balance at end of period ................................. $1,353 $1,177 $1,088
====== ====== ======
Net charge offs (recoveries) during the period
to average loans outstanding during the period .......... (0.03%) 0.10% 0.36%
====== ====== ======
Balance of allowance for loan losses at the
end of year to gross year end loans ..................... 1.64% 1.63% 1.79%
====== ====== ======
</TABLE>
The following table sets forth the allocation of the allowance for loan losses
at the dates indicated by category loans:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ----------------------------- ------------------------
PERCENT PERCENT PERCENT
AMOUNT TO TOTAL (1) AMOUNT TO TOTAL (1) AMOUNT TO TOTAL (1)
--------- ------------ ------------ ------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate--residential ............... $ 148 18.5% $ 91 19.9% $ 78 17.8%
Real estate--commercial ................ 360 32.6% 403 32.2% 406 32.2%
Commercial ............................. 587 21.1% 530 21.6% 454 22.9%
Consumer ............................... 258 27.8% 153 26.3% 150 27.1%
------ ----- ------ ----- ------ -----
Total allowance for loan losses ....... $1,353 100.0% $1,177 100.0% $1,088 100.0%
------ ----- ------ ----- ------ -----
</TABLE>
- --------------
(1) Represents percentage of loan balance in category to total gross loans.
INVESTMENT PORTFOLIO
The Corporation maintains an investment portfolio to enhance its yields and to
provide a secondary source of liquidity. The portfolio is comprised of U.S.
Treasury securities, U.S. Government and Agency obligations, mortgage-backed
securities, and state and political subdivision obligations and has been
classified as held to maturity, or available for sale or trading. Investments in
debt securities that the Corporation has the positive intent and the ability to
hold to maturity are classified as held to maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and are reported at fair value, with the unrealized holding gains and
losses included in earnings. Debt and equity securities not classified as
trading securities nor as held to maturity securities shall be classified as
available for sale securities and reported at fair value, with unrealized
holding
26
<PAGE>
gains or losses reported in a separate component of stockholders'
equity. Securities in the available for sale category may be held for indefinite
periods of time and include securities that management intends to use as part of
its Asset/Liability strategy or that may be sold in response to changes in
interest rates, changes in prepayment risks, the need to provide liquidity, the
need to increase regulatory capital or similar factors. Securities held to
maturity increased $0.4 million, or 1.8%, to $20.0 million at December 31, 1996,
from $19.6 million at December 31, 1995. Securities available for sale increased
to $11.4 million at December 31, 1996, from $9.9 million at December 31, 1995,
an increase of $1.6 million, or 15.7%.
The following table sets forth the classification of the Corporation's
investment securities by major category at the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------- ----------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury ...................... $ 3,586 31.4% $ 2,372 24.0% $ 4,216 48.4%
U.S. Govemment agencies ............ 1,049 9.2% 790 8.0% 887 10.2%
Obligations of state and
political subdivisions ............ 268 2.3% 269 2.7% - -
Mortgage-backed securities ......... 6,531 57.1% 6,450 65.3% 3,614 41.4%
------- ----- ------- ----- ------- -----
Total ............................... $11,434 100.0% $ 9,881 100.0% $ 8,717 100.0%
======= ===== ======= ===== ======= =====
Securities held to maturity:
U.S.Treasury ....................... $ 2,193 11.0% $ 2,741 13.9% $ 747 4.9%
U.S. Government agencies ........... 6,356 31.8% 4,918 25.0% 2,313 15.1%
Obligations of state and
political subdivisions ............ 8,931 44.6% 8,976 45.8% 9,367 61.4%
Mortgage-backed securities ......... 2,523 12.6% 3,014 15.3% 2,843 18.6%
------- ----- ------- ----- ------- -----
Total .............................. $20,003 100.0% $19,649 100.0% $15,270 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities available for
sale as of December 31, 1996:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 5 YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
--------- ------------ -------------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury:
Carrying value $1,121 $2,465 $ - $ - $ 3,586
Yield 5.90% 5.97% - - 5.95%
U.S. Government agencies:
Carrying value 250 543 256 - 1,049
Yield 6.13% 5.04% 7.37% - 5.86%
Obligations of state and
political subdivisions:
Carrying value - - 268 - 268
Yield - - 4.47% - 4.47%
Mortgage-backed securities:
Carrying value 17 159 315 6,040 6,531
Yield 8.50% 7.87% 6.82% 6.76% 6.80%
------ ------ ------ ------ -------
Total carrying value $1,388 $3,167 $ 839 $6,040 $11,434
====== ====== ====== ====== =======
Weighted average yield 5.97% 5.90% 6.24% 6.76% 6.39%
====== ====== ====== ====== =======
</TABLE>
27
<PAGE>
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities held to maturity
as of December 31, 1996:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 5 YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
------ ------------- --------------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury:
Carrying value ................................ $ 250 $ 1,943 $ -- $ -- $ 2,193
Yield ......................................... 6.36% 5.79% -- -- 5.85%
U.S. Government agencies:
Carrying value ................................ 750 2,556 3,050 -- 6,356
Yield ......................................... 5.14% 6.36% 6.76% -- 6.41%
Obligations of state and political subdivisions:
Carrying value ............................... 1,802 7,129 -- -- 8,931
Yield ........................................ 4.86% 5.08% -- -- 5.03%
Mortgage-backed securities:
Carrying value ................................ -- -- -- 2,523 2,523
Yield ......................................... -- -- -- 7.33% 7.33%
------ ------- ------ ------ -------
Total carrying value .......................... $2,802 $11,628 $3,050 $2,523 $20,003
====== ======= ====== ====== =======
Weighted average yield ........................ 5.07% 5.48% 6.76% 7.33% 5.85%
====== ======= ====== ====== =======
</TABLE>
DEPOSITS
Corporation deposits at December 31, 1996 totaled $115.8 million, an increase of
$14.0 million, or 13.8%, over the comparable period of 1995, when deposits
totaled $101.8 million. The Corporation attributes this increase to competitive
products and services and changes in the Corporation's marketplace, including
changes of ownership among some of the Corporation's competitors. These changes
have made customer relationships with some competitors unstable and have
provided the Corporation with an opportunity to attract new depositors. The
following table sets forth the classification of the Corporation's deposits by
major category as of December 31 of each of the preceding years:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand ..... $ 25,136 21.7% $ 22,962 22.6% $17,313 21.0%
Interest-bearing demand ........ 23,992 20.7% 21,761 21.4% 20,413 24.7%
Savings deposit ................ 20,885 18.0% 18,766 18.4% 20,737 25.1%
Time deposits .................. 45,812 39.6% 38,300 37.6% 24,113 29.2%
-------- ----- -------- ----- ------- -----
Total .......................... $115,825 100.0% $101,789 100.0% $82,576 100.0%
======== ===== ======== ===== ======= =====
</TABLE>
28
<PAGE>
As of December 31, 1996, the aggregate amount of outstanding time deposits
issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (in thousands):
Three months or less ........................ $2,591
Four months through six months .............. 761
Seven months through twelve months .......... 323
Over twelve months .......................... 2,768
------
Total ..................................... $6,443
======
INTEREST RATE SENSITIVITY
Interest rate movements and deregulation of interest rates have made
managing the Corporation's interest rate sensitivity increasingly important. The
Corporation attempts to maintain stable net interest margins by generally
matching the volume of assets and liabilities maturing, or subject to repricing,
by adjusting interest rates to market conditions, and by developing new
products. The difference between the volume of assets and liabilities that
reprice in a given period is the interest sensitivity gap. A "positive" gap
results when more assets than liabilities mature or are repricing in a given
time frame. Conversely, a "negative" gap results when there are more liabilities
than assets maturing or repricing during a given period of time. The smaller the
gap, the less the effect of the market volatility on net interest income. During
a period of rising interest rates, an institution with a negative gap position
would not be in as favorable a position, as compared to an institution with a
positive gap, to invest in higher yielding assets. This may result in yields on
its assets increasing at a slower rate than the increase in its costs of
interest-bearing liabilities than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap would experience a
repricing of its assets at a slower rate than its interest-bearing liabilities
which consequently may result in its net interest income growing at a faster
rate than an institution with a positive gap position.
The following table sets forth the estimated maturity/repricing structure
of the Corporation's interest-earning assets and interest-bearing liabilities as
of December 31, 1996. Except as stated below, the amounts of assets or
liabilities shown which reprice or mature during a particular period were
determined in accordance with the contractual terms of each asset or liability.
For example, the table does not assume any prepayment of fixed-rate loans or
mortgage-backed securities. For purposes of this report, the Corporation has
assumed that savings and interest-bearing sources of funds will reprice at a
rate of 20% in three months or less, 20% in more than three months through one
year, and 60% in after one year. The table does not necessarily indicate the
impact of general interest rate movements on the Corporation's net interest
income because the repricing of certain categories of assets and liabilities,
for example, prepayments of loans and withdrawal of deposits, is beyond the
Corporation's control. As a result, certain assets and liabilities indicated as
repricing within a period may in fact reprice at different times and at
different rate levels.
29
<PAGE>
<TABLE>
<CAPTION>
More than
Three Months
Three Months Through After Noninterest
or Less One Year On Year Sensitive Total
------------ -------- ------- --------- -------
(Dollars in thousands)
ASSETS:
Loans:
<S> <C> <C> <C> <C> <C>
Real estate mortgage ...................... $ 3,915 $ 4,430 $33,709 $ -- $ 42,054
Commercial ................................ 10,132 699 6,572 -- 17,403
Consumer .................................. 3,930 678 18,258 -- 22,866
Mortgage loans held for sale ............... 237 -- -- -- 237
Investment securities (1) .................. 7,309 5,819 18,760 -- 31,888
Federal funds sold ......................... 5,950 -- -- -- 5,950
Other assets ............................... 19 200 -- 8,004 8,223
------- -------- ------- -------- --------
Total assets ............................. $31,492 $ 11,826 $77,299 $ 8,004 $128,621
------- -------- ------- -------- --------
SOURCE OF FUNDS:
Savings .................................... $ 4,177 $ 4,177 $12,531 $ -- $ 20,885
Interest-bearing ........................... 4,798 4,798 14,396 -- 23,992
Time deposits .............................. 9,818 13,882 22,112 -- 45,812
Repurchase agreements....................... 1,067 644 -- -- 1,711
Other liabilities .......................... -- -- -- 25,814 25,814
Stockholders' equity ....................... -- -- -- 10,407 10,407
------- -------- ------- -------- --------
Total source of funds .................... $19,860 $ 23,501 $49,039 $ 36,221 $128,621
------- -------- ------- -------- --------
Interest rate sensitivity gap .............. $11,632 $(11,675) $28,260 (28,217)
Cumulative interest rate sensitivity gap ... $11,632 $ (43) $28,217 $ --
======= ======== ======= ========
Ratio of GAP to total assets ............... 9.0% (9.1%) 22.0% (21.9%)
======= ======== ======= ========
Ratio of cumulative GAP assets to
total assets .............................. 9.0% (0.1%) 21.9% --
======= ======== ======= ========
- --------------------
</TABLE>
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
LIQUIDITY
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 by 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
loan and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions, and competition.
30
<PAGE>
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. These activities
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents--beginning ....................... $ 7,465 $ 4,741 $ 7,561
Operating activities:
Net income ................................................ 1,317 1,144 1,002
Adjustments to reconcile net income to net cash
provided by operating activities ......................... 550 (715) 429
-------- -------- --------
Net cash provided by operating activities .................. 1,867 429 1,431
Net cash used in investing activities ...................... (12,408) (17,248) (11,764)
Net cash provided by financing activities .................. 14,031 19,543 7,513
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... 3,490 2,724 (2,820)
-------- -------- --------
Cash and cash equivalents--ending .......................... $ 10,955 $ 7,465 $ 4,741
======== ======== ========
</TABLE>
Cash was generated by operating activities in each of the above periods. The
primary source of cash from operating activities during each period was 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 December 31,
1996, the Corporation has outstanding loan commitments of $4.1 million and
unused lines and letters of credit totaling $12.0 million. Certificates of
deposit scheduled to mature in one year or less, at December 31, 1996, totaled
$23.7 million. Management believes that a significant portion of such deposits
will remain with the Corporation.
CAPITAL
The Corporation is subject to capital adequacy guidelines promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The FRB has issued
regulations to define the adequacy of capital based upon the sensitivity of
assets and off-balance sheet exposures to risk factors. Four categories of risk
weights (0%, 20%, 50% and 100%) were established to be applied to different
types of balance sheet assets and off-balance sheet exposures. The aggregate of
the risk weighted items (risk-based assets) is the denominator of the ratio, the
numerator is risk-based capital. Under the regulations, risk-based capital has
been classified into two categories. Tier 1 capital includes common and
qualifying perpetual preferred stockholders' equity less goodwill. Tier 2
capital includes mandatory convertible debt, allowance for loan losses, subject
to certain limitations, and certain subordinated and term debt securities. Total
qualifying capital consists of Tier 1 capital and Tier 2 capital; however, the
amount of Tier 2 capital may not exceed the amount of Tier 1 capital. The FRB
has also issued leverage capital adequacy standards. Under these standards, in
addition to the risk-based capital ratios, a Corporation must also compute a
ratio of Tier 1 capital (using the risk-based capital definition) to total
quarterly average assets. The following table reflects the Corporation's capital
ratios at December 31, 1996. The Bank's federal regulator has promulgated
substantially similar capital regulations applicable to the Bank, see note 11 to
the consolidated financial statements.
------------------------------------------
Required Actual Excess
------------------------------------------
Risk-based capital:
Tier 1 ...................... 4.00% 12.40% 8.40%
Total ....................... 8.00% 13.65% 5.65%
Leverage ratio*.............. 3.00% 7.80% 4.80%
- ----------
* The minimum leverage ratio set by the FRB is 3.00%. Institutions which are
not "top-rated" will be expected to maintain a ratio of approximately 100 to
200 basis points above this ratio.
31
<PAGE>
[LOGO KPMG]
New Jersey Headquarters
150 J.F.K. Parkway
Short Hills, New Jersey 07078
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Stewardship Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Stewardship Financial Corporation and subsidiary (formerly Atlantic
Stewardship Bank, see note 2) as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The accompanying consolidated statements of income, changes in
stockholders' equity, and cash flows of Stewardship Financial Corporation for
the year ended December 31, 1994 were audited by other auditors whose report
thereon, dated January 24, 1995, expressed an opinion qualified for the effects,
if any, as might have been determined to be necessary had they been able to
obtain an understanding of the internal control structure of the outside
computer service organization and included an explanatory paragraph that
discussed the change in the Corporation's method of accounting for certain
investments in debt and equity securities.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stewardship
Financial Corporation and subsidiary as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
February 12, 1997
32
<PAGE>
LOGO
STEWARDSHIP FINANCIAL CORPORATION
February 12, 1997
MANAGEMENT RESPONSIBILITY STATEMENT
Management of Stewardship Financial Corporation and subsidiary is responsible
for the preparation of the consolidated financial statements and all other
financial information included in this report. The consolidated financial
statements were prepared in accordance with generally accepted accounting
principles applied on a consistent basis. All consolidated financial information
included in the report agrees with the consolidated financial statements. In
preparing the consolidated financial statements, management makes informed
estimates and judgments, with consideration given to materiality, about the
expected results of various events and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities, and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of internal control and the benefits derived.
Management reviews and modifies its system of accounting and internal control in
light of changes in conditions and operations as well as in response to
recommendations from the independent certified public accountants. Management
believes the accounting and internal control systems provide reasonable
assurance that assets are safeguarded and financial information is reliable.
The Board of Directors is responsible for determining that management fulfills
its responsibilities in the preparation of consolidated financial statements and
the control of operations. The Board appoints the independent certified public
accountant. The Board meets with management and the independent certified public
accountants, approves the overall scope of audit work and relative fee
arrangements, and reviews audit reports and findings.
/s/ PAUL VAN OSTENBRIDGE /s/ JULIE E. HOLLAND
- ------------------------------------- --------------------------------------
Paul Van Ostenbridge Julie E. Holland
President and Chief Executive Officer Assistant Vice President and Treasurer
33
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1995
----------------------------------------
Assets
<S> <C> <C>
Cash and due from banks ..................................................... $ 4,786,342 $ 4,369,476
Interest-bearing due from banks ............................................. 219,098 46,055
Federal funds sold .......................................................... 5,950,000 3,050,000
----------------------------------------
Cash and cash equivalents ................................................... 10,955,440 7,465,531
Securities available for sale (note 4) ...................................... 11,434,354 9,881,267
Securities held to maturity; estimated
fair value of $20,195,917 (1996) and
$20,291,878 (1995) (note 5) ................................................. 20,002,689 19,648,898
FHLB-NY stock, at cost ...................................................... 450,800 337,200
Loans, net of allowance for loan losses
of $1,352,508 (1996) and $1,176,822 (1995) (notes 6 and 7) .................. 80,847,769 70,975,852
Mortgage loans held for sale ................................................ 236,754 350,389
Premises and equipment, net (note 8) ........................................ 2,306,098 2,160,260
Accrued interest receivable ................................................. 880,558 836,689
Intangible assets, net of accumulated
amortization of $154,773 and $73,967 at
December 31, 1996 and 1995 respectively (note 3) .......................... 595,207 698,013
Other real estate owned, net (note 7) ....................................... 229,302 249,302
Other assets (note 13) ...................................................... 681,559 516,710
----------------------------------------
Total assets ................................................................ $128,620,530 $113,120,111
========================================
</TABLE>
Liabilities and Stockholders' equity
Liabilities
<TABLE>
<CAPTION>
<S> <C> <C>
Deposits: (note 9)
Noninterest-bearing ...................................................... $ 25,135,689 $ 22,961,834
Interest-bearing ......................................................... 90,689,057 78,826,708
--------------------------------------
Total deposits ....................................................... 115,824,746 101,788,542
Securities sold under agreements to repurchase (note 10) ............... 1,711,419 1,650,049
Accrued expenses and other liabilities ................................... 676,980 530,769
--------------------------------------
Total liabilities ...................................................... 118,213,145 103,969,360
--------------------------------------
</TABLE>
Commitments and contingencies (note 14)
<TABLE>
<CAPTION>
Stockholders' equity (notes 11 and 15)
<S> <C> <C>
Common stock, no par value; 5,000,000 shares authorized;
460,252 and 455,441 shares issued and outstanding at
December 31, 1996 and 1995, respectively ................................... 4,990,746 4,865,537
Retained earnings ........................................................... 5,395,454 4,269,933
Net unrealized gain on securities available for sale ........................ 21,185 15,281
----------------------------------------
Total Stockholders' equity ............................................. 10,407,385 9,150,751
Total liabilities and Stockholders' equity ............................. $128,620,530 $113,120,111
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1996 1995 1994
--------------------------------------------------
Interest income:
<S> <C> <C> <C>
Loans ................................................................... $6,922,698 $6,037,199 $4,952,478
Securities held to maturity:
Taxable ............................................................... 696,884 586,226 176,203
Nontaxable ............................................................ 438,302 461,817 488,140
Securities available for sale ........................................... 634,713 533,536 626,648
Other interest-earning assets ........................................... 360,581 355,408 152,559
--------------------------------------------------
Total interest income ............................................... 9,053,178 7,974,186 6,396,028
--------------------------------------------------
Interest expense:
Deposits (note 9) ....................................................... 3,271,369 2,691,622 1,773,019
Borrowed money .......................................................... 78,488 79,666 26,360
--------------------------------------------------
Total interest expense .............................................. 3,349,857 2,771,288 1,799,379
--------------------------------------------------
Net interest income before provision for loan losses .................... 5,703,321 5,202,898 4,596,649
Provision for loan losses (note 6) ...................................... 155,000 150,000 295,000
--------------------------------------------------
Net interest income after provision for loan losses...................... 5,548,321 5,052,898 4,301,649
--------------------------------------------------
Noninterest income:
Fees and service charges ................................................ 511,848 364,519 275,429
Loss on calls and sales of securities, net .............................. (3,766) (9,819) --
Gain on sales of mortgage loans ......................................... 52,215 24,526 51,265
Miscellaneous ........................................................... 103,643 87,119 43,108
--------------------------------------------------
Total noninterest income ............................................. 663,940 466,345 369,802
--------------------------------------------------
Noninterest expense:
Salaries and employee benefits ........................................ 2,116,103 1,908,846 1,616,664
Occupancy, net (note 14) .............................................. 288,184 254,882 151,840
Equipment ............................................................. 232,284 179,967 147,724
Data processing ....................................................... 219,476 207,191 153,649
Advertising ........................................................... 97,298 68,948 77,298
FDIC insurance premium ................................................ 48,797 102,596 171,737
Amortization of intangible assets ..................................... 80,806 73,967 --
Other real estate owned expense ....................................... 10,466 30,697 27,259
Charitable contributions .............................................. 150,571 141,799 124,458
Stationery and supplies ............................................... 200,158 150,109 126,429
Miscellaneous ......................................................... 883,082 784,763 589,685
--------------------------------------------------
Total noninterest expenses .......................................... 4,327,225 3,903,765 3,186,743
--------------------------------------------------
Income before income tax expense ...................................... 1,885,036 1,615,478 1,484,708
Income tax expense (note 13) .......................................... 567,719 471,067 482,209
--------------------------------------------------
Net income ............................................................ $1,317,317 $1,144,411 $1,002,499
==================================================
Net income per common share ........................................... $2.88 $2.53 $2.27
==================================================
Dividends per common share ............................................ $0.42 $0.36 $0.30
==================================================
Weighted average number of common shares outstanding .................. 457,877 452,625 441,258
==================================================
</TABLE>
See accompanying notes to consolidated financial statements
35
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1995, and 1994
---------------------------------------------------------------------------------
Net Unrealized
Gain/(loss) On
Common Stock Securities
---------------------------- Retained Available
Shares Amount Earnings For Sale Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1993 .................. 427,731 $4,391,264 $2,417,505 $ -- $ 6,808,769
Dividends paid ($.30 per share) ........... -- -- (132,004) -- (132,004)
Sale of common stock ...................... 22,257 374,895 -- -- 374,895
Net income for the year ended
December 31, 1994 ....................... -- -- 1,002,499 -- 1,002,499
Net unrealized loss on securities
available for sale ...................... -- -- -- (220,315) (220,315)
---------------------------------------------------------------------------------
Balance--December 31, 1994 .................. 449,988 $4,766,159 $3,288,000 $(220,315) $ 7,833,844
Dividends paid ($.36 per share) .......... -- -- (162,478) -- (162,478)
Sale of common stock ..................... 5,453 99,378 -- -- 99,378
Net income for the year ended
December 31, 1995 ...................... -- -- 1,144,411 -- 1,144,411
Net unrealized gain on securities
available for sale ..................... -- -- -- 235,596 235,596
---------------------------------------------------------------------------------
Balance--December 31, 1995 .................. 455,441 $4,865,537 $4,269,933 $ 15,281 $ 9,150,751
Dividends paid ($.42 per share) ........... -- -- (191,796) -- (191,796)
Sale of common stock ...................... 4,811 125,209 -- -- 125,209
Net income for the year
ended December 31, 1996 ................. -- -- 1,317,317 -- 1,317,317
Net unrealized gain on securities
available for sale ..................... -- -- -- 5,904 5,904
---------------------------------------------------------------------------------
Balance--December 31, 1996 .................. 460,252 $4,990,746 $5,395,454 $ 21,185 $ 10,407,385
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ................................................ $ 1,317,317 $ 1,144,411 $1,002,499
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment . 229,415 201,300 147,375
Loss on calls and sales of investment securities ........ 3,766 9,819 --
Provision for losses on investment securities ........... 1,241 5,984 20,830
Amortization of premiums and accretion of discounts, net 56,389 31,925 85,776
Accretion of deferred loan fees ......................... (64,603) (86,730) (71,794)
Provision for loan losses ............................... 155,000 150,000 295,000
Provision for losses on other real estate ............... 20,000 20,000 --
Originations of mortgage loans held for sale ............ (4,955,200) (2,744,150) (3,343,100)
Proceeds from sale of mortgage loans .................... 5,121,050 2,418,287 3,687,005
Gain on sale of loans ................................... (52,215) (24,526) (51,265)
Loss on retirement of fixed assets ...................... -- -- 2,702
Premium paid on deposit acquisition ..................... -- (771,980) --
Deferred income tax benefit ............................. (132,140) (91,063) (52,843)
Amortization of intangible assets ....................... 80,806 73,967 --
lncrease in accrued interest receivable ................. (43,869) (127,762) (141,159)
Decrease (increase) in other assets ..................... (37,945) 639 (24,443)
Increase (decrease) in other liabilities ................. 168,311 218,895 (125,270)
-----------------------------------------------------------
Net cash provided by operating activities ............... 1,867,223 429,016 1,431,313
-----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale ................. (3,299,396) (3,920,292) (746,664)
Proceeds from maturities and principal repayments
on securities available for sale ......................... 1,725,870 682,404 2,403,994
Proceeds from sales and calls on securities available
for sale ................................................. -- 3,161,480 1,000,000
Purchase of securities held to maturity ................... (5,930,086) (9,825,052) (6,573,618)
Proceeds from maturities and principal repayments on
securities held to maturity .............................. 4,311,636 4,192,454 513,251
Proceeds from calls of securities held to maturity ........ 1,234,842 500,000 --
Purchase of FHLB-NY stock ................................. (113,600) (337,200) --
Net increase in loans ..................................... (9,962,314) (11,548,645) (8,062,588)
Additions to premises and equipment ....................... (375,253) (153,360) (297,945)
-----------------------------------------------------------
Net cash used in investing activities ................... (12,408,301) (17,248,211) (11,763,570)
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits .............. 2,173,855 5,492,149 2,794,751
Net increase in Interest-bearing deposits ................. 11,862,349 4,841,650 3,586,209
Net increase in securities sold under agreement to
repurchase ............................................... 61,370 394,195 889,090
Purchase of deposits ...................................... -- 8,878,365 --
Cash dividends paid on common stock ....................... (191,796) (162,478) (132,004)
Sale of common stock ...................................... 125,209 99,378 374,895
-----------------------------------------------------------
Net cash provided by financing activities ............... 14,030,987 19,543,259 7,512,941
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ...... 3,489,909 2,724,064 (2,819,316)
Cash and cash equivalents-beginning ....................... 7,465,531 4,741,467 7,560,783
-----------------------------------------------------------
Cash and cash equivalents-ending .......................... $ 10,955,440 $ 7,465,531 $ 4,741,467
===========================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest .................... 3,275,789 2,463,809 1,846,229
Cash paid during the year for income taxes ................ 691,633 479,520 691,740
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfer of securities held to maturity to securities ..... -- 744,791 800,000
Transfer of loan to other real estate owned ............... -- -- 269,302
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, ("the Corporation") (formerly Atlantic Stewardship
Bank--see note 2) 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.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits in other banks and federal funds sold. Generally, federal funds are
sold for one day periods.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
The Corporation classifies its securities into one of three investment
categories: securities held to maturity, securities available for sale, or
trading securities. Investments in debt securities that the Corporation has the
positive intent and ability to hold to maturity are classified as securities
held to maturity and are carried at cost, adjusted for amortization of premium
and accretion of discount, which are recognized as adjustments to income, on a
level yield basis. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized holding gains and
losses included in earnings. All other securities are classified as securities
available for sale. Securities available for sale may be sold prior to maturity
in response to changes in interest rates or prepayment risk, for asset/liability
management purposes, or other similar factors. These securities are carried at
fair value with unrealized holding gains or losses reported in a separate
component of stockholders' equity, net of the related tax effects. Realized
gains or losses on sales of securities are based upon the specific
identification method.
FEDERAL HOME LOAN BANK OF NEW YORK STOCK
As a condition of membership, the Corporation is required to maintain shares of
stock in the Federal Home Loan Bank of New York (FHLB-NY) based on the
Corporation's level of residential mortgage loans and mortgage-backed securities
or outstanding advances from the FHLB-NY, whichever is larger. Such shares are
carried at cost.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are reported at the lower of cost or market on an
aggregate basis. Mortgage loans held for sale are carried net of deferred fees
which are recognized as income at the time the loans are sold to permanent
38
<PAGE>
investors. Gains or losses on the sale of mortgage loans held for sale are
recognized at the settlement date and are determined by the difference between
the net proceeds and the amortized cost.
LOANS
Loans are carried at the principal amount outstanding, net of unearned discounts
and deferred loan fees and costs. Interest on loans is accrued and credited to
interest income as earned.
The accrual of interest income is discontinued on a loan when certain factors
indicate reasonable doubt as to the collectability of principal and interest. At
the time a loan is placed on nonaccrual status, previously accrued and
uncollected interest is reversed against interest income in the current period.
Interest collections on nonaccrual loans are generally credited to interest
income when received. Such loans are restored to an accrual status only if the
loan is brought contractually current and the borrower has demonstrated an
ability to make future payments of principal and interest.
On January 1, 1995, the Corporation adopted Statement of Financial Accounting
Standards No. 114, (SFAS No. 114) "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures." These statements address the accounting for
impaired loans and specify how allowances for loan losses related to these
impaired loans are calculated. The Corporation defined the population of
impaired loans to include nonaccrual loans and loans more than 90 days past due.
Adoption of these new standards had no effect on the level of the allowance for
loan losses or operating results for the periods ended December 31, 1996 and
1995. SFAS No. 114 also provides that impaired loans should remain in the loan
portfolio until the Corporation takes possession of the collateral at which time
they are reclassified to other real estate owned for financial reporting
purposes.
Loan fees collected and certain costs incurred related to loan originations are
deferred and amortized as an adjustment to interest income over the life of the
related loans. The deferred fees and costs are recorded as an adjustment to
loans outstanding.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
An allowance for loan losses is maintained at a level considered adequate to
absorb inherent loan losses. Management of the Corporation, in determining the
provision for loan losses, considers the risks inherent in its loan portfolio
and changes in the nature and volume of its loan activities, along with general
economic and real estate market conditions.
The Corporation utilizes a two tier approach: (1) identification of problem
loans and the establishment of specific loss allowances on such loans; and (2)
establishment of general allowances on the remainder of its loan portfolio based
on historical loss experience and other economic data management believes
relevant. The Corporation maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other things,
delinquency status, size of loans, types of collateral and financial condition
of the borrowers. Specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
Although management believes that adequate specific and general loan losses are
established, actual losses are dependent upon future events and, as such,
further additions to the level of the specific and general loan loss allowance
may be necessary.
In addition, 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 recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.
CONCENTRATION OF RISK
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.
39
<PAGE>
PREMISES AND EQUIPMENT
Land is stated at cost. Buildings and improvements and furniture, fixtures and
equipment are stated at cost, less accumulated depreciation computed on the
straight-line method over the estimated lives of each type of asset. Estimated
useful lives are ten to forty years for buildings and improvements and three to
twenty-five years for furniture, fixtures and equipment. Leasehold improvements
are stated at cost less accumulated amortization computed on the straight-line
method over the shorter of the term of the lease or useful life. Significant
renewals and improvements are capitalized. Maintenance and repairs are charged
to operations as incurred. Rental income is netted against occupancy costs in
the consolidated statements of income.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of foreclosed property and is carried at
the lower of cost or fair value less estimated selling costs. When a property is
acquired, the excess of the carrying amount over fair value, if any, is charged
to the allowance for loan losses. Subsequent adjustments to the carrying value
are recorded in an allowance for OREO and charged to OREO expense. Operating
results for OREO, including rental income, operating expenses, and gains and
losses realized from the sale of property owned, are also recorded in OREO
expense.
INCOME TAXES
The Corporation accounts for taxes under the asset/liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period.
INTANGIBLE ASSETS
Intangible assets are comprised of goodwill and core deposit intangibles.
Goodwill represents the excess of the fair value of liabilities assumed over the
fair value of tangible assets acquired through a purchase acquisition completed
in 1995 and amounted to $420,382 and $475,981 at December 31, 1996 and December
31, 1995, respectively, and is amortized on a straight-line method over a period
of fifteen years.
The core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in the same
acquisition. The core deposit intangible amounted to $174,825 and $222,032 at
December 31, 1996 and December 31, 1995, respectively, and is amortized on an
accelerated basis over a period of twelve years.
INTEREST RATE RISK
The Corporation is principally engaged in the business of attracting deposits
from the general public and using these deposits, together with borrowings and
other funds, to make loans secured by real estate, commercial and consumer loans
and to invest in investment and mortgage-backed securities. The potential for
interest rate risk exists as a result of the shorter duration of the
Corporation's interest-sensitive liabilities compared to the generally longer
duration of interest-sensitive assets. In a rising rate environment, liabilities
will reprice faster than assets, thereby reducing the market value of long-term
assets and net interest income. The opposite effect occurs in a falling rate
environment. For this reason, management regularly monitors the maturity
structure of the Corporation's assets and liabilities in order to measure its
level of interest rate risk and plan for future volatility.
40
<PAGE>
NOTE 2. FORMATION OF BANK HOLDING COMPANY AND EXCHANGE OF COMMON STOCK
The Corporation is a New Jersey corporation incorporated in January, 1995 to
serve as a one-bank holding company for Atlantic Stewardship Bank. The
Corporation was organized at the direction of the Board of Directors of the Bank
for the purpose of acquiring all of the capital stock of the Bank. As part of
the acquisition on November 22, 1996, shareholders of the Bank received one
share of the Corporation's common stock, no par value for each outstanding share
of the common stock of the Bank, $5.00 per share par value. The acquisition was
accounted for in a manner similar to a pooling of interest, resulting in no
changes in the underlying assets and liabilities. The accompanying consolidated
financial statements have been restated beginning with the earliest year
presented.
NOTE 3. PURCHASE OF DEPOSITS
On March 10, 1995, the Corporation purchased certain assets and assumed the
deposit account liabilities of a branch of Carteret Federal Savings Bank from
the Resolution Trust Corporation. The deposit liabilities assumed amounted to
$8,878,365 and assets received consisted primarily of cash amounting to
$8,091,642. The fair value of liabilities assumed exceeded the fair value of
tangible assets acquired by $771,980. This was allocated to core deposit premium
and goodwill of $268,000 and $503,980, respectively.
41
<PAGE>
NOTE 4. SECURITIES AVAILABLE FOR SALE
The following is a summary of the contractual maturities of securities available
for sale:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Unrealized
Amortized ------------------- Carrying
Cost Gains Losses Value
-----------------------------------------------------------
U.S. Treasury:
<S> <C> <C> <C> <C>
Within one year ............................................ $1,118,125 $ 3,064 $ 25 $ 1,121,164
After one but within five years ............................ 2,464,933 3,573 4,180 2,464,326
-----------------------------------------------------------
3,583,058 6,637 4,205 3,585,490
-----------------------------------------------------------
U.S. Government agencies:
Within one year ............................................ 250,000 313 -- 250,313
After one but within five years ............................ 550,000 225 6,875 543,350
After five years ........................................... 251,853 3,887 -- 255,740
-----------------------------------------------------------
1,051,853 4,425 6,875 1,049,403
-----------------------------------------------------------
Obligations of state and political subdivisions:
After five years ........................................... 274,185 -- 6,099 268,086
Mortgage-backed securities:
Within one year ............................................ 17,003 201 -- 17,204
After one but within five years ............................ 156,205 3,188 -- 159,393
After five years ........................................... 6,319,141 72,955 37,318 6,354,778
-----------------------------------------------------------
6,492,349 76,344 37,318 6,531,375
-----------------------------------------------------------
$11,401,445 $87,406 $54,497 $11,434,354
===========================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Unrealized
Amortized ------------------- Carrying
Cost Gains Losses Value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ............................................ $ 749,794 $ 8,111 $ -- $ 757,905
After one but within five years ............................ 1,595,170 18,606 -- 1,613,776
-----------------------------------------------------------
2,344,964 26,717 -- 2,371,681
-----------------------------------------------------------
U.S. Government agencies:
After one but within five years ............................ 800,000 625 10,191 790,434
Obligations of state and political subdivisions:
After five years ........................................... 275,913 -- 7,242 268,671
Mortgage-backed securities:
After one but within five years ............................ 185,712 3,730 -- 189,442
After five years ........................................... 6,252,908 44,735 36,604 6,261,039
-----------------------------------------------------------
6,438,620 48,465 36,604 6,450,481
-----------------------------------------------------------
$9,859,497 $75,807 $54,037 $9,881,267
===========================================================
</TABLE>
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
No cash proceeds were realized from sales or calls of securities available for
sale for the year ended December 31, 1996. Cash proceeds from sales and calls of
securities available for sale amounted to $3,161,480 and $1,000,000 for the year
ended December 31, 1995 and 1994, respectively. No gains or losses were realized
on sales and calls during 1996 and 1994 while gross gains of $10,331 and gross
losses of $20,150 were realized on sales and calls during 1995.
The carrying value of securities pledged to secure public deposits approximated
$100,000 and $102,000 at December 31, 1996 and 1995, respectively. See Note 10
to financial statements regarding securities pledged as collateral for
securities sold under agreements to repurchase.
42
<PAGE>
NOTE 5. SECURITIES HELD TO MATURITY
The following is a summary of the contractual maturities of securities held to
maturity:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Unrealized
Carrying ------------------- Estimated
Value Gains Losses Fair Value
-----------------------------------------------------------
Treasury:
<S> <C> <C> <C> <C>
Within one year ............................................ $ 250,187 $ 1,458 $ -- $ 251,645
After one but within five years ............................ 1,942,726 1,796 2,396 1,942,126
-----------------------------------------------------------
2,192,913 3,254 2,396 2,193,771
-----------------------------------------------------------
U.S. Government agencies:
Within one year ............................................ 750,000 -- 2,580 747,420
After one but within five years ............................ 2,556,508 10,374 10,389 2,556,493
After five years ........................................... 3,049,760 13,820 17,587 3,045,993
-----------------------------------------------------------
6,356,268 24,194 30,556 6,349,906
-----------------------------------------------------------
Obligations of state and political subdivisions:
Within one year ............................................ 1,801,504 15,240 329 1,816,415
After one but within five years ............................ 7,129,167 132,537 16,131 7,245,573
-----------------------------------------------------------
8,930,671 147,777 16,460 9,061,988
-----------------------------------------------------------
Mortgage-backed securities:
After five years ........................................... 2,522,837 67,928 513 2,590,252
-----------------------------------------------------------
$20,002,689 $243,153 $49,925 $20,195,917
===========================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Unrealized
Carrying ------------------- Estimated
Value Gains Losses Fair Value
-----------------------------------------------------------
U.S. Treasury:
<S> <C> <C> <C> <C>
Within one year ............................................ $ 1,496,642 $ 2,241 $ 813 $ 1,498,070
After one but within five years ............................ 1,244,272 6,876 -- 1,251,148
-----------------------------------------------------------
2,740,914 9,117 813 2,749,218
-----------------------------------------------------------
U.S. Government agencies:
After one but within five years ............................ 2,774,226 11,584 8,777 2,777,033
After five years ........................................... 2,144,249 73,684 -- 2,217,933
-----------------------------------------------------------
4,918,475 85,268 8,777 4,994,966
-----------------------------------------------------------
Obligations of state and political subdivisions:
Within one year ............................................ 2,246,897 72,303 4,366 2,314,834
After one but within five years ............................ 6,174,204 364,974 3,383 6,535,795
After five years ........................................... 554,637 45,442 1,728 598,351
-----------------------------------------------------------
8,975,738 482,719 9,477 9,448,980
-----------------------------------------------------------
Mortgage-backed securities:
After five years ........................................... 3,013,771 84,943 -- 3,098,714
-----------------------------------------------------------
$19,648,898 $662,047 $19,067 $20,291,878
===========================================================
</TABLE>
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
Cash proceeds from calls of securities held to maturity amounted to $1,234,842
and $500,000 for the years ended December 31, 1996 and 1995, respectively. There
were no proceeds from calls of securities held to maturity for the year ended
December 31, 1994. Gross gains totaling $2,061 and gross losses totaling $5,827
were realized on calls during the year ended December 31, 1996. No gains or
losses were realized on sales and calls during the years ended December 31, 1995
and 1994.
The carrying value of securities pledged to secure treasury tax and loan
deposits approximated $495,000 and $499,000 at December 31, 1996 and 1995,
respectively. See also Note 10 to financial statements regarding securities
pledged as collateral for securities sold under agreements to repurchase.
43
<PAGE>
NOTE 6. LOANS
The loan portfolio consisted of the following:
DECEMBER 31,
--------------------------------
1996 1995
--------------------------------
Mortgage:
Residential .............................. $15,257,401 $14,421,777
Commercial ............................... 26,796,619 23,264,126
Commercial ................................. 17,402,697 15,596,991
Equity ..................................... 3,837,733 4,100,386
Installment ................................ 18,891,809 14,782,622
Other ...................................... 136,172 142,267
--------------------------------
Total loans ............................. 82,322,431 72,308,169
--------------------------------
Less: Deferred loan fees ................... 122,154 155,495
Allowance for loan losses ............ 1,352,508 1,176,822
--------------------------------
1,474,662 1,332,317
--------------------------------
Loans, net ................................. $80,847,769 $70,975,852
================================
At December 31, 1996, 1995 and 1994, loans serviced by the Corporation for the
benefit of others totaled approximately $2,802,000, $2,349,000 and $2,463,000,
respectively.
Activity in the allowance for loan losses is summarized as follows:
DECEMBER 31,
-------------------------------------
1996 1995 1994
-------------------------------------
Balance, beginning ...................... $1,176,822 $1,088,486 $ 993,986
Provision charged to operations ......... 155,000 150,000 295,000
Recoveries of loans charged off ......... 32,995 120 --
Loans charged off ....................... (12,309) (61,784) (200,500)
-------------------------------------
Balance, ending ......................... $1,352,508 $1,176,822 $1,088,486
=====================================
The Corporation has entered into lending transactions in the ordinary course of
business with directors, executive officers and principal stockholders of the
Corporation and their affiliates on the same terms as those prevailing for
comparable transactions with other borrowers. At December 31, 1996 and 1995,
these loans aggregated approximately $1,735,000 and 1,744,000, respectively.
During the year ended December 31, 1996, new loans totaling $476,000 were
granted and repayments totaled approximately $485,000. The loans at December 31,
1996, were current as to principal and interest payments, and do not involve
more than normal risk of collectability.
44
<PAGE>
NOTE 7. NONPERFORMING ASSETS
Nonperforming assets include the following:
DECEMBER 31,
-----------------------------
1996 1995
-----------------------------
Nonaccrual loans .............................. $ 95,000 $ 332,800
Loans past due ninety days or more
and accruing ................................. 550,000 764,351
Restructured loans ............................ 261,098 69,125
-----------------------------
Total nonperforming loans .................. 906,098 1,166,276
Other real estate owned ....................... 269,302 269,302
Less allowance for other real estate owned .... 40,000 20,000
-----------------------------
229,302 249,302
Nonaccrual investments ........................ -- 7,541
-----------------------------
Total nonperforming assets .................... $1,135,400 $ 1,423,119
=============================
At December 31, 1996, there were no restructured loans classified as nonaccrual.
Approximately $238,000 of restructured loans were classified as nonaccrual at
December 31, 1995.
The following information is presented for assets classified as nonaccrual and
restructured:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
-------------------------------------
Income that would have been recorded
under contractual terms ................ $ 39,000 $ 44,000 $ 63,000
Less interest income received ........... 25,000 31,000 29,000
-------------------------------------
Lost income on nonperforming assets
at year end ............................ $ 14,000 $ 13,000 $ 34,000
=====================================
The activity in the allowance for OREO in 1996 and 1995 consisted of a provision
of $20,000 in each year.
Impaired loans consisted of the following:
DECEMBER 31,
----------------------------
1996 1995
----------------------------
Impaired Loans
With related allowance for loan loss .......... $ 645,000 $ 1,097,151
Without related allowance for loan loss ....... -- --
----------------------------
Total impaired loans ............................ $ 645,000 $ 1,097,151
============================
Related allowance for loan losses ............... $ 162,000 $ 225,135
============================
Average investment in impaired loans ............ $ 665,128 $ 1,114,865
============================
Interest recognized on impaired loans ........... $ 58,566 $ 106,907
============================
45
<PAGE>
NOTE 8. PREMISES AND EQUIPMENT, NET
DECEMBER 31,
------------------------
1996 1995
------------------------
Land .............................................. $ 575,655 $ 575,655
Buildings and improvements ........................ 1,417,489 1,409,929
Leasehold improvements ............................ 213,457 213,457
Furniture, fixtures and equipment ................. 1,158,244 790,551
------------------------
3,364,845 2,989,592
Less accumulated depreciation and amortization .... 1,058,747 829,332
------------------------
Total premises & equipment, net ................... $2,306,098 $2,160,260
========================
NOTE 9. DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
---------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand .................... 0% $ 25,135,689 0% $ 22,961,834
---------------------------------------------------
NOW accounts .................................. 2.00% 13,538,187 2.00% 12,074,565
Money market accounts ......................... 2.33% 10,453,580 2.33% 9,686,882
---------------------------------------------------
Total interest-bearing demand ............... 2.14% 23,991,767 2.15% 21,761,447
Statement savings and clubs ................... 2.25% 19,125,769 2.25% 17,636,833
Business savings .............................. 2.25% 1,758,885 2.25% 1,128,774
---------------------------------------------------
Total savings ............................... 2.25% 20,884,654 2.25% 18,765,607
IRA investment and variable rate savings ...... 5.66% 8,388,898 5.62% 7,164,153
Money market certificates ..................... 5.36% 37,423,738 5.48% 31,135,501
---------------------------------------------------
Total certificates of deposit ............... 5.41% 45,812,636 5.51% 38,299,654
---------------------------------------------------
Total interest-bearing deposits ............... 3.82% 90,689,057 3.81% 78,826,708
Total deposits ................................ 2.99% $115,824,746 2.95% $101,788,542
===================================================
</TABLE>
Certificates of deposit with balances of $100,000 or more at December 31, 1996
and 1995, totaled approximately $6,443,000 and $3,655,000, respectively.
Interest on certificates of deposit with balances of $100,000 or more totaled
$174,385, $163,385 and $57,941 for the years ended December 31, 1996, 1995 and
1994, respectively.
The scheduled maturities of certificates of deposit were as follows:
DECEMBER 31,
-----------------------------
1996 1995
-----------------------------
One year or less .............................. $23,700,365 $18,626,586
After one to three years ...................... 18,629,459 14,567,957
After three years ............................. 3,482,812 5,105,111
-----------------------------
$45,812,636 $38,299,654
=============================
46
<PAGE>
NOTE 10. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
At December 31, 1996, 1995 and 1994, securities sold under agreements to
repurchase were collateralized by U. S. Treasury securities having a carrying
value of approximately $2,216,000, $2,486,000 and $1,518,000, respectively.
These securities were maintained in a separate safekeeping account within the
Corporation's control.
DECEMBER 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
Balance ........................... $ 1,711,419 $ 1,650,049 $ 1,255,854
Weighted average interest rate .... 4.67% 4.67% 4.45%
Average length of maturity ........ 14-365 days 60-367 days 14-182 days
Maximum amount outstanding at
any month end during the year .... $ 2,398,000 $ 1,844,000 $ 1,256,000
Average amount outstanding
during the year .................. $ 1,695,379 $ 1,627,371 $ 720,557
Average interest rate during
the year ......................... 4.63% 4.84% 3.67%
NOTE 11. REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1996, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets
of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
assets of 4.0% and 8.0%, respectively. The Corporation has had substantially
similar capital regulations promulgated by the Board of Governors of the Federal
Reserve System.
Under its prompt corrective action regulations, the FDIC is
required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution. Such
actions could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification of
savings institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well capitalized if it
has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at least
10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk weightings and other factors.
Management believes that, as of December 31, 1996, the Bank and the Corporation
have met all capital adequacy requirements to which they are subject. Further,
the most recent FDIC notification categorized the Bank as a well capitalized
institution under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes have
changed the Bank's capital classification.
47
<PAGE>
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1996 and 1995, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well capitalized
institution:
<TABLE>
<CAPTION>
FDIC Requirements
-------------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy As Well Capitalized
--------------------- ------------------ ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------- ------------------ ---------------------
DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Leverage (Tier 1) capital ............................. 9,790,993 7.80% 5,023,069 4.00% 6,278,836 5.00%
Risk-based capital:
Tier 1 ............................................... 9,790,993 12.40% 3,157,623 4.00% 4,736,434 6.00%
Total ................................................ 10,777,027 13.65% 6,315,246 8.00% 7,894,057 10.00%
DECEMBER 31, 1995
Leverage (Tier 1) capital ............................. 8,437,457 7.57% 4,456,908 4.00% 5,571,135 5.00%
Risk-based capital:
Tier 1 ............................................... 8,437,457 12.13% 2,783,040 4.00% 4,174,560 6.00%
Total ................................................ 9,307,158 13.38% 5,566,080 8.00% 6,957,600 10.00%
</TABLE>
NOTE 12. BENEFIT PLANS
The Corporation has a noncontributory profit sharing plan covering all eligible
employees. Contributions are determined by the Corporation's Board of Directors
on an annual basis. Total profit sharing plan expense for the years ended
December 31, 1996, 1995 and 1994 amounted to approximately $95,000, $83,400 and
$85,500, respectively.
The Corporation also has a 401(k) plan which covers all eligible employees.
Participants may elect to contribute up to 15% of their salaries, not to exceed
the applicable limitations as per the Internal Revenue Code. The Corporation, on
an annual basis, may elect to match 50% of the participant's first 5%
contribution. Total 401(k) expense for the years ended December 31, 1996, 1995
and 1994 amounted to approximately $22,500, $21,800 and $18,800, respectively.
During 1995, the shareholders approved an Employee Stock Purchase Plan which
allows all eligible employees to authorize a specific payroll deduction from his
or her base compensation. On a semiannual basis, the fiduciary will purchase
shares for each participant. The Corporation may, at its discretion, contribute
an amount (not to exceed 5% of fair market value of the shares purchased) toward
the purchase of the shares, thereby reducing the purchase price to all
participating employees below the fair market value of the shares. The
Corporation implemented this plan during 1996 with payroll deductions beginning
July 1, 1996. The first stock purchase totaling 192 shares was made in January,
1997.
Also approved by the shareholders in 1995, was an Employee Stock Option Plan and
a Stock Option Plan for non-employee Directors. The Employee Stock Option Plan
provides for options to purchase shares of Common Stock to be issued to key
employees of the Corporation at the discretion of the Stock Option Committee.
The committee has the authority to determine the terms and conditions of the
options granted, the exercise price thereof, and whether the options are
incentive or non-statutory options. The Employee Stock Option Plan has reserved
22,500 shares of common stock for issuance. No options have been granted under
this plan. The Stock Option Plan for non-employee Directors has also reserved
22,500 shares of common stock for issuance. Each participant will automatically
receive an option to purchase 2,045 shares of common stock effective as of the
date such participant commences his service on the Board of Directors. No option
may be exercised more than ten years after the date of its grant. The purchase
price of the shares of common stock subject to these options will be 95% of the
fair market value on the date such option is granted. This plan has not yet
become effective and so no options have been granted. Upon the future granting
of options under these plans, the Corporation anticipates adopting Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-based Compensation." The Corporation will account for compensation cost
under the intrinsic value based method and will provide pro forma disclosures
for all awards granted. Such disclosures will include net income and earnings
per share as if the fair values based method of accounting had been applied.
48
<PAGE>
NOTE 13. INCOME TAXES
The components of income taxes (benefit) are summarized as follows:
Years Ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
Current tax expense:
Federal .................................... $563,656 $463,527 $426,190
State ...................................... 136,203 98,603 108,862
--------------------------------
699,859 562,130 535,052
Deferred tax benefit:
Federal .................................... (103,933) 1,681 (52,843)
State ...................................... (28,207) (92,744) --
--------------------------------
(132,140) (91,063) (52,843)
--------------------------------
$567,719 $471,067 $482,209
================================
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate (34%) to income before income taxes:
Years Ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
Federal income tax .......................... $640,912 $549,263 $504,801
Add (deduct) effect of
State income taxes, net of federal
income tax effect ......................... 71,277 3,867 71,849
Nontaxable interest income ................. (142,592) (96,698) (104,651)
Other items, net ........................... (1,878) 14,635 10,210
--------------------------------
Effective federal income taxes .............. $567,719 $471,067 $482,209
================================
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31,
-------------------------------
1996 1995
-------------------------------
Deferred tax assets:
Allowance for loan losses .................. $545,570 $ 470,430
Allowance for losses on investments ........ 13,823 13,823
Allowance for OREO losses .................. 8,600 8,600
Core deposit intangible amortization ....... 12,616 13,364
Nonaccrual loan interest ................... 27,537 19,699
Unrealized (gain) loss on securities
available for sale ........................ 11,189 (6,488)
Other ...................................... -- 1,336
-------------------------------
619,335 520,764
-------------------------------
Deferred tax liabilities:
Depreciation ............................... 21,336 82,809
Deferred state tax ......................... 41,759 31,532
-------------------------------
63,095 114,341
-------------------------------
Net deferred tax assets ..................... $556,240 $406,423
===============================
The Corporation has determined that it is not required to establish a valuation
reserve for the deferred tax asset, since it is more likely than not that the
deferred tax asset will be principally realized through carrybacks to taxable
income in prior years. The Corporation's conclusion that it is "more likely than
not" that the deferred tax asset will be realized is based on a history of
growth in earnings and the prospects for continued growth.
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Corporation is 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 financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated financial statements. The contract or notional
49
<PAGE>
amounts of those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
At December 31, 1996, the Corporation had mortgage commitments to extend credit
aggregating approximately $338,000 at fixed interest rates averaging 7.63% and
$1.0 million floating rate loans. Of the $1.0 million floating rate loans,
$478,000 have been committed for sale to investors. Commercial, installment and
home equity loan commitments of approximately $2.9 million were extended with
floating interest rates currently averaging 9.15% and $796,000 were extended at
fixed interest rates averaging 8.44%. All commitments were due to expire within
approximately 90 days.
At December 31, 1995, the Bank had mortgage commitments to extend credit
aggregating approximately $204,000 at fixed interest rates averaging 6.66%.
Commercial, installment and home equity loan commitments of approximately
$1,515,000 were extended with floating interest rates which fluctuate with the
prime rate, and $292,000 were extended at fixed interest rates averaging 8.00%.
Additionally, at December 31,1996, the Corporation was committed for
approximately $11.9 million of unused lines of credit, consisting of $5.1
million relating to a home equity line of credit program and an unsecured line
of credit program (cash reserve), $1.2 million relating to credit cards, and
$5.6 million relating to commercial and construction lines of credit. Amounts
drawn on the unused lines of credit are predominantly assessed interest at rates
which fluctuate with the base rate.
Commitments under standby and commercial letters of credit aggregated
approximately $90,000 and $33,000, respectively, at December 31, 1996, all of
which expire within one year. Should any letter of credit be drawn on, the
interest rate charged on the resulting note would fluctuate with the
Corporation's base rate.
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 or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Corporation evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Corporation upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby and commercial letters of credit are conditional commitments issued by
the Corporation to guarantee payment or performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation obtains collateral supporting those commitments for which
collateral is deemed necessary.
Rentals under a long-term operating lease for a branch office amounted to
approximately $45,608 and $43,400 during the years ended December 31, 1996 and
1995 respectively. On November 30, 1996, the Corporation entered into a second
long-term lease agreement for a new branch opening during 1997. At December 31,
1996, the minimum rental commitments on the noncancellable leases with an
initial term of one year or more and expiring through 2001 is as follows:
Year Ending Minimum
December 31 Rent
----------- ---------
1997 $ 57,207
1998 57,898
1999 47,209
2000 25,141
2001 23,678
---- --------
$211,133
========
50
<PAGE>
The Corporation is also 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.
NOTE 15. DIVIDEND LIMITATION
The Corporation's ability to pay cash dividends is based on its ability to
receive cash from its bank subsidiary. New Jersey law provides that no dividend
shall be paid by the Bank on its capital stock unless, following the payment of
each such dividend, the capital stock of the Bank will be unimpaired, and the
Bank will have a surplus of not less than 50% of its capital stock, or, if not,
the payment of such dividend will not reduce the surplus of the Bank. At
December 31, 1996 this restriction did not result in any effective limitation in
the manner in which the Bank is currently operating.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No.107) "Disclosures
About Fair Value of Financial Instruments," requires that the Corporation
disclose the estimated fair value of its financial instruments whether or not
recognized in the consolidated balance sheet. Fair value estimates, methods and
assumptions are set forth below for the Corporation's financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1996 1995
--------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------- ----------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents .................... $ 10,955 $ 10,955 $ 7,466 $ 7,466
Securities available for sale ................ 11,434 11,434 9,881 9,881
Securities held to maturity .................. 20,003 20,196 19,649 20,292
FHLB-NY stock ................................ 451 451 337 337
Net loans .................................... 80,848 78,519 70,976 72,324
Mortgage loans held for sale ................. 237 237 350 350
Financial liabilities:
Deposits ..................................... 115,825 116,245 101,789 101,983
Securities sold under agreements to repurchase 1,711 1,711 1,650 1,650
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents
The carrying amount approximates fair value.
Securities available for sale
All securities available for sale are actively traded and have been valued using
quoted market prices.
Securities held to maturity
All securities held to maturity are actively traded and have been valued using
quoted market prices.
FHLB-NY stock
The carrying amount approximates fair value.
Net loans
Fair values are estimated for portfolios of loan with similar financial
characteristics. Loans are segregated by type such as residential and commercial
mortgages, commercial and other installment. The fair value of loans is
51
<PAGE>
estimated by discounting cash flows using estimated market discount rates which
reflect the credit and interest rate risk inherent in the loans.
Mortgage loans held for sale
Loans in this category have been committed for sale to investors at the current
carrying amount.
Deposits
The fair value of deposits, with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW and money market accounts, is equal to the amount
payable on demand as of December 31,1996. The fair value of the certificates of
deposit is based on the discounted value of cash flows. The discount rate is
estimated using market discount rates which reflect interest rate risk inherent
in the certificates of deposit.
Securities sold under agreements to repurchase
The carrying value approximates fair value due to the relatively short time
before maturity.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties, and at
December 31, 1996 and 1995 were not material.
Limitations
The preceding fair value estimates were made at December 31, 1996 and 1995,
based on pertinent market data and relevant information on the financial
instruments. These estimates do not include any premium or discount that could
result from an offer to sell at one time the Corporation's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Corporation's financial instruments, fair value
estimates were necessarily based on judgements with respect to future expected
loss experience, current economic conditions, risk assessments of various
financial instruments, and other factors. Given the subjective nature of these
estimates, the uncertainties surrounding them and the matters of significant
judgement that must be applied, these fair value estimates cannot be calculated
with precision. Modifications in such assumptions could meaningfully alter these
estimates.
Since these fair value approximations were made solely for on and off balance
sheet financial instruments at December 31, 1996 and 1995, no attempt was made
to estimate the value of anticipated future business. Furthermore, certain tax
implications related to the realization of unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.
52
<PAGE>
NOTE 17. PARENT COMPANY ONLY
Stewardship Financial Corporation (Parent Company), formed in November, 1996,
owns one subsidiary, Atlantic Stewardship Bank. The earnings of the subsidiary
are recognized by the Parent Company using the equity method of accounting.
Accordingly, the subsidiary dividends paid reduce the Parent Company's
investment in the subsidiary. The following information should be read in
conjunction with other notes to the consolidated financial statements. Condensed
financial statements of the Parent Company at December 31, 1996 are presented
below:
<TABLE>
<CAPTION>
Statement of Financial Condition at December 31, 1996
Assets
<S> <C>
Cash and due from banks .................................... $ 6,715
Investment in subsidiary ................................... 10,399,553
------------
Total assets .............................................. $ 10,406,268
============
Liabilities and Stockholders' equity
Other liabilities .......................................... $ (1,117)
Stockholders' equity ....................................... 10,407,385
------------
Total liabilities and Stockholders' equity ................ $ 10,406,268
============
Statement of Income for the Year Ended December 31, 1996
Dividend income ............................................ $ 10,000
Equity in undistributed earnings of subsidiary ............. 1,309,485
Other income ............................................... 150
------------
Total income .............................................. 1,319,635
Other expenses ............................................. 3,435
Income before income tax benefit ........................... 1,316,200
Tax benefit ................................................ (1,117)
------------
Net income ................................................ $ 1,317,317
============
Statement of Cash Flows for the Year Ended December 31, 1996
Cash flows from operating activities:
Net income ................................................ $ 1,317,317
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiary ............ (1,309,485)
Decrease in other liabilities ............................. (1,117)
------------
Net cash provided by operating activities ................ 6,715
Net increase in cash and cash equivalents .................. 6,715
Cash and cash equivalents--beginning ....................... --
------------
Cash and cash equivalents--ending .......................... $ 6,715
============
</TABLE>
NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1996, the FASB issued Statement of Financial Accounting Standards No.
125 (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." SFAS 125 amends portions of SFAS 115,
amends and extends to all servicing assets and liabilities the accounting
standards for mortgage servicing rights now in SFAS 65, and supersedes SFAS 122.
The statement provides consistent standards for distinguishing transfers of
financial assets which are sales from transfers that are secured borrowings.
Those standards are based upon consistent application of a financial components
approach that focuses on control. The statement also defines accounting
treatment for servicing assets and other retained interest in the assets that
are transferred. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. The adoption of the statement is not expected to
have a material effect on the Corporation's financial condition or results of
operations.
53
<PAGE>
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the years ended
December 31, 1996 and 1995 (dollars in thousands, except per share data).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------------------------------------
Year ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Interest income ..................................... $2,153 $2,216 $2,313 $2,371 $9,053
Interest expense .................................... 789 826 860 875 3,350
------------------------------------------
Net interest income before provision for loan losses 1,364 1,390 1,453 1,496 5,703
Provision for loan losses ........................... 30 50 30 45 155
------------------------------------------
Net interest income after provision for loan losses 1,334 1,340 1,423 1,451 5,548
Noninterest income .................................. 146 178 183 157 664
Noninterest expense ................................. 1,015 1,079 1,136 1,097 4,327
------------------------------------------
Net income before income tax expense ............... 465 439 470 511 1,885
Federal and state income tax expense ................ 155 133 136 144 568
------------------------------------------
Net income .......................................... $ 310 $ 306 $ 334 $ 367 $1,317
===========================================
Net income per common share ......................... $ .68 $ .67 $ .73 $ .80 $ 2.88
===========================================
Year ended December 31, 1995:
Interest income ..................................... $1,784 $1,989 $2,053 $2,148 $7,974
Interest expense .................................... 538 712 752 769 2,771
------------------------------------------
Net interest income before provision for loan losses 1,246 1,277 1,301 1,379 5,203
Provision for loan losses ........................... 60 30 30 30 150
------------------------------------------
Net interest income after provision for loan losses 1,186 1,247 1,271 1,349 5,053
Noninterest income .................................. 87 128 107 144 466
Noninterest expense ................................. 973 993 923 1,015 3,904
------------------------------------------
Net income before income tax expense ............... 300 382 455 478 1,615
Federal and state income tax expense ................ 87 122 152 110 471
------------------------------------------
Net income .......................................... $ 213 $ 260 $ 303 $ 368 $1,144
===========================================
Net income per common share ......................... $ .47 $ .57 $ .67 $ .82 $ 2.53
===========================================
</TABLE>
54
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Stewardship Financial Corporation:
We consent to incorporation by reference in registration statement Nos.
333-20699 on Form S-3 and 333-20793 on Form S-8 of Stewardship Financial
Corporation of our report dated February 12, 1997, relating to the consolidated
statements of financial condition of Stewardship Financial Corporation and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of years in the two-year period ended December 31, 1996, which report appears in
an Exhibit to the December 31, 1996 annual report on Form 10-KSB of Stewardship
Financial Corporation.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT'S
AUDITED DECEMBER 31, 1996 YEAR END FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,786,342
<INT-BEARING-DEPOSITS> 219,098
<FED-FUNDS-SOLD> 5,950,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,434,354
<INVESTMENTS-CARRYING> 20,002,689
<INVESTMENTS-MARKET> 20,195,917
<LOANS> 82,200,277
<ALLOWANCE> 1,352,508
<TOTAL-ASSETS> 128,620,530
<DEPOSITS> 115,824,746
<SHORT-TERM> 7,711,419
<LIABILITIES-OTHER> 676,980
<LONG-TERM> 0
0
0
<COMMON> 460,252
<OTHER-SE> 10,407,385
<TOTAL-LIABILITIES-AND-EQUITY> 128,620,530
<INTEREST-LOAN> 6,922,698
<INTEREST-INVEST> 1,769,899
<INTEREST-OTHER> 360,581
<INTEREST-TOTAL> 9,053,178
<INTEREST-DEPOSIT> 3,271,369
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 3,349,857
<LOAN-LOSSES> 155,000
<SECURITIES-GAINS> (3,766)
<EXPENSE-OTHER> 4,327,225
<INCOME-PRETAX> 1,885,036
<INCOME-PRE-EXTRAORDINARY> 1,885,036
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,317,317
<EPS-PRIMARY> 2.88
<EPS-DILUTED> 2.88
<YIELD-ACTUAL> 5.21
<LOANS-NON> 95,000
<LOANS-PAST> 550,000
<LOANS-TROUBLED> 261,098
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,176,822
<CHARGE-OFFS> 12,309
<RECOVERIES> 32,995
<ALLOWANCE-CLOSE> 1,352,508
<ALLOWANCE-DOMESTIC> 1,352,508
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
