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FORM 10-QSB
----------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21855
STEWARDSHIP FINANCIAL CORPORATION
-----------------------------------------------------------
(Name of small business issuer as specified in its charter)
NEW JERSEY 22-3351447
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
630 GODWIN AVENUE, MIDLAND PARK, NJ 07432
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(201) 444-7100
---------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Issuer's Common Stock, no par
value, outstanding as of October 31, 1998, was 987,585.
Transitional Small Business Disclosure Format (Check one):
Yes No X
--- ---
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<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
INDEX
Page
Number
-------
PART I -- CONSOLIDATED FINANCIAL INFORMATION
ITEM I -- CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at September 30, 1998 and December 31, 1997 (Unaudited) ..... 1
Consolidated Statements of Income for the Nine Months
ended September 30, 1998 and 1997 (Unaudited) ............... 2
Consolidated Statements of Income for the Three Months
ended September 30, 1998 and 1997 (Unaudited) ............... 3
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1998 and 1997 (Unaudited) ............... 4
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended
September 30, 1998 (Unaudited) .............................. 5
Notes to Consolidated Financial Statements (Unaudited) ........ 6 - 11
ITEM II -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .............................................. 12 - 18
ITEM III -- QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ....................................... 18
PART II -- OTHER INFORMATION
ITEM 1 THRU ITEM 6 .................................................. 19
SIGNATURES .......................................................... 20
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks .................................... $ 6,107,000 $ 4,348,000
Commercial paper and interest-bearing due from banks ....... 4,578,000 3,099,000
Federal funds sold ......................................... 12,550,000 5,225,000
------------ ------------
Cash and cash equivalents ........................... 23,235,000 12,672,000
Securities available for sale .............................. 18,364,000 11,047,000
Securities held to maturity; estimated fair value
of $22,510,000 (1998) and $20,535,000 (1997) ........... 22,220,000 20,282,000
FHLB-NY stock, at cost ..................................... 557,000 510,000
Loans, net of allowance for loan losses of
of $1,542,000 (1998) and $1,462,000 (1997) ............. 109,554,000 99,205,000
Mortgage loans held for sale ............................... 309,000 756,000
Premises and equipment, net ................................ 2,481,000 2,724,000
Accrued interest receivable ................................ 1,103,000 1,029,000
Intangible assets, net of accumulated amortization of
$269,000 (1998) and $222,000 (1997) .................... 481,000 528,000
Other real estate owned, net ............................... -- 229,000
Other assets ............................................... 725,000 750,000
------------ ------------
Total assets ........................................ $179,029,000 $149,732,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing .................................... $ 34,236,000 $ 29,428,000
Interest-bearing ....................................... 129,817,000 106,787,000
------------ ------------
Total deposits ..................................... 164,053,000 136,215,000
Securities sold under agreements to repurchase ............. 662,000 533,000
Accrued expenses and other liabilities ..................... 1,123,000 1,058,000
------------ ------------
Total liabilities .................................. 165,838,000 137,806,000
------------ ------------
Commitments and contingencies .............................. -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
987,586 and 931,888 shares issued outstanding at
September 30, 1998 and December 31, 1997, respectively 6,576,000 5,229,000
Retained earnings .......................................... 6,492,000 6,637,000
Accumulated other comprehensive income:
Net unrealized gain on securities available
for sale, net of tax ................................ 123,000 60,000
------------ ------------
Total stockholders' equity ......................... 13,191,000 11,926,000
------------ ------------
Total liabilities and stockholders' equity ......... $179,029,000 $149,732,000
============ ============
See notes to unaudited consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest income:
Loans ............................................... $ 6,934,000 $ 5,865,000
Securities held to maturity
Taxable ........................................... 614,000 555,000
Non-taxable ....................................... 309,000 348,000
Securities available for sale ....................... 662,000 523,000
Other interest-earning assets ....................... 558,000 202,000
----------- -----------
Total interest income .......................... 9,077,000 7,493,000
----------- -----------
Interest expense:
Deposits ............................................ 3,560,000 2,684,000
Borrowed money ...................................... 22,000 71,000
----------- -----------
Total interest expense ......................... 3,582,000 2,755,000
----------- -----------
Net interest income before provision for loan losses ..... 5,495,000 4,738,000
Provision for loan losses ................................ 90,000 90,000
----------- -----------
Net interest income after provision for loan losses ...... 5,405,000 4,648,000
----------- -----------
Noninterest income:
Fees and service charges ............................ 512,000 421,000
Gain on sales of mortgage loans ..................... 110,000 24,000
Miscellaneous ....................................... 118,000 186,000
----------- -----------
Total noninterest income ...................... 740,000 631,000
----------- -----------
Noninterest expenses:
Salaries and employee benefits ...................... 2,092,000 1,808,000
Occupancy, net ...................................... 299,000 237,000
Equipment ........................................... 331,000 270,000
Data processing ..................................... 222,000 186,000
Advertising ......................................... 108,000 124,000
FDIC insurance premium .............................. 16,000 13,000
Amortization of intangible assets ................... 47,000 50,000
Other real estate owned expense ..................... (30,000) (16,000)
Charitable contributions ............................ 180,000 165,000
Stationery and supplies ............................. 150,000 125,000
Miscellaneous ....................................... 943,000 745,000
----------- -----------
Total noninterest expenses ..................... 4,358,000 3,707,000
----------- -----------
Income before income tax expense ......................... 1,787,000 1,572,000
Income tax expense ....................................... 583,000 497,000
=========== ===========
Net income ............................................... $ 1,204,000 $ 1,075,000
=========== ===========
Basic earnings per share ................................. $ 1.22 $ 1.11
=========== ===========
Diluted earnings per share ............................... $ 1.21 $ 1.11
=========== ===========
Weighted average number of common shares outstanding ..... 983,411 971,286
=========== ===========
Weighted average number of diluted common
shares outstanding .................................. 995,411 971,286
=========== ===========
Per share data has been restated to reflect a 2 for 1 stock split completed in
September, 1997, and a 5% stock dividend paid June 1, 1998
See notes to unaudited consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest income:
Loans .............................................. $ 2,382,000 $ 2,083,000
Securities held to maturity
Taxable .......................................... 195,000 181,000
Non-taxable ...................................... 113,000 116,000
Securities available for sale ...................... 247,000 165,000
Other interest-earning assets ...................... 241,000 86,000
----------- -----------
Total interest income ......................... 3,178,000 2,631,000
----------- -----------
Interest expense:
Deposits ........................................... 1,289,000 964,000
Borrowed money ..................................... 8,000 19,000
----------- -----------
Total interest expense ........................ 1,297,000 983,000
----------- -----------
Net interest income before provision for loan losses .... 1,881,000 1,648,000
Provision for loan losses ............................... 20,000 30,000
----------- -----------
Net interest income after provision for loan losses ..... 1,861,000 1,618,000
----------- -----------
Noninterest income:
Fees and service charges ........................... 165,000 132,000
Gain on sales of mortgage loans .................... 35,000 12,000
Miscellaneous ...................................... 28,000 123,000
----------- -----------
Total noninterest income ..................... 228,000 267,000
----------- -----------
Noninterest expenses:
Salaries and employee benefits ..................... 710,000 615,000
Occupancy, net ..................................... 106,000 83,000
Equipment .......................................... 112,000 106,000
Data processing .................................... 74,000 62,000
Advertising ........................................ 27,000 49,000
FDIC insurance premium ............................. 6,000 4,000
Amortization of intangible assets .................. 16,000 14,000
Other real estate owned expense .................... 0 (6,000)
Charitable contributions ........................... 63,000 55,000
Stationery and supplies ............................ 49,000 41,000
Miscellaneous ...................................... 304,000 265,000
----------- -----------
Total noninterest expenses .................... 1,467,000 1,288,000
----------- -----------
Income before income tax expense ........................ 622,000 597,000
Income tax expense ...................................... 202,000 205,000
=========== ===========
Net income .............................................. $ 420,000 $ 392,000
=========== ===========
Basic earnings per share ................................ $ 0.43 $ 0.40
=========== ===========
Diluted earnings per share .............................. $ 0.42 $ 0.40
=========== ===========
Weighted average number of common shares outstanding .... 986,385 973,255
=========== ===========
Weighted average number of diluted common
shares outstanding ................................. 999,519 973,255
=========== ===========
Per share data has been restated to reflect a 2 for 1 stock split completed in
September, 1997, and a 5% stock dividend paid June 1, 1998.
See notes to unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 1,204,000 $ 1,075,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment ... 319,000 240,000
Amortization of premiums and accretion of discounts, net .. 25,000 39,000
Accretion of deferred loan fees ........................... (44,000) (38,000)
Provision for loan losses ................................. 90,000 90,000
Originations of mortgage loans held for sale .............. (8,586,000) (2,256,000)
Proceeds from sale of mortgage loans ...................... 9,142,000 2,326,000
Gain on sale of mortgage loans ............................ (110,000) (24,000)
Issuance of stock options at discount ..................... -- 38,000
Loss on sale of fixed assets .............................. -- 2,000
Deferred income tax benefit ............................... (34,000) (90,000)
Amortization of intangibles ............................... 47,000 50,000
Increase in accrued interest receivable ................... (73,000) (82,000)
Decrease in other assets .................................. 7,000 91,000
Increase in other liabilities ............................. 65,000 284,000
------------ ------------
Net cash provided by operating activities ............. 2,052,000 1,745,000
------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale ..................... (10,024,000) (250,000)
Proceeds from maturities and principal repayments
on securities available for sale ........................... 2,354,000 1,548,000
Proceeds from call on securities available for sale ........... 451,000 --
Purchase of securities held to maturity ....................... (10,076,000) (2,687,000)
Proceeds from maturities and principal repayments
on securities held to maturity ............................. 4,580,000 2,095,000
Proceeds from call on securities held to maturity ............. 3,550,000 550,000
Purchase of FHLB-NY stock ..................................... (47,000) (59,000)
Net increase in loans ......................................... (10,395,000) (13,955,000)
Sale of other real estate owned ............................... 229,000 --
Additions to premises and equipment ........................... (77,000) (480,000)
------------ ------------
Net cash used in investing activities ..................... (19,455,000) (13,238,000)
------------ ------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits .................. 4,808,000 3,000,000
Net increase in interest-bearing deposits ..................... 23,030,000 8,036,000
Net increase (decrease) in securities sold under
agreements to repurchase .................................... 129,000 (830,000)
Cash dividends paid on common stock ........................... (206,000) (221,000)
Common stock issued under stock plans ......................... 205,000 184,000
------------ ------------
Net cash provided by financing activities ................. 27,966,000 10,169,000
------------ ------------
Net increase in cash and cash equivalents .......................... 10,563,000 (1,324,000)
Cash and cash equivalents -- beginning ............................. 12,672,000 10,955,000
============ ============
Cash and cash equivalents -- ending ................................ $ 23,235,000 $ 9,631,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ........................ $ 3,686,000 $ 2,815,000
Cash paid during the year for income taxes .................... 663,000 550,000
See notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
For the Period Ended September 30, 1998
-----------------------------------------------------------------
Accumulated
Common Stock Other
--------------------- Retained Comprehensive
Shares Amount Earnings Income Total
------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1997 .................... 931,888 $5,229,000 $ 6,637,000 $ 60,000 $11,926,000
Dividends Paid .................................. -- -- (200,000) -- (200,000)
Stock Dividend .................................. 46,614 1,142,000 (1,149,000) -- (7,000)
Common Stock issued under stock plans ........... 9,084 205,000 -- -- 205,000
Net income for the nine months
ended September 30, 1998 .................... -- -- 1,204,000 -- 1,204,000
Unrealized gain (loss) on securities
available for sale, net of tax .............. -- -- -- 63,000 63,000
-----------
Total comprehensive income, net of tax .......... 1,267,000
Net unrealized loss on securities
------- ---------- ----------- -------- -----------
Balance -- September 30, 1998 ................... 987,586 $6,576,000 $ 6,492,000 $123,000 $13,191,000
======= ========== =========== ======== ===========
Data has been restated to reflect a 2 for 1 stock split completed in September, 1997,
and a 5% stock dividend payable June 1, 1998 to shareholders of record on May 20, 1998
See notes to unaudited consolidated financial statements.
</TABLE>
5
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, ("the Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank ("the Bank"). Atlantic Stewardship Bank includes its
wholly owned subsidiary, Stewardship Investment Corp. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current presentation. The consolidated financial statements of
the Corporation have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the statements of financial condition
and revenues and expenses during the reporting periods. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
NOTE 2. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-QSB and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of the consolidated
financial statements, have been included. The results of operations for nine
months ended September 30, 1998 are not necessarily indicative of the results
which may be expected for the entire year.
6
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and carrying value of the
Corporation's securities available for sale as of September 30, 1998 and
December 31, 1997. In accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", securities available for sale are carried at estimated fair value.
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 3,455,000 $ 81,000 $ - $ 3,536,000
U.S. Government agencies 7,496,000 62,000 2,000 7,556,000
Obligations of state and political
subdivisions 271,000 7,000 - 278,000
Mortgage-backed securities 6,943,000 72,000 21,000 6,994,000
------------------------------------------------------------------
$ 18,165,000 $ 222,000 $ 23,000 $ 18,364,000
==================================================================
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,961,000 $ 16,000 $ - $ 2,977,000
U.S. Government agencies 1,451,000 5,000 2,000 1,454,000
Obligations of state and political
subdivisions 272,000 3,000 - 275,000
Mortgage-backed securities 6,267,000 97,000 23,000 6,341,000
------------------------------------------------------------------
$ 10,951,000 $ 121,000 $ 25,000 $ 11,047,000
==================================================================
</TABLE>
NOTE 4. SECURITIES HELD TO MATURITY
The following table sets forth the carrying value and estimated fair value of
the Corporation's securities held to maturity as September 30, 1998 and December
31, 1997. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,448,000 $ 34,000 $ - $ 1,482,000
U.S. Government agencies 8,125,000 76,000 - 8,201,000
Obligations of state and political
subdivisions 10,429,000 150,000 5,000 10,574,000
Mortgage-backed securities 2,218,000 41,000 6,000 2,253,000
==================================================================
$ 22,220,000 $ 301,000 $ 11,000 $ 22,510,000
==================================================================
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,948,000 $ 5,000 $ - $ 1,953,000
U.S. Government agencies 7,736,000 48,000 7,000 7,777,000
Obligations of state and political
subdivisions 8,479,000 132,000 1,000 8,610,000
Mortgage-backed securities 2,119,000 76,000 - 2,195,000
==================================================================
$ 20,282,000 $ 261,000 $ 8,000 $ 20,535,000
==================================================================
</TABLE>
7
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 5. LOANS
The Corporation's primary market area for lending is the small and medium sized
business and professional community as well as the individuals residing, working
and shopping in the Bergen and Passaic counties, New Jersey area. The following
table set forth the composition of loans as of the periods indicated.
September 30, December 31,
1998 1997
--------------------------------
Mortgage
Residential $ 20,480,000 $ 20,305,000
Commercial 40,596,000 35,035,000
Commercial 18,909,000 17,826,000
Equity 3,407,000 3,551,000
Installment 27,704,000 23,659,000
Other 109,000 414,000
---------------------------------
Total loans 111,205,000 100,790,000
---------------------------------
Less: Deferred loan fees 109,000 123,000
Allowance for loan losses 1,542,000 1,462,000
---------------------------------
1,651,000 1,585,000
---------------------------------
Loans, net $109,554,000 $ 99,205,000
=================================
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Nine Months Ended September 30,
1998 1997
-----------------------------
Balance, beginning of period $1,462,000 $1,353,000
Provision charged to operations 90,000 60,000
Recoveries of loans charged off - 2,000
Loans charged off (10,000) (17,000)
-----------------------------
Balance, end of period $1,542,000 $1,398,000
=============================
8
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 7. LOAN IMPAIRMENT
The Corporation has defined the population of impaired loans to include all
nonaccrual loans and loans more than 90 days past due. The following table sets
forth information regarding the impaired loans as of the periods indicated.
September 30, December 31,
1998 1997
------------------------
Impaired loans
With related allowance for loan losses $ 85,000 $40,000
Without related allowance for loan losses 15,000 4,000
========= ========
Total impaired loans $100,000 $44,000
========= ========
Related allowance for loan losses $ 86,000 $40,000
========= ========
9
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 8. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued. Potential dilutive securities totalled
10,367 shares at September 30, 1998. There were no dilutive securities
outstanding at September 30, 1997.
All share and per share amounts have been restated to reflect the 2 for 1 stock
split issued in September, 1997 and a 5% stock dividend paid June 1, 1998.
NOTE 9. COMPREHENSIVE INCOME
During the first quarter of 1998, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. In accordance with the provisions of SFAS No.
130 for interim period reporting, the Corporation's total comprehensive income
for the nine months ended September 30, 1998 and 1997 was $1,267,000 and
$1,112,000, respectively. The difference between the Corporation's net income
and total comprehensive income for these periods relates to the change in the
net unrealized gains on securities available for sale during the applicable
period of time.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 132, "Employer's Disclosure account Pensions and
Other Postretirement Benefits" (SFAS No. 132). SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements
10
<PAGE>
for pensions and other post retirement benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
required disclosures for nonpublic entities.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available. As SFAS No. 132 affects disclosure requirements only, it
is not expected to have an impact on the consolidated financial statements of
the Corporation.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), was issued by the Financial
Accounting Standards Board in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
The Corporation must adopt SFAS No. 133 by January 1, 2000 however, early
adoption is permitted. On adoption, the provisions of SFAS No. 133 must be
applied prospectively. The Corporation anticipates that the adoption of SFAS No.
133 will not have a material impact on the financial statements.
11
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased by $29.3 million, or 19.6%, from $149.7 million at
December 31, 1997 to $179.0 million at September 30, 1998. The increase in
assets reflects, among other things, increases in net loans of $10.3 million,
federal funds sold of $7.3 million, and securities available for sale of $7.3
million. The composition of the loan portfolio is basically unchanged at
September 30, 1998 when compared with the portfolio at December 31, 1997.
Total deposits increased $27.8 million, or 20.4%, to $164.1 million at September
30, 1998 from $136.2 million at December 31, 1997. Interest-bearing deposits
increased $23.0 million, or 21.6%, to $129.8 million at September 30, 1998, and
noninterest-bearing deposits, increased $4.8 million, or 16.3%, to $34.2 million
at September 30, 1998. The increase in interest-bearing deposits can be
attributed to the popularity of a tiered money market product and continued
success of the new branches in Waldwick and Ridgewood, Bergen County, New Jersey
which opened during 1997. The Corporation also continues to benefit from the
consolidation of other banking institutions as customers continue to look for
personalized customer service in their local area.
The Corporation's primary focus during the past nine months was to continue to
develop the new market bases developed with the new branches and products
offered in 1997. A 24 hour telephone banking product has been established which
allows customers to request balances, check inquiries, deposit transfers, and
loan payments. Based on the popularity of this product, the Corporation will
begin to assess the ability to provide a PC banking product in the future. The
Corporation has also begun an analysis of a Debit card product and it is
anticipated that this will be available for customers during 1999. The
Corporation has recently filed applications with the State of New Jersey and the
FDIC to open a new branch in Wayne, Passaic County, New Jersey. It is
anticipated that the new location will provide products and services to a new
customer area as well as enhance and supplement our current Wayne location.
Pending approvals from the regulatory bodies and improvements completed to the
branch location, management expects to provide this new branch location during
the first quarter of 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
General
The Corporation reported net income of $1,204,000, or $1.22 basic earnings per
share for the nine months ended September 30, 1998 compared to $1,075,000, or
$1.11 basic earnings per share for the same period in 1997. The $129,000
increase was primarily caused by increases in net interest income and
noninterest income, partially offset by increases in noninterest expense.
12
<PAGE>
Net interest income
Net interest income increased $757,000, or 16.0%, for the nine months ended
September 30, 1998 as compared with the corresponding period in 1997. The
increase was primarily due to an increase in average net interest-earning assets
offered by a decrease in net interest margin.
Total interest income increased $1.6 million, or 21.1%, primarily due to an
increase in the average volume of interest-earning assets partially offset by a
decrease in yields on earning assets. The average balance on interest-earning
assets increased $30.0 million, or 24.3%, from $123.7 million for the nine
months ended September 30, 1997 to $153.7 million for the same period in 1998,
primarily being funded by an increase to the Corporation's average deposit base.
The Corporation continued to experience an increase in loan demand which allowed
loans on average to increase $20.3 million to an average $107.4 million for the
nine months end September 30, 1998, from an average $87.1 million for the
comparable period in 1997.
Interest paid on deposits and borrowed money increased $827,000, or 30.0%, due
primarily to an increase in the average volume of total interest-bearing
deposits and an increase in cost of funds as the Corporation becomes more
reliant on its money market account products. The average balance of total
interest-bearing deposits increased to $117.2 million for the nine months ended
September 30, 1998 from $93.2 million for the comparable 1997 period, primarily
as a result of the Corporation's expanding customer base and the popularity of
the tiered money market product. Yields on deposits and borrowed money increased
from 3.88% to 4.07% for the comparable period in 1998 due to the change in mix
of deposit products for the nine months ended September 30, 1998.
Provision for loan losses
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and ultimate losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $90,000 during the nine months ended
September 30, 1998 and 1997. See "Asset Quality" section for summary of
allowance for loan losses and nonperforming assets. The Corporation monitors its
loan portfolio and intends to continue to provide for loan loss reserves based
on its ongoing periodic review of the loan portfolio and general market
conditions.
Noninterest income
Noninterest income increased by $109,000, or 17.3%, to $740,000 during the nine
months ended September 30, 1998 when compared with $631,000 during the 1997
period. Contributing to this increase was a $91,000 increase in deposit-related
fees and service charges caused by an the increased deposit base and an increase
of $86,000 in gain on sale of mortgage loans due primarily to the increase in
loans originated and sold during the three quarters of 1998 compared to the
similar period in 1997. Partially offsetting these increases was a decrease in
miscellaneous
13
<PAGE>
income of $68,000 due to nonrecurring income in 1997. The average yield on
earning assets for the nine months ended September 30, 1998 was 7.97% compared
with 8.22% for the nine months ended September 30, 1997 reflecting the decline
in investment and lower yields.
Noninterest expense
Noninterest expense increased by approximately $651,000, or 17.6%, to $4.4
million for the nine months ended September 30, 1998, compared to $3.7 million
for the same 1997 period. Salaries and employee benefits, the major component of
noninterest expense, increased $284,000, or 15.7%, during the nine months ended
September 30, 1998. This increase was due primarily to additions to staff for
the Ridgewood branch, general increases for merit and performance and increases
in employee benefits such as health insurance. Miscellaneous expenses increased
$198,000, or 26.6% due to increases in consulting fees of $104,000 and deposit
related costs of $78,000. The Corporation has utilized outside consultants to
provide experience with data processing systems to help better utilize automated
teller and platform systems and to analyze issues related to the assessment of
Year 2000 issues. Occupancy and equipment expenses increased $123,000, or 24.3%
due primarily to the establishment of the new branches and the ATM network.
Income taxes
Income tax expense totaled $583,000 and $497,000 during the nine months ended
September 30, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
General
The Corporation reported net income of $420,000, or $.43 basic earnings per
share for the three months ended September 30, 1998 compared to $392,000 or $.40
per share for the same period in 1997. The $28,000 increase in net income was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense.
Net interest income
Net interest income increased $233,000, or 14.1%, for the three months ended
September 30, 1998 as compared with the corresponding period in 1997. The
increase was primarily due to an increase in average net interest-earning assets
offset by a decline in the interest rate spread.
Total interest income increased $547,000, or 20.8%, primarily due to an increase
in the average volume of interest-earning assets offset by a decrease in the
yields earned on most interest-earning asset categories reflecting lower market
rates of interest. The average balance of interest-earning assets increased
$40.4 million, or 32.7%, from $123.7 million for the three months ended
September 30, 1997 to $164.1 million for the same period in 1998, primarily
being funded by an increase to the Corporation's average deposit base. The
Corporation continued to experience an increase in loan demand which allowed
loans on average to increase $18.6 million
14
<PAGE>
to an average $111.6 million for the three months ended September 30, 1998, from
an average $93.0 million for the comparable period in 1997.
Interest paid on deposits and borrowed money increased $314,000, or 31.9%, due
primarily to an increase in the average volume of total interest-bearing
deposits and to higher rates paid on money market products. The average balance
of total interest-bearing deposits increased to $126.0 million for the three
months ended September 30, 1998 from $98.2 million for the comparable 1997
period, primarily as a result of the Corporation's expanding customer base and
the popularity of the tiered money market account.
Provision for loan losses
The provision charged to operations totaled $20,000 and $30,000 for each of the
three months ended September 30, 1998 and 1997, respectively. See "Asset
Quality" section for summary of allowance for loan losses and nonperforming
assets.
Noninterest income
Noninterest income decreased by $39,000, or 14.6%, to $228,000 during the three
months ended September 30, 1998 when compared with $267,000 during the 1997
period. Contributing to this decrease was a $95,000 decline in miscellaneous
income offset by an increase in gains on sales of mortgages of $23,000 and an
increase in fees and service charges of $33,000. The decline in miscellaneous
income was due primarily to a 1997 nonrecurring adjustment to miscellaneous
income which occurred in the three months ended September 30, 1998.
Noninterest expenses
Noninterest expenses increased by approximately $179,000, or 13.9%, to $1.5
million for the three months ended September 30, 1998, compared to $1.3 million
for the same 1997 period. Salaries and employee benefits, the major component of
noninterest expenses, increased $95,000, or 15.4%, during the three months ended
September 30, 1998. This increase was due primarily to additions to staff for
the Ridgewood branch, general increases for merit and performance and increases
in employee benefits such as health insurance. Miscellaneous expenses increased
$39,000, or 14.7% due to increases in consulting fees of $37,000. The
Corporation continued to utilize outside consultants to provide experience with
data processing systems to help properly assess and develop test plans for Year
2000 issues. Occupancy and equipment increased $29,000, or 15.3% due primarily
to the establishment of the Ridgewood branch in the fourth quarter of 1997.
Income taxes
Income tax expense totaled $202,000 and $205,000 during the three months ended
September 30, 1998 and 1997, respectively.
15
<PAGE>
ASSET QUALITY
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrower's ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
<TABLE>
<CAPTION>
09/30/98 06/30/98 03/31/98 12/31/97
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans: (1) $ 96 $ 11 $ 4 $ 40
Loans past due 90 days or more: (2) 4 7 8 4
Restructured loans: 540 552 629 652
------ ------ ------ ------
Total nonperforming loans 640 570 641 696
Other real estate -- -- -- 229
------ ------ ------ ------
Total nonperforming assets 640 $ 570 $ 641 $ 925
====== ====== ====== ======
Allowance for loan losses $1,542 $1,522 $1,492 $1,462
====== ====== ====== ======
Nonaccrual loans to total loans 0.09% 0.01% -- 0.04%
Nonperforming loans to total loans 0.58% 0.54% 0.62% 0.69%
Nonperforming loans to total assets 0.36% 0.33% 0.40% 0.47%
Nonperforming assets to total assets 0.36% 0.33% 0.40% 0.62%
Allowance for loan losses to total loans 1.39% 1.43% 1.43% 1.45%
Allowance for loan losses to non-
performing loans 240.94% 267.02% 232.76% 210.06%
</TABLE>
- --------------
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously
accrued on these loans and not yet paid is reversed and charged against
income during the current period. Interest earned thereafter is only
included in income to the extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing
income at the contractually stated rates. A determination is made to
continue accruing income on those loans which are sufficiently
collateralized and on which management believes all interest and principal
owed will be collected.
There were no loans at September 30, 1998, other than those included in the
above table, where the Corporation was aware of any credit conditions of any
borrowers that would indicate a strong possibility of the borrowers not
complying with the present terms and conditions of repayment and which may
result in such loans being included as non-accrual, past due or restructured at
a future date.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey. Accordingly, the collectibility of a
substantial portion of the Corporation's loan portfolio is susceptible to
changes in real estate market conditions.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
area relatively predictable source of funds, deposit flow and prepayments on
loans and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition.
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. Cash and cash
equivalents increased $10.6 million during the first nine months of 1998, as
inveting activities used $19.4 million offset by financing and operating
activities providing $28.0 million and $2.0 million, respectively.
Liquidity management is a daily and long-term function of business management.
Excessliquidity is generally invested in short-term investments, such as
federal funds.
As of September 30, 1998 the Bank's capital ratios were as follows:
Required Actual Excess
Risk-based Capital -------- ------ ------
Tier 1 4.00% 10.91% 6.91%
Total 8.00% 12.16% 4.16%
Leverage Ratio 3.00% 7.22% 4.22%
YEAR 2000 ISSUES
The Year 2000 issue involves preparing computer systems and programs to identify
the arrival of January 1, 2000. In the past computer programs allocated only two
digits to a year, (i.e. 1998 was represented as 98.) Given this programming, the
year 2000 could be confused with that of 1900. The Year 2000 issue not only
impacts computer hardware and software, but all equipment which utilizes
processors or computer microchips.
Management formed a Year 2000 Compliance Committee during 1997, which includes
officers from all operating areas. The objectives of the Committee are to ensure
that the Corporation will be prepared for the issues arising out of the Year
2000. The Corporation has conducted a comprehensive review of its operations to
identify systems, vendors and customers that could be affected by the Year 2000
issue. The Committee has developed an implementation plan to test mission
critical systems and to rectify any issues related to the processing of
transactions in the year 2000 and beyond. The Corporation generally relies on
independent third parties to provide data processing services and continues to
assess and test the "readiness" of those parties. The Corporation will work with
its significant borrowers, depositors, and vendors to ensure they are taking
appropriate steps to become Year 2000 compliant.
17
<PAGE>
The Corporation expects that all appropriate year 2000 compliance testing,
including third party vendors and interfaces will be completed by 1st quarter of
1999.
Although contingency plans will be developed, the Corporation continues to bear
some risk related to the Year 2000 issue and could be adversely affected, if
other entities (i.e. vendors) do not appropriately address their own compliance.
The Corporation continues to evaluate the estimated costs associated with
attaining Year 2000 readiness. Additional costs for 1998, such as testing,
software purchases and marketing are not anticipated to be material to the
Corporation. While additional costs will be incurred, the Corporation believes,
based upon available information, that it will be able to manage its Year 2000
transition without any adverse effect on business operations or financial
condition.
ITEM III QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 1998, there have been no significant changes in the Corporation's
assessment of market risk as reported in Item 6. of the Corporation's Form
10-KSB.
18
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to litigation which arises primarily in
the ordinary course of business. In the opinion of management the
ultimate disposition of such litigation should not have a material
adverse effect on the financial position of the Corporation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports
None
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STEWARDSHIP FINANCIAL CORPORATION
DATE: November 13, 1998 BY: /s/ PAUL VAN OSTENBRIDGE
-------------------------------- ----------------------------
Paul Van Ostenbridge
President and Chief
Executive Officer
DATE: November 13, 1998 BY: /s/ JULIE E. HOLLAND
-------------------------------- ----------------------------
Julie E. Holland
Vice President
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the registrant's
unaudited June 30, 1998 interim financial statements and is qualified
in its entirety by references to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,107,000
<INT-BEARING-DEPOSITS> 4,578,000
<FED-FUNDS-SOLD> 12,550,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,364,000
<INVESTMENTS-CARRYING> 22,220,000
<INVESTMENTS-MARKET> 22,510,000
<LOANS> 111,096,000
<ALLOWANCE> 1,542,000
<TOTAL-ASSETS> 179,029,000
<DEPOSITS> 164,053,000
<SHORT-TERM> 662,000
<LIABILITIES-OTHER> 1,123,000
<LONG-TERM> 0
0
0
<COMMON> 987,586
<OTHER-SE> 13,191,000
<TOTAL-LIABILITIES-AND-EQUITY> 179,029,000
<INTEREST-LOAN> 6,934,000
<INTEREST-INVEST> 1,585,000
<INTEREST-OTHER> 558,000
<INTEREST-TOTAL> 9,077,000
<INTEREST-DEPOSIT> 3,560,000
<INTEREST-EXPENSE> 3,582,000
<INTEREST-INCOME-NET> 5,495,000
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 489,000
<EXPENSE-OTHER> 4,358,000
<INCOME-PRETAX> 1,787,000
<INCOME-PRE-EXTRAORDINARY> 1,787,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,204,000
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 4.88
<LOANS-NON> 96,000
<LOANS-PAST> 4,000
<LOANS-TROUBLED> 540,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,492,000
<CHARGE-OFFS> 10,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,542,000
<ALLOWANCE-DOMESTIC> 1,542,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
