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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO_____________
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COMMISSION FILE NUMBER 0-21855
STEWARDSHIP FINANCIAL CORPORATION
(Name of small business issuer as specified in its charter)
NEW JERSEY 22-3351447
(State of other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
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 UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
TITLE OF EACH CLASS
TITLE OF EACH CLASS
INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED 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 MARCH 19, 1998 WAS $21,969,868.
THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK, NO PAR
VALUE, OUTSTANDING AS OF MARCH 19, 1998 WAS 934,888.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, THE ISSUER HAD TOTAL REVENUES
OF $11,008,000.
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DOCUMENTS INCORPORATED BY REFERENCE
Item 6 Management's Discussion Registrant's Annual Report to
and Analysis or Plan of Shareholders under the caption
Operation "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 1998
Officers of the Company; Annual Meeting of Shareholders
Compliance with Section under the captions "Proposal I
16(a) of the Exchange Act Election of Directors" and
"Compliance with Section 16(a)
of the Securities Exchange Act
of 1934" to be filed no later
than April 30, 1998
Item 10 Executive Compensation Proxy Statement for 1998
Annual Meeting of Shareholders
under the caption
"Compensation Committee Report
on Executive Compensation," to
be filed no later than April
30, 1998
Item 11 Security Ownership of Proxy Statement for 1998
Certain Beneficial Owners Annual Meeting of Shareholders
and Management under the caption "Stock
Ownership of Management and
Principal Stockholders," to be
filed no later than April 30,
1998
Item 12 Certain Relationships and Proxy Statement for 1998
Related Transactions Annual Meeting of Shareholders
under the caption "Interest of
Management and Others in
Certain Transactions," to be
filed no later than April 30,
1998
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Stewardship Financial Corporation (the "Corporation" 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 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 (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 Corporation 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 Corporation for
each outstanding share of the common stock of the Bank. The only significant
activity of the Corporation is ownership and supervision of the Bank. The
Corporation'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 four branches located at 386 Lafayette
Avenue, Hawthorne, New Jersey, 190 Franklin Avenue, Ridgewood, New Jersey, 30
Franklin Turnpike, Waldwick, New Jersey, and 87 Berdan Avenue, Wayne, New
Jersey. The Bank operates ATM machines at its Midland Park, Waldwick, and Wayne
branches and it anticipates installing machines at the Hawthorne and Ridgewood
branches in 1998. The Bank is also in the process of implementing a Telephone
Banking System, to be introduced in the second quarter of 1998, which will
enable customers to access account information 24 hours a day, 7 days a week.
The Corporation 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 Corporation
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 Corporation are located at 630 Godwin Avenue,
Midland Park, New Jersey 07432, and the telephone number is (201) 444-7100.
BUSINESS OF THE CORPORATION
The Corporation's primary business is the ownership and supervision of the
Bank. The Corporation, 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 Corporation 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
Corporation 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 and local charities.
SERVICE AREA
The Corporation's service area primarily consists of the Bergen and Passaic
County, New Jersey market, although the Corporation makes loans throughout New
Jersey. The Corporation operates its main office in Midland Park, New Jersey and
four branch offices in Hawthorne, Ridgewood, Waldwick, and Wayne, New Jersey.
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COMPETITION
The Corporation 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
Corporation. Many large financial institutions in New York City and other parts
of New Jersey and Pennsylvania compete for the business of New Jersey residents
located in the Corporation's service area. Certain of these institutions have
significantly higher lending limits than the Corporation and provide services to
their customers which the Corporation does not offer.
Management believes the Corporation is able to compete on a substantially
equal basis with its competitors because it provides responsive personalized
services through management's knowledge and awareness of the Corporation's
service area, customers and business.
EMPLOYEES
At December 31, 1997, the Corporation employed 54 full-time employees and
31 part-time employees. None of these employees is covered by a collective
bargaining agreement and the Corporation believes that its employee relations
are good.
SUPERVISION AND REGULATION
Bank holding companies and banks are extremely 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 Corporation 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 Corporation is subject to the
regulation and supervision of the FRB. The Corporation 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 Corporation'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 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.
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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
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, 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 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 concellable 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 a FDIC-insured
institution, the Bank is subject to regulation, supervision and control by 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.
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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 regulatory. Under the matrix
as currently in effect, the assessment rate 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 Legislation. 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 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 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
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 has
enhanced 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.
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ITEM 2. DESCRIPTION OF PROPERTY
The Corporation conducts its business through its main office located at
630 Godwin Avenue, Midland Park, New Jersey, and its four branch offices. The
following table sets forth certain information regarding the Corporation's
properties as of December 31, 1997.
LEASED DATE OF LEASE
LOCATION OR OWNED EXPIRATION
-------- -------- ----------
630 Godwin Avenue
Midland Park, NJ .................. Owned --
386 Lafayette Avenue
Hawthorne, NJ ..................... Owned --
190 Franklin Avenue
Ridgewood, NJ ..................... Leased 10/31/07
30 Franklin Turnpike
Waldwick, NJ ...................... Leased 03/31/02
87 Berdan Avenue
Wayne, NJ ......................... Leased 08/31/99
ITEM 3. LEGAL PROCEEDINGS
The Corporation 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
Corporation or the Bank which, if determined adversely, would have a material
effect on the business or financial position of the Corporation 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 1997.
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PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Although the Corporation is now listed on the NASDAQ Bulletin Board with
the symbol SSFN, limited quotations have been available. As of December 31,
1997, there were approximately 651 holders of record of Common Stock.
The Corporation may pay dividends as declared from time to time by the
Corporation's Board of Directors out of funds legally available therefore,
subject to certain restrictions. Since dividends from the Bank will be the
Corporation's main source of income, any restriction on the Bank's ability to
pay dividends will act as a restriction on the Corporation'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 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 1997, the Corporation paid semi-annual cash dividends of
$0.12 per share for an annual dividend payout ratio of 15.16%. During fiscal
1996, the Corporation paid semi-annual cash dividends of $0.11 per share for an
annual dividend payout ratio of 14.56%.
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
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning directors and executive officers is included in the
definitive Proxy Statement for the Corporation's 1998 Annual Meeting of
Shareholders under the caption "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 30, 1998.
The following table sets forth information about each significant employee
of the Corporation who is not also a director.
PRINCIPAL OCCUPATION
NAME, AGE AND POSITION OFFICER SINCE (1) DURING PAST FIVE YEARS
- ---------------------- ----------------- ----------------------
Julie E. Holland, 38, ....... 1997 Vice President, Accounting
Vice President Atlantic Stewardship Bank
April, 1997
Assistant Vice President,
Accounting
Atlantic Stewardship Bank
March, 1995
Assistant Controller,
Accounting,
Atlantic Stewardship Bank
May, 1994
Vice President, Accounting
Ramapo Financial
Corporation
December, 1990
M. Bernard Joustra, 61, ..... 1991 Vice President,
Vice President Commercial Lending,
Atlantic Stewardship Bank
- ----------
(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 Corporation's 1998 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 30, 1998.
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
Corporation's 1998 Annual Meeting of Shareholders under the caption "Stock
Ownership of Management and Principal Stockholders," 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 30, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Corporation's 1998 Annual
Meeting of Shareholders under the caption "Interest of Management and Others in
Certain Transactions," 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 30, 1998.
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ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3(i) Certificate of Incorporation of the Corporation (1)
3(ii) Bylaws of the Corporation (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)
10(vi) Stewardship Financial Corporation Director Stock Plan (4)
13 Annual Report to Shareholders for the year ended December 31, 1997
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
Corporation'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
Corporation'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 Corporation's
Registration Statement on Form S-3, Registration No. 333-20699, filed
January 30, 1997.
(4) Incorporated by reference from Exhibit 4(a) from the Corporation's
Registration Statement on Form S-8, Registration No. 333-31245, filed July
11, 1997.
(b) Reports on Form 8-K
None.
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STEWARDSHIP FINANCIAL CORPORATION
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3(i) Certificate of Incorporation of the Corporation (1)
3(ii) Bylaws of the Corporation (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)
10 (vi) Stewardship Financial Corporation Director Stock Plan (4)
13 Annual Report to Shareholders for the year ended December 31, 1997
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
Corporation'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
Corporation'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 Corporation's
Registration Statement on Form S-3, Registration No. 333-20699, filed
January 30, 1997.
(4) Incorporated by reference from Exhibit 4(a) from the Corporation's
Registration Statement on Form S-8, Registration No. 333-31245, filed July
11, 1997.
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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, 1998
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.
NAME TITLE DATE
---- ----- ----
/s/ PAUL VAN OSTENBRIDGE Chief Executive Officer March 28, 1998
- ----------------------------
Paul Van Ostenbridge
/s/ JULIE E. HOLLAND Principal Financial Officer and
- ---------------------------- Principal Accounting Officer March 28, 1998
Julie E. Holland
/s/ WILLIAM ALMROTH Director March 28, 1998
- ----------------------------
William Almroth
/s/ HAROLD DYER Director March 28, 1998
- ----------------------------
Harold Dyer
/s/ EDWARD FYLSTRA Secretary and Director March 28, 1998
- ----------------------------
Edward Fylstra
/s/ WILLIAM HANSE Director March 28, 1998
- ----------------------------
William Hanse
/s/ MARGO LANE Director March 28, 1998
- ----------------------------
Margo Lane
/s/ ARIE LEEGWATER Chairman of the Board March 28, 1998
- ---------------------------- and Director
Arie Leegwater
/s/ JOHN L. STEEN Vice Chairman of the Board March 28, 1998
- ---------------------------- and Director
John L. Steen
/s/ WILLIAM J. VANDEREEMS Director March 28, 1998
- ----------------------------
William J. VanderEems
10
[LOGO] SFC
STEWARDSHIP FINANCIAL CORPORATION
and Subsidiary
Annual Report 1997
<PAGE>
TABLE OF CONTENTS
================================================================================
Financial Highlights .......................................... 2
Board of Directors ............................................ 3
Shareholders' Message ......................................... 4-5
Officers of the Bank .......................................... 6
B.E.A.C.H. Committee .......................................... 6
Character and Identity ........................................ 7
Our Tithing Program ........................................... 8-9
New Products and Services ..................................... 10
Branches ...................................................... 11
Shareholder Information ....................................... 12
Selected Financial Data ....................................... 13
Management's Discussion and Analysis .......................... 14-28
Independent Auditor's Report .................................. 29
Consolidated Statements of Financial Condition ................ 30
Consolidated Statements of Income ............................. 31
Consolidated Statements of Changes in Stockholders' Equity .... 32
Consolidated Statements of Cashflows .......................... 33
Notes to Consolidated Financial Statements .................... 34-51
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
1997 1996 %Change
-----------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
For the Year Ended December 31
Net Income $ 1,463 $ 1,317 11.1
Average Shares outstanding 926 916 1.1
Per common share:
Basic earnings 1.58 1.44 9.7
Diluted earnings 1.57 1.44 9.0
Cash dividends declared 0.24 0.21 14.3
Book value at year end 12.80 11.31 13.2
Balance Sheet Data at December 31
Total assets 149,732 128,621 16.4
Deposits 136,215 115,825 17.6
Loans 100,790 82,323 22.4
Stockholders' equity 11,926 10,407 14.6
Allowance for loan losses 1,462 1,353 8.1
Consolidated Ratios
Return on average assets 1.07% 1.10% (2.7)
Return on average equity 13.12% 13.55% (3.2)
Tier 1 capital to average assets (leverage) 7.75% 7.80% (0.6)
Tier 1 capital to risk-adjusted assets 11.41% 12.40% (8.0)
Total capital to risk-adjusted assets 12.67% 13.65% (7.2)
</TABLE>
Shares and per share data have been restated to reflect a two-for-one stock
split completed in 1997.
[GRAPHICAL REPRESENTATION OF BAR CHART
SHOWING RETURN ON ASSETS FOR THE YEARS 1993 TO 1997]
[GRAPHICAL REPRESENTATION OF BAR CHART
SHOWING RETURN ON EQUITY FOR THE YEARS 1993 TO 1997]
[GRAPHICAL REPRESENTATION OF BAR CHART
SHOWING TOTAL EARNINGS PER SHARE FOR THE YEARS 1993 TO 1997]
[GRAPHICAL REPRESENTATION OF BAR CHART
SHOWING NET INCOME FOR THE YEARS 1993 TO 1997]
2
<PAGE>
OUR BOARD OF DIRECTORS
================================================================================
[PHOTO OF BOARD OF DIRECTORS]
Seated, left to right: William C. Hanse; Arie Leegwater, Chairman of the Board;
John L. Steen, Vice Chairman of the Board; Edward Fylstra, Secretary of the
Board. Standing, left to right: Harold Dyer; Robert J. Turner; William Almroth;
Margo Lane; William J. Vander Eems; Herman deWaal Malefyt; Paul Van Ostenbridge,
President & CEO.
"Without continued support from
committed organizations like the
Atlantic Stewardship Bank, it would be
impossible for us to sustain and provide
our important service to those less
fortunate..."
Frederick W. Roeder,
Executive Director
Foundation for the
Handicapped; Wayne, NJ
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
3
<PAGE>
MESSAGE TO THE SHAREHOLDERS
================================================================================
Dear Shareholders and Friends:
1997 was a year of outstanding growth for Stewardship Financial Corporation and
its subsidiary, the Atlantic Stewardship Bank.
We are pleased to report strong growth in earnings, deposits and loans, in
addition to an expansion of services and branches.
On a consolidated basis, net income earned for the year ended December 31, 1997
was $1,463,000, or $1.58 basic earnings per share. This represents an increase
of 11.1% and 9.7% in net income and basic earnings per share respectively, as
compared to net income of $1,317,000, or $1.44 basic earnings per share for the
previous year. Diluted earnings per share were $1.57 for the year ended December
31, 1997, an increase of 9.0% over the diluted earnings of $1.44 per share for
the year ended December 31, 1996. Cash dividends paid per share increased 14.3%
in 1997 to $.24. Net earnings and cash dividends per share have been restated to
reflect a two-for-one stock split in 1997. Shareholders' Equity grew to $11.9
million, representing a 14.6% increase, compared to $10.4 million a year ago.
Stewardship Financial Corporation's total assets reached $149.7 million at
December 31, 1997, compared to $128.6 million at December 31, 1996; a growth of
16.4%. Total deposits were $136.2 million at year end for a 17.6% growth over
the $115.8 million reported a year earlier. Total gross loans were $100.8
million at year end, or a 22.4% increase over the $82.2 million in loans
reported for the previous year.
Stock Split
The Board of Directors approved a two-for-one stock split for Shareholders of
Record on August 22, 1997. The stock split was issued on September 19, 1997.
This was the corporation's first stock split and was granted in order to reward
Shareholders and help keep the Stewardship Financial Corporation's price in line
with other New Jersey banks' stock trading prices.
Market Maker
We are pleased to have enlisted the services of FIA Capital Group Inc., 119
Littleton Road, Parsippany, NJ 07054, as a Market Maker for Stewardship
Financial Corporation.
New Branches
We successfully introduced two new branches in 1997, in order to expand our
customer base. The first, our Waldwick branch, was opened in May. This is a
convenient storefront office, offering customers an after-hours Teller Walk-Up
Window and an ATM in Waldwick's busiest shopping area. The Ridgewood office
opened in November and provides safe deposit boxes, in addition to a full range
of banking products and services. The new branches have received an enthusiastic
response from depositors and together have generated well over $10 million in
new business. We now look forward to growing each of our branches and making
them become even more profitable.
[PHOTO]
Ridgewood branch opening. Pictured from left to right: Louis J. Mader, Chief of
Police; Robert R. Greenlaw, Chief of Emergency Services; Patrick A. Mancusa,
Mayor; Arie Leegwater, Chairman; John Kiernan, Branch Manager; Richard Powers,
Assistant Vice President; and Paul Van Ostenbridge, President and CEO.
4
<PAGE>
================================================================================
ATMs
The installation of ATMs was greatly appreciated by our customers. This 24-hour
banking convenience is now available at our Midland Park, Waldwick and Wayne
offices. We look forward to expanding our ATM network in 1998.
Marketing
The Bank enhanced its marketing efforts by adding a New Business Development
Officer to our Sales Team. Our sales representatives are concentrating on
promoting the Bank to businesses, as well as churches and non-profit
organizations. Our Mortgage Department introduced a service which allows
Residential Mortgage Applications to be taken at the applicant's home or
business.
Strategic Planning
We continue to ascertain the needs of customers, in order to alter our products
to meet their demands. At present, we are in the early stages of introducing
Telephone Banking. We are also researching the best Debit Card product to offer
in 1998.
Year 2000
We have a Technology Committee thoroughly informed and dedicated to resolving
all concerns arising from computer limitations which may interfere with our
quality service when the new millennium arrives. This Committee began addressing
all related issues in the third quarter, 1997. We expect to begin testing all
phases of required changes by the fourth quarter of this year. The Technology
Committee is confident that we are on target to meet the technological
challenges of the Year 2000.
Tithing
The Bank's unique Tithing Program hit a new milestone with the distribution of
the 1997 Tithe in the amount of $189,000. The total giving under the Atlantic
Stewardship Bank's Tithe Program since inception exceeded $1,000,000. We are
truly blessed to be able to share a portion of our earnings with these
non-profit Christian organizations.
We continue to develop a strong organizational structure to meet the needs of
our customers. Our dedicated associates work diligently to offer quality service
and products to our customers, and we sincerely thank them for all they do.
Helping our customers succeed will lead to additional success of the Stewardship
Financial Corporation.
We are fortunate to have a loyal core of customers and equally fortunate to have
Shareholders who believe in our concept. We are grateful for your support.
Very truly yours,
Paul Van Ostenbridge
President and CEO
[PHOTO]
Waldwick branch opening. From left to right: Larry White, President, Waldwick
Ambulance Corps.; Diane Barsa, Assistant Director of the Hermitage; Arie
Leegwater, Chairman; Tina Rasile, Branch Manager; Joseph Agugliara, Assistant
Chief Waldwick Fire Department; Thomas Giordano, President, Waldwick Fire
Department; and Paul Van Ostenbridge, President and CEO.
[GRAPHICAL REPRESENTATION OF BAR CHART
SHOWING TOTAL ASSETS FOR THE YEARS 1993 TO 1997]
5
<PAGE>
OFFICERS OF
ATLANTIC STEWARDSHIP BANK
================================================================================
Paul Van Ostenbridge
President and Chief Executive Officer
Julie E. Holland
Vice President and Treasurer
M. Bernard Joustra
Vice President
James S. Donado
Assistant Vice President
Elizabeth M. Lamb
Assistant Vice President
Dennis R. Murley
Assistant Vice President
Cynthia Perrotta
Assistant Vice President
Richard D. Powers
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
John G. Kiernan
Assistant Secretary
Ellie King
Assistant Secretary
Nancy F. Lystash
Assistant Secretary
Kristine Rasile
Assistant Secretary
David A. Struck
Assistant Secretary
Marie E. McCall
Assistant Treasurer
Louise H. Rohner
Administrative Assistant
Jean M. Schaver
Administrative Assistant
OUR B.E.A.C.H. COMMITTEE
================================================================================
Atlantic Stewardship's community investment goes beyond financial assistance.
Members of the bank's B.E.A.C.H. Committee (Bank Employees Assisting CHarities)
volunteer their time to run a number of programs, enlisting the support of
fellow co-workers and customers for projects such as food drives and holiday
gift collections; demonstrating again and again their commitment to the practice
of "Stewardship."
[PHOTO]
Elaine Booth, B.E.A.C.H. Committee Chairperson with Jay Sinclair, Executive
Director, Star of Hope Missions (center); and Raymond Santhouse, ASB Assistant
Vice President and Midland Park Branch Manager.
[PHOTO]
B.E.A.C.H. Committee Members distribute Easter baskets to families in need.
6
<PAGE>
OUR CHARACTER AND IDENTITY
================================================================================
[PHOTO]
Bank associates' annual work day for Paterson Habitat for Humanity, when
computers and calculators are replaced with hammers and shovels to help provide
low-cost housing.
Atlantic Stewardship Bank, a subsidiary of Stewardship Financial Corporation, is
a full-service, independent commercial bank, established in 1985, dedicated to
meeting the financial needs of the northern New Jersey community. Our associates
work together as a team, continually striving to maintain our high level of
customer service, while consistently upgrading all phases of operations. We
recognize the value of all our customers and we acknowledge 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. In turn, we allocate the
necessary resources to develop products and services which will position us to
meet the challenges of the next century. 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.
"God has blessed the ministry of our home by giving us the gift of friends who
love Him and who share their blessings with us and many other worthwhile
charities. We are thankful that we are serviced by your trustworthy Bank."
Nell Hartog,
Asst. Treasurer
The Florence Christian Home;
Wayne, NJ
7
<PAGE>
GIVING BACK:
OUR TITHING PROGRAM FOR 1997
================================================================================
With the 1997 distribution of $189,000, our Bank's unique Tithing Program has
surpassed $1,000,000 in total donations since its inception in 1988. The Tithing
Program is mandated by our corporate by-laws, which direct us to donate ten
percent of pre-tax profits to Christian and charitable organizations. Initially
established as an ecumenical program to support mission, health and educational
programs, the Tithing Program has been expanded to offer support for local
charitable and civic organizations, such as ambulance corps, libraries and PBAs
in the communities where the Bank maintains branches. Tithe recipients are
selected at the end of each year by the bank's Board of Directors. In 1997, 190
organizations received financial support from Atlantic Stewardship Bank. This
year's tithe benefitted a wide array of organizations, from national and local
missionary programs to hospitals, senior care facilities, Christian schools and
local civic organizations.
- --------------------------------------------------------------------------------
WE ARE PLEASED TO ASSIST THE FOLLOWING CHARITIES
THROUGH OUR 1997 TITHE DISTRIBUTION:
- --------------------------------------------------------------------------------
* Africa Inland Mission
* Bessie Green Community
* Bethany Christian Services
* Bethlehem Ministries
* Calvary Temple School
* Calvin College
* Christian Health Care Center
* Christian Reformed World Relief Committee
* Christian School International Foundation
* CLEAR
* CUMAC-ECHO
* Dawn Treader School
* Eastern Christian Children's Retreat
* Eastern Christian School Association
* Eastern Home Mission Board
* Elim Christian School
* Eva's Village
Fellowship Homes, Wayne
* Florence Christian Home
Foundation for the Handicapped
* Goshen Christian School
* Hawthorne Christian Academy
* Holland Christian Home
Holly House
Homebound Pilots Foundation
* Lord's Day Alliance
Love Fund, Inc.
* Netherlands Reformed Christian School
New Jersey Community Loan Fund
* Operation Double Harvest
* Paterson Habitat for Humanity
* Ron Hutchcraft Ministries
* Siena Village
* Star of Hope Ministries
* Wyckoff Family YMCA
"Every bit of human encouragement offers hope to those who have lost hope. We
help people of all faiths and of no particular faith to find their way in a
sometimes cold and indifferent world. Your gift makes their lives a little
warmer. We send renewed and heartfelt thanks."
Rev. John Catoir,
Executive Director
Eva's Village,
Paterson, NJ
[GRAPHICAL REPRESENTATION OF BAR CHART
SHOWING TOTAL ASSETS FOR THE YEARS 1993 TO 1997]
8
<PAGE>
[PHOTO]
Arie Leegwater (3rd from left), Chairman of the Board; and Paul Van Ostenbridge
(5th from left) with 1997 Tithe recipients, from left to right: William T.
Barnett, Africa Inland Mission; Patricia Geurkink, Eastern Christian Children's
Retreat; Sister Alice Matthew, Siena Village; Susan Bucci, Calvary Temple
School; Douglas Struyk, Christian Health Care Center; and Barbara Dunn, Paterson
Habitat for Humanity.
- --------------------------------------------------------------------------------
IN ADDITION, THE BANK HAS PROVIDED SUPPORT
THROUGHOUT 1997 TO THE
FOLLOWING ORGANIZATIONS:
- --------------------------------------------------------------------------------
Albert Payson Terhune Elementary School
American Cancer Society Bergen County
American Heart Association
American Red Cross Bergen County
Bergen County Foster Care Parents Association
Bergen County Housing Coalition
Bergen Pines County Hospital
Boy Scouts of America--Passaic Valley Council
Boys & Girls Club of Hawthorne
Calvin Coolidge School
* Calvin Theological Seminary
* Cathedral Choir
Cerebral Palsy Center
* Christian Homes for Children
* Christian Overcomers
Community Learning Center of Wyckoff
* Corner Closet
Deborah Hospital
* Eastern Home Mission Board
Emergency Services
* 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
* Friendship Ministries
* Gideons International Passaic Valley Camp
* Gideons International Ramapo Camp
Girl Scout Council of Bergen County
* Good Shepherd Mission
* Grace Counseling Ministries
* Habitat for Humanity Bergen County
Hawthorne Baseball/Softball Association
Hawthorne Caballeros
Hawthorne Chamber of Commerce
Hawthorne Chamber Symphony
Hawthorne Community Library Foundation
Hawthorne Cubs
Hawthorne Education Foundation
Hawthorne Family Fun Day Picnic
Hawthorne Girl Scouts
Hawthorne High School
Hawthorne PBA Local 200
Hawthorne Rotary Club
Hawthorne Special Rec
Hawthorne Volunteer Fire Department
Hugh O'Brian Youth Foundation
* Interchurch Softball League
JFK Elementary School
Juvenile Diabetes Foundation
Keith Van Hook Fund
Leukemia Society of America, Inc.
* Little Sisters of the Poor
* Luke Society
* Metropolitan Youth for Christ
Midland Park Ambulance Corps
Midland Park Baseball Association, Inc.
Midland Park High School
Midland Park/Ho-Ho-Kus PBA
Midland Park Lions Club
Midland Park PTA
Midland Park Police
Midland Park Volunteer Fire Company
Mohawk Athletic Club
New Jersey Explosion Softball
New Jersey Firemen's Home
Northeast Urban Church Planting
North Jersey Chorus
* Our Lady of the Consolation School
* Our Lady of the Magnificat
* Our Lady of Mount Carmel
Passaic Valley Hospice
Paterson Adult and Continuing Education
Paterson Chamber of Commerce
Paterson Coalition for Housing, Inc.
* Our Lady of the Consolation School
* Our Lady of the Magnificat
* Our Lady of Mount Carmel
Passaic Valley Hospice
Paterson Adult and Continuing Education
Paterson Chamber of Commerce
Paterson Coalition for Housing, Inc.
Prison Fellowship Ministries
Ridgewood AM Rotary
Ridgewood Emergency Services
* Ridgewood YMCA
Roosevelt School
* Saint Anthony School & Parish
* St. Brendan School
* St. Peter's Haven
SHARE, Inc.
Spectrum for Living Development, Inc.
Stars Vocational
* Strategic Prayer Command
Torpedoes Soccer Club
* Touch the World
Tri-County Chamber of Commerce
* Unity Christian Reformed Church
After-School Program
Valley Hospital & Valley Hospital Auxiliary
Waldwick Ambulance
Waldwick Borough
Waldwick Fire Department
Waldwick High School Booster Club
Waldwick High School & Home Association
Waldwick PBA
Wayne Adult Community Center, Inc.
Wayne First Aid Squad
Wayne General Hospital
Wayne Hills High School
Wayne Library
Wayne Little League
Wayne Police Athletic League
Wayne Township Public Schools
Wayne Valley Band Parents Association
Wayne Volunteer Fire Company
* Westminster Theological Seminary
William B. Mawhinney Ambulance Corps.
Women Who Raise the Roof
Wyckoff/Midland Park Rotary
YM-YWHA of North Jersey
* Denotes Christian Charity
9
<PAGE>
NEW PRODUCTS & SERVICES
================================================================================
ATM
First introduced in our Wayne branch in March, then in Waldwick and Midland
Park, our ATMs offer 24-hour account access to ASB customers and to the
community, with no transaction fees.
We also offer our customers an ATM Access/Check Card, which is both a 24-hour
ATM card and a debit card. The card has worldwide acceptance at ATMs and can
also be used to pay for purchases at NYCE merchant locations.
[PHOTO OF ATM MACHINE]
PGA
Our Premium Growth Account offers tiered interest rates, allowing investors to
earn higher interest on larger balances. The PGA also features easy access,
limited check writing, and the security of FDIC insurance. In addition, PGA
investors receive additional benefits, including 24-hour account information by
phone, free personal checking and a free Gold VISA(R) card.
[GRAPHIC] PGA
Premium Growth Account
A Solid Investment in Liquid Form
Atlantic [LOGO]
Stewardship Bank
"We never know what emergencies we will face, nor the magnitude of suffering we
may have to address. Gifts such as yours make it possible to help, swiftly and
with confidence. Your leadership has set an example for others who share your
commitment to helping people in need."
Douglas H. Dittrick
Chairman, Major Gifts
American Red Cross,
Ridgewood, NJ
10
<PAGE>
BRANCH ACTIVITIES
================================================================================
[PHOTO]
Hawthorne Branch Manager Dave Van Lenten does double duty as Manager of another
Atlantic Stewardship team.
[PHOTO]
On a sales call, Waldwick Branch Manager Kristine Rasile with (left to right):
Richard Powers, Assistant Vice President, Sales; Carol and Vinnie DeMauro,
Countryside Glass and Mirror Inc. of Waldwick, NJ.
[PHOTO]
Pictured from left to right: Jennifer Heller, Ridgewood Customer Sales
Representative; with Don Rick, Dolphin Construction; and family; Kelly, Jackie,
Emily and Shannon.
[PHOTO]
NY Yankees General Manager, Bob Watson, visits the Midland Park branch for a
book signing. From left to right: ASB Board Member, William C. Hanse; Bob
Watson; Mrs. Watson; ASB Assistant VP and Treasurer, Julie E. Holland; ASB Vice
President, M. Bernard Joustra; Carol Van Ostenbridge; Brian Hanse and ASB
President and CEO, Paul Van Ostenbridge.
[PHOTO]
Robert Giannetti, ASB Wayne Branch Manager, presents a check to Principal
Vincent Benfatti and students at the Albert Payson Terhune Elementary School,
matching funds which students raised for school improvements.
11
<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 11, 1998, at 7:00 P.M.
The Corporation had 651 shareholders of record on December 31, 1997.
Dividend Reinvestment Plan
A total of 467 shareholders currently participate in the Corporation's
Shareholder Reinvestment Plan, representing 659,666 or 70 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)444-7100,
extension 118.
Stewardship Financial Corporation will provide a copy of the Annual Report on
Form 10K, free of charge, to any Shareholder 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 Board of Directors of the Stewardship Financial Corporation is pleased to
pay, on February 2, 1998, its first quarterly dividend to Shareholders of Record
on January 15, 1998, in the amount of $0.07 per share. This marks a change in
the dividend program, inasmuch as prior dividends were paid on a semi-annual
basis. Future dividends will be paid in May, August, November and February,
subject to Board approval.
Recent History
of Dividends
Paid
September 30, 1997 $.12
March 28, 1997 $.12
September 30, 1996 $.11
March 29, 1996 $.10
September 29, 1995 $.09
March 31, 1995 $.09
Dividends have been restated to reflect a two-for-one stock split completed in
1997.
- --------------------------------------------------------------------------------
Corporate Services Ellie King, Assistant Secretary
Stewardship Financial Corporation
630 Godwin Avenue
Midland Park, NJ 07432
(201)444-7100
Bank Counsel William C. Hanse
Hanse & Hanse
2035 Hamburg Turnpike, Suite E
Wayne, NJ 07470
(201)831-8700
Market Maker FIA Capital Group, Inc.
119 Littleton Road
Parsippany, NJ 07054
(800)875-0086
12
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Net interest income ................................ $ 6,451 $ 5,703 $ 5,203 $ 4,597 $ 3,943
Provision for loan losses .......................... (120) (155) (150) (295) (398)
-------- -------- -------- ------- -------
Net interest income after provision
for loan losses .................................. 6,331 5,548 5,053 4,302 3,545
Noninterest income ................................. 753 664 466 369 474
Noninterest expense ................................ 5,024 4,327 3,904 3,187 2,736
-------- -------- -------- ------- -------
Income before income tax expense ................... 2,060 1,885 1,615 1,484 1,283
Income tax expense ................................. 597 568 471 482 375
-------- -------- -------- ------- -------
Net income ......................................... $ 1,463 $ 1,317 $ 1,144 $ 1,002 $ 908
======== ======== ======== ======= =======
COMMON SHARE DATA:
Basic net income ................................... $ 1.58 $ 1.44 $ 1.26 $ 1.14 $ 1.17
Diluted net income ................................. 1.57 1.44 1.26 1.14 1.17
Cash dividends declared ............................ 0.24 0.21 0.18 0.15 0.10
Book Value at year end ............................. 12.80 11.31 10.05 8.71 7.96
Average shares outstanding ......................... 926 916 905 883 780
Shares outstanding at year end ..................... 932 921 911 900 855
Dividend payout ratio .............................. 15.16% 14.56% 14.20% 13.17% 8.52%
SELECTED CONSOLIDATED RATIOS:
Return on average assets ........................... 1.07% 1.10% 1.10% 1.13% 1.16%
Return on average stockholders' equity ............. 13.12% 13.55% 13.54% 13.51% 15.66%
Average stockholders' equity as a
percentage of average total assets ............... 8.19% 8.12% 8.14% 8.39% 7.40%
Tier-1 capital leverage (1) ........................ 7.75% 7.80% 7.57% 8.64% 8.15%
Tier-1 risk based capital (2) ...................... 11.41% 12.40% 12.13% 13.79% 12.77%
Total risk based capital (2) ....................... 12.67% 13.65% 13.38% 15.04% 14.27%
Allowance for loan loss to year-end loans .......... 1.45% 1.64% 1.63% 1.79% 1.87%
Non-performing loans to year-end loans ............. 0.69% 1.10% 1.61% 1.32% 1.74%
SELECTED YEAR-END BALANCES:
Total assets ....................................... $149,732 $128,621 $113,120 $91,978 $83,798
Total loans, net of allowance for loan loss ........ 99,205 80,848 70,976 59,490 51,920
Total deposits ..................................... 136,215 115,825 101,789 82,576 76,195
Stockholders' equity ............................... 11,926 10,407 9,151 7,834 6,809
</TABLE>
- ----------------
(1) As a percentage of average quarterly assets.
(2) As a percentage of total risk-weighted assets.
13
<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, 1997, 1996 and 1995. 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 four branches located in Ridgewood and Waldwick, Bergen
County, New Jersey and 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 $1.5 million, or $1.58 basic earnings per
share, for the year ended December 31, 1997, an increase of $146,000, or 11.1%,
above the $1.3 million recorded for 1996. Earnings for 1996 had increased
$173,000, or 15.1%, over the 1995 earnings of $1.1 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 1997 to 1.07% from 1.10% in 1996 and 1995.
The return on average equity decreased to 13.12% in 1997 from 13.55% in 1996 and
13.54% in 1995.
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 1997, net interest income increased to $6.5 million from $5.7 million in
1996, an increase of $748,000, or 13.1%. This was caused by an increase of $5.2
million, or 20.8%, 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 (4 basis
points) and an increase in interest rates on interest-bearing liabilities (7
basis points).
14
<PAGE>
Interest income, on a tax equivalent basis, increased $1.2 million, or 13.2%,
during 1997 to $10.5 million from $9.2 million earned during 1996. 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 rates. Average interest-earning assets increased
$15.5 million in 1997, or 13.7%, over the 1996 amount with average loans
attributing to $14.3 million of the increase due primarily to the Corporation's
increased competitiveness within the marketplace.
Interest expense increased $454,000, or 13.6%, during 1997 to $3.8 million. The
increase was due to an increase in average interest-bearing liabilities of $10.2
million, or 11.7%, to $98.1 million during 1997 and to a rise in interest rates
paid on interest-bearing liabilities. Yields on interest-bearing liabilities
increased to 3.88% during 1997 from 3.81% during 1996. Contributing to this
increase was 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 and to higher yielding term
deposits. The Corporation began offering a new tiered money market account
carrying market yields in the second quarter of 1997. This product has been
successful in attracting new funds into the Corporation. 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 $4.5 million, or 21.0%, to $26.2 million during 1997.
In 1996, net interest income increased to $5.7 million from $5.2 million in
1995, an increase of $500,000, or 9.6%. 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 in 1995. The increase was due primarily to an increase in the
average volume of interest-earning assets offset by a decrease in yields on
interest-earning assets. Average interest-earning assets increased $15.7 million
in 1996, or 16.2%, over the 1995 amount. Interest expense increased $579,000, or
20.9%, during 1996. 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
1996 and increased $3.6 million, or 20.0%, over the 1995 average balances.
The following table reflects the components of the Corporation's net interest
income for the years ended December 31, 1997, 1996 and 1995 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 1997, 1996 and
1995. 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.
15
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
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> <C>
ASSETS
Interest-earning assets:
Loans (1) ............................ $ 91,022 $ 8,052 8.85% $ 76,751 $6,926 9.02% $ 64,612 $6,040 9.35%
Taxable investment securities ........ 21,498 1,388 6.46 20,650 1,319 6.39 17,575 1,120 6.37
Tax-exempt investment
securities (2) ...................... 9,511 660 6.94 8,896 631 7.09 8,992 648 7.21
Other interest-earning assets ........ 6,369 357 5.61 6,633 360 5.43 6,032 355 5.89
-------- ------- -------- ------ -------- ------
Total interest-earning assets ........ 128,400 10,457 8.14 112,930 9,236 8.18 97,211 8,163 8.40
------- ------ ------
Net interest-earning assets:
Allowance for loan losses ............ (1,407) (1,249) (1,127)
Other assets ......................... 9,183 8,161 7,711
-------- -------- --------
Total assets ......................... $136,176 $119,842 $103,795
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits ............................ $ 29,856 $ 774 2.59% $ 23,150 $ 485 2.10% $ 20,813 $ 446 2.14%
Savings deposits ..................... 21,219 480 2.26 20,353 458 2.25 19,839 448 2.26
Time deposits ........................ 45,427 2,470 5.44 42,625 2,329 5.46 34,552 1,797 5.20
Borrowing ............................ 1,570 80 5.10 1,695 78 4.60 1,645 80 4.86
-------- ------- -------- ------ -------- ------
Total interest-bearing
liabilities ......................... 98,072 3,804 3.88 87,823 3,350 3.81 76,849 2,771 3.61
------- ------ ------
Noninterest-bearing liabilities:
Demand deposits ...................... 26,158 21,626 18,028
Other liabilities .................... 792 668 468
Stockholders' equity ................. 11,154 9,725 8,450
-------- -------- --------
Total liabilities and
stockholders' equity ................ $136,176 $119,842 $103,795
======== ======== ========
Net interest income
(taxable equivalent basis) .......... $ 6,653 $5,886 $5,392
======= ====== ======
Net interest spread
(taxable equivalent basis) .......... 4.26% 4.37% 4.79%
==== ==== ====
Net yield on interest-earning
assets (taxable equivalent
basis) (3) .......................... 5.18% 5.21% 5.55%
==== ==== ====
</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.
16
<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>
1997 VERSUS 1996 1996 VERSUS 1995
-------------------------- ---------------------------
(In thousands)
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE DUE TO CHANGE
IN AVERAGE IN AVERAGE
------------------- ------------------
VOLUME RATE NET VOLUME RATE NET
------- ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans ................................................. $1,265 $ (139) $1,126 $1,102 $ (216) $ 886
Taxable investment securities ......................... 55 14 69 196 3 199
Tax-exempt investment securities ...................... 43 (14) 29 (7) (10) (17)
Federal funds sold .................................... (15) 12 (3) 34 (29) 5
------ ------- ------ ------ ------- ------
Total interest-earning assets ........................ 1,348 (127) 1,221 1,325 (252) 1,073
------ ------- ------ ------ ------- ------
Interest expense:
Interest-bearing demand deposits ...................... $ 159 $ 130 $ 289 $ 49 $ (10) $ 39
Savings deposits ...................................... 20 2 22 12 (2) 10
Time deposits ......................................... 152 (11) 141 437 95 532
Borrowings ............................................ (6) 8 2 2 (4) (2)
------ ------- ------ ------ ------- ------
Total interest-bearing liabilities ................... 325 129 454 500 79 579
------ ------- ------ ------ ------- ------
Net change in net interest income ...................... $1,023 $ (256) $ 767 $ 825 $ (331) $ 494
====== ======= ====== ====== ======= ======
</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 $120,000 in 1997, representing a 22.6% decrease
from the 1996 provision of $155,000. The 1996 provision increased 3.3% from the
1995 provision of $150,000.
NONINTEREST INCOME
Noninterest income increased $89,000, or 13.4%, to $753,000 during the year
ended December 31, 1997, when compared with $664,000 during the 1996 period. The
increase in noninterest income resulted primarily from an increase in fees and
service charges on deposit accounts of $51,000 to $563,000 for the year ended
December 31, 1997 due to an expanding customer base. Gain on sales of mortgage
loans decreased $6,000 to $46,000 for 1997 due to a decrease in the volume of
loans originated for sale.
Noninterest income increased by $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 resulted primarily from an increase in fees and service charges and a
volume related increase in gain on sales of mortgage loans.
17
<PAGE>
NONINTEREST EXPENSE
Although management is committed to containing noninterest expense, the
continued growth of the Corporation has caused noninterest expense to increase
by $697,000, or 16.1%, to $5.0 million for the year ended December 31, 1997,
compared to $4.3 million for the same period in 1996. Salaries and employee
benefits, the major component of noninterest expense, increased $369,000, or
17.4%. The increase was due primarily to additions to staff in the operations
area, new business development and the new branches in Waldwick and Ridgewood
and general merit and salary increases. Increases in occupancy, equipment and
data processing totaling $218,000 were due to the installation of an ATM network
and the opening of the two new branches. Advertising expense increased $78,000
as a result of the new branches and the new tiered money account product.
Miscellaneous expense increased $109,000 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 Bank had charitable contributions totaling $189,000
for the year ended December 31, 1997, an increase of $38,000, or 25.2%, over the
same period in 1996.
Noninterest expense increased $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.
Increases in salaries and employee benefits, equipment, data processing,
stationery and supplies and miscellaneous expense were caused primarily by
staffing additions in the accounting and operations area, computer system
conversion completed in April, 1996, and general growth of the Corporation.
Offsetting these increases in noninterest expense was a reduction in FDIC
insurance premiums of $54,000.
FINANCIAL CONDITION
Total assets at December 31, 1997 were $149.7 million, an increase of $21.1
million, or 16.4%, over the $128.6 million at December 31, 1996. This increase
in assets reflects, among other things, a $18.4 million increase in net loans
held for portfolio and a $2.9 million increase in commercial paper and
interest-bearing due from banks.
LOAN PORTFOLIO
The Corporation's loan portfolio at December 31, 1997, net of allowance for loan
losses, totaled $99.2 million, an increase of $18.4 million, or 22.7%, over the
$80.8 million at December 31, 1996. During 1997, the Corporation experienced
strong volume of new loan originations. Increases continued to occur in most
loan categories and were caused by the commitment to competitively price
products, the continued "fallout" of the small business customer from the
mergers of other financial institutions in the Corporation's market area and the
retention of residential mortgages. Commercial real estate mortgage loans
consisting of $35.0 million, or 34.8% of the total portfolio, comprised the
largest portion of the loan portfolio. This represented an increase of $8.2
million from $26.8 million, or 32.6% of the total portfolio at December 31,
1996. Residential mortgage and installment loans increased $5.0 million and $4.8
million, respectively. Mortgage loans held for sale totaled $756,000 at December
31, 1997 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, 1997, 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.
18
<PAGE>
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,
---------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential ...................... $20,305 20.1% $15,257 18.5% $14,422 19.9%
Commercial ....................... 35,035 34.8% 26,797 32.6% 23,264 32.2%
Commercial loans .................. 17,826 17.7% 17,403 21.1% 15,597 21.6%
Consumer loans:
Installment (1) .................. 23,659 23.5% 18,892 22.9% 14,783 20.4%
Home equity ...................... 3,551 3.5% 3,838 4.7% 4,100 5.7%
Other ............................ 414 0.4% 136 0.2% 142 0.2%
------- ----- ------- ----- ------- -----
Total loans ....................... 100,790 100.0% 82,323 100.0% 72,308 100.0%
Less: Allowance for loan losses ... 1,462 1,353 1,177
Deferred loan fees .......... 123 122 155
------- ------- -------
Net loans ......................... $99,205 $80,848 $70,976
======= ======= =======
</TABLE>
- ----------
(1) Includes automobile, home improvement, second mortgages and unsecured
loans.
The following table sets forth certain categories of loans as of December 31,
1997 by contractual maturity:
<TABLE>
<CAPTION>
AFTER 1 YEAR
WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
------- ------------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage ........... $ 5,352 $ 9,432 $40,556 $ 55,340
Commercial ..................... 4,681 11,491 1,654 17,826
Consumer ....................... 1,446 9,805 16,373 27,624
------- ------- ------- --------
Total loans .................... $11,479 $30,728 $58,583 $100,790
======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due one year or
more after December 31, 1997, which have predetermined interest rates or
floating or adjustable interest rates:
<TABLE>
<CAPTION>
FLOATING OR
PREDETERMINED ADJUSTABLE
RATES RATES TOTAL
------------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage ..................... $23,051 $26,937 $49,988
Commercial ............................... 6,127 7,018 13,145
Consumer ................................. 21,659 4,519 26,178
------- ------- -------
Total .................................... $50,837 $38,474 $89,311
======= ======= =======
</TABLE>
19
<PAGE>
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,
1997 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 was written off during 1996.
20
<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>
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans: (1)
Commercial real estate ...................................... $ 40 $ -- $ 194
Commercial .................................................. -- 95 139
------ ------- -------
Total nonaccrual loans ..................................... 40 95 333
------ ------- -------
Loans past due ninety days or more and accruing:
Commercial real estate ...................................... -- -- 174
Commercial .................................................. -- 550 590
Consumer 4 -- --
------ ------- -------
Total loans past due ninety days or more and accruing ...... 4 550 764
------ ------- -------
Restructured loans:
Commercial .................................................. 612 131 6
Consumer .................................................... 40 130 63
------ ------- -------
Total restructured loans ................................... 652 261 69
------ ------- -------
Total nonperforming loans .................................... $ 696 $ 906 $ 1,166
====== ======= =======
Nonaccrual investments ....................................... $ -- $ -- $ 8
Other real estate owned, net ................................. 229 229 249
------ ------- -------
Total nonperforming assets ................................... $ 925 $ 1,135 $ 1,423
====== ======= =======
Nonaccrual loans to total gross loans ........................ 0.04% 0.12% 0.46%
Nonperforming loans to total gross loans ..................... 0.69% 1.10% 1.61%
Nonperforming loans to total assets .......................... 0.47% 0.70% 1.03%
Nonperforming assets to total assets ......................... 0.62% 0.88% 1.26%
Allowance for loan losses to nonperforming loans ............. 209.96% 149.27% 100.90%
</TABLE>
- ----------
(1) At December 31, 1997 and 1996, there were no restructured loans classified
as nonaccrual. Approximately $238,000 restructured loans were classfied as
nonaccrual at December 31, 1995.
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.
21
<PAGE>
The following table sets forth, for the years ended December 31, 1997, 1996 and
1995, 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>
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period ........................... $1,353 $1,177 $1,088
Loans charged off:
Commercial .............................................. 2 2 59
Consumer ................................................ 17 10 2
------ ------ ------
Total loans charged off ................................ 19 12 61
------ ------ ------
Recoveries of loans previously charged off:
Commercial real estate .................................. 1 5 --
Commercial .............................................. 4 28 --
Consumer ................................................ 3 -- --
------ ------ ------
Total recoveries of loans previously charged off ....... 8 33 --
------ ------ ------
Net loans charged off (recovered) ........................ 11 (21) 61
Provisions charged to operations ......................... 120 155 150
------ ------ ------
Balance at end of period ................................. $1,462 $1,353 $1,177
====== ====== ======
Net charge offs (recoveries) during the period
to average loans outstanding ............................ 0.01% (0.03%) 0.10%
====== ====== ======
Balance of allowance for loan losses at the
end of year to gross year end loans ..................... 1.45% 1.64% 1.63%
====== ====== ======
</TABLE>
The following table sets forth the allocation of the allowance for loan losses
at the dates indicated by category loans:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ----------------------
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 .......... $ 175 20.1% $ 148 18.5% $ 91 19.9%
Real estate--commercial ........... 404 34.8% 360 32.6% 403 32.2%
Commercial ........................ 576 17.7% 587 21.1% 530 21.6%
Consumer .......................... 307 27.4% 258 27.8% 153 26.3%
------ ----- ------ ----- ------ -----
Total allowance for loan losses .. $1,462 100.0% $1,353 100.0% $1,177 100.0%
====== ===== ====== ===== ====== =====
</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. 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. All other securities are classified as available for sale
securities and reported at fair value, with unrealized holding gains or losses
reported in a separate component of stockholders' equity. Securities in the
available for sale category
22
<PAGE>
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. Because of the strong demand in the loan portfolio, the Corporation
followed a policy of replacing matured issues and did not look to substantially
increase the investment portfolios. Securities held to maturity increased $0.3
million, or 1.4%, to $20.3 million at December 31, 1997 from $20.0 million at
December 31, 1996. Securities available for sale decreased to $11.0 million at
December 31, 1997, from $11.4 million at December 31, 1996, a decrease of $0.4
million, or 3.4%.
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,
--------------------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury ................... $ 2,977 26.9% $ 3,586 31.4% $ 2,372 24.0%
U.S. Government agencies ........ 1,454 13.2% 1,049 9.2% 790 8.0%
Obligations of state and
political subdivisions ......... 275 2.5% 268 2.3% 269 2.7%
Mortgage-backed securities ...... 6,341 57.4% 6,531 57.1% 6,450 65.3%
------- ----- ------- ----- ------- -----
Total ............................ $11,047 100.0% $11,434 100.0% $ 9,881 100.0%
======= ===== ======= ===== ======= =====
Securities held to maturity:
U.S. Treasury ................... $ 1,948 9.6% $ 2,193 11.0% $ 2,741 13.9%
U.S. Government agencies ........ 7,736 38.1% 6,357 31.8% 4,918 25.0%
Obligations of state and
political subdivisions ......... 8,479 41.9% 8,930 44.6% 8,976 45.8%
Mortgage-backed securities ...... 2,119 10.4% 2,523 12.6% 3,014 15.3%
------- ----- ------- ----- ------- -----
Total ............................ $20,282 100.0% $20,003 100.0% $19,649 100.0%
======= ===== ======= ===== ======= =====
</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, 1997:
<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 .................................... $ 752 $2,225 $ -- $ -- $ 2,977
Yield ............................................. 5.85% 5.98% -- -- 5.95%
U.S. Government agencies:
Carrying value .................................... 548 650 256 -- 1,454
Yield ............................................. 5.11% 6.27% 7.37% -- 6.02%
Obligations of state and political subdivisions:
Carrying value .................................... -- -- 275 -- 275
Yield ............................................. -- -- 4.47% -- 4.47%
Mortgage-backed securities:
Carrying value .................................... -- 321 653 5,367 6,341
Yield ............................................. -- 6.75% 6.89% 6.74% 6.75%
------ ------ ------ ------ -------
Total carrying value ............................... $1,300 $3,196 $1,184 $5,367 $11,047
====== ====== ====== ====== =======
Weighted average yield ............................. 5.54% 6.12% 6.43% 6.74% 6.38%
====== ====== ====== ====== =======
</TABLE>
23
<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, 1997:
<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 ...................................... $1,498 $ 450 $ -- $ -- $ 1,948
Yield ............................................... 5.68% 6.13% -- -- 5.78%
U.S. Government agencies:
Carrying value ...................................... -- 4,912 2,824 -- 7,736
Yield ............................................... -- 6.36% 7.00% -- 6.59%
Obligations of state and political subdivisions:
Carrying value ...................................... 3,491 3,936 1,052 -- 8,479
Yield ............................................... 5.09% 4.91% 4.61% -- 4.95%
Mortgage-backed securities:
Carrying value ...................................... -- -- 504 1,615 2,119
Yield ............................................... -- -- 7.13% 7.24% 7.22%
------ ------ ------ ------ -------
Total carrying value ................................. $4,989 $9,298 $4,380 $1,615 $20,282
====== ====== ====== ====== =======
Weighted average yield ............................... 5.27% 5.73% 6.44% 7.24% 5.89%
====== ====== ====== ====== =======
</TABLE>
DEPOSITS
Deposits at December 31, 1997 totaled $136.2 million, an increase of $20.4
million, or 17.6%, over the comparable period of 1996, when deposits totaled
$115.8 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 opening of the
two new branch locations and the successfulness of the tiered money market
product also contributed to the growth in deposits.
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,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand ...... $ 29,428 21.6% $ 25,136 21.7% $ 22,962 22.6%
Interest-bearing demand ......... 38,027 27.9% 23,992 20.7% 21,761 21.4%
Savings deposit ................. 20,418 15.0% 20,885 18.0% 18,766 18.4%
Time deposits ................... 48,342 35.5% 45,812 39.6% 38,300 37.6%
-------- ----- -------- ----- -------- -----
Total ........................... $136,215 100.0% $115,825 100.0% $101,789 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
24
<PAGE>
As of December 31, 1997, 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 ......................... $ 934
Four months through six months ............... 788
Seven months through twelve months ........... 1,499
Over twelve months ........................... 3,190
------
Total ........................................ $6,411
======
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Corporation's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. Management actively monitors and
manages its interest rate risk exposure.
The Corporation's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Corporation's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Corporation monitors the impact of changes in interest rates on its
net interest income using several tools. One measure of the Corporation's
exposure to differential changes in interest rates between assets and
liabilities is shown in the Corporation's Maturity and Repricing Analysis under
the Interest Rate Sensitivity caption below. The Corporation's primary objective
in managing interest rate risk is to minimize the adverse impact of changes in
interest rates on the Corporation's net interest income and capital, while
structuring the asset-liability structure to obtain the maximum net interest
spread on that structure. The Corporation relies primarily on its
asset-liability structure to control interest rate risk.
The Corporation continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost effective,
and therefore, has focused its efforts on increasing the Corporation's net
interest spread through retail growth opportunities.
The following table shows the Corporation's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997. Market rate sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. For assets, expected maturities are based upon
contractual maturity and contractual repayments of principal. For deposit
products with no stated maturities, it is assumed that 40% of balances will
"runoff" within the first year with a remaining 10% per year thereafter.
<TABLE>
<CAPTION>
AVERAGE
INTEREST FAIR
RATE 1998 1999 2000 2001 2002 THEREAFTER BALANCE VALUE
------ ---- ---- ---- ---- ---- ---------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Federal funds sold ...................... 6.18% $ 5,225 $ -- $ -- $ -- $ -- $ -- $ 5,225 $ 5,225
Commercial paper ........................ 5.88% 2,973 -- -- -- -- -- 2,973 2,973
Interest-bearing due from banks ......... 5.83% 126 -- -- -- -- -- 126 126
Loans:
Real estate mortgage ................... 8.65% 5,365 1,701 874 1,848 2,430 43,122 55,340 55,791
Commercial ............................. 9.64% 4,779 4,553 3,809 1,379 1,656 1,650 17,826 17,806
Consumer ............................... 7.94% 1,810 1,342 2,457 2,744 2,680 16,591 27,624 27,500
Mortgage loans held for sale ............ 6.80% 756 -- -- -- -- -- 756 756
Investment securities ................... 6.06% 6,798 1,839 2,072 3,570 5,014 12,546 31,839 32,092
INTEREST-SENSITIVE LIABILITIES
Savings deposits ........................ 2.25% 8,168 2,070 2,070 2,070 2,070 3,970 20,418 20,418
Interest-bearing deposits ............... 3.23% 15,211 3,803 3,803 3,803 3,803 7,604 38,027 34,226
Time deposits ........................... 5.46% 25,635 17,147 4,018 1,347 195 -- 48,342 48,640
Repurchase agreements ................... 5.45% 533 -- -- -- -- -- 533 533
</TABLE>
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
25
<PAGE>
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, 1997. 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 with the exception of the new tiered money market account which
will reprice in three months or less. 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.
<TABLE>
<CAPTION>
MORE THAN
THREE MONTHS
THREE MONTHS THROUGH AFTER NONINTEREST
OR LESS ONE YEAR ONE YEAR SENSITIVE TOTAL
------------ ------------- --------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS:
Loans:
Real estate mortgage $ 5,143 $ 6,717 $ 43,480 $ - $ 55,340
Commercial 10,282 1,094 6,450 - 17,826
Consumer 3,863 2,261 21,500 - 27,624
Mortgage loans held for sale 756 - - - 756
Investment securities (1) 6,003 6,455 19,381 - 31,839
Federal funds sold 5,225 - - - 5,225
Other assets 2,999 100 - 8,023 11,122
---------- ---------- --------- --------- ---------
Total assets $ 34,271 $ 16,627 $ 90,811 $ 8,023 $ 149,732
---------- ---------- --------- --------- ---------
SOURCE OF FUNDS:
Savings deposits $ 4,084 $ 4,084 $ 12,250 $ - $ 20,418
Interest-bearing deposits 19,213 4,703 14,111 - 38,027
Time deposits 8,068 17,567 22,707 - 48,342
Repurchase agreements - 533 - - 533
Other liabilities - - - 30,486 30,486
Stockholders' equity - - - 11,926 11,926
---------- ---------- --------- --------- ---------
Total source of funds $ 31,365 $ 26,887 $ 49,068 $ 42,412 $ 149,732
---------- ---------- --------- --------- ---------
Interest rate sensitivity gap $ 2,906 $ (10,260) $ 41,743 $ (34,389)
========== ========== ========= =========
Cumulative interest rate sensitivity gap $ 2,906 $ (7,354) $ 34,389 $ -
========== ========== ========= =========
Ratio of GAP to total assets 1.9% (6.9%) 27.9% (22.9%)
========== ========== ========= =========
Ratio of cumulative GAP assets to
total assets 1.9% (5.0%) 22.9% -
========== ========== ========= =========
</TABLE>
- ----------
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
26
<PAGE>
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.
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,
-----------------------------------------------
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents--beginning ...................... $10,955 $ 7,465 $ 4,741
Operating activities:
Net income ............................................... 1,463 1,317 1,144
Adjustments to reconcile net income to net cash
provided by operating activities ........................ 202 550 (715)
------- ------- -------
Net cash provided by operating activities ................. 1,665 1,867 429
Net cash used in investing activities ..................... (19,139) (12,408) (17,248)
Net cash provided by financing activities ................. 19,191 14,031 19,543
------- ------- -------
Net increase (decrease) in cash and cash equivalents ...... 1,717 3,490 2,724
------- ------- -------
Cash and cash equivalents--ending ......................... $12,672 $10,995 $ 7,465
======= ======= =======
</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,
1997, the Corporation has outstanding loan commitments of $5.0 million and
unused lines and letters of credit totaling $15.5 million. Certificates of
deposit scheduled to mature in one year or less, at December 31, 1997, totaled
$25.6 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, 1997. The Bank's Federal regulator has promulgated
substantially similar capital regulations applicable to the Bank.
27
<PAGE>
REQUIRED ACTUAL EXCESS
-------- ------ ------
Risk-based capital:
Tier 1 ....................... 4.00% 11.41% 7.41%
Total ........................ 8.00% 12.67% 4.67%
Leverage ratio* ............... 3.00% 7.75% 4.75%
* 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.
YEAR 2000 COMPLIANCE
Stewardship Financial Corporation established 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 new
Millennium. The Corporation is currently in the Assessment Phase of the Year
2000 Plan which includes establishing an inventory of all hardware, software,
networks, vendors and forms affected by the Year 2000 change. Although
management believes it is taking all appropriate steps to become Year 2000
ready, it is dependent on vendor and servicer compliance. Prioritization of the
most critical applications have been addressed and trigger dates have been
established for testing and verification. While the Corporation has not
determined the final cost of compliance, it currently anticipates such costs to
be immaterial. In addition, to the extent customers' financial positions are
weakened as a result of the century date change, credit quality could be
affected.
28
<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 as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. 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.
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, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick, LLP
January 30, 1998
29
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------------
1997 1996
---------------------------
<S> <C> <C>
ASSETS
Cash and due from banks .......................................................... $ 4,348,000 $ 4,786,000
Commercial paper and interest-bearing due from banks ............................. 3,099,000 219,000
Federal funds sold ............................................................... 5,225,000 5,950,000
---------------------------
Cash and cash equivalents ....................................................... 12,672,000 10,955,000
Securities available for sale (note 4) ........................................... 11,047,000 11,434,000
Securities held to maturity; estimated fair value of $20,535,000 (1997) and
$20,196,000 (1996) (note 5) ..................................................... 20,282,000 20,003,000
FHLB-NY stock, at cost ........................................................... 510,000 451,000
Loans, net of allowance for loan losses of $1,462,000 (1997) and $1,353,000 (1996)
(notes 6 and 7) ................................................................. 99,205,000 80,848,000
Mortgage loans held for sale ..................................................... 756,000 237,000
Premises and equipment, net (note 8) ............................................. 2,724,000 2,306,000
Accrued interest receivable ...................................................... 1,029,000 881,000
Intangible assets, net of accumulated amortization of $222,000 and $154,000 at
December 31, 1997 and 1996 respectively (note 3) ................................ 528,000 595,000
Other real estate owned, net (note 7) ............................................ 229,000 229,000
Other assets (note 15) ........................................................... 750,000 682,000
---------------------------
Total assets ................................................................... $149,732,000 $128,621,000
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits: (note 9)
Noninterest-bearing .............................................................. $ 29,428,000 $ 25,136,000
Interest-bearing ................................................................. 106,787,000 90,689,000
---------------------------
Total deposits ................................................................. 136,215,000 115,825,000
Securities sold under agreements to repurchase (note 10) ......................... 533,000 1,711,000
Accrued expenses and other liabilities ........................................... 1,058,000 678,000
---------------------------
Total liabilities .............................................................. 137,806,000 118,214,000
---------------------------
Commitments and contingencies (note 16) ............................................ -- --
STOCKHOLDERS' EQUITY (note 11 and 17)
Common stock, no par value; 5,000,000 shares authorized;
931,888 and 920,505 shares issued and outstanding at
December 31, 1997 and 1996, respectively ......................................... 5,229,000 4,991,000
Retained earnings .................................................................. 6,637,000 5,395,000
Net unrealized gain on securities available for sale ............................... 60,000 21,000
---------------------------
Total Stockholders' equity ..................................................... 11,926,000 10,407,000
Total liabilities and Stockholders' equity ..................................... $149,732,000 $128,621,000
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans .............................................. $ 8,039,000 $6,923,000 $6,037,000
Securities held to maturity:
Taxable .......................................... 750,000 697,000 586,000
Nontaxable ....................................... 458,000 438,000 462,000
Securities available for sale ...................... 683,000 635,000 534,000
Other interest-earning assets ...................... 325,000 360,000 355,000
---------------------------------------
Total interest income .......................... 10,255,000 9,053,000 7,974,000
---------------------------------------
INTEREST EXPENSE:
Deposits (note 9) .................................. 3,724,000 3,271,000 2,692,000
Borrowed money ..................................... 80,000 79,000 79,000
---------------------------------------
Total interest expense ......................... 3,804,000 3,350,000 2,771,000
---------------------------------------
Net interest income before provision for loan losses 6,451,000 5,703,000 5,203,000
Provision for loan losses (note 6) ................. 120,000 155,000 150,000
---------------------------------------
Net interest income after provision for loan losses 6,331,000 5,548,000 5,053,000
---------------------------------------
NONINTEREST INCOME:
Fees and service charges ........................... 563,000 512,000 365,000
Loss on calls and sales of securities, net ......... -- (4,000) (10,000)
Gain on sales of mortgage loans .................... 46,000 52,000 25,000
Miscellaneous ...................................... 144,000 104,000 86,000
---------------------------------------
Total noninterest income ....................... 753,000 664,000 466,000
---------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits ..................... 2,485,000 2,116,000 1,909,000
Occupancy, net (note 16) ........................... 348,000 288,000 255,000
Equipment .......................................... 356,000 232,000 180,000
Data processing .................................... 253,000 219,000 207,000
Advertising ........................................ 175,000 97,000 69,000
FDIC insurance premium ............................. 18,000 49,000 103,000
Amortization of intangible assets .................. 67,000 81,000 74,000
Other real estate owned expense .................... (19,000) 10,000 31,000
Charitable contributions ........................... 189,000 151,000 142,000
Stationery and supplies ............................ 159,000 200,000 150,000
Miscellaneous ...................................... 993,000 884,000 784,000
---------------------------------------
Total noninterest expenses ..................... 5,024,000 4,327,000 3,904,000
---------------------------------------
Income before income tax expense ................... 2,060,000 1,885,000 1,615,000
Income tax expense (note 15) ....................... 597,000 568,000 471,000
---------------------------------------
Net income ......................................... $ 1,463,000 $1,317,000 $1,144,000
=======================================
Basic earnings per share (note 14) ................. $1.58 $1.44 $1.26
=======================================
Diluted earnings per share (note 14) ............... $1.57 $1.44 $1.26
=======================================
Weighted average number of common shares
outstanding (note 14) ............................ 926,369 915,754 905,250
=======================================
Weighted average number of diluted common
shares outstanding (note 14) ...................... 929,644 915,754 905,250
=======================================
</TABLE>
Per share data has been restated to reflect a 2 for 1 stock split completed in
1997.
See accompanying notes to consolidated financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
-----------------------------------------------------------------------
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, 1994 ................. 899,976 $4,766,000 $3,288,000 $(220,000) $ 7,834,000
Dividends paid ($.18 per share) ........... -- -- (162,000) -- (162,000)
Common stock issued under stock plans ..... 10,907 100,000 -- -- 100,000
Net income for the year
ended December 31, 1995 .................. -- -- 1,144,000 -- 1,144,000
Net unrealized gain on securities
available for sale ....................... -- -- -- 235,000 235,000
-----------------------------------------------------------------------
Balance--December 31, 1995 ................. 910,883 $4,866,000 $4,270,000 $ 15,000 $ 9,151,000
Dividends paid ($.21 per share) ........... -- -- (192,000) -- (192,000)
Common stock issued under stock plans ..... 9,622 125,000 -- -- 125,000
Net income for the year
ended December 31, 1996 .................. -- -- 1,317,000 -- 1,317,000
Net unrealized gain on securities
available for sale ....................... -- -- -- 6,000 6,000
-----------------------------------------------------------------------
Balance--December 31, 1996 ................. 920,505 $4,991,000 $5,395,000 $ 21,000 $10,407,000
Dividends paid ($.24 per share) ........... -- -- (221,000) -- (221,000)
Common stock issued under stock plans ..... 11,383 200,000 -- -- 200,000
Issuance of stock options ................. -- 38,000 -- -- 38,000
Net income for the year
ended December 31, 1997 .................. -- -- 1,463,000 -- 1,463,000
Net unrealized gain on securities
available for sale ....................... -- -- -- 39,000 39,000
-----------------------------------------------------------------------
Balance--December 31, 1997 ................. 931,888 5,229,000 6,637,000 60,000 $11,926,000
=======================================================================
</TABLE>
Per share data has been restated to reflect a 2 for 1 stock split completed in
1997.
See accompanying notes to consolidated financial statements
32
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 1,463,000 $ 1,317,000 $ 1,144,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment ...... 320,000 229,000 201,000
Loss on calls and sales of investment securities ............. -- 4,000 10,000
Provision for losses on investment securities ................ -- 1,000 6,000
Amortization of premiums and accretion of discounts, net ..... 51,000 56,000 32,000
Accretion of deferred loan fees .............................. (53,000) (65,000) (87,000)
Provision for loan losses .................................... 120,000 155,000 150,000
Provision for losses on other real estate .................... -- 20,000 20,000
Originations of mortgage loans held for sale ................. (4,604,000) (4,955,000) (2,744,000)
Proceeds from sale of mortgage loans ......................... 4,131,000 5,121,000 2,418,000
Gain on sale of loans ........................................ (46,000) (52,000) (25,000)
Issuance of stock options .................................... 38,000 -- --
Loss on retirement of fixed assets ........................... 2,000 -- --
Premium paid on deposit acquisition .......................... -- -- (772,000)
Deferred income tax benefit .................................. (105,000) (132,000) (91,000)
Amortization of intangible assets ............................ 67,000 81,000 74,000
Increase in accrued interest receivable ...................... (149,000) (44,000) (128,000)
Decrease (increase) in other assets .......................... (8,000) (38,000) 1,000
Increase in other liabilities ................................ 438,000 169,000 220,000
--------------------------------------------
Net cash provided by operating activities .................. 1,665,000 1,867,000 429,000
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale ..................... (1,884,000) (3,299,000) (3,920,000)
Proceeds from maturities and principal repayments
on securities available for sale ............................. 2,313,000 1,726,000 682,000
Proceeds from sales and calls on securities available for sale -- -- 3,161,000
Purchase of securities held to maturity ....................... (4,241,000) (5,930,000) (9,825,000)
Proceeds from maturities and principal repayments on
securities held to maturity .................................. 3,257,000 4,312,000 4,192,000
Proceeds from calls of securities held to maturity ............ 675,000 1,235,000 500,000
Purchase of FHLB-NY stock ..................................... (59,000) (114,000) (337,000)
Net increase in loans ......................................... (18,424,000) (9,962,000) (11,549,000)
Additions to premises and equipment ........................... (776,000) (376,000) (152,000)
--------------------------------------------
Net cash used in investing activities ....................... (19,139,000) (12,408,000) (17,248,000)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits .................. 4,292,000 2,174,000 5,492,000
Net increase in interest-bearing deposits ..................... 16,098,000 11,863,000 4,841,000
Net increase in securities sold under agreement to repurchase . (1,178,000) 61,000 394,000
Purchase of deposits .......................................... -- -- 8,878,000
Cash dividends paid on common stock ........................... (221,000) (192,000) (162,000)
Common stock issued under stock plans ......................... 200,000 125,000 100,000
--------------------------------------------
Net cash provided by financing activities ................... 19,191,000 14,031,000 19,543,000
--------------------------------------------
Net increase in cash and cash equivalents ...................... 1,717,000 3,490,000 2,724,000
Cash and cash equivalents--beginning ........................... 10,955,000 7,465,000 4,741,000
--------------------------------------------
Cash and cash equivalents--ending .............................. $ 12,672,000 $ 10,955,000 $ 7,465,000
============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest ........................ $ 3,771,000 $ 3,276,000 $ 2,464,000
Cash paid during the year for income taxes .................... 711,000 692,000 480,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfer of securities held to maturity to securities available
for sale ..................................................... -- -- 745,000
</TABLE>
See accompanying notes to consolidated financial statements
33
<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, commercial paper,
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 as securities held to maturity or
securities available for sale. 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. 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
34
<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.
The Corporation defined the population of impaired loans to include nonaccrual
loans and loans more than 90 days past due. Impaired loans are individually
assessed to determine that the loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's expected future
cash flows.
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 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.
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.
35
<PAGE>
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. Under this
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.
STOCK OPTION PLANS
The Corporation applies the "intrinsic value based method" as described in APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation. Accordingly, no
compensation cost has been recognized for the stock option plans.
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 the 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.
All share and per share amounts have been restated to reflect the 2 for 1 stock
split issued in September, 1997.
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 $391,000 and $420,000 at December 31, 1997 and December
31, 1996, 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 $137,000 and $175,000 at
December 31, 1997 and December 31, 1996, respectively, and is amortized on an
accelerated basis over a period of twelve years.
36
<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 of 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, shareholders of the Bank received one share of common stock, no
par value of the Corporation for each outstanding share of common stock, $5.00
par value of the Bank. 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 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.
37
<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, 1997
---------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------------------- CARRYING
COST GAINS LOSSES VALUE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ..................................... $ 752,000 $ -- $ -- $ 752,000
After one but within five years ..................... 2,209,000 16,000 -- 2,225,000
---------------------------------------------------------------------------
2,961,000 16,000 -- 2,977,000
---------------------------------------------------------------------------
U.S. Government agencies:
Within one year ..................................... 550,000 -- 2,000 548,000
After one but within five years ..................... 650,000 -- -- 650,000
After five years .................................... 251,000 5,000 -- 256,000
---------------------------------------------------------------------------
1,451,000 5,000 2,000 1,454,000
---------------------------------------------------------------------------
Obligations of state and political subdivisions:
After five years .................................... 272,000 3,000 -- 275,000
Mortgage-backed securities:
After one but within five years ..................... 319,000 2,000 -- 321,000
After five years .................................... 5,948,000 95,000 23,000 6,020,000
---------------------------------------------------------------------------
6,267,000 97,000 23,000 6,341,000
---------------------------------------------------------------------------
$10,951,000 $ 121,000 $ 25,000 $11,047,000
==========================================================================
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------------------- CARRYING
COST GAINS LOSSES VALUE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ..................................... $ 1,118,000 $ 3,000 $ -- $ 1,121,000
After one but within five years ..................... 2,465,000 4,000 4,000 2,465,000
---------------------------------------------------------------------------
3,583,000 7,000 4,000 3,586,000
---------------------------------------------------------------------------
U.S. Government agencies:
Within one year ..................................... 250,000 -- -- 250,000
After one but within five years ..................... 550,000 -- 7,000 543,000
After five years .................................... 252,000 4,000 -- 256,000
---------------------------------------------------------------------------
1,052,000 4,000 7,000 1,049,000
---------------------------------------------------------------------------
Obligations of state and political subdivisions:
After five years .................................... 274,000 -- 6,000 268,000
Mortgage-backed securities:
Within one year ..................................... 17,000 -- -- 17,000
After one but within five years ..................... 156,000 3,000 -- 159,000
After five years .................................... 6,319,000 73,000 37,000 6,355,000
---------------------------------------------------------------------------
6,492,000 76,000 37,000 6,531,000
---------------------------------------------------------------------------
$11,401,000 $ 87,000 $ 54,000 $11,434,000
==========================================================================
</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 years ended December 31, 1997 and 1996. Cash proceeds from sales
and calls of securities available for sale amounted to $3,161,000 for the year
ended December 31, 1995. No gains or losses were realized on sales and calls
during 1997 and 1996, while gross gains of $10,000 and gross losses of $20,000
were realized on sales and calls during 1995.
There were no securities available for sale pledged to secure public
deposits at December 31, 1997. The carrying value of securities pledged to
secure public deposits approximated $100,000 at December 31, 1996. See Note 10
to financial statements regarding securities pledged as collateral for
securities sold under agreements to repurchase.
38
<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, 1997
---------------------------------------------------------------------------
GROSS UNREALIZED
CARRYING -------------------------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ..................................... $ 1,498,000 $ -- $ -- $ 1,498,000
After one but within five years ..................... 450,000 5,000 -- 455,000
---------------------------------------------------------------------------
1,948,000 5,000 -- 1,953,000
---------------------------------------------------------------------------
U.S. Government agencies:
After one but within five years ..................... 4,912,000 12,000 7,000 4,917,000
After five years .................................... 2,824,000 36,000 -- 2,860,000
---------------------------------------------------------------------------
7,736,000 48,000 7,000 7,777,000
---------------------------------------------------------------------------
Obligations of state and political subdivisions:
Within one year ..................................... 3,491,000 22,000 1,000 3,512,000
After one but within five years ..................... 3,936,000 88,000 -- 4,024,000
After five years .................................... 1,052,000 22,000 -- 1,074,000
---------------------------------------------------------------------------
8,479,000 132,000 1,000 8,610,000
---------------------------------------------------------------------------
Mortgage-backed securities:
After five years .................................... 2,119,000 76,000 -- 2,195,000
---------------------------------------------------------------------------
$ 20,282,000 $ 261,000 $ 8,000 $ 20,535,000
===========================================================================
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------
GROSS UNREALIZED
CARRYING -------------------------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ..................................... $ 250,000 $ 1,000 $ -- $ 251,000
After one but within five years ..................... 1,943,000 2,000 2,000 1,943,000
---------------------------------------------------------------------------
2,193,000 3,000 2,000 2,194,000
---------------------------------------------------------------------------
U.S. Government agencies:
Within one year ..................................... 750,000 -- 3,000 747,000
After one but within five years ..................... 2,557,000 10,000 10,000 2,557,000
After five years .................................... 3,050,000 14,000 18,000 3,046,000
---------------------------------------------------------------------------
6,357,000 24,000 31,000 6,350,000
---------------------------------------------------------------------------
Obligations of state and political subdivisions:
Within one year ..................................... 1,801,000 15,000 -- 1,816,000
After one but within five years ..................... 7,129,000 133,000 16,000 7,246,000
---------------------------------------------------------------------------
8,930,000 148,000 16,000 9,062,000
---------------------------------------------------------------------------
Mortgage-backed securities:
After five years .................................... 2,523,000 68,000 1,000 2,590,000
---------------------------------------------------------------------------
$ 20,003,000 $ 243,000 $ 50,000 $ 20,196,000
===========================================================================
</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 $675,000,
$1,235,000 and $500,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. No gains or losses were realized on sales and calls during the
years ended December 31, 1997 and 1995. Gross gains totaling $2,000 and gross
losses totaling $6,000 were realized on calls during the year ended December 31,
1996.
The carrying value of securities pledged to secure treasury tax and loan
deposits and public deposits approximated $700,000 at December 31, 1997. The
carrying value of securities pledged to secure treasury tax and loan deposits
approximated $495,000 at December 31, 1996. See also Note 10 to financial
statements regarding securities pledged as collateral for securities sold under
agreements to repurchase.
39
<PAGE>
NOTE 6. LOANS
The loan portfolio consisted of the following:
DECEMBER 31,
------------------------------------
1997 1996
------------------------------------
Mortgage:
Residential ............................ $ 20,305,000 $ 15,257,000
Commercial ............................. 35,035,000 26,797,000
Commercial .............................. 17,826,000 17,403,000
Equity .................................. 3,551,000 3,838,000
Installment ............................. 23,659,000 18,892,000
Other ................................... 414,000 136,000
------------------------------------
Total loans .......................... 100,790,000 82,323,000
------------------------------------
Less: Deferred loan fees ................ 123,000 122,000
Allowance for loan losses ............ 1,462,000 1,353,000
------------------------------------
1,585,000 1,475,000
------------------------------------
Loans, net .............................. $ 99,205,000 $80,848,000
====================================
At December 31, 1997, 1996 and 1995, loans serviced by the Corporation for the
benefit of others totaled approximately $4,774,000, $2,802,000 and $2,349,000,
respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning ............................ $ 1,353,000 $ 1,177,000 $ 1,088,000
Provision charged to operations ............... 120,000 155,000 150,000
Recoveries of loans charged off ............... 8,000 33,000 --
Loans charged off ............................. (19,000) (12,000) (61,000)
-----------------------------------------------------------------
Balance, ending ............................... $ 1,462,000 $ 1,353,000 $ 1,177,000
=================================================================
</TABLE>
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, 1997 and 1996,
these loans aggregated approximately $1,370,000 and 1,720,000, respectively.
During the year ended December 31, 1997, new loans totaling $505,000 were
granted and repayments totaled approximately $855,000. The loans, at December
31, 1997, were current as to principal and interest payments, and do not involve
more than normal risk of collectability.
40
<PAGE>
NOTE 7. NONPERFORMING ASSETS
Nonperforming assets include the following:
DECEMBER 31,
--------------------------
1997 1996
--------------------------
Nonaccrual loans .................................. $ 40,000 $ 95,000
Loans past due ninety days or more and accruing ... 4,000 550,000
Restructured loans ................................ 652,000 261,000
--------------------------
Total nonperforming loans ....................... 696,000 906,000
Other real estate owned ........................... 269,000 269,000
Less allowance for other real estate owned ........ 40,000 40,000
--------------------------
229,000 229,000
--------------------------
Total nonperforming assets ........................ $ 925,000 $ 1,135,000
==========================
The following information is presented for assets classified as nonaccrual and
restructured:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Income that would have been recorded under
contractual terms ...................................... $ 76,000 $ 39,000 $ 44,000
Less interest income received ............................ 67,000 25,000 31,000
-----------------------------------
Lost income on nonperforming assets at year end .......... $ 9,000 $ 14,000 $ 13,000
===================================
</TABLE>
The activity in the allowance for other real estate owned in 1996 and 1995
consisted of a provision of $20,000 in each year.
Impaired loans consisted of the following:
DECEMBER 31,
-----------------------
1997 1996
-----------------------
Impaired Loans
With related allowance for loan loss $ 40,000 $ 645,000
Without related allowance for loan loss 4,000 --
-----------------------
Total impaired loans $ 44,000 $ 645,000
=======================
Related allowance for possible credit losses $ 40,000 $ 162,000
=======================
Average investment in impaired loans $ 37,000 $ 665,000
=======================
Interest recognized on impaired loans $ 1,000 $ 59,000
=======================
41
<PAGE>
NOTE 8. PREMISES AND EQUIPMENT, NET
DECEMBER 31,
--------------------------
1997 1996
--------------------------
Land ............................................... $ 576,000 $ 576,000
Buildings and improvements ......................... 1,433,000 1,418,000
Leasehold improvements ............................. 380,000 213,000
Furniture, fixtures and equipment .................. 1,698,000 1,158,000
--------------------------
4,087,000 3,365,000
Less accumulated depreciation and amortization ..... 1,363,000 1,059,000
--------------------------
Total premises & equipment, net .................... $2,724,000 $2,306,000
==========================
NOTE 9. DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand ....................... 0% $ 29,428,000 0% $ 25,136,000
-------------------------------------------------------------------------
NOW accounts ..................................... 2.00% 16,054,000 2.00% 13,538,000
Money market accounts ............................ 4.13% 21,973,000 2.33% 10,454,000
-------------------------------------------------------------------------
Total interest-bearing demand .................. 3.23% 38,027,000 2.14% 23,992,000
Statement savings and clubs ...................... 2.25% 18,539,000 2.25% 19,126,000
Business savings ................................. 2.25% 1,879,000 2.25% 1,759,000
-------------------------------------------------------------------------
Total savings .................................. 2.25% 20,418,000 2.25% 20,885,000
IRA investment and variable rate savings ......... 5.50% 9,399,000 5.66% 8,389,000
Money market certificates ........................ 5.45% 38,943,000 5.36% 37,423,000
-------------------------------------------------------------------------
Total certificates of deposit .................. 5.46% 48,342,000 5.41% 45,812,000
-------------------------------------------------------------------------
Total interest-bearing deposits .................. 4.05% 106,787,000 3.82% 90,689,000
-------------------------------------------------------------------------
Total deposits ................................... 3.18% $136,215,000 2.99% $115,825,000
=========================================================================
</TABLE>
Certificates of deposit with balances of $100,000 or more at December 31, 1997
and 1996, totaled approximately $6,411,000 and $6,443,000, respectively.
Interest on certificates of deposit with balances of $100,000 or more totaled
$316,000, $174,000 and $163,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The scheduled maturities of certificates of deposit were as follows:
DECEMBER 31,
-----------------------------------
1997 1996
-----------------------------------
One year or less ......................... $25,635,000 $23,700,000
After one to three years ................. 21,164,000 18,629,000
After three years ........................ 1,543,000 3,483,000
-----------------------------------
$48,342,000 $45,812,000
===================================
42
<PAGE>
NOTE 10. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
At December 31, 1997, 1996 and 1995, securities sold under agreements to
repurchase were collateralized byU. S. Treasury securities having a carrying
value of approximately $2,208,000, $2,216,000 and $2,486,000, respectively.
These securities were maintained in a separate safekeeping account within the
Corporation's control.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Balance .................................................. $ 533,000 $ 1,711,000 $ 1,650,000
Weighted average interest rate ........................... 5.45% 4.67% 4.67%
Average length of maturity ............................... 365 days 14-365 days 60-367 days
Maximum amount outstanding at any month end during
the year ................................................ $ 3,553,000 $ 2,398,000 $ 1,844,000
Average amount outstanding during the year ............... $ 1,569,000 $ 1,695,000 $ 1,627,000
Average interest rate during the year .................... 5.10% 4.63% 4.84%
</TABLE>
NOTE 11. REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1997, 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, 1997, 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.
43
<PAGE>
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1997 and 1996, 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
------------------------ ----------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Leverage (Tier 1) capital .............. 11,308,000 7.73% 5,850,000 4.00% 7,313,000 5.00%
Risk-based capital:
Tier 1 ................................ 11,308,000 11.38% 3,973,000 4.00% 5,960,000 6.00%
Total ................................. 12,552,000 12.64% 7,947,000 8.00% 9,934,000 10.00%
DECEMBER 31, 1996
Leverage (Tier 1) capital .............. 9,791,000 7.80% 5,023,000 4.00% 6,279,000 5.00%
Risk-based capital:
Tier 1 ................................ 9,791,000 12.40% 3,158,000 4.00% 4,736,000 6.00%
Total ................................. 10,777,000 13.65% 6,315,000 8.00% 7,894,000 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, 1997, 1996 and 1995 amounted to approximately $101,000, $95,000 and
$83,000, 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, 1997, 1996
and 1995 amounted to approximately $24,000, $23,000 and $22,000, 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 10% 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. Total stock purchases amounted to 796 shares during 1997.
NOTE 13. STOCK-BASED COMPENSATION
At December 31, 1997, the Corporation had four types of stock award programs
referred to as the Employee Stock Bonus Plan, the Director Stock Plan, an
Employee Stock Option Plan and a Stock Option Plan for Non-employee Directors.
The Employee Stock Bonus Plan is intended to provide incentives which will
retain highly competent key management employees of the Corporation by providing
them with a bonus in the form of shares of the common stock of the Corporation.
The Corporation granted 985 shares during 1997.
The Director Stock Plan permits members of the Board of Directors of the Bank to
receive any Board of Directors' fees in shares of the Corporation's common
stock, rather than in cash. The Corporation issued 1,038 shares during 1997.
44
<PAGE>
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 45,000 shares of common stock for issuance. During 1997,
12,000 options were granted. The options were issued with an exercise price of
$18.50 which represented market price at date of grant. Options are exercisable
starting one year from the date of the grant and expire ten years from the date
of grant. No options were available for exercise during 1997.
The Stock Option Plan for Non-employee Directors has also reserved 45,000 shares
of common stock for issuance. During 1997 each participant was granted the
option to purchase 4,090 shares of common stock . No option may be exercised
more than ten years after the date of its grant. The options were issued with an
exercise price of $17.58, 95% of the fair market value on the date the options
were granted. As a result of the discount, $38,000 was charged to noninterest
expense for 1997. No options were exercised during 1997.
The Corporation applies APB 25 in accounting for the Plans. Consistent with SFAS
123, if compensation cost for the Plans was included, the Corporation's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. There were no options granted in 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported ................................................... $ 1,463,000 $ 1,317,000 $ 1,144,000
Pro forma ..................................................... 1,325,000 1,317,000 1,144,000
EARNINGS PER SHARE:
Basic earnings per share ...................................... $ 1.58 $ 1.44 $ 1.26
Diluted earnings per share .................................... 1.57 1.44 1.26
Pro forma basic earnings per share ............................ 1.43 1.44 1.26
Pro forma diluted earnings per share .......................... 1.42 1.44 1.26
Weighted average fair value of options granted during year ..... $ 5.06 $ -- $ --
</TABLE>
The fair value of options granted for employees is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions used for 1997: dividend yield of 1.15%; expected volatility of
14.1%; risk-free interest rates of 6.64%; and expected lives of 7 years. The
fair value at grant date for the Employee Stock Options was $5.78. The fair
value of options granted for non-employee directors used the following
assumptions for 1997: dividend yield of 1.15%; expected volatility of 14.1%;
risk-free interest rates of 6.01%; and expected lives of 5 years. The fair value
at the grant date for these options was $4.85.
NOTE 14. EARNINGS PER SHARE
The following reconciles the income available to common shareholders (numerator)
and the weighted average common stock outstanding (denominator) for both basic
and diluted earnings per share for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Net income .................................................................. $1,463,000 $1,317,000 $1,144,000
-----------------------------------------------
Income available to common stockholders, basic and diluted .................. 1,463,000 1,317,000 1,144,000
===============================================
Weighted average common shares outstanding--basic ........................... 926,369 915,754 905,250
Effect of dilutive securities--stock options ................................ 3,275 -- --
-----------------------------------------------
Weighted average common shares outstanding--diluted ......................... 929,644 915,754 905,250
===============================================
</TABLE>
45
<PAGE>
NOTE 15. INCOME TAXES
The components of income taxes (benefit) are summarized as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
----------------------------------
Current tax expense:
Federal ................................ $ 556,00 $ 564,000 $ 463,000
State .................................. 147,000 136,000 99,000
----------------------------------
703,000 700,000 562,000
Deferred tax benefit:
Federal ................................ (90,000) (104,000) 2,000
State .................................. (16,000) (28,000) (93,000)
----------------------------------
(106,000) (132,000) (91,000)
----------------------------------
$ 597,000 $ 568,000 $ 471,000
===================================
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Federal income tax ................................. $ 646,000 $ 641,000 $ 549,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect 87,000 71,000 4,000
Nontaxable interest income ........................ (151,000) (142,000) (97,000)
Other items, net .................................. 15,000 (2,000) 15,000
-----------------------------------
Effective federal income taxes ..................... $ 597,000 $ 568,000 $ 471,000
===================================
</TABLE>
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,
---------------------
1997 1996
---------------------
Deferred tax assets:
Allowance for loan losses ........................... $584,000 $507,000
Allowance for losses on investments ................. 6,000 13,000
Allowance for OREO losses ........................... 16,000 8,000
Core deposit intangible amortization ................ 20,000 12,000
Nonaccrual loan interest ............................ 14,000 25,000
Unrealized loss on securities available for sale .... -- 11,000
Other ............................................... 15,000 --
---------------------
655,000 576,000
---------------------
Deferred tax liabilities:
Depreciation ........................................ 2,000 20,000
Unrealized gain on securities available for sale .... 215,000 --
Deferred state tax .................................. 2,000 --
---------------------
219,000 20,000
---------------------
Net deferred tax assets .............................. $436,000 $556,000
=====================
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 16. 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
46
<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, 1997, the Corporation had mortgage commitments to
extend credit aggregating approximately $435,000 at fixed rates averaging 7.24%
and $305,000 floating rate loans. Of these loans, $190,000 fixed and $305,000
floating were committed for sale to investors. Commercial, installment and home
equity loan commitments of approximately $768,000 were extended with floating
rates currently averaging 8.99% and $2.7 million were extended at fixed interest
rates averaging 8.71%. All commitments were due to expire within approximately
90 days.
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 had 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%.
Additionally, at December 31, 1997, the Corporation was committed for
approximately $15.2 million of unused lines of credit, consisting of $5.8
million relating to a home equity line of credit program and an unsecured line
of credit program (cash reserve), $1.9 million relating to credit cards, and
$7.5 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 $270,000 and $33,000, respectively at December 31, 1997, 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 long-term operating leases for
branch offices amounted to approximately $79,000 and $46,000 and $43,000 during
the years ended December 31, 1997, 1996 and 1995, respectively. At December 31,
1997, the minimum rental commitments on the noncancellable leases is as follows:
YEAR ENDING MINIMUM
DECEMBER 31 RENT
----------- --------
1998 $133,000
1999 118,000
2000 87,000
2001 88,000
2002 67,000
Thereafter 301,000
--------
$794,000
========
47
<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 17. 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
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, 1997, this restriction did not result in any effective limitation in the
manner in which the Bank is currently operating.
NOTE 18. 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.
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR
--------------------- ---------------------
VALUE
Financial assets
Cash and cash equivalents ....... $ 12,672 $ 12,672 $ 10,955 $ 10,955
Securities available for sale ... 11,047 11,047 11,434 11,434
Securities held to maturity ..... 20,282 20,535 20,003 20,196
FHLB-NY stock ................... 510 510 451 451
Net loans ....................... 99,205 99,512 80,848 78,519
Mortgage loans held for sale .... 756 756 237 237
Financial liabilities:
Deposits ........................ 136,215 136,513 115,825 116,245
Securities sold under
agreements to repurchase ......... 533 533 1,711 1,711
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 loans 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
48
<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, 1997. 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, 1997 and 1996 were not material.
LIMITATIONS
The preceding fair value estimates were made at December 31, 1997 and 1996,
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, 1997 and 1996, 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.
49
<PAGE>
NOTE 19. PARENT COMPANY ONLY
The Corporation, formed in November, 1996, owns one subsidiary, Atlantic
Stewardship Bank. The earnings of the bank are recognized by the Corporation
using the equity method of accounting. Accordingly, the bank dividends paid
reduce the Corporation's investment in the subsidiary. The following information
should be read in conjunction with the other notes to the consolidated financial
statements. Condensed financial statements of the Corporation at December 31,
1997 and 1996 are presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION YEARS ENDED DECEMBER 31,
----------------------------
1997 1996
----------------------------
ASSETS
Cash and due from bank ......................... $ 20,000 $ 7,000
Investment in subsidiary ....................... 11,896,000 10,399,000
----------------------------
Total assets ................................... $ 11,916,000 $10,406,000
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities .............................. $ (10,000) $ (1,000)
Stockholders' equity ........................... 11,926,000 10,407,000
----------------------------
Total liabilities and Stockholders' equity .. $ 11,916,000 $10,406,000
============================
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31,
----------------------------
1997 1996
----------------------------
Dividend income ................................ $ 83,000 $ 10,000
Other income ................................... 1,000 --
Other expenses ................................. (99,000) (3,000)
----------------------------
Income before income tax benefit and
before undistributed earnings of subsidiary .. (15,000) 7,000
Income Tax benefit ............................. (20,000) (1,000)
----------------------------
Net income before undistributed
earnings of subsidiary ....................... 5,000 8,000
Equity in undistributed earnings
of subsidiary ................................ 1,458,000 1,309,000
----------------------------
Net income ..................................... $ 1,463,000 $ 1,317,000
============================
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
----------------------------
1997 1996
----------------------------
Cash flows from operating activities:
Net income $ 1,463,000 $(1,317,700)
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings
of subsidiary (1,458,000) (1,309,000)
Issuance of stock options 38,000 --
Decrease in other liabilities (9,000) (1,000)
----------------------------
Net cash provided by operating
activities 34,000 7,000
Cash flows from financing activities:
Cash dividends paid on common stock (221,000) --
Common stock issued under stock plans 200,000 --
----------------------------
(21,000) --
Net increase in cash and cash equivalents 13,000 7,000
Cash and cash equivalentsCbeginning 7,000 --
----------------------------
Cash and cash equivalentsCending $ 20,000 $ 7,000
============================
50
<PAGE>
NOTE 20. RECENT ACCOUNTING PRONOUNCEMENTS
The Statement of Financial Accounting Standard No. 130 (SFAS No. 130),
"Reporting Comprehensive Income," establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Under SFAS No. 130, comprehensive income is
divided into net income and other comprehensive income. Other comprehensive
income includes items previously recorded in equity, such as unrealized gains or
losses on securities available for sale. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Comparative financial statements for
earlier periods are required to be reclassified to reflect application of the
provisions of SFAS No. 130. The adoption of this standard will not have a
material effect on the Corporation's financial statement presentation.
NOTE 21. QUARTERLY FINANCIAL DATA
The following table contains quarterly financial data for the years ended
December 31, 1997 and 1996 (dollars in thousands, except per share data).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Interest income ................................................... $ 2,361 $ 2,502 $ 2,631 $ 2,761 $ 10,255
Interest expense .................................................. 859 914 983 1,048 3,804
-----------------------------------------------------
Net interest income before provision for loan losses ............. 1,502 1,588 1,648 1,713 6,451
Provision for loan losses ......................................... 30 30 30 30 120
-----------------------------------------------------
Net interest income after provision for loan losses .............. 1,472 1,558 1,618 1,683 6,331
Noninterest income ................................................ 168 195 184 206 753
Noninterest expense ............................................... 1,160 1,259 1,288 1,317 5,024
-----------------------------------------------------
Net income before income tax expense ............................. 480 494 514 572 2,060
Federal and state income tax expense .............................. 143 148 122 184 597
-----------------------------------------------------
Net income ........................................................ $ 337 $ 346 $ 392 $ 388 $ 1,463
=====================================================
Basic earnings per share .......................................... $ 0.37 $ 0.37 $ 0.42 $ 0.42 $ 1.58
=====================================================
Diluted earnings per share ........................................ $ 0.37 $ 0.37 $ 0.42 $ 0.41 $ 1.57
=====================================================
YEAR ENDED DECEMBER 31, 1996:
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
=====================================================
Basic earnings per share .......................................... $ 0.34 $ 0.33 $ 0.37 $ 0.40 $ 1.44
=====================================================
Diluted earnings per share ........................................ $ 0.34 $ 0.33 $ 0.37 $ 0.40 $ 1.44
=====================================================
</TABLE>
51
<PAGE>
Our Branch Locations
Call: (201)444-7100
HEADQUARTERS:
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
David Van Lenten
Branch Manager & Assistant Vice President
Alma M. Baxter
Assistant Branch Manager & Assistant Secretary
RIDGEWOOD
190 Franklin Avenue
John G. Kiernan
Branch Manager & Assistant Secretary
WALDWICK
30 Franklin Turnpike
Kristine Rasile
Branch Manager & Assistant Secretary
WAYNE
87 Berdan Avenue
Robert A. Giannetti
Branch Manager & Assistant Secretary
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, 333-20793 on Form S-8 and 333-31245 on Form S-8 of
Stewardship Financial Corporation of our report dated January 30, 1998, relating
to the consolidated statements of financial condition of Stewardship Financial
Corporation and subsidiary as of December 31, 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
is incorporated by reference in the December 31, 1997 annual report on Form
10-KSB of Stewardship Financial Corporation.
/s/ KPMG PEAT MARWICK LLP
---------------------------------
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the registrant's
audited December 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,348,000
<INT-BEARING-DEPOSITS> 3,099,000
<FED-FUNDS-SOLD> 5,225,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,047,000
<INVESTMENTS-CARRYING> 20,282,000
<INVESTMENTS-MARKET> 20,535,000
<LOANS> 99,205,000
<ALLOWANCE> 1,462,000
<TOTAL-ASSETS> 149,732,000
<DEPOSITS> 136,215,000
<SHORT-TERM> 533,000
<LIABILITIES-OTHER> 1,058,000
<LONG-TERM> 0
0
0
<COMMON> 931,888
<OTHER-SE> 11,926,000
<TOTAL-LIABILITIES-AND-EQUITY> 149,732,000
<INTEREST-LOAN> 8,039,000
<INTEREST-INVEST> 1,891,000
<INTEREST-OTHER> 325,000
<INTEREST-TOTAL> 10,255,000
<INTEREST-DEPOSIT> 3,724,000
<INTEREST-EXPENSE> 3,804,000
<INTEREST-INCOME-NET> 6,451,000
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,024,000
<INCOME-PRETAX> 2,060,000
<INCOME-PRE-EXTRAORDINARY> 1,463,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,463,000
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 5.18
<LOANS-NON> 40,000
<LOANS-PAST> 4,000
<LOANS-TROUBLED> 652,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,353,000
<CHARGE-OFFS> 19,000
<RECOVERIES> 8,000
<ALLOWANCE-CLOSE> 1,462,000
<ALLOWANCE-DOMESTIC> 1,462,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
