================================================================================
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
( ) TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21855
STEWARDSHIP FINANCIAL CORPORATION
- -------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
NEW JERSEY 22-3351447
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
630 GODWIN AVENUE, MIDLAND PARK, NJ 07432
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(201) 444-7100
-----------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Issuer's Common Stock, no par value,
outstanding as of May 4, 1998, was 984,315, restated for a 5% stock dividend
payable June 1, 1998 to stockholders of record on May 20, 1998.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
================================================================================
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
------
PART I -- CONSOLIDATED FINANCIAL INFORMATION
ITEM I -- CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at March 31, 1998 and December 31, 1997 (Unaudited) ...... 1
Consolidated Statements of Income for the Three
Months ended March 31, 1998 and 1997 (Unaudited) ......... 2
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 1998 and 1997 (Unaudited) ......... 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended
March 31, 1998 (Unaudited) ............................... 4
Notes to Consolidated Financial Statements (Unaudited) ..... 5-10
ITEM II -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................. 11-15
ITEM III -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 15
PART II -- OTHER INFORMATION
ITEM 1 THRU ITEM 6 .................................................. 16
SIGNATURES .......................................................... 17
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,529,000 $ 4,348,000
Commercial paper and interest-bearing due from banks 3,094,000 3,099,000
Federal funds sold 7,650,000 5,225,000
------------ ------------
Cash and cash equivalents 17,273,000 12,672,000
Securities available for sale 13,666,000 11,047,000
Securities held to maturity; estimated fair value
of $ 20,044,000 (1998) and $20,535,000 (1997) 19,802,000 20,282,000
FHLB-NY stock, at cost 557,000 510,000
Loans, net of allowance for loan losses of
of $ 1,492,000 (1998) and $1,462,000 (1997) 102,432,000 99,205,000
Mortgage loans held for sale 553,000 756,000
Premises and equipment, net 2,645,000 2,724,000
Accrued interest receivable 1,040,000 1,029,000
Intangible assets, net of accumulated amortization of
$238,000 (1998) and $222,000 (1997) 512,000 528,000
Other real estate owned, net -- 229,000
Other assets 1,193,000 750,000
------------ ------------
Total assets $159,673,000 $149,732,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 31,205,000 $ 29,428,000
Interest-bearing 114,466,000 106,787,000
------------ ------------
Total deposits 145,671,000 136,215,000
Securities sold under agreements to repurchase 533,000 533,000
Accrued expenses and other liabilities 1,173,000 1,058,000
------------ ------------
Total liabilities 147,377,000 137,806,000
------------ ------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
981,947 and 931,888 shares issued outstanding at
March 31, 1998 and December 31, 1997, respectively 6,441,000 5,229,000
Retained earnings 5,806,000 6,637,000
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale 49,000 60,000
------------ ------------
Total stockholders' equity 12,296,000 11,926,000
------------ ------------
Total liabilities and stockholders' equity $159,673,000 $149,732,000
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Interest income:
Loans $2,245,000 $1,829,000
Securities held to maturity
Taxable 207,000 179,000
Non-taxable 99,000 115,000
Securities available for sale 188,000 181,000
Other interest-earning assets 126,000 57,000
---------- ----------
Total interest income 2,865,000 2,361,000
---------- ----------
Interest expense:
Deposits 1,100,000 838,000
Borrowed money 7,000 21,000
---------- ----------
Total interest expense 1,107,000 859,000
---------- ----------
Net interest income before provision for loan losses 1,758,000 1,502,000
Provision for loan losses 40,000 30,000
---------- ----------
Net interest income after provision for loan losses 1,718,000 1,472,000
---------- ----------
Noninterest income:
Fees and service charges 155,000 146,000
Gain on sales of mortgage loans 25,000 5,000
Miscellaneous 35,000 17,000
---------- ----------
Total noninterest income 215,000 168,000
---------- ----------
Noninterest expenses:
Salaries and employee benefits 679,000 574,000
Occupancy, net 96,000 72,000
Equipment 99,000 63,000
Data processing 78,000 64,000
Advertising 27,000 27,000
FDIC insurance premium 5,000 4,000
Amortization of intangible assets 16,000 18,000
Other real estate owned expense (30,000) (4,000)
Charitable contributions 54,000 56,000
Stationery and supplies 44,000 42,000
Miscellaneous 299,000 244,000
---------- ----------
Total noninterest expenses 1,367,000 1,160,000
---------- ----------
Income before income tax expense 566,000 480,000
Income tax expense 184,000 143,000
---------- ----------
Net income $ 382,000 $ 337,000
========== ==========
Basic earnings per share $0.39 $0.35
========== ==========
Diluted earnings per share $0.39 $0.35
========== ==========
Weighted average number of common shares outstanding 980,730 968,075
========== ==========
Weighted average number of diluted common
shares outstanding 987,933 968,075
========== ==========
</TABLE>
Per share data has been restated to reflect a 2 for 1 stock split completed in
September, 1997, and a 5% stock dividend payable June 1, 1998 to shareholders of
record on May 20, 1998.
See notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 382,000 $ 337,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 96,000 61,000
Amortization of premiums and accretion of discounts, net 15,000 13,000
Accretion of deferred loan fees (14,000) (13,000)
Provision for loan losses 40,000 30,000
Originations of mortgage loans held for sale (1,999,000) (347,000)
Proceeds from sale of mortgage loans 2,227,000 589,000
Gain on sale of mortgage loans (25,000) (5,000)
Loss on sale of fixed assets -- 2,000
Deferred income tax benefit (13,000) (67,000)
Amortization of intangibles 16,000 18,000
Increase in accrued interest receivable (11,000) (64,000)
Increase (decrease) in other assets (423,000) 129,000
Increase in other liabilities 115,000 238,000
----------- -----------
Net cash provided by operating activities 406,000 921,000
----------- -----------
Cash flows from investing activities:
Purchase of securities available for sale (3,442,000) (250,000)
Proceeds from maturities and principal repayments
on securities available for sale 797,000 266,000
Purchase of securities held to maturity (1,685,000) (486,000)
Proceeds from maturities and principal repayments
on securities held to maturity 1,658,000 100,000
Proceeds from call on securities held to maturity 500,000 --
Purchase of FHLB-NY stock (47,000) (59,000)
Net increase in loans (3,253,000) (2,115,000)
Sale of other real estate owned 229,000 --
Additions to premises and equipment (17,000) (90,000)
----------- -----------
Net cash used in investing activities (5,260,000) (2,634,000)
----------- -----------
Cash flows from financing activities:
Net increase decrease in noninterest-bearing deposits 1,777,000 (411,000)
Net increase in interest-bearing deposits 7,679,000 89,000
Net increase in securities sold under agreements to repurchase -- 251,000
Cash dividends paid on common stock (65,000) (111,000)
Common stock issued under stock plans 64,000 89,000
----------- -----------
Net cash provided by (used in) financing activities 9,455,000 (93,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,601,000 (1,806,000)
Cash and cash equivalents - beginning 12,672,000 10,955,000
----------- -----------
Cash and cash equivalents - ending $17,273,000 $ 9,149,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 1,146,000 $ 935,000
Cash paid during the year for income taxes 10,000 25,000
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD ENDED MARCH 31, 1998
-------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1997 931,888 $5,229,000 $6,637,000 $ 60,000 $11,926,000
Dividends Paid -- -- (65,000) -- (65,000)
Common Stock issued under stock plans 3,187 64,000 -- -- 64,000
Net income for the three months
ended March 31, 1998 -- -- 382,000 -- 382,000
Unrealized gain (loss) on securities
available for sale, net of tax -- -- -- (11,000) (11,000)
------- ---------- ---------- ------------- ----------
Total comprehensive income,
net of tax -- -- -- -- 371,000
Common Stock issued 5% stock dividend
record date May 20, 1998, payable
date June 1, 1998 46,872 1,148,000 (1,148,000) 0
------- ---------- ---------- -------- -----------
Balance -- March 31, 1998 981,947 $6,441,000 $5,806,000 $ 49,000 $12,296,000
======= ========== ========== ======== ===========
</TABLE>
Data has been restated to reflect a 2 for 1 stock split completed in September,
1997, and a 5% stock dividend payable June 1, 1998 to shareholders of record on
May 20, 1998
See notes to unaudited consolidated financial statements.
4
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, ("the Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank ("the Bank"). Atlantic Stewardship Bank includes its
wholly owned subsidiary, Stewardship Investment Corp. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current presentation. The consolidated financial statements of
the Corporation have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the statements of financial condition
and revenues and expenses during the reporting periods. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
NOTE 2. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-QSB and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of the consolidated
financial statements, have been included. The results of operations for three
months ended March 31, 1998 are not necessarily indicative of the results which
may be expected for the entire year.
5
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and carrying value of the
Corporation's securities available for sale as of March 31, 1998 and December
31, 1997. In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
securities available for sale are carried at estimated fair value.
<TABLE>
<CAPTION>
March 31, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 3,459,000 $ 25,000 $ -- $ 3,484,000
U.S. Government agencies 3,449,000 7,000 19,000 3,437,000
Obligations of state and political
subdivisions 272,000 5,000 -- 277,000
Mortgage-backed securities 6,407,000 84,000 23,000 6,468,000
----------- -------- ------- -----------
$13,587,000 $121,000 $42,000 $13,666,000
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,961,000 $ 16,000 $ -- $ 2,977,000
U.S. Government agencies 1,451,000 5,000 2,000 1,454,000
Obligations of state and political
subdivisions 272,000 3,000 -- 275,000
Mortgage-backed securities 6,267,000 97,000 23,000 6,341,000
----------- --------- ------- -----------
$10,951,000 $ 121,000 $25,000 $11,047,000
=========== ========= ======= ===========
</TABLE>
NOTE 4. SECURITIES HELD TO MATURITY
The following table sets forth the carrying value and estimated fair
value of the Corporation's securities held to maturity as March 31, 1998 and
December 31, 1997. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,450,000 $ 7,000 $ -- $ 1,457,000
U.S. Government agencies 8,420,000 46,000 7,000 8,459,000
Obligations of state and political
subdivisions 7,922,000 139,000 -- 8,061,000
Mortgage-backed securities 2,010,000 57,000 -- 2,067,000
----------- --------- ------- -----------
$19,802,000 $ 249,000 $ 7,000 $20,044,000
=========== ========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,948,000 $ 5,000 $ -- $ 1,953,000
U.S. Government agencies 7,736,000 48,000 7,000 7,777,000
Obligations of state and political
subdivisions 8,479,000 132,000 1,000 8,610,000
Mortgage-backed securities 2,119,000 76,000 -- 2,195,000
----------- --------- ------- -----------
$20,282,000 $ 261,000 $ 8,000 $20,535,000
=========== ========= ======= ===========
</TABLE>
6
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 5. LOANS
The Corporation's primary market area for lending is the small and medium
sized business and professional community as well as the individuals residing,
working and shopping in the Bergen and Passaic counties, New Jersey area. The
following table set forth the composition of loans as of the periods indicated.
March 31, December 31,
1998 1997
------------ ------------
Mortgage
Residential $ 20,527,000 $ 20,305,000
Commercial 35,460,000 35,035,000
Commercial 19,770,000 17,826,000
Equity 3,523,000 3,551,000
Installment 24,726,000 23,659,000
Other 40,000 414,000
------------ ------------
Total loans 104,046,000 100,790,000
------------ ------------
Less: Deferred loan fees 122,000 123,000
Allowance for loan losses 1,492,000 1,462,000
------------ ------------
1,614,000 1,585,000
------------ ------------
Loans, net $102,432,000 $ 99,205,000
============ ============
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Three Months Ended March 31,
1998 1997
------------ ------------
Balance, beginning of period $ 1,462,000 $ 1,353,000
Provision charged to operations 40,000 30,000
Recoveries of loans charged off -- 1,000
Loans charged off (10,000) (11,000)
------------ ------------
Balance, end of period $ 1,492,000 $ 1,373,000
============ ============
7
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 7. LOAN IMPAIRMENT
The Corporation has defined the population of impaired loans to include all
nonaccrual loans and loans more than 90 days past due. The following table sets
forth information regarding the impaired loans as of the periods indicated.
March 31, December 31,
1998 1997
------------ ------------
Impaired loans
With related allowance for loan losses $ -- $ 40,000
Without related allowance for loan
losses 12,000 4,000
------------ ------------
Total impaired loans $ 12,000 $ 44,000
============ ============
Related allowance for loan losses $ -- $ 40,000
============ =============
8
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 8. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued. Potential dilutive securities totaled 7,203
shares at March 31, 1998. There were no dilutive securities outstanding at March
31, 1997.
All share and per share amounts have been restated to reflect the 2 for 1 stock
split issued in September, 1997 and a 5% stock dividend declared on May 12, 1998
and payable June 1, 1998 to shareholders of record on May 20, 1998.
NOTE 9. COMPREHENSIVE INCOME
During the first quarter of 1998, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. In accordance with the provisions of SFAS No.
130 for interim period reporting, the Corporation's total comprehensive income
for the three months ended March 31, 1998 and 1997 was $371,000 and $319,000,
respectively. The difference between the Corporation's net income and total
comprehensive income for these periods relates to the change in the net
unrealized gains on securities available for sale during the applicable period
of time.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 132, "Employer's Disclosure Account Pensions and
Other Postretirement Benefits" (SFAS No. 132). SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the
9
<PAGE>
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other post retirement benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain required disclosures for nonpublic entities.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available. As SFAS No. 132 affects disclosure requirements only, it
is not expected to have an impact on the consolidated financial statements of
the Corporation.
10
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased by $9.9 million, or 6.6%, from $149.7 million at December
31, 1997 to $159.7 million at March 31, 1998. The increase in assets reflects,
among other things, increases in net loans of $3.2 million, securities available
for sale of $2.6 million and federal funds sold of $2.4 million. The composition
of the loan portfolio is basically unchanged at March 31, 1998 when compared
with the portfolio at December 31, 1997.
Total deposits increased $9.5 million, or 6.9%, to $145.7 million at March 31,
1998 from $136.2 million at December 31, 1997. Interest-bearing deposits
increased $7.7 million, or 7.2%, to $114.5 million at March 31, 1998, and
noninterest-bearing deposits, increased $1.8 million, or 6.0%, to $31.2 million
at March 31, 1998. The increase in interest-bearing deposits can be attributed
to the popularity of a tiered money market product and continued success of the
new branches in Waldwick and Ridgewood, Bergen County, New Jersey which opened
during 1997. The Corporation also continues to benefit from the consolidation of
other banking institutions as customers continue to look for personalized
customer service.
The Corporation's primary focus during the past three months was to continue to
develop the new market bases developed with the new branches and products
offered in 1997. The Corporation's fourth ATM machine has been installed at the
Ridgewood branch. A 24 hour telephone banking product has been established with
testing completed in the first quarter of 1997. A marketing strategy is
currently being established with the product being offered to all customers by
June, 1998. This will allow customers to request balances, check inquiries,
deposit transfers, and loan payments. Based on the popularity of this product,
the Corporation will begin to assess the ability to provide a PC banking product
in the future. The Corporation has also begun an initial analysis of a Debit
card product and it is anticipated that this will be available for customers
before year end.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
General
The Corporation reported net income of $382,000, or $.39 basic earnings per
share for the three months ended March 31, 1998 compared to $337,000 or $.35 per
share for the same period in 1997. The $45,000 increase in net income was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense.
11
<PAGE>
Net interest income
Net interest income increased $256,000, or 17.0%, for the three months ended
March 31, 1998 as compared with the corresponding period in 1997. The increase
was primarily due to an increase in average net interest-earning assets offset
by a decline in the interest rate spread.
Total interest income increased $504,000, or 21.3%, primarily due to an increase
in the average volume of interest-earning assets offset by a decrease in the
yields earned on most interest-earning asset categories reflecting lower market
rates of interest. The average balance of interest-earning assets increased
$25.7 million, or 21.6%, from $119.1 million for the three months ended March
31, 1997 to $144.8 million for the same period in 1998, primarily being funded
by an increase to the Corporation's average deposit base. The Corporation
continued to experience an increase in loan demand which allowed loans on
average to increase $21.8 million to an average $105.1 million for the three
months ended March 31, 1998, from an average $83.2 million for the comparable
period in 1997.
Interest paid on deposits and borrowed money increased $248,000, or 28.9%, due
primarily to an increase in the average volume of total interest-bearing
deposits and to higher rates paid on money market and time deposit categories.
Average costs for interest-bearing liabilities increased to 4.07% for the three
months ended March 31, 1998 from 3.85% for the three months ended March 31,
1997. The average balance of total interest-bearing deposits increased to $109.8
million for the three months ended March 31, 1998 from $88.6 million for the
comparable 1997 period, primarily as a result of the Corporation's expanding
customer base and the popularity of the tiered money market account.
Provision for loan losses
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and ultimate losses may vary from the
current estimates. Additions to the allowance for loan losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $40,000 and $30,000 for the three
months ended March 31, 1998 and 1997, respectively. See "Asset Quality" section
for summary of allowance for loan losses and nonperforming assets. The
Corporation monitors its loan portfolio and intends to continue to provide for
loan loss reserves based on its ongoing periodic review of the loan portfolio
and general market conditions.
12
<PAGE>
Noninterest income
Noninterest income increased by $47,000, or 28.0%, to $215,000 during the three
months ended March 31, 1998 when compared with $168,000 during the 1997 period.
Contributing to this increase was a $20,000 gain on sale of mortgage loans due
primarily to the increase in loans sold during the first quarter of 1998
compared to the similar period in 1997 and a $18,000 increase in miscellaneous
income.
Noninterest expenses
Noninterest expenses increased by approximately $207,000, or 17.8%, to $1.4
million for the three months ended March 31, 1998, compared to $1.2 million for
the same 1997 period. Salaries and employee benefits, the major component of
noninterest expenses, increased $105,000, or 18.3%, during the three months
ended March 31, 1998. This increase was due primarily to additions to staff for
the Ridgewood branch, general increases for merit and performance and increases
in employee benefits such as health insurance. Miscellaneous expenses increased
$55,000, or 22.5% due to increases in consulting fees of $38,000. The
Corporation has utilized outside consultants to provide experience with data
processing systems to help better utilize automated teller and platform systems
and analyze issues related to assessment of Year 2000 issues. Data processing
increased $14,000, or 21.9%, due to general volume related increases and
occupancy and equipment increased $60,000, or 44.4% due primarily to the
establishment of the new branches. Partially offsetting these expenses, other
real estate expense decreased $26,000 from the first quarter of 1997, as the
Corporation sold the only other real estate property during the first quarter of
1998.
Income taxes
Income tax expense totaled $184,000 and $143,000 during the three months ended
March 31, 1998 and 1997, respectively.
13
<PAGE>
ASSET QUALITY
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrower's ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
03/31/98 12/31/97 09/30/97 06/30/97
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 4 $ 40 $ 40 $ 40
Loans past due 90 days or more: (2) 8 4 5 532
Restructured loans: 629 652 701 246
------- ------ ------ ------
Total nonperforming loans 641 696 746 818
Other real estate -- 229 229 229
------- ------ ------ ------
Total nonperforming assets $ 641 $ 925 $ 975 $1,047
======= ====== ====== ======
Allowance for loan losses $ 1,492 $1,462 $1,428 $1,398
======= ====== ====== ======
Nonaccrual loans to total loans 0.04% 0.04% 0.04% 0.04%
Nonperforming loans to total loans 0.62% 0.69% 0.77% 0.90%
Nonperforming loans to total assets 0.40% 0.47% 0.53% 0.59%
Nonperforming assets to total assets 0.40% 0.62% 0.70% 0.75%
Allowance for loan losses to
total loans 1.43% 1.45% 1.48% 1.54%
Allowance for loan losses to
non-performing loans 232.76% 209.96% 191.49% 170.90%
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously
accrued on these loans and not yet paid is reversed and charged against
income during the current period. Interest earned thereafter is only
included in income to the extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing
income at the contractually stated rates. A determination is made to
continue accruing income on those loans which are sufficiently
collateralized and on which management believes all interest and principal
owed will be collected.
There were no loans at March 31, 1998, other than those included in the above
table, where the Corporation was aware of any credit conditions of any borrowers
that would indicate a strong possibility of the borrowers not complying with the
present terms and conditions of repayment and which may result in such loans
being included as non-accrual, past due or restructured at a future date.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey. Accordingly, the collectibility of a
substantial portion of the Corporation's loan portfolio is susceptible to
changes in real estate market conditions.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
are a relatively predictable source of funds, deposit flow and prepayments on
loans and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition.
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. Cash and cash
equivalents increased $4.6 million during the first three months of 1998, as
investing activities used $5.3 million offset by financing and operating
activities providing $9.5 million and $0.4 million, respectively.
Liquidity management is a daily and long-term function of business management.
Excess liquidity is generally invested in short-term investments, such as
federal funds.
As of March 31, 1998 the Bank's capital ratios were as follows:
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 11.23% 7.23%
Total 8.00% 12.49% 4.49%
Leverage Ratio 3.00% 7.66% 4.66%
ITEM III QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first quarter of 1998, there were no significant changes in the
Corporation's assessment of market risk as reported in Item 6 of the
Corporation's Form 10-KSB, for the year ended December 31, 1997.
15
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to litigation which arises primarily in the
ordinary course of business. In the opinion of management the ultimate
disposition of such litigation should not have a material adverse effect on
the financial position of the Corporation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Stewardship Financial Corporation was
held on May 11, 1998 at 7:00 P.M. Total number of shares outstanding as of
March 31, 1998 (Record Date) was 935,075. Total number of shares
represented at the meeting was 704,304. The meeting was held for the
purpose of considering and voting the following matter:
Election of Directors
The election of four persons named below to serve as directors of the Bank
for a three year term.
Total Number of Shares
--------------------------------
Director Voted For Withheld
-------- --------- --------
William M. Almroth 704,304 --
Herman deWaal Malefyt 697,857 6,447
Harold Dyer 697,857 6,447
Edward Fylstra 678,115 26,189
Item 5. Other Information
A 5% stock dividend was declared at the Annual Meeting of shareholders of
Stewardship Financial Corporation, held on May 11, 1998, payable on
June 1, 1998 to shareholders of record on May 20, 1998.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports
None
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STEWARDSHIP FINANCIAL CORPORATION
DATE: May 14, 1998 BY:/s/ PAUL VAN OSTENBRIDGE
------------------------ ----------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
DATE: May 14, 1998 BY:/s/ JULIE E. HOLLAND
-------------------------- ----------------------------------
Julie E. Holland
Vice President and Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the registrant's
audited March 31, 1998 year end financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,529,000
<INT-BEARING-DEPOSITS> 3,094,000
<FED-FUNDS-SOLD> 7,650,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,666,000
<INVESTMENTS-CARRYING> 19,802,000
<INVESTMENTS-MARKET> 20,044,000
<LOANS> 103,924,000
<ALLOWANCE> 1,492,000
<TOTAL-ASSETS> 159,673,000
<DEPOSITS> 145,671,000
<SHORT-TERM> 533,000
<LIABILITIES-OTHER> 1,173,000
<LONG-TERM> 0
0
0
<COMMON> 981,947
<OTHER-SE> 12,296,000
<TOTAL-LIABILITIES-AND-EQUITY> 159,673,000
<INTEREST-LOAN> 2,245,000
<INTEREST-INVEST> 494,000
<INTEREST-OTHER> 126,000
<INTEREST-TOTAL> 2,865,000
<INTEREST-DEPOSIT> 1,100,000
<INTEREST-EXPENSE> 1,107,000
<INTEREST-INCOME-NET> 1,758,000
<LOAN-LOSSES> 40,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,367,000
<INCOME-PRETAX> 566,000
<INCOME-PRE-EXTRAORDINARY> 566,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 382,000
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 5.05
<LOANS-NON> 4,000
<LOANS-PAST> 8,000
<LOANS-TROUBLED> 629,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,462,000
<CHARGE-OFFS> 10,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,492,000
<ALLOWANCE-DOMESTIC> 1,492,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
