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 June 30, 1998
( ) TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission file number 0-21855
Stewardship Financial Corporation
(Name of small business issuer as specified in its charter)
New Jersey 22-3351447
(State or other jurisdiction of (IRS Employer 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 July 31, 1998, was 984,901.
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 June 30, 1998 and December 31, 1997 (Unaudited) .......... 1
Consolidated Statements of Income for the Six
Months ended June 30, 1998 and 1997 ( Unaudited) ............ 2
Consolidated Statements of Income for the Three
Months ended June 30, 1998 and 1997 ( Unaudited) ............ 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1998 and 1997 (Unaudited) ............. 4
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended
June 30, 1998 (Unaudited) ................................... 5
Notes to Consolidated Financial Statements (Unaudited) ...... 6 - 11
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................. 12 - 18
ITEM III - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .......................................... 18
PART II - OTHER INFORMATION
- ----------------------------
ITEM 1 THRU ITEM 6 .................................................... 19
SIGNATURES ............................................................ 20
<PAGE>
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 6,261,000 $ 4,348,000
Commercial paper and interest-bearing due from banks 4,074,000 3,099,000
Federal funds sold 12,900,000 5,225,000
-------------------------------------
Cash and cash equivalents 23,235,000 12,672,000
Securities available for sale 15,913,000 11,047,000
Securities held to maturity; estimated fair value
of $ 21,277,000 (1998) and $20,535,000 (1997) 21,117,000 20,282,000
FHLB-NY stock, at cost 557,000 510,000
Loans, net of allowance for loan losses of
of $ 1,522,000 (1998) and $1,462,000 (1997) 104,875,000 99,205,000
Mortgage loans held for sale 723,000 756,000
Premises and equipment, net 2,564,000 2,724,000
Accrued interest receivable 1,126,000 1,029,000
Intangible assets, net of accumulated amortization of
$253,000 (1998) and $222,000 (1997) 497,000 528,000
Other real estate owned, net -- 229,000
Other assets 761,000 750,000
-------------------------------------
Total assets $171,368,000 $149,732,000
=====================================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 34,523,000 $ 29,428,000
Interest-bearing 122,599,000 106,787,000
-------------------------------------
Total deposits 157,122,000 136,215,000
Securities sold under agreements to repurchase 533,000 533,000
Accrued expenses and other liabilities 1,030,000 1,058,000
-------------------------------------
Total liabilities 158,685,000 137,806,000
-------------------------------------
Commitments and contingencies -- --
Stockholders' equity
Common stock, no par value; 5,000,000 shares authorized;
984,496 and 931,888 shares issued outstanding at
June 30, 1998 and December 31, 1997, respectively 6,499,000 5,229,000
Retained earnings 6,142,000 6,637,000
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale 42,000 60,000
-------------------------------------
Total stockholders' equity 12,683,000 11,926,000
-------------------------------------
Total liabilities and stockholders' equity $171,368,000 $149,732,000
=====================================
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997
------------------------------------
<S> <C> <C>
Interest income:
Loans $ 4,552,000 $ 3,782,000
Securities held to maturity
Taxable 419,000 374,000
Non-taxable 196,000 232,000
Securities available for sale 415,000 358,000
Other interest-earning assets 317,000 116,000
------------------------------------
Total interest income 5,899,000 4,862,000
------------------------------------
Interest expense:
Deposits 2,271,000 1,720,000
Borrowed money 14,000 52,000
------------------------------------
Total interest expense 2,285,000 1,772,000
------------------------------------
Net interest income before provision for loan losses 3,614,000 3,090,000
Provision for loan losses 70,000 60,000
------------------------------------
Net interest income after provision for loan losses 3,544,000 3,030,000
------------------------------------
Noninterest income:
Fees and service charges 347,000 289,000
Gain on sales of mortgage loans 75,000 12,000
Miscellaneous 90,000 63,000
------------------------------------
Total noninterest income 512,000 364,000
------------------------------------
Noninterest expenses:
Salaries and employee benefits 1,382,000 1,193,000
Occupancy, net 193,000 154,000
Equipment 219,000 164,000
Data processing 148,000 124,000
Advertising 81,000 75,000
FDIC insurance premium 10,000 9,000
Amortization of intangible assets 31,000 36,000
Other real estate owned expense (30,000) (10,000)
Charitable contributions 117,000 110,000
Stationery and supplies 101,000 84,000
Miscellaneous 639,000 480,000
------------------------------------
Total noninterest expenses 2,891,000 2,419,000
------------------------------------
Income before income tax expense 1,165,000 975,000
Income tax expense 381,000 292,000
====================================
Net income $ 784,000 $ 683,000
====================================
Basic earnings per share $0.80 $0.70
====================================
Diluted earnings per share $0.79 $0.70
====================================
Weighted average number of common shares outstanding 983,858 970,285
====================================
Weighted average number of diluted common
shares outstanding 994,773 970,285
====================================
</TABLE>
Per share data has been restated to reflect a 2 for 1 stock split completed in
September, 1997, and a 5% stock dividend paid June 1, 1998
See notes to unaudited consolidated financial statements.
2
<PAGE>
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------------
1998 1997
------------------------------------
<S> <C> <C>
Interest income:
Loans $ 2,307,000 $ 1,953,000
Securities held to maturity
Taxable 212,000 195,000
Non-taxable 97,000 117,000
Securities available for sale 227,000 177,000
Other interest-earning assets 191,000 59,000
------------------------------------
Total interest income 3,034,000 2,501,000
------------------------------------
Interest expense:
Deposits 1,171,000 882,000
Borrowed money 7,000 31,000
------------------------------------
Total interest expense 1,178,000 913,000
------------------------------------
Net interest income before provision for loan losses 1,856,000 1,588,000
Provision for loan losses 30,000 30,000
------------------------------------
Net interest income after provision for loan losses 1,826,000 1,558,000
------------------------------------
Noninterest income:
Fees and service charges 192,000 143,000
Gain on sales of mortgage loans 50,000 7,000
Miscellaneous 55,000 46,000
------------------------------------
Total noninterest income 297,000 196,000
------------------------------------
Noninterest expenses:
Salaries and employee benefits 703,000 619,000
Occupancy, net 97,000 82,000
Equipment 120,000 101,000
Data processing 70,000 60,000
Advertising 54,000 48,000
FDIC insurance premium 5,000 5,000
Amortization of intangible assets 15,000 18,000
Other real estate owned expense 0 (6,000)
Charitable contributions 63,000 54,000
Stationery and supplies 57,000 42,000
Miscellaneous 340,000 236,000
------------------------------------
Total noninterest expenses 1,524,000 1,259,000
------------------------------------
Income before income tax expense 599,000 495,000
Income tax expense 197,000 149,000
====================================
Net income $ 402,000 $ 346,000
====================================
Basic earnings per share $0.41 $0.36
====================================
Diluted earnings per share $0.40 $0.36
====================================
Weighted average number of common shares outstanding 983,858 972,726
====================================
Weighted average number of diluted common
shares outstanding 994,773 972,726
====================================
</TABLE>
Per share data has been restated to reflect a 2 for 1 stock split completed in
September, 1997, and a 5% stock dividend paid June 1, 1998.
See notes to unaudited consolidated financial statements.
3
<PAGE>
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 784,000 $ 683,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 246,000 147,000
Amortization of premiums and accretion of discounts, net 17,000 26,000
Accretion of deferred loan fees (29,000) (28,000)
Provision for loan losses 70,000 60,000
Originations of mortgage loans held for sale (5,964,000) (1,012,000)
Proceeds from sale of mortgage loans 6,072,000 1,261,000
Gain on sale of mortgage loans (75,000) (12,000)
Loss on sale of fixed assets -- 2,000
Deferred income tax benefit (26,000) (77,000)
Amortization of intangibles 31,000 36,000
Increase in accrued interest receivable (97,000) (115,000)
Decrease in other assets 16,000 148,000
(Decrease) increase in other liabilities (28,000) 154,000
-----------------------------------
Net cash provided by operating activities 1,017,000 1,273,000
-----------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (6,321,000) (250,000)
Proceeds from maturities and principal repayments
on securities available for sale 1,420,000 784,000
Purchase of securities held to maturity (5,465,000) (638,000)
Proceeds from maturities and principal repayments
on securities held to maturity 2,777,000 388,000
Proceeds from call on securities held to maturity 1,850,000 100,000
Purchase of FHLB-NY stock (47,000) (59,000)
Net increase in loans (5,711,000) (8,684,000)
Sale of other real estate owned 229,000 --
Additions to premises and equipment (85,000) (364,000)
-----------------------------------
Net cash used in investing activities (11,353,000) (8,723,000)
-----------------------------------
Cash flows from financing activities:
Net increase decrease in noninterest-bearing deposits 5,095,000 3,334,000
Net increase in interest-bearing deposits 15,812,000 4,568,000
Net increase in securities sold under agreements to repurchase -- 1,441,000
Cash dividends paid on common stock (137,000) (111,000)
Common stock issued under stock plans 129,000 89,000
-----------------------------------
Net cash provided by financing activities 20,899,000 9,321,000
-----------------------------------
Net increase in cash and cash equivalents 10,563,000 1,871,000
Cash and cash equivalents - beginning 12,672,000 10,955,000
-----------------------------------
Cash and cash equivalents - ending $ 23,235,000 $ 12,826,000
===================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 2,334,000 $ 1,741,000
Cash paid during the year for income taxes 440,000 403,000
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
For the Period Ended June 30, 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 -- -- (131,000) -- (131,000)
Stock Dividend 46,614 1,142,000 (1,148,000) (6,000)
Common Stock issued under stock plans 5,994 128,000 -- -- 128,000
Net income for the six months
ended June 30, 1998 -- -- 784,000 -- 784,000
Unrealized gain (loss) on securities
available for sale, net of tax (18,000) (18,000)
------------
Total comprehensive income, net of tax 766,000
----------------------------------------------------------------------------
Balance -- June 30, 1998 984,496 $ 6,499,000 $ 6,142,000 $ 42,000 $ 12,683,000
============================================================================
</TABLE>
Data has been restated to reflect a 2 for 1 stock split completed in September,
1997, and a 5% stock dividend paid June 1, 1998.
See notes to unaudited consolidated financial statements.
5
<PAGE>
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Principles of consolidation
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, ("the Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank ("the Bank"). Atlantic Stewardship Bank includes its
wholly owned subsidiary, Stewardship Investment Corp. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current presentation. The consolidated financial statements of
the Corporation have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the statements of financial condition
and revenues and expenses during the reporting periods. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
Note 2. Basis of presentation
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-QSB and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of the consolidated
financial statements, have been included. The results of operations for six
months ended June 30, 1998 are not necessarily indicative of the results which
may be expected for the entire year.
6
<PAGE>
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 3. Securities Available for Sale
The following table sets forth the amortized cost and carrying value of the
Corporation's securities available for sale as of June 30, 1998 and December 31,
1997. In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", securities
available for sale are carried at estimated fair value.
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 3,457,000 $ 25,000 $ -- $ 3,482,000
U.S. Government agencies 5,632,000 6,000 21,000 5,617,000
Obligations of state and political
subdivisions 272,000 3,000 -- 275,000
Mortgage-backed securities 6,485,000 76,000 22,000 6,539,000
-----------------------------------------------------------------------
$15,846,000 $ 110,000 $ 43,000 $15,913,000
=======================================================================
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,961,000 $ 16,000 $ -- $ 2,977,000
U.S. Government agencies 1,451,000 5,000 2,000 1,454,000
Obligations of state and political
subdivisions 272,000 3,000 -- 275,000
Mortgage-backed securities 6,267,000 97,000 23,000 6,341,000
-----------------------------------------------------------------------
$10,951,000 $ 121,000 $ 25,000 $11,047,000
=======================================================================
</TABLE>
Note 4. Securities Held to Maturity
The following table sets forth the carrying value and estimated fair value
of the Corporation's securities held to maturity as June 30, 1998 and December
31, 1997. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,448,000 $ 7,000 $ -- $ 1,455,000
U.S. Government agencies 8,818,000 31,000 12,000 8,837,000
Obligations of state and political
subdivisions 9,043,000 100,000 9,000 9,134,000
Mortgage-backed securities 1,808,000 43,000 -- 1,851,000
-----------------------------------------------------------------------
$21,117,000 $ 181,000 $ 21,000 $21,277,000
=======================================================================
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,948,000 $ 5,000 $ -- $ 1,953,000
U.S. Government agencies 7,736,000 48,000 7,000 7,777,000
Obligations of state and political
subdivisions 8,479,000 132,000 1,000 8,610,000
Mortgage-backed securities 2,119,000 76,000 -- 2,195,000
-----------------------------------------------------------------------
$20,282,000 $ 261,000 $ 8,000 $20,535,000
=======================================================================
</TABLE>
7
<PAGE>
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 5. Loans
The Corporation's primary market area for lending is the small and medium
sized business and professional community as well as the individuals residing,
working and shopping in the Bergen and Passaic counties, New Jersey area. The
following table set forth the composition of loans as of the periods indicated.
June 30, December 31,
1998 1997
------------------------------
Mortgage
Residential $ 20,597,000 $ 20,305,000
Commercial 37,177,000 35,035,000
Commercial 18,815,000 17,826,000
Equity 3,497,000 3,551,000
Installment 26,120,000 23,659,000
Other 304,000 414,000
------------------------------
Total loans 106,510,000 100,790,000
------------------------------
Less: Deferred loan fees 113,000 123,000
Allowance for loan losses 1,522,000 1,462,000
------------------------------
1,635,000 1,585,000
------------------------------
Loans, net $104,875,000 $ 99,205,000
==============================
Note 6. Allowance for loan losses
Six Months Ended June 30,
1998 1997
------------------------------
Balance, beginning of period $ 1,462,000 $ 1,353,000
Provision charged to operations 70,000 60,000
Recoveries of loans charged off -- 2,000
Loans charged off (10,000) (17,000)
------------------------------
Balance, end of period $ 1,522,000 $ 1,398,000
==============================
8
<PAGE>
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 7. Loan Impairment
The Corporation has defined the population of impaired loans to include all
nonaccrual loans and loans more than 90 days past due. The following table sets
forth information regarding the impaired loans as of the periods indicated.
June 30, December 31,
1998 1997
------------------------
Impaired loans
With related allowance for loan losses $ -- $40,000
Without related allowance for loan losses 18,000 4,000
------- -------
Total impaired loans $18,000 $44,000
======= =======
Related allowance for loan losses $ -- $40,000
======= =======
9
<PAGE>
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 8. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued. Potential dilutive securities totalled 9,002
shared at June 30, 1998. There were no dilutive securities outstanding at June
30, 1997.
All share and per share amounts have been restated to reflect the 2 for 1 stock
split issued in September, 1997 and a 5% stock dividend paid June 1, 1998.
Note 9. Comprehensive Income
During the first quarter of 1998, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. In accordance with the provisions of SFAS No.
130 for interim period reporting, the Corporation's total comprehensive income
for the six months ended June 30, 1998 and 1997 was $766,000 and $701,000,
respectively. The difference between the Corporation's net income and total
comprehensive income for these periods relates to the change in the net
unrealized gains on securities available for sale during the applicable period
of time.
Note 10. Recent Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 132, "Employer's Disclosure account Pensions and
Other Postretirement Benefits" (SFAS No. 132). SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements
10
<PAGE>
for pensions and other post retirement benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
required disclosures for nonpublic entities.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available. As SFAS No. 132 affects disclosure requirements only, it
is not expected to have an impact on the consolidated financial statements of
the Corporation.
11
<PAGE>
Stewardship Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition
Total assets increased by $21.6 million, or 14.4%, from $149.7 million at
December 31, 1997 to $171.4 million at June 30, 1998. The increase in assets
reflects, among other things, increases in federal funds sold of $7.7 million,
net loans of $5.7 million, and securities available for sale of $4.9 million.
The composition of the loan portfolio is basically unchanged at June 30, 1998
when compared with the portfolio at December 31, 1997.
Total deposits increased $20.9 million, or 15.3%, to $157.1 million at June 30,
1998 from $136.2 million at December 31, 1997. Interest-bearing deposits
increased $15.8 million, or 14.8%, to $122.6 million at June 30, 1998, and
noninterest-bearing deposits, increased $5.1 million, or 17.3%, to $34.5 million
at June 30, 1998. The increase in interest-bearing deposits can be attributed to
the popularity of a tiered money market product and continued success of the new
branches in Waldwick and Ridgewood, Bergen County, New Jersey which opened
during 1997. The Corporation also continues to benefit from the consolidation of
other banking institutions as customers continue to look for personalized
customer service in their local area.
The Corporation's primary focus during the past six 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
marketing to customer base to be completed in the third quarter of 1998. This
product allows customers to request balances, check inquiries, deposit
transfers, and loan payments. Based on the popularity of this product, the
Corporation will begin to assess the ability to provide a PC banking product in
the future. The Corporation has also begun an analysis of a Debit card product
and it is anticipated that this will be available for customers before year end.
Results of Operations
Six Months Ended June 30, 1998
General
The Corporation reported net income of $784,000, or $0.80 basic earnings per
share for the six months ended June 30, 1998 compared to $683,000, or $0.70
basic earnings per share for the same period in 1997. The $101,000 increase was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense.
12
<PAGE>
Net interest income
Net interest income increased $524,000, or 17.0%, for the six months ended June
30, 1998 as compared with the corresponding period in 1997. The increase was
primarily due to an increase in average net interest-earning assets.
Total interest income increased $1.0 million, or 21.3%, primarily due to an
increase in the average volume of interest-earning assets. The average balance
on interest-earning assets increased $26.4 million, or 21.6%, from $122.0
million for the six months ended June 30, 1997 to $148.4 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 $19.6 million to an
average $105.2 million for the six months end June 30, 1998, from an average
$85.6 million for the comparable period in 1997.
Interest paid on deposits and borrowed money increased $513,000, or 29.0%, due
primarily to an increase in the average volume of total interest-bearing
deposits and an increase in cost of funds as the Corporation becomes more
reliant on its money market account products. The average balance of total
interest-bearing deposits increased to $112.8 million for the six months ended
June 30, 1998 from $90.6 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 product.
Provision for loan losses
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and ultimate losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $70,000 and $60,000 during the six
months ended June 30, 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.
Noninterest income
Noninterest income increased by $148,000, or 40.7%, to $512,000 during the six
months ended June 30, 1998 when compared with $364,000 during the 1997 period.
Contributing to this increase was a $58,000 increase in deposit-related fees and
service charges caused by an the increased deposit base and an increase of
$63,000 in gain on sale of mortgage loans due primarily to the increase in loans
originated and sold during the first half of 1998 compared to the similar period
in 1997.
13
<PAGE>
Noninterest expense
Noninterest expense increased by approximately $472,000, or 19.5%, to $2.9
million for the six months ended June 30, 1998, compared to $2.4 million for the
same 1997 period. Salaries and employee benefits, the major component of
noninterest expense, increased $189,000, or 15.8%, during the six months ended
June 30, 1998. This increase was due primarily to additions to staff for the
Ridgewood branch, general increases for merit and performance and increases in
employee benefits such as health insurance. Miscellaneous expenses increased
$159,000, or 33.1% due to increases in consulting fees of $75,000 and deposit
related costs of $54,000. The Corporation has utilized outside consultants to
provide experience with data processing systems to help better utilize automated
teller and platform systems and to analyze issues related to the assessment of
Year 2000 issues. Occupancy and equipment expenses increased $94,000, or 29.5%
due primarily to the establishment of the new branches and the ATM network.
Income taxes
Income tax expense totaled $381,000 and $292,000 during the six months ended
June 30, 1998 and 1997, respectively.
Results of Operations
Three Months Ended June 30, 1998
General
The Corporation reported net income of $402,000, or $.41 basic earnings per
share for the three months ended June 30, 1998 compared to $346,000 or $.36 per
share for the same period in 1997. The $56,000 increase in net income was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense.
Net interest income
Net interest income increased $268,000, or 16.9%, for the three months ended
June 30, 1998 as compared with the corresponding period in 1997. The increase
was primarily due to an increase in average net interest-earning assets offset
by a decline in the interest rate spread.
Total interest income increased $533,000, 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
$29.8 million, or 23.9%, from $124.9 million for the three months ended June 30,
1997 to $154.7 million for the same period in 1998, primarily being funded by an
increase to the Corporation's average deposit base. The Corporation continued to
experience an increase in loan demand which allowed loans on average to increase
$17.0 million to an average $105.0 million for the three months ended June 30,
1998, from an average $88.0 million for the comparable period in 1997.
14
<PAGE>
Interest paid on deposits and borrowed money increased $265,000, or 29.0%, due
primarily to an increase in the average volume of total interest-bearing
deposits and to higher rates paid on money market products. The average balance
of total interest-bearing deposits increased to $105.8 million for the three
months ended June 30, 1998 from $92.6 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 provision charged to operations totaled $30,000 for each of the three months
ended June 30, 1998 and 1997, respectively. See "Asset Quality" section for
summary of allowance for loan losses and nonperforming assets.
Noninterest income
Noninterest income increased by $101,000, or 51.5%, to $297,000 during the three
months ended June 30, 1998 when compared with $196,000 during the 1997 period.
Contributing to this increase was a $43,000 gain on sale of mortgage loans due
primarily to the increase in loans sold during the second quarter of 1998
compared to the similar period in 1997 and a $49,000 increase deposit related
fees and service charges.
Noninterest expenses
Noninterest expenses increased by approximately $265,000, or 21.0%, to $1.5
million for the three months ended June 30, 1998, compared to $1.3 million for
the same 1997 period. Salaries and employee benefits, the major component of
noninterest expenses, increased $84,000, or 13.6%, during the three months ended
June 30, 1998. This increase was due primarily to additions to staff for the
Ridgewood branch, general increases for merit and performance and increases in
employee benefits such as health insurance. Miscellaneous expenses increased
$104,000, or 44.1% due to increases in consulting fees of $50,000. The
Corporation continued to utilize outside consultants to provide experience with
data processing systems to help properly assess and develop test plans for Year
2000 issues. Occupancy and equipment increased $34,000, or 18.6% due primarily
to the establishment of the Ridgewood branch in the fourth quarter of 1997.
Income taxes
Income tax expense totaled $197,000 and $149,000 during the three months ended
June 30, 1998 and 1997, respectively.
15
<PAGE>
Asset Quality
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrower's ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
<TABLE>
<CAPTION>
03/31/98 03/31/98 12/31/97 09/30/97
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans: (1) $ 11 $ 4 $ 40 $ 40
Loans past due 90 days or more: (2) 7 8 4 5
Restructured loans: 552 629 652 701
--------- ------ ------ ------
Total nonperforming loans 570 641 696 746
Other real estate -- -- 229 229
--------- ------ ------ ------
Total nonperforming assets $ 570 $ 641 $ 925 $ 975
========= ====== ====== ======
Allowance for loan losses $ 1,522 $1,492 $1,462 $1,428
========= ====== ====== ======
Nonaccrual loans to total loans 0.01% -- 0.04% 0.04%
Nonperforming loans to total loans 0.54% 0.62% 0.69% 0.77%
Nonperforming loans to total assets 0.33% 0.40% 0.47% 0.53%
Nonperforming assets to total assets 0.33% 0.40% 0.62% 0.70%
Allowance for loan losses to total loans 1.43% 1.43% 1.45% 1.48%
Allowance for loan losses to non-
performing loans 267.02% 232.76% 210.06% 191.49%
</TABLE>
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing income
at the contractually stated rates. A determination is made to continue accruing
income on those loans which are sufficiently collateralized and on which
management believes all interest and principal owed will be collected.
There were no loans at June 30, 1998, other than those included in the above
table, where the Corporation was aware of any credit conditions of any borrowers
that would indicate a strong possibility of the borrowers not complying with the
present terms and conditions of repayment and which may result in such loans
being included as non-accrual, past due or restructured at a future date.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey. Accordingly, the collectibility of a
substantial portion of the Corporation's loan portfolio is susceptible to
changes in real estate market conditions.
16
<PAGE>
Liquidity and Capital Resources
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
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 $10.6 million during the first six months of 1998, as
investing activities used $11.4 million offset by financing and operating
activities providing $20.9 million and $1.0 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 June 30, 1998 the Bank's capital ratios were as follows:
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 11.11% 7.11%
Total 8.00% 12.36% 4.36%
Leverage Ratio 3.00% 7.43% 4.43%
Year 2000 Issues
The Year 2000 issue involves preparing computer systems and programs to identify
the arrival of January 1, 2000. In the past computer programs allocated only two
digits to a year, (i.e. 1998 was represented as 98.) Given this programming, the
year 2000 could be confused with that of 1900. The Year 2000 issue not only
impacts computer hardware and software, but all equipment which utilizes
processors or computer microchips.
Management has formed a Year 2000 Compliance Committee during 1997, which
includes officers from all operating areas. The objectives of the Committee are
to ensure that the Corporation will be prepared for the issues arising out of
the Year 2000. The Corporation has conducted a comprehensive review of its
operations to identify systems, vendors and customers that could be affected by
the Year 2000 issue. The Committee is developing an implementation plan to test
mission critical systems and to rectify any issues related to the processing of
transactions in the year 2000 and beyond. The Corporation generally relies on
independent third parties to provide data processing services and continues to
assess and test the "readiness" of those parties. The Corporation will work with
its significant borrowers, depositors, and vendors to ensure they are taking
appropriate steps to become Year 2000 compliant.
17
<PAGE>
The Corporation expects that all appropriate year 2000 compliance testing,
including third party vendors and interfaces will be completed by 1st quarter of
1999.
Although contingency plans will be developed, the Corporation continues to bear
some risk related to the Year 2000 issue and could be adversely affected, if
other entities (i.e. vendors) do not appropriately address their own compliance.
The Corporation continues to evaluate the estimated costs associated with
attaining Year 2000 readiness. Additional costs for 1998, such as testing,
software purchases and marketing are not anticipated to be material to the
Corporation. While additional costs will be incurred, the Corporation believes,
based upon available information, that it will be able to manage its Year 2000
transition without any adverse effect on business operations or financial
condition.
ITEM III QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first half 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.
18
<PAGE>
Stewardship Financial Corporation
Part II -- Other Information
Item 1. Legal Proceedings
The Corporation is subject to litigation which arises primarily
in the ordinary course of business. In the opinion of management
the ultimate disposition of such litigation should not have a
material adverse effect on the financial position of the
Corporation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports
None
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Stewardship Financial Corporation
Date: August 13, 1998 By: /s/ PAUL VAN OSTENBRIDGE
------------------------ --------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
Date: August 13, 1998 By: /s/ JULIE E. HOLLAND
------------------------ --------------------------------
Julie E. Holland
Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,261,000
<INT-BEARING-DEPOSITS> 4,074,000
<FED-FUNDS-SOLD> 12,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,913,000
<INVESTMENTS-CARRYING> 21,117,000
<INVESTMENTS-MARKET> 21,277,000
<LOANS> 106,397,000
<ALLOWANCE> 1,522,000
<TOTAL-ASSETS> 171,368,000
<DEPOSITS> 157,122,000
<SHORT-TERM> 533,000
<LIABILITIES-OTHER> 1,030,000
<LONG-TERM> 0
0
0
<COMMON> 984,496
<OTHER-SE> 12,683,000
<TOTAL-LIABILITIES-AND-EQUITY> 171,368,000
<INTEREST-LOAN> 4,552,000
<INTEREST-INVEST> 1,030,000
<INTEREST-OTHER> 317,000
<INTEREST-TOTAL> 5,899,000
<INTEREST-DEPOSIT> 2,271,000
<INTEREST-EXPENSE> 2,285,000
<INTEREST-INCOME-NET> 3,614,000
<LOAN-LOSSES> 70,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,891,000
<INCOME-PRETAX> 1,165,000
<INCOME-PRE-EXTRAORDINARY> 1,165,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 784,000
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 5.00
<LOANS-NON> 11,000
<LOANS-PAST> 7,000
<LOANS-TROUBLED> 552,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,462,000
<CHARGE-OFFS> 10,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,522,000
<ALLOWANCE-DOMESTIC> 1,522,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
