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FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
( ) 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 November 1, 1999, was 1,597,043.
Transitional Small Business Disclosure Format (Check one): Yes No X
---- ----
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<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM I - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at September 30, 1999 and December 31, 1998 (Unaudited) ..... 1
Consolidated Statements of Income for the Nine
Months ended September 30, 1999 and 1998 ( Unaudited) ....... 2
Consolidated Statements of Income for the Three
Months ended September 30, 1999 and 1998 ( Unaudited) ....... 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1999 and 1998 (Unaudited) ........ 4
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended
September 30, 1999 (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>
September 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,774,000 $ 7,379,000
Commercial paper and interest-bearing due from banks 47,000 5,045,000
Federal funds sold 6,050,000 4,575,000
------------- -------------
Cash and cash equivalents 13,871,000 16,999,000
Securities available for sale 17,544,000 18,578,000
Securities held to maturity; estimated fair value
of $ 20,312,000 (1999) and $22,757,000 (1998) 20,590,000 22,513,000
FHLB-NY stock, at cost 663,000 557,000
Loans, net of allowance for loan losses of
of $ 1,761,000 (1999) and $1,542,000 (1998) 139,851,000 121,508,000
Mortgage loans held for sale 350,000 793,000
Premises and equipment, net 2,626,000 2,484,000
Accrued interest receivable 1,195,000 1,229,000
Intangible assets, net of accumulated amortization of
$326,000 (1999) and $284,000 (1998) 423,000 465,000
Other assets 1,206,000 844,000
------------- -------------
Total assets $ 198,319,000 $ 185,970,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 40,177,000 $ 39,234,000
Interest-bearing 138,799,000 131,487,000
------------- -------------
Total deposits 178,976,000 170,721,000
Securities sold under agreements to repurchase 2,962,000 662,000
Accrued expenses and other liabilities 1,592,000 1,038,000
------------- -------------
Total liabilities 183,530,000 172,421,000
------------- -------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
1,591,729 and 1,485,427 shares issued outstanding at
September 30, 1999 and December 31, 1998, respectively 8,636,000 6,645,000
Retained earnings 6,462,000 6,867,000
Accumulated other comprehensive income: (309,000) 37,000
------------- -------------
Total stockholders' equity 14,789,000 13,549,000
------------- -------------
Total liabilities and stockholders' equity $ 198,319,000 $ 185,970,000
============= =============
</TABLE>
Share data has been restated to reflect a 3 for 2 stock split completed July 1,
1999 and a 5% stock dividend payable on October 27, 1999.
See notes to unaudited consolidated financial statements.
1
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Interest income:
Loans $ 8,128,000 $ 6,934,000
Securities held to maturity
Taxable 410,000 614,000
Non-taxable 411,000 309,000
Securities available for sale 733,000 662,000
Other interest-earning assets 256,000 558,000
----------- -----------
Total interest income 9,938,000 9,077,000
----------- -----------
Deposits 3,365,000 3,560,000
Borrowed money 43,000 22,000
----------- -----------
Total interest expense 3,408,000 3,582,000
----------- -----------
Net interest income before provision for loan losses 6,530,000 5,495,000
Provision for loan losses 230,000 90,000
----------- -----------
Net interest income after provision for loan losses 6,300,000 5,405,000
----------- -----------
Fees and service charges 612,000 512,000
Gain on sales of mortgage loans 79,000 110,000
Miscellaneous 114,000 118,000
----------- -----------
Total noninterest income 805,000 740,000
----------- -----------
Noninterest expenses:
Salaries and employee benefits 2,368,000 2,092,000
Occupancy, net 364,000 299,000
Equipment 340,000 331,000
Data processing 271,000 222,000
Advertising 141,000 108,000
FDIC insurance premium 18,000 16,000
Amortization of intangible assets 42,000 47,000
Other real estate owned expense (1,000) (30,000)
Charitable contributions 224,000 180,000
Stationery and supplies 173,000 150,000
Miscellaneous 1,062,000 943,000
----------- -----------
Total noninterest expenses 5,002,000 4,358,000
----------- -----------
Income before income tax expense 2,103,000 1,787,000
Income tax expense 683,000 583,000
=========== ===========
Net income $ 1,420,000 $ 1,204,000
=========== ===========
Basic earnings per share $ 0.90 $ 0.78
=========== ===========
Diluted earnings per share $ 0.89 $ 0.77
=========== ===========
Weighted average number of common shares outstanding 1,572,348 1,548,873
=========== ===========
Weighted average number of diluted common
shares outstanding 1,595,002 1,565,839
=========== ===========
</TABLE>
Share data has been restated to reflect a 3 for 2 stock split completed July 1,
1999 and a 5% stock dividend payable on October 27, 1999.
See notes to unaudited consolidated financial statements.
2
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended
September 30,
-------------------------
1999 1998
----------- ------------
Interest income:
Loans $2,854,000 $2,382,000
Securities held to maturity
Taxable 128,000 195,000
Non-taxable 131,000 113,000
Securities available for sale 251,000 247,000
Other interest-earning assets 87,000 241,000
---------- ----------
Total interest income 3,451,000 3,178,000
---------- ----------
Interest expense:
Deposits 1,173,000 1,289,000
Borrowed money 19,000 8,000
---------- ----------
Total interest expense 1,192,000 1,297,000
---------- ----------
Net interest income before provision for loan losses 2,259,000 1,881,000
Provision for loan losses 80,000 20,000
---------- ----------
Net interest income after provision for loan losses 2,179,000 1,861,000
---------- ----------
Noninterest income:
Fees and service charges 204,000 165,000
Gain on sales of mortgage loans 21,000 35,000
Miscellaneous 25,000 28,000
---------- ----------
Total noninterest income 250,000 228,000
---------- ----------
Noninterest expenses:
Salaries and employee benefits 825,000 710,000
Occupancy, net 134,000 106,000
Equipment 94,000 112,000
Data processing 100,000 74,000
Advertising 46,000 27,000
FDIC insurance premium 6,000 6,000
Amortization of intangible assets 14,000 16,000
Other real estate owned expense 0 0
Charitable contributions 94,000 63,000
Stationery and supplies 62,000 49,000
Miscellaneous 329,000 304,000
---------- ----------
Total noninterest expenses 1,704,000 1,467,000
---------- ----------
Income before income tax expense 725,000 622,000
Income tax expense 238,000 202,000
========== ==========
Net income $ 487,000 $ 420,000
========== ==========
Basic earnings per share $ 0.31 $ 0.27
========== ==========
Diluted earnings per share $ 0.30 $ 0.27
========== ==========
Weighted average number of common shares outstanding 1,582,011 1,553,556
========== ==========
Weighted average number of diluted common
shares outstanding 1,606,483 1,574,242
========== ==========
Share data has been restated to reflect a 3 for 2 stock split completed July 1,
1999 and a 5% stock dividend payable on October 27, 1999.
See notes to unaudited consolidated financial statements.
3
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,420,000 $ 1,204,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 337,000 319,000
Amortization of premiums and accretion of discounts, net 53,000 25,000
Accretion of deferred loan fees (22,000) (44,000)
Provision for loan losses 230,000 90,000
Originations of mortgage loans held for sale (6,155,000) (8,586,000)
Proceeds from sale of mortgage loans 6,677,000 9,142,000
Gain on sale of mortgage loans (79,000) (110,000)
Deferred income tax benefit (94,000) (34,000)
Amortization of intangibles 42,000 47,000
Decrease (increase) in accrued interest receivable 35,000 (73,000)
(Increase) decrease in other assets (58,000) 7,000
Increase in other liabilities 554,000 65,000
------------ ------------
Net cash provided by operating activities 2,940,000 2,052,000
------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale (5,441,000) (10,024,000)
Proceeds from maturities and principal repayments
on securities available for sale 2,929,000 2,354,000
Proceeds from calls and sales of securities available for sale 2,971,000 451,000
Purchase of securities held to maturity (4,298,000) (10,076,000)
Proceeds from maturities and principal repayments
on securities held to maturity 2,983,000 4,580,000
Proceeds from call on securities held to maturity 3,203,000 3,550,000
Purchase of FHLB-NY stock (105,000) (47,000)
Net increase in loans (18,551,000) (10,395,000)
Sale of other real estate owned -- 229,000
Additions to premises and equipment (479,000) (77,000)
------------ ------------
Net cash used in investing activities (16,788,000) (19,455,000)
------------ ------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits 942,000 4,808,000
Net increase in interest-bearing deposits 7,312,000 23,030,000
Net increase in securities sold under agreements to repurchase 2,300,000 129,000
Cash dividends paid on common stock (276,000) (206,000)
Common stock issued under stock plans 442,000 205,000
------------ ------------
Net cash provided by financing activities 10,720,000 27,966,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,128,000) 10,563,000
Cash and cash equivalents - beginning 16,999,000 12,672,000
============ ============
Cash and cash equivalents - ending $ 13,871,000 $ 23,235,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 3,416,000 $ 3,686,000
Cash paid during the year for income taxes 735,000 663,000
</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 SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> -- <C>
Balance -- December 31, 1998 1,485,427 $6,645,000 $ 6,867,000 $ 37,000 $13,549,000
Dividends Paid - - (269,000) - (269,000)
5% Stock dividend (payable October 27, 1999) 75,797 1,549,000 (1,556,000) (7,000)
Common stock issued under stock plans 14,403 262,000 - - 262,000
Exercise of stock options 16,102 180,000 180,000
Comprehensive income:
Net income for the nine months
ended September 30, 1999 - - 1,420,000 - 1,420,000
Unrealized holding loss on securities
available for sale arising during the period
(net of tax benefit of $216,000) - - - (346,000) (346,000)
-------------
Total comprehensive income, net of tax 1,074,000
===================================================================================
Balance -- September 30, 1999 1,591,729 $8,636,000 $ 6,462,000 $(309,000) $14,789,000
===================================================================================
</TABLE>
Data has been restated to reflect a 3 for 2 stock split completed July 1, 1999.
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 nine
months ended September 30, 1999 are not necessarily indicative of the results
which may be expected for the entire year.
6
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and carrying value of the
Corporation's securities available for sale as of September 30, 1999 and
December 31, 1998. In accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", securities available for sale are carried at estimated fair value.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,001,000 $ 7,000 $ -- $ 2,008,000
U.S. Government agencies 9,037,000 1,000 421,000 8,617,000
Obligations of state and political
subdivisions 863,000 2,000 4,000 861,000
Mortgage-backed securities 6,144,000 30,000 116,000 6,058,000
-------------------------------------------------------------------------
$ 18,045,000 $ 40,000 $ 541,000 $ 17,544,000
=========================================================================
December 31, 1998
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-------------------------------------------------------------------------
U.S. Treasury securities $ 3,203,000 $ 77,000 $ -- $ 3,280,000
U.S. Government agencies 8,213,000 24,000 32,000 8,205,000
Obligations of state and political
subdivisions 524,000 9,000 -- 533,000
Mortgage-backed securities 6,578,000 39,000 57,000 6,560,000
-------------------------------------------------------------------------
$ 18,518,000 $149,000 $ 89,000 $ 18,578,000
=========================================================================
</TABLE>
NOTE 4. SECURITIES HELD TO MATURITY
The following table sets forth the carrying value and estimated fair value
of the Corporation's securities held to maturity as September 30, 1999 and
December 31, 1998. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 748,000 $ 2,000 $ 4,000 $ 746,000
U.S. Government agencies 6,347,000 7,000 189,000 6,165,000
Obligations of state and political
subdivisions 12,290,000 42,000 150,000 12,182,000
Mortgage-backed securities 1,205,000 17,000 3,000 1,219,000
========================================================================
$ 20,590,000 $ 68,000 $346,000 $ 20,312,000
========================================================================
December 31, 1998
------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------------------------------------------------------------------
U.S. Treasury securities $ 948,000 $ 31,000 $ -- $ 979,000
U.S. Government agencies 7,123,000 36,000 10,000 7,149,000
Obligations of state and political
subdivisions 12,359,000 181,000 8,000 12,532,000
Mortgage-backed securities 2,083,000 22,000 8,000 2,097,000
========================================================================
$ 22,513,000 $270,000 $ 26,000 $ 22,757,000
========================================================================
</TABLE>
7
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 5. LOANS
The Corporation's primary market area for lending is the small and medium
sized business and professional community as well as the individuals residing,
working and shopping in the Bergen and Passaic counties, New Jersey area. The
following table set forth the composition of loans as of the periods indicated.
September 30, December 31,
1999 1998
--------------------------------------
Mortgage
Residential $ 32,555,000 $ 24,784,000
Commercial 52,268,000 46,375,000
Commercial 20,608,000 18,995,000
Equity 4,362,000 3,593,000
Installment 31,897,000 29,290,000
Other 42,000 126,000
----------------------------------
Total loans 141,732,000 123,163,000
----------------------------------
Less: Deferred loan fees 120,000 113,000
Allowance for loan losses 1,761,000 1,542,000
----------------------------------
1,881,000 1,655,000
----------------------------------
Loans, net $139,851,000 $121,508,000
==================================
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Nine Months Ended September 30,
---------------------------------
1999 1998
---------------------------------
Balance, beginning of period $ 1,542,000 $ 1,462,000
Provision charged to operations 230,000 90,000
Recoveries of loans charged off 22,000 --
Loans charged off (33,000) (10,000)
---------------------------------
Balance, end of period $ 1,761,000 $ 1,542,000
=================================
8
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 7. LOAN IMPAIRMENT
The Corporation has defined the population of impaired loans to include all
nonaccrual loans and loans more than 90 days past due. The following table sets
forth information regarding the impaired loans as of the periods indicated.
September 30, December 31,
1999 1998
------------- ------------
Impaired loans
With related allowance for loan losses $ -- $64,000
Without related allowance for loan losses 4,000 4,000
======= ========
Total impaired loans $4,000 $68,000
======= ========
Related allowance for loan losses $ -- $ 3,000
======= ========
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 totaled 22,654
and 16,966 shares at September 30, 1999 and 1998, respectively.
All share and per share amounts have been restated to reflect a 3 for 2 stock
split paid in July, 1999 and a 5% stock dividend payable October 27, 1999.
NOTE 9. COMPREHENSIVE INCOME
Total comprehensive income includes net income and other comprehensive income
which is comprised of unrealized holding gains and lossess on securities
available for sale, net of taxes. The Corporation's total comprehensive income
for the nine months ended September 30, 1999 and 1998 was $1.1 million and $1.3
million, respectively. The difference between the Corporation's net income and
total comprehensive income for these periods relates to the change in the net
unrealized holding gains or losses on securities available for sale during the
applicable period of time.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), was issued by the Financial
Accounting Standards Board in June, 1998. SFAS No. 133 standardizes the
accounting for derivative instruments including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
As issued in June 1998, the corporation must adopt SFAS No. 133 by January 1,
2000, however, early adoption is permitted. On adoption, the provisions of SFAS
No. 133 must be applied prospectively. The Corporation anticipates that the
adoption of SFAS No. 133 will not have a material impact on financial
statements. With the issuance of Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Intsruments and Hedging Activities - Deferral of
the Effective Date of FASB No. 133", the effective date of SFAS No. 133 has been
deferred to all fiscal years beginning after June 15, 2000.
10
<PAGE>
On October 9, 1998 the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise"
(SFAS No. 134). SFAS No. 134 changes the way mortgage banking firms account for
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. This statement is effective for fiscal quarters
beginning after December 15, 1998. Early application was permitted. The adoption
of this statement by the Corporation did not have a material effect on the
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 $12.3 million, or 6.6%, from $186.0 million at
December 31, 1998 to $198.3 million at September 30, 1999. Net loans increased
$18.3 million with offsetting decreases of $3.0 million in cash and cash
equivalents, $1.9 million in securities held to maturity and $1.0 million in
securities available for sale. The composition of the loan portfolio is
basically unchanged at September 30, 1999 when compared with the portfolio at
December 31, 1998.
Total deposits totaled $179.0 million at September 30, 1999, an increase of $8.3
million, or 4.8% from $170.7 million at December 31, 1998. Interest-bearing
deposits increased $7.3 million, or 5.6%, to $179.0 million at September 30,
1999, and noninterest-bearing deposits increased $0.9 million, or 2.4%, to $40.2
million at September 30, 1999. The increase in interest-bearing deposits can be
attributed to the popularity of the new branch which opened in April in Wayne,
Passaic County, New Jersey and an overall marketing effort to attract additional
certificates of deposit.
The Corporation's primary focus during the past nine months was to continue to
concentrate on developing the market bases of the new branches and products
offered in 1997 and to enhance our market position in the Wayne, Passaic County,
New Jersey area with the creation of our new Wayne Valley branch. The new branch
successfully opened in April, 1999. Management believes that this enhancement to
our branch delivery system will help existing customers and attract a new
customer base. The Corporation continues to evaluate the issuance of a debit
card product to our customers and anticipates a product offering during 2000.
The Corporation also has begun the initial process of installing an internet
banking product for customers. The product will be offered through an external
service bureau which supports the product, provides necessary security and
internal controls, and assists in regulatory compliance. It is anticipated that
the product will be in beta testing during the first quarter of 2000 with
rollout to our customer base in second quarter 2000. Management believes that
this will enhance the delivery channels being offered to existing and new
customers which will allow us to continue to provide strong personalized
customer service.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
General
The Corporation reported net income of $1.4 million, or $0.90 basic earnings per
share for the nine months ended September 30, 1999 compared to $1.2 million, or
$.78 basic earnings per share for the same period in 1998. The $216,000 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 $1.0 million, or 18.8%, for the nine months ended
September 30, 1999 as compared with the corresponding period in 1998. The
increase was primarily due to an increase in average net interest-earning assets
and a increase in net interest margin.
Total interest income increased $861,000, or 9.5%, primarily due to an increase
in the average volume of interest-earning assets partially offset by a decrease
in yields on earning assets. The average balance on interest-earning assets
increased $22.9 million, or 14.9%, from $153.6 million for the nine months ended
September 30, 1998 to $176.5 million for the same period in 1999, 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 net
loans on average to increase $24.8 million to an average $132.1 million for the
nine months end September 30, 1999, from an average $107.4 million for the
comparable period in 1998.
Interest paid on deposits and borrowed money decreased by $174,000, or 4.9%, due
primarily to a decrease in cost of funds as the Corporation responded to
declines in market rates by lowering rates on all interest-bearing deposit
products. The average balance of total interest-bearing deposits increased to
$133.1 million for the nine months ended September 30, 1999 from $117.2 million
for the comparable 1998 period, primarily as a result of the Corporation's
expanding customer base and the popularity of the tiered money market product
and certificate of deposit promotions. Yields on deposits and borrowed money
decreased from 4.06% for the period ended September 30, 1998 to 3.38% for the
comparable period in 1999.
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 $230,000 and $90,000 during the nine
months ended September 30, 1999 and 1998. The increase in the provision was due
to the general increase in the loans outstanding. 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 $65,000, or 8.8%, to $805,000 during the nine
months ended September 30, 1999 when compared with $740,000 during the 1998
period. Contributing to this increase was a $100,000 increase in deposit-related
fees and service charges caused by the increased deposit base offset by a
decrease of $31,000 in gain on sale of mortgage loans due primarily to a
decrease in loans originated and sold during 1999 compared to the similar period
in 1998.
13
<PAGE>
Noninterest expense
Noninterest expense increased by approximately $644,000, or 14.8%, to $5.0
million for the nine months ended September 30, 1999, compared to $4.4 million
for the same 1998 period. Salaries and employee benefits, the major component of
noninterest expense, increased $276,000, or 13.2%, during the nine months ended
September 30, 1999. This increase was due primarily to additions to staff for
the new Wayne Valley branch and lending operations and general increases for
merit and performance. Occupancy, equipment, and data processing expense
increased $123,000, or 14.4% due to the new branch and additional computer
upgrades. Miscellaneous expenses increased $119,000, or 12.6% due to the
necessary support of the general growth of the Corporation.
Income taxes
Income tax expense totaled $683,000 and $583,000 during the nine months ended
September 30, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
General
The Corporation reported net income of $487,000, or $0.31 basic earnings per
share for the three months ended September 30, 1999 compared to $420,000, or
$.27 basic earnings per share for the same period in 1998. The $67,000 increase
was primarily caused by an increase in net interest income and noninterest
income, partially offset by increases in noninterest expense.
Net interest income
Net interest income increased $378,000, or 20.1%, for the three months ended
September 30, 1999 as compared with the corresponding period in 1998. The
increase was primarily due to an increase in average net interest-earning assets
and an increase in net interest margin.
Total interest income increased $273,000, or 8.6%, primarily due to an increase
in the average volume of interest-earning assets, partially offset by a decrease
in yields on earning assets. The average balance on interest-earning assets
increased $19.2 million, or 11.6%, from $165.6 million for the three months
ended September 30, 1998 to $184.8 million for the same period in 1999,
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 $30.8 million to an average $139.9 million for the
three months end September 30, 1999, from an average $109.1 million for the
comparable period in 1998.
Interest paid on deposits and borrowed money decreased $105,000, or 8.1%, due
primarily to a decrease in cost of funds as the Corporation responded to
declines in market rates by lowering rates on all interest-bearing deposit
products early in 1999. The average balance of total interest-bearing deposits
increased to $136.6 million for the three months ended September 30, 1999
14
<PAGE>
from $125.7 million for the comparable 1998 period, primarily as a result of the
Corporation's expanding customer base and the increased marketing efforts of
certificates of deposits. Yields on deposits and borrowed money decreased from
4.08% for the period ended September 30, 1998 to 3.41% for the comparable period
in 1999.
Provision for loan losses
The provision charged to operations totaled $80,000 and $20,000 during the three
months ended September 30, 1999 and 1998. The increase to the provision resulted
primarily from the continued strong growth in total loans outstanding. See
"Asset Quality" section for summary of allowance for loan losses and
nonperforming assets.
Noninterest income
Noninterest income increased by $22,000, or 9.6%, to $250,000 during the three
months ended September 30, 1999 when compared with $228,000 during the 1998
period. Contributing to this increase was an increase of $39,000 in
deposit-related fees and service charges offset by a decrease of $14,000 in gain
on sale of mortgage loans due primarily to a decrease in loans originated and
sold during 1999 compared to the similar period in 1998.
Noninterest expense
Noninterest expense increased by approximately $237,000, or 16.2%, to $1.7
million for the three months ended September 30, 1999, compared to $1.5 million
for the same 1998 period. Salaries and employee benefits, the major component of
noninterest expense, increased $115,000, or 16.2%, during the three months ended
September 30, 1999. This increase was due primarily to additions to staff for
the new Wayne Valley branch and lending operations and general increases for
merit and performance. Occupancy, equipment, and data processing expense
increased $36,000, or 12.3% due to the new branch and additional computer
upgrades. Miscellaneous expenses increased $25,000, or 6.8% due to the necessary
support of the general growth of the Corporation.
Income taxes
Income tax expense totaled $238,000 and $202,000 during the three months ended
September 30, 1999 and 1998, 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:
09/30/99 06/30/99 03/31/99 12/31/98
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 4 $ 4 $ 4 $ 4
Loans past due 90 days or more: (2) -- 1 -- 64
Restructured loans: 26 27 29 480
------ ------ ------ ------
Total nonperforming loans $ 30 $ 32 $ 33 $ 548
====== ====== ====== ======
Allowance for loan losses $1,761 $1,676 $1,616 $1,542
====== ====== ====== ======
Nonaccrual loans to total loans -% -% -% -%
Nonperforming loans to total loans 0.02% 0.02% 0.03% 0.45%
Nonperforming loans to total assets 0.02% 0.02% 0.02% 0.29%
Allowance for loan losses to total loans 1.24% 1.23% 1.27% 1.25%
- ------
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing income
at the contractually stated rates. A determination is made to continue accruing
income on those loans which are sufficiently collateralized and on which
management believes all interest and principal owed will be collected.
There were no loans at September 30, 1999, 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.
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
16
<PAGE>
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 decreased $3.1 million during the first nine months of 1999, as
investing activities used $16.8 million, offset by financing activities and
operating activities providing cash and cash equivalents totaling $10.7 million
and $2.9 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 September 30, 1999 the Bank's capital ratios were as follows:
Required Actual Excess
-------- ------- ------
Risk-based Capital
Tier 1 4.00% 10.87% 6.87%
Total 8.00% 12.12% 4.12%
Leverage Ratio 3.00% 7.49% 4.49%
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. 1999 was represented as 99.) Given this programming,
the year 2000 could be confused with that of 1900. The Year 2000 issue not only
impacts computer hardware and software, but all equipment which utilizes
processors or computer microchips.
Management formed a Year 2000 Compliance Committee during 1997, which includes
officers from all operating areas. The objectives of the Committee are to ensure
that the Corporation will be prepared for the issues arising out of the Year
2000. The Corporation has conducted a comprehensive review of its operations to
identify systems, vendors and customers that could be affected by the Year 2000
issue. The Committee has developed an implementation plan to test mission
critical systems and to rectify any issues related to the processing of
transactions in the year 2000 and beyond. The Corporation generally relies on
independent third parties to provide data processing services and continues to
assess and test the "readiness" of those parties. The Corporation will work with
its significant borrowers, depositors, and vendors to ensure they are taking
appropriate steps to become Year 2000 compliant.
The Corporation completed all appropriate year 2000 compliance testing,
including third party vendors and interfaces during the first half of 1999 and
employed an independent third party to validate the testing process.
Contingency plans were also developed during the second quarter of 1999 to
provide for service disruptions during this period. These plans were approved by
the Board of Directors during July,
17
<PAGE>
1999. The Committee continues to validate and enhance the plans through event
planning meetings and has begun testing the plans through walk through testing.
Although contingency plans continue to be enhanced and management continues to
monitor all Year 2000 issues, the Corporation does continue 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 has developed a budget for Year 2000 costs which includes
hardware and software replacement and upgrades, consulting and testing expense
and a reallocation of human resource expense. Total cost is estimated at
$350,000 with approximately $280,000 has been expensed to date. It is not
anticipated that this will materially affect the performance of the Corporation
in the future.
ITEM III QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 1999, there have been no significant changes in the Corporation's
assessment of market risk as reported in Item 6. of the Corporation's Form
10-KSB.
18
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to litigation which arises primarily
in the ordinary course of business. In the opinion of management
the ultimate disposition of such litigation should not have a
material adverse effect on the financial position of the
Corporation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports
None
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STEWARDSHIP FINANCIAL CORPORATION
DATE: November 15, 1999 BY:/s/ PAUL VAN OSTENBRIDGE
----------------------------- -----------------------------------
Paul Van Ostenbridge
President and Chief
Executive Officer
DATE: November 15, 1999 BY:/s/ JULIE E. HOLLAND
----------------------------- -----------------------------------
Julie E. Holland
Vice President and Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the registrant's
unaudited September 30, 1999 interim financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,774,000
<INT-BEARING-DEPOSITS> 47,000
<FED-FUNDS-SOLD> 6,050,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,544,000
<INVESTMENTS-CARRYING> 20,590,000
<INVESTMENTS-MARKET> 20,312,000
<LOANS> 139,851,000
<ALLOWANCE> 1,761,000
<TOTAL-ASSETS> 198,319,000
<DEPOSITS> 178,976,000
<SHORT-TERM> 2,962,000
<LIABILITIES-OTHER> 1,592,000
<LONG-TERM> 0
0
0
<COMMON> 1,591,729
<OTHER-SE> 14,789,000
<TOTAL-LIABILITIES-AND-EQUITY> 198,319,000
<INTEREST-LOAN> 8,128,000
<INTEREST-INVEST> 1,554,000
<INTEREST-OTHER> 256,000
<INTEREST-TOTAL> 9,938,000
<INTEREST-DEPOSIT> 3,365,000
<INTEREST-EXPENSE> 3,408,000
<INTEREST-INCOME-NET> 6,530,000
<LOAN-LOSSES> 230,000
<SECURITIES-GAINS> 4,000
<EXPENSE-OTHER> 5,002,000
<INCOME-PRETAX> 2,103,000
<INCOME-PRE-EXTRAORDINARY> 2,103,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,420,000
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 5.02
<LOANS-NON> 4,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 26,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,542,000
<CHARGE-OFFS> 33,000
<RECOVERIES> 22,000
<ALLOWANCE-CLOSE> 1,761,000
<ALLOWANCE-DOMESTIC> 1,761,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
