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, 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 August 4, 1999, was 1,505,864.
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, 1999 and December 31, 1998 (Unaudited) ............. 1
Consolidated Statements of Income for the Six
Months ended June 30, 1999 and 1998 ( Unaudited) ............... 2
Consolidated Statements of Income for the Three
Months ended June 30, 1999 and 1998 ( Unaudited) ............... 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1999 and 1998 (Unaudited) ................ 4
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended
June 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>
June 30, DECEMBER 31,
1999 1998
--------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,872,000 $ 7,379,000
Commercial paper and interest-bearing due from banks 136,000 5,045,000
Federal funds sold 2,000,000 4,575,000
--------------------------------
Cash and cash equivalents 9,008,000 16,999,000
Securities available for sale 16,002,000 18,578,000
Securities held to maturity; estimated fair value
of $20,864,000 (1999) and $22,757,000 (1998) 21,088,000 22,513,000
FHLB-NY stock, at cost 663,000 557,000
Loans, net of allowance for loan losses of
$1,676,000 (1999) and $1,542,000 (1998) 134,591,000 121,508,000
Mortgage loans held for sale 673,000 793,000
Premises and equipment, net 2,689,000 2,484,000
Accrued interest receivable 1,232,000 1,229,000
Intangible assets, net of accumulated amortization of
$312,000 (1999) and $284,000 (1998) 437,000 465,000
Other assets 1,059,000 844,000
--------------------------------
Total assets $ 187,442,000 $ 185,970,000
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 38,347,000 $ 39,234,000
Interest-bearing 132,180,000 131,487,000
--------------------------------
Total deposits 170,527,000 170,721,000
Securities sold under agreements to repurchase 1,414,000 662,000
Accrued expenses and other liabilities 1,231,000 1,038,000
--------------------------------
Total liabilities 173,172,000 172,421,000
--------------------------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
1,501,595 and 1,485,426 shares issued outstanding at
June 30, 1999 and December 31, 1998, respectively 6,889,000 6,645,000
Retained earnings 7,621,000 6,867,000
Accumulated other comprehensive income: (240,000) 37,000
--------------------------------
Total stockholders' equity 14,270,000 13,549,000
--------------------------------
Total liabilities and stockholders' equity $ 187,442,000 $ 185,970,000
================================
</TABLE>
Share data has been restated to reflect a 3 for 2 stock split completed July 1,
1999.
See notes to unaudited consolidated financial statements.
1
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Interest income:
Loans $ 5,274,000 $ 4,552,000
Securities held to maturity
Taxable 282,000 419,000
Non-taxable 280,000 196,000
Securities available for sale 482,000 415,000
Other interest-earning assets 169,000 317,000
------------------------------
Total interest income 6,487,000 5,899,000
------------------------------
Interest expense:
Deposits 2,192,000 2,271,000
Borrowed money 24,000 14,000
------------------------------
Total interest expense 2,216,000 2,285,000
------------------------------
Net interest income before provision for loan losses 4,271,000 3,614,000
Provision for loan losses 150,000 70,000
------------------------------
Net interest income after provision for loan losses 4,121,000 3,544,000
------------------------------
Noninterest income:
Fees and service charges 408,000 347,000
Gain on sales of mortgage loans 58,000 75,000
Miscellaneous 89,000 90,000
------------------------------
Total noninterest income 555,000 512,000
------------------------------
Noninterest expenses:
Salaries and employee benefits 1,543,000 1,382,000
Occupancy, net 230,000 193,000
Equipment 246,000 219,000
Data processing 171,000 148,000
Advertising 95,000 81,000
FDIC insurance premium 12,000 10,000
Amortization of intangible assets 28,000 31,000
Other real estate owned expense (1,000) (30,000)
Charitable contributions 130,000 117,000
Stationery and supplies 111,000 101,000
Miscellaneous 733,000 639,000
------------------------------
Total noninterest expenses 3,298,000 2,891,000
------------------------------
Income before income tax expense 1,378,000 1,165,000
Income tax expense 445,000 381,000
==============================
Net income $ 933,000 $ 784,000
==============================
Basic earnings per share $ 0.62 $ 0.53
==============================
Diluted earnings per share $ 0.61 $ 0.53
==============================
Weighted average number of common shares outstanding 1,492,796 1,475,787
==============================
Weighted average number of diluted common
shares outstanding 1,517,610 1,492,160
==============================
</TABLE>
Per share data has been restated to reflect a 3 for 2 stock split issued July 1,
1999.
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,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Interest income:
Loans $2,716,000 $2,307,000
Securities held to maturity
Taxable 134,000 212,000
Non-taxable 143,000 97,000
Securities available for sale 240,000 227,000
Other interest-earning assets 53,000 191,000
----------------------------
Total interest income 3,286,000 3,034,000
----------------------------
Interest expense:
Deposits 1,090,000 1,171,000
Borrowed money 11,000 7,000
----------------------------
Total interest expense 1,101,000 1,178,000
----------------------------
Net interest income before provision for loan losses 2,185,000 1,856,000
Provision for loan losses 75,000 30,000
----------------------------
Net interest income after provision for loan losses 2,110,000 1,826,000
----------------------------
Noninterest income:
Fees and service charges 218,000 192,000
Gain on sales of mortgage loans 16,000 50,000
Miscellaneous 54,000 55,000
----------------------------
Total noninterest income 288,000 297,000
----------------------------
Noninterest expenses:
Salaries and employee benefits 802,000 703,000
Occupancy, net 120,000 97,000
Equipment 130,000 120,000
Data processing 80,000 70,000
Advertising 42,000 54,000
FDIC insurance premium 6,000 5,000
Amortization of intangible assets 14,000 15,000
Other real estate owned expense 0 0
Charitable contributions 68,000 63,000
Stationery and supplies 63,000 57,000
Miscellaneous 363,000 340,000
----------------------------
Total noninterest expenses 1,688,000 1,524,000
----------------------------
Income before income tax expense 710,000 599,000
Income tax expense 231,000 197,000
============================
Net income $ 479,000 $ 402,000
============================
Basic earnings per share $ 0.32 $ 0.27
============================
Diluted earnings per share $ 0.31 $ 0.27
============================
Weighted average number of common shares outstanding 1,496,914 1,475,787
============================
Weighted average number of diluted common
shares outstanding 1,521,877 1,492,160
============================
</TABLE>
Per share data has been restated to reflect a 3 for 2 stock split issued July 1,
1999.
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,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 933,000 $ 784,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 248,000 246,000
Amortization of premiums and accretion of discounts, net 44,000 17,000
Accretion of deferred loan fees (18,000) (29,000)
Provision for loan losses 150,000 70,000
Originations of mortgage loans held for sale (4,871,000) (5,964,000)
Proceeds from sale of mortgage loans 5,049,000 6,072,000
Gain on sale of mortgage loans (58,000) (75,000)
Deferred income tax benefit (57,000) (26,000)
Amortization of intangibles 28,000 31,000
Increase in accrued interest receivable (3,000) (97,000)
Decrease in other assets 8,000 16,000
Increase (decrease) in other liabilities 194,000 (28,000)
---------------------------------
Net cash provided by operating activities 1,647,000 1,017,000
---------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (3,195,000) (6,321,000)
Proceeds from maturities and principal repayments
on securities available for sale 2,336,000 1,420,000
Proceeds from calls and sales of securities available for sale 2,971,000 --
Purchase of securities held to maturity (3,042,000) (5,465,000)
Proceeds from maturities and principal repayments
on securities held to maturity 1,493,000 2,777,000
Proceeds from call on securities held to maturity 2,950,000 1,850,000
Purchase of FHLB-NY stock (105,000) (47,000)
Net increase in loans (13,215,000) (5,711,000)
Sale of other real estate owned -- 229,000
Additions to premises and equipment (453,000) (85,000)
---------------------------------
Net cash used in investing activities (10,260,000) (11,353,000)
---------------------------------
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits (887,000) 5,095,000
Net increase in interest-bearing deposits 693,000 15,812,000
Net decrease in securities sold under agreements to repurchase 751,000 --
Cash dividends paid on common stock (179,000) (137,000)
Common stock issued under stock plans 244,000 129,000
---------------------------------
Net cash (used in) provided by financing activities 622,000 20,899,000
---------------------------------
Net (decrease) increase in cash and cash equivalents (7,991,000) 10,563,000
Cash and cash equivalents - beginning 16,999,000 12,672,000
=================================
Cash and cash equivalents - ending $ 9,008,000 $ 23,235,000
=================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 2,282,000 $ 2,334,000
Cash paid during the year for income taxes 555,000 440,000
</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, 1999
--------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1998 1,485,426 $ 6,645,000 $ 6,867,000 $ 37,000 $ 13,549,000
Dividends Paid -- -- (179,000) -- (179,000)
Issuance of common stock under stock plans 16,169 244,000 -- -- 244,000
Comprehensive income:
Net income for the six months
ended June 30, 1999 -- -- 933,000 -- 933,000
Unrealized holding loss on securities
available for sale arising during the period
(net of tax benefit of $171,000) -- -- -- (277,000) (277,000)
------------
Total comprehensive income, net of tax 656,000
===============================================================================
Balance -- June 30, 1999 1,501,595 $ 6,889,000 $ 7,621,000 $ (240,000) $ 14,270,000
===============================================================================
</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 six
months ended June 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 June 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>
June 30, 1999
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,202,000 $ 8,000 $ -- $ 2,210,000
U.S. Government agencies 7,428,000 -- 318,000 7,110,000
Obligations of state and political
subdivisions 522,000 3,000 3,000 522,000
Mortgage-backed securities 6,237,000 30,000 107,000 6,160,000
-------------------------------------------------------------------
$16,389,000 $ 41,000 $ 428,000 $16,002,000
===================================================================
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 June 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>
June 30, 1999
-------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 948,000 $ 3,000 $ 5,000 $ 946,000
U.S. Government agencies 5,355,000 4,000 172,000 5,187,000
Obligations of state and political
subdivisions 13,486,000 59,000 125,000 13,420,000
Mortgage-backed securities 1,299,000 19,000 7,000 1,311,000
===================================================================
$21,088,000 $ 85,000 $ 309,000 $20,864,000
===================================================================
December 31, 1998
-------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
June 30, December 31,
1999 1998
-----------------------------------
Mortgage
Residential $ 31,700,000 $ 24,784,000
Commercial 50,109,000 46,375,000
Commercial 19,642,000 18,995,000
Equity 3,854,000 3,593,000
Installment 30,855,000 29,290,000
Other 221,000 126,000
-----------------------------------
Total loans 136,381,000 123,163,000
-----------------------------------
Less: Deferred loan fees 114,000 113,000
Allowance for loan losses 1,676,000 1,542,000
-----------------------------------
1,790,000 1,655,000
-----------------------------------
Loans, net $ 134,591,000 $ 121,508,000
===================================
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Six Months Ended June 30,
1999 1998
-----------------------------------
Balance, beginning of period $ 1,542,000 $ 1,462,000
Provision charged to operations 150,000 40,000
Recoveries of loans charged off 11,000 --
Loans charged off (27,000) (10,000)
-----------------------------------
Balance, end of period $ 1,676,000 $ 1,492,000
===================================
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,
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 24,814
and 16,373 shares at June 30, 1999 and 1998, respectively.
All share and per share amounts have been restated to reflect a 3 for 2 stock
split paid on July 1, 1999.
NOTE 9. COMPREHENSIVE INCOME
Total comprehensive income includes net income and other comprehensive income
which is comprised of unrealized holding gains and losses on securities
available for sale, net of taxes. The Corporation's total comprehensive income
for the six months ended June 30, 1999 and 1998 was $656,000 and $766,000,
respectively.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Account 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
10
<PAGE>
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 SFAS No. 137 "Accounting For Derivative Instruments 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.
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 $1.5 million, or 0.8%, from $186.0 million at December
31, 1998 to $187.4 million at June 30, 1999. Net loans increased $13.1 million
with offsetting decreases of $8.0 million in cash and cash equivalents, $2.6
million in securities available and $1.4 million in securities held to maturity.
The composition of the loan portfolio is basically unchanged at June 30, 1999
when compared with the portfolio at December 31, 1998.
Total deposits remained steady at $171.0 million for both June 30, 1999 and
December 31, 1998. Interest-bearing deposits increased $0.7 million, or 0.5%, to
$132.2 million at June 30, 1999, and noninterest-bearing deposits, decreased
$0.9 million, or 2.3%, to $38.3 million at June 30, 1999. The slight 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. Overall the
Corporation has experienced a slowing in deposits as customers are looking for
higher yielding investment alternatives.
The Corporation's primary focus during the past six 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 a new branch. The new branch successfully
opened on April 17, 1999. Management believes that this enhancement to our
branch delivery system will help existing customers and attract a new customer
base. The Corporation has begun initial assessment of the ability to provide a
PC banking product in the future and continues to analyze a Debit card program.
It is anticipated that both products will be available for customers in 2000. It
is believed that the mix of electronic and branch delivery systems will continue
to provide strong personalized service to our customers.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
General
The Corporation reported net income of $933,000, or $0.62 basic earnings per
share for the six months ended June 30, 1999 compared to $784,000, or $.53 basic
earnings per share for the same period in 1998. The $149,000 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 $657,000, or 18.2%, for the six months ended June
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 $588,000, or 10.0%, 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 $25.5 million, or 17.2%, from $148.4 million for the six months ended
June 30, 1998 to $173.9 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 $24.3 million to an average $129.6 million for the six
months end June 30, 1999, from an average $105.2 million for the comparable
period in 1998.
Interest paid on deposits and borrowed money decreased by $69,000, or 3.0%, 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
$169.7 million for the six months ended June 30, 1999 from $144.8 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. Yields on
deposits and borrowed money decreased from 4.07% for the period ended June 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 $150,000 and $70,000 during the six
months ended June 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 $43,000, or 8.4%, to $555,000 during the six
months ended June 30, 1999 when compared with $512,000 during the 1998 period.
Contributing to this increase was a $61,000 increase in deposit-related fees and
service charges caused by the increased deposit base offset by a decrease of
$17,000 in gain on sale of mortgage loans due primarily to a decrease in loans
originated and sold during the first half of 1999 compared to the similar period
in 1998.
13
<PAGE>
Noninterest expense
Noninterest expense increased by approximately $407,000, or 14.1%, to $3.3
million for the six months ended June 30, 1999, compared to $2.9 million for the
same 1998 period. Salaries and employee benefits, the major component of
noninterest expense, increased $161,000, or 11.6%, during the six months ended
June 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
$87,000, or 15.5% due to the new branch and additional computer upgrades.
Miscellaneous expenses increased $94,000, or 14.7% due to the necessary support
of the general growth of the Corporation.
Income taxes
Income tax expense totaled $445,000 and $381,000 during the six months ended
June 30, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
General
The Corporation reported net income of $479,000, or $0.32 basic earnings per
share for the three months ended June 30, 1999 compared to $402,000, or $.27
basic earnings per share for the same period in 1998. The $77,000 increase was
primarily caused by an increase in net interest income, partially offset by
increases in noninterest expense.
Net interest income
Net interest income increased $329,000, or 17.7%, for the three months ended
June 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 $252,000, or 8.3%, 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 $21.4 million, or 13.9%, from $154.7 million for the three months
ended June 30, 1998 to $176.2 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 $27.6 million to an average $132.6 million for the
three months end June 30, 1999, from an average $105.0 million for the
comparable period in 1998.
Interest paid on deposits and borrowed money decreased $77,000, or 6.5%, 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
$132.4 million for the three months ended June 30, 1999 from $106.3 million for
the comparable 1998 period, primarily as a result of the Corporation's expanding
14
<PAGE>
customer base and the popularity of the tiered money market product. Yields on
deposits and borrowed money decreased from 4.44% for the period ended June 30,
1998 to 3.34% for the comparable period in 1999.
Provision for loan losses
The provision charged to operations totaled $75,000 and $30,000 during the three
months ended June 30, 1999 and 1998. See "Asset Quality" section for summary of
allowance for loan losses and nonperforming assets.
Noninterest income
Noninterest income decreased by $9,000, or 3.0%, to $288,000 during the three
months ended June 30, 1999 when compared with $297,000 during the 1998 period.
Contributing to this decrease was a decrease of $34,000 in gain on sale of
mortgage loans due primarily to a decrease in loans originated and sold during
the first half of 1999 compared to the similar period in 1998 offset by a
$26,000 increase in deposit-related fees and service charges caused by the
increased deposit base.
Noninterest expense
Noninterest expense increased by approximately $164,000, or 10.8%, to $1.7
million for the three months ended June 30, 1999, compared to $1.5 million for
the same 1998 period. Salaries and employee benefits, the major component of
noninterest expense, increased $99,000, or 14.1%, during the three months ended
June 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
$43,000, or 15.0% due to the new branch and additional computer upgrades.
Miscellaneous expenses increased $23,000, or 6.8% due to the necessary support
of the general growth of the Corporation.
Income taxes
Income tax expense totaled $231,000 and $197,000 during the three months ended
June 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:
<TABLE>
<CAPTION>
06/30/99 03/31/99 12/31/98 09/30/98
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans: (1) $ 4 $ 4 $ 4 $ 96
Loans past due 90 days or more: (2) 1 -- 64 4
Restructured loans: 27 29 480 540
------ ------ ------ ------
Total nonperforming loans $ 32 $ 33 $ 548 $ 640
====== ====== ====== ======
Allowance for loan losses $1,676 $1,616 $1,542 $1,542
====== ====== ====== ======
Nonaccrual loans to total loans --% --% --% 0.09%
Nonperforming loans to total loans 0.02% 0.03% 0.45% 0.58%
Nonperforming loans to total assets 0.02% 0.02% 0.29% 0.36%
Allowance for loan losses to total loans 1.23% 1.27% 1.25% 1.39%
</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, 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 on
loans and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition.
16
<PAGE>
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 $8.0 million during the first six months of 1999, as
investing activities used $10.3 million, offset by operating activities and
financing activities providing $1.6 million and $0.6 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, 1999 the Bank's capital ratios were as follows:
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 10.98% 6.98%
Total 8.00% 12.23% 4.23%
Leverage Ratio 3.00% 7.52% 4.52%
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, 1999. The Committee continues to validate
and enhance the plans through event planning meetings and will begin to test the
plans with walk through testing during September. Independent verification of
the plans will be completed during the third quarter.
17
<PAGE>
Although contingency plans continue to be enhanced, 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 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 $250,000 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
The Annual Meeting of Shareholders of Stewardship Financial
Corporation was held on May 11, 1999 at 7:00 P.M. Total number of
shares outstanding as of March 31, 1999 (Record Date) was
993,623. Total number of shares represented at the meeting was
758,899. The meeting was held for the purpose of considering and
voting the following matters:
Election of Directors
The election of William C. Hanse, Margo Lane, Arie Leegwater, and
John L. Steen to serve as directors of the Corporation for a
three year term. Total number of shares voted for the election
was 738,321 shares and withheld 20,578. Total Broker nonvotes
were 35,076.
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: BY: /s/ PAUL VAN OSTENBRIDGE
------------------ -----------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
DATE: 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 March 31, 1999 interim financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,872,000
<INT-BEARING-DEPOSITS> 136,000
<FED-FUNDS-SOLD> 2,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,002,000
<INVESTMENTS-CARRYING> 21,088,000
<INVESTMENTS-MARKET> 20,864,000
<LOANS> 134,591,000
<ALLOWANCE> 1,676,000
<TOTAL-ASSETS> 187,442,000
<DEPOSITS> 170,527,000
<SHORT-TERM> 1,414,000
<LIABILITIES-OTHER> 1,231,000
<LONG-TERM> 0
0
0
<COMMON> 1,501,595
<OTHER-SE> 13,549,000
<TOTAL-LIABILITIES-AND-EQUITY> 185,970,000
<INTEREST-LOAN> 5,274,000
<INTEREST-INVEST> 1,044,000
<INTEREST-OTHER> 169,000
<INTEREST-TOTAL> 6,487,000
<INTEREST-DEPOSIT> 2,192,000
<INTEREST-EXPENSE> 2,216,000
<INTEREST-INCOME-NET> 4,271,000
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> (611,000)
<EXPENSE-OTHER> 3,298,000
<INCOME-PRETAX> 1,378,000
<INCOME-PRE-EXTRAORDINARY> 1,378,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 933,000
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 5.07
<LOANS-NON> 4,000
<LOANS-PAST> 1,000
<LOANS-TROUBLED> 27,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,542,000
<CHARGE-OFFS> 27,000
<RECOVERIES> 11,000
<ALLOWANCE-CLOSE> 1,676,000
<ALLOWANCE-DOMESTIC> 1,676,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
