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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 March 31, 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 April 30, 1999, was 993,815.
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 March 31, 1999 and December 31, 1998 (Unaudited) ..... 1
Consolidated Statements of Income for the Three
Months ended March 31, 1999 and 1998 (Unaudited)......... 2
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 1999 and 1998 (Unaudited) ........ 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended
March 31, 1999 (Unaudited) .............................. 4
Notes to Consolidated Financial Statements (Unaudited) .. 5 - 10
ITEM II -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ........................................ 11 - 15
ITEM III -- QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................. 15
PART II -- OTHER INFORMATION
- -------------------------------
ITEM 1 THRU ITEM 6 ............................................... 16
SIGNATURES ....................................................... 17
- ----------
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks ................................ $ 6,404,000 $ 7,379,000
Commercial paper and interest-bearing due from banks ... 3,093,000 5,045,000
Federal funds sold ..................................... 2,575,000 4,575,000
------------- -------------
Cash and cash equivalents ....................... 12,072,000 16,999,000
Securities available for sale .......................... 16,965,000 18,578,000
Securities held to maturity; estimated fair value
of $22,885,000 (1999) and $22,757,000 (1998) ....... 22,753,000 22,513,000
FHLB-NY stock, at cost ................................. 663,000 557,000
Loans, net of allowance for loan losses
of $1,616,000 (1999) and $1,542,000 (1998) ......... 127,174,000 121,508,000
Mortgage loans held for sale ........................... 404,000 793,000
Premises and equipment, net ............................ 2,606,000 2,484,000
Accrued interest receivable ............................ 1,209,000 1,229,000
Intangible assets, net of accumulated amortization of
$298,000 (1999) and $284,000 (1998) ................ 451,000 465,000
Other assets ........................................... 934,000 844,000
------------- -------------
Total assets .................................... $ 185,231,000 $ 185,970,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ................................ $ 36,555,000 $ 39,234,000
Interest-bearing ................................... 132,801,000 131,487,000
------------- -------------
Total deposits ................................. 169,356,000 170,721,000
Securities sold under agreements to repurchase ......... 562,000 662,000
Accrued expenses and other liabilities ................. 1,377,000 1,038,000
------------- -------------
Total liabilities .............................. 171,295,000 172,421,000
------------- -------------
Commitments and contingencies .......................... -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
993,623 and 990,284 shares issued outstanding at
March 31, 1999 and December 31, 1998, respectively ... 6,735,000 6,645,000
Retained earnings ...................................... 7,232,000 6,867,000
Accumulated other comprehensive income ................. (31,000) 37,000
------------- -------------
Total stockholders' equity ..................... 13,936,000 13,549,000
------------- -------------
Total liabilities and stockholders' equity ..... $ 185,231,000 $ 185,970,000
============= =============
</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Interest income:
Loans ......................................... $ 2,558,000 $ 2,245,000
Securities held to maturity
Taxable ..................................... 148,000 207,000
Non-taxable ................................. 137,000 99,000
Securities available for sale ................. 242,000 188,000
Other interest-earning assets ................. 116,000 126,000
----------- -----------
Total interest income .................... 3,201,000 2,865,000
----------- -----------
Interest expense:
Deposits ...................................... 1,102,000 1,100,000
Borrowed money ................................ 13,000 7,000
----------- -----------
Total interest expense ................... 1,115,000 1,107,000
----------- -----------
Net interest income before provision for loan losses 2,086,000 1,758,000
Provision for loan losses .......................... 75,000 40,000
----------- -----------
Net interest income after provision for loan losses 2,011,000 1,718,000
----------- -----------
Noninterest income:
Fees and service charges ...................... 190,000 155,000
Gain on sales of mortgage loans ............... 42,000 25,000
Miscellaneous ................................. 35,000 35,000
----------- -----------
Total noninterest income ................ 267,000 215,000
----------- -----------
Noninterest expenses:
Salaries and employee benefits ................ 741,000 679,000
Occupancy, net ................................ 110,000 96,000
Equipment ..................................... 116,000 99,000
Data processing ............................... 91,000 78,000
Advertising ................................... 53,000 27,000
FDIC insurance premium ........................ 6,000 5,000
Amortization of intangible assets ............. 14,000 16,000
Other real estate owned expense ............... (1,000) (30,000)
Charitable contributions ...................... 62,000 54,000
Stationery and supplies ....................... 48,000 44,000
Miscellaneous ................................. 370,000 299,000
----------- -----------
Total noninterest expenses ............... 1,610,000 1,367,000
----------- -----------
Income before income tax expense ................... 668,000 566,000
Income tax expense ................................. 214,000 184,000
----------- -----------
Net income ......................................... $ 454,000 $ 382,000
=========== ===========
Basic earnings per share ........................... $0.46 $0.39
===== =====
Diluted earnings per share ......................... $0.45 $0.39
===== =====
Weighted average number of common shares outstanding 992,422 980,551
======= =======
Weighted average number of diluted common
shares outstanding ............................ 1,008,868 988,108
========= =======
</TABLE>
Per share data has been restated to reflect a 5% stock dividend paid in
June 1, 1998.
See notes to unaudited consolidated financial statements.
2
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 454,000 $ 382,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment ....... 124,000 96,000
Amortization of premiums and accretion of discounts, net ...... 25,000 15,000
Accretion of deferred loan fees ............................... (6,000) (14,000)
Provision for loan losses ..................................... 75,000 40,000
Originations of mortgage loans held for sale .................. (3,318,000) (1,999,000)
Proceeds from sale of mortgage loans .......................... 3,749,000 2,227,000
Gain on sale of mortgage loans ................................ (42,000) (25,000)
Deferred income tax benefit ................................... (36,000) (13,000)
Amortization of intangibles ................................... 14,000 16,000
Decrease (increase) in accrued interest receivable ............ 20,000 (11,000)
Increase in other assets ...................................... (17,000) (423,000)
Increase in other liabilities ................................. 339,000 115,000
----------- ------------
Net cash provided by operating activities ................... 1,381,000 406,000
----------- ------------
Cash flows from investing activities:
Purchase of securities available for sale ......................... (1,095,000) (3,442,000)
Proceeds from maturities and principal repayments
on securities available for sale ............................... 1,339,000 797,000
Proceeds from call on securities available for sale ............... 1,250,000 -
Purchase of securities held to maturity ........................... (2,884,000) (1,685,000)
Proceeds from maturities and principal repayments
on securities held to maturity ................................. 933,000 1,658,000
Proceeds from call on securities held to maturity ................. 1,700,000 500,000
Purchase of FHLB-NY stock ......................................... (105,000) (47,000)
Net increase in loans ............................................. (5,736,000) (3,253,000)
Sale of other real estate owned ................................... - 229,000
Additions to premises and equipment ............................... (247,000) (17,000)
----------- ------------
Net cash used in investing activities ....................... (4,845,000) (5,260,000)
----------- ------------
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits ........... (2,679,000) 1,777,000
Net increase in interest-bearing deposits ......................... 1,315,000 7,679,000
Net decrease in securities sold under agreements to repurchase .... (100,000) -
Cash dividends paid on common stock ............................... (89,000) (65,000)
Common stock issued under stock plans ............................. 90,000 64,000
----------- ------------
Net cash (used in) provided by financing activities ......... (1,463,000) 9,455,000
----------- ------------
Net (decrease) increase in cash and cash equivalents ................... (4,927,000) 4,601,000
Cash and cash equivalents - beginning .................................. 16,999,000 12,672,000
----------- ------------
Cash and cash equivalents - ending ..................................... $12,072,000 $ 17,273,000
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ............................ $ 1,161,000 $ 1,146,000
Cash paid during the year for income taxes ........................ 50,000 10,000
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period Ended March 31, 1999
-----------------------------------------------------------------------
Accumulated
Common Stock Other
------------------------ Retained Comprehensive
Shares Amount Earnings Income Total
------------ ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1998 ....................... 990,284 $6,645,000 $6,867,000 $ 37,000 $ 13,549,000
Dividends Paid ..................................... - - (89,000) - (89,000)
Issuance of common stock ........................... 3,339 90,000 - - 90,000
Comprehensive income:
Net income for the three months
ended March 31, 1999 ........................... - - 454,000 - 454,000
Unrealized holding loss on securities
available for sale arising during the period
(net of tax of $42,000) ........................ - - - (68,000) (68,000)
------------
Total comprehensive income, net of tax ............. 386,000
------- ---------- ---------- --------- ------------
Balance -- March 31, 1999 .......................... 993,623 $6,735,000 $7,232,000 $ (31,000) $ 13,936,000
======= ========== ========== ========= ============
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, ("the Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank ("the Bank"). Atlantic Stewardship Bank includes its
wholly owned subsidiary, Stewardship Investment Corp. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current presentation. The consolidated financial statements of
the Corporation have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the statements of financial condition
and revenues and expenses during the reporting periods. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
NOTE 2. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-QSB and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of the consolidated
financial statements, have been included. The results of operations for three
months ended March 31, 1999 are not necessarily indicative of the results which
may be expected for the entire year.
5
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and carrying value of the
Corporation's securities available for sale as of March 31, 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>
March 31, 1999
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........................... $ 3,202,000 $41,000 $ -- $ 3,243,000
U.S. Government agencies ........................... 7,568,000 4,000 111,000 7,461,000
Obligations of state and political
subdivisions ..................................... 523,000 9,000 -- 532,000
Mortgage-backed securities ......................... 5,721,000 39,000 31,000 5,729,000
----------- ------- -------- -----------
$17,014,000 $93,000 $142,000 $16,965,000
=========== ======= ======== ===========
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
=========== ======== ======= ===========
NOTE 4. SECURITIES HELD TO MATURITY
The following table sets forth the carrying value and estimated fair value
of the Corporation's securities held to maturity as March 31, 1999 and December
31, 1998. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
March 31, 1999
-----------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........................... $ 948,000 $ 14,000 $ -- $ 962,000
U.S. Government agencies ........................... 6,614,000 13,000 66,000 6,561,000
Obligations of state and political
subdivisions ..................................... 13,747,000 167,000 11,000 13,903,000
Mortgage-backed securities ......................... 1,444,000 21,000 6,000 1,459,000
----------- ------- -------- -----------
$22,753,000 $215,000 $83,000 $22,885,000
=========== ======== ======= ===========
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>
6
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 5. LOANS
The Corporation's primary market area for lending is the small and medium
sized business and professional community as well as the individuals residing,
working and shopping in the Bergen and Passaic counties, New Jersey area. The
following table set forth the composition of loans as of the periods indicated.
March 31, December 31,
1999 1998
------------ ------------
Mortgage
Residential ......................... $ 27,141,000 $ 24,784,000
Commercial .......................... 48,462,000 46,375,000
Commercial ............................... 19,205,000 18,995,000
Equity ................................... 3,412,000 3,593,000
Installment .............................. 29,928,000 29,290,000
Other .................................... 753,000 126,000
------------ ------------
Total loans ...................... 128,901,000 123,163,000
------------ ------------
Less: Deferred loan fees ................ 111,000 113,000
Allowance for loan losses ...... 1,616,000 1,542,000
------------ ------------
1,727,000 1,655,000
------------ ------------
Loans, net ....................... $127,174,000 $121,508,000
============ ============
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Three Months Ended March 31,
---------------------------
1999 1998
---------- ----------
Balance, beginning of period .............. $1,542,000 $1,462,000
Provision charged to operations ........... 75,000 40,000
Recoveries of loans charged off ........... 10,000 --
Loans charged off ......................... (11,000) (10,000)
---------- ----------
Balance, end of period .................... $1,616,000 $1,492,000
========== ==========
7
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 7. LOAN IMPAIRMENT
The Corporation has defined the population of impaired loans to include all
nonaccrual loans and loans more than 90 days past due. The following table sets
forth information regarding the impaired loans as of the periods indicated.
March 31, December 31,
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
====== =======
8
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 8. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued. Potential dilutive securities totaled 16,446
and 7,557 shares at March 31, 1999 and 1998, respectively.
All share and per share amounts have been restated to reflect the 5% stock
dividend paid June 1, 1998.
NOTE 9. COMPREHENSIVE INCOME
During the first quarter of 1998, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. In accordance with the provisions of SFAS No.
130 for interim period reporting, the Corporation's total comprehensive income
for the three months ended March 31, 1999 and 1998 was $386,000 and $371,000,
respectively. The difference between the Corporation's net income and total
comprehensive income for these periods relates to the change in the net
unrealized holding gains or losses on securities available for sale during the
applicable period of time.
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
9
<PAGE>
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value.
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.
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.
10
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased by $0.8 million, or 0.4%, from $186.0 million at December
31, 1998 to $185.2 million at March 31, 1999. Despite the slight decrease in
assets, net loans increased $5.7 million with offsetting decreases of $4.9
million in cash and cash equivalents and $1.6 million in securities available
for sale. The composition of the loan portfolio is basically unchanged at March
31, 1999 when compared with the portfolio at December 31, 1998.
Total deposits decreased $1.4 million, or 0.8%, to $169.4 million at March 31,
1999 from $170.7 million at December 31, 1998. Interest-bearing deposits
increased $1.3 million, or 1.0%, to $132.8 million at March 31, 1999, and
noninterest-bearing deposits, decreased $2.7 million, or 6.8%, to $36.6 million
at March 31, 1999. The slight increase in interest-bearing deposits can be
attributed to the continued popularity of the tiered money market product. The
decrease in noninterest-bearing deposits occurred predominantly in commercial
deposits and reflected normal seasonal trends in this product.
The Corporation's primary focus during the past three 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
THREE MONTHS ENDED MARCH 31, 1999
General
The Corporation reported net income of $454,000, or $0.46 basic earnings per
share for the three months ended March 31, 1999 compared to $382,000, or $.39
basic earnings per share for the same period in 1998. The $72,000 increase was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense.
11
<PAGE>
Net interest income
Net interest income increased $328,000, or 18.7%, for the three months ended
March 31, 1999 as compared with the corresponding period in 1998. The increase
was primarily due to an increase in average net interest-earning assets offset
by a slight decrease in net interest margin.
Total interest income increased $336,000, or 11.7%, 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 $30.1 million, or 20.8%, from $144.8 million for the three months
ended March 31, 1998 to $174.9 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 $23.9 million to an average $129.0 million for the
three months end March 31, 1999, from an average $105.1 million for the
comparable period in 1998.
Interest paid on deposits and borrowed money increased by only $8,000, or 0.70%,
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
$131.0 million for the three months ended March 31, 1999 from $109.8 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 4.06% for the period ended March 31,
1998 to 3.41% 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 actual losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $75,000 and $40,000 during the three
months ended March 31, 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 $52,000, or 24.2%, to $267,000 during the three
months ended March 31, 1999 when compared with $215,000 during the 1998 period.
Contributing to this increase was a $35,000 increase in deposit-related fees and
service charges caused by the increased deposit base and an increase of $17,000
in gain on sale of mortgage loans due primarily to the increase in loans
originated and sold during the first quarter of 1999 compared to the similar
period in 1998.
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Noninterest expense
Noninterest expense increased by approximately $243,000, or 17.1%, to $1.6
million for the three months ended March 31, 1999, compared to $1.4 million for
the same 1998 period. Salaries and employee benefits, the major component of
noninterest expense, increased $62,000, or 9.1%, during the three months ended
March 31, 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
$44,000, or 16.1% due to the new branch and additional computer upgrades.
Miscellaneous expenses increased $71,000, or 23.7% due to the necessary support
of the general growth of the Corporation.
Income taxes
Income tax expense totaled $214,000 and $184,000 during the three months ended
March 31, 1999 and 1998, respectively.
ASSET QUALITY
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrower's ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
<TABLE>
<CAPTION>
03/31/99 12/31/98 09/30/98 06/30/98
---------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans: (1) ..................................... $ 4 $ 4 $ 96 $ 11
Loans past due 90 days or more: (2) ....................... -- 64 4 7
Restructured loans: ....................................... 29 480 540 552
------ ------ ------ ------
Total nonperforming loans ............................ $ 33 $ 548 $ 640 $ 570
====== ====== ====== ======
Allowance for loan losses ................................. $1,616 $1,542 $1,542 $1,522
====== ====== ====== ======
Nonaccrual loans to total loans ........................... -% -% 0.09% 0.01%
Nonperforming loans to total loans ........................ 0.03% 0.45% 0.58% 0.54%
Nonperforming loans to total assets ....................... 0.02% 0.29% 0.36% 0.33%
Allowance for loan losses to total loans .................. 1.27% 1.25% 1.39% 1.43%
</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.
13
<PAGE>
There were no loans at March 31, 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.
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 $4.9 million during the first three months of 1999, as
investing activities and financing activities used $4.8 million and $1.5
million, respectively offset by operating activities providing $1.4 million.
Liquidity management is a daily and long-term function of business management.
Excess liquidity is generally invested in short-term investments, such as
federal funds.
As of March 31, 1999 the Bank's capital ratios were as follows:
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 ..................... 4.00% 10.71% 6.71%
Total ...................... 8.00% 11.96% 3.96%
Leverage Ratio ...................... 3.00% 7.33% 4.33%
YEAR 2000 ISSUES
The Year 2000 issue involves preparing computer systems and programs to identify
the arrival of January 1, 2000. In the past, computer programs allocated only
two digits to a year, (i.e. 1998 was represented as 98.) Given this programming,
the year 2000 could be confused with that of 1900. The Year 2000 issue not only
impacts computer hardware and software, but all equipment which utilizes
processors or computer microchips.
Management 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
14
<PAGE>
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 expects that all appropriate year 2000 compliance testing,
including third party vendors and interfaces will be completed in the first half
of 1999.
Although contingency plans will be developed, the Corporation continues to bear
some risk related to the Year 2000 issue and could be adversely affected, if
other entities (i.e. vendors) do not appropriately address their own compliance.
The Corporation 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 $150,000 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 the first quarter of 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.
15
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to litigation which arises
primarily in the ordinary course of business. In the opinion
of management the ultimate disposition of such litigation
should not have a material adverse effect on the financial
position of the Corporation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports
None
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STEWARDSHIP FINANCIAL CORPORATION
DATE: May 10, 1999 BY: /s/ PAUL VAN OSTENBRIDGE
------------------------- ----------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
DATE: May 10, 1999 BY: /s/ JULIE E. HOLLAND
------------------------- ------------------------------
Julie E. Holland
Vice President and Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the registrant's
unaudited March 31, 1999 interim financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,404,000
<INT-BEARING-DEPOSITS> 3,093,000
<FED-FUNDS-SOLD> 2,575,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,965,000
<INVESTMENTS-CARRYING> 22,753,000
<INVESTMENTS-MARKET> 22,885,000
<LOANS> 128,790,000
<ALLOWANCE> 1,616,000
<TOTAL-ASSETS> 185,231,000
<DEPOSITS> 169,356,000
<SHORT-TERM> 562,000
<LIABILITIES-OTHER> 1,377,000
<LONG-TERM> 0
0
0
<COMMON> 993,623
<OTHER-SE> 13,936,000
<TOTAL-LIABILITIES-AND-EQUITY> 185,231,000
<INTEREST-LOAN> 2,558,000
<INTEREST-INVEST> 527,000
<INTEREST-OTHER> 116,000
<INTEREST-TOTAL> 3,201,000
<INTEREST-DEPOSIT> 1,102,000
<INTEREST-EXPENSE> 1,115,000
<INTEREST-INCOME-NET> 2,086,000
<LOAN-LOSSES> 75,000
<SECURITIES-GAINS> 5,000
<EXPENSE-OTHER> 1,610,000
<INCOME-PRETAX> 668,000
<INCOME-PRE-EXTRAORDINARY> 668,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 454,000
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 4.99
<LOANS-NON> 4,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 29,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,542,000
<CHARGE-OFFS> 11,000
<RECOVERIES> 10,000
<ALLOWANCE-CLOSE> 1,616,000
<ALLOWANCE-DOMESTIC> 1,616,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
