SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 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 of other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
630 Godwin Avenue, Midland Park, NJ 07432
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (201) 444-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the Issuer: (1) has filed reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934, as
amended, during the preceding 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
The aggregate market value of the voting stock held by non-affiliates of the
Issuer, as of March 19, 1999 was $22,319,096.
The number of shares outstanding of the Issuer's Common Stock, no par value,
outstanding as of March 19, 1999 was 993,623.
For the fiscal year ended December 31, 1998, the Issuer had total revenues of
$13,328,000.
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DOCUMENTS INCORPORATED BY REFERENCE
Item 6 Management's Discussion Registrant's Annual Report to
and Analysis or Plan of Shareholders under the
Operation caption "Management's
Discussion and Analysis
of Financial Condition and
Results of Operations"
Item 7 Financial Statements Registrant's Annual Report to
Shareholders under the
caption "Consolidated
Statements of Financial
Condition"
Item 9 Directors and Executive Proxy Statement for 1999
Officers of the Company; Annual Meeting of
Compliance with Section Shareholders under the caption,
16(a) of the Exchange Act "Compliance with Section 16(a) of
the Securities Exchange Act of
1934," to be filed no later than
April 30, 1999
Item 10 Executive Compensation Proxy Statement for 1999
Annual Meeting of
Shareholders under the caption,
"Compensation Committee on
Report on Executive Compensation,"
to be filed no later than
April 30, 1999
Item 11 Security Ownership of Proxy Statement for 1999
Certain Beneficial Owners Annual Meeting of Shareholders
and Management under the caption, "Stock
Ownership of Management and
Principal Stockholders," to be
filed no later than
April 30, 1999
Item 12 Certain Relationships and Proxy Statement for 1999
Related Transactions Annual Meeting of Shareholders
under the caption, "Interest of
Management and Others in
Certain Transactions," to be
filed no later than
April 30, 1999
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Part I
Item 1 - Description of Business
General
Stewardship Financial Corporation (the "Corporation" or "Registrant") is a
one-bank holding company incorporated under the laws of the State of New Jersey
in January, 1995 to serve as a holding company for Atlantic Stewardship Bank
(the "Bank"). The Corporation was organized at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock of
the Bank (the "Acquisition"). Pursuant to the New Jersey Banking Act of 1948, as
amended (the "Banking Act"), and pursuant to approval of the shareholders of the
Bank, the Corporation acquired the Bank and became its holding company on
November 22, 1996. As part of the Acquisition, shareholders of the Bank received
one share of common stock, no par value ("Common Stock") of the Corporation for
each outstanding share of the common stock of the Bank. The only significant
activity of the Corporation is ownership and supervision of the Bank. The
Corporation's main office is located at 630 Godwin Avenue, Midland Park, Bergen
County, New Jersey 07432.
The Bank is a commercial bank formed under the laws of the State of New
Jersey on April 26, 1984. The Bank operates from its main office at 630 Godwin
Avenue, Midland Park, New Jersey, and its four branches located at 386 Lafayette
Avenue, Hawthorne, New Jersey, 190 Franklin Avenue, Ridgewood, New Jersey, 30
Franklin Turnpike, Waldwick, New Jersey, and 87 Berdan Avenue, Wayne, New
Jersey. The Bank operates ATM machines at its Midland Park, Ridgewood, Waldwick,
and Wayne branches. The Bank plans on opening its fifth branch located at 311
Valley Road, Wayne, New Jersey during April 1999.
The Corporation is subject to the supervision and regulation of the Board
of Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits. The operations of the Corporation
and the Bank are subject to the supervision and regulation of the FRB, FDIC and
the New Jersey Department of Banking and Insurance (the "Department"). The
principal executive offices of the Corporation are located at 630 Godwin Avenue,
Midland Park, New Jersey 07432, and the telephone number is (201) 444-7100.
Business of the Corporation
The Corporation's primary business is the ownership and supervision of the
Bank. The Corporation, through the Bank, conducts a traditional commercial
banking business, and offers services including personal and business checking
accounts and time deposits, money market accounts and regular savings accounts.
The Corporation structures its specific services and charges in a manner
designed to attract the business of the small and medium sized business and
professional community as well as that of individuals residing, working and
shopping in its Bergen and Passaic County, New Jersey trade area. The
Corporation engages in a wide range of lending activities and offers commercial,
consumer, mortgage, home equity and personal loans. Stewardship Investment Corp.
is a wholly-owned nonbank subsidiary of the Bank, whose primary business is to
own and manage the Bank's investment portfolio.
In addition, in forming the Bank, the members of the Board of Directors
envisioned a community-based institution which would serve the local communities
surrounding its branches, while also providing a return to its shareholders.
This vision has been reflected in the Bank's tithing policy, under which the
Bank tithes 10% of its pre-tax profits to worthy Christian charities.
Service Area
The Corporation's service area primarily consists of the Bergen and Passaic
County, New Jersey market, although the Corporation makes loans throughout New
Jersey. The Corporation operates its main office in Midland Park, New Jersey and
four existing branch offices in Hawthorne, Ridgewood, Waldwick, and Wayne, New
Jersey.
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Competition
The Corporation operates in a highly competitive environment in competing
for deposits and loans with commercial banks, thrifts and other financial
institutions, many of which have greater financial resources than the
Corporation. Many large financial institutions in New York City and other parts
of New Jersey compete for the business of New Jersey residents located in the
Corporation's service area. Certain of these institutions have significantly
higher lending limits than the Corporation and provide services to their
customers which the Corporation does not offer.
Management believes the Corporation is able to compete on a substantially
equal basis with its competitors because it provides responsive personalized
services through management's knowledge and awareness of the Corporation's
service area, customers and business.
Employees
At December 31, 1998, the Corporation employed 57 full-time employees and
34 part-time employees. None of these employees is covered by a collective
bargaining agreement and the Corporation believes that its employee relations
are good.
Supervision and Regulation
Bank holding companies and banks are extremely regulated under both federal
and state law. These laws and regulations are intended to protect depositors,
not stockholders. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
the applicable law or regulation may have a material effect on the business and
prospects of the Corporation and the Bank.
Bank Holding Company Regulation
GENERAL. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), the Corporation is subject to the
regulation and supervision of the FRB. The Corporation is required to file with
the FRB annual reports and other information regarding its business operations
and those of its subsidiaries are limited to banking, managing or controlling
banks, furnishing services to or performing services for its subsidiaries or
engaging in any other activity which the FRB determines to be so closely related
to banking or managing or controlling banks as to be properly incident thereto.
The BHCA requires, among other things, the prior approval of the FRB in any
case where a bank holding company proposes to (i) acquire all or substantially
all of the assets of any other bank, (ii) acquire direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any bank (unless
it owns a majority of such bank's voting shares), or (iii) merge or consolidate
with any other bank holding company. The FRB will not approve any acquisition,
merger, or consolidation that would have a substantially anti-competitive
effect, unless the anti-competitive impact of the proposed transaction is
clearly outweighed by a greater public interest in meeting the convenience and
needs of the community to be served. The FRB also considers capital adequacy and
other financial and managerial resources and future prospects of the companies
and the banks concerned, together with the convenience and needs of the
community to be served, when reviewing acquisitions or mergers.
Additionally, the BHCA prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company, or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries; unless such non-banking business is
determined by the FRB to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such
determinations, the FRB is required to weigh the expected benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices.
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There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to serve
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under the BHCA to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the FRB's determination that such activity
or control constitutes a serious risk to the financial soundness and stability
of any bank subsidiary of the bank holding company.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The FRB has adopted
risk-based capital guidelines for bank holding companies. The risk-based capital
guidelines are designed to make regulatory capital requirements more sensitive
to differences in risk profiles among banks and bank holding companies, to
account for off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Under these guidelines, assets and off-balance sheet
items are assigned to broad risk categories each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less than $150 million in consolidated assets, the guidelines
will be applied on a bank-only basis unless: (a) the parent bank holding company
is engaged in non-bank activity involving significant leverage, or (b) the
parent company has a significant amount of outstanding debt that is held by the
general public. The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least 4% of the total capital is required to be "Tier I"
capital, consisting of common stockholders' equity and certain preferred stock,
less certain goodwill items and other intangible assets. The remainder, "Tier II
Capital," may consist of (a) the allowance for loan losses of up to 1.25% of
risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid
capital instruments, (d) debt, (e) mandatory convertible securities, and (f)
qualifying subordinated debt. Total capital is the sum of Tier I and Tier II
capital less reciprocal holdings of other banking organizations' capital
instruments, investments in unconsolidated subsidiaries and any other deductions
as determined by the FRB (determined on a case-by-case basis or as a matter of
policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50%, and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighing. Most investment securities ( including, primarily,
general obligation claims of states or other political subdivisions of the
United States) are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing nonfinancial obligations, and undrawn commitments (including
commercial credit lines with an initial maturity or more than one year) have a
50% risk-weighing. Short term commercial letters of credit have a 20%
risk-weighing and certain short-term unconditionally concelable commitments have
a 0% risk-weighing.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
Bank Regulation
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As a FDIC-insured
institution, the Bank is subject to
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regulation, supervision and control by the FDIC, an agency of the federal
government. The regulations of the FDIC and the Department impact virtually all
activities of the Bank, including the minimum level of capital the Bank must
maintain, the ability of the Bank to pay dividends, the ability of the Bank to
expand through new branches or acquisitions, and various other matters.
INSURANCE OF DEPOSITS. The Bank's deposits are insured up to a maximum of
$100,000 per depositor under the BIF. The FDIC has established a risk-based
assessment system for all insured depository institutions. Under this system,
the FDIC has established an insurance premium assessment system based upon: (i)
the probability that the insurance fund will incur a loss with respect to the
institution; (ii) the likely amount of the loss; and (iii) the revenue needs of
the insurance fund. In compliance with this mandate, FDIC has developed a matrix
that sets the assessment premium for a particular institution in accordance with
its capital level and overall rating by the primary regulatory. Under the matrix
as currently in effect, the assessment rate ranges from 0 to 31 basis points of
assessed deposits.
DIVIDEND RIGHTS. Under the Banking Act, a Bank may declare and pay
dividends only if, after payment of the dividend, the capital stock of the Bank
will be unimpaired and either the Bank will have a surplus of not less than 50%
of its capital stock or the payment of the dividend will not reduce the Bank's
surplus.
RECENT LEGISLATION. On September 30, 1996, the Deposit Insurance Funds Act
of 1996 (the "Deposit Act") became law. The primary purpose of the Deposit Act
is to recapitalize the Savings Association Insurance Fund of the FDIC (the
"SAIF") by charging all SAIF member institutions a one-time special assessment.
The Deposit Act will lead to equalization of the deposit insurance assessments
between BIF and SAIF insured institutions, and will also separate out from
insurance assessments payments required for debt service and principal repayment
on bonds issued by the Federal Finance Corporation ("FICO") in the mid-1980s to
fund a portion of the thrift bailout. Under the Deposit Act, BIF-insured
institutions like the Bank will be required to pay a portion of the obligations
owed under the FICO bonds. SAIF institutions will be required to pay 6.4 basis
points on assessed deposits while BIF institutions will only be required to pay
1.3 basis points on assessed deposits. This disparity will stay in effect until
such time as the Federal thrift and commercial bank charters are merged and the
deposit insurance funds are thereafter merged.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act (the "Interstate Act") was enacted. The Interstate Act generally
enhanced the ability of bank holding companies to conduct their banking business
across state borders. The Interstate Act had two main provisions. The first
provision generally provided that commencing on September 29, 1995, bank holding
companies could have acquired banks located in any state regardless of the
provisions of state law. These acquisitions are subject to certain restrictions,
including caps on the total percentage of deposits that a bank holding company
may control both nationally and in any single state. New Jersey law currently
allows interstate acquisitions by bank holding companies whose home state has
"reciprocal" legislation which would allow acquisitions by New Jersey based
holding companies.
The second major provision of the Interstate Act permitted, beginning on
June 1, 1997, banks located in different states to merge and continue to operate
as a single institution in more than one state. States could have, by
legislation passed before June 1, 1997, opted out of the interstate bank merger
provisions of the Interstate Act. In addition, states could have elected to opt
in and allow interstate bank mergers prior to June 1, 1997.
A final provision of the Interstate Act permitted banks located in one
state to establish new branches in another state without obtaining a separate
bank charter in that state, but only if the state in which the branch was
located had adopted legislation specifically allowing interstate de novo
branching.
In April, 1996, the New Jersey legislature passed legislation which would
permit interstate bank mergers prior to June 1, 1997, provided that the home
state of the institution acquiring the New Jersey institution permits interstate
mergers prior to June 1, 1997. In addition, the legislation permitted an
out-of-state institution to acquire an existing branch of a New Jersey-based
institution, and thereby conduct a business in New Jersey. The legislation has
enhanced competition in
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the New Jersey marketplace as bank holding companies located outside of New
Jersey became freer to acquire institutions located within the state of New
Jersey.
Item 2. Description of Property
The Corporation conducts its business through its main office located at
630 Godwin Avenue, Midland Park, New Jersey, and its four branch offices. A
fifth branch located at 311 Valley Road, Wayne, New Jersey will be opened in
April, 1999. The following table sets forth certain information regarding the
Corporation's properties as of December 31, 1997.
Leased Date of Lease
Location or Owned Expiration
- -------- -------- ----------
630 Godwin Avenue Owned --
Midland Park, NJ
386 Lafayette Avenue Owned --
Hawthorne, NJ
190 Franklin Avenue Leased 10/31/07
Ridgewood, NJ
30 Franklin Turnpike Leased 03/31/02
Waldwick, NJ
87 Berdan Avenue Leased 08/31/99
Wayne, NJ
311 Valley Road Leased 11/30/03
Wayne, NJ
Item 3 - Legal Proceedings
The Corporation and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to the Bank's business. Management
does not believe that there is any pending or threatened proceeding against the
Corporation or the Bank which, if determined adversely, would have a material
effect on the business or financial position of the Corporation or the Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the Registrant's shareholders
during the fourth quarter of fiscal 1998.
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Part II
Item 5 - Market for the Common Equity and Related Stockholder Matters
Commencing in November 1997, the Company's Common Stock began trading on
the NASDAQ Bulletin Board under the symbol "SSFN". As of December 31, 1998,
there were 695 stockholders of record of the Common stock.
The following table sets forth the quarterly high and low bid prices of the
Common Stock as reported on the NASDAQ Bulletin Board for the quarterly periods
presented. The Common Stock of the Company is thinly traded, and the prices
below reflect inter-dealer prices, without retail markup, markdown or
commissions, and may not reflect actual transactions, as such. The stock prices
and cash dividends set forth below also reflect adjustments related to a
two-for-one stock split completed in 1997, and a 5% stock dividend paid on June
1, 1998.
Bid
---------------------
Cash
High Low Dividend
------ ------ --------
Year Ended December 31, 1998
Fourth quarter $27.00 $26.00 $0.07
Third quarter 26.50 25.50 0.07
Second quarter N/A N/A 0.07
First quarter N/A N/A 0.07
Fourth quarter N/A N/A --
Third quarter N/A N/A 0.11
Second quarter N/A N/A --
First quarter N/A N/A 0.11
- ----------
N/A indicated no regularly published bid prices available.
The Corporation may pay dividends as declared from time to time by the
Corporation's Board of Directors out of funds legally available therefore,
subject to certain restrictions. Since dividends from the Bank will be the
Corporation's main source of income, any restriction on the Bank's ability to
pay dividends will act as a restriction on the Corporation's ability to pay
dividends. Under the Banking Act, no cash dividend may be paid by the Bank
unless, following the payment of such dividend, the capital stock of the Bank
will be unimpaired and the Bank will have a surplus of no less than 50% of its
capital stock or, if not, the payment of such dividend will not reduce the
surplus of the Bank. In addition, the Bank cannot pay dividends in such amounts
as would reduce its capital below the regulatory imposed minimums.
During fiscal 1998, the Corporation paid quarterly cash dividends of $0.07
per share for an annual dividend payout ratio of 16.70%. During fiscal 1997, the
Corporation paid semi-annual cash dividends of $0.11 per share for an annual
dividend payout ratio of 15.16%.
Item 6 - Management's Discussion and Analysis or Plan of Operation
The information required by this item is incorporated by reference from
page 14 of the Registrant's Annual Report to Shareholders under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 7 - Financial Statements
The information required by this item is incorporated by reference from
page 30 of the Registrant's Annual Report to Shareholders under the caption
"Consolidated Statements of Financial Condition"
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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Part III
Item 9 - Directors and Executive Officers of the Corporation; Compliance with
Section 16(a) of the Exchange Act
Information concerning directors and executive officers will be included in
the definitive Proxy Statement for the Corporation's 1999 Annual Meeting of
Shareholders under the caption "Compliance with Section 16(a) of the Securities
Exchange Act of 1934," which is incorporated herein by reference. It is expected
that such Proxy Statement will be filed with the Securities and Exchange
Commission no later than April 30, 1999.
The following table sets forth information about each significant employee
of the Corporation who is not also a director.
Principal Occupation
Name, Age and Position Officer Since (1) During Past Five Years
- ---------------------- ----------------- ----------------------
Julie E. Holland, 39, 1997 Vice President, Accounting
Vice President Atlantic Stewardship Bank
April, 1997
Assistant Vice President,
Accounting
Atlantic Stewardship Bank
March, 1995
Assistant Controller,
Accounting,
Atlantic Stewardship Bank
May, 1994
M. Bernard Joustra, 62, 1991 Vice President,
Vice President Commercial Lending,
Atlantic Stewardship Bank
(1) Includes prior service as an officer of the Bank.
Item 10 - Executive Compensation
Information concerning executive compensation will be included in the
definitive Proxy Statement for the Corporation's 1999 Annual Meeting of
Shareholders under the caption "Executive Compensation," which is incorporated
herein by reference. It is expected that such Proxy Statement will be filed with
the Securities and Exchange Commission no later than April 30, 1999.
Item 11 - Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management will be included in the definitive Proxy Statement for the
Corporation's 1999 Annual Meeting of Shareholders under the caption "Stock
Ownership of Management and Principal Stockholders," which is incorporated
herein by reference. It is expected that such Proxy Statement will be filed with
the Securities and Exchange Commission no later than April 30, 1999.
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Item 12 - Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions will
be included in the definitive Proxy Statement for the Corporation's 1999 Annual
Meeting of Shareholders under the caption "Interest of Management and Others in
Certain Transactions," which is incorporated herein by reference. It is expected
that such Proxy Statement will be filed with the Securities and Exchange
Commission no later than April 30, 1999.
Item 13 - Exhibits, Lists and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
- ------ -----------------------
3(i) Certificate of Incorporation of the Corporation (1)
3(ii) Bylaws of the Corporation (1)
10(i)* 1995 Incentive Stock Option Plan (1)
10(ii)* 1995 Stock Option Plan for Non-Employee Directors (1)
10(iii)* 1995 Employee Stock Purchase Plan (2)
10(iv)* Stock Bonus Plan (2)
10(v) Stewardship Financial Corporation Dividend Reinvestment
Plan (3)
10(vi)* Stewardship Financial Corporation Director Stock Plan (4)
10(vii)* Amended and Restated 1995 Stock Option Plan filed herewith
10(viii)* Amended and Restated Director Stock Plan filed herewith
13 Annual Report to Shareholders for the year ended
December 31, 1998
21 Subsidiaries of the Registrant (1)
23 Consent of KPMG LLP
27 Financial Data Schedule
- ----------
(1) Incorporated by reference from Exhibits 5(B)(3)(i), 5(B)(3)(ii),
5(B)(3)(iii), 5(B)(10)(a), 5(B)(10)(b), 5(B)(21), from the Corporation's
Registration Statement on Form 8-B, Registration No. 0-21855, filed
December 10, 1996.
(2) Incorporated by reference from Exhibits 4(c) to 23(d) from the
Corporation's Registration Statement on Form S-8, Registration No.
333-20793, filed January 31, 1997.
(3) Incorporated by reference from Exhibit 4(a) from the Corporation's
Registration Statement on Form S-3, Registration No. 333-20699, filed
January 30, 1997.
(4) Incorporated by reference from Exhibit 4(a) from the Corporation's
Registration Statement on Form S-8, Registration No. 333-31245, filed July
11, 1997.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
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STEWARDSHIP FINANCIAL CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------ -----------------------
3(i) Certificate of Incorporation of the Corporation (1)
3(ii) Bylaws of the Corporation (1)
10(i) 1995 Incentive Stock Option Plan (1)
10(ii) 1995 Stock Option Plan for Non-Employee Directors (1)
10(iii) 1995 Employee Stock Purchase Plan (2)
10(iv) Stock Bonus Plan (2)
10(v) Stewardship Financial Corporation Dividend Reinvestment
Plan (3)
10(vi) Stewardship Financial Corporation Director Stock Plan (4)
10(vii) Amended and Restated 1995 Stock Option Plan filed herewith
10(viii) Amended and Restated Director Stock Plan filed herewith
13 Annual Report to Shareholders for the year ended
December 31, 1998
21 Subsidiaries of the Registrant (1)
23 Consent of KPMG LLP
27 Financial Data Schedule
- ----------
(1) Incorporated by reference from Exhibits 5(B)(3)(i), 5(B)(3)(ii),
5(B)(3)(iii), 5(B)(10)(a), 5(B)(10)(b), 5(B)(21), from the
Corporation's Registration Statement on Form 8-B, Registration No. 0-21855,
filed December 10, 1996.
(2) Incorporated by reference from Exhibits 4(c) to 23(d) from the
Corporation's Registration Statement on Form S-8, Registration No.
333-20793, filed January 31, 1997.
(3) Incorporated by reference from Exhibit 4(a) from the Corporation's
Registration Statement on Form S-3, Registration No. 333-20699, filed
January 30, 1997.
(4) Incorporated by reference from Exhibit 4(a) from the Corporation's
Registration Statement on Form S-8, Registration No. 333-31245, filed July
11, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STEWARDSHIP FINANCIAL CORPORATION
By: /s/ Paul Van Ostenbridge
-----------------------------------
Paul Van Ostenbridge
Chief Executive Officer
Dated: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Paul Van Ostenbridge Chief Executive Officer March 29, 1999
---------------------------
Paul Van Ostenbridge
/s/ Julie E. Holland Principal Financial March 29, 1999
--------------------------- Officer and Principal
Julie E. Holland Accounting Officer
/s/ William Almroth Director March 29, 1999
---------------------------
William Almroth
/s/ Harold Dyer Director March 29, 1999
---------------------------
Harold Dyer
/s/ Edward Fylstra Secretary and Director March 29, 1999
---------------------------
Edward Fylstra
/s/ William Hanse Director March 29, 1999
---------------------------
William Hanse
/s/ Margo Lane Director March 29, 1999
---------------------------
Margo Lane
/s/ Arie Leegwater Chairman of the Board March 29, 1999
--------------------------- and Director
Arie Leegwater
/s/ John L. Steen Vice Chairman of the March 29, 1999
--------------------------- Board and Director
John L. Steen
/s/ Robert J. Turner Director March 29, 1999
---------------------------
Robert J. Turner
/s/ William J. VanderEems Director March 29, 1999
---------------------------
William J. VanderEems
12
FINANCIAL CORPORATION
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
(As of November 17, 1998)
Section 1. Purpose
The purpose of the Stewardship Financial Corporation 1995 Stock Option Plan
(the "Plan") is to enable Stewardship Financial Corporation (the "Corporation")
to attract, retain and motivate its key executive employees and to enable key
executive employees to participate in the long-term growth of the Corporation by
providing for or increasing the proprietary interests of such persons in the
Corporation thereby assisting the Corporation to achieve its long-range goals.
Section 2. Definitions
Capitalized terms not specifically defined elsewhere herein shall have the
following meaning:
"Act" means the Securities Exchange Act of 1934, as amended from time to
time, and regulations promulgated thereunder.
"Board" means the Board of Directors of the Corporation.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the regulations promulgated thereunder.
"Committee" means the Stock Option Committee of the Board (or any successor
committee of the Board responsible for administering the Plan), which shall
consist of two or more directors, each of whom shall be a "disinterested person"
within the meaning of Rule 16b-3(c) under the Act, to administer the Plan and
perform the functions set forth herein.
"Common Stock" or "Stock" means the common stock, no par value, of the
Corporation.
"Corporation" means Stewardship Financial Corporation and any present or
future subsidiary corporations of Stewardship Financial Corporation (as defined
in Section 424 of the Code) or any successor to such corporations.
"Disability" means total disability as determined in accordance with the
terms of the Corporation's long-term disability plan (or, if the Corporation has
no such plan, its retirement plan) as in effect from time to time; provided,
however, with respect to a Participant who has been granted an Incentive Stock
Option such term shall have the meaning set forth in Section 422(c)(6) of the
Code.
<PAGE>
"Fair Market Value" means, with respect to shares of Common Stock, the fair
market value as determined by the Committee in good faith and in a manner
established by the Committee from time to time; provided, however, that if the
shares of Common Stock are last sale reported over the counter securities, then
the "fair market value" of such shares on any date shall be the average of the
high and low prices reported in the consolidated reporting system, or the
average of the bid and asked prices (if the shares of Common Stock are over the
counter securities), on the business day immediately preceding the date in
question, as reported on the NASDAQ system.
"Incentive Stock Option" means an option to purchase shares of Common Stock
a Participant under the Plan which is intended to meet the requirements of
Section granted to 422 of the Code.
"Non-Qualified Stock Option" means an option to purchase shares of Common
Stock granted to a Participant under the Plan which is not intended to be an
Incentive Stock Option.
"Option" means an Incentive Stock Option or a Non-Qualified Stock Option.
"Participant" means a person selected by the Committee to receive an Option
under the Plan.
"Plan" means the Stewardship Financial Corporation 1995 Stock Option Plan.
"Retirement" means termination of employment in accordance with the
retirement provisions of any retirement or pension plan maintained by the
Corporation or any of its subsidiaries.
Section 3. Administration
(a) The Plan shall be administered by the Committee. Among other things,
the Committee shall have authority, subject to the terms of the Plan to grant
Options, to determine the individuals to whom and the time or times at which
Options may be granted, and to determine the terms and conditions of any Option
granted hereunder, and the exercise price thereof.
(b) Subject to the other provisions of the Plan, the Committee shall have
authority to adopt, amend, alter and repeal such administrative rules,
guidelines and practices governing the operation of the Plan as it shall from
time to time consider advisable, to interpret the provisions of the Plan and any
Option and to decide all disputes arising in connection with the Plan. The
Committee may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any option agreement in the manner and to the
extent it shall deem appropriate to carry the Plan into effect, in its sole and
absolute discretion. The Committee's decision and interpretations shall be final
and binding. Any
<PAGE>
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote or by the unanimous written consent of its
members.
(c) The Committee may employ such legal counsel, consultants and agents as
it may deem desirable for the administration of the Plan and may rely upon any
opinion received from any such counsel or consultant and any computation
received from any such consultant or agent.
Section 4. Eligibility and Participation
Executive officers and other key employees of the Corporation (including
executive officers and key employees who are directors) who are from time to
time responsible for the management, growth and protection of the business of
the Corporation, shall be eligible to participate in the Plan. The Participants
under the Plan shall be selected from time to time by the Committee, in its sole
discretion, from among those eligible, and the Committee shall determine in its
sole discretion the numbers of shares to be covered by the Option or Options
granted to each Participant. Options intended to qualify as Incentive Stock
Options shall be granted only to persons who are eligible to receive such
options under Section 422 of the Code.
Section 5. Shares of Stock Available for Options
(a) The maximum number of shares of Common Stock which may be issued and
purchased pursuant to Options granted under the Plan is 22,500, subject to the
adjustments as provided in Section 5 and Section 7, to the extent applicable. If
an Option granted under this Plan expires or terminates before exercise or is
forfeited for any reason, without a payment in the form of Common Stock being
granted to the Participant, the shares of Common Stock subject to such Option,
to the extent of such expiration, termination or forfeiture, shall again be
available for subsequent Option grant under the Plan. Shares of Common Stock
issued under the Plan may consist in whole or in part of authorized but unissued
shares or treasury shares.
(b) In the event that the Committee determines, in its sole discretion,
that any stock dividend, stock split, reverse stock split or combination,
extraordinary cash dividend, creation of a class of equity securities,
recapitalization, reclassification, reorganization, merger, consolidation,
split-up, spin-off, combination, exchange of shares, warrants or rights offering
to purchase Common Stock at a price substantially below Fair Market Value, or
other similar transaction affects the Common Stock such that an adjustment is
required in order to preserve the benefits or potential benefits intended to be
granted or made available under the Plan to Participants, the Committee shall
have the right to proportionately and appropriately adjust equitably any or all
of (i) the maximum number and kind of shares of Common Stock in respect of which
Options may be granted under the Plan to Participants, (ii) the number and kind
of shares of Common Stock subject to outstanding Options held by Participants,
and (iii) the exercise price with respect to any Options held by Participants,
without changing the aggregate purchase price as to which
<PAGE>
such Options remain exercisable, and if considered appropriate, the Committee
may make provision for a cash payment with respect to any outstanding Options
held by a Participant, provided that no adjustment shall be made pursuant to
this Section if such adjustment would cause the Plan to fail to comply with
Section 422 of the Code or with Rule 16b-3 of the Act. No fractional Shares
shall be issued on account of any such adjustment.
(c) Any adjustments under this Section will be made by the Committee, whose
determination as to what adjustments, if any, will be made and the extent
thereof will be final, binding and conclusive.
Section 6. Options
(a) Subject to Federal and state statutes then applicable and the
provisions of the Plan, the Committee may grant Incentive Stock Options and
Non-Qualified Stock Options and determine the number of shares to be covered by
each Option, the Option price therefor, the term of the Option, and the other
conditions and limitations applicable to the exercise of the Option. The terms
and conditions of Incentive Stock Options shall be subject to and comply with
Section 422 of the Code. Anything in the Plan to the contrary notwithstanding,
no term of the Plan relating to Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted to the
Committee under the Plan be so exercised, so as to disqualify the Plan, or
without the consent of the Participant, any Incentive Stock Option granted under
the Plan pursuant to Section 422 of the Code.
(b) The Option price per share of Common Stock purchasable under an Option
shall not be less than 100% of the Fair Market Value of the Common Stock on the
date of grant. If the Participant owns or is deemed to own (by reason of the
attribution rules applicable under Section 424(d) of the Code) more than 10% of
the combined voting power of all classes of stock of the Corporation or any
subsidiary or parent corporation of the Corporation and an Incentive Stock
Option is granted to such Participant, the Option price shall be not less than
110% of Fair Market Value of the Common Stock on the date of grant.
(c) No Option shall be exercisable more than ten (10) years after the date
the Option is granted. If a Participant owns or is deemed to own (by reason of
the attribution rules of Section 424(d) of the Code) more than 10% of the total
combined voting power of all classes of stock of the Corporation or any
subsidiary or parent corporation of the Corporation and an Incentive Stock
Option is granted to such Participant, such Option shall not be exercisable
after the expiration of five (5) years from the date of grant.
(d) No shares of Common Stock shall be delivered pursuant to any exercise
of an Option until payment in full of the Option price therefor is received by
the Corporation.
<PAGE>
Such payment may be made in whole or in part in cash or by certified or bank
check or, to the extent permitted by the Committee at or after the grant of the
Option, by delivery of shares of Common Stock owned by the Participant valued at
their Fair Market Value on the date of delivery, or such other lawful
consideration as the Committee may determine.
(e) Unless otherwise determined by the Committee at the time of grant of an
Option, in the event a Participant's employment with the Corporation terminates
by reason of death or Disability, any Option granted to such Participant which
is then outstanding may be exercised at any time prior to the expiration of the
term of such Option or within twelve (12) months following the Participant's
termination of employment by reason of death or Disability, whichever period is
shorter.
(f) Unless otherwise determined by the Committee at the time of grant of an
Option, in the event the Participant's employment with the Corporation
terminates for any reason other than death or Disability, any Option granted to
such Participant which is then outstanding may be exercised at any time prior to
the expiration of the term of such Option, or in the case of the Participant's
termination of employment for reasons other than death, Disability or
Retirement, within one (1) month of such termination, or in the case of the
Participant's Retirement, within three (3) months of such Retirement, whichever
period is shorter.
(g) No Option shall be transferable by the Participant otherwise than by
will or by the laws of descent and distribution, and all Options shall be
exercisable during the Participant's lifetime only by the Participant or the
Participant's appointed guardian or legal representative. A Participant shall
notify the Committee in writing in the event that he disposes of Common Stock
acquired upon exercise of an Incentive Stock Option within the two-year period
following the date the Incentive Stock Option was granted or within the one-year
period following the date he received Common Stock upon the exercise of an
Incentive Stock Option and shall comply with any other requirements imposed by
the Corporation in order to enable the Corporation to secure the related income
tax deduction to which it will be entitled in such event under the Code.
(h) The Committee may in its sole discretion, (i) accelerate the date or
dates on which all or any particular Option or Options granted under the Plan
may be exercised or (ii) extend the dates during which all or any particular
Option or Options granted under the Plan may be exercised; provided, however,
that no such extension shall be permitted if it would cause the Plan to fail to
comply with Section 422 of the Code or with Rule 16b-3 of the Act.
(i) The aggregate Fair Market Value of shares of Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by a
Participant who is an employee of the Corporation during one calendar year
(under all plans of the Corporation and its parent and subsidiary corporations)
shall not exceed the sum of One Hundred Thousand Dollars ($100,000.00). Such
aggregate Fair Market Value shall be determined as of the date such Option is
granted.
<PAGE>
Section 7. General Provisions Applicable to Options
(a) Notwithstanding any other provision of the Plan, in order to qualify
for the exemption provided by Rule 16b-3 of the Act, any Common Stock acquired
by a Participant subject to Section 16 of the Act (a "Section 16 Participant")
upon exercise of an Option may not be sold for six (6) months after the date of
grant of the Option. The Committee shall have no authority to take any action if
the authority to take such action, or the taking of such action, would
disqualify the Plan from the exemption provided by Rule 16b-3 of the Act.
(b) Each Option under the Plan shall be evidenced by a writing delivered to
the Participant specifying the terms and conditions thereof and containing such
other terms and conditions not inconsistent with the provisions of the Plan as
the Committee considers necessary or advisable to achieve the purposes of the
Plan or comply with applicable tax and regulatory laws and accounting
principles.
(c) Each Option may be granted alone, in addition to or in relation to any
other Option. The terms of each Option need not be identical, and the Committee
need not treat Participants uniformly. Except as otherwise provided by the Plan
or a particular Option, any determination with respect to an Option may be made
by the Committee at the time of grant or at any time thereafter.
(d) In the event of a consolidation, reorganization, merger or sale of all
or substantially all of the assets of the Corporation in each case in which
outstanding shares of Common Stock are exchanged for securities, cash or other
property of any other corporation or business entity or in the event of a
liquidation of the Corporation, the committee of the board of directors of any
corporation assuming the obligations of the Corporation, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such options substituted for Incentive Stock Options
shall meet the requirements of Section 424(a) of the Code, (ii) upon written
notice to the Participants, provide that all unexercised options will terminate
immediately prior to the consummation of such transaction unless exercised (to
the extent then exercisable) by the Participant within a specified period
following the date of such notice, (iii) in the event of a merger under the
terms of which holders of the Common Stock of the Corporation will receive upon
consummation thereof a cash payment for each share surrendered in the merger
(the "Merger Price"), make or provide for a cash payment to the Participants
equal to the difference between (A) the Merger Price times the number of shares
of Common Stock subject to such outstanding Options (to the extent then
exercisable at prices not in excess of the Merger Price) and (B) the aggregate
exercise price of all such outstanding Options in exchange for the termination
of such Options, and (iv) provide that all or any outstanding Options shall
become exercisable in full immediately prior to such event.
<PAGE>
(e) The Committee may grant Options under the Plan in substitution for
options held by employees of another corporation who become employees of the
Corporation, or a subsidiary of the Corporation, as the result of a merger or
consolidation of the employing corporation with the Corporation or a subsidiary
of the Corporation, or as a result of the acquisition by the Corporation, or one
of its subsidiaries, of property or stock of the employing corporation. The
Corporation may direct that substitute options be granted on such terms and
conditions as the Committee considers appropriate in the circumstances.
(f) The Participant shall pay to the Corporation, or make provision
satisfactory to the Committee for payment of, any taxes required by law to be
withheld in respect of Options under the Plan no later than the date of the
event creating the tax liability. In the Committee's sole discretion, a
Participant (other than a Section 16 Participant, who shall be subject to the
following sentence) may elect to have such tax obligations paid, in whole or in
part, in shares of Common Stock, including shares retained from the Option
creating the tax obligation. With respect to Section 16 Participants, upon the
issuance of shares of Common Stock in respect of an Option, such number of
shares issuable shall be reduced by the number of shares necessary to satisfy
such Section 16 Participant's federal, and where applicable, state withholding
tax obligations. For withholding tax purposes, the value of the shares of Common
Stock shall be the Fair Market Value on the date the withholding obligation is
incurred. The Corporation may, to the extent permitted by law, deduct any such
tax obligations from any payment of any kind otherwise due to the Participant.
(g) For purposes of the Plan, the following events shall not be deemed a
termination of employment of a Participant:
(i) a transfer to the employment of the Corporation from a subsidiary
or from the Corporation to a subsidiary, or from one subsidiary to
another, or
(ii) an approved leave of absence for military service or sickness, or
for any other purpose approved by the Corporation, if the
Participant's right to re-employment is guaranteed either by a statute
or by contract or under the policy pursuant to which the leave of
absence was granted or if the Committee otherwise so provides in
writing.
For purposes of the Plan, employees of a subsidiary of the Corporation
shall be deemed to have terminated their employment on the date on which such
subsidiary ceases to be a subsidiary of the Corporation.
(h) The Committee may at any time, and from time to time, amend, modify or
terminate the Plan or any outstanding Option held by a Participant, including
substituting therefor another Option of the same or a different type, changing
the date of exercise or realization, and converting an Incentive Stock Option to
a Non-Qualified Stock Option, provided that the Participant's consent to each
action shall be required unless the
<PAGE>
Committee determines that the action, taking into account any related action,
would not materially and adversely affect the Participant.
Section 8. Miscellaneous
(a) No person shall have any claim or right to be granted an Option, and
the grant of an Option shall not be construed as giving a Participant the right
to continued employment. The Corporation expressly reserves the right at any
time to dismiss a Participant free from any liability or claim under the Plan,
except as expressly provided in the applicable Option.
(b) Nothing contained in the Plan shall prevent the Corporation from
adopting other or additional compensation arrangements for its employees.
(c) Subject to the provisions of the applicable Option, no Participant
shall have any rights as a shareholder (including, without limitation, any
rights to receive dividends, or non cash distributions with respect to such
shares) with respect to any shares of Common Stock to be distributed under the
Plan until he or she becomes the holder thereof.
(d) Notwithstanding anything to the contrary expressed in this Plan, any
provisions hereof that vary from or conflict with any applicable Federal or
State securities laws (including any regulations promulgated thereunder) shall
be deemed to be modified to conform to and comply with such laws.
(e) No member of the Board of Directors or the Committee shall be liable
for any action or determination taken or granted in good faith with respect to
this Plan nor shall any member of the Board of Directors or the Committee be
liable for any agreement issued pursuant to this Plan or any grants under it.
Each member of the Board of Directors and the Committee shall be indemnified by
the Corporation against any losses incurred in such administration of the Plan,
unless his action constitutes serious and willful misconduct.
(f) The Plan shall be effective upon its approval by the shareholders of
the Corporation. Prior to such approval, Options may be granted under the Plan
expressly subject to such approval.
(g) The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, provided that no amendment shall be granted without
shareholder approval if such approval is necessary to comply with any applicable
tax laws or regulatory requirement, including any requirements for exemptive
relief under Section 16(b) of the Act.
(h) Options may not be granted under the Plan after the tenth anniversary
of its effective date, but then outstanding Options may extend beyond such date.
<PAGE>
(i) To the extent that State laws shall not have been preempted by any laws
of the United States, the Plan shall be construed, regulated, interpreted and
administered according to the other laws of the State of New Jersey
FINANCIAL CORPORATION
DIRECTOR STOCK PLAN
(As amended and restated through January 19, 1999)
1. Purpose. This Director Stock Plan (the "Plan") is intended to permit
members of the Boards of Directors ("Directors") of Stewardship Financial
Corporation (the "Company"), Atlantic Stewardship Bank (the "Bank") and any
subsidiaries ("the Subsidiaries") which the Company may, directly or indirectly
through the Bank, from time to time own or establish, to receive any Board of
Directors' fees to which they may otherwise be entitled pursuant to policies
adopted by their respective Boards of Directors ("Directors' Fees") in shares of
the Company's Common Stock, no par value (the "Common Stock") rather than in
cash.
2. Administration. The Stock Compensation Committee of the Board of
Directors of the Company (the "Committee") shall supervise and administer the
Plan. Subject to the provisions of the Plan, the Committee shall have the
authority to take any and all actions necessary to implement and interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, and to make all other determinations necessary and advisable in
administering the Plan. All such determinations shall be final and binding upon
all persons. A quorum of the Committee shall consist of a majority of its
members and the Committee may act by vote of a majority of its members at a
meeting at which a quorum is present, or without a meeting by a written consent
to the action taken signed by all members of the Committee. The Committee may
request advice or assistance or employ such other persons as are necessary for
the proper administration of the Plan.
3. Eligible Participants. All members of the Boards of Directors of the
Company, the Bank or any Subsidiaries are eligible to participate in the Plan,
to the extent they are eligible to receive Directors' Fees.
4. Election to Participate. Each Director may elect to participate in the
Plan effective on the first day of any month following the date he or she makes
such election by notifying the Committee in writing of such election to
participate and authorizing the Committee to pay any and all Directors' Fees
such Director would otherwise be entitled to receive in shares of Common Stock
as determined pursuant to Section 5 hereof. A Director who is participating in
the Plan may, at any time, withdraw from the Plan by delivering to the Committee
a written notice of withdrawal. Such notice of withdrawal shall be effective 10
days after its receipt by the Committee. From and after the date of such
effective withdrawal, any Directors' Fees to which such Director may be entitled
will be paid in cash.
5. Distribution of Shares. Not later than the last business day of each
calendar month in which a participating Director is entitled to receive
Directors' Fees, the Company shall deliver to each participating Director, in
lieu of such fees, the number of whole and fractional shares of Common Stock
which such Directors' Fees would entitle such
<PAGE>
Director to purchase based upon the fair market value of such shares on the day
of the Board of Directors meeting for that month. For purposes of this Plan, the
term "fair market value" means the fair market value as determined by the
Committee in good faith and in a manner established by the Committee from time
to time taking into account such factors as the Committee shall deem
appropriate. Shares to be distributed under this Plan may either be issued
directly from the Company's authorized but unissued shares or shares which have
been purchased in one or more transactions on the open market at the direction
of the Committee. In the event shares are purchased in the open market, the
Company will be responsible for paying any and all brokerage or other
transactional fees incurred in connection with such purchases.
6. Tax and Securities Law Implications of the Plan: Holding Period
(a) Each Director participating in the Plan will be responsible to pay any
and all federal, state and local taxes due in connection with the acquisition of
shares of Common Stock hereunder in the same manner as if such participating
Director had received their Directors' Fees in cash. Each such participating
Director will receive a Form 1099 from the Company indicating the value of
director fees paid in Common Stock.
(b) The shares of common stock issued under the Plan will have been
registered under the Securities Act of 1933, as amended and under applicable
state securities laws. However, participating Directors may be deemed to be
"affiliates" of the Company, and may therefore be subject to any and all
restrictions on transfers imposed upon affiliates.
(c) In order to comply with Securities and Exchange Commission Rule 16b-3
under the Securities Exchange Act of 1934, as amended, each share of Common
Stock issued pursuant to this Plan must be held by a participating Director, and
may not be transferred by such participating Director, for a period of six (6)
months from its date of issuance. In order to ensure compliance with this
provision, the Company will ensure that stop transfer orders are place on its
stock transfer books with regard to such shares.
7. Rights to Continued Service on the Board of Directors. Nothing provided
in this Plan shall be deemed to enlarge or otherwise affect any rights a
participating Director may have to continue to serve on the Board of Directors
of the Company, the Bank or any Subsidiary.
8. Amendment or Termination of the Plan. The Board of Directors of the
Company may elect, at any time and from time to time, to amend, modify or
terminate the Plan in any respect. Upon such termination, a participating
Director shall have no further rights to acquire shares of the Common Stock
hereunder.
9. Governing Law. The Plan and all transactions hereunder shall be governed
by and construed in accordance with the substantive law of the State of New
Jersey.
<PAGE>
10. Indemnification of the Committee. Service on the Committee shall
constitute service as a Director of the Company so that members of the Committee
shall be entitled to such rights of indemnification and reimbursement, and such
limitations on liability, as are Directors of the Company pursuant to the terms
of the Company's Certificate of Incorporation and Bylaws.
[LOGO]
STEWARDSHIP FINANCIAL CORPORATION
AND SUBSIDIARY
[PHOTO]
Annual Report 1998
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Stewardship Financial Corporation, is the holding company for Atlantic
Stewardship Bank, a full-service, independent commercial bank, established in
1985. The bank is dedicated to meeting the financial needs of businesses and
residents in northern New Jersey. This commitment is evidenced by our reputation
for offering superior customer service while keeping pace with current
technological standards in all phases of operations. We appreciate the value of
all our customers and accept our responsibility to treat each one fairly and
respectfully.
The bank employs a sound investment strategy to safeguard assets, provide
adequate capital growth and recognize Shareholders with a proper return. To
carry our success into the next century, we continue to devote the resources
needed to advance and expand our line of products and services.
In addition to our obligation to our clients and Shareholders, we recognize our
responsibilities as an employer. The bank provides a supportive, professional
environment for our associates, in which they are encouraged to work together as
a team as well as develop their individual talents and are recognized for their
accomplishments.
In accordance with our bank charter, we are pleased to tithe or share ten
percent of our pre-tax profits with Christian and local charities.
Table of Contents
Financial Highlights ..................................................... 2-3
With Gratitude ........................................................... 4
Board of Directors ....................................................... 5
Shareholders' Message .................................................... 6-7
Our Tithing Program ...................................................... 8-9
Lending Products ......................................................... 10
B.e.a.c.h. Committee ..................................................... 11
Bank Officers ............................................................ 11
Shareholder Information .................................................. 12
Selected Financial Data .................................................. 13
Management's Discussion and Analysis of Financial Condition
and results of operations .............................................. 14-28
Independent Auditor's Report ............................................. 29
Consolidated Statements of Financial Condition ........................... 30
Consolidated Statements of Income ........................................ 31
Consolidated Statements of Changes in Stockholders' Equity ............... 32
Consolidated Statements of Cashflows ..................................... 33
Notes to Consolidated Financial Statements ............................... 34-51
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
1998 1997 % Change
---------------------------------
(Dollars in thousands,
except per share amounts)
For the Year Ended December 31
Net Income $ 1,647 $ 1,463 12.6
Average Shares outstanding 985 973 1.2
Per common share:
Basic net income 1.67 1.50 11.3
Diluted net income 1.65 1.50 10.0
Cash dividends declared 0.27 0.23 17.4
Book value at year end 13.68 12.19 12.2
Balance Sheet Data at December 31
Total assets 185,970 149,732 24.2
Deposits 170,721 136,215 25.3
Loans 123,163 100,790 22.2
Stockholders' equity 13,549 11,926 13.6
Allowance for loan losses 1,542 1,462 5.5
Consolidated Ratios
Return on average assets 0.98% 1.07% (8.4)
Return on average equity 12.94% 13.12% (1.4)
Tier 1 capital to average assets (leverage) 7.16% 7.75% (7.6)
Tier 1 capital to risk-adjusted assets 10.62% 11.41% (6.9)
Total capital to risk-adjusted assets 11.87% 12.67% (6.3)
"As a result of contributions
like yours, the YMCA is more
fully able to provide essential
programs to help build strong
kids, strong families, strong
communities, as well as instill the
core values of caring, honesty,
respect and responsibility.
We are most appreciative of your
thoughtfulness and support, and
we invite you to stop by the
YMCA to see for yourself our
continuing mission of service."
Richard J. Claydon,
Chief Executive Officer
Ridgewood YMCA
Ridgewood, NJ
[PHOTO]
Atlantic Stewardship Bank, subsidiary of the Stewardship Financial Corporation
is known for its unique Tithing Program. The Discipleship House in Paterson, NJ
is one example of the program's recipients. Pictured above, William Vander Eems,
Director (left) and Alma Baxter, Assistant Secretary and Hawthorne Branch
Manager, present a check to Reverend John Algera from Madison Avenue Christian
Reformed Church of Paterson and Arthur Jackson, Director of the new Discipleship
House. The newly refurbished house serves as a transition home for those who are
re-establishing themselves in society.
2
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHICAL REPRESENTATION OF CHART--TOTAL ASSETS]
[GRAPHICAL REPRESENTATION OF CHART--RETURN ON ASSETS]
[GRAPHICAL REPRESENTATION OF CHART--TOTAL EARNINGS PER SHARE]
[GRAPHICAL REPRESENTATION OF CHART--TITHE]
[GRAPHICAL REPRESENTATION OF CHART--RETURN ON EQUITY]
[GRAPHICAL REPRESENTATION OF CHART--NET INCOME]
3
<PAGE>
With Gratitude
- --------------------------------------------------------------------------------
[PHOTO]
Herman de Waal Malefyt
The Stewardship Financial Corporation and its subsidiary, the Atlantic
Stewardship Bank, were truly blessed to have had Herman de Waal Malefyt serve as
a Director. Director de Waal Malefyt, who passed away in October, 1998, was an
original organizer of the Atlantic Stewardship Bank. He served faithfully on
several of the Board of Directors' Committees, including Audit, Human Resources,
and Loan.
Director de Waal Malefyt and his family owned and operated Skyline Greenhouses,
Inc. in Ramsey, New Jersey. He was active in his community, serving the Midland
Park Christian Reformed Church, as well as sitting on boards for a number of
charitable and school organizations.
Director de Waal Malefyt's thorough familiarity with the bank's market area, as
well as his wisdom, insight, and compassion made him a trusted and valuable
member of our Board. We are grateful to him for his vision and for helping to
chart the course for the Atlantic Stewardship Bank and Stewardship Financial
Corporation. He will be missed by the Board of Directors, bank associates and
the community.
4
<PAGE>
Board of Directors
- --------------------------------------------------------------------------------
of Stewardship Financial Corporation and Atlantic Stewardship Bank
[PHOTO]
OUR BOARD OF DIRECTORS
Arie Leegwater, Chairman
Owner, Arie Leegwater Associates
William M. Almroth
Retired
Harold Dyer
Retired
Edward Fylstra, Secretary
Managing Partner, Fylstra, Wright & Co.
William C. Hanse
Partner, Hanse & Hanse
Margo Lane
Corporate Communications Manager
Garden State Paper
Corporate Secretary, Lane Electric, Inc.
John L. Steen, Vice Chairman
President, Steen Sales, Inc.
President, Dutch Valley Throwing Co., Inc.
Robert J. Turner
President, The Turner Group
William J. Vander Eems
President, William Van Der Eems, Inc.
Paul Van Ostenbridge
President and Chief Executive Officer
Atlantic Stewardship Bank
OUR BUSINESS
DEVELOPMENT BOARDS
BERGEN BOARD
Samuel Braen
William Braunius
William R. Cook
Paul D. Heerema
Bartel Leegwater
Paul Ruitenberg
William Soodsma
Margaret Stanley
Samuel J. Steen
Kathryn Stiles
Russel Teschon, Esq.
PASSAIC/MORRIS BOARD
Donald De Bruin
Frederick Everett
Brian Hanse, Esq.
Garret Hoogerhyde
Ruth Kuiken
William Monaghan, Esq.
Ronald Steiginga
Charles Sybesma
Abe Van Wingerden
Ralph Wiegers
"On behalf of the Board of
Trustees, the staff and,
most importantly, our
'special' workers, I want to
sincerely thank the Atlantic
Stewardship Bank for its
generous donation from
the bank's 1998 Annual
Tithe. Your donation
and continued personal
commitment to the
Foundation are a
testimony to Atlantic
Stewardship Bank's care
for the less fortunate."
Frank Brescia,
Executive Director
Foundation for the Handicapped
Wayne, NJ
5
<PAGE>
Message to the Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders and Friends:
The Stewardship Financial Corporation and its subsidiary, the Atlantic
Stewardship Bank experienced strong growth in earnings and assets this past
year.
The consolidated earnings for 1998 were a record high of $1.6 million or $1.67
per share, compared to $1.5 million or $1.50 per share in 1997. This was an
increase of 12.6% in income and 11.3% in earnings per share over the previous
year. Diluted earnings per share were $1.65 in 1998 compared to $1.50 in 1997.
The higher earnings are attributable to the solid gains in core consumer and
commercial banking business. We experienced exceptionally heightened activity in
our Residential Mortgage Department, which had a positive impact on earnings.
Cash dividends paid in the amount of $.27 per share were 17.4% higher than the
$.23 paid per share during the previous year. The company also paid its first
stock dividend on June 1, 1998 in the amount of 5%.
Shareholder's Equity grew to $13.5 million, representing a 13.4% increase over
the $11.9 million reported a year earlier.
Stewardship Financial Corporation's total assets reached $186.0 million as of
December 31, 1998, compared to $149.7 million on December 31, 1997, representing
a 24.2% increase. The bank's total deposits were $170.7 million at year end--a
25.3% increase over the $136.2 million at year end 1997. The substantial
increase in deposits was attributable to the popularity of our Premium Growth
Account (PGA), which is a tiered money market account, as well as the deposit
growth in our new branch markets in Waldwick and Ridgewood. Total loans, net of
allowances for loan losses were $121.5 million as of December 31, 1998 for an
increase of 22.5% over the $99.2 million reported a year earlier.
Business Development Boards
Our Business Development Board has always played an important role in
strengthening our ties to the community. This past year, the original Business
Development Board was divided into two, with several new members appointed. The
Bank is pleased to now have a Bergen County Board and a Passaic/Morris County
Board specializing in their respective markets. We are grateful to have such
outstanding Board Members helping to promote the Bank's services in the
community.
Phone Banking
We were pleased to introduce our Phone Banking service to customers this past
year. Customers are now given the opportunity to access their accounts by
telephone, twenty-four hours a day. The exclusive telephone line enables
accountholders to complete all of their basic banking tasks such as account
inquiries, balance transfers and loan payments from the convenience of their
office or home.
Expanding Branch Network
We are excited to announce the development of a second branch in the Township of
Wayne, NJ. The new branch will be located at 311 Valley Road in the Valley
Brooke Shopping Center. This location will introduce our services to a new
market in Wayne, where our community style of banking has been well received.
The new branch is scheduled to open in April, 1999 and will offer full service
banking, safe deposit boxes and an automatic teller machine.
[PHOTO]
Paul Van Ostenbridge, President and Chief Executive Officer and Arie Leegwater,
Chairman of the Board, assist with food packages delivered to Paterson, New
Jersey residences through the Hispanic Multi Purpose Center of Paterson. The
food program was coordinated by Anita Osorio and Maria Magda O'Keefe, Executive
Director of the Center.
"Thank you for your
wonderful generosity during
1998. Every penny went to
finance Eva's Kitchen and
Sheltering Programs. Feeding
the hungry and sheltering the
homeless is our mission, and we
serve people of all faiths.
In helping me to help them, you
share in the spiritual merits of
Eva's Village in a special way.
Thank you and God bless you
for your kindness."
Reverend John Catoir,
Executive Director
Eva's Village
Paterson, NJ
6
<PAGE>
- --------------------------------------------------------------------------------
"Your most generous gift to
our Home was a profound
act of faith in action. I must
say, the Atlantic Stewardship
Bank really lends credence
to the policy of tithing.
Thank you for being an
outstanding example and
leader in the community.
The interest and concern
of friends like you is truly
a source of encouragement
for all of us who work here.
Your commitment is
exemplary of the faith
that binds all of us
together in Christ.
Be assured that your
contribution will be put
to good use in the
operations of our Home.
Blessings and good
health be with you and
the other good folks at
your bank in the days
and years ahead."
Andrew Lee,
Executive Director/CEO
Holland Christian
Home Assn.
North Haledon, NJ
Year 2000 Preparation
The Year 2000 presents businesses throughout the world with an unprecedented
challenge due to certain computer restrictions. Fortunately, the banking
industry began addressing the situation early on and is in the forefront of
preparing for this event. Regulatory authorities have been closely reviewing
each bank's progress to avoid potential processing delays. The Federal Deposit
Insurance Corporation states that the Year 2000 issue will not affect customer's
deposit insurance coverage.
The Atlantic Stewardship Bank began addressing Year 2000 concerns in 1997, when
a special Technology Committee was established. The Committee has dedicated
itself to addressing all computer-related
limitations. The Bank's internal systems are being tested in addition to all
related systems. As a result of the Year 2000 date change, a major investment in
new computer hardware was made to support updated software systems.
The Technology Committee is confident it is on target to meet the technological
challenges of the Year 2000.
Tithing
Thanks to our loyal Shareholders, dedicated Bank Associates, and an expanding
customer base, we were able to increase our Tithing Program in 1998. The Bank is
pleased to share 10% of our profits with Christian missions, health care
facilities and schools. A total of $215,000 was distributed among these worthy
organizations; a 14% increase over the previous year's giving. The Bank also
offers strong support to local civic groups.
Bank Associates delivering the Tithe checks were able to see first-hand the
dedicated and loving efforts of these fine Christians who work tirelessly as
ambassadors of Christ. It has been a true blessing and a privilege to assist
these organizations with their financial needs.
We offer our sincere thanks to our Shareholders for the continued
support which enables us to help the community financially and share our profits
with others. We would also like to acknowledge all of our Associates who worked
together to make 1998 such a tremendous success.
We look forward to another productive year.
Very truly yours,
Arie Leegwater Paul Van Ostenbridge
Chairman of the Board of Directors President and Chief Executive Officer
7
<PAGE>
Giving Back: Tithing in 1998
- --------------------------------------------------------------------------------
WE ARE PLEASED TO ASSIST THE FOLLOWING
CHARITIES THROUGH OUR 1998 TITHE DISTRIBUTION:
* Africa Inland Mission
American Red Cross, Bergen County Chapter
* Bessie Green Community
* Bethany Christian Services
* Bethlehem Ministries
* Calvary Temple School
* Calvin College
* Cary Christian Center, Inc.
* Christian Health Care Center
* Christian Reformed World Relief Committee
* Christian School International Foundation
* CLEAR
* CUMAC-ECHO
* Dawn Treader School
* Discipleship House
* Eastern Christian Children's Retreat
* Eastern Christian School Association
* Eastern Home Mission Board
* Ebenezer Netherlands Reformed School
* Elim Christian School
Emergency Services of Ridgewood
* Eva's Village
Fellowship Homes, Wayne
* Florence Christian Home
Foundation for the Handicapped
* Good Shepherd Mission
* Goshen Christian School
* Hawthorne Christian Academy
* Holland Christian Home
Homebound Pilots Foundation
Kilbarchen Paterson Orphanage
* Lord's Day Alliance
Love Fund, Inc.
* Luke Society
Midland Park Ambulance Corps
* Netherlands Reformed Christian School
New Jersey Community Loan Fund
* Operation Double Harvest/Haiti
* Paterson Habitat for Humanity
* Ridgewood YMCA
* Ron Hutchcraft Ministries
* Saint Anthony's School
* Salvation Army
* Siena Village
* Star of Hope Ministries
* Touch the World Ministries
Valley Hospital
Waldwick Ambulance Corps
Wayne Memorial First Aid Squad
William F. Mawhinney Ambulance Corps
* Wyckoff Family YMCA
[PHOTO]
Bank Chairman, Arie Leegwater (left) and Assistant Secretary, Louise Rohner
(right), present a donation to representatives of the Midland Park Love Fund.
The Love Fund is a special friend to those in need in the community.
"Thank you very much for Atlantic Stewardship Bank's
generous gift to Africa Inland Mission. We do appreciate
your including our ministry in your tithing program.
AIM appreciates your leadership and the good
service that ASB continues to give to our missionaries.
The Lord Bless You."
Ted Barnett, Ed.D,
U.S. Director
Africa Inland Mission International, Inc.
Pearl River, NY
[PHOTO]
John L. Steen, (center) Vice Chairman of the Bank's Board of Directors presents
a new school bus to Eastern Christian School Association. Accepting the Tithe
donation on behalf of the school are Superintendent Gil Kitchen and student
James Rohner.
8
<PAGE>
- --------------------------------------------------------------------------------
IN ADDITION, THE BANK HAS PROVIDED SUPPORT
THROUGHOUT 1998 TO THE FOLLOWING ORGANIZATIONS:
* Advent Charities
Albert Payson Terhune Elementary School
American Cancer Society Bergen County
American Heart Association
American Legion, Midland Park
* Baptist Haiti Mission
Bergen County Community Blood Services
Bergen County Foster Care Parents Association
Bergen County Housing Coalition
Bergen Pines County Hospital
Boy Scouts of America
Boy Scouts of America--Passaic Valley Council
Boys & Girls Club of Hawthorne
Boys & Girls Club of Paterson
Calvin Coolidge School
* Calvin Theological Seminary
* Cathedral Choir
Center for Food Action
Cerebral Palsy Center
* Christian Homes for Children
* Christian Overcomers
Coleman School
Community High School
Community Learning Center of Wyckoff
Computer Enabling Program
Cooperative Nursery School of Ridgewood
* Corner Closet
Cystic Fibrosis
Deborah Hospital
Downtown for the Holidays, Ridgewood
* Eastern Home Mission Board
Emergency Services
Forum School
Foundation for Free Enterprise
Free Public Library, Waldwick
Friends of the Hermitage
Friends of the Louis Bay 2nd Library
Friends of the Midland Park Library
* Friends of the Reformed Church Home
* Friendship Ministries
Friendship Pregnancy Center
* Gideons International Passaic Valley Camp
* Gideons International Ramapo Camp
Girl Scout Council of Bergen County
* Grace Counseling Ministries
Hawthorne Baseball/Softball Association
Hawthorne Caballeros
Hawthorne Centennial Committee
Hawthorne Chamber of Commerce
Hawthorne Chamber Symphony
Hawthorne Community Library Foundation
Hawthorne Cubs
Hawthorne Education Foundation
Hawthorne Family Fun Day Picnic
Hawthorne Girl Scouts
Hawthorne High School
Hawthorne Hurricanes
Hawthorne PBA Local 200
Hawthorne Rotary Club
Hawthorne Special Rec
Hawthorne Volunteer Fire Department
Highland Community Association, Waldwick
* Hispanic Multi-Purpose Center
Ho-Ho-Kus Chamber of Commerce
Hugh O'Brian Youth Foundation
* Interchurch Softball League
JFK Elementary School
Julie A. Traphagen School
Keith Van Hook Fund
Kids Day America
Lenni-Lenape Girl Scouts
Leukemia Society of America, Inc.
* Life Advocates
* Little Sisters of the Poor
* Metropolitan Youth for Christ
Midland Park Baseball Association, Inc.
Midland Park High School
Midland Park/Ho-Ho-Kus PBA
Midland Park Lions Club
Midland Park PTA
Midland Park Volunteer Fire Company
Mohawk Athletic Club
Muscular Dystrophy Association
* New Jersey Family Policy Council
Northeast Urban Church Planting
North Jersey Chorus
Opera in the Park, Ridgewood
* Our Lady of the Consolation School
* Our Lady of the Magnificat School
* Our Lady of Mount Carmel School
Paterson Chamber of Commerce
Paterson Coalition for Housing, Inc.
Pompton Falls Fire Department
Prison Fellowship Ministries
* Reformed Church Home
Ridgewood Baseball Association
Ridgewood Chamber of Commerce
Ridgewood Emergency Services
Ridgewood First Night/Fourth of July
Ridgewood High School
Ridgewood Historical Society
Ridgewood PBA
Ridgewood Public Library
Ridgewood Public Education Foundation
Ridgewood Rotary
* St. Joseph's Home for the Elderly
* St. Peter's Haven
SHARE, Inc.
Shelter Our Sisters
Special Olympics
Spectrum for Living Development, Inc.
Stars Vocational
* Strategic Prayer Command
* Sunshine Christian Academy
The Depot
* The Fig Orchard
Torpedoes Soccer Club
Tri-County Chamber of Commerce
* Unity Christian Reformed Church
After-School Program
Waldwick Education Foundation
Waldwick Fire Department
Waldwick High School Booster Club
Waldwick High School & Home Association
Waldwick PBA
Wayne Adult Community Center, Inc.
Wayne General Hospital
Wayne Hills High School
Wayne Library
Wayne Little League
Wayne Police Athletic League
Wayne Township Public Schools
Wayne Valley All School
Wayne Valley Band Parents Association
Wayne Volunteer Fire Company
West Bergen Mental Health Clinic
* Westminster Theological Seminary
* World for Christ
* Women Who Raise the Roof
Wyckoff/Midland Park Rotary
YM-YWHA of North Jersey
* Youthnet Ministries
* Denotes Christian Charity
[PHOTO]
(left to right) Marina Rizzi, Assistant Branch Manager in Wayne, joins Robert
Giannetti, Asst. Vice President and Wayne Branch Manager, in donating a gift
from the Bank to Frank Brescia and Sylvia Motichka of The Foundation for the
Handicapped of Wayne, NJ. The Foundation employs handicapped individuals to
offer services to businesses in need of mail preparation or light assembly work.
"To a child without hope of
parents, to a couple praying
to become a family, we are--
you are--the instrument of
Jesus' love. Think of it:
Today, right now, a mother is
holding her baby because
you cared--and the only
tears she is shedding are
tears of joy.
Your love has helped make a
family happen--and we are
so thankful that YOU
CARED.
Nancy Dykstra-Powers
Director
Bethany Christian
Services
Hawthorne, NJ
9
<PAGE>
Lending Products
- --------------------------------------------------------------------------------
The Bank offers a complete line of lending products to assist commercial
customers and consumers. The Commercial Lending Division can assist businesses
with Lines of Credit, Letters of Credit, Commercial Loans, Equipment Loans, Term
Loans and Commercial Mortgages.
Customers can arrange financing in a variety of ways to meet their individual
needs. We are pleased to offer Home Equity Loans, Home Equity Lines of Credit,
Residential Mortgages, Automobile Loans, Installment Loans and Credit Cards at
some of the lowest rates in the country.
In addition, Atlantic Stewardship introduced a new Construction Real Estate
Lending Division in 1998. The division offers Construction Mortgages to both
residential and commercial customers and has been well received in our local
communities.
Our lending territory for these products is restricted to the section of
Northern New Jersey surrounding the bank.
[PHOTO]
Bernie Joustra, Vice President of Lending (right) discussing business strategies
with Nick Verduin and Steven Verduin of Verduin Machinery Company, Inc.,
Paterson, New Jersey.
[PHOTO]
David Van Lenten, Assistant Vice President in charge of Construction Lending
(left), with Suzanne and Richard Kucharski reviewing plans for their new home.
[LOGO]
"We gratefully acknowledge your
generous donation towards the
work of the Waldwick Volunteer
Ambulance Corps. It is with the
faithful support of concerned
people such as yourselves that
we are able to continue the
important work of helping people
in Waldwick. God Bless You All!"
Carmella Morey,
Secretary
Waldwick Volunteer
Ambulance Corps
Waldwick, NJ
"Your recent donation
will be used to expand the
programs we offer to our special
children and young adults. Such
thoughtfulness is greatly
appreciated."
Steven Krapes, Ed.D.,
Director
The Forum School
Waldwick, NJ
10
<PAGE>
Bank Officers
- --------------------------------------------------------------------------------
Paul Van Ostenbridge
President and Chief Executive Officer
Julie E. Holland
Vice President and Treasurer
M. Bernard Joustra
Vice President
James S. Donado
Assistant Vice President
Robert A. Giannetti
Assistant Vice President
Elizabeth M. Lamb
Assistant Vice President
Dennis R. Murley
Assistant Vice President
Cynthia Perrotta
Assistant Vice President
Richard D. Powers
Assistant Vice President
Raymond J. Santhouse
Assistant Vice President
Gail K. Tilstra
Assistant Vice President
David J. Van Lenten
Assistant Vice President
Alma M. Baxter
Assistant Secretary
Ellie King
Assistant Secretary
Kristine Rasile
Assistant Secretary
Louise H. Rohner
Assistant Secretary
David A. Struck
Assistant Secretary
Marie E. McCall
Assistant Treasurer
Jennifer Heller
Administrative Assistant
Leigh Knorr
Administrative Assistant
Grace Lobbregt
Administrative Assistant
Jean M. Schaver
Administrative Assistant
Our B.E.A.C.H. Committee
- --------------------------------------------------------------------------------
[PHOTO]
Mary Beth Steiginga and Jennifer Heller, chairperson of the B.E.A.C.H.
Committee, help package food containers generously donated by customers to
benefit several local food pantries.
Atlantic Stewardship Bank associates volunteer their own time to extend our
policy of community investment beyond superb customer service and financial
assistance. Since its inception, the bank's B.E.A.C.H. Committee (Bank Employees
Assisting CHarities) has devoted countless hours and seemingly unlimited energy
and enthusiasm to operate a number of programs to benefit our surrounding
communities. Their enthusiasm often seems contagious as they enlist the support
of fellow co-workers and customers for projects such as food drives and holiday
gift collections; demonstrating again and again their commitment to the practice
of "Stewardship."
[PHOTO]
Jennifer Heller, Ellie King and Jean Schaver, members of the Bank's B.E.A.C.H.
Committee, help prepare Christmas ornaments to be used as part of the
Committee's Wish Tree Program. Customers helped by bringing in gifts for
Bethlehem Ministries of Paterson and needy students at Monthaven School in New
York.
"We are grateful for Atlantic
Stewardship Bank and its
unique policy of tithing. ...we
know you pray for our
ministry as well as giving
financially. Your prayers and
gifts are a reflection of God's
special love. We pray for your
success in banking. May the
Lord who loves us so much
bless all of you with the good
gifts He desires to give."
Nell Hartog,
Assistant Treasurer
The Florence
Christian Home
Wayne, NJ
11
<PAGE>
Shareholder Information
- --------------------------------------------------------------------------------
The Annual Shareholders' Meeting for Stewardship Financial Corporation will be
held at the main office, 630 Godwin Avenue, Midland Park, New Jersey, on
Tuesday, May 11, 1999, at 7:00 P.M. The Corporation had 695 shareholders of
record on December 31, 1998.
Dividend Reinvestment Plan
A total of 529 shareholders currently participate in the Corporation's
Shareholder Reinvestment Plan, representing 723,329 or 76 percent of all shares
outstanding. Participants in the Plan reinvest dividends to purchase new shares
of stock at 95 percent of the market value, based on the most recent trade.
Shareholders interested in signing up for the Dividend Reinvestment Plan may
request the Plan Membership Form from Corporate Services at (201)444-7100,
extension 7118.
Dividend
Stewardship Financial Corporation will provide a copy of the Annual Report on
Form 10K, free of charge, to any Shareholder upon written request, including the
financial statements and schedules which have been filed with the Securities and
Exchange Commission. Requests should be addressed to Stewardship Financial
Corporation, Attn: Ellie King, Assistant Secretary, 630 Godwin Avenue, Midland
Park, NJ 07432-1405.
Recent History of Dividends Paid
The Board of Directors of the Stewardship Financial Corporation is pleased to
pay, on February 1, 1999, a quarterly dividend to Shareholders of Record on
January 15, 1999, in the amount of $0.09 per share. Future dividends will be
paid in May, August, November and February, subject to Board approval.
November 2, 1998 $.07
August 3, 1998 $.07
June 1, 1998 5% stock dividend
May 1, 1998 $.07
February 2, 1998 $.07
September 30, 1997 $.11
March 28, 1997 $.11
Dividends have been restated to reflect a two-for-one stock split completed in
1997 and the 5% stock dividend paid June 1, 1998.
[PHOTO]
Richard Schuurman (right), of the Bank's Business Marketing Division, presents a
Tithe donation to the Salvation Army. Major Fred Trask and Lorraine Walker were
pleased to accept on behalf of their many volunteers.
"The Atlantic Stewardship
Bank's donation to Siena Village
at Wayne means a great deal
more to us than the generosity of
the amount. The idea that, in
these days of materialism and
self-seeking, a bank would base
its financial philosophy
on the idea that we should `use our
gifts to serve others' provides a
spiritual gift far more
valuable. We are forever grateful
to all of you for the quality
and quantity of both great gifts.
We believe that the
Atlantic Stewardship Bank--
whose generosity benefits us
and many other worthy endeavors
--more than merits whatever
support we can give; we love
to sing your praises.
Again, thank you and all
the members of your
organization for your
generous support of Siena
Village. We will continue to use
your generosity in ways best
calculated to administer God's
grace in its various forms."
Sister Alice Matthew, O.P.
Siena Village,
Wayne, NJ
12
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Net interest income ............................... $ 7,495 $ 6,451 $ 5,703 $ 5,203 $ 4,597
Provision for loan losses ......................... (200) (120) (155) (150) (295)
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 7,295 6,331 5,548 5,053 4,302
Noninterest income ................................ 1,008 753 664 466 369
Noninterest expense ............................... 5,858 5,024 4,327 3,904 3,187
--------- --------- --------- --------- ---------
Income before income tax expense .................. 2,445 2,060 1,885 1,615 1,484
Income tax expense ................................ 798 597 568 471 482
--------- --------- --------- --------- ---------
Net income ........................................ $ 1,647 $ 1,463 $ 1,317 $ 1,144 $ 1,002
========= ========= ========= ========= =========
COMMON SHARE DATA: (1)
Basic net income .................................. $ 1.67 $ 1.50 $ 1.37 $ 1.20 $ 1.08
Diluted net income ................................ 1.65 1.50 1.37 1.20 1.08
Cash dividends declared ........................... 0.27 0.23 0.20 0.17 0.14
Book Value at year end ............................ 13.68 12.19 10.77 9.56 8.29
Average shares outstanding ........................ 985 973 962 952 929
Shares outstanding at year end .................... 990 978 967 956 945
Dividend payout ratio ............................. 16.70% 15.16% 14.56% 14.20% 13.17%
SELECTED CONSOLIDATED RATIOS:
Return on average assets .......................... 0.98% 1.07% 1.10% 1.10% 1.13%
Return on average stockholders' equity ............ 12.94% 13.12% 13.55% 13.54% 13.51%
Average stockholders' equity as
a percentage of average total assets ............. 7.55% 8.19% 8.12% 8.14% 8.39%
Tier-I capital leverage (2) ....................... 7.16% 7.75% 7.80% 7.57% 8.64%
Tier-I risk based capital (3) ..................... 10.62% 11.41% 12.40% 12.13% 13.79%
Total risk based capital (3) ...................... 11.87% 12.67% 13.65% 13.38% 15.04%
Allowance for loan loss to year-end loans ......... 1.25% 1.45% 1.64% 1.63% 1.79%
Non-performing loans to year-end loans ............ 0.45% 0.69% 1.10% 1.61% 1.32%
SELECTED YEAR-END BALANCES:
Total assets ...................................... $ 185,970 $ 149,732 $ 128,621 $ 113,120 $ 91,978
Total loans, net of allowance for loan loss ....... 121,508 99,205 80,848 70,976 59,490
Total deposits .................................... 170,721 136,215 115,825 101,789 82,576
Stockholders' equity .............................. 13,549 11,926 10,407 9,151 7,834
</TABLE>
- ----------
(1) Common share data has been restated to reflect a 2 for 1 stock split
completed in September, 1997, and a 5% stock dividend paid June 1, 1998.
(2) As a percentage of average quarterly assets.
(3) As a percentage of total risk-weighted assets.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section provides an analysis of the Stewardship Financial Corporation's
(the "Corporation") consolidated financial condition and results of operations
for the years ended December 31, 1998, 1997 and 1996. The analysis should be
read in conjunction with the related audited consolidated financial statements
and the accompanying notes presented elsewhere herein.
BUSINESS OF STEWARDSHIP FINANCIAL CORPORATION
The Corporation, organized in January, 1995, as a business corporation under the
laws of the State of New Jersey, was established by the Board of Directors of
Atlantic Stewardship Bank (the "Bank") to become a holding company for the Bank.
The shareholders of the Bank approved the holding company formation at the
annual meeting in 1996. After obtaining approval and submitting appropriate
applications, the Corporation, on November 22, 1996, acquired all of the shares
of the Bank in exchange for its own shares, on a share per share basis. The
Bank, and its subsidiary, Stewardship Investment Corp., is now the wholly-owned
subsidiary of the Corporation.
The Corporation has its main office located in Midland Park, Bergen County, New
Jersey and operates four branches located in Ridgewood and Waldwick, Bergen
County, New Jersey and Hawthorne and Wayne, Passaic County, New Jersey. The
Corporation conducts a general commercial and retail banking business
encompassing a wide range of traditional deposit and lending functions along
with the other customary banking services. Stewardship Investment Corporation is
a wholly-owned nonbank subsidiary of Atlantic Stewardship Bank, whose primary
business is to own and manage the Bank's investment portfolio.
EARNINGS SUMMARY
The Corporation reported net income of $1.6 million, or $1.67 per share, for the
year ended December 31, 1998, an increase of $184,000, or 12.6%, above the $1.5
million recorded for 1997. Earnings for 1997 had increased $146,000, or 11.1%,
over the 1996 earnings of $1.3 million. Earnings have increased in both years as
a result of increases in net interest income and noninterest income offset by
increases in noninterest expense.
The return on average assets decreased in 1998 to 0.98% from 1.07% in 1997
and 1.10% in 1996. The return on average equity decreased to 12.94% in 1998 from
13.12% in 1997 and 13.55% in 1996.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Corporation's principal source of revenue is the net interest income derived
from the Bank, which represents the difference between the interest earned on
assets and interest paid on funds acquired to support those assets. Net interest
income is affected by the balances and mix of interest-earning assets and
interest-bearing liabilities, changes in their corresponding yields and costs,
and by the volume of interest-earning assets funded by noninterest-bearing
deposits. The Corporation's principal interest-earning assets are loans made to
businesses and individuals, investment securities, and federal funds sold.
In 1998, net interest income increased to $7.5 million from $6.5 million in
1997, an increase of $1.0 million, or 16.2%. This was caused by an increase of
$7.7 million, or 25.4%, in net average interest-earning assets (average
interest-earning assets less average interest-bearing liabilities) partially
offset by a decrease in interest rates on interest-earning assets (32 basis
points) and an increase in interest rates on interest-bearing liabilities(8
basis points).
14
<PAGE>
Interest income, on a tax equivalent basis, increased $2.0 million, or 19.6%,
during 1998 to $12.5 million from $10.5 million earned during 1997. The increase
was due to an increase in the average volume of interest-earning assets offset
by a decrease in yields on interest-earning assets. Yields decreased primarily
due to market pressure on loan rates. Average interest-earning assets increased
$31.5 million in 1998, or 24.5%, over the 1997 amount with average loans
attributing to $17.6 million of the increase due primarily to the Corporation's
increased competitiveness within the marketplace.
Interest expense increased $1.0 million, or 26.8%, during 1998 to $4.8 million.
The increase was due to an increase in average interest-bearing liabilities of
$23.8 million, or 24.2%, to $121.8 million during 1998 and to a rise in interest
rates paid on interest-bearing liabilities. Yields on interest-bearing
liabilities increased to 3.96% during 1998 from 3.88% during 1997. Contributing
to this increase was a change in the mix of interest-bearing products. The
Corporation continued to offer a tiered money market account carrying market
yields. This product has been successful in attracting new funds into the
Corporation. Despite this move toward higher yielding instruments, the
Corporation was able to maintain its balances in noninterest-bearing demand
deposits. Average noninterest-bearing demand deposits increased $6.9 million, or
26.4%, to $33.1 million during 1998.
In 1997, net interest income increased to $6.5 million from $5.7 million in
1996, an increase of $748,000, or 13.1%. Interest income, on a tax equivalent
basis, increased $1.2 million, or 13.2%, during 1997 to $10.5 million from $9.2
million earned in 1996. The increase was due primarily to an increase in the
average volume of interest-earning assets offset by a decrease in yields on
interest-earning assets. Average interest-earning assets increased $15.5 million
in 1997, or 13.7%, over the 1996 amount. Interest expense increased $454,000, or
13.6%, during 1997. This increase can be attributed to an increase in rates on
interest-bearing liabilities and an increase in average volume of
interest-bearing liabilities. Average demand deposits continued to grow during
1997 and increased $4.5 million, or 21.0%, over the 1996 average balances.
The following table reflects the components of the Corporation's net interest
income for the years ended December 31, 1998, 1997 and 1996 presented herein,
(1) average assets, liabilities, and stockholders' equity, (2) interest income
earned on interest-earning assets and interest expense paid on interest-bearing
liabilities, (3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, and (4) net yield on
interest-earning assets. Nontaxable income from investment securities and loans
is presented on a tax-equivalent basis assuming a statutory tax rate of 34% and
compliance with Section 291 of the Internal Revenue Code for 1998, 1997 and
1996. This was accomplished by adjusting this income upward to make it
equivalent to the level of taxable income required to earn the same amount after
taxes.
15
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
INTEREST RATES INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID
-------- ------- ---- -------- ------- ---- -------- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) ............................ $108,667 $ 9,437 8.68% $ 91,022 $ 8,052 8.85% $ 76,751 $6,926 9.02%
Taxable investment securities ........ 26,996 1,656 6.13 21,498 1,388 6.46 20,650 1,319 6.39
Tax-exempt investment
securities (2) ...................... 9,751 621 6.37 9,511 660 6.94 8,896 631 7.09
Other interest-earning assets ........ 14,450 788 5.45 6,369 357 5.61 6,633 360 5.43
-------- ------- -------- ------- -------- ------
Total interest-earning assets ........ 159,864 12,502 7.82 128,400 10,457 8.14 112,930 9,236 8.18
------- ------- ------
Net-interest-earning assets:
Allowance for loan losses ............ (1,523) (1,407) (1,249)
Other assets ......................... 10,275 9,183 8,161
-------- -------- --------
Total assets ......................... $168,616 $136,176 $119,842
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits ............................ $ 55,195 $ 1,898 3.44% $ 29,856 $ 774 2.59% $ 23,150 $ 485 2.10%
Savings deposits ..................... 20,914 473 2.26 21,219 480 2.26 20,353 458 2.25
Time deposits ........................ 45,142 2,424 5.37 45,427 2,470 5.44 42,625 2,329 5.46
Borrowing ............................ 572 31 5.42 1,570 80 5.10 1,695 78 4.60
-------- ------- -------- ------- -------- ------
Total interest-bearing liabilities ... 121,823 4,826 3.96 98,072 3,804 3.88 887,823 3,350 3.81
------- ------- ------
on-interest-bearing liabilities:
Demand deposits ...................... 33,051 26,158 21,626
Other liabilities .................... 1,010 792 668
Stockholders' equity ................. 12,732 11,154 9,725
-------- -------- --------
Total liabilities and stockholders'
equity .............................. $168,616 $136,176 $119,842
======== ======== ========
Net interest income
(taxable equivalent basis) .......... $ 7,676 $ 6,653 $5,886
======= ======= ======
Net interest spread
(taxable equivalent basis) .......... 3.86% 4.26% 4.37%
==== ==== ====
Net yield on interest-earning
assets (taxable equivalent
basis) (3) .......................... 4.80% 5.18% 5.21%
==== ==== ====
- ----------
(1) For purpose of these calculations, nonaccruing loans are included in the
average balance. Fees are included in loan interest. Loans and total
interest-earning assets are net of unearned income. Tax equivalent
adjustments are based on a marginal tax rate of 34% and the provisions of
Section 291 of the Internal Revenue Code.
(2) The tax equivalent adjustments are based on a marginal tax rate of 34% and
the provisions of Section 291 of the Internal Revenue Code.
(3) Net interest income (taxable equivalent basis) divided by average
interest-earning assets.
</TABLE>
16
<PAGE>
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields earned and rates paid on such assets and liabilities on a tax
equivalent basis. The table reflects the extent to which changes in the
Corporation's interest income and interest expense are attributable to changes
in volume (changes in volume multiplied by prior rate) and changes in rate
(changes in rate multiplied by prior year volume). Changes attributable to the
combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
1998 VERSUS 1997 1997 VERSUS 1996
----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
AVERAGE AVERAGE
------------------- ------------------
VOLUME RATE NET VOLUME RATE NET
------- -------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans ................................. $ 1,535 $ (150) $ 1,385 $ 1,265 $ (139) $ 1,126
Taxable investment securities ......... 340 (72) 268 55 14 69
Tax-exempt investment securities ...... 16 (55) (39) 43 (14) 29
Federal funds sold .................... 441 (10) 431 (15) 12 (3)
------- ------- ------- ------- ------- -------
Total interest-earning assets ........ 2,332 (287) 2,045 1,348 (127) 1,221
------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand deposits ...... $ 812 $ 312 $ 1,124 $ 159 $ 130 $ 289
Savings deposits ...................... (7) 0 (7) 20 2 22
Time deposits ......................... (15) (31) (46) 152 (11) 141
Borrowings ............................ (54) 5 (49) (6) 8 2
------- ------- ------- ------- ------- -------
Total interest-bearing liability ..... 736 286 1,022 325 129 454
------- ------- ------- ------- ------- -------
Net change in net interest income ...... $ 1,596 $ (573) $ 1,023 $ 1,023 $ (256) $ 767
======= ======= ======= ======= ======= =======
</TABLE>
PROVISION FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses considered by management
to be adequate to cover the inherent risk of loss associated with its loan
portfolio. On an ongoing basis, management analyzes the adequacy of this
allowance by considering the nature and volume of the Corporation's loan
activity, financial condition of the borrower, fair market value of underlying
collateral, and changes in general market conditions. Additions to the allowance
for loan losses are charged to operations in the appropriate period. Actual loan
losses, net of recoveries, serve to reduce the allowance. The appropriate level
of the allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates.
The loan loss provision totaled $200,000 in 1998 representing a 66.7% increase
from the 1997 provision of $120,000. The 1997 provision decreased 22.6% from the
1996 provision of $155,000.
NONINTEREST INCOME
Noninterest income increased $255,000, or 33.9%, to $1.0 million during the year
ended December 31, 1998, when compared with $753,000 during the 1997 period. The
increase in noninterest income resulted primarily from an increase in fees and
service charges on deposit accounts of $139,000 to $702,000 for the year ended
December 31, 1998 due to an expanding customer base. Gain on sales of mortgage
loans increased $110,000 to $156,000 for 1998 due to an increase in the volume
of loans originated for sale.
Noninterest income increased by $89,000, or 13.4%, to $753,000 during the year
ended December 31, 1997, when compared with $664,000 during the 1996 period. The
increase resulted primarily from an increase in fees and service charges
partially offset by a volume related decrease in gain on sales of mortgage
loans.
17
<PAGE>
NONINTEREST EXPENSE
Although management is committed to containing noninterest expense, the
continued growth of the Corporation has caused noninterest expense to increase
by $834,000, or 16.6%, to $5.9 million for the year ended December 31,1998,
compared to $5.0 million for the same period in 1997. Salaries and employee
benefits, the major component of noninterest expense, increased $343,000, or
13.8%. The increase was due primarily to the full year effect of staffing the
new branches in Waldwick and Ridgewood and general merit and salary increases.
Increases in occupancy, equipment and data processing totaling $163,000 were due
to the full year effect of the installation during 1997 of an ATM network and
the opening of the two new branches. Miscellaneous expense increased $305,000
due primarily to an increase in consulting fees of $111,000 and auditing expense
of $37,000. Management enhanced the internal audit program used by the bank
during 1998 and utilized outside consultants to continue to improve the data
processing network.
In accordance with its By-laws to tithe ten percent (10%) of its pre-tax profits
to various charities, the Corporation had charitable contributions totaling
$215,000 for the year ended December 31, 1998, an increase of $26,000, or 13.8%,
over the same period in 1997.
Noninterest expense increased $697,000, or 16.1%, to $5.0 million for the year
ended December 31, 1997, compared to $4.3 million for the same period in 1996.
Increases in salaries and employee benefits, equipment, data processing,
stationery and supplies and miscellaneous expense were caused primarily by the
installation of an ATM network, the opening of new branches in Waldwick and
Ridgewood, and staffing additions in the operations area, new business
development and new branches.
FINANCIAL CONDITION
Total assets at December 31, 1998 were $186.0 million, an increase of $36.2
million, or 24.2%, over the $149.7 million at December 31, 1997. This increase
in assets reflects, among other things, a $22.3 million increase in net loans
held for portfolio, a $7.5 million increase in securities available for sale and
$4.3 million increase in cash and cash equivalents.
LOAN PORTFOLIO
The Corporation's loan portfolio at December 31, 1998, net of allowance for loan
losses, totaled $121.5 million, an increase of $22.3 million, or 22.5%, over the
$99.2 million at December 31, 1997. During 1998, the Corporation experienced
strong volume of new loan originations. Increases continued to occur in most
loan categories and were caused by the commitment to competitively price
products, the continued "fallout" of the small business customer from the
mergers of other financial institutions in the Corporation's market area and the
retention of residential mortgages. Commercial real estate mortgage loans
consisting of $46.4 million, or 37.7% of the total portfolio, comprised the
largest portion of the loan portfolio. This represented an increase of $11.3
million from $35.0 million, or 34.8% of the total portfolio at December 31,
1997. Residential mortgage and installment loans increased $4.5 million and $5.6
million, respectively. Mortgage loans held for sale totaled $793,000 at December
31, 1998 and consisted of 1-4 family mortgage loans. It is the policy of the
Corporation to offer certain competitive mortgage products which are immediately
sold to specific investors, servicing released. This allows the Corporation to
continue to maintain a competitive mortgage product line, recognize other fee
income, and maintain liquidity requirements. The Corporation's loans are made
primarily to businesses and individuals located in the State of New Jersey. The
Corporation has not made loans to borrowers outside the United States.
At December 31, 1998, there were no concentrations of loans exceeding 10% of
total loans outstanding. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
related conditions. The Corporation's lending activities are concentrated in
loans secured by real estate located in northern New Jersey and therefore
collectibility of the loan portfolio is susceptible to changes in real estate
market conditions in the northern New Jersey market.
18
<PAGE>
The following table sets forth the classification of the Corporation's loans by
major category at the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential ........................ $ 24,784 20.1% $20,305 20.1% $15,257 18.5%
Commercial ......................... 46,375 37.7% 35,035 34.8% 26,797 32.6%
Commercial loans .................... 18,995 15.4% 17,826 17.7% 17,403 21.1%
Consumer loans:
Installment (1) .................... 29,290 23.8% 23,659 23.5% 18,892 22.9%
Home equity ........................ 3,593 2.9% 3,551 3.5% 3,838 4.7%
Other .............................. 126 0.1% 414 0.4% 136 0.2%
-------- ----- -------- ----- ------- -----
Total loans ......................... 123,163 100.0% 100,790 100.0% 82,323 100.0%
Less: Allowance for loan losses ..... 1,542 1,462 1,353
Deferred loan fees ............... 113 123 122
-------- -------- -------
Net loans ........................... $121,508 $99,205 $80,848
======== ======= =======
</TABLE>
- ----------
(1) Includes automobile, home improvement, second mortgages and unsecured loans.
The following table sets forth certain categories of loans as of December 31,
1998 by contractual maturity:
AFTER 1 YEAR
WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
-------- -------- -------- --------
(In thousands)
Real estate mortgage ... $ 2,738 $ 15,591 $ 52,830 $ 71,159
Commercial ............. 8,345 9,394 1,256 18,995
Consumer ............... 1,208 13,738 18,063 33,009
-------- -------- -------- --------
Total loans ............ $ 12,291 $ 38,723 $ 72,149 $123,163
======== ======== ======== ========
The following table sets forth the dollar amount of all loans due one year or
more after December 31, 1998, which have predetermined interest rates or
floating or adjustable interest rates:
FLOATING OR
PREDETERMINED ADJUSTABLE
RATES RATES TOTAL
-------- -------- --------
(In thousands)
Real estate mortgage ... $ 34,875 $ 33,546 $ 68,421
Commercial ............. 4,819 5,831 10,650
Consumer ............... 26,908 4,893 31,801
-------- -------- --------
Total .................. $ 66,602 $ 44,270 $110,872
======== ======== ========
19
<PAGE>
ASSET QUALITY
The Corporation's principal earning asset is its loan portfolio. Inherent in the
lending function is the risk of deterioration in a borrower's ability to repay
loans under existing loan agreements. Management realizes that because of this
risk, reserves are maintained to absorb potential loan losses. In determining
the adequacy of the allowance for loan losses, management of the Corporation
considers the risks inherent in its loan portfolio and changes in the nature and
volume of its loan activities, along with general economic and real estate
market conditions. Although management attempts to establish a reserve
sufficient to offset potential losses in the portfolio, changes in economic
conditions, regulatory policies and borrower's performance could require future
changes to the allowance.
The Corporation utilizes a two tier approach by (1) identifying problem loans
and allocating specific loss allowances on such loans and (2) establishing a
general valuation allowance on the remainder of its loan portfolio. The
Corporation maintains a loan review system which allows for a periodic review of
its loan portfolio and the early identification of potential problem loans. Such
a system takes into consideration, among other things, delinquency status, size
of loans, type of collateral and financial condition of the borrowers.
Allocation of specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, restructured loans, loans past
due 90 days or more and accruing, other real estate owned and nonaccrual
investments. The Corporation's loans are generally placed in a nonaccrual status
when they become past due in excess of 90 days as to payment of principal and
interest. Interest previously accrued on these loans and not yet paid is charged
against income during the current period. Interest earned thereafter is only
included in income to the extent that it is received in cash. Loans past due 90
days or more and accruing represent those loans which are sufficiently
collateralized and management believes all interest and principal owed will be
collected. Restructured loans are loans which have been renegotiated to permit a
borrower, who has incurred adverse financial circumstances, to continue to
perform. Management can reduce the contractual interest rates to below market
rates or make significant concessions to the terms of the loan in order for the
borrower to continue to make payments. Other real estate owned was sold during
1998.
20
<PAGE>
The following table sets forth certain information regarding the Corporation's
nonperforming assets as of December 31 of each of the preceding three years:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans: (1)
Commercial real estate ................................... $ -- $ 40 $ --
Commercial ............................................... -- -- 95
Consumer ................................................. 4 -- --
------ ------ ------
Total nonaccrual loans .................................. 4 40 95
------ ------ ------
Loans past due ninety days or more and accruing:
Commercial ............................................... 64 -- 550
Consumer ................................................. -- 4 --
------ ------ ------
Total loans past due ninety days or more and accruing ... 64 4 550
------ ------ ------
Restructured loans:
Commercial ............................................... 480 612 131
Consumer ................................................. -- 40 130
------ ------ ------
Total restructured loans ................................ 480 652 261
------ ------ ------
Total nonperforming loans .................................. $ 548 $ 696 $ 906
====== ====== ======
Other real estate owned, net ............................... -- 229 229
------ ------ ------
Total nonperforming assets ................................. $ 548 $ 925 $1,135
====== ====== ======
Nonaccrual loans to total gross loans ...................... -- % 0.04% 0.12%
Nonperforming loans to total gross loans ................... 0.45% 0.69% 1.10%
Nonperforming loans to total assets ........................ 0.29% 0.47% 0.70%
Nonperforming assets to total assets ....................... 0.29% 0.62% 0.88%
Allowance for loan losses to nonperforming loans ........... 281.53% 209.96% 149.27%
</TABLE>
- ----------
(1) At December 31, 1998, 1997 and 1996, there were no restructured loans
classified as nonaccrual.
There were no loans, 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 nonaccrual, past due or restructured at a future date.
21
<PAGE>
The following table sets forth, for the years ended December 31, 1998, 1997 and
1996, the historical relationships among the amount of loans outstanding, the
allowance for loan losses, the provision for loan losses, the amount of loans
charged off and the amount of loan recoveries:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period ....................... $ 1,462 $ 1,353 $ 1,177
Loans charged off:
Commercial .......................................... 113 2 2
Consumer ............................................ 7 17 10
------- ------- -------
Total loans charged off ............................ 120 19 12
------- ------- -------
Recoveries of loans previously charged off:
Commercial real estate .............................. -- 1 5
Commercial .......................................... -- 4 28
Consumer ............................................ -- 3 --
------- ------- -------
Total recoveries of loans previously charged off ... 0 8 33
------- ------- -------
Net loans charged off (recovered) .................... 120 11 (21)
Provisions charged to operations ..................... 200 120 155
------- ------- -------
Balance at end of period ............................. $ 1,542 $ 1,462 $ 1,353
======= ======= =======
Net charge offs (recoveries) during the period
to average loans outstanding during the period ...... 0.11% (0.01%) (0.03%)
======= ======= =======
Balance of allowance for loan losses at the
end of year to gross year end loans ................. 1.25% 1.45% 1.64%
======= ======= =======
<CAPTION>
The following table sets forth the allocation of the allowance for loan losses
at the dates indicated by category loans:
1998 1997 1996
-------------------------- ------------------------- ------------------------
PERCENT PERCENT PERCENT
AMOUNT TO TOTAL (1) AMOUNT TO TOTAL (1) AMOUNT TO TOTAL (1)
------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate--residential $ 195 20.1% $ 175 20.1% $ 148 18.5%
Real estate--commercial 479 37.7% 404 34.8% 360 32.6%
Commercial 479 15.4% 576 17.7% 587 21.1%
Consumer 389 26.8% 307 27.4% 258 27.8%
------ ----- ------ ----- ------ -----
Total allowance for loan losses $1,542 100.0% $1,462 100.0% $1,353 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
- ----------
(1) Represents percentage of loan balance in category to total gross loans.
INVESTMENT PORTFOLIO
The Corporation maintains an investment portfolio to enhance its yields and to
provide a secondary source of liquidity. The portfolio is comprised of U.S.
Treasury securities, U.S. Government and Agency obligations, mortgage-backed
securities, and state and political subdivision obligations and has been
classified as held to maturity or available for sale. Investments in debt
securities that the Corporation has the positive intent and the ability to hold
to maturity are classified as held to maturity securities and reported at
amortized cost. All other securities are classified as available for sale
securities and reported at fair value, with unrealized holding gains or losses
reported in a separate component of stockholders' equity. Securities in the
available for sale category may
22
<PAGE>
be held for indefinite periods of time and include securities that management
intends to use as part of its Asset/Liability strategy or that may be sold in
response to changes in interest rates, changes in prepayment risks, the need to
provide liquidity, the need to increase regulatory capital or similar factors.
Because of the strong growth in deposits, the Corporation followed a policy of
replacing all matured and called issues and purchased net new securities
totaling $9.8 million. Securities available for sale increased to $18.6 million
at December 31, 1998, from $11.0 million at December 31, 1997, a increase of
$7.5 million, or 68.2%. Securities held to maturity increased $2.2 million, or
11.0%, to $22.5 million at December 31, 1998 from $20.2 million at December 31,
1997.
The following table sets forth the classification of the Corporation's
investment securities by major category at the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury ................. $ 3,280 17.6% $ 2,977 26.9% $ 3,586 31.4%
U.S. Government agencies ...... 8,205 44.2% 1,454 13.2% 1,049 9.2%
Obligations of state and
political subdivisions ...... 533 2.9% 275 2.5% 268 2.3%
Mortgage-backed securities .... 6,560 35.3% 6,341 57.4% 6,531 57.1%
------- ----- ------- ----- ------- -----
Total ........................... $18,578 100.0% $11,047 100.0% $11,434 100.0%
======= ===== ======= ===== ======= =====
Securities held to maturity:
U.S. Treasury ................. $ 948 4.2% $ 1,948 9.6% $ 2,193 11.0%
U.S. Government agencies ...... 7,123 31.6% 7,736 38.1% 6,357 31.8%
Obligations of state and
political subdivisions ...... 12,359 54.9% 8,479 41.9% 8,930 44.6%
Mortgage-backed securities .... 2,083 9.3% 2,119 10.4% 2,523 12.6%
------- ----- ------- ----- ------- -----
Total ........................... $22,513 100.0% $20,282 100.0% $20,003 100.0%
======= ===== ======= ===== ======= =====
<CAPTION>
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities available for
sale as of December 31, 1998:
AFTER 1 YEAR AFTER 5 YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury:
Carrying value ................................... $ 706 $ 2,574 $ -- $ -- $ 3,280
Yield ............................................ 6.01% 5.84% -- -- 5.88%
U.S. Government agencies:
Carrying value ................................... 497 3,504 2,891 1,313 8,205
Yield ............................................ 5.32% 5.92% 6.16% 6.60% 6.08%
Obligations of state and political subdivisions: ...
Carrying value ................................... -- 533 -- -- 533
Yield ............................................ -- 4.11% -- -- 4.11%
Mortgage-backed securities:
Carrying value ................................... -- 164 1,062 5,334 6,560
Yield ............................................ -- 6.68% 5.88% 6.21% 6.17%
------- ------- ------- ------- -------
Total carrying value ............................... $ 1,203 $ 6,775 $ 3,953 $ 6,647 $18,578
======= ======= ======= ======= =======
Weighted average yield ............................. 5.73% 5.77% 6.08% 6.29% 6.02%
======= ======= ======= ======= =======
</TABLE>
23
<PAGE>
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities held to maturity
as of December 31, 1998:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 5 YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury:
Carrying value ................................... $ 200 $ 748 $ -- $ -- $ 948
Yield ............................................ 6.08% 5.79% -- -- 5.85%
U.S. Government agencies:
Carrying value ................................... 10 4,769 2,344 -- 7,123
Yield ............................................ 7.35% 6.00% 6.14% -- 6.05%
Obligations of state and political subdivisions: ...
Carrying value ................................... 2,091 5,985 4,283 -- 12,359
Yield ............................................ 4.24% 4.35% 4.11% -- 4.25%
Mortgage-backed securities:
Carrying value ................................... -- -- 502 1,581 2,083
Yield ............................................ -- -- 6.09% 8.12% 6.16%
------- ------- ------- ------- -------
Total carrying value ............................... $ 2,301 $11,502 $ 7,129 $ 1,581 $22,513
======= ======= ======= ======= =======
Weighted average yield ............................. 4.42% 5.12% 4.92% 8.12% 5.06%
======= ======= ======= ======= =======
</TABLE>
DEPOSITS
Corporation deposits at December 31, 1998 totaled $170.7 million, an increase of
$34.5 million, or 25.3%, over the comparable period of 1997, when deposits
totaled $136.2 million. The Corporation attributes this increase to competitive
products and services and changes in the Corporation's marketplace, including
changes of ownership among some of the Corporation's competitors. These changes
have made customer relationships with some competitors unstable and have
provided the Corporation with an opportunity to attract new depositors. The
opening of the two new branch locations and the successfulness of the tiered
money market product also contributed to the growth in deposits.
The following table sets forth the classification of the Corporation's deposits
by major category as of December 31 of each of the preceding years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand ......... $ 39,234 23.0% $ 29,428 21.6% $ 25,136 21.7%
Interest-bearing demand ............ 66,384 38.9% 38,027 27.9% 23,992 20.7%
Savings deposit .................... 21,044 12.3% 20,418 15.0% 20,885 18.0%
Time deposits ...................... 44,059 25.8% 48,342 35.5% 45,812 39.6%
-------- ----- -------- ----- -------- -----
Total .............................. $170,721 100.0% $136,215 100.0% $115,825 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
24
<PAGE>
As of December 31, 1998, the aggregate amount of outstanding time deposits
issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (in thousands):
Three months or less ........................ $ 881
Four months through six months .............. 1,734
Seven months through twelve months .......... 687
Over twelve months .......................... 2,616
------
Total ....................................... $5,918
======
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Corporation's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. Management actively monitors and
manages its interest rate risk exposure.
The Corporation's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Corporation's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Corporation monitors the impact of changes in interest rates on its
net interest income using several tools. One measure of the Corporation's
exposure to differential changes in interest rates between assets and
liabilities is shown in the Corporation's Maturity and Repricing Analysis under
the Interest Rate Sensitivity caption below.
The Corporation's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Corporation's
net interest income and capital, while structuring the asset-liability structure
to obtain the maximum yield-cost spread on that structure. The Corporation
relies primarily on its asset-liability structure to control interest rate risk.
The Corporation continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost effective,
and therefore, has focused its efforts on increasing the Corporation's
yield-cost spread through retail growth opportunities.
The following table shows the Corporation's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1998. Market rate sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. For assets, expected maturities are based upon
contractual maturity and contractual repayments of principal. For deposit
products with no stated maturities, balances are identified as core/noncore
deposits based on historical averages. Core deposits are noninterest sensitive
and are placed in the "thereafter" category. Noncore deposits are considered
interest sensitive and are placed in the "1999" category.
<TABLE>
<CAPTION>
AVERAGE
INTEREST FAIR
RATE 1999 2000 2001 2002 2003 THEREAFTER BALANCE(1) VALUE
------ ------ ------ ------ ----- ----- ---------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Federal funds sold ............... 4.79% $ 4,575 $ -- $ -- $ -- $ -- $ -- $ 4,575 $ 4,575
Commercial paper ................. 5.04% 4,941 -- -- -- -- -- 4,941 4,941
Interest-bearing due from banks .. 5.45% 104 -- -- -- -- -- 104 104
Loans:
Real estate mortgage ............ 8.27% 6,196 4,959 5,930 5,681 11,160 37,233 71,159 71,846
Commercial ...................... 9.17% 9,899 2,158 4,837 814 661 626 18,995 18,996
Consumer ........................ 7.92% 5,557 4,424 4,242 2,945 3,906 11,935 33,009 33,022
Mortgage loans held for sale ..... 6.30% 793 -- -- -- -- -- 793 793
Investment securities(1) ......... 5.39% 10,012 4,688 4,214 4,014 4,609 14,111 41,648 41,892
INTEREST-SENSITIVE LIABILITIES
Savings .......................... 2.25% 1,697 -- -- -- -- 19,347 21,044 21,044
Interest-bearing ................. 1.94% 15,313 -- -- -- -- 51,071 66,384 66,384
Time deposits .................... 5.22% 27,828 11,851 2,455 1,399 125 401 44,059 44,462
Repurchase agreements ............ 5.24% 662 -- -- -- -- -- 662 662
</TABLE>
- ----------
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock
INTEREST RATE SENSITIVITY
Interest rate movements and deregulation of interest rates have made managing
the Corporation's interest rate sensitivity increasingly important. The
Corporation attempts to maintain stable net interest margins by generally
25
<PAGE>
matching the volume of assets and liabilities maturing, or subject to repricing,
by adjusting interest rates to market conditions, and by developing new
products. The difference between the volume of assets and liabilities that
reprice in a given period is the interest sensitivity gap. A "positive" gap
results when more assets than liabilities mature or are repricing in a given
time frame. Conversely, a "negative" gap results when there are more liabilities
than assets maturing or repricing during a given period of time. The smaller the
gap, the less the effect of the market volatility on net interest income. During
a period of rising interest rates, an institution with a negative gap position
would not be in as favorable a position, as compared to an institution with a
positive gap, to invest in higher yielding assets. This may result in yields on
its assets increasing at a slower rate than the increase in its costs of
interest-bearing liabilities than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap would experience a
repricing of its assets at a slower rate than its interest-bearing liabilities
which consequently may result in its net interest income growing at a faster
rate than an institution with a positive gap position.
The following table sets forth the estimated maturity/repricing structure of the
Corporation's interest-earning assets and interest-bearing liabilities as of
December 31, 1998. Except as stated below, the amounts of assets or liabilities
shown which reprice or mature during a particular period were determined in
accordance with the contractual terms of each asset or liability. For example,
the table does not assume any prepayment of fixed-rate loans or mortgage-backed
securities. The table does not necessarily indicate the impact of general
interest rate movements on the Corporation's net interest income because the
repricing of certain categories of assets and liabilities, for example,
prepayments of loans and withdrawal of deposits, is beyond the Corporation's
control. As a result, certain assets and liabilities indicated as repricing
within a period may in fact reprice at different times and at different rate
levels.
<TABLE>
<CAPTION>
MORE THAN
THREE MONTHS
THREE MONTHS THROUGH AFTER NONINTEREST
OR LESS ONE YEAR ONE YEAR SENSITIVE TOTAL
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS:
Loans:
Real estate mortgage .......................... $ 4,120 $ 6,715 $ 60,324 $ -- $ 71,159
Commercial .................................... 14,444 1,674 2,877 -- 18,995
Consumer ...................................... 5,314 4,569 23,126 -- 33,009
Mortgage loans held for sale .................... 793 -- -- -- 793
Investment securities (1) ....................... 4,152 8,344 29,152 -- 41,648
Federal funds sold .............................. 4,575 -- -- -- 4,575
Other assets .................................... 4,945 100 -- 10,746 15,791
-------- -------- -------- -------- --------
Total assets ................................ $ 38,343 $ 21,402 $115,479 $ 10,746 $185,970
-------- -------- -------- -------- --------
SOURCE OF FUNDS:
Savings deposits ................................ $ -- $ 21,044 $ -- $ -- $ 21,044
Interest-bearing ................................ 66,384 -- -- -- 66,384
Time deposits ................................... 9,032 18,796 16,231 -- 44,059
Repurchase agreements ........................... 100 562 -- -- 662
Other liabilities ............................... -- -- -- 40,272 40,272
Stockholders' equity ............................ -- -- -- 13,549 13,549
-------- -------- -------- -------- --------
Total source of funds ....................... $ 75,516 $ 40,402 $ 16,231 $ 53,821 $185,970
-------- -------- -------- -------- --------
Interest rate sensitivity gap ................... $(37,173) $(19,000) $ 99,248 $(43,075)
======== ======== ======== ========
Cumulative interest rate sensitivity gap ........ $(37,173) $(56,173) $ 43,075 $ --
======== ======== ======== ========
Ratio of GAP to total assets .................... (20.0%) (10.2%) 53.4% (23.2%)
======== ======== ======== ========
Ratio of cumulative GAP assets to
total assets .................................. (20.0%) (30.2%) 23.2% --
======== ======== ======== ========
</TABLE>
- ----------
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
26
<PAGE>
LIQUIDITY
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 by 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
loan 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. These activities
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents--beginning ...................... $12,672 $10,955 $ 7,465
Operating activities:
Net income .............................................. 1,647 1,463 1,317
Adjustments to reconcile net income to net cash
provided by operating activities ...................... 289 202 550
------- ------- -------
Net cash provided by operating activities ................. 1,936 1,665 1,867
Net cash used in investing activities ..................... (32,243) (19,139) (12,408)
Net cash provided by financing activities ................. 34,634 19,191 14,031
------- ------- -------
Net increase (decrease) in cash and cash equivalents ...... 4,327 1,717 3,490
------- ------- -------
Cash and cash equivalents--ending ......................... $16,999 $12,672 $10,995
======= ======= =======
</TABLE>
Cash was generated by operating activities in each of the above periods. The
primary source of cash from operating activities during each period was net
income.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as federal funds sold. The Corporation anticipates that it will have
sufficient funds available to meet its current loan commitments. At December 31,
1998, the Corporation has outstanding loan commitments of $6.4 million and
unused lines and letters of credit totaling $19.7 million. Certificates of
deposit scheduled to mature in one year or less, at December 31, 1998, totaled
$28.2 million. Management believes that a significant portion of such deposits
will remain with the Corporation.
CAPITAL
The Corporation is subject to capital adequacy guidelines promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The FRB has issued
regulations to define the adequacy of capital based upon the sensitivity of
assets and off-balance sheet exposures to risk factors. Four categories of risk
weights (0%, 20%, 50% and 100%) were established to be applied to different
types of balance sheet assets and off-balance sheet exposures. The aggregate of
the risk weighted items (risk-based assets) is the denominator of the ratio, the
numerator is risk-based capital. Under the regulations, risk-based capital has
been classified into two categories. Tier 1 capital includes common and
qualifying perpetual preferred stockholders' equity less goodwill. Tier 2
capital includes mandatory convertible debt, allowance for loan losses, subject
to certain limitations, and certain subordinated and term debt securities. Total
qualifying capital consists of Tier 1 capital and Tier 2 capital; however, the
amount of Tier 2 capital may not exceed the amount of Tier 1 capital. The FRB
has also issued leverage capital adequacy standards. Under these standards, in
addition to the risk-based capital ratios, a corporation must also compute a
ratio of Tier 1 capital (using the risk-based capital definition) to total
quarterly
27
<PAGE>
average assets. The following table reflects the Corporation's capital ratios at
December 31, 1998. The Bank Federal regulator has promulgated substantially
similar capital regulations applicable to the Bank.
----------------------------------
REQUIRED ACTUAL EXCESS
----------------------------------
Risk-based capital:
Tier 1 .................... 4.00% 10.62% 6.62%
Total ..................... 8.00% 11.87% 3.87%
Leverage ratio* ............. 3.00% 7.16% 4.16%
- ----------
* The minimum leverage ratio set by the FRB is 3.00%. Institutions which are
not "top-rated" will be expected to maintain a ratio of approximately 100
to 200 basis points above this ratio.
YEAR 2000 COMPLIANCE
Stewardship Financial Corporation established 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 new
Millennium. The Corporation, under the guidance from the FFIEC established five
phases to follow to provide a Year 2000 self assessment and action plan. The
first phase, Awareness, was completed by March, 1998 and included an inventory
of all hardware and software used within the organization and a list of vendors
and companies providing service to the Corporation. The second phase,
Assessment, was substantially completed by September, 1998 and included an
evaluation of all hardware and software with the determination of Y2K compliant
status and a schedule of when and how the item would be made compliant. The
third phase, Renovation, is currently being completed. During the first six
months of 1999, remaining noncompliant hardware and software is scheduled to be
replaced and/or upgraded. The fourth phase, Validation, is the testing of all
mission critical hardware, software, and equipment. Initial testing of the core
processing system was completed in the fourth quarter 1998. A second phase of
testing to include vendor interfacing will be completed in March and April 1999.
The final phase, Implementation, requires the monitoring and development of
business resumptive and contingency plans and will be completed during the
second quarter of 1999. The Corporation will utilize an independent third party
to verify results of testing and documentation of contingency plans.
In addition to the Year 2000 self assessment and action plan, Management is
evaluating risk inherent in customers' financial positions based on their
reliance on equipment and vendors affected by the century date change.
Management has utilized questionnaires and direct visits to determine and
quantify risk within the lending portfolio. As of December 31, 1998, no material
risks pertaining to Year 2000 were quantified. Management continues to monitor
and to the extent a customer's financial position is weakened as a result of the
century date change, credit quality could be affected.
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 $100,000 expensed to date. It is not anticipated that this will
materially affect the performance of the Corporation in the future.
While the Corporation continues to be reliant on third party processing,
management has a plan in place which helps identify potential weaknesses.
Management is concentrating on these mission critical areas in final testing and
in developing strong business resumption plans. Management is confident that it
is on target to meet the technological challenges of the Year 2000.
28
<PAGE>
KPMG LLP [LOGO]
New Jersey Headquarters
150 J.F.K. Parkway
Short Hills, New Jersey 07078
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Stewardship Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Stewardship Financial Corporation and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the financial position of Stewardship Financial
Corporation and subsidiary as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles
KPMG LLP
January 27, 1999
29
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ......................................................... $ 7,379,000 $ 4,348,000
Commercial paper and interest-bearing due from banks ............................ 5,045,000 3,099,000
Federal funds sold .............................................................. 4,575,000 5,225,000
-----------------------------------
Cash and cash equivalents ...................................................... 16,999,000 12,672,000
Securities available for sale (note 2) .......................................... 18,578,000 11,047,000
Securities held to maturity; estimated fair value
of $ 22,757,000 (1998) and $20,535,000 (1997) (note 3) ......................... 22,513,000 20,282,000
FHLB-NY stock, at cost .......................................................... 557,000 510,000
Loans, net of allowance for loan losses of $1,542,000 (1998)
and $1,462,000 (1997) (notes 4 and 5) .......................................... 121,508,000 99,205,000
Mortgage loans held for sale .................................................... 793,000 756,000
Premises and equipment, net (note 6) ............................................ 2,484,000 2,724,000
Accrued interest receivable ..................................................... 1,229,000 1,029,000
Intangible assets, net of accumulated amortization of $284,000 and
$222,000 at December 31, 1998 and 1997 respectively ............................ 465,000 528,000
Other real estate owned, net (note 5) ........................................... -- 229,000
Other assets (note 13) .......................................................... 844,000 750,000
-----------------------------------
Total assets ................................................................. $185,970,000 $149,732,000
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits: (note 7)
Noninterest-bearing ............................................................ $ 39,234,000 $ 29,428,000
Interest-bearing ............................................................... 131,487,000 106,787,000
-----------------------------------
Total deposits ............................................................... 170,721,000 136,215,000
Securities sold under agreements to repurchase (note 8) ........................ 662,000 533,000
Accrued expenses and other liabilities ......................................... 1,038,000 1,058,000
-----------------------------------
Total liabilities ............................................................ 172,421,000 137,806,000
Commitments and contingencies (note 14) -- --
STOCKHOLDERS' EQUITY (note 9 and 15)
Common stock, no par value; 5,000,000 shares authorized;
990,284 and 931,888 shares issued and outstanding at
December 31, 1998 and 1997, respectively ....................................... 6,645,000 5,229,000
Retained earnings ............................................................... 6,867,000 6,637,000
Accumulated other comprehensive income .......................................... 37,000 60,000
-----------------------------------
Total Stockholders' equity ................................................... 13,549,000 11,926,000
-----------------------------------
Total liabilities and Stockholders' equity ................................... $185,970,000 $149,732,000
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ......................................................... $ 9,430,000 $ 8,039,000 $ 6,923,000
Securities held to maturity:
Taxable ...................................................... 782,000 750,000 697,000
Nontaxable ................................................... 432,000 458,000 438,000
Securities available for sale ................................. 929,000 683,000 635,000
Other interest-earning assets ................................. 747,000 325,000 360,000
----------------------------------------------------
Total interest income ...................................... 12,320,000 10,255,000 9,053,000
----------------------------------------------------
INTEREST EXPENSE:
Deposits (note 7) ............................................. 4,794,000 3,724,000 3,271,000
Borrowed money ................................................ 31,000 80,000 79,000
----------------------------------------------------
Total interest expense ..................................... 4,825,000 3,804,000 3,350,000
----------------------------------------------------
Net interest income before provision for loan losses .......... 7,495,000 6,451,000 5,703,000
Provision for loan losses (note 4) ............................ 200,000 120,000 155,000
----------------------------------------------------
Net interest income after provision for loan losses ........... 7,295,000 6,331,000 5,548,000
----------------------------------------------------
NONINTEREST INCOME:
Fees and service charges ...................................... 702,000 563,000 512,000
Gain/(Loss) on calls and sales of securities, net ............. 22,000 -- (4,000)
Gain on sales of mortgage loans ............................... 156,000 46,000 52,000
Miscellaneous ................................................. 128,000 144,000 104,000
----------------------------------------------------
Total noninterest income ................................... 1,008,000 753,000 664,000
----------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits (note 10) ...................... 2,828,000 2,485,000 2,116,000
Occupancy, net (note 14) ...................................... 400,000 348,000 288,000
Equipment ..................................................... 411,000 356,000 232,000
Data processing ............................................... 309,000 253,000 219,000
Advertising ................................................... 139,000 175,000 97,000
FDIC insurance premium ........................................ 22,000 18,000 49,000
Amortization of intangible assets ............................. 62,000 67,000 81,000
Other real estate owned expense ............................... (25,000) (19,000) 10,000
Charitable contributions ...................................... 215,000 189,000 151,000
Stationery and supplies ....................................... 199,000 159,000 200,000
Miscellaneous ................................................. 1,298,000 993,000 884,000
----------------------------------------------------
Total noninterest expenses ................................. 5,858,000 5,024,000 4,327,000
----------------------------------------------------
Income before income tax expense .............................. 2,445,000 2,060,000 1,885,000
Income tax expense (note 13) .................................. 798,000 597,000 568,000
----------------------------------------------------
Net income .................................................... $ 1,647,000 $ 1,463,000 $ 1,317,000
====================================================
Basic earnings per share (note 12) ............................ $1.67 $1.50 $1.37
====================================================
Diluted earnings per share (note 12) .......................... $1.65 $1.50 $1.37
====================================================
Cash dividends per share ...................................... $0.27 $0.23 $0.20
====================================================
Weighted average number of common shares
outstanding (note 12) ........................................ 984,842 972,983 962,368
====================================================
Weighted average number of diluted common
shares outstanding (note 12) ................................. 996,302 976,258 962,368
====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-------------------------------------------------------------------
ACCUMULATED
COMMON STOCK OTHER
---------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1995 .......................... 910,883 $4,866,000 $4,270,000 $ 15,000 $ 9,151,000
Cash dividends paid ($.20 per share) ............... -- -- (192,000) -- (192,000)
Issuance of common stock ........................... 9,622 125,000 -- -- 125,000
Comprehensive income:
Net income for the year
ended December 31, 1996 ........................... -- -- 1,317,000 -- 1,317,000
Unrealized holding gains on securities
available for sale arising during the period
(net of tax of $4,000) ........................... -- -- -- 6,000 6,000
-----------
Total comprehensive income 1,323,000
-------------------------------------------------------------------
Balance--December 31, 1996 .......................... 920,505 $4,991,000 $5,395,000 $ 21,000 $10,407,000
Cash dividends paid ($.23 per share) ............... -- -- (221,000) -- (221,000)
Issuance of common stock ........................... 11,383 200,000 -- -- 200,000
Issuance of stock options at discount .............. -- 38,000 -- -- 38,000
Comprehensive income:
Net income for the year
ended December 31, 1997 ........................... -- -- 1,463,000 -- 1,463,000
Unrealized holding gains on securities
available for sale arising during the period
(net of tax of $24,000) .......................... -- -- -- 39,000 39,000
-----------
Total comprehensive income 1,502,000
-------------------------------------------------------------------
Balance--December 31, 1997 .......................... 931,888 $5,229,000 $6,637,000 $ 60,000 $11,926,000
Cash dividends paid ($.27 per share) ............... -- -- (269,000) -- (269,000)
5% Stock Dividend .................................. 46,614 1,142,000 (1,148,000) -- (6,000)
Common stock issued under stock plans .............. 11,782 274,000 -- -- 274,000
Comprehensive income:
Net income for the year
ended December 31, 1998 ........................... -- -- 1,647,000 -- 1,647,000
Unrealized holding losses on securities
available for sale arising during the period
(net of tax credit of $12,000) ................... -- -- -- (23,000) (23,000)
-----------
Total comprehensive income ......................... 1,624,000
-------------------------------------------------------------------
Balance--December 31, 1998 .......................... 990,284 6,645,000 6,867,000 37,000 $13,549,000
===================================================================
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 1,647,000 $ 1,463,000 $ 1,317,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment ......... 395,000 320,000 229,000
Provision for losses on investment securities ................... -- -- 1,000
Amortization of premiums and accretion of discounts, net ........ 37,000 51,000 56,000
Accretion of deferred loan fees ................................. (53,000) (53,000) (65,000)
Provision for loan losses ....................................... 200,000 120,000 155,000
Provision for losses on other real estate ....................... -- -- 20,000
Originations of mortgage loans held for sale .................... (12,817,000) (4,604,000) (4,955,000)
Proceeds from sale of mortgage loans ............................ 12,936,000 4,131,000 5,121,000
Gain on sale of loans ........................................... (156,000) (46,000) (52,000)
Issuance of stock options at discount ........................... -- 38,000 --
Loss on retirement of fixed assets .............................. -- 2,000 --
Deferred income tax benefit ..................................... (32,000) (105,000) (132,000)
Amortization of intangible assets ............................... 63,000 67,000 81,000
Increase in accrued interest receivable ......................... (200,000) (149,000) (44,000)
Increase in other assets ........................................ (64,000) (8,000) (34,000)
(Decrease)/increase in other liabilities ........................ (20,000) 438,000 169,000
----------------------------------------------------
Net cash provided by operating activities ..................... 1,936,000 1,665,000 1,867,000
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale ........................ (12,391,000) (1,884,000) (3,299,000)
Proceeds from maturities and principal repayments
on securities available for sale ................................ 3,717,000 2,313,000 1,726,000
Proceeds from calls on securities available for sale ............. 1,101,000 -- --
Purchase of securities held to maturity .......................... (13,966,000) (4,241,000) (5,930,000)
Proceeds from maturities and principal repayments on
securities held to maturity ..................................... 5,576,000 3,257,000 4,312,000
Proceeds from calls of securities held to maturity ............... 6,150,000 675,000 1,235,000
Purchase of FHLB-NY stock ........................................ (48,000) (59,000) (114,000)
Net increase in loans ............................................ (22,449,000) (18,424,000) (9,962,000)
Sale of other real estate owned .................................. 229,000 -- --
Additions to premises and equipment .............................. (162,000) (776,000) (376,000)
----------------------------------------------------
Net cash used in investing activities ......................... (32,243,000) (19,139,000) (12,408,000)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits ..................... 9,806,000 4,292,000 2,174,000
Net increase in interest-bearing deposits ........................ 24,700,000 16,098,000 11,863,000
Net increase/(decrease) in securities sold under agreement
to repurchase ................................................... 129,000 (1,178,000) 61,000
Cash dividends paid on common stock .............................. (275,000) (221,000) (192,000)
Issuance of common stock ......................................... 274,000 200,000 125,000
----------------------------------------------------
Net cash provided by financing activities ..................... 34,634,000 19,191,000 14,031,000
----------------------------------------------------
Net increase in cash and cash equivalents ......................... 4,327,000 1,717,000 3,490,000
Cash and cash equivalents--beginning .............................. 12,672,000 10,955,000 7,465,000
----------------------------------------------------
Cash and cash equivalents--ending ................................. $16,999,000 $12,672,000 $10,955,000
====================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest ........................... 4,924,000 3,771,000 3,276,000
Cash paid during the year for income taxes ....................... 823,000 711,000 692,000
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
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.
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, commercial paper,
interest-bearing deposits in other banks and federal funds sold. Generally,
federal funds are sold for one day periods.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
The Corporation classifies its securities as securities held to maturity or
securities available for sale. Investments in debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as securities held to maturity and are carried at cost, adjusted for
amortization of premium and accretion of discount, which are recognized as
adjustments to income, on a level yield basis. All other securities are
classified as securities available for sale. Securities available for sale may
be sold prior to maturity in response to changes in interest rates or prepayment
risk, for asset/liability management purposes, or other similar factors. These
securities are carried at fair value with unrealized holding gains or losses
reported in a separate component of stockholders' equity, net of the related tax
effects. Realized gains or losses on sales of securities are based upon the
specific identification method.
FEDERAL HOME LOAN BANK OF NEW YORK STOCK
As a condition of membership, the Corporation is required to maintain shares of
stock in the Federal Home Loan Bank of New York (FHLB-NY) based on the
Corporation's level of residential mortgage loans and mortgage-backed securities
or outstanding advances from the FHLB-NY, whichever is larger. Such shares are
carried at cost.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are reported at the lower of cost or market on an
aggregate basis. Mortgage loans held for sale are carried net of deferred fees
which are recognized as income at the time the loans are sold to permanent
34
<PAGE>
investors. Gains or losses on the sale of mortgage loans held for sale are
recognized at the settlement date and are determined by the difference between
the net proceeds and the amortized cost.
LOANS
Loans are carried at the principal amount outstanding, net of unearned discounts
and deferred loan fees and costs. Interest on loans is accrued and credited to
interest income as earned.
The accrual of interest income is discontinued on a loan when certain factors
indicate reasonable doubt as to the collectability of principal and interest. At
the time a loan is placed on nonaccrual status, previously accrued and
uncollected interest is reversed against interest income in the current period.
Interest collections on nonaccrual loans are generally credited to interest
income when received. Such loans are restored to an accrual status only if the
loan is brought contractually current and the borrower has demonstrated an
ability to make future payments of principal and interest.
The Corporation defined the population of impaired loans to include nonaccrual
loans and loans more than 90 days past due. Impaired loans are individually
assessed to determine that the loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's expected future
cash flows.
Loan fees collected and certain costs incurred related to loan originations are
deferred and amortized as an adjustment to interest income over the life of the
related loans. The deferred fees and costs are recorded as an adjustment to
loans outstanding.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level considered adequate to
absorb inherent loan losses. Management of the Corporation, in determining the
provision for loan losses, considers the risks inherent in its loan portfolio
and changes in the nature and volume of its loan activities, along with general
economic and real estate market conditions.
The Corporation utilizes a two tier approach: (1) identification of problem
loans and the establishment of specific loss allowances on such loans; and (2)
establishment of general allowances on the remainder of its loan portfolio based
on historical loss experience and other economic data management believes
relevant. The Corporation maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other things,
delinquency status, size of loans, types of collateral and financial condition
of the borrowers. Specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
Although management believes that adequate specific and general loan losses are
established, actual losses are dependent upon future events and, as such,
further additions to the level of the specific and general loan loss allowance
may be necessary.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.
CONCENTRATION OF RISK
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.
PREMISES AND EQUIPMENT
Land is stated at cost. Buildings and improvements and furniture, fixtures and
equipment are stated at cost, less accumulated depreciation computed on the
straight-line method over the estimated lives of each type of asset.
35
<PAGE>
Estimated useful lives are ten to forty years for buildings and improvements and
three to twenty-five years for furniture, fixtures and equipment. Leasehold
improvements are stated at cost less accumulated amortization computed on the
straight-line method over the shorter of the term of the lease or useful life.
Significant renewals and improvements are capitalized. Maintenance and repairs
are charged to operations as incurred. Rental income is netted against occupancy
costs in the consolidated statements of income.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of foreclosed property and is carried at
the lower of cost or fair value less estimated selling costs. When a property is
acquired, the excess of the carrying amount over fair value, if any, is charged
to the allowance for loan losses. Subsequent adjustments to the carrying value
are recorded in an allowance for OREO and charged to OREO expense. Operating
results for OREO, including rental income, operating expenses, and gains and
losses realized from the sale of property owned, are also recorded in OREO
expense.
INCOME TAXES
The Corporation accounts for taxes under the asset/liability method. Under this
method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK OPTION PLAN
The corporation applies the "intrinsic value based method" as described in APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation. Accordingly, no
compensation cost has been recognized for the stock option plan.
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 the 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.
All share and per share amounts have been restated to reflect the 2 for 1 stock
split in September 1997 and a 5% stock dividend paid June 1, 1998.
INTANGIBLE ASSETS
Intangible assets are comprised of goodwill and core deposit intangibles.
Goodwill represents the excess of the fair value of liabilities assumed over the
fair value of tangible assets acquired through a purchase acquisition completed
in 1995 and amounted to $358,000 and $391,000 at December 31, 1998 and December
31, 1997, respectively, and is amortized on a straight-line method over a period
of fifteen years.
The core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in the same
acquisition. The core deposit intangible amounted to $107,000 and $137,000 at
December 31, 1998 and December 31, 1997, respectively, and is amortized on an
accelerated basis over a period of twelve years.
36
<PAGE>
NOTE 2. SECURITIES AVAILABLE FOR SALE
The following is a summary of the contractual maturities of securities available
for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------------ CARRYING
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ...................... $ 702,000 $ 4,000 $ -- $ 706,000
After one but within five years ...... 2,501,000 73,000 -- 2,574,000
------------------------------------------------------------------------------
3,203,000 77,000 -- 3,280,000
------------------------------------------------------------------------------
U.S. Government agencies:
Within one year ...................... 498,000 -- 1,000 497,000
After one but within five years ...... 3,499,000 11,000 6,000 3,504,000
After five years ..................... 4,216,000 13,000 25,000 4,204,000
------------------------------------------------------------------------------
8,213,000 24,000 32,000 8,205,000
------------------------------------------------------------------------------
Obligations of state and political
subdivisions:
After one but within five years ...... 524,000 9,000 -- 533,000
Mortgage-backed securities:
After one but within five years ...... 162,000 2,000 -- 164,000
After five years ..................... 6,416,000 37,000 57,000 6,396,000
------------------------------------------------------------------------------
6,578,000 39,000 57,000 6,560,000
------------------------------------------------------------------------------
$ 18,518,000 $ 149,000 $ 89,000 $ 18,578,000
==============================================================================
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------------ CARRYING
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ...................... $ 752,000 $ -- $ -- $ 752,000
After one but within five years ...... 2,209,000 16,000 -- 2,225,000
------------------------------------------------------------------------------
2,961,000 16,000 -- 2,977,000
------------------------------------------------------------------------------
U.S. Government agencies:
Within one year ...................... 550,000 -- 2,000 548,000
After one but within five years ...... 650,000 -- -- 650,000
After five years ..................... 251,000 5,000 -- 256,000
------------------------------------------------------------------------------
1,451,000 5,000 2,000 1,454,000
------------------------------------------------------------------------------
Obligations of state and political
subdivisions:
After five years ..................... 272,000 3,000 -- 275,000
Mortgage-backed securities:
After one but within five years ...... 319,000 2,000 -- 321,000
After five years ..................... 5,948,000 95,000 23,000 6,020,000
------------------------------------------------------------------------------
6,267,000 97,000 23,000 6,341,000
------------------------------------------------------------------------------
$ 10,951,000 $ 121,000 $ 25,000 $ 11,047,000
==============================================================================
</TABLE>
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
Cash proceeds realized from calls of securities available for sale for the year
ended December 31, 1998 were $1,101,000. No cash proceeds were realized from
calls of securities available for sale for the years ended December 31, 1997 and
1996. No gains or losses were realized on calls during 1998, 1997 and 1996.
There were no securities available for sale pledged to secure public deposits at
December 31, 1998 and 1997. See Note 8 to financial statements regarding
securities pledged as collateral for securities sold under agreements to
repurchase.
37
<PAGE>
NOTE 3. SECURITIES HELD TO MATURITY
The following is a summary of the contractual maturities of securities held to
maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------
GROSS UNREALIZED
CARRYING ------------------------------ ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ...................... $ 200,000 $ 2,000 $ -- $ 202,000
After one but within five years ...... 748,000 29,000 -- 777,000
------------------------------------------------------------------------------
948,000 31,000 -- 979,000
------------------------------------------------------------------------------
U.S. Government agencies:
Within one year ...................... 10,000 -- -- 10,000
After one but within five years ...... 4,769,000 22,000 8,000 4,783,000
After five years ..................... 2,344,000 14,000 2,000 2,356,000
------------------------------------------------------------------------------
7,123,000 36,000 10,000 7,149,000
------------------------------------------------------------------------------
Obligations of state and political
subdivisions:
Within one year ...................... 2,091,000 12,000 -- 2,103,000
After one but within five years ...... 5,985,000 106,000 3,000 6,088,000
After five years ..................... 4,283,000 63,000 5,000 4,341,000
------------------------------------------------------------------------------
12,359,000 181,000 8,000 12,532,000
------------------------------------------------------------------------------
Mortgage-backed securities:
After five years ..................... 2,083,000 22,000 8,000 2,097,000
------------------------------------------------------------------------------
$ 22,513,000 $ 270,000 $26,000 $ 22,757,000
==============================================================================
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------
GROSS UNREALIZED
CARRYING ------------------------------ ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year ...................... $ 1,498,000 $ -- $ -- $ 1,498,000
After one but within five years ...... 450,000 5,000 -- 455,000
------------------------------------------------------------------------------
1,948,000 5,000 -- 1,953,000
------------------------------------------------------------------------------
U.S. Government agencies:
After one but within five years ...... 4,912,000 12,000 7,000 4,917,000
After five years ..................... 2,824,000 36,000 -- 2,860,000
------------------------------------------------------------------------------
7,736,000 48,000 7,000 7,777,000
------------------------------------------------------------------------------
Obligations of state and political
subdivisions:
Within one year ...................... 3,491,000 22,000 1,000 3,512,000
After one but within five years ...... 3,936,000 88,000 -- 4,024,000
After five years ..................... 1,052,000 22,000 -- 1,074,000
------------------------------------------------------------------------------
.......................................... 8,479,000 132,000 1,000 8,610,000
------------------------------------------------------------------------------
Mortgage-backed securities:
After five years ..................... 2,119,000 76,000 -- 2,195,000
------------------------------------------------------------------------------
$ 20,282,000 $ 261,000 $ 8,000 $ 20,535,000
==============================================================================
</TABLE>
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
Cash proceeds from calls of securities held to maturity amounted to $6,150,000,
$675,000 and $1,235,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Gains totaling $22,000 and no losses were realized from calls for
the year ended December 31, 1998. There were no realized gains or losses from
calls for the year ended December 31, 1997. Gross gains totaling $2,000 and
gross losses totaling $6,000 were realized on calls during the year ended
December 31, 1996.
The carrying value of securities pledged to secure treasury tax and loan
deposits and public deposits approximated $699,000 and $700,000 at December 31,
1998 and 1997 respectively. See also Note 8 to financial statements regarding
securities pledged as collateral for securities sold under agreements to
repurchase.
38
<PAGE>
NOTE 4. LOANS
The loan portfolio consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1998 1997
-------------------------------------------------------
<S> <C> <C>
Mortgage:
Residential .............................................. $ 24,784,000 $ 20,305,000
Commercial ............................................... 46,375,000 35,035,000
Commercial ................................................ 18,995,000 17,826,000
Equity .................................................... 3,593,000 3,551,000
Installment ............................................... 29,290,000 23,659,000
Other ..................................................... 126,000 414,000
-------------------------------------------------------
Total loans ............................................ 123,163,000 100,790,000
-------------------------------------------------------
Less: Deferred loan fees .................................. 113,000 123,000
Allowance for loan losses ............................... 1,542,000 1,462,000
-------------------------------------------------------
.......................................................... 1,655,000 1,585,000
-------------------------------------------------------
Loans, net ................................................ $ 121,508,000 $ 99,205,000
=======================================================
</TABLE>
At December 31, 1998, 1997 and 1996, loans serviced by the Corporation for the
benefit of others totaled approximately $5,390,000, $4,774,000, and $2,802,000,
respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning ........................................ $ 1,462,000 $ 1,353,000 $ 1,177,000
Provision charged to operations ........................... 200,000 120,000 155,000
Recoveries of loans charged off ........................... -- 8,000 33,000
Loans charged off ......................................... (120,000) (19,000) (12,000)
------------------------------------------------------
Balance, ending ........................................... $ 1,542,000 $ 1,462,000 $ 1,353,000
======================================================
</TABLE>
The Corporation has entered into lending transactions in the ordinary course of
business with directors, executive officers and principal stockholders of the
Corporation and their affiliates on the same terms as those prevailing for
comparable transactions with other borrowers. At December 31, 1998 and 1997,
these loans aggregated approximately $1,191,000 and $1,370,000, respectively.
During the year ended December 31, 1998, new loans totaling $400,000 were
granted and repayments totaled approximately $479,000. The loans, at December
31, 1998, were current as to principal and interest payments, and do not involve
more than normal risk of collectability.
39
<PAGE>
NOTE 5. NONPERFORMING ASSETS
Nonperforming assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 4,000 $ 40,000
Loans past due ninety days or more and accruing 64,000 4,000
Restructured loans 480,000 652,000
------------------------------------------------------
Total nonperforming loans 548,000 696,000
Other real estate owned -- 269,000
Less allowance for other real estate owned -- 40,000
------------------------------------------------------
-- 229,000
------------------------------------------------------
Total nonperforming assets $ 548,000 $ 925,000
======================================================
</TABLE>
The following information is presented for assets classified as nonaccrual and
restructured:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Income that would have been recorded under
contractual terms $ 58,000 $ 76,000 $ 39,000
Less interest income received 46,000 67,000 25,000
------------------------------------------------------
Lost income on nonperforming assets at year end $ 12,000 $ 9,000 $ 14,000
======================================================
</TABLE>
Impaired loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
------------------------------------------------------
<S> <C> <C>
Impaired Loans
With related allowance for loan loss $ 64,000 $ 40,000
Without related allowance for loan loss 4,000 4,000
------------------------------------------------------
Total impaired loans $ 68,000 $ 44,000
======================================================
Related allowance for possible credit losses $ 3,000 $ 40,000
======================================================
Average investment in impaired loans $ 65,000 $ 37,000
======================================================
Interest recognized on impaired loans $ 5,000 $ 1,000
======================================================
</TABLE>
40
<PAGE>
NOTE 6. PREMISES AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Land .................................................... $ 576,000 $ 576,000
Buildings and improvements .............................. 1,433,000 1,433,000
Leasehold improvements .................................. 379,000 380,000
Furniture, fixtures and equipment ....................... 1,854,000 1,698,000
-------------------------------
4,242,000 4,087,000
Less accumulated depreciation and amortization .......... 1,758,000 1,363,000
-------------------------------
Total premises & equipment, net ......................... $2,484,000 $2,724,000
===============================
</TABLE>
NOTE 7. DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand ................. 0% $ 39,234,000 0% $ 29,428,000
NOW accounts ............................... 1.35% 19,991,000 2.00% 16,054,000
Money market accounts ...................... 2.20% 46,393,000 4.13% 21,973,000
----------------------------------------------------------------------
Total interest-bearing demand .............. 1.94% 66,384,000 3.23% 38,027,000
Statement savings and clubs ................ 2.25% 19,311,000 2.25% 18,539,000
Business savings ........................... 2.25% 1,733,000 2.25% 1,879,000
---------------------------------------------------------------------
Total savings ............................... 2.25% 21,044,000 2.25% 20,418,000
IRA investment and variable rate savings ... 5.28% 9,593,000 5.50% 9,399,000
Money market certificates .................. 5.20% 34,466,000 5.45% 38,943,000
----------------------------------------------------------------------
Total certificates of deposit .............. 5.22% 44,059,000 5.46% 48,342,000
----------------------------------------------------------------------
Total interest-bearing deposits ............ 3.09% 131,487,000 4.05% 106,787,000
----------------------------------------------------------------------
Total deposits ............................. 2.38% $170,721,000 3.18% $136,215,000
======================================================================
</TABLE>
Certificates of deposit with balances of $100,000 or more at December 31, 1998
and 1997, totaled approximately $5,918,000 and $6,411,000, respectively.
Interest on certificates of deposit with balances of $100,000 or more totaled
$236,000, $316,000, and $174,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
The scheduled maturities of certificates of deposit were as follows:
DECEMBER 31,
-------------------------------
1998 1997
-------------------------------
One year or less ....................... $28,219,000 $25,635,000
After one to three years ............... 14,306,000 21,164,000
After three years ...................... 1,534,000 1,543,000
-------------------------------
$44,059,000 $48,342,000
===============================
41
<PAGE>
NOTE 8. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
At December 31, 1998, 1997 and 1996, securities sold under agreements to
repurchase were collateralized by U. S. Treasury securities having a carrying
value of approximately $1,703,000, $2,208,000, and $2,216,000, respectively.
These securities were maintained in a separate safekeeping account within the
Corporation's control.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Balance ........................................................ $662,000 $533,000 $1,711,000
Weighted average interest rate ................................. 5.24% 5.45% 4.67%
Average length of maturity ..................................... 273 days 365 days 14-365 days
Maximum amount outstanding at any month end during
the year ...................................................... $662,000 $3,553,000 $2,398,000
Average amount outstanding during the year ..................... $572,000 $1,569,000 $1,695,000
Average interest rate during the year .......................... 5.37% 5.10% 4.63%
</TABLE>
NOTE 9. REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1998, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets
of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
assets of 4.0% and 8.0%, respectively. The Corporation has had substantially
similar capital regulations promulgated by the Board of Governors of the Federal
Reserve System.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components, risk
weightings and other factors.
Management believes that, as of December 31, 1998, the Bank and the Corporation
have met all capital adequacy requirements to which they are subject. Further,
the most recent FDIC notification categorized the Bank as a well capitalized
institution under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes have
changed the Bank's capital classification.
42
<PAGE>
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1998 and 1997, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well capitalized
institution:
<TABLE>
<CAPTION>
FDIC REQUIREMENTS
-------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL CAPITALIZED
----------------------- -------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------- -------------------- ----------------------
DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Leverage (Tier 1) capital ........... 13,017,000 7.15% 7,287,000 4.00% 9,109,000 5.00%
Risk-based capital:
Tier 1 ............................. 13,017,000 10.60% 4,914,000 4.00% 7,371,000 6.00%
Total .............................. 14,553,000 11.85% 9,828,000 8.00% 12,285,000 10.00%
DECEMBER 31, 1997
Leverage (Tier 1) capital ........... 11,308,000 7.73% 7,287,000 4.00% 9,109,000 5.00%
Risk-based capital:
Tier 1 ............................. 11,308,000 11.38% 4,914,000 4.00% 7,371,000 6.00%
Total .............................. 12,552,000 12.64% 9,828,000 8.00% 12,285,000 10.00%
</TABLE>
NOTE 10. BENEFIT PLANS
The Corporation has a noncontributory profit sharing plan covering all eligible
employees. Contributions are determined by the Corporation's Board of Directors
on an annual basis. Total profit sharing plan expense for the years ended
December 31, 1998, 1997 and 1996 amounted to approximately $117,000, $101,000
and $95,000, respectively.
The Corporation also has a 401(k) plan which covers all eligible employees.
Participants may elect to contribute up to 15% of their salaries, not to exceed
the applicable limitations as per the Internal Revenue Code. The Corporation, on
an annual basis, may elect to match 50% of the participant's first 5%
contribution. Total 401(k) expense for the years ended December 31, 1998, 1997
and 1996 amounted to approximately $26,000, $24,000 and $23,000, respectively.
During 1996, the Corporation adopted an Employee Stock Purchase Plan which
allows all eligible employees to authorize a specific payroll deduction from his
or her base compensation. On a semiannual basis, the fiduciary will purchase
shares for each participant. The Corporation may, at its discretion, contribute
an amount (not to exceed 10% of fair market value of the shares purchased)
toward the purchase of the shares, thereby reducing the purchase price to all
participating employees below the fair market value of the shares. Total stock
purchases amounted to 828 and 796 shares during 1998 and 1997, respectively.
NOTE 11. STOCK-BASED COMPENSATION
At December 31, 1998, the Corporation had four types of stock award programs
referred to as the Employee Stock Bonus Plan, the Director Stock Plan, an
Employee Stock Option Plan and a Stock Option Plan for non-employee Directors.
The Employee Stock Bonus Plan is intended to provide incentives which will
retain highly competent key management employees of the Corporation by providing
them with a bonus in the form of shares of the common stock of the Corporation.
The Corporation granted 180 and 985 shares during 1998 and 1997, respectively.
The Director Stock Plan permits members of the Board of Directors of the Bank to
receive any monthly Board of Directors' fees in shares of the Corporation's
common stock, rather than in cash. The Corporation issued 2,206 and 1,038 shares
during 1998 and 1997, respectively.
43
<PAGE>
The Employee Stock Option Plan provides for options to purchase shares of Common
Stock to be issued to key employees of the Corporation at the discretion of the
Stock Option Committee. The committee has the authority to determine the terms
and conditions of the options granted, the exercise price thereof, and whether
the options are incentive or non-statutory options. The Employee Stock Option
Plan has reserved 47,250 shares of common stock for issuance. The options were
issued with an exercise price which represented market price of the stock at the
date of grant. Options are exercisable starting one year from the date of the
grant and expire ten years from the date of grant and are subject to a vesting
schedule. A summary of the status of the qualified stock options as of December
31, 1998 and 1997 and changes during the years then ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ............. 12,600 $17.62 -- --
Granted ...................................... 2,100 20.00 12,600 $17.62
Exercised .................................... -- -- -- --
Forfeited .................................... -- -- -- --
-------------------------------------------------------------------
Outstanding at end of year ................... 14,700 $17.96 12,600 $17.62
Options exercisable at year end .............. 2,520 --
Weighted-average fair value of options
granted during the year ..................... $5.83 $5.51
</TABLE>
The following table summarizes information about the qualified employee stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------------------------
NUMBER WEIGHTED-AVG. WEIGHTED- NUMBER
OUTSTANDING REMAINING AVERAGE EXERCISABLE
AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98
---------------------------------------------------------------------------------
Range of Exercise Prices:
<S> <C> <C> <C> <C> <C>
$17-19 .......................... 12,600 8.42 $17.62 2,520
$20-22 .......................... 2,100 9.17 20.00 --
---------------------------------------------------------------------------------
$17-22 .......................... 14,700 8.53 $17.96 2,520
=================================================================================
</TABLE>
The Stock Option Plan for non-employee Directors has also reserved 47,250 shares
of common stock for issuance. During 1997 each participant was granted the
option to purchase 4,295 shares of common stock. No option may be exercised
more than ten years after the date of its grant. The options were issued with an
exercise price of $16.74, 95% of the fair market value on the date the options
were granted. As a result of the discount, $38,000 was charged to noninterest
expense for 1997. No options were exercised during the years ended 1998 and
1997.
44
<PAGE>
The Corporation applies APB 25 in accounting for the Plans. Consistent with SFAS
123, if compensation cost for the Plans was included, the Corporation's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data). There were no options
granted in 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------
NET INCOME:
<S> <C> <C> <C>
As reported ............................................... $1,647,000 $1,463,000 $1,317,000
Pro forma ................................................. 1,640,000 1,325,000 1,317,000
EARNINGS PER SHARE:
As reported Basic earnings per share ...................... $ 1.67 $ 1.50 $ 1.37
As reported Diluted earnings per share .................... 1.65 1.50 1.37
Pro forma Basic earnings per share ........................ 1.67 1.35 1.37
Pro forma Diluted earnings per share ...................... 1.65 1.35 1.37
Weighted average fair value of options granted
during year ............................................... $ 5.83 $ 4.82 --
</TABLE>
The fair value of options granted for employees is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions used:
<TABLE>
<CAPTION>
EMPLOYEE EMPLOYEE NONEMPLOYEE
STOCK OPTIONS STOCK OPTIONS STOCK OPTIONS
1998 1997 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield .......................................... 1.12% 1.15% 1.15%
Expected volatility ..................................... 16.24% 14.10% 14.10%
Risk-free interest rate ................................. 5.58% 6.64% 6.01%
Expected Life ........................................... 7 years 7 years 5 years
Fair value at grant date ................................ $5.83 $5.51 $4.62
</TABLE>
NOTE 12: EARNINGS PER SHARE
The following reconciles the income available to common shareholders (numerator)
and the weighted average common stock outstanding (denominator) for both basic
and diluted earnings per share for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Net income .............................................................. $1,647,000 $1,463,000 $1,317,000
------------------------------------------------
Income available to common stockholders, basic and diluted .............. 1,647,000 1,463,000 1,317,000
================================================
Weighted average common shares outstanding--basic ....................... 984,842 972,983 962,368
Effect of dilutive securities--stock options ............................ 11,460 3,275 --
------------------------------------------------
Weighted average common shares outstanding--diluted ..................... 996,302 976,258 962,368
================================================
</TABLE>
45
<PAGE>
NOTE 13. INCOME TAXES
The components of income taxes (benefit) are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal .................................................................... $ 683,000 $ 556,000 $ 564,000
State ...................................................................... 160,000 147,000 136,000
--------------------------------------------
843,000 703,000 700,000
Deferred tax benefit:
Federal .................................................................... (38,000) (90,000) (104,000)
State ...................................................................... (7,000) (16,000) (28,000)
--------------------------------------------
(45,000) (106,000) (132,000)
--------------------------------------------
$ 798,000 $ 597,000 $ 568,000
============================================
</TABLE>
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate (34%) to income before income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Federal income tax .......................................................... $ 831,000 $ 646,000 $ 641,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect ....................... 101,000 87,000 71,000
Nontaxable interest income ................................................. (172,000) (151,000) (142,000)
Other items, net ........................................................... 38,000 15,000 (2,000)
--------------------------------------------
Effective federal income taxes .............................................. $ 798,000 $ 597,000 $ 568,000
============================================
</TABLE>
The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997
--------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses .................................................. $ 616,000 $ 584,000
Allowance for losses on investments ........................................ 6,000 6,000
Allowance for OREO losses .................................................. -- 16,000
Core deposit intangible amortization ....................................... 25,000 20,000
Nonaccrual loan interest ................................................... 14,000 14,000
Depreciation ............................................................... 22,000 --
Other ...................................................................... 13,000 15,000
--------------------------------------------
696,000 655,000
--------------------------------------------
Deferred tax liabilities:
Depreciation ............................................................... -- 2,000
Unrealized gain on securities available for sale ........................... 23,000 215,000
Deferred state tax -- 2,000
--------------------------------------------
23,000 219,000
--------------------------------------------
Net deferred tax assets ..................................................... $ 673,000 $ 436,000
============================================
</TABLE>
The Corporation has determined that it is not required to establish a valuation
reserve for the deferred tax asset, since it is more likely than not that the
deferred tax asset will be principally realized through carrybacks to taxable
income in prior years. The Corporation's conclusion that it is more likely than
not that the deferred tax asset will be realized is based on a history of growth
in earnings and the prospects for continued growth.
46
<PAGE>
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated financial statements. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
At December 31, 1998, the Corporation had mortgage commitments to extend credit
aggregating approximately $2.7 million at fixed rates averaging 6.53% and
$346,000 floating rate loans. Of these loans, $1.9 million fixed and $346,000
floating were committed for sale to investors. Commercial, installment and home
equity loan commitments of approximately $1.7 million were extended with
floating rates currently averaging 8.24% and $1.7 million were extended at fixed
interest rates averaging 7.64%. All commitments were due to expire within
approximately 90 days.
At December 31, 1997, the Corporation had mortgage commitments to extend credit
aggregating approximately $435,000 at fixed interest rates averaging 7.24% and
$305,000 floating rate loans. Of these loans, $190,000 fixed and $305,000
floating were committed for sale to investors. Commercial, installment and home
equity loan commitments of approximately $768,000 were extended with floating
interest rates currently averaging 8.99% and $2.7 million were extended at fixed
interest rates averaging 8.71%.
Additionally, at December 31, 1998, the Corporation was committed for
approximately $19.4 million of unused lines of credit, consisting of $7.0
million relating to a home equity line of credit program and an unsecured line
of credit program (cash reserve), $3.6 million relating to credit cards, and
$8.8 million relating to commercial and construction lines of credit. Amounts
drawn on the unused lines of credit are predominantly assessed interest at rates
which fluctuate with the base rate.
Commitments under standby and commercial letters of credit aggregated
approximately $287,000 at December 31, 1998, all of which expire within
approximately one year. Should any letter of credit be drawn on, the interest
rate charged on the resulting note would fluctuate with the Corporation's base
rate.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Corporation evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Corporation upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies, but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby and commercial letters of credit are conditional commitments issued by
the Corporation to guarantee payment or performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation obtains collateral supporting those commitments for which
collateral is deemed necessary.
47
<PAGE>
Rentals under long-term operating lease for branch offices amounted to
approximately $141,000, $79,000, and $46,000 during the years ended December 31,
1998, 1997, and 1996, respectively. At December 31, 1998, the minimum rental
commitments on the noncancellable leases with an initial term of one year and
expiring thereafter is as follows:
YEAR ENDING MINIMUM
DECEMBER 31 RENT
----------- --------
1999 ..................... $145,000
2000 ..................... 117,000
2001 ..................... 118,000
2002 ..................... 96,000
2003 ..................... 90,000
Thereafter .................. 234,000
-------
$800,000
========
The Corporation is also 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.
NOTE 15. DIVIDEND LIMITATION
The Corporation's ability to pay cash dividends is based on its ability to
receive cash from its bank subsidiary. New Jersey law provides that no dividend
shall be paid by the Bank on its capital stock unless, following the payment of
such dividend, the capital stock of the Bank will be unimpaired, and the Bank
will have a surplus of not less than 50% of its capital stock, or if not, the
payment of such dividend will not reduce the surplus of the Bank. At December
31, 1998, this restriction did not result in any effective limitation in the
manner in which the Bank is currently operating.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107) Disclosures
About Fair Value of Financial Instruments, requires that the Corporation
disclose the estimated fair value of its financial instruments whether or not
recognized in the consolidated balance sheet. Fair value estimates, methods and
assumptions are set forth below for the Corporation's financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1998 1997
-------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ................................ $16,999 $16,999 $12,672 $12,672
Securities available for sale ............................ 18,578 18,578 11,047 11,047
Securities held to maturity .............................. 22,513 22,757 20,282 20,535
FHLB-NY stock ............................................ 557 557 510 510
Net loans ................................................ 121,508 122,209 99,205 99,512
Mortgage loans held for sale .............................. 793 793 756 756
Financial liabilities:
Deposits ................................................. 170,721 171,124 136,215 136,513
Securities sold under agreements to repurchase ........... 662 662 533 533
</TABLE>
48
<PAGE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value.
SECURITIES AVAILABLE FOR SALE
All securities available for sale are actively traded and have been valued using
quoted market prices.
SECURITIES HELD TO MATURITY
All securities held to maturity are actively traded and have been valued using
quoted market prices.
FHLB-NY STOCK
The carrying amount approximates fair value.
NET LOANS
Fair values are estimated for portfolios of loan with similar financial
characteristics. Loans are segregated by type such as residential and commercial
mortgages, commercial and other installment. The fair value of loans is
estimated by discounting cash flows using estimated market discount rates which
reflect the credit and interest rate risk inherent in the loans.
MORTGAGE LOANS HELD FOR SALE
Loans in this category have been committed for sale to investors at the current
carrying amount.
DEPOSITS
The fair value of deposits, with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW and money market accounts, is equal to the amount
payable on demand as of December 31, 1998. The fair value of the certificates of
deposit is based on the discounted value of cash flows. The discount rate is
estimated using market discount rates which reflect interest rate risk inherent
in the certificates of deposit.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The carrying value approximates fair value due to the relatively short time
before maturity.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties, and at
December 31, 1998 and 1997 were not material.
LIMITATIONS
The preceding fair value estimates were made at December 31, 1998 and 1997,
based on pertinent market data and relevant information on the financial
instruments. These estimates do not include any premium or discount that could
result from an offer to sell at one time the Corporation's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Corporation's financial instruments, fair value
estimates were necessarily based on judgements with respect to future expected
loss experience, current economic conditions, risk assessments of various
financial instruments, and other factors. Given the subjective nature of these
estimates, the uncertainties surrounding them and the matters of significant
judgement that must be applied, these fair value estimates cannot be calculated
with precision. Modifications in such assumptions could meaningfully alter these
estimates.
Since these fair value approximations were made solely for on and off balance
sheet financial instruments at December 31, 1998 and 1997, no attempt was made
to estimate the value of anticipated future business. Furthermore, certain tax
implications related to the realization of unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.
49
<PAGE>
NOTE 17. PARENT COMPANY ONLY
The Corporation, formed in November, 1996, owns one subsidiary, Atlantic
Stewardship Bank. The earnings of the bank are recognized by the Corporation
using the equity method of accounting. Accordingly, the bank dividends paid
reduce the Corporation's investment in the subsidiary. The following information
should be read in conjunction with the other notes to the consolidated financial
statements. Condensed financial statements of the Corporation at December 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997
-------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks .............................................. $ 25,000 $ 20,000
Investment in subsidiary ............................................. 13,520,000 11,896,000
-------------------------------------
Total assets ...................................................... $ 13,545,000 $ 11,916,000
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities .................................................... $ (4,000) $ (10,000)
Stockholders' equity ................................................. 13,549,000 11,926,000
-------------------------------------
Total liabilities and Stockholders' equity ........................ $ 13,545,000 $ 11,916,000
=====================================
<CAPTION>
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
Dividend income ...................................................... $ 35,000 $ 83,000
Other income ......................................................... 6,000 1,000
Other expenses ....................................................... (59,000) (99,000)
-------------------------------------
Income before income tax benefit and undistributed
earnings of subsidiary ............................................. (18,000) (15,000)
Income tax benefit ................................................... (18,000) (20,000)
-------------------------------------
Net income before undistributed earnings of subsidiary ............... -- $ 5,000
Equity in undistributed earnings of subsidiary ....................... 1,647,000 1,458,000
-------------------------------------
Net income ........................................................... $ 1,647,000 $ 1,463,000
=====================================
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 1,647,000 $ 1,463,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary .................... (1,647,000) (1,458,000)
Issuance of stock options at a discount ........................... -- 38,000
Increase/(decrease) in other liabilities .......................... 6,000 (9,000)
-------------------------------------
Net cash provided by operating activities ........................ 6,000 34,000
Cash flows from financing activities:
Cash dividends paid on common stock ................................ (275,000) (221,000)
Issuance of common stock ........................................... 274,000 200,000
-------------------------------------
Net cash provided by financing activities ...................... (1,000) (21,000)
Net increase in cash and cash equivalents ............................ 5,000 13,000
Cash and cash equivalents--beginning ................................. 20,000 7,000
-------------------------------------
Cash and cash equivalents--ending .................................... $ 25,000 $ 20,000
=====================================
50
</TABLE>
<PAGE>
NOTE 18. 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 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 SFAS 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 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 is
permitted. The adoption of this statement by the Corporation is not expected to
have a material effect on the financial statements of the Corporation.
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the years ended
December 31, 1998 and 1997 (dollars in thousands).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998:
<S> <C> <C> <C> <C> <C>
Interest income ........................................... $ 2,865 $ 3,034 $ 3,178 $ 3,243 $ 12,320
Interest expense .......................................... 1,107 1,178 1,297 1,243 4,825
-------------------------------------------------------------
Net interest income before provision for loan losses ..... 1,758 1,856 1,881 2,000 7,495
Provision for loan losses ................................. 40 30 20 110 200
-------------------------------------------------------------
Net interest income after provision for loan losses ...... 1,718 1,826 1,861 1,890 7,295
Noninterest income ........................................ 215 297 228 268 1,008
Noninterest expense ....................................... 1,367 1,524 1,467 1,500 5,858
-------------------------------------------------------------
Net income before income tax expense ..................... 566 599 622 658 2,445
Federal and state income tax expense ...................... 184 197 202 215 798
-------------------------------------------------------------
Net income ................................................ $ 382 $ 402 $ 420 $ 443 $ 1,647
=============================================================
Basic earnings per share .................................. $ 0.39 $ 0.41 $ 0.43 $ 0.44 $ 1.67
=============================================================
Diluted earnings per share ................................ $ 0.39 $ 0.40 $ 0.42 $ 0.44 $ 1.65
=============================================================
YEAR ENDED DECEMBER 31, 1997:
Interest income ........................................... $ 2,361 $ 2,502 $ 2,631 $ 2,761 $ 10,255
Interest expense .......................................... 859 914 983 1,048 3,804
-------------------------------------------------------------
Net interest income before provision for loan losses ..... 1,502 1,588 1,648 1,713 6,451
Provision for loan losses ................................. 30 30 30 30 120
-------------------------------------------------------------
Net interest income after provision for loan losses ...... 1,472 1,558 1,618 1,683 6,331
Noninterest income ........................................ 168 195 184 206 753
Noninterest expense ....................................... 1,160 1,259 1,288 1,317 5,024
-------------------------------------------------------------
Net income before income tax expense ..................... 480 494 514 572 2,060
Federal and state income tax expense ...................... 143 148 122 184 597
-------------------------------------------------------------
Net income ................................................ $ 337 $ 346 $ 392 $ 388 $ 1,463
=============================================================
Basic earnings per share .................................. $ 0.35 $ 0.35 $ 0.40 $ 0.40 $ 1.50
=============================================================
Diluted earnings per share ................................ $ 0.35 $ 0.35 $ 0.40 $ 0.40 $ 1.50
=============================================================
</TABLE>
51
<PAGE>
Atlantic Stewardship
Branch Locations
Call: 201-444-7100
HEADQUARTERS:
MIDLAND PARK
630 Godwin Avenue
Raymond J. Santhouse
Branch Manager & Assistant Vice President
Louise Rohner
Assistant Branch Manager & Assistant Secretary
HAWTHORNE
386 Lafayette Avenue
Alma M. Baxter
Branch Manager & Assistant Secretary
Grace Lobbregt
Assistant Branch Manager & Administrative Assistant
RIDGEWOOD
190 Franklin Avenue
Jennifer L. Heller
Branch Manager & Administrative Assistant
Joyce Dykstra
Assistant Branch Manager
WALDWICK
30 Franklin Turnpike
Kristine Rasile
Branch Manager & Assistant Secretary
WAYNE
87 Berdan Avenue
Robert A. Giannetti
Branch Manager & Assistant Vice President
Maria Rizzi
Assistant Branch Manager
311 Valley Road
Leigh Knorr
Branch Manager & Administrative Assistant
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Stewardship Financial Corporation:
We consent to incorporation by reference in registration statement Nos.
333-20699 on Form S-3, 333-20793 and 333-31245 on Form S-8 of Stewardship
Financial Corporation of our report dated January 27, 1999, relating to the
consolidated statements of financial condition of Stewardship Financial
Corporation and subsidiary as of December 31, 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998, which report is
incorporated by reference in the December 31, 1998 annual report on form 10-KSB
of Stewardship Financial Corporation
/s/KPMG LLP
-----------
KPMG LLP
Short Hills, New Jersey
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the registrant's
audited December 31, 1998 year end financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,379,000
<INT-BEARING-DEPOSITS> 5,045,000
<FED-FUNDS-SOLD> 4,575,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,578,000
<INVESTMENTS-CARRYING> 22,513,000
<INVESTMENTS-MARKET> 22,757,000
<LOANS> 121,508,000
<ALLOWANCE> 1,542,000
<TOTAL-ASSETS> 185,970,000
<DEPOSITS> 170,721,000
<SHORT-TERM> 662,000
<LIABILITIES-OTHER> 1,038,000
<LONG-TERM> 0
0
0
<COMMON> 990,284
<OTHER-SE> 13,549,000
<TOTAL-LIABILITIES-AND-EQUITY> 185,970,000
<INTEREST-LOAN> 9,430,000
<INTEREST-INVEST> 2,143,000
<INTEREST-OTHER> 747,000
<INTEREST-TOTAL> 12,320,000
<INTEREST-DEPOSIT> 4,794,000
<INTEREST-EXPENSE> 4,825,000
<INTEREST-INCOME-NET> 7,495,000
<LOAN-LOSSES> 200,000
<SECURITIES-GAINS> 22,000
<EXPENSE-OTHER> 5,858,000
<INCOME-PRETAX> 2,445,000
<INCOME-PRE-EXTRAORDINARY> 1,647,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,647,000
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 4.80
<LOANS-NON> 4,000
<LOANS-PAST> 64,000
<LOANS-TROUBLED> 480,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,462,000
<CHARGE-OFFS> 120,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,542,000
<ALLOWANCE-DOMESTIC> 1,542,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
