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, 1999
( ) 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
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(Name of small business issuer as specified in its charter)
NEW JERSEY 22-3351447
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(State of other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
630 GODWIN AVENUE, MIDLAND PARK, NJ 07432
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(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
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(Title of class)
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(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. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Issuer, as of March 7, 2000 was $24,748,768.
The number of shares outstanding of the Issuer's Common Stock, no par value,
outstanding as of March 7, 2000 was 1,621,047.
For the fiscal year ended December 31, 1999, the Issuer had total revenues of
$14,679,000.
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DOCUMENTS INCORPORATED BY REFERENCE
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<S> <C> <C>
Item 6 Selected Financial Data Registrant's Annual Report to
Shareholders under the
caption "Selected Financial
Data"
Item 7 Management's Discussion Registrant's Annual Report to
and Analysis of Financial Shareholders under the
Condition and Results caption "Management's
of Operations Discussion and Analysis
of Financial Condition and
Results of Operations"
Item 8 Financial Statements Registrant's Annual Report to
Shareholders under the
caption "Consolidated
Statements of Financial
Condition"
Item 10 Directors and Executive Proxy Statement for 2000
Officers of the Company; Annual Meeting of
Compliance with Section Shareholders under the caption,
"Compliance with Section 16(a)
of the Securities Exchange Act
of 1934," to be filed no
later than April 30, 2000
Item 11 Executive Compensation Proxy Statement for 2000
Annual Meeting of
Shareholders under the caption,
"Compensation Committee on
Report on Executive
Compensation," to be filed no
later than April 30, 2000
Item 12 Security Ownership of Proxy Statement for 2000
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, 2000
Item 13 Certain Relationships and Proxy Statement for 2000
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, 2000
</TABLE>
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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 five branches located at 386 Lafayette
Avenue, Hawthorne, New Jersey, 190 Franklin Avenue, Ridgewood, New Jersey, 30
Franklin Turnpike, Waldwick, New Jersey, 87 Berdan Avenue, Wayne, New Jersey and
311 Valley Road, Wayne, New Jersey. The Bank operates ATM machines at its
Midland Park, Ridgewood, Waldwick, and at both Wayne branches. The Bank has
filed applications with the State of New Jersey and the Federal Deposit
Insurance Corporation to open a sixth branch in Pequannock, New Jersey. Pending
regulator approval and local site planning approval, an opening date is
anticipated to be during the fourth quarter of 2000.
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
five existing branch offices in Hawthorne, Ridgewood, Waldwick, and Wayne, New
Jersey.
<PAGE>
Competition
The Corporation operates in a highly competitive environment 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, 1999, the Corporation employed 67 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.
<PAGE>
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. 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 cancelable 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.
Recent Regulation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("FMSA"). The
passage of the FMSA removes the barriers to affiliations among financial service
companies by repealing restrictions imposed under the Glass-Steagall Act of 1933
on banks affiliating with securities firms and by creating a new financial
holding company ("FHC") under the Bank Holding Company Act. A company may form
an FHC if all of its insured depository institution subsidiaries are considered
well-capitalized, well-
<PAGE>
managed, and hold a satisfactory Community Reinvestment Act ("CRA") rating. An
FHC can engage in a prescribed list of financial services, including insurance
and securities underwriting and agency activities, merchant banking, insurance
company portfolio investment activities and "complementary" financial
activities.
To insure consistency in the treatment of banks and other financial
institutions, FMSA reorganizes regulatory authority of federal agencies over
securities and investment activities.
In the area of insurance, FMSA designates the insurance products that banks
and subsidiaries may provide, prohibits national banks from underwriting or
selling title insurance if they did not actively conduct those activities before
FMSA, permits national banks to sell title insurance in States where State banks
are specifically authorized to do so. FMSA requires Federal banking agencies to
prescribe consumer protection regulations for bank insure sales and preempts
state laws that interfere with affiliations between banks and insurance
companies. It also initiates a process for creating a uniformity in licensing of
insurance agents on a national level.
FMSA reinforced the barrier separating banking from general commerce by
preventing organizations from applying to the Office of Thrift Supervision to
form a unitary holding company after May 4, 1999. All existing unitaries can
continue to operate, no matter who owns them but these unitaries can only be
sold to financial companies.
FMSA also included provisions covering privacy of consumer information
which requires every financial institution to disclose its privacy policy
regarding the sharing of "nonpublic personal information" with affiliates and
with third parties. It also requires consumers to be given a notice and an
opportunity to "opt out" of sharing their nonpublic personal information with
nonaffiliated third parties.
The various provisions of the statute become effective on different dates
over the course of the next year, and the full impact will not be evident until
final implementing regulations are issued.
Additional proposals to change the regulations and laws governing the
banking and financial services industry are frequently introduced in the state
legislatures, before various banking regulatory agencies, and in Congress. The
likelihood and timing of any such changes and the impact of such changes might
have on the Corporation cannot be determined at this time.
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 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 date 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.
<PAGE>
BIF PREMIUMS AND THE RECAPITALIZATION OF SAIF. The Bank is a member of the
Bank Insurance Fund ("BIF") of the FDIC. The FDIC also maintains another
insurance fund, the Savings Association Insurance Fund ("SAIF"), which primarily
covers savings and loan association deposits but also covers deposits that are
acquired by a BIF-insured institution from a savings and loan association
("OAKAR"). The Bank had approximately $10.1 million of Oakar deposits at
December 31, 1999, which are considered assessed under SAIF insurance premium.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Deposit
Act") became law. The primary purpose of the Deposit Act was 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 was designed
to lead to an equalization of the deposit insurance assessments between BIF and
SAIF insured institutions, and to 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, the FDIC charged assessments for SAIF
and BIF deposits in a 5 to 1 ratio to pay FICO bonds until January 1, 2000, at
which time the assessment became equal. During 1999 a FICO rate of approximately
1.19 basis points was charged on BIF deposits, and approximately 5.93 basis
points was charged on SAIF deposits. Oakar deposits are treated as SAIF deposits
for purposes of the FICO bond assessment.
INTERSTATE BANKING. On September 29, 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act (the "Interstate Act") was enacted. The
Interstate Act generally enhances the ability of bank holding companies to
conduct their banking business across state borders. The Interstate Act has two
main provisions. The first provision generally provides that commencing on
September 29, 1995, bank holding companies may acquire 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 permits 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 is located has
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 permits 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 is likely to enhance
competition in the New Jersey marketplace as bank holding companies located
outside of New Jersey become freer to acquire institutions located within the
state of New Jersey.
<PAGE>
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 five branch offices. The
following table sets forth certain information regarding the Corporation's
properties as of December 31, 1999.
Leased Date of Lease
Location or Owned Expiration
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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 06/30/04
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 1999.
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Part II
ITEM 5 - MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDERS' 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, 1999,
there were 735 stockholder 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, a 5% stock dividend paid in June,
1998, a three-for-two stock split completed in July, 1999, and a 5% stock
dividend paid in November, 1999.
Bid
---------------------- Cash
High Low Dividend
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Year Ended December 31, 1999
Fourth quarter $19.52 $18.10 $0.06
Third quarter 20.00 19.05 0.06
Second quarter 24.76 16.83 0.06
First quarter 18.41 16.19 0.05
Year Ended December 31, 1998
Fourth quarter $27.00 $26.00 $0.04
Third quarter 26.50 25.50 0.04
Second quarter N/A N/A 0.04
First quarter N/A N/A 0.03
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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 1999, the Corporation paid quarterly cash dividends of $0.06
per share for an annual dividend payout ratio of 18.16%. During fiscal 1998, the
Corporation paid quarterly cash dividends of $0.04 per share for an annual
dividend payout ratio of 16.70%.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from
page 13 of the Registrant's Annual Report to Shareholders under the caption
"Selected Financial Data."
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding Quantitative and Qualitative Disclosures About
Market Risk, see Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 8 - 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 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10 - 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 2000 Annual Meeting of
Shareholders under the caption "Proposal I- Election of Directors and
information concerning compliance with Section 16(a) of the Exchange Act is
included under the caption "Compliance with Section 16(a) of the Securities
Exchange Act of 1934," each of 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, 2000.
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, 40, 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, 63 1991 Vice President,
Vice President Commercial Lending,
Atlantic Stewardship Bank
(1) Includes prior service as an officer of the Bank.
ITEM 11 - EXECUTIVE COMPENSATION
Information concerning executive compensation will be included in the
definitive Proxy Statement for the Corporation's 2000 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, 2000.
ITEM 12 - 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 2000 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, 2000.
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions will
be included in the definitive Proxy Statement for the Corporation's 2000 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, 2000.
<PAGE>
Part IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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
10(viii)* Amended and Restated Director Stock Plan
13 Annual Report to Shareholders for the year ended
December 31, 1999
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.
<PAGE>
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
10(viii) Amended and Restated Director Stock Plan
13 Annual Report to Shareholders for the year ended
December 31, 1999
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.
<PAGE>
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 21, 2000
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 21, 2000
- ------------------------------
Paul Van Ostenbridge
/s/ Julie E. Holland Principal Financial
- ------------------------------ Officer and Principal
Julie E. Holland Accounting Officer March 21, 2000
/s/ William Almroth Director March 21, 2000
- ------------------------------
William Almroth
/s/ Harold Dyer Director March 21, 2000
- ------------------------------
Harold Dyer
/s/ Edward Fylstra Secretary and Director March 21, 2000
- ------------------------------
Edward Fylstra
/s/ William Hanse Director March 21, 2000
- ------------------------------
William Hanse
/s/ Margo Lane Director March 21, 2000
- ------------------------------
Margo Lane
/s/ Arie Leegwater Chairman of the Board March 21, 2000
- ------------------------------ and Director
Arie Leegwater
/s/ John L. Steen Vice Chairman of the March 21, 2000
- ------------------------------ Board and Director
John L. Steen
/s/ William J. VanderEems Director March 21, 2000
- ------------------------------
William J. VanderEems
Annual Report 1999
[PHOTO]
[LOGO]
SFC
STEWARDSHIP FINANCIAL CORPORATION
AND SUBSIDIARY
<PAGE>
[PHOTO]
[PHOTO]
[PHOTO]
[PHOTO]
<PAGE>
- --------------------------------------------------------------------------------
About Our Cover:
The Biblical concept of stewardship is fundamental to the Stewardship Financial
Corporation and its subsidiary, the Atlantic Stewardship Bank--an integral part
of our name and the Bank's charter. As God's stewards, we celebrate His many
gifts, and accept responsibility for their proper use. We rejoice in all our
blessings and we acknowledge them by embracing the Biblical principle of
Tithing, or sharing 10 percent of our profits annually.
This year, the Bank was pleased to make its largest donation ever under its
unique Tithing Program; we shared $252,000 with 203 Christian and local civic
organizations. A few of the Tithe Recipients are pictured on the opposite page.
Opposite Page:
Upper Left: Residents of the Christian Health Care Center in Wyckoff, NJ.
Center: Students at the Ebenezer Netherlands Reformed School, Pompton Plains,
NJ.
Upper Right: A resident of the Eastern Christian Children's Retreat receives a
loving hug from a Retreat employee.
Lower Left:A missionary from the Africa Inland Mission in Pearl River, NY,
working with members of the Datoga people of Tanzania.
- --------------------------------------------------------------------------------
Throughout the pages of this Annual Report are additional photos of Atlantic
Stewardship Bank's Tithe Recipients. See pages 3,5,7,9,10,11 and 12.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table of Contents
Financial Highlights ..................................................... 2
Shareholder Information .................................................. 3
Board of Directors ....................................................... 4
Stewardship Financial Corporation Officers ............................... 5
Bank Officers ............................................................ 5
Beach Committee .......................................................... 5
Message to the Shareholders .............................................. 6-7
Giving Back: Tithing in 1999 ............................................. 8-9
Products and Services .................................................... 10
Commercial Services ...................................................... 11
Branch Locations and Associates .......................................... 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 Cash Flows .................................... 33
Notes to Consolidated Financial Statements ............................... 34-51
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO]
RETURN ON ASSETS
[CHART]
"Thank you for the wonderful way you and Atlantic Stewardship Bank have
ministered to AIM through missionary banking services and advice. Your good
service and helpfulness are much appreciated by our missionaries, the Finance
Department staff, and myself. Also, I want to express our sincere appreciation
for your significant contribution to the ministry of Africa Inland Mission
through the Tithing Program of ASB. We are deeply grateful for your partnership
in sharing Jesus Christ with the peoples of Africa and in urban areas here in
the United States."
Ted Barnett, Ed.D.
U.S. Director,
Africa Inland Mission International, Inc.,
Pearl River, NY
- --------------------------------------------------------------------------------
Financial Highlights
<TABLE>
<CAPTION>
1999 1998 %Change
-----------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
For the Year Ended December 31
Net income $ 1,981 $ 1,647 20.3
Average shares outstanding 1,578 1,551 1.7
Per common share:
Basic net income 1.26 1.06 18.9
Diluted net income 1.24 1.05 18.1
Cash dividends declared 0.23 0.17 35.3
Book value at year end 9.56 8.69 10.0
Balance Sheet Data at December 31
Total assets 203,072 185,970 9.2
Deposits 185,167 170,721 8.5
Loans 144,190 123,163 17.1
Stockholders' equity 15,286 13,549 12.8
Allowance for loan losses $ 1,874 $ 1,542 21.5
Consolidated Ratios
Return on average assets 1.03% 0.98% 5.1
Return on average equity 13.77% 12.94% 6.4
Tier 1 capital to average assets (leverage) 7.52% 7.16% 5.0
Tier 1 capital to risk-adjusted assets 11.16% 10.62% 5.1
Total capital to risk-adjusted assets 12.41% 11.87% 4.5
</TABLE>
TOTAL ASSETS
[CHART]
IN INCREMENTS OF MILLIONS
NET INCOME
[CHART]
IN INCREMENTS OF THOUSANDS
2
<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 9, 2000, at 7:00 P.M. The Corporation had 742 shareholders of
record on December 31, 1999.
Dividend Reinvestment Plan
A total of 588 shareholders currently participate in the Corporation's
Shareholder Reinvestment Plan, representing 1,172,302 or 73.3 percent of all
shares outstanding. Plan participants reinvest cash dividends to purchase new
shares of stock at 95 percent of the market value, based on the most recent
trade. Shareholders interested in joining the Dividend Reinvestment Plan may
request a 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, 2000, a quarterly dividend to Shareholders of Record on
January 14, 2000, in the amount of $0.07 per share. Future dividends will be
paid in May, August, November and February, subject to Board approval.
November 2, 1999 $.06
October 27, 1999 5% stock dividend
August 3, 1999 $.06
May 3, 1999 $.06
February 1, 1999 $.05
November 2, 1998 $.04
August 3, 1998 $.04
June 1, 1998 5% stock dividend
May 1, 1998 $.04
February 2, 1998 $.03
Dividends have been restated to reflect all stock splits and stock dividends.
RETURN ON EQUITY
[CHART]
TOTAL EARNINGS PER SHARE
[CHART]
IN INCREMENTS OF MILLIONS
- --------------------------------------------------------------------------------
[PHOTO]
Eastern Christian Children's Retreat
1999 Tithe Recipient
"You have chosen to display God's love, mercy, and grace to the children and
adults at Elim. Gifts help over 600 people with disabilities gain the
opportunity to reach their highest God-given potential. Christ's love through
you continues to improve life at Elim.
Elim is alive in all four of our ministries. Children receive opportunities
through our School and Residential programs. Adults are able to work and learn
through our Work Services program and over 350 children in Christian schools
receive educational assistance through Discovery Network Services. Thank you for
being a part of life in Elim's ministry."
George Groen
Executive Director
Jack Strong
Director of Development
and Community Relations
Elim Christian School,
Palos Heights, IL
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO]
"We are most grateful for the support you have given us as we work
to Preserve the Past for the Future. I would like to add that our banking
relationship with your Waldwick branch has been a most gratifying experience.
Your staff is both pleasant and professional."
Roberta Svarre President, Friends
of the Hermitage, Inc.,
Ho-Ho-Kus, NJ
- --------------------------------------------------------------------------------
Board of Directors
of Stewardship Financial Corporation and Atlantic Stewardship Bank
[PHOTO]
Seated, from left to right: William C. Hanse, John L. Steen, Arie Leegwater,
Edward Fylstra Standing, from left to right: William M. Almroth, Paul Van
Ostenbridge, Margo Lane, William J. Vander Eems, Robert J. Turner, Harold Dyer
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, Esq.
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
*We regret to report that our dear friend and colleague, Samuel Braen, passed
into Eternal Life in January, 2000. We sincerely appreciate all of Samuel
Braen's efforts in promoting the Atlantic Stewardship Bank and his strong
endorsement of our unique Tithing Program.
4
<PAGE>
Stewardship Financial Corporation Officers
Arie Leegwater
Chairman of the Board
John L. Steen
Vice Chairman of the Board
Paul Van Ostenbridge
President and Chief Executive Officer
Edward Fylstra
Secretary
Julie E. Holland
Vice President and Treasurer
M. Bernard Joustra
Vice President
Ellie King
Assistant Secretary
David A. Struck
Assistant Secretary
Marie E. McCall
Assistant Treasurer
Bank Officers
Paul Van Ostenbridge
President and Chief Executive Officer
Julie E. Holland
Vice President and Treasurer
M. Bernard Joustra
Vice President
Alma M. Baxter
Assistant Vice President
James S. Donado
Assistant Vice President
Robert A. Giannetti
Assistant Vice President
John S. Krantz
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
Ellie King
Assistant Secretary
Helen Potter
Assistant Secretary
Kristine Rasile
Assistant Secretary
Louise H. Rohner
Assistant Secretary
David A. Struck
Assistant Secretary
Marie E. McCall
Assistant Treasurer
Jennifer L. Heller
Administrative Assistant
Leigh A. Knorr
Administrative Assistant
Grace Lobbregt
Administrative Assistant
Jean M. Schaver
Administrative Assistant
Mary Beth Steiginga
Administrative Assistant
- --------------------------------------------------------------------------------
[PHOTO]
Midland Park
Ambulance Corps
1999 Tithe Recipient
"Thank you so much for your overwhelming generosity to the work of Star of Hope.
We are grateful to God for His compassion as expressed through the Tithing
ministry of the Atlantic Stewardship Bank. What a wonderful concept! What a
great bank!
... Your faithful support to Star of Hope enables us to continue to care for
those in need in the Greater Paterson area. Thank you once again. We look
forward to continued partnership with you in the years to come. Our prayer is
that God will bless you and the Atlantic Stewardship Bank."
Edward Jay Sinclair
Executive Director,
Star of Hope Ministries, Inc., Paterson, NJ
- --------------------------------------------------------------------------------
Our BEACH Committee
As the Bank provides financial support to community projects and organizations,
many of our associates extend our commitment to "Stewardship" well beyond
banking hours. Members of the Bank's BEACH (Bank Employees Assisting CHarities)
Committee volunteer their time and talents to a number of programs to benefit
the less fortunate in our area. In 1999, BEACH Committee projects included a
Business Suit Drive to assist low-income women entering the workforce, as well
as the annual Food Drive in November, and the Christmas "Wish Tree" program.
Often serving as the catalyst for others to get involved, the committee's work
continues to reinforce the importance of the "Golden Rule."
5
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO]
[PHOTO]
Our Wayne Valley office Ribbon Cutting Ceremony April, 1999.
"Thank you for remembering the Luke Society in your Tithing Program. This will
help us in continuing to help the poor and hurting throughout the
world--extending Christ's love.
Wrede Vogel, MD
Executive Director,
The Luke Society,
Sioux Falls, SD
- --------------------------------------------------------------------------------
Message to the Shareholders
Dear Shareholders and Friends:
We are pleased to report that 1999 was another spectacular year for the
Stewardship Financial Corporation and its subsidiary, the Atlantic Stewardship
Bank. New records were established in virtually all performance categories.
Consolidated earnings for 1999 reached a new high of $2.0 million or $1.26 basic
earnings per share, compared to $1.6 million or $1.06 basic earnings per share
the previous year. This was an increase of 20.3% in income and 18.9% in basic
earnings per share over 1998. Diluted earnings per share were $1.24 in 1999
compared to $1.05 in 1998. The higher earnings reflected strong loan growth,
particularly in our Commercial Mortgage Department.
Cash dividends paid totalled $0.23 per share in 1999: 35.3% higher than the
$0.17 paid per share in 1998. In July, Stewardship Financial Corporation issued
a 3-for-2 stock split, and followed in October with its second 5% stock
dividend.
Shareholder's Equity grew to $15.3 million, representing a 12.8% increase over
the $13.5 million reported in 1998.
Total assets for the Stewardship Financial Corporation climbed to $203.1 million
as of December 31, 1999: a 9.2% increase over the December 31, 1998 figure of
$186.0 million. Total deposits were $185.2 million at year-end, representing a
8.5% increase over last year's year-end total of $170.7 million. The notable
increase can be attributed to new deposit activity generated by the opening of
our Wayne Valley branch, as well as a special certificate of deposit promotion.
As of December 31, 1999, total loans net of allowance for loan losses were
$142.2 million--an increase of 17.0% over the $121.5 million reported at the end
of 1998.
The Year 2000
The Bank was well prepared for the advent of the new millennium. Our Technology
Committee was established in 1997 to address concerns about computer readiness
for the Year 2000, and we approached the date change with full confidence. As
expected, the arrival of the new year presented no technological problems
whatsoever, and business continues without interruption.
New Technology
Keeping pace with the 21st century, we plan to introduce the Atlantic
Stewardship Bank website in the coming year. Our website will enable us to serve
customers outside our immediate area, while still maintaining our community
banking style. The site will provide individual and business Internet users with
up-to-date information about the Bank, including products and services,
financial updates and news about our Tithing Program. In addition, customers
will be able to access their accounts at any time with the site's Online Banking
feature. As more and more people connect to the Internet, we are looking forward
to taking advantage of the new possibilities this important medium offers to
reach out nationwide.
6
<PAGE>
Bank Growth
In April, the Grand Opening of our second Wayne location was a resounding
success, and business at our Wayne Valley branch continues to thrive. Looking
forward, we are delighted to announce the addition of a seventh location to the
Atlantic Stewardship family. We plan to open a new branch at 249 Newark-Pompton
Turnpike, Pequannock, NJ. This location will introduce our style of
community-oriented banking to a new market in Morris County. Our Pequannock
branch is scheduled to open in the last quarter of 2000, and will offer our full
range of banking products and services, including safe deposit boxes and an
Automatic Teller Machine.
Tithing
We are grateful to our Shareholders, bank associates and customers, whose loyal
support enabled us to increase our Tithe in 1999. Once again, we were pleased to
share 10% of our profits with Christian missions, health care facilities,
schools, charitable and civic organizations. This past year, our contributions
totalled an unprecedented $252,000--an increase of 17.2% over the 1998
Tithe--shared with 203 deserving organizations.
Each day, we see or hear about the positive impact that these fine groups have
had--in far corners of the world and in our own communities. We feel honored and
truly blessed to be able to contribute to their good works with our financial
assistance.
We extend our most profound thanks to our Shareholders for the steadfast support
that enables us to continue our mission of sharing our profits and giving back
to the community. Further thanks go out to our bank associates for their
outstanding contributions to our success, and our customers for their loyalty
and confidence.
Very truly yours,
Arie Leegwater Paul Van Ostenbridge
Chairman of the Board of Directors President and Chief Executive Officer
- --------------------------------------------------------------------------------
[PHOTO]
Touch the World Ministries
1999 Tithe Recipient
"For nearly 90 years, the Christian Health Care Center has adhered to its
mission of Christian service to the elderly and mentally ill. Your support
enables us to maintain and expand our services, thereby insuring that those
within our midst will receive the care and compassion that they need and
deserve.
...This gift will be directed toward expanding the services of our Heritage
Manor Nursing Home in ways that would have otherwise not been possible. We hope
that others within the business community will learn from your fine example and
be as supportive to their communities. It must be so rewarding for the entire
Atlantic Stewardship Bank family to know that your efforts are helping to
improve countless lives throughout our area."
Douglas A. Struyk
President and CEO,
Christian Health Care Center,
Wyckoff, NJ
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO]
TITHE
[CHART]
IN INCREMENTS OF THOUSANDS
"We count it a privilege and blessing to be part of your Stewardship Bank
Tithing Program.
...The ministry here at the Bethel Ranch and at the Fellowship House continues
to be a blessing to the many homeless in the area. As the Gospel is being
preached week after week, many are coming to know Christ as Savior and believers
are being encouraged. Please pray with us that this Christ-centered Ministry
will continue well into the New Millennium. May God bless each of you and give
you a Happy and Prosperous New Year.
William Stelpstra
Executive Director,
World for Christ Ministries,
West Milford, NJ
- --------------------------------------------------------------------------------
Giving Back: Tithing in 1999
WE ARE PLEASED TO HAVE ASSISTED THE FOLLOWING ORGANIZATIONS WITH OUR 1999 TITHE
DISTRIBUTION:
* Africa Inland Mission
* Bethany Christian Services
* Bethlehem Ministries
* Brookdale Christian School
* 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
* 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
* Florence Christian Home
Foundation for the Handicapped
* Good Shepherd Mission, Inc.
* Goshen Christian School
* Hawthorne Christian Academy
Healing the Children Midlantic, Inc.
* Holland Christian Home
* Lord's Day Alliance
Love Fund, Inc.
* Luke Society, Inc.
* Madison Avenue Baptist Academy
* Madison Avenue Crossroads Ministries
* Mid-Atlantic Mercy Ministries
Midland Park Ambulance Corps
* Mississippi Christian Family Services, Inc.
* Mustard Seed School
* Operation Double Harvest/Haiti
* Operation Mobilization
* 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
* United Presbyterian Educational
Valley Hospital
Waldwick Ambulance Corps
Wayne Memorial First Aid Squad
* Wyckoff Family YMCA
IN ADDITION, THE BANK HAS PROVIDED SUPPORT THROUGHOUT 1999 TO THE FOLLOWING
ORGANIZATIONS:
* Advent Charities
Albert Payson Terhune Elementary School
American Cancer Society Bergen County
American Heart Association
American Legion, Midland Park
* American Red Cross Bergen Crossroads
* Baptist Haiti Mission
Bergen County Community Blood Services
Bergen County Community Housing in
Partnership
Bergen Regional Medical Center
* Bessie Green Community
Boy Scouts of America
Boys & Girls Club of Hawthorne
Boys & Girls Club of Paterson
* Calvin Theological Seminary
Camp Nejda
* Cathedral Choir
Cerebral Palsy Center
* Child Evangelism Fellowship of NJ, Inc.
Children's Aid and Family Services
* Christian Overcomers
Cody's Foundation
Community High School
Community Housing in Partnership (CHIP)
Community Learning Center of Wyckoff
Community Meals, Inc.
CNBC/PNJA
Cooperative Nursery School of Ridgewood
* Crossroads Community Ministries, Inc.
Cystic Fibrosis Foundation
* Daughters of Miriam Center
Deborah Hospital
Downtown for the Holidays, Ridgewood
Fair Housing Council of Northern NJ
* Fig Orchard
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
8
<PAGE>
* Gideons International Lakeland Camp
* Gideons International Passaic Valley Camp
* Gideons International Paterson Camp
* Gideons International Ramapo Camp
Girl Scout Council of Bergen County
* Grace Counseling Ministries
* Habitat for Humanity, Bergen County
Hawthorne Baseball/Softball Association
Hawthorne Boys and Girls Club
Hawthorne Caballeros
Hawthorne Chamber of Commerce
Hawthorne Chamber Symphony
Hawthorne Community Library Foundation
Hawthorne Cubs Football Assoc.
Hawthorne Education Foundation
Hawthorne High School
Hawthorne Hurricanes
Hawthorne Library
Hawthorne Lions Club
Hawthorne PBA Local 200
Hawthorne Rotary Club
Hawthorne Soccer Assoc.
Hawthorne Special Rec
Hawthorne Volunteer Fire Department
Hawthorne William B. Wawhinney
Ambulance Corps
* Hispanic Multi-Purpose Center
* Hope for New York Mercy Ministries
Hospice of Hackensack Hospital
Hugh O'Brian Youth Foundation
* Interchurch Softball League
Lenni-Lenape Girl Scouts
* Life Advocates
* Little Sisters of the Poor
Lupus Foundation of America, Inc.
* Metropolitan Youth for Christ, Inc.
Midland Park Baseball Association, Inc.
Midland Park Chamber of Commerce
Midland Park High School
Midland Park/Ho-Ho-Kus PBA
Midland Park Lions Club
Midland Park Public Library
Midland Park Volunteer Fire Company
Mohawk Athletic Club
Multiple Sclerosis National Society
Muscular Dystrophy Association
* New Jersey Family Policy Council
* Northeast Urban Church Planting
North Jersey Chorus
Opera in the Park, Ridgewood
Paterson Chamber of Commerce
Paterson Coalition for Housing, Inc.
Pompton Falls Fire Department
* Prison Fellowship Ministries
Ramapo High School
* Reformed Bible College
* Reformed Church Home
Ridgewood Arts Council Ridgewood Baseball Association
Ridgewood Chamber of Commerce
Ridgewood Fire Association
Ridgewood First Night/Fourth of July
Ridgewood Friends of Music Ridgewood High School
Ridgewood Ice Hockey Foundation
Ridgewood Kids Day America
Ridgewood PBA
Ridgewood Public Library
Ridgewood Public Education Foundation
Ridgewood Rotary Ridgewood Softball Association
Ridgewood Village HC/HV
* St. Frances Residence for Women
* St. Peter's Haven
* St. Thomas More School
SHARE, Inc.
* Strategic Prayer Command
* Sonshine Christian Academy
Tri-County Chamber of Commerce
* United Paterson Development Corporation
Waldwick Fire Department
Waldwick High School Athletic Association
Waldwick High School Booster Club
Waldwick High School & Home Association
Waldwick PBA
* Waldwick Seventh Day Adventist School
Waldwick Township Wayne Adult Community Center, Inc.
Wayne Boys and Girls Club
Wayne Counseling and Family Services
Wayne General Hospital
Wayne Hills High School
Wayne Lafayette School
Wayne Lions Charities, Inc.
Wayne Little League
Wayne Police Athletic League
Wayne Public Library
Wayne Township Public Schools
Wayne Valley Band Parents Association
Wayne Volunteer Fire Company
West Bergen Mental Health Clinic
* Westminster Theological Seminary
* World for Christ
* Wyckoff Family YMCA
Wyckoff Torpedoes Soccer Club
* Denotes Christian Charity
- --------------------------------------------------------------------------------
[PHOTO]
Hawthorne Public Library, Hawthorne, NJ
1999 Tithe Recipient
"Thank you for the generous gift to the Lord's Day Alliance.... We will add this
gift to our endowment reserve to provide present and future resources to
continue to make people aware of the need to worship God and to keep the Sabbath
holy. We appreciate your ministry and pray that God continues to bless you, your
employees and directors.
John D. Rea
Treasurer,
Lord's Day Alliance of
New Jersey,
Yardley, PA
9
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO]
[PHOTO]
Touch the World Ministries
1999 Tithe Recipient
"Thank you for your generous donation. Atlantic Stewardship Bank's continued
support has been a blessing to our Gideon Ministry. May our Heavenly Father
continue to bless your unique and wonderful institution."
Jeffrey R. Bryan
Treasurer, The Gideons International,
Nashville, TN
- --------------------------------------------------------------------------------
Products and Services
Atlantic Stewardship Bank offers a full range of products and services for
individuals and businesses.
Here are some highlights of what we offer:
Checking
Personal Checking Account
Free 55+ Checking
New Jersey Consumer
Checking Account
NOW Account
Commercial and Business Advantage
Checking Accounts
Stewardship Statement
Money Market
Atlantic Money Market Account -
Personal or Business
Premium Growth Account (PGA)
Savings
Statement Savings - Personal or Business
Individual Retirement Account
Christmas Clubs
Certificates of Deposit
Power Certificates of Deposit
Loans
Installment Loans
Home Equity Lines of Credit
Mortgages
Reserve Credit
Student Loans
VISA o MasterCard
Commercial Financing
Other Services
ATM ACCESS/CHECK CARD
Point of Sale/Check Card
Certified Checks
Direct Deposit
Payroll, Social Security
Discount Brokerage*
Drive-Up Banking Fax Service
Foreign Currency Interpreter Services
Merchant Deposit
VISA, MasterCard, & Point of Sale Money Orders
Notary Services
Official Checks
Phone Banking (800-861-4361)
Safe Deposit Boxes
(Not available in all branches)
Signature Guarantee
Traveler's Checks
Treasury Tax and Loan
[LOGO] FDIC
*Not FDIC insured
10
<PAGE>
Commercial Services
Commercial Lending Division
In a market where most financial competitors prefer large balance loans,
Atlantic Stewardship Bank is carving a niche in our desire to help businesses
grow, and in our willingness to finance smaller and mid-size loan requests.
The Commercial Lending Division produced the greatest loan volume for
the Atlantic Stewardship Bank this past year, responding quickly to the needs of
businesses by offering effective solutions. The bank provides term loans, time
loans, lines of credit, commercial mortgages and more. Short- and long-term
financing is also available.
Construction Mortgages
Construction financing is available for commercial and residential buildings, as
the bank works closely with the borrower and the building contractor during the
construction process. Permanent financing is arranged upon completion of the
building project.
Residential Mortgage Lending
This division enjoys an outstanding reputation as a result of highly
personalized service. The Mortgage associates work diligently with customers to
help them purchase the home of their dreams, a second home, or even an
investment property.
Since each borrower's needs are different, the Mortgage Division has developed
an extended portfolio of loan products. These mortgages include the traditional
fifteen- and thirty-year fixed-rate mortgages as well as balloon and adjustable
rate mortgages.
The bank works in concert with the State of New Jersey Housing Mortgage and
Finance Agency to entertain applications for first time home buyer programs and
a separate program for New Jersey professional firefighters and police officers.
Low/Moderate Income Lending
The Atlantic Stewardship Bank Lending Division is committed to assisting
qualified low/moderate income applicants with financing. Special financing
programs are available for residential home purchases and home renovations.
Consumer Lending Division
Atlantic Stewardship Bank is extremely competitive with vehicle financing. Both
new and used vehicle loans are attractively priced.
Home equity loans and lines of credit are very popular due to the value of homes
in our lending market and added income tax benefits for those who qualify. The
bank's goal is to make the application process easy and to provide a quick
response.
Credit Cards
We offer one of the most attractive credit card programs in the nation. Both
VISA and MasterCard regular, gold and platinum cards are available.
- --------------------------------------------------------------------------------
[PHOTO]
Forum School, Waldwick, NJ
1999 Tithe Recipient
"The Atlantic Stewardship Bank's donation...is not just a generous gift, it is
also a symbolic one. It represents your bank's noble practice of tithing; it is
also indicative of your concern for senior citizens.
We are grateful for your generosity and encouraged by what your gift says about
your bank and to us. You confirm our belief that nobility is not dead; you give
us the courage to continue working for a quality life for senior citizens.
May you, your fellow workers, and the Atlantic Stewardship Bank continue to be
successful."
Sister Alice Matthew, OP,
Director,
Siena Village,
Wayne, NJ
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO]
[PHOTO]
CUMAC Echo Mission, Paterson, NJ
1999 Tithe Recipient
"Eva's is clearly blessed by the wonderful people like yourself who continually
support our efforts. We, on the staff, see the faces of poverty daily, but would
be unable to assist them without your help. Your generosity is something we
treasure, and I hope that it will continue. The needs are so great, but the cost
of meeting them is also. We are just about to open our new and much larger
shelter for homeless women, homeless women with their children, and our addicted
women who, with our guidance, are trying to straighten out their lives for the
new millennium.
...Please continue your support. I know God will bless you in some special way
for your generosity to us."
Sister Jane Frances Brady, S.C.,
Executive Director,
Eva's Village
Paterson, NJ
- --------------------------------------------------------------------------------
Branch Locations and Staff
Telephone: 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 HILLS
87 Berdan Avenue
Robert A. Giannetti
Branch Manager & Assistant Vice President
Barbara LaRue
Assistant Branch Manager
WAYNE VALLEY
311 Valley Road
Leigh A. Knorr
Branch Manager & Administrative Assistant
12
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Net interest income ........................................ $ 8,881 $ 7,495 $ 6,451 $ 5,703 $ 5,203
Provision for loan losses .................................. (340) (200) (120) (155) (150)
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses ........ 8,541 7,295 6,331 5,548 5,053
Noninterest income ......................................... 1,091 1,008 753 664 466
Noninterest expense ........................................ 6,679 5,858 5,024 4,327 3,904
--------- --------- --------- --------- ---------
Income before income tax expense ........................... 2,953 2,445 2,060 1,885 1,615
Income tax expense ......................................... 972 798 597 568 471
--------- --------- --------- --------- ---------
Net income ................................................. $ 1,981 $ 1,647 $ 1,463 $ 1,317 $ 1,144
========= ========= ========= ========= =========
COMMON SHARE DATA: (1)
Basic net income ........................................... $ 1.26 $ 1.06 $ 0.95 $ 0.87 $ 0.76
Diluted net income ......................................... 1.24 1.05 0.95 0.87 0.76
Cash dividends declared .................................... 0.23 0.17 0.15 0.11 0.11
Book Value at year end ..................................... 9.56 8.69 7.74 6.84 6.07
Average shares outstanding ................................. 1,578 1,551 1,532 1,514 1,497
Shares outstanding at year end ............................. 1,600 1,570 1,540 1,522 1,506
Dividend payout ratio ...................................... 18.16% 16.70% 15.16% 14.56% 14.20%
SELECTED CONSOLIDATED RATIOS:
Return on average assets ................................... 1.03% 0.98% 1.07% 1.10% 1.10%
Return on average stockholders' equity ..................... 13.77% 12.94% 13.12% 13.55% 13.54%
Average stockholders' equity as
a percentage of average total assets ..................... 7.49% 7.55% 8.19% 8.12% 8.14%
Tier-I capital leverage (2) ................................ 7.52% 7.16% 7.75% 7.80% 7.57%
Tier-I risk based capital (3) .............................. 11.16% 10.62% 11.41% 12.40% 12.13%
Total risk based capital (3) ............................... 12.41% 11.87% 12.67% 13.65% 13.38%
Allowance for loan loss to year-end loans .................. 1.32% 1.25% 1.45% 1.64% 1.63%
Non-performing loans to year-end loans ..................... 0.02% 0.45% 0.69% 1.10% 1.61%
SELECTED YEAR-END BALANCES:
Total assets ............................................... $ 203,072 $ 185,970 $ 149,732 $ 128,621 $ 113,120
Total loans, net of allowance for loan loss ................ 142,196 121,508 99,205 80,848 70,976
Total deposits ............................................. 185,167 170,721 136,215 115,825 101,789
Stockholders' equity ....................................... 15,286 13,549 11,926 10,407 9,151
</TABLE>
- -------------------
(1) Common share data has been restated to reflect a 2 for 1 stock split
completed in September, 1997, a 5% stock dividend paid June, 1998, a 3 for
2 stock split completed July 1, 1999 and a 5% stock dividend paid October
27, 1999.
(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, 1999, 1998 and 1997. 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 five branches located in Ridgewood and Waldwick, Bergen
County, New Jersey and Hawthorne and two in 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 $2.0 million, or $1.26 basic earnings per
share, for the year ended December 31, 1999, an increase of $334,000, or 20.3%,
above the $1.6 million recorded for 1998. Earnings for 1998 had increased
$184,000, or 12.6%, over the 1997 earnings of $1.5 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 increased in 1999 to 1.03% from 0.98% in 1998 and
1.07% in 1997. The return on average equity increased to 13.77% in 1999 from
12.94% in 1998 and 13.12% in 1997.
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 1999, net interest income, on a tax equivalent basis, increased to $9.1
million from $7.7 million in 1998, an increase of $1.4 million, or 18.7%. This
was caused by an increase of $6.0 million, or 15.7%, in net average
interest-earning assets (average interest-earning assets less average
interest-bearing liabilities) and a decrease in interest rates on
interest-bearing liabilities (54 basis points), partially offset by a decrease
in interest rates on interest-earning assets (21 basis points).
Interest income, on a tax equivalent basis, increased $1.3 million, or 10.5%,
during 1999 to $13.8 million from $12.5 million earned during 1998. The increase
was due to an increase in the average volume of interest-earning
14
<PAGE>
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 $21.8 million in 1999, or 13.6%, over the 1998
amount with average loans attributing to $26.1 million of the increase due
primarily to the Corporation's increased competitiveness within the marketplace
and other interest-earning assets decreased $4.3 million.
Interest expense decreased $119,000, or 2.5%, during 1999 to $4.7 million. The
decrease was due to a decrease in interest rates paid on interest-bearing
liabilities, partially offset by an increase in average interest-bearing
liabilities of $15.8 million, or 13.0%, to $137.6 million during 1999. Yields on
interest-bearing liabilities decreased to 3.42% during 1999 from 3.96% during
1998. Contributing to this decrease was a decrease in rates paid on savings and
interest bearing demand deposits. The Corporation concentrated its marketing
efforts in advertising its new Power 18 month certificate of deposit which
allows customers to lock in a rate for 18 months with the ability to add to the
deposit once and if interest rates rise, to increase the rate once on the total
deposit. Despite customer movements to interest bearing deposits, average
noninterest-bearing demand deposits increased $5.9 million, or 17.9%, to $39.0
million during 1999.
In 1998, net interest income, on a tax equivalent basis, increased to $7.7
million from $6.7 million in 1997, an increase of $1 million, or 15.4%. 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 in 1997. 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 $31.5 million in 1998, or 24.5%, over the 1997 amount. Interest
expense increased $1.0 million, or 26.9%, during 1998. 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 1998 and increased $6.9 million, or 26.4%,
over the 1997 average balances.
The following table reflects the components of the Corporation's net interest
income for the years ended December 31, 1999, 1998 and 1997 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 1999, 1998 and
1997. 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>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
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)
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) ....................... $134,723 $11,097 8.24% $108,667 $ 9,437 8.68% $ 91,022 $ 8,052 8.85%
Taxable investment securities ... 24,643 1,480 6.01 26,996 1,656 6.13 21,498 1,388 6.46
Tax-exempt investment
securities (2) ................ 13,511 790 5.85 9,751 621 6.37 9,511 660 6.94
Other interest-earning assets ... 8,760 450 5.14 14,450 788 5.45 6,369 357 5.61
------- ------ ------- ------ ---- ------- ------ ----
Total interest-earning assets ... 181,637 13,817 7.61 159,864 12,502 7.82 128,400 10,457 8.14
------ ------ ------
Net interest-earning assets:
Allowance for loan losses ....... (1,696) (1,523) (1,407)
Other assets .................... 12,278 10,275 9,183
-------- -------- --------
Total assets .................... $192,219 $168,616 $136,176
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits ...................... $ 68,395 $ 2,002 2.93% $ 55,195 $ 1,898 3.44% $ 29,856 $ 774 2.59%
Savings deposits ................ 21,230 327 1.54 20,914 473 2.26 21,219 480 2.26
Time deposits ................... 46,577 2,313 4.97 45,142 2,424 5.37 45,427 2,470 5.44
Borrowing ....................... 1,420 65 4.58 572 31 5.42 1,570 80 5.10
-------- ------- ------- ------- ------- ------
Total interest-bearing
liabilities .................... 137,622 4,707 3.42 121,823 4,826 3.96 98,072 3,804 3.88
Noninterest-bearing liabilities:
Demand deposits ................. 38,955 33,051 26,158
Other liabilities ............... 1,249 1,010 792
Stockholders' equity ............ 14,393 12,732 11,154
------- -------- --------
Total liabilities and
stockholders' equity ........... $192,219 $168,616 $136,176
======== ======== ========
Net interest income
(taxable equivalent basis) .... $ 9,110 $ 7,676 $ 6,653
======= ======= =======
Net interest spread
(taxable equivalent basis) .... 4.19% 3.86% 4.26%
==== ==== ====
Net yield on interest-earning
assets (taxable equivalent
basis) (3) .................... 5.02% 4.80% 5.18%
==== ==== ====
- -----------
</TABLE>
(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.
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>
1999 VERSUS 1998 1998 VERSUS 1997
----------------------------- -----------------------------
(In thousands)
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------ ------------------
VOLUME RATE NET VOLUME RATE NET
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans ..................................... $ 2,167 $ (507) $ 1,660 $ 1,535 $ (150) $ 1,385
Taxable investment securities ............. (142) (34) (176) 340 (72) 268
Tax-exempt investment securities .......... 223 (54) 169 16 (55) (39)
Federal funds sold ........................ (295) (43) (338) 441 (10) 431
------- ------- ------- ------- ------- -------
Total interest-earning assets ........... 1,953 (638) 1,315 2,332 (287) 2,045
------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand deposits .......... $ 412 $ (308) $ 104 $ 812 $ 312 $ 1,124
Savings deposits .......................... 7 (153) (146) (7) 0 (7)
Time deposits ............................. 75 (186) (111) (15) (31) (46)
Borrowings ................................ 39 (5) 34 (54) 5 (49)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ...... 533 (652) (119) 736 286 1,022
------- ------- ------- ------- ------- -------
Net change in net interest income ........... $ 1,420 $ 14 $ 1,434 $ 1,596 $ (573) $ 1,023
======= ======= ======= ======= ======= =======
</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 $340,000 in 1999 representing a 70.0% increase
from the 1998 provision of $200,000. The 1998 provision increased 66.7% from the
1997 provision of $120,000.
NONINTEREST INCOME
Noninterest income increased $83,000, or 8.2%, to $1.1 million during the year
ended December 31, 1999, when compared with $1.0 million during the 1998 period.
The increase in noninterest income resulted primarily from an increase in fees
and service charges on deposit accounts of $152,000 to $854,000 for the year
ended December 31, 1999 due to an expanding customer base. Gain on sales of
mortgage loans decreased $69,000 to $87,000 for 1999 due to a decrease in the
volume of loans originated for sale.
Noninterest income increased by $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 resulted primarily from an increase in fees and service charges and
a volume related increase 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 $821,000, or 14.0%, to $6.7 million for the year ended December 31,1999,
compared to $5.9 million for the same period in 1998. Salaries and employee
benefits, the major component of noninterest expense, increased $387,000, or
13.7%. The increase was due primarily to the full year effect of staffing the
new branch in Wayne and general merit and salary increases. Increases in
occupancy, equipment and data processing totaling $165,000 were due to the new
branch in Wayne which opened in April of 1999.
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
$252,000 for the year ended December 31, 1999, an increase of $37,000, or 17.2%,
over the same period in 1998.
Noninterest expense increased $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.
Increases in salaries and employee benefits, equipment, data processing,
stationery and supplies and miscellaneous expense were caused primarily by the
full year effect of the installation of an ATM network and the opening of new
branches in Waldwick and Ridgewood.
FINANCIAL CONDITION
Total assets at December 31, 1999 were $203.1 million, an increase of $17.1
million, or 9.2%, over the $186.0 million at December 31, 1998. This increase in
assets reflects, among other things, a $20.7 million increase in net loans held
for portfolio partially offset by decreases of $1.8 million in securities
available for sale and $1.7 million in securities held to maturity.
LOAN PORTFOLIO
The Corporation's loan portfolio at December 31, 1999, net of allowance for loan
losses, totaled $142.2 million, an increase of $20.7 million, or 17.0%, over the
$121.5 million at December 31, 1998. During 1999, 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 $53.6 million, or 37.2% of the total portfolio, comprised the
largest portion of the loan portfolio. This represented an increase of $7.2
million from $46.4 million, or 37.7% of the total portfolio at December 31,
1998. Residential mortgage and installment loans increased $6.9 million and $2.8
million, respectively. 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, 1999, 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 five years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential .............................. $ 31,716 $ 24,784 $ 20,305 $ 15,257 $ 14,422
Commercial ............................... 53,609 46,375 35,035 26,797 23,264
Commercial loans ........................... 21,838 18,995 17,826 17,403 15,597
Consumer loans:
Installment (1) .......................... 32,110 29,290 23,659 18,892 14,783
Home equity .............................. 4,742 3,593 3,551 3,838 4,100
Other .................................... 175 126 414 136 142
-------- -------- -------- -------- --------
Total loans ................................ 144,190 123,163 100,790 82,323 72,308
Less: Allowance for loan losses ............ 1,874 1,542 1,462 1,353 1,177
Deferred loan fees ..................... 120 113 123 122 155
-------- -------- -------- -------- --------
Net loans .................................. $142,196 $121,508 $ 99,205 $ 80,848 $ 70,976
======== ======== ======== ======== ========
</TABLE>
- --------------
(1) Includes automobile, home improvement, second mortgages and unsecured
loans.
The following table sets forth certain categories of loans as of December 31,
1999 by contractual maturity:
<TABLE>
<CAPTION>
AFTER 1 YEAR
WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage .............................. $ 2,984 $19,286 $63,055 $ 85,325
Commercial ........................................ 7,786 12,645 1,407 21,838
Consumer .......................................... 1,144 14,740 21,143 37,027
------- ------- ------- --------
Total loans ....................................... $11,914 $46,671 $85,605 $144,190
======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due one year or
more after December 31, 1999, which have predetermined interest rates or
floating or adjustable interest rates:
FLOATING OR
PREDETERMINED ADJUSTABLE
RATES RATES TOTAL
-------- -------- --------
(In thousands)
Real estate mortgage .............. $ 46,563 $ 35,778 $ 82,341
Commercial ........................ 6,571 7,481 14,052
Consumer .......................... 29,312 6,571 35,883
-------- -------- --------
Total ............................. $ 82,446 $ 49,830 $132,276
======== ======== ========
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. All 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 five years:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Commercial real estate .................................. $ -- $ -- $ 40 $ -- $ 194
Commercial .............................................. -- -- -- 95 139
Consumer ................................................ -- 4 -- -- --
--------- ------ ------ ------ ------
Total nonaccrual loans ................................ -- 4 40 95 333
--------- ------ ------ ------ ------
Loans past due ninety days or more and accruing:
Commercial real estate .................................. -- -- -- -- 174
Commercial .............................................. -- 64 -- 550 590
Consumer ................................................ -- -- 4 -- --
--------- ------ ------ ------ ------
Total loans past due ninety days or more
and accruing ........................................ -- 64 4 550 764
--------- ------ ------ ------ ------
Restructured loans:
Commercial .............................................. 25 480 612 131 6
Consumer ................................................ -- -- 40 130 63
--------- ------ ------ ------ ------
Total restructured loans .............................. 25 480 652 261 69
--------- ------ ------ ------ ------
Total nonperforming loans ................................. $ 25 $ 548 $ 696 $ 906 $1,166
========= ====== ====== ====== ======
Nonaccrual investments .................................... -- -- -- -- 8
Other real estate owned, net .............................. -- -- 229 229 249
--------- ------ ------ ------ ------
Total nonperforming assets ................................ $ 25 $ 548 $ 925 $1,135 $1,423
========= ====== ====== ====== ======
Nonaccrual loans to total gross loans ..................... 0.00% 0.00% 0.04% 0.12% 0.46%
Nonperforming loans to total gross loans .................. 0.02% 0.45% 0.69% 1.10% 1.61%
Nonperforming loans to total assets ....................... 0.01% 0.29% 0.47% 0.70% 1.03%
Nonperforming assets to total assets ...................... 0.01% 0.29% 0.62% 0.88% 1.26%
Allowance for loan losses to nonperforming loans .......... 7,493.62% 281.53% 209.96% 149.27% 100.90%
</TABLE>
- ------------------
(1) At December 31, 1999, 1998, 1997 and 1996, there were no restructured loans
classified as nonaccrual. Approximately $238,000 restructured loans were
classified as nonaccrual at December 31, 1995.
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, 1999, 1998,
1997, 1996 and 1995, 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>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .................................. $ 1,542 $ 1,462 $ 1,353 $ 1,177 $ 1,088
Loans charged off:
Commercial .................................................... 11 113 2 2 59
Consumer ...................................................... 26 7 17 10 2
------- ------- ------- ------- -------
Total loans charged off ..................................... 37 120 19 12 61
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Commercial real estate ........................................ 12 -- 1 5 --
Commercial .................................................... 5 -- 4 28 --
Consumer ...................................................... 12 -- 3 -- --
------- ------- ------- ------- -------
Total recoveries of loans previously charged off ............ 29 -- 8 33 --
------- ------- ------- ------- -------
Net loans charged off (recovered) ............................... 8 120 11 (21) 61
Provisions charged to operations ................................ 340 200 120 155 150
------- ------- ------- ------- -------
Balance at end of period ........................................ $ 1,874 $ 1,542 $ 1,462 $ 1,353 $ 1,177
======= ======= ======= ======= =======
Net charge offs (recoveries) during the period
to average loans outstanding during the period ................ 0.01% 0.11% (0.01%) (0.03%) 0.10%
======= ======= ======= ======= =======
Balance of allowance for loan losses at the
end of year to gross year end loans ........................... 1.30% 1.25% 1.45% 1.64% 1.63%
======= ======= ======= ======= =======
</TABLE>
The following table sets forth the allocation of the allowance for loan losses
at the dates indicated by category loans:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ----------------------
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 ....................... $ 246 22.0% $ 195 20.1% $ 175 20.1%
Real estate--commercial ........................ 562 37.2% 479 37.7% 404 34.8%
Commercial ..................................... 623 15.1% 479 15.4% 576 17.7%
Consumer ....................................... 443 25.7% 389 26.8% 307 27.4%
------ ----- ------ ----- ------ -----
Total allowance for loan losses .............. $1,874 100.0% $1,542 100.0% $1,462 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
1996 1995
----------------------- -----------------------
PERCENT PERCENT
AMOUNT TO TOTAL(1) AMOUNT TO TOTAL(1)
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate--residential ....................... $ 148 18.5% $ 91 19.9%
Real estate--commercial ........................ 360 32.6% 403 32.2%
Commercial ..................................... 587 21.1% 530 21.6%
Consumer ....................................... 258 27.8% 153 26.3%
------ ----- ------ -----
Total allowance for loan losses .............. $1,353 100.0% $1,177 100.0%
====== ===== ====== =====
</TABLE>
- -----------------
(1) Represents percentage of loan balance in category to total gross loans.
22
<PAGE>
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 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. Securities available for sale decreased
to $16.8 million at December 31, 1999, from $18.6 million at December 31, 1998,
a decrease of $1.8 million, or 9.6%. Securities held to maturity decreased $1.7
million, or 7.3%, to $20.9 million at December 31, 1999 from $22.5 million at
December 31, 1998.
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,
------------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury ............................. $ 1,990 11.8% $ 3,280 17.6% $ 2,977 26.9%
U.S. Government agencies .................. 7,728 46.0% 8,205 44.2% 1,454 13.2%
Obligations of state and
political subdivisions .................. 853 5.1% 533 2.9% 275 2.5%
Mortgage-backed securities ................ 6,231 37.1% 6,560 35.3% 6,341 57.4%
------- ----- ------- ----- ------- -----
Total ....................................... $16,802 100.0% $18,578 100.0% $11,047 100.0%
======= ===== ======= ===== ======= =====
Securities held to maturity:
U.S. Treasury ............................. $ 749 3.6% $ 948 4.2% $ 1,948 9.6%
U.S. Government agencies .................. 5,847 28.0% 7,123 31.6% 7,736 38.1%
Obligations of state and
political subdivisions .................. 12,870 61.7% 12,359 54.9% 8,479 41.9%
Mortgage-backed securities ................ 1,396 6.7% 2,083 9.3% 2,119 10.4%
------- ----- ------- ----- ------- -----
Total ....................................... $20,862 100.0% $22,513 100.0% $20,282 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
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, 1999:
<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 ......................................... $ -- $ 1,990 $ -- $ -- $ 1,990
Yield .................................................. -- 5.87% -- -- 5.87%
U.S. Government agencies:
Carrying value ......................................... -- 4,502 1,795 1,431 7,728
Yield .................................................. -- 6.08% 6.01% 6.46% 6.14%
Obligations of state and political subdivisions:
Carrying value ......................................... -- 853 -- -- 853
Yield .................................................. -- 4.20% -- -- 4.20%
Mortgage-backed securities:
Carrying value ......................................... 32 3,673 734 1,792 6,231
Yield .................................................. 7.83% 6.26% 5.73% 6.61% 6.31%
---------- ---------- ---------- ---------- ----------
Total carrying value ..................................... $ 32 $ 11,018 $ 2,529 $ 3,223 $ 16,802
========== ========== ========== ========== ==========
Weighted average yield ................................... 7.83% 5.96% 5.93% 6.55% 6.07%
========== ========== ========== ========== ==========
</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, 1999:
<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 ......................................... $ -- $ 749 $ -- $ -- $ 749
Yield .................................................. -- 5.77% -- -- 5.77%
U.S. Government agencies:
Carrying value ......................................... 250 4,100 1,497 -- 5,847
Yield .................................................. 6.63% 5.83% 6.50% -- 6.04%
Obligations of state and political subdivisions:
Carrying value ......................................... 980 11,305 585 -- 12,870
Yield .................................................. 4.38% 4.15% 4.06% -- 4.16%
Mortgage-backed securities:
Carrying value ......................................... 92 1,086 153 65 1,396
Yield .................................................. 6.77% 6.31% 6.69% 7.00% 6.41%
---------- ---------- ---------- ---------- ----------
Total carrying value ..................................... $ 1,322 $ 17,240 $ 2,235 $ 65 $ 20,862
========== ========== ========== ========== ==========
Weighted average yield ................................... 4.97% 4.75% 5.87% 7.00% 4.89%
========== ========== ========== ========== ==========
</TABLE>
DEPOSITS
Corporation deposits at December 31, 1999 totaled $185.2 million, an increase of
$14.4 million, or 8.5%, over the comparable period of 1998, when deposits
totaled $170.7 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 a new branch location and the successfulness of the certificate of
deposit promotion 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,
---------------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand ............... $ 41,359 22.3% $ 39,234 23.0% $ 29,428 21.6%
Interest-bearing demand .................. 68,123 36.8% 66,384 38.9% 38,027 27.9%
Savings deposit .......................... 21,005 11.4% 21,044 12.3% 20,418 15.0%
Time deposits ............................ 54,680 29.5% 44,059 25.8% 48,342 35.5%
-------- ----- -------- ----- -------- -----
Total .................................... $185,167 100.0% $170,721 100.0% $136,215 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
24
<PAGE>
As of December 31, 1999, 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 ....................... $2,294
Four months through six months ............. 999
Seven months through twelve months ......... 2,478
Over twelve months ......................... 3,630
------
Total ...................................... $9,401
======
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, 1999. 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 "2000" category.
<TABLE>
<CAPTION>
AVERAGE
INTEREST FAIR
RATE 2000 2001 2002 2003 2004 THEREAFTER BALANCE VALUE
-------- ---- ---- ---- ---- ---- ---------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Federal funds sold ....................... 4.52% $ 8,625 $ -- $ -- $ -- $ -- $ -- $ 8,625 $ 8,625
Commercial paper ......................... 5.95% 495 -- -- -- -- -- 495 495
Interest-bearing due from banks .......... 7.93% 51 -- -- -- -- -- 51 51
Loans:
Real estate mortgage ................... 8.06% 7,056 7,045 6,541 11,577 9,874 43,232 85,325 84,168
Commercial ............................. 9.50% 8,834 5,712 3,284 1,451 1,753 804 21,838 21,814
Consumer ............................... 7.92% 7,505 4,543 3,929 4,518 3,540 12,993 37,028 36,913
Investment securities(1) ................. 5.36% 5,975 4,799 3,713 6,305 6,460 11,076 38,328 37,239
INTEREST-SENSITIVE LIABILITIES
Savings .................................. 1.50% 1,773 -- -- -- -- 19,232 21,005 21,005
Interest-bearing ......................... 3.04% 14,589 -- -- -- -- 53,534 68,123 68,123
Time deposits ............................ 5.06% 29,904 21,028 2,177 1,140 429 2 54,680 54,534
Repurchase agreements .................... 4.77% 1,173 -- -- -- -- -- 1,173 1,173
</TABLE>
- ---------------------
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
25
<PAGE>
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
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, 1999. 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 ............................. $ 4,173 $ 10,749 $ 70,403 $ -- $ 85,325
Commercial ....................................... 16,908 691 4,239 -- 21,838
Consumer ......................................... 6,666 5,327 25,035 -- 37,028
Investment securities (1) .......................... 3,794 2,181 32,352 -- 38,327
Federal funds sold ................................. 8,625 -- -- -- 8,625
Other assets ....................................... 546 -- -- 11,383 11,929
-------- -------- -------- -------- --------
Total assets ................................... $ 40,712 $ 18,948 $132,029 $ 11,383 $203,072
-------- -------- -------- -------- --------
SOURCE OF FUNDS:
Savings ............................................ $ -- $ 21,005 $ -- $ -- $ 21,005
Interest-bearing ................................... 68,123 -- -- -- 68,123
Time deposits ...................................... 8,856 20,016 25,808 -- 54,680
Repurchase agreements .............................. 464 709 -- -- 1,173
Other liabilities .................................. -- -- -- 42,805 42,805
Stockholders' equity ............................... -- -- -- 15,286 15,286
-------- -------- -------- -------- --------
Total source of funds .......................... $ 77,443 $ 41,730 $ 25,808 $ 58,091 $203,072
-------- -------- -------- -------- --------
Interest rate sensitivity gap ...................... $(36,731) $(22,782) $106,221 $(46,708)
======== ======== ======== ========
Cumulative interest rate sensitivity gap ........... $(36,731) $(59,513) $ 46,708 $ --
======== ======== ======== ========
Ratio of GAP to total assets ....................... (18.1%) (11.2%) 52.3% (23.0%)
======== ======== ======== ========
Ratio of cumulative GAP assets to
total assets ..................................... (18.1%) (29.3%) 23.0% --
======== ======== ======== ========
</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,
--------------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents--beginning ..................... $ 16,999 $ 12,672 $ 10,955
Operating activities:
Net income ............................................. 1,981 1,647 1,463
Adjustments to reconcile net income to net cash
provided by operating activities ..................... 1,834 289 202
-------- -------- --------
Net cash provided by operating activities ................ 3,815 1,936 1,665
Net cash used in investing activities .................... (19,075) (32,243) (19,139)
Net cash provided by financing activities ................ 15,156 34,634 19,191
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ..... (104) 4,327 1,717
-------- -------- --------
Cash and cash equivalents--ending ........................ $ 16,895 $ 16,999 $ 12,672
======== ======== ========
</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,
1999, the Corporation has outstanding loan commitments of $10.1 million and
unused lines and letters of credit totaling $26.4 million. Certificates of
deposit scheduled to mature in one year or less, at December 31, 1999, totaled
$29.9 million. Management believes that a significant portion of such deposits
will remain with the Corporation.
27
<PAGE>
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 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% 11.16% 7.16%
Total ................. 8.00% 12.41% 4.41%
Leverage ratio* ......... 3.00% 7.52% 4.52%
* 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
The Corporation successfully completed its Year 2000 (Y2K) upgrade for
compliance with computer hardware and software systems. As a result of these
upgrades and development of contingency plans, the Corporation entered the Year
2000 smoothly and with no major impact to our customer base. Since implementing
the assessment of Y2K issues, the Corporation recognized costs to external
sources of approximately $155,000.
28
<PAGE>
PEAT MARWICK 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 condition of
Stewardship Financial Corporation and subsidiary as of December 31, 1999 and
1998, and 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, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
January 28, 2000
29
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ................................................... $ 7,724,000 $ 7,379,000
Commercial paper and interest-bearing due from banks ...................... 546,000 5,045,000
Federal funds sold ........................................................ 8,625,000 4,575,000
------------------------------
Cash and cash equivalents ............................................... 16,895,000 16,999,000
Securities available for sale (note 2) .................................... 16,802,000 18,578,000
Securities held to maturity; estimated fair value
of $20,437,000 (1999) and $22,757,000 (1998) (note 3) ................... 20,862,000 22,513,000
FHLB-NY stock, at cost .................................................... 663,000 557,000
Loans, net of allowance for loan losses of $1,874,000 (1999)
and $1,542,000 (1998) (notes 4 and 5) ................................... 142,196,000 121,508,000
Mortgage loans held for sale .............................................. -- 793,000
Premises and equipment, net (note 6) ...................................... 2,694,000 2,484,000
Accrued interest receivable ............................................... 1,253,000 1,229,000
Intangible assets, net of accumulated amortization of $341,000 and
$284,000 at December 31, 1999 and 1998 respectively ..................... 409,000 465,000
Other assets (note 13) .................................................... 1,298,000 844,000
------------------------------
Total assets ........................................................ $203,072,000 $185,970,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits: (note 7)
Noninterest-bearing ..................................................... $ 41,359,000 $ 39,234,000
Interest-bearing ........................................................ 143,808,000 131,487,000
------------------------------
Total deposits ...................................................... 185,167,000 170,721,000
Securities sold under agreements to repurchase (note 8) ................. 1,173,000 662,000
Accrued expenses and other liabilities .................................. 1,446,000 1,038,000
------------------------------
Total liabilities ................................................... 187,786,000 172,421,000
Commitments and contingencies (note 14) ................................... -- --
------------------------------
STOCKHOLDERS' EQUITY (note 9 and 15)
Common stock, no par value; 5,000,000 shares authorized;
1,599,646 and 1,485,427 shares issued and outstanding at
December 31, 1999 and 1998, respectively ................................ 8,760,000 6,645,000
Retained earnings ......................................................... 6,932,000 6,867,000
Accumulated other comprehensive (loss) income, net ........................ (406,000) 37,000
------------------------------
Total Stockholders' equity .......................................... 15,286,000 13,549,000
------------------------------
Total liabilities and Stockholders' equity .......................... $203,072,000 $185,970,000
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ..................................................... $11,093,000 $ 9,430,000 $ 8,039,000
Securities held to maturity:
Taxable ................................................. 552,000 782,000 750,000
Nontaxable .............................................. 538,000 432,000 458,000
Securities available for sale ............................. 999,000 929,000 683,000
Other interest-earning assets ............................. 406,000 747,000 325,000
--------------------------------------------
Total interest income ............................... 13,588,000 12,320,000 10,255,000
--------------------------------------------
INTEREST EXPENSE:
Deposits (note 7) ......................................... 4,642,000 4,794,000 3,724,000
Borrowed money ............................................ 65,000 31,000 80,000
--------------------------------------------
Total interest expense .............................. 4,707,000 4,825,000 3,804,000
--------------------------------------------
Net interest income before provision for loan losses ...... 8,881,000 7,495,000 6,451,000
Provision for loan losses (note 4) ........................ 340,000 200,000 120,000
--------------------------------------------
Net interest income after provision for loan losses ....... 8,541,000 7,295,000 6,331,000
--------------------------------------------
NONINTEREST INCOME:
Fees and service charges .................................. 854,000 702,000 563,000
Gain on calls and sales of securities, net ................ 4,000 22,000 --
Gain on sales of mortgage loans ........................... 87,000 156,000 46,000
Miscellaneous ............................................. 146,000 128,000 144,000
--------------------------------------------
Total noninterest income ............................ 1,091,000 1,008,000 753,000
--------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits (note 10) .................. 3,215,000 2,828,000 2,485,000
Occupancy, net (note 14) .................................. 480,000 400,000 348,000
Equipment ................................................. 424,000 411,000 356,000
Data processing ........................................... 381,000 309,000 253,000
Advertising ............................................... 193,000 139,000 175,000
FDIC insurance premium .................................... 24,000 22,000 18,000
Amortization of intangible assets ......................... 57,000 62,000 67,000
Other real estate owned expense ........................... (2,000) (25,000) (19,000)
Charitable contributions .................................. 252,000 215,000 189,000
Stationery and supplies ................................... 242,000 199,000 159,000
Miscellaneous ............................................. 1,413,000 1,298,000 993,000
--------------------------------------------
Total noninterest expenses .......................... 6,679,000 5,858,000 5,024,000
--------------------------------------------
Income before income tax expense .......................... 2,953,000 2,445,000 2,060,000
Income tax expense (note 13) .............................. 972,000 798,000 597,000
--------------------------------------------
Net income ................................................ $ 1,981,000 $ 1,647,000 $ 1,463,000
============================================
Basic earnings per share (note 12) ........................ $1.26 $1.06 $0.95
============================================
Diluted earnings per share (note 12) ...................... $1.24 $1.05 $0.95
============================================
Cash dividends per share .................................. $0.23 $0.17 $0.15
============================================
Weighted average number of common shares
outstanding (note 14) ................................... 1,578,325 1,551,126 1,531,983
============================================
Weighted average number of diluted common
shares outstanding (note 12) ............................ 1,600,435 1,569,176 1,539,761
============================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
---------------------------------------------------------------------
ACCUMULATED
OTHER
COMMMON STOCK COMPREHENSIVE
------------------------ RETAINED INCOME/(LOSS)
SHARES AMOUNT EARNINGS NET TOTAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1996 ....................... 1,380,758 $4,991,000 $5,395,000 $ 21,000 $10,407,000
Cash dividends paid ($.15 per share) ........... -- -- (221,000) -- (221,000)
Issuance of common stock ....................... 17,075 200,000 -- -- 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 ....................... 1,397,833 $5,229,000 $6,637,000 $ 60,000 $11,926,000
Cash dividends paid ($.17 per share) ........... -- -- (269,000) -- (269,000)
5% Stock dividend .............................. 69,921 1,142,000 (1,148,000) -- (6,000)
Issuance of common stock ....................... 17,673 274,000 -- -- 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 ....................... 1,485,427 $6,645,000 $6,867,000 $ 37,000 $13,549,000
Cash dividends paid ($.23 per share) ........... -- -- (360,000) -- (360,000)
5% Stock Dividend .............................. 75,552 1,549,000 (1,556,000) -- (7,000)
Common stock issued under stock plans .......... 18,515 342,000 -- -- 342,000
Stock options exercised ........................ 20,152 224,000 -- -- 224,000
Comprehensive income:
Net income for the year
ended December 31, 1999 ...................... -- -- 1,981,000 -- 1,981,000
Unrealized holding losses on securities
available for sale arising during the
period (net of tax credit of $276,000) ....... -- -- -- (443,000) (443,000)
-----------
Total comprehensive income ..................... 1,538,000
---------------------------------------------------------------------
Balance--December 31, 1999 ....................... 1,599,646 $8,760,000 $6,932,000 $(406,000) $15,286,000
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 1,981,000 $ 1,647,000 $ 1,463,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment ... 411,000 395,000 320,000
Amortization of premiums and accretion of discounts, net .. 54,000 37,000 51,000
Accretion of deferred loan fees ........................... (29,000) (53,000) (53,000)
Provision for loan losses ................................. 340,000 200,000 120,000
Originations of mortgage loans held for sale .............. (6,644,000) (12,817,000) (4,604,000)
Proceeds from sale of mortgage loans ...................... 7,524,000 12,936,000 4,131,000
Gain on sale of loans ..................................... (87,000) (156,000) (46,000)
Issuance of stock options at discount ..................... -- -- 38,000
Loss on retirement of fixed assets ........................ -- -- 2,000
Deferred income tax benefit ............................... (143,000) (32,000) (105,000)
Amortization of intangible assets ......................... 57,000 63,000 67,000
Increase in accrued interest receivable ................... (23,000) (200,000) (149,000)
Decrease in other assets .................................. (34,000) (64,000) (8,000)
Increase/(decrease) in other liabilities .................. 408,000 (20,000) 438,000
----------------------------------------------
Net cash provided by operating activities ............. 3,815,000 1,936,000 1,665,000
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale ................... (6,627,000) (12,391,000) (1,884,000)
Proceeds from maturities and principal repayments
on securities available for sale .......................... 3,205,000 3,717,000 2,313,000
Proceeds from sales and calls on securities available
for sale .................................................. 4,469,000 1,101,000 --
Purchase of securities held to maturity ..................... (5,635,000) (13,966,000) (4,241,000)
Proceeds from maturities and principal repayments on
securities held to maturity ............................... 3,542,000 5,576,000 3,257,000
Proceeds from calls of securities held to maturity .......... 3,703,000 6,150,000 675,000
Purchase of FHLB-NY stock ................................... (106,000) (48,000) (59,000)
Net increase in loans ....................................... (21,000,000) (22,449,000) (18,424,000)
Sale of other real estate owned ............................. -- 229,000 --
Additions to premises and equipment ......................... (626,000) (162,000) (776,000)
----------------------------------------------
Net cash used in investing activities ................. (19,075,000) (32,243,000) (19,139,000)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits ................ 2,125,000 9,806,000 4,292,000
Net increase in interest-bearing deposits ................... 12,321,000 24,700,000 16,098,000
Net increase/(decrease) in securities sold under agreement
to repurchase ............................................. 511,000 129,000 (1,178,000)
Cash dividends paid on common stock ......................... (367,000) (275,000) (221,000)
Exercise of stock options ................................... 224,000 -- --
Issuance of common stock .................................... 342,000 274,000 200,000
----------------------------------------------
Net cash provided by financing activities ............. 15,156,000 34,634,000 19,191,000
----------------------------------------------
Net (decrease)/increase in cash and cash equivalents ........ (104,000) 4,327,000 1,717,000
Cash and cash equivalents--beginning ........................ 16,999,000 12,672,000 10,955,000
----------------------------------------------
Cash and cash equivalents--ending ........................... $ 16,895,000 $ 16,999,000 $ 12,672,000
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest 4,613,000 4,924,000 3,771,000
Cash paid during the year for income taxes 955,000 823,000 711,00
</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
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.
34
<PAGE>
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. 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
35
<PAGE>
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.
OTHER COMPREHENSIVE INCOME
The Corporation's other comprehensive income is comprised of unrealized gains
and losses on securities available for sale. Disclosure of comprehensive income
for the years end 1999, 1998 and 1997 is presented in the accompanying
consolidated statements of changes in Stockholders' Equity.
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, a 5% stock dividend paid June, 1998, a 3 for 2 stock
split in July, 1999, and a 5% stock dividend paid in October, 1999.
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 $327,000 and $358,000 at December 31, 1999 and December
31, 1998, 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 $82,000 and $107,000 at
December 31, 1999 and December 31, 1998, 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, 1999
------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED --------------------------- CARRYING
COST GAINS LOSSES VALUE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury:
After one but within five years .... 2,001,000 -- 11,000 1,990,000
U.S. Government agencies:
After one but within five years .... 4,649,000 -- 147,000 4,502,000
After five years ................... 3,599,000 -- 373,000 3,226,000
------------------------------------------------------------------
8,248,000 -- 520,000 7,728,000
------------------------------------------------------------------
Mortgage-backed securities:
Within one year .................... $ 31,000 $ 1,000 $ -- $ 32,000
After one but within five years .... 3,680,000 16,000 23,000 3,673,000
After five years ................... 2,639,000 7,000 120,000 2,526,000
------------------------------------------------------------------
6,350,000 24,000 143,000 6,231,000
------------------------------------------------------------------
Obligations of state and political
subdivisions:
After one but within five years .... 862,000 -- 9,000 853,000
------------------------------------------------------------------
$ 17,461,000 $ 24,000 $ 683,000 $ 16,802,000
==================================================================
<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
==================================================================
</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 sales and
calls of securities available for sale for the years ended December 31, 1999 and
1998 were $4,469,000 and $1,101,000 respectively. No cash proceeds were realized
from sales and calls of securities available for sale for the year ended
December 31, 1997. Gross gains totalling $8,000 and gross losses totalling
$4,000 were realized on sales and calls of securities during the year ended
December 31, 1999. No gains or losses were realized on calls or sales during the
1998 and 1997.
There were no securities available for sale pledged to secure public deposits at
December 31, 1999 and 1998. 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, 1999
----------------------------------------------------------
GROSS UNREALIZED
CARRYING ---------------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
[GRAPHIC OMITTED]
U.S. Treasury:
After one but within five years .... 749,000 -- 11,000 738,000
U.S. Government agencies:
Within one year .................... 250,000 -- -- 250,000
After one but within five years .... 4,100,000 -- 154,000 3,946,000
After five years ................... 1,497,000 -- 81,000 1,416,000
----------------------------------------------------------
5,847,000 -- 235,000 5,612,000
----------------------------------------------------------
Obligations of state and political
subdivisions:
Within one year .................... 980,000 4,000 -- 984,000
After one but within five years .... 11,305,000 20,000 182,000 11,143,000
After five years ................... 585,000 -- 28,000 557,000
----------------------------------------------------------
12,870,000 24,000 210,000 12,684,000
----------------------------------------------------------
Mortgage-backed securities:
Within one year .................... 92,000 2,000 -- 94,000
After one but within five years .... 1,086,000 6,000 6,000 1,086,000
After five years ................... 218,000 5,000 -- 223,000
----------------------------------------------------------
1,396,000 13,000 6,000 1,403,000
----------------------------------------------------------
$ 20,862,000 $ 37,000 $ 462,000 $ 20,437,000
==========================================================
<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
==========================================================
</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 $3,703,000,
$6,150,000, and $675,000 for the years ended December 31, 1999, 1998, and 1997,
respectively. There were no realized gains or losses from calls and sales for
the year ended December 31, 1999. Gross 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 sales and calls for the year ended December 31,
1997.
38
<PAGE>
The carrying value of securities pledged to secure treasury tax and loan
deposits and public deposits approximated $749,000 and $699,000 at December 31,
1999 and 1998 respectively. See also Note 8 to financial statements regarding
securities pledged as collateral for securities sold under agreements to
repurchase.
NOTE 4. LOANS
The loan portfolio consisted of the following:
DECEMBER 31,
-------------------------------
1999 1998
-------------------------------
Mortgage:
Residential ............................ $ 31,716,000 $ 24,784,000
Commercial ............................. 53,609,000 46,375,000
Commercial ............................... 21,838,000 18,995,000
Equity ................................... 4,742,000 3,593,000
Installment .............................. 32,110,000 29,290,000
Other .................................... 175,000 126,000
-------------------------------
Total loans ........................ 144,190,000 123,163,000
-------------------------------
Less: Deferred loan fees ................. 120,000 113,000
Allowance for loan losses ............ 1,874,000 1,542,000
-------------------------------
1,994,000 1,655,000
-------------------------------
Loans, net ............................... $142,196,000 $121,508,000
===============================
At December 31, 1999, 1998 and 1997, loans serviced by the Corporation for the
benefit of others totaled approximately $6,665,000, $5,390,000, and $4,774,000,
respectively.
Activity in the allowance for loan losses is summarized as follows:
DECEMBER 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
Balance, beginning ................ $ 1,542,000 $ 1,462,000 $ 1,353,000
Provision charged to operations ... 340,000 200,000 120,000
Recoveries of loans charged off ... 29,000 -- 8,000
Loans charged off ................. (37,000) (120,000) (19,000)
-----------------------------------------
Balance, ending ................... $ 1,874,000 $ 1,542,000 $ 1,462,000
=========================================
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, 1999 and 1998,
these loans aggregated approximately $1,136,000 and $1,191,000, respectively.
During the year ended December 31, 1999, new loans totaling $65,000 were granted
and repayments totaled approximately $120,000. The loans, at December 31, 1999,
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:
DECEMBER 31,
---------------------
1999 1998
---------------------
Nonaccrual loans ..................................... $ -- $ 4,000
Loans past due ninety days or more and accruing ...... -- 64,000
Restructured loans ................................... 25,000 480,000
---------------------
Total nonperforming loans ...................... 25,000 548,000
Total nonperforming assets ........................... $ 25,000 $548,000
=====================
The following information is presented for assets classified as nonaccrual and
restructured:
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
---------------------------
Income that would have been recorded under
contractual terms ............................ $ 3,000 $58,000 $76,000
Less interest income received .................... 2,000 46,000 67,000
---------------------------
Lost income on nonperforming assets at year end .. $ 1,000 $12,000 $ 9,000
===========================
Impaired loans consisted of the following:
DECEMBER 31,
------------------------
1999 1998
------------------------
Impaired Loans
With related allowance for loan loss ........... $ -- $64,000
Without related allowance for loan loss ........ $ -- 4,000
-------------------------
Total impaired loans ............................... $ -- $68,000
=========================
Related allowance for possible credit losses ....... $ -- $ 3,000
=========================
Average investment in impaired loans ............... $ -- $65,000
=========================
Interest recognized on impaired loans .............. $ -- $ 5,000
=========================
40
<PAGE>
NOTE 6. PREMISES AND EQUIPMENT, NET
DECEMBER 31,
------------------------
1999 1998
------------------------
Land ............................................... $ 627,000 $ 576,000
Buildings and improvements ......................... 1,445,000 1,433,000
Leasehold improvements ............................. 463,000 379,000
Furniture, fixtures and equipment .................. 2,328,000 1,854,000
------------------------
4,863,000 4,242,000
Less accumulated depreciation and amortization ..... 2,169,000 1,758,000
------------------------
Total premises & equipment, net .................... $2,694,000 $2,484,000
========================
NOTE 7. DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-----------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand ................... 0% $ 41,359,000 0% $ 39,234,000
NOW accounts ................................. 1.35% 20,020,000 1.35% 19,991,000
Money market accounts ........................ 3.75% 48,103,000 3.64% 46,393,000
-----------------------------------------------------------------------------
Total interest-bearing demand ................ 3.04% 68,123,000 2.95% 66,384,000
Statement savings and clubs .................. 1.50% 18,940,000 2.25% 19,311,000
Business savings ............................. 1.50% 2,065,000 2.25% 1,733,000
-----------------------------------------------------------------------------
Total savings ................................ 1.50% 21,005,000 2.25% 21,044,000
IRA investment and variable rate savings ..... 5.13% 10,079,000 5.28%
9,593,000
Money market certificates .................... 5.05% 44,601,000 5.20% 34,466,000
-----------------------------------------------------------------------------
Total certificates of deposit ................ 5.06% 54,680,000 5.22% 44,059,000
-----------------------------------------------------------------------------
Total interest-bearing deposits .............. 3.59% 143,808,000 3.60% 131,487,000
Total deposits ............................... 2.79% $185,167,000 2.77% $170,721,000
=============================================================================
</TABLE>
Certificates of deposit with balances of $100,000 or more at December 31, 1999
and 1998, totaled approximately $9,401,000 and $5,918,000, respectively.
Interest on certificates of deposit with balances of $100,000 or more totaled
$378,000, $236,000, and $316,000, for the years ended December 31, 1999, 1998
and 1997, respectively.
The scheduled maturities of certificates of deposit were as follows:
DECEMBER 31,
----------------------------------
1999 1998
----------------------------------
One year or less ................. $29,904,000 $28,219,000
After one to three years ......... 23,206,000 14,306,000
After three years ................ 1,570,000 1,534,000
----------------------------------
$54,680,000 $44,059,000
==================================
41
<PAGE>
NOTE 8. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
At December 31, 1999 and 1998, securities sold under agreements to repurchase
were collateralized by U. S. Treasury securities having a carrying value of
approximately $2,069,000 and $1,703,000, respectively. These securities were
maintained in a separate safekeeping account within the Corporation's control.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Balance ......................................................... $1,173,000 $ 662,000
Weighted average interest rate .................................. 4.77% 5.24%
Average length of maturity ...................................... 190 days 273 days
Maximum amount outstanding at any month end during the year ..... $3,027,000 $ 662,000
Average amount outstanding during the year ...................... $1,418,000 $ 572,000
Average interest rate during the year ........................... 4.59% 5.37%
</TABLE>
NOTE 9. REGULATORY CAPITAL REQUIREMENTS
Regulations of the Federal Reserve Bank require bank holding companies to
maintain minimum levels of regulatory capital. Under the regulations in effect
at December 31, 1999, the Corporation was required to maintain (i) a minimum
leverage ratio of Tier 1 capital to total adjusted assets of 3.0% and (ii)
minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and
8.0%, respectively. The Bank has substantially similar capital regulations
promulgated by the FDIC.
Under its prompt corrective action regulations, the Federal Reserve Bank 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 Federal Reserve Bank about capital
components, risk weightings and other factors.
Management believes that, as of December 31, 1999, the Bank and the Corporation
have met all capital adequacy requirements to which they are subject.
42
<PAGE>
The following is a summary of the Corporation's actual capital amounts and
ratios as of December 31, 1999 and 1998, compared to the Federal Reserve Bank
minimum capital adequacy requirements and the Federal Reserve Bank requirements
for classification as a well capitalized institution:
<TABLE>
<CAPTION>
FEDERAL RESERVE BANK REQUIREMENTS
--------------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL CAPITALIZED
------------------------ ------------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------ ------------------------- ------------------------
DECEMBER 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Leverage (Tier 1) capital ........... 15,283,000 7.52% 8,134,000 4.00% 10,167,000 5.00%
Risk-based capital:
Tier 1 ............................ 15,283,000 11.16% 5,476,000 4.00% 8,214,000 6.00%
Total ............................. 16,996,000 12.41% 10,952,000 8.00% 13,690,000 10.00%
DECEMBER 31, 1998
Leverage (Tier 1) capital ........... 13,046,000 7.16% 7,287,000 4.00% 9,109,000 5.00%
Risk-based capital:
Tier 1 ............................ 13,046,000 10.62% 4,914,000 4.00% 7,371,000 6.00%
Total ............................. 14,582,000 11.87% 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, 1999, 1998 and 1997 amounted to approximately $166,000, $117,000
and $101,000, 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, 1999, 1998
and 1997 amounted to approximately $31,000, $26,000 and $24,000, 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 1,105 and 1,304 shares during 1999 and 1998, respectively.
NOTE 11. STOCK-BASED COMPENSATION
At December 31, 1999, 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 284 shares during 1998 and did not grant any shares
during 1999.
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 2,934 and 3,474 shares
during 1999 and 1998, 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 74,419 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, 1999 and 1998 and changes during the years then ended on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ......................... 23,153 $ 11.32 19,845 $ 11.19
Granted .................................................. 4,567 17.38 3,308 $ 12.70
Exercised ................................................ -- -- -- --
Forfeited ................................................ -- -- -- --
---------------------------------------------------------------
Outstanding at end of year ............................... 27,720 $ 12.32 23,153 $ 11.32
Options exercisable at year end .......................... 8,600 3,969
Weighted-average fair value of options
granted during the year ................................ $ 6.31 $ 3.70
</TABLE>
The following table summarizes information about the qualified employee stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------------------------
NUMBER WEIGHTED-AVG. WEIGHTED- NUMBER
OUTSTANDING REMAINING AVERAGE EXERCISABLE
AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99
---------------------------------------------------------------------------------
Range of Exercise Prices:
<S> <C> <C> <C> <C>
$10-12 ........................ 19,845 7.39 $11.19 7,938
$12-14 ........................ 3,308 8.15 12.70 662
$16-18 ........................ 4,567 9.21 17.38 --
---------------------------------------------------------------------------------
$10-18 ........................ 27,720 7.78 12.39 8,600
=================================================================================
</TABLE>
The Stock Option Plan for non-employee Directors has also reserved 74,402 shares
of common stock for issuance. During 1997 each participant was granted the
option to purchase 6,763 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 $10.63, 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. Options to purchase 21,051 shares were exercised in 1999. No
options were exercised during the year ended 1998.
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).
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported ................................ $ 1,981,000 $ 1,647,000 $ 1,463,000
Pro forma .................................. 1,964,000 1,640,000 1,325,000
EARNINGS PER SHARE:
As reported Basic earnings per share ....... $ 1.26 $ 1.06 $ 0.95
As reported Diluted earnings per share ..... 1.24 1.05 0.95
Pro forma Basic earnings per share ......... 1.24 1.06 0.86
Pro forma Diluted earnings per share ....... 1.23 1.05 0.86
Weighted average fair value of options granted
during year ................................ $ 6.31 $ 3.70 $ 3.06
</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 EMPLOYEE NONEMPLOYEE
STOCK OPTIONS STOCK OPTIONS STOCK OPTIONS STOCK OPTIONS
1999 1998 1997 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dividend yield ......................... 1.25% 1.12% 1.15% 1.15%
Expected volatility .................... 23.63% 16.24% 14.10% 14.10%
Risk-free interest rate ................ 6.65% 5.58% 6.64% 6.01%
Expected Life .......................... 7 years 7 years 7 years 5 years
Fair value at grant date ............... $6.31 $3.70 $3.50 $2.93
</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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Net income ........................................................... $1,981,000 $1,647,000 $1,463,000
--------------------------------------------------
Income available to common stockholders, basic and diluted ........... 1,981,000 1,647,000 1,463,000
==================================================
Weighted average common shares outstanding--basic .................... 1,578,325 1,551,126 1,531,983
Effect of dilutive securities--stock options ......................... 22,110 18,050 7,778
--------------------------------------------------
Weighted average common shares outstanding--diluted .................. 1,600,435 1,569,176 1,539,761
==================================================
</TABLE>
45
<PAGE>
NOTE 13. INCOME TAXES
The components of income taxes (benefit) are summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Current tax expense:
Federal ......................... $ 883,000 $ 683,000 $ 556,000
State ........................... 226,000 160,000 147,000
--------------------------------------
1,109,000 843,000 703,000
Deferred tax benefit:
Federal ......................... (117,000) (38,000) (90,000)
State ........................... (20,000) (7,000) (16,000)
--------------------------------------
(137,000) (45,000) (106,000)
--------------------------------------
$ 972,000 $ 798,000 $ 597,000
======================================
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:
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Federal income tax ................ $ 1,004,000 $ 831,000 $ 646,000
Add (deduct) effect of:
State income taxes, net of
federalincome tax effect ...... 136,000 101,000 87,000
Nontaxable interest income ...... (213,000) (172,000) (151,000)
Other items, net ................ 45,000 38,000 15,000
--------------------------------------
Effective federal income taxes .... $ 972,000 $ 798,000 $ 597,000
======================================
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,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ............................ $ 749,000 $ 616,000
Allowance for losses on investments .................. 13,000 6,000
Unrealized losses on securities ...................... 253,000 --
Core deposit intangible amortization ................. 27,000 25,000
Nonaccrual loan interest ............................. -- 14,000
Depreciation ......................................... 37,000 22,000
Other ................................................ 7,000 13,000
---------------------------
1,086,000 696,000
---------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale ..... -- 23,000
Net deferred tax assets .............................. $ 1,086,000 $ 673,000
===========================
</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, 1999, the Corporation had mortgage commitments to extend credit
aggregating approximately $433,000 at fixed rates averaging 7.04% and $807,000
floating rate loans. Of these loans, $433,000 fixed and $662,000 floating were
committed for sale to investors. Commercial, installment and home equity loan
commitments of approximately $6.3 million were extended with floating rates
currently averaging 8.90% and $2.6 million were extended at fixed interest rates
averaging 8.804%. All commitments were due to expire within approximately 90
days. At December 31, 1998, the Corporation had mortgage commitments to extend
credit aggregating approximately $2.7 million at fixed interest 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 interest rates currently averaging 8.24% and $1.7 million were
extended at fixed interest rates averaging 7.64%.
Additionally, at December 31, 1999, the Corporation was committed for
approximately $26.4 million of unused lines of credit, consisting of $8.0
million relating to a home equity line of credit program and an unsecured line
of credit program (cash reserve), $5.6 million relating to credit cards, and
$12.8 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 $371,000 at December 31, 1999, 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 $222,000 and $141,000 during the years ended December 31, 1999 and
1998 respectively. At December 31, 1999, 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
----------- --------
2000 .............. $164,000
2001 .............. 165,000
2002 .............. 143,000
2003 .............. 136,000
2004 .............. 82,000
Thereafter ........... 171,000
--------
$861,000
========
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, 1999, 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,
-------------------------------------------------
1999 1998
---------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------- -----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ........................... $ 16,895 $ 16,895 $ 16,999 $ 16,999
Securities available for sale ....................... 16,802 16,802 18,578 18,578
Securities held to maturity ......................... 20,862 20,437 22,513 22,757
FHLB-NY stock ....................................... 663 663 557 557
Net loans ........................................... 142,196 140,918 121,508 122,209
Mortgage loans held for sale .......................... -- -- 793 793
Financial liabilities:
Deposits ............................................ 185,167 185,021 170,721 171,124
Securities sold under agreements to repurchase ...... 1,173 1,173 662 662
</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, 1999 and 1998, respectively. 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, 1999 and 1998 were not material.
LIMITATIONS
The preceding fair value estimates were made at December 31, 1999 and 1998,
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, 1999 and 1998, 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,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998
----------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks .................................. $ 125,000 $ 25,000
Securities available for sale ............................ 99,000 --
Investment in subsidiary ................................. 15,092,000 13,520,000
Accrued interest receivable .............................. 2,000 --
----------------------------------------
Total assets ....................................... $15,318,000 $13,545,000
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ........................................ $ 32,000 $ (4,000)
Stockholders' equity ..................................... 15,286,000 13,549,000
----------------------------------------
Total liabilities and Stockholders' equity ......... $15,318,000 $13,545,000
========================================
<CAPTION>
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Interest income--securities available for sale ........... $ 2,000 $ -- $ --
Dividend income .......................................... 20,000 35,000 83,000
Equity in undistributed earnings of subsidiary ........... 2,014,000 1,647,000 1,458,000
Other income ............................................. 6,000 6,000 1,000
----------------------------------------
Total income ....................................... 2,042,000 1,688,000 1,542,000
Other expenses ........................................... 88,000 59,000 99,000
----------------------------------------
Income before income tax benefit ......................... 1,954,000 1,629,000 1,443,000
Tax benefit .............................................. (27,000) (18,000) (20,000)
----------------------------------------
Net income ............................................... $ 1,981,000 $ 1,647,000 $ 1,463,000
========================================
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 1,981,000 $ 1,647,000 $ 1,463,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary ..... (2,014,000) (1,647,000) (1,458,000)
Issuance of stock options at a discount ............ -- -- 38,000
Increase in accrued interest receivable ............ (2,000) -- --
Increase/(decrease) in other liabilities ........... 36,000 6,000 (9,000)
----------------------------------------
Net cash provided by operating activities ........ 1,000 6,000 34,000
----------------------------------------
Cash flows from investing activities:
Purchase of security available for sale ................ (100,000) -- --
----------------------------------------
Net cash used in investing activities .................. (100,000) -- --
----------------------------------------
Cash flows from financing activities:
Cash dividends paid on common stock .................... (367,000) (275,000) (221,000)
Exercise of stock options .............................. 224,000
Issuance of common stock ............................... 342,000 274,000 200,000
----------------------------------------
199,000 (1,000) (21,000)
----------------------------------------
Net increase in cash and cash equivalents ................ 105,000 5,000 13,000
Cash and cash equivalents--beginning ..................... 25,000 20,000 7,000
----------------------------------------
Cash and cash equivalents--ending ........................ $ 125,000 $ 25,000 $ 20,000
========================================
</TABLE>
50
<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 in standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
As issued in June 1998, the corporation must adopt SFAS 133 by January 1, 2000,
however, early adoption is permitted. On adoption, the provisions of SFAS No.
133 must be applied prospectively. The Corporation anticipates that the adoption
of SFAS No. 133 will not have a material impact on financial statements. With
the issuance of Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB No. 133," the effective date of SFAS No. 133 has been deferred to
all fiscal years beginning after June 15, 2000.
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the years ended
December 31, 1999 and 1998 (dollarsin thousands).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Interest income $ 3,201 $ 3,286 $ 3,451 $ 3,650 $13,588
Interest expense 1,115 1,101 1,192 1,299 4,707
------------------------------------------------------------
Net interest income before provision for loan losses 2,086 2,185 2,259 2,351 8,881
Provision for loan losses 75 75 80 110 340
------------------------------------------------------------
Net interest income after provision for loan losses 2,011 2,110 2,179 2,241 8,541
Noninterest income 267 288 250 286 1,091
Noninterest expense 1,610 1,688 1,704 1,677 6,679
------------------------------------------------------------
Net income before income tax expense 668 710 725 850 2,953
Federal and state income tax expense 214 231 238 289 972
------------------------------------------------------------
Net income $ 454 $ 479 $ 487 $ 561 $ 1,981
============================================================
Basic earnings per share $ 0.29 $ 0.31 $ 0.31 $ 0.35 $ 1.26
============================================================
Diluted earnings per share $ 0.29 $ 0.30 $ 0.30 $ 0.35 $ 1.24
============================================================
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
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 $ 0.25 $ 0.26 $ 0.27 $ 0.28 $ 1.06
============================================================
Diluted earnings per share $ 0.25 $ 0.25 $ 0.27 $ 0.28 $ 1.05
============================================================
</TABLE>
51
INDEPENDENT ACCOUNTANTS' 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 28, 2000, relating to the
consolidated statements of financial condition of Stewardship Financial
Corporation and subsidiary as of December 31, 1999 and 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, 1999,
which report is incorporated by reference in the December 31, 1999 annual report
on Form 10-KSB of Stewardship Financial Corporation.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This scedule contains summary information extracted from the reistrant's
audited December 31, 1999 year end financial statements and is qualifed
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,724,000
<INT-BEARING-DEPOSITS> 546,000
<FED-FUNDS-SOLD> 8,625,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,802,000
<INVESTMENTS-CARRYING> 20,862,000
<INVESTMENTS-MARKET> 20,437,000
<LOANS> 142,496,000
<ALLOWANCE> 1,874,000
<TOTAL-ASSETS> 203,072,000
<DEPOSITS> 185,167,000
<SHORT-TERM> 1,173,000
<LIABILITIES-OTHER> 1,446,000
<LONG-TERM> 0
0
0
<COMMON> 8,760,000
<OTHER-SE> 6,526,000
<TOTAL-LIABILITIES-AND-EQUITY> 203,072,000
<INTEREST-LOAN> 11,093,000
<INTEREST-INVEST> 2,089,000
<INTEREST-OTHER> 406,000
<INTEREST-TOTAL> 13,588,000
<INTEREST-DEPOSIT> 4,642,000
<INTEREST-EXPENSE> 4,707,000
<INTEREST-INCOME-NET> 8,881,000
<LOAN-LOSSES> 340,000
<SECURITIES-GAINS> 4,000
<EXPENSE-OTHER> 6,679,000
<INCOME-PRETAX> 2,953,000
<INCOME-PRE-EXTRAORDINARY> 1,981,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,981,000
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 5.02
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 25,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,542,000
<CHARGE-OFFS> 37,000
<RECOVERIES> 29,000
<ALLOWANCE-CLOSE> 1,874,000
<ALLOWANCE-DOMESTIC> 1,874,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
