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FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission file number 0-21855
STEWARDSHIP FINANCIAL CORPORATION
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(Name of small business issuer as specified in its charter)
New Jersey 22-3351447
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
630 Godwin Avenue, Midland Park, NJ 07432
--------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(201) 444-7100
---------------------------
(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No
--- ---
The number of shares outstanding of the Issuer's Common Stock, no par
value, outstanding as of July 20, 2000 was 1,633,704.
Transitional Small Business Disclosure Format (Check one): Yes No X
---- ----
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<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM I - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at June 30, 2000 and December 31, 1999 (Unaudited) ......... 1
Consolidated Statements of Income for the Six
Months ended June 30, 2000 and 1999 ( Unaudited) ........... 2
Consolidated Statements of Income for the Three
Months ended June 30, 2000 and 1999 ( Unaudited) ........... 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2000 and 1999 (Unaudited) ............ 4
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended
June 30, 2000 (Unaudited) .................................. 5
Notes to Consolidated Financial Statements (Unaudited) .... 6 - 11
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ...................................... 12 - 16
ITEM III - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................ 16
PART II - OTHER INFORMATION
ITEM 1 THRU ITEM 6 .................................................. 17
SIGNATURES .......................................................... 18
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks ................................. $ 12,123,000 $ 7,724,000
Commercial paper and interest-bearing due from banks .... 528,000 546,000
Federal funds sold ...................................... 5,975,000 8,625,000
------------------------------
Cash and cash equivalents ........................ 18,626,000 16,895,000
Securities available for sale ........................... 17,553,000 16,802,000
Securities held to maturity; estimated fair value
of $ 21,537,000 (2000) and $20,437,000 (1999) ....... 22,019,000 20,862,000
FHLB-NY stock, at cost .................................. 770,000 663,000
Loans, net of allowance for loan losses of
of $ 2,072,000 (2000) and $1,874,000 (1999) ......... 155,074,000 142,196,000
Mortgage loans held for sale ............................ 578,000 --
Premises and equipment, net ............................. 2,527,000 2,694,000
Accrued interest receivable ............................. 1,378,000 1,253,000
Intangible assets, net of accumulated amortization of
$367,000 (2000) and $341,000 (1999) ................. 383,000 409,000
Other assets ............................................ 1,401,000 1,298,000
------------------------------
Total assets ..................................... $ 220,309,000 $ 203,072,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing ................................. $ 47,691,000 $ 41,359,000
Interest-bearing .................................... 153,421,000 143,808,000
------------------------------
Total deposits .................................. 201,112,000 185,167,000
Securities sold under agreements to repurchase .......... 1,283,000 1,173,000
Accrued expenses and other liabilities .................. 1,334,000 1,446,000
------------------------------
Total liabilities ............................... 203,729,000 187,786,000
------------------------------
Commitments and contingencies ........................... -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
1,632,607 and 1,599,646 shares issued outstanding at
June 30, 2000 and December 31, 1999, respectively .. 9,196,000 8,760,000
Retained earnings ....................................... 7,827,000 6,932,000
Accumulated other comprehensive loss .................. (443,000) (406,000)
------------------------------
Total stockholders' equity ...................... 16,580,000 15,286,000
------------------------------
Total liabilities and stockholders' equity ...... $ 220,309,000 $ 203,072,000
==============================
</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-----------------------
Interest income:
Loans ........................................... $6,286,000 $5,274,000
Securities held to maturity
Taxable ....................................... 299,000 282,000
Non-taxable ................................... 272,000 280,000
Securities available for sale ................... 560,000 482,000
Other interest-earning assets ................... 281,000 169,000
-----------------------
Total interest income ...................... 7,698,000 6,487,000
-----------------------
Interest expense:
Deposits ........................................ 2,685,000 2,192,000
Borrowed money .................................. 33,000 24,000
-----------------------
Total interest expense ..................... 2,718,000 2,216,000
-----------------------
Net interest income before provision for loan losses . 4,980,000 4,271,000
Provision for loan losses ............................ 200,000 150,000
-----------------------
Net interest income after provision for loan losses .. 4,780,000 4,121,000
-----------------------
Noninterest income:
Fees and service charges ........................ 518,000 408,000
Gain on sales of mortgage loans ................. 11,000 58,000
Miscellaneous ................................... 101,000 89,000
-----------------------
Total noninterest income .................. 630,000 555,000
-----------------------
Noninterest expenses:
Salaries and employee benefits .................. 1,753,000 1,543,000
Occupancy, net .................................. 270,000 230,000
Equipment ....................................... 232,000 246,000
Data processing ................................. 223,000 171,000
Advertising ..................................... 96,000 95,000
FDIC insurance premium .......................... 18,000 12,000
Amortization of intangible assets ............... 26,000 28,000
Charitable contributions ........................ 139,000 130,000
Stationery and supplies ......................... 93,000 111,000
Miscellaneous ................................... 877,000 732,000
-----------------------
Total noninterest expenses ................. 3,727,000 3,298,000
-----------------------
Income before income tax expense ..................... 1,683,000 1,378,000
Income tax expense ................................... 563,000 445,000
-----------------------
Net income ........................................... $1,120,000 $ 933,000
=======================
Basic earnings per share ............................. $0.69 $0.60
=======================
Diluted earnings per share ........................... $0.68 $0.59
=======================
Weighted average number of common shares outstanding . 1,621,729 1,567,436
=======================
Weighted average number of diluted common
shares outstanding .............................. 1,637,588 1,593,490
=======================
Share data has been restated to reflect a 3 for 2 stock split completed
July 1, 1999 and a 5% stock dividend paid on October 27, 1999.
See notes to unaudited consolidated financial statements.
2
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-----------------------
Interest income:
Loans ........................................... $3,238,000 $2,716,000
Securities held to maturity
Taxable ....................................... 159,000 134,000
Non-taxable ................................... 137,000 143,000
Securities available for sale ................... 284,000 240,000
Other interest-earning assets ................... 144,000 53,000
-----------------------
Total interest income ...................... 3,962,000 3,286,000
-----------------------
Interest expense:
Deposits ........................................ 1,382,000 1,090,000
Borrowed money .................................. 17,000 11,000
-----------------------
Total interest expense ..................... 1,399,000 1,101,000
-----------------------
Net interest income before provision for loan losses . 2,563,000 2,185,000
Provision for loan losses ............................ 110,000 75,000
-----------------------
Net interest income after provision for loan losses .. 2,453,000 2,110,000
-----------------------
Noninterest income:
Fees and service charges ........................ 283,000 218,000
Gain on sales of mortgage loans ................. 4,000 16,000
Miscellaneous ................................... 76,000 54,000
-----------------------
Total noninterest income .................. 363,000 288,000
-----------------------
Noninterest expenses:
Salaries and employee benefits .................. 887,000 802,000
Occupancy, net .................................. 131,000 120,000
Equipment ....................................... 119,000 130,000
Data processing ................................. 116,000 80,000
Advertising ..................................... 59,000 42,000
FDIC insurance premium .......................... 9,000 6,000
Amortization of intangible assets ............... 13,000 14,000
Charitable contributions ........................ 69,000 68,000
Stationery and supplies ......................... 46,000 63,000
Miscellaneous ................................... 469,000 363,000
-----------------------
Total noninterest expenses ................. 1,918,000 1,688,000
-----------------------
Income before income tax expense ..................... 898,000 710,000
Income tax expense ................................... 304,000 231,000
=======================
Net income ........................................... $ 594,000 $ 479,000
=======================
Basic earnings per share ............................. $0.36 $0.31
=======================
Diluted earnings per share ........................... $0.36 $0.30
=======================
Weighted average number of common shares outstanding . 1,627,558 1,571,760
=======================
Weighted average number of diluted common
shares outstanding .............................. 1,642,012 1,597,971
=======================
Share data has been restated to reflect a 3 for 2 stock split completed
July 1, 1999 and a 5% stock dividend paid on October 27, 1999.
See notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 1,120,000 $ 933,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 219,000 248,000
Amortization of premiums and accretion of discounts, net 14,000 44,000
Accretion of deferred loan fees ........................ (20,000) (18,000)
Provision for loan losses .............................. 200,000 150,000
Originations of mortgage loans held for sale ........... (1,571,000) (4,871,000)
Proceeds from sale of mortgage loans ................... 1,004,000 5,049,000
Gain on sale of mortgage loans ......................... (11,000) (58,000)
Deferred income tax benefit ............................ (87,000) (57,000)
Amortization of intangibles ............................ 26,000 28,000
Increase in accrued interest receivable ................ (125,000) (3,000)
Decrease in other assets ............................... 3,000 8,000
(Decrease) increase in other liabilities ............... (112,000) 194,000
----------------------------
Net cash provided by operating activities .......... 660,000 1,647,000
----------------------------
Cash flows from investing activities:
Purchase of securities available for sale .................... (1,253,000) (3,195,000)
Proceeds from maturities and principal repayments
on securities available for sale .......................... 455,000 2,336,000
Proceeds from calls and sales of securities available for sale -- 2,971,000
Purchase of securities held to maturity ...................... (1,817,000) (3,042,000)
Proceeds from maturities and principal repayments
on securities held to maturity ............................ 637,000 1,493,000
Proceeds from call on securities held to maturity ............ -- 2,950,000
Purchase of FHLB-NY stock .................................... (107,000) (105,000)
Net increase in loans ........................................ (13,058,000) (13,215,000)
Additions to premises and equipment .......................... (52,000) (453,000)
----------------------------
Net cash used in investing activities .................. (15,195,000) (10,260,000)
----------------------------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits ...... 6,332,000 (887,000)
Net increase in interest-bearing deposits .................... 9,613,000 693,000
Net increase in securities sold under agreements to repurchase 110,000 751,000
Cash dividends paid on common stock .......................... (225,000) (179,000)
Common stock issued under stock plans ........................ 436,000 244,000
----------------------------
Net cash provided by financing activities .............. 16,266,000 622,000
----------------------------
Net increase (decrease) in cash and cash equivalents .............. 1,731,000 (7,991,000)
Cash and cash equivalents - beginning ............................. 16,895,000 16,999,000
============================
Cash and cash equivalents - ending ................................ $ 18,626,000 $ 9,008,000
============================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ....................... $ 2,628,000 $ 2,282,000
Cash paid during the year for income taxes ................... 683,000 555,000
See notes to unaudited consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS LOSS TOTAL
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1999 ................... 1,599,646 $ 8,760,000 $ 6,932,000 $ (406,000) $ 15,286,000
Dividends Paid ................................. -- -- (225,000) -- (225,000)
Common stock issued under stock plans .......... 11,202 205,000 -- -- 205,000
Exercise of stock options ...................... 21,759 231,000 -- -- 231,000
Comprehensive income:
Net income for the six months
ended June 30, 2000 ........................ -- -- 1,120,000 -- 1,120,000
Unrealized holding loss on securities
available for sale arising during the period
(net of tax benefit of $21,000) ............ -- -- -- (37,000) (37,000)
------------
Total comprehensive income, net of tax ......... -- -- -- -- 1,083,000
-----------------------------------------------------------------------
Balance -- June 30, 2000 ....................... 1,632,607 $ 9,196,000 $ 7,827,000 $ (443,000) $ 16,580,000
=======================================================================
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, ("the Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank ("the Bank"). Atlantic Stewardship Bank includes its
wholly owned subsidiary, Stewardship Investment Corp. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current presentation. The consolidated financial statements of
the Corporation have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the statements of financial condition
and revenues and expenses during the reporting periods. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
NOTE 2. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-QSB and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of the consolidated
financial statements, have been included. The results of operations for the six
months ended June 30, 2000 are not necessarily indicative of the results which
may be expected for the entire year.
This Form 10-QSB contains certain "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, and may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," planned," "estimated," and "potential." Examples of forward looking
statements include, but are not limited to, estimates with respect to the
financial condition, results of operations and business of Stewardship Financial
Corporation that are subject to various factors which could cause actual results
to differ materially from these estimates. These factors include: changes in
general, economic and market conditions, legislative and regulatory conditions,
or the development of an interest rate environment that adversely affects
Stewardship Financial Corporation's interest rate spread or other income
anticipated from operations and investments. As used in this Form 10-QSB, "we"
and "us" and "our" refer to Stewardship Financial Corporation and its
consolidated subsidiary, Atlantic Stewardship Bank, depending on the context.
6
<PAGE>
<TABLE>
<CAPTION>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and carrying value of the Corporation's securities available for sale
as of June 30, 2000 and December 31, 1999. In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", securities available for sale are carried at estimated
fair value.
June 30, 2000
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Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........................ $ 2,001,000 $ -- $ 17,000 $ 1,984,000
U.S. Government agencies ........................ 9,316,000 -- 552,000 8,764,000
Obligations of state and political
subdivisions ............................... 1,063,000 -- 9,000 1,054,000
Mortgage-backed securities ...................... 5,888,000 18,000 155,000 5,751,000
---------------------------------------------------------------------
$18,268,000 $ 18,000 $ 733,000 $17,553,000
=====================================================================
December 31, 1999
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........................ $ 2,001,000 $ -- $ 11,000 $ 1,990,000
U.S. Government agencies ........................ 8,248,000 -- 520,000 7,728,000
Obligations of state and political
subdivisions ............................... 862,000 -- 9,000 853,000
Mortgage-backed securities ...................... 6,350,000 24,000 143,000 6,231,000
---------------------------------------------------------------------
$17,461,000 $ 24,000 $ 683,000 $16,802,000
=====================================================================
NOTE 4. SECURITIES HELD TO MATURITY
The following table sets forth the carrying value and estimated fair value of the Corporation's securities held to
maturity as June 30, 2000 and December 31, 1999. Securities held to maturity are stated at cost, adjusted for amortization
of premiums and accretion of discounts.
June 30, 2000
---------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........................ $ 749,000 $ -- $ 14,000 $ 735,000
U.S. Government agencies ........................ 6,585,000 -- 269,000 6,316,000
Obligations of state and political
subdivisions ............................... 13,159,000 19,000 214,000 12,964,000
Mortgage-backed securities ...................... 1,526,000 17,000 21,000 1,522,000
---------------------------------------------------------------------
$22,019,000 $ 36,000 $ 518,000 $21,537,000
=====================================================================
December 31, 1999
---------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities ........................ $ 749,000 $ -- $ 11,000 $ 738,000
U.S. Government agencies ........................ 5,847,000 -- 235,000 5,612,000
Obligations of state and political
subdivisions ............................... 12,870,000 24,000 210,000 12,684,000
Mortgage-backed securities ...................... 1,396,000 13,000 6,000 1,403,000
---------------------------------------------------------------------
$20,862,000 $ 37,000 $ 462,000 $20,437,000
=====================================================================
</TABLE>
7
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 5. LOANS
The Corporation's primary market area for lending is the small and medium
sized business and professional community as well as the individuals residing,
working and shopping in the Bergen and Passaic counties, New Jersey area. The
following table set forth the composition of loans as of the periods indicated.
June 30, December 31,
2000 1999
---------------------------
Mortgage
Residential .................. $ 33,165,000 $ 31,716,000
Commercial ................... 59,796,000 53,609,000
Commercial ........................ 25,227,000 21,838,000
Equity ............................ 5,412,000 4,742,000
Installment ....................... 32,385,000 32,110,000
Other ............................. 1,286,000 175,000
---------------------------
Total loans ............... 157,271,000 144,190,000
---------------------------
Less: Deferred loan fees ......... 125,000 120,000
Allowance for loan losses... 2,072,000 1,874,000
---------------------------
2,197,000 1,994,000
---------------------------
Loans, net ................ $155,074,000 $142,196,000
===========================
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Six Months Ended June 30,
2000 1999
---------------------------
Balance, beginning of period ....... $ 1,874,000 $ 1,542,000
Provision charged to operations .... 200,000 150,000
Recoveries of loans charged off .... 1,000 27,000
Loans charged off .................. (3,000) (11,000)
---------------------------
Balance, end of period ............. $ 2,072,000 $ 1,676,000
===========================
8
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 7. LOAN IMPAIRMENT
The Corporation has defined the population of impaired loans to include all
nonaccrual loans and loans more than 90 days past due. The following table sets
forth information regarding the impaired loans as of the periods indicated.
June 30, December 31,
2000 1999
---------------------------
Impaired loans
With related allowance for loan losses ..... $766,000 $ --
Without related allowance for loan losses .. 8,000 --
---------------------------
Total impaired loans ........................... $774,000 $ --
===========================
Related allowance for loan losses .............. $181,000 $ --
===========================
9
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 8. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued. Potential dilutive securities totaled 15,859
and 26,054 shares for the six months ended June 30, 2000 and 1999, respectively.
All share and per share amounts have been restated to reflect a 3 for 2 stock
split paid in July, 1999 and a 5% stock dividend paid October 27, 1999.
NOTE 9. COMPREHENSIVE INCOME
Total comprehensive income includes net income and other comprehensive income
which is comprised of unrealized holding gains and lossess on securities
available for sale, net of taxes. The Corporation's total comprehensive income
for the six months ended June 30, 2000 and 1999 was $1.1 million and $0.7
million, respectively. The difference between the Corporation's net income and
total comprehensive income for these periods relates to the change in the net
unrealized holding gains or losses on securities available for sale during the
applicable period of time.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), was issued by the Financial
Accounting Standards Board in June, 1998. SFAS No. 133 standardizes the
accounting for derivative instruments including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
As issued in June, 1998, the Corporation must adopt SFAS No. 133 by January 1,
2000, however, early adoption is permitted. On adoption, the provisions of SFAS
No. 133 must be applied prospectively. With the issuance of Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Intsruments
and Hedging Activities - Deferral of the Effective Date of FASB No. 133", the
effective date of SFAS No. 133 has been deferred to all fiscal years beginning
after June 15, 2000. The Corporation anticipates that the adoption of SFAS No.
133 will not have a material impact on financial statements.
10
<PAGE>
On October 9, 1998 the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise"
(SFAS No. 134). SFAS No. 134 changes the way mortgage banking firms account for
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. This statement is effective for fiscal quarters
beginning after December 15, 1998. Early application was permitted. The adoption
of this statement by the Corporation did not have a material effect on the
financial statements of the Corporation.
11
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
-------------------
Total assets increased by $17.2 million, or 8.5%, from $203.1 million at
December 31, 1999 to $220.3 million at June 30, 2000. Net loans increased $12.9
million and cash and cash equivalents and securities held to maturity increased
$1.7 million and $1.2 million, respectively. The composition of the loan
portfolio is basically unchanged at June 30, 2000 when compared with the
portfolio at December 31, 1999.
Total deposits totaled $201.1 million at June 30, 2000, an increase of $15.9
million, or 8.6% from $185.2 million at December 31, 1999. Interest-bearing
deposits increased $9.6 million, or 6.7%, to $153.4 million at June 30, 2000,
and noninterest-bearing deposits increased $6.3 million, or 15.3%, to $47.7
million at June 30, 2000. The increase in deposits can be attributed to an
overall marketing effort to attract additional certificates of deposit and
noninterest-bearing accounts.
The Corporation's primary focus during the first six months was to continue to
concentrate on developing the market base in Wayne, Passaic County, New Jersey
and to concentrate marketing efforts toward increasing noninterest-bearing
deposits. The Corporation also introduced its website and began the installation
of an internet banking product for customers. The product is offered through an
external service bureau which supports the product, provides necessary security
and internal controls, and assists in regulatory compliance. Management believes
that this will enhance the delivery channels being offered to existing and new
customers which will allow us to continue to provide strong personalized
customer service.
RESULTS OF OPERATIONS
---------------------
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
General
-------
The Corporation reported net income of $1.1 million, or $0.69 basic earnings per
share for the six months ended June 30, 2000 compared to $933,000, or $.60 basic
earnings per share for the same period in 1999. The $187,000 increase was
primarily caused by increases in net interest income, partially offset by
increases in noninterest expense.
Net interest income
-------------------
Net interest income increased $709,000, or 16.6%, for the six months ended June
30, 2000 as compared with the corresponding period in 1999. The increase was
primarily due to an increase in average net interest-earning assets and an
increase in net interest margin.
Total interest income increased $1.2 million, or 18.7%, primarily due to an
increase in the average volume of interest-earning assets and an increase in
yields on earning assets. The average balance on interest-earning assets
increased $23.1 million, or 13.3%, from $173.9 million for the six months
12
<PAGE>
ended June 30, 1999 to $197.0 million for the same period in 2000, primarily
being funded by an increase to the Corporation's average deposit base. The
Corporation continued to experience an increase in loan demand which allowed net
loans on average to increase $18.4 million to an average $148.0 million for the
six months ended June 30, 2000, from an average $129.6 million for the
comparable period in 1999.
Interest paid on deposits and borrowed money increased by $502,000, or 22.7%,
due primarily to an increase in average deposits and an increase in cost of
funds as customers redeployed funds into certificates of deposit products. The
average balance of total interest-bearing deposits increased to $147.0 million
for the six months ended June 30, 2000 from $131.2 million for the comparable
1999 period, primarily as a result of the Corporation's expanding customer base
and the certificate of deposit promotions. Yields on deposits and borrowed money
increased from 3.37% for the period ended June 30, 1999 to 3.67% for the
comparable period in 2000.
Provision for loan losses
-------------------------
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent risks associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and ultimate losses are charged to
operations during the period in which such additions are deemed necessary.
The provision charged to operations totaled $200,000 and $150,000 during the six
months ended June 30, 2000 and 1999. The increase in the provision was due to
the general increase in the loans outstanding and an increase in nonperforming
loans. See "Asset Quality" section for summary of allowance for loan losses and
nonperforming assets. The Corporation monitors its loan portfolio and intends to
continue to provide for loan loss reserves based on its ongoing periodic review
of the loan portfolio and general market conditions.
Noninterest income
------------------
Noninterest income increased $75,000, or 13.5%, to $630,000 for the six months
ended June 30, 2000, compared to $555,000 for the same period in 1999. Deposit
related fees increased $110,000 offset by a decrease of $47,000 in gains on sale
of mortgage loans due primarily to a decrease in loans originated and sold
during 2000 compared to the similar period in 1999.
Noninterest expense
-------------------
Noninterest expense increased by approximately $429,000, or 13.0%, to $3.7
million for the six months ended June 30, 2000, compared to $3.3 million for the
same 1999 period. Salaries and employee benefits, the major component of
noninterest expense, increased $210,000, or 13.6%, during the six months ended
June 30, 2000. This increase was due to the full quarter effect of additions to
staff for the Wayne Valley branch, deposit operations, accounting, and data
processing departments and general increases for merit and performance.
Occupancy, equipment, and data processing expense increased $78,000, or 12.1%
due to the full effect of the new Wayne Valley branch. Miscellaneous expenses
increased $145,000, or 19.8% due to the necessary support of the general growth
of the Corporation.
13
<PAGE>
Income taxes
------------
Income tax expense totaled $563,000 and $445,000 during the six months ended
June 30, 2000 and 1999, respectively.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JUNE 30, 2000
--------------------------------
General
-------
The Corporation reported net income of $594,000, or $0.36 basic earnings per
share for the three months ended June 30, 2000, compared to $479,000, or $0.31
basic earnings per share for the same period in 1999. The $115,000 increase was
primarily caused by an increase in net interest income, partially offset by
increases in noninterest expense.
Net interest income
-------------------
Net interest income increased $378,000, or 17.3%, for the three months ended
June 30, 2000 compared with the corresponding period in 1999. The increase was
primarily due to an increase in average net interest-earning assets and an
increase in net interest margin.
Total interest income increased $676,000, or 20.6%, primarily due to an increase
in the average volume of interest-earning assets and an increase in yields on
earning assets. The average balance on interest-earning assets increased $23.8
million, or 13.5%, from $176.2 million for the three months ended June 30, 1999
to $200.0 million for the same period in 2000, primarily being funded by an
increase to the Corporation's average deposit base. The Corporation continued to
experience an increase in loan demand which allowed loans on average to increase
$17.7 million to an average $150.9 million for the three months ended June 30,
2000, from an average $132.6 million for the comparable period in 1999.
Interest paid on deposits and borrowed money increased $298,000, or 27.1%, due
primarily to an increase in cost of funds as customers shifted from lower
yielding deposits into longer term certificates of deposit. The average balance
of total interest-bearing deposits increased to $148.9 million for the three
months ended June 30, 2000 from $132.4 million for the comparable 1999 period,
primarily as a result of the Corporation's expanding customer base and the
popularity of an 18 month certificate of deposit program.
Provision for loan losses
-------------------------
The provision charged to operations totaled $110,000 and $75,000 during the
three months ended June 30, 2000 and 1999. See "Asset Quality" section for
summary of allowance for loan losses and nonperforming assets.
Noninterest income
------------------
Noninterest income increased $75,000, or 26.0%, to $363,000 during the three
months ended June 30, 2000 when compared with $288,000 during the 1999 period.
Contributing to this increase was
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<PAGE>
an increase of $65,000 in deposit-related fees and service charges caused by the
increased deposit base.
Noninterest expense
-------------------
Noninterest expense increased $230,000, or 13.6%, to $1.9 million for the three
months ended June 30, 2000, compared to $1.7 million for the same 1999 period.
Salaries and employee benefits, the major component of noninterest expense,
increased $85,000, or 10.6%, during the three months ended June 30, 2000. The
increase was due primarily to additions to staff in the lending and deposit
operations areas and general increases for merit and performance. Miscellaneous
expenses increased $106,000, or 29.2% due to the necessary support of the
general growth of the Corporation and additions in consulting expense being
utilized to provide strategic planning consulting.
Income taxes
------------
Income tax expense totaled $304,000 and $231,000 during the three months ended
June 30, 2000 and 1999, respectively.
ASSET QUALITY
-------------
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrower's ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
<TABLE>
<CAPTION>
06/30/00 03/31/00 12/31/99 09/30/99
-------- ---------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans: (1) .................. $ 766 $ 564 $ -- $ 4
Loans past due 90 days or more: (2) .... 8 -- -- --
Restructured loans: .................... 22 23 25 26
------ ------ ------ ------
Total nonperforming loans ......... $ 796 $ 587 $ 25 $ 30
====== ====== ====== ======
Allowance for loan losses .............. $2,072 $1,964 $1,874 $1,761
====== ====== ====== ======
Nonaccrual loans to total loans ........ 0.49% 0.38% -% -%
Nonperforming loans to total loans ..... 0.51% 0.39% 0.02% 0.02%
Nonperforming loans to total assets .... 0.36% 0.28% 0.01% 0.02%
Allowance for loan losses to total loans 1.32% 1.32% 1.30% 1.24%
</TABLE>
----------
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing income
at the contractually stated rates. A determination is made to continue accruing
income on those loans which are sufficiently collateralized and on which
management believes all interest and principal owed will be collected.
15
<PAGE>
There were no loans at June 30, 2000, other than those included in the above
table, where the Corporation was aware of any credit conditions of any borrowers
that would indicate a strong possibility of the borrowers not complying with the
present terms and conditions of repayment and which may result in such loans
being included as non-accrual, past due or restructured at a future date.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey. Accordingly, the collectibility of a
substantial portion of the Corporation's loan portfolio is susceptible to
changes in real estate market conditions.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
are a relatively predictable source of funds, deposit flow and prepayments on
loans and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition.
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. Cash and cash
equivalents increased $1.7 million during the first six months of 2000, as
financing activities and operating activities increased provided $16.3 million
and $0.7 million, respectively, offset by investing activities using $15.2
million.
Liquidity management is a daily and long-term function of business management.
Excess liquidity is generally invested in short-term investments, such as
federal funds.
As of June 30, 2000 the Corporation's capital ratios were as follows:
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 .................. 4.00% 10.94% 6.94%
Total ................... 8.00% 12.19% 4.19%
Leverage Ratio ................... 3.00% 7.79% 4.79%
ITEM III QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During 2000, there have been no significant changes in the Corporation's
assessment of market risk as reported in Item 6. of the Corporation's Form
10-KSB.
16
<PAGE>
STEWARDSHIP FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Corporation is subject to litigation which arises primarily in the
ordinary course of business. In the opinion of management the ultimate
disposition of such litigation should not have a material adverse
effect on the financial position of the Corporation.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8K
-------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports
None
17
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STEWARDSHIP FINANCIAL CORPORATION
DATE: AUGUST 11, 20000 BY: /s/ PAUL VAN OSTENBRIDGE
-------------------------- --------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
DATE: AUGUST 11, 20000 BY: /s/ JULIE E. HOLLAND
-------------------------- --------------------------------
Julie E. Holland
Vice President and Treasurer
18
