UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
|_| 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
(Exact name of registrant as specified in its charter)
New Jersey 22-3351447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
630 Godwin Avenue, Midland Park, NJ 07432
(Address of principal executive offices) (Zip Code)
(201) 444-7100
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by a checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. The number of shares
outstanding of the Issuer's Common Stock, no par value, as of May 4, 2004, net
of treasury stock, was 3,162,817.
Stewardship Financial Corporation
INDEX
PAGE
NUMBER
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PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at March 31, 2004 (Unaudited) and December 31, 2003 ........ 1
Consolidated Statements of Income for the Three
Months ended March 31, 2004 and 2003 (Unaudited) ........... 2
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2004 and 2003 (Unaudited) ........... 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended March 31, 2004 and
March 31, 2003 (Unaudited) ................................. 4
Notes to Consolidated Financial Statements (Unaudited) ..... 5 - 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................. 12 - 19
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK ...................................... 19
ITEM 4 - CONTROLS AND PROCEDURES .................................. 19
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ........................... 20
SIGNATURES .......................................................... 21 - 25
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
March 31, December 31,
2004 2003
--------------------------------
(Unaudited)
Assets
Cash and due from banks $ 14,883,000 $ 15,640,000
Other interest-earning assets 2,955,000 2,198,000
Federal funds sold 5,250,000 1,300,000
--------------------------------
Cash and cash equivalents 23,088,000 19,138,000
Securities available for sale 58,814,000 61,305,000
Securities held to maturity; estimated fair value
of $ 46,274,000 (2004) and $53,370,000 (2003) 45,032,000 52,360,000
FHLB-NY stock, at cost 1,322,000 1,322,000
Loans, net of allowance for loan losses of
of $ 2,964,000 (2004) and $2,888,000 (2003) 264,218,000 258,776,000
Mortgage loans held for sale 484,000 576,000
Premises and equipment, net 3,530,000 3,637,000
Accrued interest receivable 1,857,000 1,863,000
Intangible assets, net of accumulated amortization of
$540,000 (2004) and $530,000 (2003) 210,000 220,000
Other assets 1,963,000 2,571,000
--------------------------------
Total assets $ 400,518,000 $401,768,000
================================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 75,817,000 $ 80,845,000
Interest-bearing 264,751,000 260,693,000
--------------------------------
Total deposits 340,568,000 341,538,000
Other borrowings 19,754,000 20,000,000
Subordinated debentures 7,217,000 7,217,000
Securities sold under agreements to repurchase 3,094,000 3,547,000
Accrued expenses and other liabilities 2,031,000 2,317,000
--------------------------------
Total liabilities 372,664,000 374,619,000
--------------------------------
Commitments and contingencies -- --
Stockholders' equity
Common stock, no par value; 5,000,000 shares authorized;
3,174,096 and 3,165,233 shares issued outstanding at
March 31, 2004 and December 31, 2003, respectively 19,731,000 19,552,000
Treasury stock; 19,746 shares outstanding at March 31, 2004 (448,000) --
Retained earnings 8,207,000 7,593,000
Accumulated other comprehensive income 364,000 4,000
--------------------------------
Total stockholders' equity 27,854,000 27,149,000
--------------------------------
Total liabilities and stockholders' equity $ 400,518,000 $401,768,000
================================
See notes to unaudited consolidated financial statements.
1
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
----------------------------
2004 2003
----------------------------
Interest income:
Loans $ 4,172,000 $3,882,000
Securities held to maturity
Taxable 287,000 395,000
Non-taxable 164,000 178,000
Securities available for sale 534,000 103,000
Other interest-earning assets 11,000 46,000
----------------------------
Total interest income 5,168,000 4,604,000
----------------------------
Interest expense:
Deposits 961,000 1,167,000
Borrowed money 298,000 13,000
----------------------------
Total interest expense 1,259,000 1,180,000
----------------------------
Net interest income before provision for loan losses 3,909,000 3,424,000
Provision for loan losses 120,000 115,000
----------------------------
Net interest income after provision for loan losses 3,789,000 3,309,000
----------------------------
Noninterest income:
Fees and service charges 538,000 485,000
Gain on sales of mortgage loans 18,000 96,000
(Loss) gain on sales of securities (4,000) 27,000
Miscellaneous 42,000 88,000
----------------------------
Total noninterest income 594,000 696,000
----------------------------
Noninterest expenses:
Salaries and employee benefits 1,366,000 1,287,000
Occupancy, net 256,000 183,000
Equipment 222,000 179,000
Data processing 245,000 210,000
Advertising 52,000 54,000
FDIC insurance premium 13,000 12,000
Amortization of intangible assets 10,000 11,000
Charitable contributions 128,000 117,000
Stationery and supplies 48,000 43,000
Miscellaneous 693,000 598,000
----------------------------
Total noninterest expenses 3,033,000 2,694,000
----------------------------
Income before income tax expense 1,350,000 1,311,000
Income tax expense 483,000 458,000
----------------------------
Net income $ 867,000 $ 853,000
============================
Basic earnings per share $ 0.27 $ 0.27
============================
Diluted earnings per share $ 0.27 $ 0.27
============================
Weighted average number of common shares outstanding 3,158,969 3,119,282
============================
Weighted average number of diluted common
shares outstanding 3,216,582 3,148,121
============================
Share data has been restated to reflect a 3 for 2 stock split issued July, 2003
and a 5% stock dividend paid November, 2003.
See notes to unaudited consolidated financial statements.
2
Stewardship, Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
-------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 867,000 $ 853,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 208,000 166,000
Amortization of premiums and accretion of discounts, net 171,000 197,000
Accretion of deferred loan fees (33,000) (20,000)
Provision for loan losses 120,000 115,000
Originations of mortgage loans held for sale (1,687,000) (8,941,000)
Proceeds from sale of mortgage loans 1,797,000 8,363,000
Gain on sale of loans (18,000) (96,000)
Loss (gain) on sale of securities available for sale 4,000 (27,000)
Gain on sale of fixed assets -- (54,000)
Deferred income tax benefit (33,000) (77,000)
Amortization of intangible assets 10,000 11,000
Decrease (increase) in accrued interest receivable 6,000 (16,000)
Decrease in other assets 408,000 82,000
Decrease in other liabilities (286,000) (85,000)
------------ ------------
Net cash provided by operating activities 1,534,000 471,000
------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale (5,433,000) --
Proceeds from maturities and principal repayments
on securities available for sale 1,436,000 1,369,000
Proceeds from sales and calls on securities available for sale 6,996,000 2,756,000
Purchase of securities held to maturity (175,000) (9,857,000)
Proceeds from maturities and principal repayments on
securities held to maturity 2,678,000 4,313,000
Proceeds from calls of securities held to maturity 4,735,000 5,825,000
Net increase in loans (5,529,000) (14,986,000)
Sales of premises and equipment -- 227,000
Additions to premises and equipment (101,000) (86,000)
------------ ------------
Net cash provided by (used in) investing activities 4,607,000 (10,439,000)
------------ ------------
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits (5,028,000) (6,708,000)
Net increase in interest-bearing deposits 4,058,000 11,261,000
Net (decrease) increase in securities sold
under agreement to repurchase (453,000) 1,609,000
Net decrease in borrowings (246,000) --
Cash dividends paid on common stock (253,000) (198,000)
Purchase of treasury stock (454,000) --
Exercise of stock options 9,000 --
Issuance of common stock 176,000 144,000
------------ ------------
Net cash (used in) provided by financing activities (2,191,000) 6,108,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,950,000 (3,860,000)
Cash and cash equivalents - beginning 19,138,000 33,418,000
------------ ------------
Cash and cash equivalents - ending $ 23,088,000 $ 29,558,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest 1,282,000 1,243,000
Cash paid during the year for income taxes -- --
See notes to unaudited consolidated financial statements.
3
Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
For the Period Ended March 31, 2004
------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Treasury Stock Retained Income,
Shares Amount Shares Amount Earnings Net Total
------------------------------------------------------------------------------------------
Balance -- December 31, 2003 3,165,233 $19,552,000 -- $ -- $ 7,593,000 $ 4,000 $ 27,149,000
Dividends Paid -- -- -- -- (253,000) -- (253,000)
Common stock issued under stock plans 7,971 170,000 254 6,000 176,000
Exercise of stock options 892 9,000 -- -- 9,000
Repurchase common stock -- -- (20,000) (454,000) -- -- (454,000)
Comprehensive income:
Net income for the three months
ended March 31, 2004 -- -- -- -- 867,000 -- 867,000
Unrealized holding gains on securities
available for sale arising during
the period (net tax benefit of
$235,000) -- -- -- -- -- 360,000 360,000
------------
Total comprehensive income, net of tax 1,227,000
------------------------------------------------------------------------------------------
Balance -- March 31, 2004 3,174,096 $19,731,000 (19,746) $(448,000) $ 8,207,000 $364,000 $ 27,854,000
==========================================================================================
For the Period Ended March 31, 2003
------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Treasury Stock Retained Income,
Shares Amount Shares Amount Earnings Net Total
------------------------------------------------------------------------------------------
Balance -- December 31, 2002 3,111,313 $ 15,058,000 -- $ -- $ 8,600,000 $ 159,000 $ 23,817,000
Dividends Paid -- -- -- -- (197,000) -- (197,000)
Treasury Stock -- -- --
Common stock issued under stock plans 2,385 144,000 -- -- -- -- 144,000
Tax benefit - exercise of stock options 81,000 81,000
Comprehensive income:
Net income for the three months
ended March 31, 2003 -- -- -- -- 853,000 -- 853,000
Unrealized holding losses on securities
available for sale arising during
the period (net tax of $38,000) -- -- -- -- -- (60,000) (60,000)
------------
Total comprehensive income, net of tax 793,000
------------------------------------------------------------------------------------------
Balance -- March 31, 2003 3,113,698 $ 15,283,000 0 $ -- $ 9,256,000 $ 99,000 $ 24,638,000
==========================================================================================
See notes to unaudited consolidated financial statements.
4
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Certain information and footnote disclosures normally included in the unaudited
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Annual Report on Form 10-K for the fiscal year
ended December 31, 2003.
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"). The 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 accounting principles generally accepted in the
United States of America. 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.
Stock-Based Compensation
The Corporation has two stock-based employee compensation plans and two director
compensation plans. The Corporation accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
5
Three Months Ended
March 31,
2004 2003
-----------------------------
Net Income:
Net income as reported $ 867,000 $ 853,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (12,000) (15,000)
----------- -----------
Pro forma net income $ 855,000 $ 838,000
=========== ===========
Earnings per share:
As reported Basic earnings per share $ 0.27 $ 0.27
As reported Diluted earnings per share 0.27 0.27
Pro forma Basic earnings per share 0.27 0.27
Pro forma Diluted earnings per share 0.27 0.27
The fair value of options granted for employees and directors is estimated on
the date of the grant using the Black-Scholes option pricing model with the
following assumptions used:
Employee Directors Employee Employee Employee
Stock Options Stock Options Stock Options Stock Options Stock Options
2003 2001 2000 1999 1998
--------------------------------------------------------------------------------------
Dividend yield 2.02% 1.62% 1.57% 1.25% 1.12%
Expected volatility 51.65% 39.76% 20.27% 23.63% 16.24%
Risk-free interest rate 3.40% 5.07% 5.16% 6.65% 5.58%
Expected Life 7 years 7 years 7 years 7 years 7 years
Fair value at grant date $9.19 $4.04 $2.96 $3.46 $2.03
6
Note 2. Basis of presentation
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-Q 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 accounting principles generally accepted in the United States of
America. 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 three months ended March 31, 2004 are not
necessarily indicative of the results which may be expected for the entire year.
All share and per share amounts have been restated for stock splits and stock
dividends.
7
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 3. Securities Available for Sale
The following table sets forth the amortized cost and carrying value of
the Corporation's securities available for sale as of March 31, 2004 and
December 31, 2003. Securities available for sale are carried at estimated fair
value.
March 31, 2004
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
----------------------------------------------------------------
U.S. Treasury securities $ 504,000 $ -- $ -- $ 504,000
U.S. Government agencies 18,118,000 75,000 3,000 18,190,000
Obligations of state and political
subdivisions 2,140,000 14,000 -- 2,154,000
Mortgage-backed securities 37,453,000 576,000 63,000 37,966,000
----------------------------------------------------------------
$ 58,215,000 $ 665,000 $ 66,000 $ 58,814,000
================================================================
December 31, 2003
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
----------------------------------------------------------------
U.S. Treasury securities $ 505,000 $ -- $ 5,000 $ 500,000
U.S. Government agencies 22,210,000 51,000 117,000 22,144,000
Obligations of state and political
subdivisions 1,400,000 11,000 5,000 1,406,000
Mortgage-backed securities 37,185,000 212,000 142,000 37,255,000
----------------------------------------------------------------
$ 61,300,000 $ 274,000 $ 269,000 $ 61,305,000
================================================================
Note 4. Securities Held to Maturity
The following table sets forth the carrying value and estimated fair value
of the Corporation's securities held to maturity as March 31, 2004 and December
31, 2003. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
March 31, 2004
----------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------------------------------------------------------------
U.S. Treasury securities $ 1,010,000 $ 69,000 $ -- $ 1,079,000
U.S. Government agencies 8,009,000 104,000 1,000 8,112,000
Obligations of state and political
subdivisions 18,456,000 711,000 1,000 19,166,000
Mortgage-backed securities 17,557,000 367,000 7,000 17,917,000
----------------------------------------------------------------
$ 45,032,000 $ 1,251,000 $ 9,000 $ 46,274,000
================================================================
December 31, 2003
----------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------------------------------------------------------------
U.S. Treasury securities $ 1,011,000 $ 56,000 $ -- $ 1,067,000
U.S. Government agencies 12,756,000 74,000 26,000 12,804,000
Obligations of state and political
subdivisions 19,686,000 654,000 -- 20,340,000
Mortgage-backed securities 18,907,000 295,000 43,000 19,159,000
----------------------------------------------------------------
$ 52,360,000 $ 1,079,000 $ 69,000 $ 53,370,000
================================================================
8
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 Bergen, Passaic and Morris counties, New Jersey. The
following table set forth the composition of loans as of the periods indicated.
March 31, December 31,
2004 2003
--------------------------------------
Mortgage
Residential $ 43,728,000 $ 44,835,000
Commercial 113,748,000 109,708,000
Commercial 48,914,000 48,950,000
Equity 18,406,000 17,181,000
Installment 42,439,000 41,067,000
Other 252,000 238,000
--------------------------------------
Total loans 267,487,000 261,979,000
--------------------------------------
Less: Deferred loan fees 305,000 315,000
Allowance for loan losses 2,964,000 2,888,000
--------------------------------------
3,269,000 3,203,000
--------------------------------------
Loans, net $ 264,218,000 $ 258,776,000
======================================
Note 6. Allowance for loan losses
Three Months Ended March 31,
2004 2003
--------------------------------------
Balance, beginning of period $ 2,888,000 $ 2,689,000
Provision charged to operations 120,000 115,000
Recoveries of loans charged off 1,000 --
Loans charged off (45,000) (16,000)
--------------------------------------
Balance, end of period $ 2,964,000 $ 2,788,000
======================================
9
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, loans more than 90 days past due and restructured loans. The
following table sets forth information regarding the impaired loans as of the
periods indicated.
March 31, December 31,
2004 2003
----------------------------
Impaired loans
With related allowance for loan losses $1,017,000 $1,073,000
Without related allowance for loan losses 991,000 17,000
---------- ----------
Total impaired loans $2,008,000 $1,090,000
========== ==========
Related allowance for loan losses $ 108,000 $ 100,000
========== ==========
Impaired loans as of March 31, 2004 include a loan to a borrower in the amount
of $940,000 that is considered past due 90 days because the loan matured and has
not been renewed. The loan is well collateralized by a lien on the borrower's
residence and is expected to be renewed pending resolution of the borrower's
legal matters. Monthly interest payments continue to be received.
10
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.
The following is a reconciliation of the calculation of basic and diluted
earnings per share.
Three Months
Ended March 31,
2004 2003
------ ------
Net income $ 867 $ 853
Weighted average shares 3,159 3,119
Effect of dilutive stock options 58 29
------ ------
Total weighted average dilutive shares 3,217 3,148
Basic earnings per share $ 0.27 $ 0.27
Diluted earnings per share $ 0.27 $ 0.27
All share and per share amounts have been restated to reflect a 5% stock
dividend paid November 15, 2003 and a 3 for 2 stock split issued in July 2003.
Note 9. Comprehensive Income
Total comprehensive income includes net income and other comprehensive income
which is comprised of unrealized holding gains and losses on securities
available for sale, net of taxes. The Corporation's total comprehensive income
for the three months ended March 31, 2004 and 2003 was $1.2 million and
$793,000, respectively. The difference between the Corporation's net income and
total comprehensive income for these periods relates to the change in the net
unrealized holding gains and losses on securities available for sale during the
applicable period of time.
11
Stewardship Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-Q 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 the 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 the Corporation's interest
rate spread or other income anticipated from operations and investments. As used
in this Form 10-Q, "we" and "us" and "our" refer to Stewardship Financial
Corporation and its consolidated subsidiary, Atlantic Stewardship Bank,
depending on the context.
Critical Accounting Policies and Estimates
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," as well as disclosures found elsewhere in this Form 10-Q, are based
upon the Corporation's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Corporation to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. Note 1 to the Corporation's
Audited Consolidated Financial Statements for the year ended December 31, 2003
included in our Annual Report on Form 10-K for the year ended December 31, 2003,
as supplemented by this report, contains a summary of the Corporation's
significant accounting policies. Management believes the Corporation's policy
with respect to the methodology for the determination of the allowance for loan
losses involves a higher degree of complexity and requires management to make
difficult and subjective judgments which often require assumptions or estimates
about highly uncertain matters. Changes in these judgments, assumptions or
estimates could materially impact results of operations. The Audit Committee and
the Board of Directors periodically review this critical policy and its
application.
The allowance for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate that is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the
12
Corporation's allowance for loan losses. Such agencies may require the
Corporation to make additional provisions for loan losses based upon information
available to them at the time of their examination. Furthermore, the majority of
the Corporation's loans are secured by real estate in the State of New Jersey.
Accordingly, the collectibility of a substantial portion of the carrying value
of the Corporation's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the northern New Jersey area experience an adverse economic shock. Future
adjustments to the allowance for loan losses may be necessary due to economic,
operating, regulatory and other conditions beyond the Corporation's control.
Financial Condition
Total assets decreased slightly by $1.3 million, or 0.3%, from $401.8 million at
December 31, 2003 to $400.5 million at March 31, 2004. Securities held to
maturity decreased $7.3 million and securities available for sale decreased $2.5
million, partially offset by a $5.4 million increase in net loans and a $4.0
million increase in federal funds sold. This was caused by an intentional
funding of loan growth from calls and principal payments from the investment
portfolio. The composition of the loan portfolio is basically unchanged at March
31, 2004 when compared with the portfolio at December 31, 2003.
Total deposits totaled $340.6 million at March 31, 2004, a decrease of $1.0
million, or 0.3%, from $341.5 million at December 31, 2003. Interest-bearing
deposits increased $4.1 million, or 1.6%, to $264.8 million at March 31, 2004
and noninterest-bearing deposits decreased $5.0 million, or 6.2%, to $75.8
million at March 31, 2004. The slight decrease in deposits can be attributed to
customers being attracted to higher yielding alternative products and typical
seasonality of our noninterest bearing demand product.
The Corporation's main focus during the first three months was to manage its
liquidity position by investing in the loan portfolio funds arising from
principal repayments, maturities, and calls in the investment portfolio. With
the increase of mortgage interest rates, the banking industry has and will
experience a reduction in loan production as a result of decreases in initial
mortgage applications and mortgage refinancings. In order to continue and
strengthen loan production, the Corporation plans to continue enhancing the
product line of the Bank. Management has introduced a new home equity product,
Equity Plus, an interest-only line of credit designed to maximize the equity
built up in residental real estate. This product does not require payment of
principal during the first five years of the term and has at an interest rate
varying with our base rate. The Corporation will market this product to
customers with high credit and collateral standards.
13
Results of Operations
Three Months Ended March 31, 2004 and 2003
General
The Corporation reported net income of $867,000, or $0.27 diluted earnings per
share for the three months ended March 31, 2004, compared to $853,000, or $0.27
diluted earnings per share for the same period in 2003. The $14,000 increase was
primarily caused by increases in net interest income, partially offset by
increases in noninterest expense and a decrease in noninterest income. Earnings
for the first quarter of 2003 were impacted by a gain on sale of real estate of
$54,000 and gains on sales of securities of $27,000.
Net interest income
Net interest income increased $485,000, or 14.2%, for the three months ended
March 31, 2004 as compared with the corresponding period in 2003. The increase
was primarily due to an increase in average net interest-earning assets,
partially offset by a decrease in the net interest margin.
Total interest income on a tax equivalent basis increased $560,000, or 12.0%,
primarily due to an increase in the average earning assets, offset by a decrease
in yields on interest-earning assets. Due to the continued low interest rate
environment, tax equivalent yields on interest earning assets continued to fall
42 basis points from 5.96% for the three months ended March 31, 2003 to 5.54%
for the same period in 2004. The average balance on interest-earning assets
increased $60.7 million, or 19.1%, from $317.6 million for the three months
ended March 31, 2003 to $378.3 million for the same period in 2004, primarily
caused by an increase to the Corporation's average deposit base and the
implementation of a leveraging strategy in December 2003. The leveraging
strategy employed the use of $20.0 million in FHLB borrowings to be invested in
agencies and mortgage-backed securities. The Corporation continued to experience
an increase in loan demand which caused loans on average to increase $36.9
million to an average $263.7 million for the three months ended March 31, 2004,
from an average $226.9 million for the comparable period in 2003. The
Corporation also increased its taxable investment portfolio $38.0 million to an
average $90.5 million at March 31, 2004. Other interest-earning assets decreased
$14.3 million to an average $3.4 million as the Corporation redeployed shortterm
assets into its lending portfolio.
Interest paid on deposits and borrowed money increased by $79,000, or 6.7%, due
primarily to an increase in deposits and borrowed funds, partially offset by a
decrease in rates paid on deposits. The average balance of total
interest-bearing deposits increased to $262.4 million for the three months ended
March 31, 2004 from $239.1 million for the comparable 2003 period, primarily as
a result of the Corporation's expanding customer base. Borrowed funds increased
due to the leveraging strategy and the issuance of subordinated debentures for
enhancing capital. Yields on deposits and borrowed money decreased from 1.98%
for the three month period ended March 31, 2003 to 1.72% for the comparable
period in 2004.
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended March 31,
2004 2003
------------------------------------------ ---------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) $ 263,748 $ 4,172 6.33% $ 226,857 $ 3,882 6.92%
Taxable investment securities (1) 90,459 812 3.60 52,495 491 3.76
Tax-exempt investment securities (1) (2) 20,669 251 4.81 20,428 266 5.22
Other interest-earning assets 3,386 10 1.28 17,777 46 1.05
----------- ----------- ----------- ----------
Total interest-earning assets 378,262 5,245 5.54 317,557 4,685 5.96
----------- ----------
Non-interest-earning assets:
Allowance for loan losses (2,955) (2,732)
Other assets 22,994 20,605
----------- -----------
Total assets $ 398,301 $ 335,430
=========== ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 120,822 $ 207 0.69% $ 106,190 $ 294 1.12%
Savings deposits 46,735 91 0.78 38,185 79 0.83
Time deposits 94,847 663 2.80 94,760 794 3.40
Repurchase agreements 3,658 9 0.99 2,981 13 1.84
FHLB borrowing 20,126 167 3.28 - - -
Subordinated debenture 7,041 122 6.85 - - -
----------- ----------- ----------- ----------
Total interest-bearing liabilities 293,229 1,259 1.72 242,116 1,180 1.98
----------- ----------
Non-interest-bearing liabilities:
Demand deposits 75,571 66,684
Other liabilities 1,993 2,223
Stockholders' equity 27,508 24,407
----------- -----------
Total liabilities and stockholders' equity $ 398,301 $ 335,430
=========== ===========
Net interest income (taxable equivalent basis) $ 3,986 $ 3,505
Tax Equivalent adjustment (77) (81)
----------- ----------
Net interest income 3,909 3,424
Net interest spread (taxable equivalent basis) 3.82% 3.98%
====== =====
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.21% 4.45%
====== =====
- ----------
(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. Securities
are included at amortized cost.
(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.
14
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 $120,000 and $115,000 during the
three months ended March 31, 2004 and 2003, respectively. The increase in the
provision was primarily due to the continued growth in loans 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 decreased $102,000, or 14.7%, from $696,000 for the three
month period ending March 31, 2003 to $594,000 for the comparable period in
2004. Deposit related fees increased $53,000 due to an increase in the deposit
base and income derived from the merchant credit card processing program. The
increase in mortgage rates and the difficult northeast winter weather conditions
experienced in the first quarter of 2004 discouraged refinancings and home
sales. Gain on mortgage loans held for sale decreased $78,000, or 81.3% for the
first quarter of 2004 compared to the comparable period in 2003. During the
first quarter of 2003, the Corporation sold a property located in Hawthorne, New
Jersey and realized a profit of $54,000. This property had been originally
purchased in December 2000 as a strategy to improve our branch facility on
Lafayette Avenue, Hawthorne, New Jersey. This strategy did not materialize, the
Corporation opened a branch on Goffle Road, Hawthorne, New Jersey, and
management found it no longer could utilize the additional property. In
addition, the Corporation realized gains on sales of securities available for
sale in the amount of $27,000 during the first quarter of 2003 compared with a
loss of $4,000 for 2004.
Noninterest expense
Noninterest expense increased by approximately $339,000, or 12.6%, to $3.0
million for the three months ended March 31, 2004, compared to $2.7 million for
the same 2003 period. Salaries and employee benefits, the major component of
noninterest expense, increased $79,000, or 6.1%, during the three months ended
March 31, 2004. This increase was due to increases in staffing for the new Wayne
branch, opened in November 2003 and general increases for merit and performance.
Occupancy and equipment increased $116,000, or 32.0%, primarily due to the
increase in the Corporation's branch facilities. Data processing expense
increased $35,000, or 16.7%, due to the increase in the Corporation's deposit
base, and the implementation of a
15
check imaging upgrade, which occurred in the second quarter of 2003.
Miscellaneous expenses increased $95,000, or 15.9%, as a result of the general
growth of the Corporation.
Income taxes
Income tax expense totaled $483,000 for the three months ended March 31, 2004,
for an effective tax rate of 35.8%. For the three months ended March 31, 2003,
income tax expense totaled $458,000, for an effective tax rate of 34.9%. The
effective tax rate has increase due to a slight change in the mix of taxable
versus nontaxable earning assets.
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 borrowers' 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:
03/31/04 12/31/03 09/30/03 06/30/03
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 201 $ 257 $ 245 $ 407
Loans past due 90 days or more: (2) 1,320 320 22 19
Restructured loans: 487 513 841 832
------ ------ ------ ------
Total nonperforming loans $2,008 $1,090 $1,108 $1,258
====== ====== ====== ======
Allowance for loan losses $2,964 $2,888 $2,791 $2,885
====== ====== ====== ======
Nonaccrual loans to total loans 0.07% 0.10% 0.10% 0.17%
Nonperforming loans to total loans 0.75% 0.42% 0.44% 0.53%
Nonperforming loans to total assets 0.50% 0.27% 0.30% 0.35%
Allowance for loan losses to total loans 1.11% 1.10% 1.22% 1.22%
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing income
at the contractually stated rates. A determination is made to continue accruing
income on those loans which are sufficiently collateralized and on which
management believes all interest and principal owed will be collected.
There were no loans at March 31, 2004 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.
16
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 in northern New Jersey.
Market Risk
The Corporation's primary exposure to market risk arises from changes in market
interest rates ("interest rate risk"). The Corporation's profitability is
largely dependent upon its ability to manage interest rate risk. Interest rate
risk can be defined as the exposure of the Corporation's net interest income to
adverse movements in interest rates. Although the Corporation manages other
risks, as in credit and liquidity risk, in the normal course of its business,
management considers interest rate risk to be its most significant market risk
and could potentially have the largest material effect on the Corporation's
financial condition. The Corporation manages its interest rate risk by utilizing
an asset/liability simulation model and by measuring and managing its interest
sensitivity gap. Interest sensitivity gap is determined by analyzing the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within the same period of time. The Asset Liability
Committee reviews and discusses these measurements on a monthly basis.
The Corporation does not have any material exposure to foreign currency exchange
rate risk or commodity price risk. The Corporation did not enter into any market
sensitive instruments for trading purposes nor did it engage in any hedging
transactions utilizing derivative financial instruments during the three months
ended March 31, 2004.
The Corporation is, however, 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 instruments, which include commitments to extend credit and
standby letters of credit, involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statement of condition. 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 and may require
collateral from the borrower if deemed necessary by the Corporation. Standby
letters of credit are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party up to a stipulated
amount and with specified terms and conditions. Commitments to extend credit and
standby letters of credit are not recorded on the Corporation's consolidated
balance sheet until the instrument is exercised.
Capital Adequacy
The Corporation is subject to capital adequacy guidelines promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The Bank is subject to
similar capital adequacy requirements imposed by the Federal Deposit Insurance
Corporation. The FRB has
17
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. At March 31, 2004, the minimum risk-based capital requirements to be
considered adequately capitalized were 4% for Tier 1 capital and 8% for total
capital.
Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determine by dividing
Tier 1 capital as defined under the risk-based guidelines by average total
assets (non risk-adjusted) for the preceding quarter. At March 31, 2004 the
minimum leverage ratio requirement to be considered well capitalized was 4%. The
following table reflects the Corporation's capital ratios at March 31, 2004.
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 12.85% 8.85%
Total 8.00% 13.96% 5.96%
Leverage Ratio 4.00% 8.60% 4.60%
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.
The primary source of cash from operating activities is 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 March 31, 2004, the Corporation has
outstanding loan commitments of $28.3 million and unused lines and letters of
credit totaling $64.1 million. Certificates of deposit scheduled to mature in
one year or less, at March 31, 2004, totaled $49.4 million. Management believes
that a significant portion of such
18
deposits will remain with the Corporation. Cash and cash equivalents increased
$4.0 million during the first three months of 2004. Operating activities and
investing activities provided $1.5 million and $4.6 million, respectively. Net
financing activities amounting to $2.2 million partially offset these amounts.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure about quantitative and qualitative market risk is located in the
Market Risk section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 4. Controls and Procedures
The Corporation's management, with the participation of the Corporation's chief
executive officer and principal accounting officer, has evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of
March 31, 2004. Based on this evaluation, the Corporation's chief executive
officer and principal accounting officer concluded that the Corporation
disclosure controls and procedures are effective for recording, processing,
summarizing and reporting the information the Corporation is required to
disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms. Such evaluation
did not identify any change in the Corporation's internal control over financial
reporting that occurred during the quarter ended March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
19
Stewardship Financial Corporation
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
See exhibit index
(b) Reports on Form 8-K
1) On February 5, 2004, the Corporation filed a current report
on Form 8-K, attaching a press release reporting results for
the year ended December 31, 2003.
20
SIGNATURES
Pursuant to the requirements 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
Date: May 14, 2004 By: /s/ Paul Van Ostenbridge
-----------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
(authorized officer on behalf
of registrant)
Date: May 14, 2004 By: /s/ Julie E. Holland
-----------------------------------
Julie E. Holland
Vice President and Treasurer
(principal accounting officer)
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Paul Van Ostenbridge required by
Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of Julie Holland required by Rule
13a-14(a) or Rule 15d-14(a)
32.1 Certification of Paul Van Ostenbridge and Julie
Holland required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
22