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 September 30, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 0-21855
Stewardship Financial Corporation
- --------------------------------------------------------------------------------
(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|
The number of shares outstanding of the Issuer's Common Stock, no par
value, as of November 2, 2004, was 3,205,928.
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 September 30, 2004 (Unaudited) and December 31, 2003 ... 1
Consolidated Statements of Income for the Nine
Months ended September 30, 2004 and 2003 (Unaudited) ...... 2
Consolidated Statements of Income for the Three
Months ended September 30, 2004 and 2003 (Unaudited) ...... 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2004 and 2003 (Unaudited) ...... 4
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended September 30, 2004 and
September 30, 2003 (Unaudited) ............................ 5
Notes to Consolidated Financial Statements (Unaudited) .... 6 - 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................ 12 - 24
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK ..................................... 25
ITEM 4 - CONTROLS AND PROCEDURES ................................. 25
PART II - OTHER INFORMATION
- -----------------------------
ITEM 6 - EXHIBITS .................................................. 26
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
September 30, December 31,
2004 2003
--------------------------------
(Unaudited)
Assets
Cash and due from banks $ 14,087,000 $ 15,640,000
Other interest-earning assets 217,000 2,198,000
Federal funds sold -- 1,300,000
--------------------------------
Cash and cash equivalents 14,304,000 19,138,000
Securities available for sale 59,745,000 61,305,000
Securities held to maturity; estimated fair value
of $42,429,000 (2004) and $53,370,000 (2003) 41,769,000 52,360,000
FHLB-NY stock, at cost 1,643,000 1,322,000
Loans, net of allowance for loan losses of
of $ 3,155,000 (2004) and $2,888,000 (2003) 273,368,000 258,776,000
Mortgage loans held for sale 98,000 576,000
Premises and equipment, net 3,439,000 3,637,000
Accrued interest receivable 1,830,000 1,863,000
Intangible assets, net of accumulated amortization of
$560,000 (2004) and $530,000 (2003) 190,000 220,000
Other assets 2,440,000 2,571,000
--------------------------------
Total assets $ 398,826,000 $401,768,000
================================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 82,067,000 $ 80,845,000
Interest-bearing 258,627,000 260,693,000
--------------------------------
Total deposits 340,694,000 341,538,000
Other borrowings 17,007,000 20,000,000
Subordinated debentures 7,217,000 7,217,000
Securities sold under agreements to repurchase 2,113,000 3,547,000
Accrued expenses and other liabilities 2,239,000 2,317,000
--------------------------------
Total liabilities 369,270,000 374,619,000
--------------------------------
Commitments and contingencies -- --
Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
3,363,738 and 3,165,233 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively 20,014,000 19,552,000
Treasury stock; 4,702 shares outstanding at September 30, 2004 (107,000) --
Retained earnings 9,650,000 7,593,000
Accumulated other comprehensive (loss) income (1,000) 4,000
--------------------------------
Total stockholders' equity 29,556,000 27,149,000
--------------------------------
Total liabilities and stockholders' equity $ 398,826,000 $401,768,000
================================
See notes to unaudited consolidated financial statements.
1
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2004 2003
------------------------------
Interest income:
Loans $ 12,741,000 $11,931,000
Securities held to maturity
Taxable 777,000 968,000
Non-taxable 474,000 526,000
Securities available for sale 1,615,000 361,000
Other interest-earning assets 36,000 155,000
------------------------------
Total interest income 15,643,000 13,941,000
------------------------------
Interest expense:
Deposits 2,699,000 3,359,000
Borrowed money 879,000 66,000
------------------------------
Total interest expense 3,578,000 3,425,000
------------------------------
Net interest income before provision for loan losses 12,065,000 10,516,000
Provision for loan losses 390,000 315,000
------------------------------
Net interest income after provision for loan losses 11,675,000 10,201,000
------------------------------
Noninterest income:
Fees and service charges 1,755,000 1,563,000
Gain on sales of mortgage loans 97,000 402,000
(Loss) gain on sales of securities (4,000) 49,000
Miscellaneous 180,000 237,000
------------------------------
Total noninterest income 2,028,000 2,251,000
------------------------------
Noninterest expenses:
Salaries and employee benefits 4,160,000 3,990,000
Occupancy, net 730,000 537,000
Equipment 617,000 544,000
Data processing 749,000 667,000
Advertising 218,000 197,000
FDIC insurance premium 37,000 36,000
Amortization of intangible assets 30,000 32,000
Charitable contributions 397,000 351,000
Stationery and supplies 172,000 171,000
Miscellaneous 2,173,000 1,898,000
------------------------------
Total noninterest expenses 9,283,000 8,423,000
------------------------------
Income before income tax expense 4,420,000 4,029,000
Income tax expense 1,602,000 1,419,000
------------------------------
Net income $ 2,818,000 $ 2,610,000
==============================
Basic earnings per share $ 0.84 $ 0.79
==============================
Diluted earnings per share $ 0.83 $ 0.78
==============================
Weighted average number of common shares outstanding 3,333,557 3,290,838
==============================
Weighted average number of diluted common
shares outstanding 3,382,034 3,332,136
==============================
Share data has been restated to reflect a 3 for 2 stock split effective as of
July 2003, a 5% stock dividend paid November 2003 and a 5% stock dividend
payable November 15, 2004.
See notes to unaudited consolidated financial statements.
2
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three Months Ended
September 30,
--------------------------
2004 2003
--------------------------
Interest income:
Loans $4,358,000 $4,061,000
Securities held to maturity
Taxable 238,000 247,000
Non-taxable 153,000 172,000
Securities available for sale 548,000 179,000
Other interest-earning assets 11,000 46,000
--------------------------
Total interest income 5,308,000 4,705,000
--------------------------
Interest expense:
Deposits 849,000 1,038,000
Borrowed money 288,000 32,000
--------------------------
Total interest expense 1,137,000 1,070,000
--------------------------
Net interest income before provision for loan losses 4,171,000 3,635,000
Provision for loan losses 150,000 90,000
--------------------------
Net interest income after provision for loan losses 4,021,000 3,545,000
--------------------------
Noninterest income:
Fees and service charges 601,000 536,000
Gain on sales of mortgage loans 30,000 164,000
(Loss) gain on sales of securities 0 22,000
Miscellaneous 43,000 55,000
--------------------------
Total noninterest income 674,000 777,000
--------------------------
Noninterest expenses:
Salaries and employee benefits 1,424,000 1,393,000
Occupancy, net 240,000 181,000
Equipment 176,000 179,000
Data processing 254,000 251,000
Advertising 80,000 72,000
FDIC insurance premium 12,000 12,000
Amortization of intangible assets 10,000 11,000
Charitable contributions 135,000 117,000
Stationery and supplies 58,000 69,000
Miscellaneous 708,000 650,000
--------------------------
Total noninterest expenses 3,097,000 2,935,000
--------------------------
Income before income tax expense 1,598,000 1,387,000
Income tax expense 584,000 492,000
--------------------------
Net income $1,014,000 $ 895,000
==========================
Basic earnings per share $ 0.30 $ 0.27
==========================
Diluted earnings per share $ 0.29 $ 0.26
==========================
Weighted average number of common shares outstanding 3,354,861 3,304,815
==========================
Weighted average number of diluted common
shares outstanding 3,403,718 3,357,578
==========================
Share data has been restated to reflect a 3 for 2 stock split effective as of
July 2003, a 5% stock dividend paid November 2003 and a 5% stock dividend
payable November 15, 2004.
See notes to unaudited consolidated financial statements.
3
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------------------
2004 2003
-------------------------------
Cash flows from operating activities:
Net income $ 2,818,000 $ 2,610,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 541,000 499,000
Amortization of premiums and accretion of discounts, net 459,000 637,000
Accretion of deferred loan fees (97,000) (126,000)
Provision for loan losses 390,000 315,000
Originations of mortgage loans held for sale (8,842,000) (32,317,000)
Proceeds from sale of mortgage loans 9,417,000 33,955,000
Gain on sale of loans (97,000) (402,000)
Loss (gain) on sale of securities available for sale 4,000 (49,000)
Gain on sale of fixed assets -- (54,000)
Loss on write off of branch startup costs 63,000 --
Deferred income tax benefit (115,000) (63,000)
Amortization of intangible assets 30,000 32,000
Decrease (increase) in accrued interest receivable 33,000 (64,000)
Decrease (increase) in other assets 245,000 (599,000)
Decrease in other liabilities (78,000) (18,000)
-------------------------------
Net cash provided by operating activities 4,771,000 4,356,000
-------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (11,932,000) (31,643,000)
Proceeds from maturities and principal repayments
on securities available for sale 6,280,000 4,138,000
Proceeds from sales and calls on securities available for sale 6,996,000 4,271,000
Purchase of securities held to maturity (2,434,000) (21,027,000)
Proceeds from maturities and principal repayments on
securities held to maturity 8,039,000 14,374,000
Proceeds from calls of securities held to maturity 4,735,000 13,375,000
Purchase of FHLB-NY stock (321,000) (263,000)
Investment in special purpose subsidiary -- (217,000)
Net increase in loans (14,885,000) (36,306,000)
Sales of premises and equipment -- 227,000
Additions to premises and equipment (406,000) (350,000)
-------------------------------
Net cash used in investing activities (3,928,000) (53,421,000)
-------------------------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits 1,222,000 9,594,000
Net (decrease) increase in interest-bearing deposits (2,066,000) 23,779,000
Net (decrease) increase in securities sold
under agreement to repurchase (1,434,000) 1,704,000
Issuance of trust preferred securities -- 7,217,000
Net decrease in borrowings (2,993,000) --
Cash dividends paid on common stock (761,000) (606,000)
Purchase of treasury stock (454,000) --
Exercise of stock options 292,000 59,000
Issuance of common stock 517,000 429,000
-------------------------------
Net cash (used in) provided by financing activities (5,677,000) 42,176,000
-------------------------------
Net decrease in cash and cash equivalents (4,834,000) (6,889,000)
Cash and cash equivalents - beginning 19,138,000 33,418,000
-------------------------------
Cash and cash equivalents - ending $ 14,304,000 $ 26,529,000
===============================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest 3,686,000 3,560,000
Cash paid during the year for income taxes 1,580,000 1,482,000
See notes to unaudited consolidated financial statements.
4
Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
For the Nine Months Ended September 30, 2004
------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Income
Common Stock Treasury Stock Retained (Loss),
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 -- -- -- -- (761,000) -- (761,000)
Treasury Stock (20,000) (454,000) (454,000)
5% stock dividend (payable
November 15, 2004 160,178 3,623,000 (224) (5,000) (3,618,000) -- --
Common stock issued under stock plans 7,971 170,000 15,522 347,000 -- -- 517,000
Exercise of stock options 30,356 292,000 292,000
Comprehensive income:
Net income for the nine months
ended September 30, 2004 -- -- -- -- 2,818,000 -- 2,818,000
Unrealized holding losses on
securities available for sale
arising during the period
(net tax of $1,000) -- -- -- -- -- (5,000) (5,000)
-----------
Total comprehensive income, net of tax 2,813,000
------------------------------------------------------------------------------------------
Balance -- September 30, 2004 3,363,738 $ 23,637,000 (4,702) $(112,000) $ 6,032,000 $(1,000) $29,556,000
==========================================================================================
For the Nine Months Ended September 30, 2003
------------------------------------------------------------------
Accumulated
Other
Comprehensive
Income
Common Stock Retained (Loss),
Shares Amount Earnings Net Total
------------------------------------------------------------------
Balance -- December 31, 2002 1,975,437 $15,058,000 $ 8,600,000 $ 159,000 $ 23,817,000
Dividends Paid -- -- (606,000) -- (606,000)
Stock split - 3 for 2 997,129 -- -- -- --
5% stock dividend (payable
November 15, 2003) 150,094 3,452,000 (3,452,000) -- --
Common stock issued under stock plans 23,863 429,000 -- -- 429,000
Exercise of stock options 5,456 59,000 -- -- 59,000
Tax Benefit - exercise of stock options -- 81,000 -- -- 81,000
Comprehensive income:
Net income for the nine months
ended September 30, 2003 -- -- 2,610,000 -- 2,610,000
Unrealized holding losses on securities
available for sale arising during the period
(net tax benefit of $184,000) -- -- -- (286,000) (286,000)
------------
Total comprehensive income, net of tax 2,324,000
------------------------------------------------------------------
Balance -- September 30, 2003 3,151,979 $19,079,000 $ 7,152,000 $(127,000) $ 26,104,000
==================================================================
See notes to unaudited consolidated financial statements.
5
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004
(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. For those plans that
issue options, 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. For the
stock issued under the Director Stock Plan, compensation expense is recorded at
the fair value of the stock issued and is reflected in net income. 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.
6
Three Months Ended Nine Months Ended
September 30, September 30
2004 2003 2004 2003
------------------------------ ------------------------------
Net Income:
Net income as reported $ 1,014,000 $ 895,000 $ 2,818,000 $ 2,610,000
Stock-based compensation expense included in net
Income, net of related tax effects 6,000 8,000 17,000 24,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (22,000) (25,000) (66,000) (67,000)
------------- ------------- ------------- -------------
Pro forma net income $ 998,000 $ 878,000 $ 2,769,000 $ 2,567,000
============= ============= ============= =============
Earnings per share:
As reported Basic earnings per share $ 0.30 $ 0.27 $ 0.84 $ 0.79
As reported Diluted earnings per share 0.29 0.26 0.83 0.78
Pro forma Basic earnings per share 0.30 0.27 0.83 0.78
Pro forma Diluted earnings per share 0.29 0.26 0.82 0.77
Share data has been restated to reflect a 3 for 2 stock split effective as of
July 2003, a 5% stock dividend paid November 2003 and a 5% stock dividend
payable November 15, 2004.
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
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 and nine months ended September 30,
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 September 30, 2004 and
December 31, 2003. 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.
September 30, 2004
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Treasury securities $ 503,000 $ -- $ 6,000 $ 497,000
U.S. Government agencies 22,325,000 51,000 129,000 22,247,000
Obligations of state and political
subdivisions 1,950,000 4,000 24,000 1,930,000
Mutual funds 1,008,000 10,000 -- 1,018,000
Mortgage-backed securities 33,958,000 245,000 150,000 34,053,000
-----------------------------------------------------------------
$59,744,000 $310,000 $ 309,000 $59,745,000
=================================================================
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
=================================================================
On a quarterly basis, the Corporation makes an assessment to determine whether
there have been any events or economic circumstances to indicate that a security
is impaired on an other-than-temporary basis. The Corporation considers many
factors including the length of time the security has had a market value less
than the cost basis; the intent and ability of the Corporation to hold the
security for a period of time sufficient for a recovery in value; and recent
events specific to the issuer or industry. Management considers the impairment
of these securities to be temporary.
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 September 30, 2004 and
December 31, 2003. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
September 30, 2004
----------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------------------------------------------------------------
U.S. Treasury securities $ 1,008,000 $ 43,000 $ -- $ 1,051,000
U.S. Government agencies 9,166,000 50,000 32,000 9,184,000
Obligations of state and political
subdivisions 17,761,000 397,000 3,000 18,155,000
Mortgage-backed securities 13,834,000 239,000 34,000 14,039,000
----------------------------------------------------------------
$41,769,000 $ 729,000 $ 69,000 $42,429,000
================================================================
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.
September 30, December 31,
2004 2003
-----------------------------------
Mortgage
Residential $ 40,710,000 $ 44,835,000
Commercial 118,965,000 109,708,000
Commercial 51,009,000 48,950,000
Equity 21,077,000 17,181,000
Installment 44,338,000 41,067,000
Other 738,000 238,000
-----------------------------------
Total loans 276,837,000 261,979,000
-----------------------------------
Less: Deferred loan fees 314,000 315,000
Allowance for loan losses 3,155,000 2,888,000
-----------------------------------
3,469,000 3,203,000
-----------------------------------
Loans, net $ 273,368,000 $ 258,776,000
===================================
Note 6. Allowance for loan losses
Nine Months Ended September 30,
2004 2003
-----------------------------------
Balance, beginning of period $ 2,888,000 $ 2,689,000
Provision charged to operations 390,000 315,000
Recoveries of loans charged off 5,000 --
Loans charged off (128,000) (213,000)
-----------------------------------
Balance, end of period $ 3,155,000 $ 2,791,000
===================================
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.
September 30, December 31,
2004 2003
------------------------------
Impaired loans
With related allowance for loan losses $1,049,000 $1,073,000
Without related allowance for loan losses 943,000 17,000
---------- ----------
Total impaired loans $1,992,000 $1,090,000
========== ==========
Related allowance for loan losses $ 83,000 $ 100,000
========== ==========
Impaired loans at September 30, 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.
Note 8. Recent Accounting Pronouncements
On September 30, 2004, the Financial Accounting Standards Board (FASB) issued
Staff Position No. EITF Issue 03-01-1, "Effective Date of Paragraphs 10-20 of
EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, " which delays the effective date for the
measurement and recognition guidance contained in EITF Issue No. 03-01. EITF
Issue No. 03-01 provides guidance for evaluating whether an investment is
other-than-temporarily impaired and was originally effective for
other-than-temporarily impairment evaluations made in reporting periods
beginning after June 15, 2004. The delay in the effective date for the
measurement and recognition guidance contained in paragraphs 10 through 20 of
EITF Issue No. 03-01 does not suspend the requirement to recognize
other-than-temporarily impairments as required by existing authoritative
literature. The disclosure guidance in paragraphs 21 and 22 of EITF Issue 03-01
remains effective. The delay will be superseded concurrent with the final
issuance of Staff Position No. EITF 03-01a, which is expected to provide
implementation guidance on matters such as impairment evaluations for declines
in value caused by increases in interest rates and/or sector spreads. The
Corporation does not believe the final issuance of the Staff Position No. EITF
03-01a will have a material impact on the financial condition of results of
operations.
10
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 9. 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 Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
------ ------ ------ ------
Net income $1,014 $ 895 $2,818 $2,610
Weighted average shares 3,355 3,305 3,334 3,291
Effect of dilutive stock options 49 53 48 41
------ ------ ------ ------
Total weighted average dilutive shares 3,404 3,358 3,382 3,332
Basic earnings per share $ 0.30 $ 0.27 $ 0.84 $ 0.79
Diluted earnings per share $ 0.29 $ 0.26 $ 0.83 $ 0.78
All share and per share amounts have been restated to reflect a 5% stock
dividend payable November 15, 2004, a 5% stock dividend paid November 15, 2003
and a 3 for 2 stock split effective as of July 2003.
Note 10. 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 nine months ended September 30, 2004 and 2003 was $2.8 million and $2.3
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 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 by $2.9 million, or 0.7%, from $401.8 million at December
31, 2003 to $398.8 million at September 30, 2004. Net loans increased $14.6
million, partially offset by a $10.6 million decrease in securities held to
maturity, $4.8 million decrease in cash and cash equivalents and $1.6 million
decrease in securities available for sale. This was caused by an intentional
repositioning of the balance sheet by funding loan growth from calls and
principal payments from the investment portfolio. The composition of the loan
portfolio is basically unchanged at September 30, 2004 when compared with the
portfolio at December 31, 2003.
Total deposits totaled $340.7 million at September 30, 2004, a decrease of $0.8
million, or 0.2%, from $341.5 million at December 31, 2003. Interest-bearing
deposits decreased $2.1 million, or 0.8%, to $258.6 million at September 30,
2004 and noninterest-bearing deposits increased $1.2 million, or 1.5%, to $82.1
million at September 30, 2004. The decrease in deposits can be attributed to the
current economic and interest rate environment. Management did not aggressively
pursue certificates of deposit products as a funding source but concentrated its
efforts to developing new core deposit products. It is expected that these
products will be offered in the fourth quarter of 2004 and will help support and
fund continued loan growth.
Borrowings totaled $17.0 million at September 30, 2004, a decrease of $3.0
million, or 15.0%, from $20.0 million at December 31, 2003. This decrease was a
result of paydowns on the leverage transaction that was completed in December,
2003.
The Corporation's main focus during the first nine months was to manage its
liquidity position by redeploying principal repayments, maturities, and calls in
the investment portfolio into the loan portfolio. With the increase in mortgage
interest rates, the banking industry has experienced a reduction in loan
production as strategies to refinance were deployed by customers in 2003. In
order to continue its strong loan production, the Corporation continues to
enhance the product line of the Bank. Management introduced a new home equity
product, Equity Plus, an interest-only line of credit designed to maximize the
equity built up in the home. Marketed to those customers with high credit and
collateral standards, this product eliminates the requirement to pay principal
during the first five years of the term and is offered at a variable interest
rate tied to our base rate.
The Corporation had been pursuing a new branch opportunity in Oakland, New
Jersey. After appearing at several meetings of the town planning board to obtain
a use variance, management found that the town was unwilling to accept a bank as
useage to the property. The Corporation withdrew its application with the town
and will not pursue this branch opportunity. The Corporation has entered into a
contract to purchase property in Waldwick, New Jersey, subject to obtaining
13
town approvals. This would allow the Corporation to move its existing branch in
Waldwick to a more visible location and will allow an ATM and driveup facility
not available at current branch. The Corporation also entered into a lease
agreement, subject to town approvals, to open a new branch in Montville, New
Jersey. It is anticipated that the new branch locations will open in 2005 and
will provide improved service to existing customers as well as extend market
penetration into new areas.
Results of Operations
- ---------------------
Nine Months Ended September 30, 2004 and 2003
- ---------------------------------------------
General
- -------
The Corporation reported net income of $2.8 million, or $0.83 diluted earnings
per share, for the nine months ended September 30, 2004, compared to $2.6
million, or $0.78 diluted earnings per share, for the same period in 2003. The
$208,000 increase was primarily caused by increases in net interest income,
partially offset by increases in noninterest expense and a decrease in
noninterest income.
Net interest income
- -------------------
Net interest income increased $1.5 million, or 14.7%, for the nine months ended
September 30, 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 $1.7 million, or
11.9%, 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 fell 13 basis
points from 5.70% for the nine months ended September 30, 2003 to 5.57% for the
same period in 2004. The average balance on interest-earning assets increased
$48.1 million, or 14.5%, from $332.7 million for the nine months ended September
30, 2003 to $380.8 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 $33.9 million to an
average $270.8 million for the nine months ended September 30, 2004, from an
average $237.0 million for the comparable period in 2003. The Corporation also
increased its taxable investment portfolio $31.9 million to an average $85.9
million at September 30, 2004. Other interest-earning assets decreased $17.8
million to an average $3.7 million as the Corporation redeployed short term
assets into its lending portfolio.
Interest paid on deposits and borrowed money increased by $153,000, or 4.5%, due
primarily to an increase in deposits and borrowed funds, partially offset by a
decrease in rates paid on
14
deposits. The average balance of total interest-bearing deposits increased to
$263.3 million for the nine months ended September 30, 2004 from $248.2 million
for the comparable 2003 period, primarily as a result of the Corporation's
expanding customer base. Borrowed funds increased due to the employing of the
leveraging strategy and the issuance of subordinated debentures for enhancing
capital. Yields on deposits and borrowed money decreased from 1.81% for the nine
month period ended September 30, 2003 to 1.63% for the comparable period in
2004.
15
Analysis of Net Interest Income (Unaudited)
For the Nine Months Ended September 30,
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) $ 270,824 $ 12,741 6.28% $ 236,958 $ 11,931 6.73%
Taxable investment securities (1) 85,936 2,365 3.68 53,992 1,309 3.24
Tax-exempt investment securities (1) (2) 20,301 726 4.78 20,205 788 5.21
Other interest-earning assets 3,737 36 1.29 21,549 155 0.96
---------- --------- ---------- ---------
Total interest-earning assets 380,798 15,868 5.57 332,704 14,183 5.70
--------- ---------
Non-interest-earning assets:
Allowance for loan losses (3,031) (2,833)
Other assets 23,842 20,918
---------- ----------
Total assets $ 401,609 $ 350,789
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 121,918 $ 571 0.63% $ 113,290 $ 839 0.99%
Savings deposits 49,085 268 0.73 40,924 243 0.79
Time deposits 92,265 1,860 2.69 93,995 2,277 3.24
Repurchase agreements 2,974 26 1.17 4,447 66 1.98
FHLB Borrowing 18,964 488 3.44 - -
Subordinated debenture 7,260 365 6.72 - -
---------- --------- ---------- ---------
Total interest-bearing liabilities 292,466 3,578 1.63 252,656 3,425 1.81
--------- ---------
Non-interest-bearing liabilities:
Demand deposits 79,117 70,911
Other liabilities 1,991 2,062
Stockholders' equity 28,035 25,160
---------- ----------
Total liabilities and stockholders' equity $ 401,609 $ 350,789
========== ==========
Net interest income (taxable equivalent basis) $ 12,290 $ 10,758
========= =========
Net interest spread (taxable equivalent basis) 3.93% 3.89%
====== ======
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.31% 4.32%
====== ======
- ----------
(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.
2004 2003
(Dollars in thousands)
Reconciliation of net interest
income (tax equivalent basis):
Net interest income 12,065 10,516
Tax equivalent basis adjustment 225 242
------ ------
Net interest income (tax equivalent basis) 12,290 10,758
====== ======
16
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 losses 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 provisions are charged to operations
during the period in which such additions are deemed necessary.
The provision charged to operations totaled $390,000 and $315,000 during the
nine months ended September 30, 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 $223,000, or 9.9%, from $2.3 million for the nine
month period ended September 30, 2003 to $2.0 million for the comparable period
in 2004. Deposit related fees increased $192,000 due to an increase in the
deposit base and income derived from the merchant credit card processing
program. Gain on mortgage loans held for sale decreased $305,000, or 75.9%, for
the first nine months of 2004 compared to the comparable period in 2003. In
2003, the Corporation realized record refinancings and with the increase in
mortgage rates experienced in 2004, this origination volume has declined. 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 $49,000 during 2003, compared with a loss of $4,000 for
2004.
Noninterest expense
- -------------------
Noninterest expense increased by approximately $860,000, or 10.2%, to $9.3
million for the nine months ended September 30, 2004, compared to $8.4 million
for the same 2003 period. Salaries and employee benefits, the major component of
noninterest expense, increased $170,000, or 4.3%, during the nine months ended
September 30, 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 $266,000, or 24.6%, primarily due
to the increase in the Corporation's branch facilities. Data processing expense
increased $82,000, or 12.3%, due to the increase in the Corporation's deposit
base, and the implementation of the check imaging upgrade, which occurred in the
second quarter of 2003. Miscellaneous expenses
17
increased $275,000, or 14.5%, to provide for increase in merchant credit card
processing business and the general growth of the Corporation.
Income taxes
- ------------
Income tax expense totaled $1.6 million for the nine months ended September 30,
2004, for an effective tax rate of 36.2%. For the nine months ended September
30, 2003, income tax expense totaled $1.4 million, for an effective tax rate of
35.2%. The effective tax rate has increased due to a slight change in the mix of
taxable versus nontaxable interest income.
Results of Operations
- ---------------------
Three Months Ended September 30, 2004 and 2003
- ----------------------------------------------
General
- -------
The Corporation reported net income of $1.0 million, or $0.29 diluted earnings
per share for the three months ended September 30, 2004, compared to $895,000,
or $0.26 diluted earnings per share for the same period in 2003. The $119,000
increase was primarily caused by increases in net interest income, partially
offset by increases in noninterest expense and a decrease in noninterest income.
Net interest income
- -------------------
Net interest income increased $536,000, or 14.7%, for the three months ended
September 30, 2004 as compared with the corresponding period in 2003. The
increase was primarily due to an increase in average net interest-earning assets
and an increase in the net interest margin.
Total interest income on a tax equivalent basis increased $594,000, or 12.4%,
primarily due to an increase in the average earning assets and an increase in
yields on interest-earning assets. Due to an increase in yields in the
investment portfolio and shift in assets into investments and loans, tax
equivalent yields on interest earning assets increased 13 basis points from
5.45% for the three months ended September 30, 2003 to 5.58% for the same period
in 2004. The average balance of interest-earning assets increased $34.7 million,
or 10.0%, from $348.6 million for the three months ended September 30, 2003 to
$383.3 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 $31.1 million to an average $277.7
million for the three months ended September 30, 2004, from an average $246.6
million for the comparable period in 2003. The Corporation also increased its
taxable investment portfolio $24.1 million to an average $83.1 million at
September 30, 2004. Other interest-earning assets decreased $20.3 million to an
average $2.5 million as the Corporation redeployed short term assets into its
lending portfolio.
18
Interest paid on deposits and borrowed money increased by $67,000, or 6.3%, 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 $264.4 million for the three months ended
September 30, 2004 from $257.2 million for the comparable 2003 period, primarily
as a result of the Corporation's expanding customer base. Borrowed funds
increased due to the employing of the leveraging strategy and the issuance of
subordinated debentures for enhancing capital. Yields on deposits and borrowed
money decreased from 1.62% for the three month period ended September 30, 2003
to 1.55% for the comparable period in 2004.
19
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended September 30,
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) $ 277,675 $ 4,358 6.24% $ 246,572 $ 4,061 6.53%
Taxable investment securities (1) 83,117 778 3.72 59,025 419 2.82
Tax-exempt investment securities (1) (2) 20,000 232 4.61 20,245 259 5.08
Other interest-earning assets 2,524 11 1.73 22,778 46 0.80
---------- --------- ---------- --------
Total interest-earning assets 383,316 5,379 5.58 348,620 4,785 5.45
--------- --------
Non-interest-earning assets:
Allowance for loan losses (3,112) (2,920)
Other assets 24,237 21,289
---------- ----------
Total assets $ 404,441 $ 366,989
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 122,578 $ 182 0.59% $ 120,954 $ 237 0.78%
Savings deposits 50,606 77 0.61 42,919 76 0.70
Time deposits 91,168 590 2.57 93,354 725 3.08
Repurchase agreements 2,431 9 1.47 5,469 32 2.32
FHLB Borrowing 17,563 158 3.58 -- --
Subordinated debenture 7,259 121 6.63 -- --
---------- --------- ---------- --------
Total interest-bearing liabilities 291,605 1,137 1.55 262,696 1,070 1.62
--------- --------
Non-interest-bearing liabilities:
Demand deposits 82,072 76,249
Other liabilities 2,063 2,208
Stockholders' equity 28,701 25,836
---------- ----------
Total liabilities and stockholders' equity $ 404,441 $ 366,989
========== ==========
Net interest income (taxable equivalent basis) $ 4,242 $ 3,715
========= ========
Net interest spread (taxable equivalent basis) 4.03% 3.83%
===== ======
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.40% 4.23%
===== ======
- ----------
(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.
2004 2003
--------------------
(Dollars in thousands)
Reconciliation of net interest
income (tax equivalent basis):
Net interest income 4,171 3,634
Tax equivalent basis adjustment 71 81
----- -----
Net interest income (tax equivalent basis) 4,242 3,715
===== =====
20
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 losses 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 provisions are charged to operations
during the period in which such additions are deemed necessary.
The provision charged to operations totaled $150,000 and $90,000 during the
three months ended September 30, 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 $103,000, or 13.3%, from $777,000 for the three
month period ended September 30, 2003 to $674,000 for the comparable period in
2004. Deposit related fees increased $65,000 due to an increase in the deposit
base and income derived from the merchant credit card processing program.
Mortgage origination volume continues to be lower than the record volume of 2003
due to the large number of refinances that occurred in 2003. Gain on mortgage
loans held for sale decreased $134,000, or 81.7%, for the third quarter of 2004
compared to the comparable period in 2003.
Noninterest expense
- -------------------
Noninterest expense increased by approximately $162,000, or 5.5%, to $3.1
million for the three months ended September 30, 2004, compared to $2.9 million
for the same 2003 period. Salaries and employee benefits, the major component of
noninterest expense, increased $31,000, or 2.2%, during the three months ended
September 30, 2004. This increase was due to general increases for merit and
performance. Occupancy and equipment increased $56,000, or 15.5%, primarily due
to the increase in the Corporation's branch facilities. Miscellaneous expenses
increased $58,000, or 8.9%, as a result of the general growth of the merchant
card processing business and the growth of the Corporation.
Income taxes
- ------------
Income tax expense totaled $584,000 for the three months ended September 30,
2004, for an effective tax rate of 36.6%. For the three months ended September
30, 2003, income tax expense totaled $492,000, for an effective tax rate of
35.5%. The effective tax rate has increased due to a slight change in the mix of
taxable versus nontaxable interest income.
21
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:
09/30/04 06/30/04 03/31/04 12/31/03
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 164 $ 164 $ 201 $ 257
Loans past due 90 days or more: (2) 1,374 1,394 1,320 320
Restructured loans: 453 477 487 513
------ ------ ------ ------
Total nonperforming loans $1,991 $2,035 $2,008 $1,090
====== ====== ====== ======
Allowance for loan losses $3,155 $3,023 $2,964 $2,888
====== ====== ====== ======
Nonaccrual loans to total loans 0.06% 0.06% 0.07% 0.10%
Nonperforming loans to total loans 0.72% 0.74% 0.75% 0.42%
Nonperforming loans to total assets 0.50% 0.50% 0.50% 0.27%
Allowance for loan losses to total loans 1.14% 1.10% 1.11% 1.10%
(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 September 30, 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.
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.
22
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 nine months
ended September 30, 2004.
The Corporation has not experienced any significant changes to its interest rate
sensitivity position since December 31, 2003.
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 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
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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 September 30, 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 September 30, 2004 the
minimum leverage ratio requirement to be considered well capitalized was 4%. The
following table reflects the Corporation's capital ratios at September 30, 2004.
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 13.08% 9.08%
Total 8.00% 14.22% 6.22%
Leverage Ratio 4.00% 8.99% 4.99%
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 September 30, 2004, the Corporation has
outstanding loan commitments of $25.2 million and unused lines and letters of
credit totaling $77.3 million. Certificates of deposit scheduled to mature in
one year or less, at September 30, 2004, totaled $56.1 million. Management
believes that a significant portion of such deposits will remain with the
Corporation. Cash and cash equivalents decreased $4.8 million during the first
nine months of 2004. Net investing activities and financing activities used $3.9
million and $5.7 million, respectively, and operating activities provided $4.8
million.
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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
September 30, 2004. Based on this evaluation, the Corporation's chief executive
officer and principal accounting officer concluded that the Corporation's
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 September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
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Stewardship Financial Corporation
Part II -- Other Information
Item 6. Exhibits
- ----------------
See exhibit index
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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: November 12, 2004 By: /s/ Paul Van Ostenbridge
----------------- ----------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
(authorized officer on behalf
of registrant)
Date: November 12, 2004 By: /s/ Julie E. Holland
----------------- ----------------------------
Julie E. Holland
Vice President and Treasurer
(principal accounting officer)
27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
99.1 Exhibit 31.1 -- Certification of Paul Van Ostenbridge required
by Rule 13a-14(a) or Rule 15d-14(a)
99.2 Exhibit 31.2 -- Certification of Julie Holland required by
Rule 13a-14(a) or Rule 15d-14(a)
99.3 Exhibit 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
28