Exhibit 13
o Annual Report 2004 | Rooted for Strength o
FINANCIAL HIGHLIGHTS
2004 2003 % CHANGE
- ---------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31 (Dollars in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------
Net income $ 3,848 $ 3,491 10.2%
Average shares outstanding 3,341 3,297 1.3%
Per common share
Basic net income 1.15 1.06 8.5%
Diluted net income 1.14 1.04 9.6%
Cash dividends declared 0.30 0.25 20.0%
Book value at year end 9.05 8.17 10.8%
BALANCE SHEET DATA AT DECEMBER 31
- ---------------------------------------------------------------------------------------------
Total assets 424,306 401,768 5.6%
Total gross loans 296,208 261,664 13.2%
Allowance for loan losses 3,299 2,888 14.2%
Total deposits 356,918 341,538 4.5%
Stockholders' equity 30,460 27,149 12.2%
CONSOLIDATED RATIOS
- ---------------------------------------------------------------------------------------------
Return on average assets 0.95% 0.97% -2.1%
Return on average equity 13.48% 13.68% -1.5%
Tier 1 capital to average assets (leverage) 9.08% 8.89% 2.1%
Tier 1 capital to risk-adjusted assets 12.48% 12.93% -3.5%
Total capital to risk-adjusted assets 13.57% 14.03% -3.3%
All share data has been restated to include the effects of 5% stock dividends
paid in November 2003 and November 2004, and a 3 for 2 stock split completed
July 2003.
- --------------------------
Total Assets (In Millions)
- --------------------------
2000 $231
2001 $279
2002 $331
2003 $402
2004 $424
- --------------------------
Net Income (In Thousands)
- --------------------------
2000 $2,420
2001 $2,558
2002 $3,116
2003 $3,491
2004 $3,848
[Graphic ommitted]
[Photo]
Happy winner of Atlantic Stewardship Bank's drawing at the Hawthorne Street Fair
"It is with sincere thanks and gratitude that we receive the annual tithe from
the Atlantic Stewardship Bank. It is truly an honor to be part of such a
wonderful enterprise of integrity and Christian principles that honors the
Lord's tithing program. It is only as we live obediently according to God's Word
that we are blessed beyond measure.
Your gift will help in many areas of our ministry and missionary efforts.
Thank you and may God continue to bless the Atlantic Stewardship Bank and all of
its branches and Officers."
Rev. William Stelpstra
President, World for Christ Ministries
World for Christ Crusade, Inc.
West Milford, NJ
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o Stewardship Financial Corporation and Subsidiary o
BOARD OF DIRECTORS
STEWARDSHIP FINANCIAL CORPORATION AND ATLANTIC STEWARDSHIP BANK
Arie Leegwater, Chairman
Owner, Arie Leegwater Associates
Harold Dyer
Retired
William C. Hanse, Esq.
Partner, Hanse & Hanse
Margo Lane
Sales and Marketing Coordinator
PBI - Dansensor America, Inc.
John J. Murphy *
Founder and Senior Principal
Murphy Capital Management, Inc.
John L. Steen, Vice Chairman
President, Steen Sales, Inc.
President, Dutch Valley Throwing Co., Inc.
Robert J. Turner
Retired
William J. Vander Eems
President, William Van Der Eems, Inc.
Paul Van Ostenbridge
President and Chief Executive Officer
Stewardship Financial Corporation and
Atlantic Stewardship Bank
Abe Van Wingerden
President, Abe Van Wingerden Co., Inc.
T/A Van Wingerden Farms
HEARTFELT GRATITUDE
AND BEST WISHES...
Stewardship Financial Corporation and the Atlantic Stewardship Bank wish to
recognize Director William M. Almroth, who retired in 2004 after faithfully
serving the Stewardship Financial Corporation Board since 1997 and the Atlantic
Stewardship Bank Board since 1993.Prior to becoming a Director, Mr. Almroth
served on the Bank's New Business Development Board. The Boards are grateful to
Mr. Almroth for providing vision to the corporations to help recognize
shareholders, as well as the Christian organizations supported through the
Tithing Program.
* The Board of Directors acknowledges with regret the resignation of John J.
Murphy from the Stewardship Financial Corporation and the Atlantic
Stewardship Bank Boards as of January 20, 2005. Mr. Murphy's decision to
relinquish his directorship was based upon outside business obligations. The
Board of Directors sincerely thanks John J. Murphy for all his contributions
to the Holding Company as well as the Bank, and extends best wishes for
continued success.
NEW BUSINESS DEVELOPMENT BOARDS
BERGEN BOARD
Janyce Bandstra
Janet Braen
William R. Cook
Richard Culp
Robert Galorenzo, M.D.
Paul D. Heerema
Ruth Knyfd
Bartel Leegwater
Edward Nieuwenhuis, Jr., M.D.
Paul Ruitenberg
William Soodsma *
Margaret Stanley *
Allen Stiles
Howard Yeaton
PASSAIC/MORRIS BOARD
William C. Bartlett
Donald De Bruin
George Forshay
Robert Fylstra, CPA
Brian Hanse, Esq., CPA
Garret Hoogerhyde, CPA
Ruth Kuiken
William A. Monaghan III, Esq. *
Darryl Siss, Esq.
James Slagter
Charles Sybesma *
Benard W. Thomas, Jr.
Michael Westra
Ralph Wiegers
* SPECIAL APPRECIATION
We extend a note of thanks to our friends and associates who successfully
completed their terms as members of the Bank's New Business Development
Boards: William A. Monaghan III, Esq., William Soodsma, Margaret Stanley, and
Charles Sybesma. We deeply appreciate all of their efforts in promoting the
Bank within the community.
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o Annual Report 2004 | Rooted for Strength o
SHAREHOLDER INFORMATION
The Annual Shareholders' Meeting for Stewardship Financial Corporation will be
held at the Christian Health Care Center, 301 Sicomac Avenue, Wyckoff, New
Jersey, on May 10, 2005, at 7:00 p.m. (please use the Mountain Avenue entrance).
The Corporation had 900 Shareholders of Record on December 31, 2004.
Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016, is the
transfer agent for Stewardship Financial Corporation common stock. We invite you
to contact them at 800-368-5948 should you wish to transfer stock or to join the
Dividend Reinvestment Plan. You may continue to contact the Corporate Services
Division of Stewardship Financial Corporation at 201-444-7100 or 877-844-BANK
for additional information.
"Thank you for your very tangible demonstration of the belief in the work of
Children's Aid and Family Services. Your generous gift makes a difference. Your
support truly impacts upon our community in meaningful, long-lasting ways -
partnering with us to make opportunities available for others, so they may
learn, grow, and thrive in their schools, families, workplaces, and community.
I recognize there are so many worthy causes that seek your support. I am deeply
grateful to you for deciding to include Children's Aid and Family Services in
your vision of a better world. Your trust and confidence means a great deal to
me and to all the members of the staff and Board.
Thanks to you, Children's Aid and Family Services gives hope."
Robert B. Jones, Ph.D.
President & CEO, Children's Aid and Family Services
Paramus, NJ
DIVIDEND REINVESTMENT PLAN
A total of 673 Shareholders currently participate in the Corporation's
Shareholder Dividend Reinvestment Plan, representing 1,909,795 or 57% of all
shares outstanding. Plan participants reinvest cash dividends to purchase new
shares of stock at 95% of the market value, based on the most recent trades.
Shareholders interested in joining the Dividend Reinvestment Plan may request a
Plan Membership Form from Registrar and Transfer Company.
ANNUAL REPORT
Stewardship Financial Corporation will provide a copy of the Annual Report on
Form 10K, free of charge to any shareholder upon written request, including the
financial statements and schedules which have been filed with the Securities and
Exchange Commission. Requests should be addressed to Stewardship Financial
Corporation, Attn: Corporate Services, 630 Godwin Avenue, Midland Park, NJ
07432-1405.
CORPORATE GOVERNANCE
The Board of Directors' Audit, Nominating and Compensation Committee Charters;
as well as the Code of Ethical Conduct for Senior Financial Managers, are
available for viewing at www.asbnow.com. Visit the "About Us" page and refer to
the "Stewardship Financial Corporation" section. This information is also
available in print to shareholders requesting same in writing.
RECENT HISTORY OF DIVIDENDS PAID
The Board of Directors of the Stewardship Financial Corporation is pleased to
pay on February 1, 2005, a quarterly dividend to Shareholders of Record on
January 12, 2005, in the amount of $0.09 per share. Future dividends are
expected to be paid on May 1, August 1, and November 1, subject to Board
approval.
November 15, 2004 5% stock dividend
--------------------------------------------
November 1, 2004 $0.08
--------------------------------------------
August 1, 2004 $0.08
--------------------------------------------
May 1, 2004 $0.07
--------------------------------------------
February 1, 2004 $0.07
--------------------------------------------
November 15, 2003 5% stock dividend
--------------------------------------------
November 1, 2003 $0.07
--------------------------------------------
August 1, 2003 $0.06
--------------------------------------------
July 1, 2003 3 for 2 split
--------------------------------------------
May 1, 2003 $0.06
--------------------------------------------
February 1, 2003 $0.06
Total Earnings Per Share
2004 $ 1.15
2003 $ 1.06
2002 $ 0.96
2001 $ 0.81
2000 $ 0.77
[Graphic ommitted]
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o Stewardship Financial Corporation and Subsidiary o
MESSAGE TO THE SHAREHOLDERS
DEAR SHAREHOLDERS AND FRIENDS
2004 was another successful year for Stewardship Financial Corporation
and its wholly owned subsidiary, Atlantic Stewardship Bank. Record earnings
were achieved despite a low interest rate environment. This increase in
earnings was possible as a result of strong growth in loans. The loans were
funded from core deposit growth and the redeployment of assets held in the
investment portfolio. Strict management of the Bank's net interest
margin was critical in achieving the increased earnings.
[PHOTO]
Net income for the year ended December 31, 2004 was $3.8 million, a 10.2%
increase when compared to the $3.5 million earned a year earlier. The Return on
Average Assets was 0.95% and the Return on Average Equity was 13.48% for the
year ending December 31, 2004.
Earnings per diluted share in 2004 were $1.14 compared to the $1.04 in 2003.
Capital increased $3.3 million for the year resulting in year-end total capital
in the amount of $30.5 million.
[PHOTO]
[PHOTO]
Total assets at year-end were $424.3 million. Total assets grew $22.5 million in
2004 or 5.6%, over the prior year. Net loans were $292.9 million at year-end,
representing a 13.2% increase over the 2003 year-end balance. Total deposits
reached $356.9 million, an increase of $15.4 million, or 4.5% over year-end
2003.
DIVIDENDS
Cash dividends paid in 2004 were $0.30 per share, representing a 22.9% increase
over the previous year.
The Stewardship Financial Corporation also paid its seventh consecutive 5% stock
dividend in November 2004.
LOAN GROWTH
Once again the corporation experienced substantial loan growth. The commercial
mortgage sector led the way with a $21.1 million increase for the year, or 19.2%
more than the prior year. The commercial loan area was also active, increasing
year-end loans outstanding by $6.3 million for a 12.9% increase over the prior
year. The Home Equity and Consumer Loan Divisions continue to remain active,
generating both variable and fixed rate loan balances. The Residential Mortgage
Division experienced a decline in the number of customers refinancing existing
loans; however, it is experiencing a demand for more home purchase mortgages.
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o Annual Report 2004 l Rooted for Strength o
We are extremely pleased with the increase in loan volume as well as the quality
of the loan portfolio.
NEW PRODUCTS INTRODUCED
There were two new interest-only residential loan products
introduced. The first is an interest-only residential first mortgage and the
second is an interest-only home equity product. These products are ideal for
families with students in college or for individuals planning to move within a
few years. The underwriting is more stringent than normal; however, the
interest-only lending has proven to be very popular.
A new deposit product was also introduced. The Sterling Lifestyle Package of
Services is designed to serve the needs of customers age 55 and older. To
qualify, customers maintain combined balances of $10,000 or more at Atlantic
Stewardship. The Sterling Lifestyle offers a variety of benefits to encourage
customers to take advantage of many of our services. The Sterling Lifestyle has
been well received by customers and continues to generate core balances for the
Bank.
COMPLIANCE
The Board of Directors has implemented steps to comply with Corporate Governance
Regulations. Professional experts have been engaged to assist in meeting all
requirements mandated by the Sarbanes Oxley Act.
"On behalf of the Pequannock Township Food Pantry, I want to thank the Atlantic
Stewardship Bank once again for their generous monetary donation. The use of the
pantry has grown over the last year. In 2004, the pantry provided over 600 bags
of food and over $10,000 in gift certificates. In anticipation of less monetary
contributions for the coming year, several clients using the pantry have been
referred to other food pantries.
It is because of donations like yours that the food pantry is able to provide
food and gift certificates to residents of Pequannock Township. Without support
from the community, the food pantry would not exist. The Atlantic Stewardship
Bank is to be commended on its giving practices to the local communities in
which it operates. The families who use the food pantry are very grateful to
those who make their lives a little better.
Thank you again for the donation. God Bless the Atlantic Stewardship Bank, its
employees, and their families. May you continue to prosper and continue your
Tithing Program."
Barbara Cook
Pequannock Township Food Pantry
Pequannock, NJ
[PHOTO]
TITHING PROGRAM INCREASES 13.7%
As the Atlantic Stewardship Bank continues to grow and as earnings increase, our
unique Tithing Program increases as well.
The Bank shares ten percent of its earnings annually with Christian and local
civic organizations. As a result of the 2004 earnings, we were pleased to share
$582,000 with 345 non-profit organizations. Once again the Board of Directors
placed strong emphasis on recognizing local food banks to assist the communities
where the Bank offers branches.
We are pleased with the increasing awareness of the Atlantic Stewardship Bank's
Tithing Program in the communities we serve. This knowledge together with our
reputation of delivering high quality services enables us to continually expand
our customer base. We wish to thank our loyal customers for banking at the
Atlantic Stewardship Bank. We also sincerely thank our shareholders for their
loyal support.
Sincerely,
/s/Arie Leegwater
Arie Leegwater
Chairman of the Board of Directors
/s/ Paul Van Ostenbridge
Paul Van Ostenbridge
President and Chief Executive Officer
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o Stewardship Financial Corporation and Subsidiary o
THE BEACH CLUB
It's called the BEACH Club - short for Bank Employees Assisting CHarities. And
if ever there were a warm and sunny place to visit, this is it. BEACH Club
members volunteer their time, hands, and hearts to conduct and participate in a
wide range of activities throughout the year to benefit those in need. Often,
the BEACH Club receives the gracious help and support of Bank customers as well.
In addition to the regular schedule of activities, three additional projects
were added in 2004:
SCHOOL SUPPLY DONATIONS - In August, the Club collected school supply packs
created by Bank associates, for donation to inner city children via the
Bethlehem Ministries in Paterson. Over 100 packs were collected, each containing
a notebook, crayons, pens, pencils, and other school supplies.
WARMING UP AMERICA - In September and October, Club members participated in the
Warm-Up America Program (www.warmupamerica.com) by crocheting beautiful,
multicolored afghan blankets for donation to the Good Shepherd Mission in
Paterson. Some members even learned how to crochet just so they could
participate.
TSUNAMI RELIEF COLLECTION - As soon as the news broke on December 26, the BEACH
Club got busy. Collection boxes were placed in all the Bank's branches, to
remain there for donations throughout January, 2005. Afterwards, the donations
would be given to the American Red Cross International Response Fund.
[PHOTO]
SPECIAL HONORS AND RECOGNITION
ATLANTIC STEWARDSHIP BANK RECEIVES
HERMITAGE HUMANITARIAN AWARD
June 19, 2004 brought a warm, wonderful evening of dining and dancing under the
stars at the annual Hermitage Rose Ball in Ho-Ho-Kus, hosted by the Friends of
the Hermitage. The Atlantic Stewardship Bank was a guest of honor at the gala
event, and was presented with the Hermitage Humanitarian Award for 2004.
[PHOTO]
The Hermitage Humanitarian Award is presented each year to a person or
corporation who is constantly giving of their time, experiences, and wealth to
help others accomplish worthwhile goals. The Atlantic Stewardship Bank was
honored for its Tithing Program, as well as its support of the Friends of the
Hermitage educational programs.
The Hermitage is a National Historic Landmark and one of the nation's
outstanding examples of domestic Gothic Revival architecture. The historic
house-museum was visited during the Revolutionary War by General George
Washington, General Lafayette, Alexander Hamilton, and James Monroe among other
notables. It is also the site where Aaron Burr met and married Theodosia
Prevost. For more information contact: The Hermitage, 335 North Franklin
Turnpike, Ho-Ho-Kus, NJ 07423 or visit their website: www.thehermitage.org.
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o Annual Report 2004 l Rooted for Strength o
2004 TITHING PROGRAM RECIPIENTS
MEET SOME FRIENDS
Each year, the Atlantic Stewardship Bank's Tithing Program enables us to share a
portion of our blessings with hundreds of deserving organizations. Our tithe
recipients serve the Bank's local communities, and we applaud them for their
outstanding efforts. On this page we'd like to introduce two of our tithing
program recipients for 2004.
[PHOTO]
ST. PHILIP'S MINISTRY OF THE
UNITED METHODIST CHURCH
Paterson, NJ
When the children of St. Philip's Ministry arrive at the steps of their brand
new building, they touch one of the twelve community stones embedded in the wall
and declare, "Look how far God has brought us!"
Indeed, the ministry has come far and so have its people. St. Philip's now runs
a wide range of services to support children, adults, and families in the
Northside of Paterson. Their good works include three meals a day and
life-maintenance services for the homeless, a health-assistance program for the
poor and homeless, a daily social and evening recreational center for teens, a
children's summer camp, after-school learning and development for 165 children,
plus more.
"Thank you for your recent charitable contribution to the work of Sussex
Christian School. Gifts like yours are used to offset the rising costs of
Christian education. With your support, we will be able to continue to provide
affordable, Christ-based education to our community.
On behalf of the Association, we THANK YOU for your continuing financial and
prayer support of the Sussex
Christian School."
Eric Thiessen
Treasurer, Sussex Christian School
Sussex, NJ
We are blessed to help support this ministry that does so much to help others.
For more information contact St. Philip's Ministry, 9-11 North First Street,
Paterson, NJ 07522 or visit their website: http://stphilipsministry.org.
THE HOLLAND CHRISTIAN HOME
North Haledon, NJ
The Holland Christian Home is a retirement and support services community bound
together as a family by a common faith in Jesus Christ. For over a century, they
have served the needs of seniors with hearts to love and hands to help.
At the center of the Holland Christian Home's mission is LIFECARE - a continuum
of care given for the rest of residents' lives. Residents can enjoy as much
independence as they wish, with the peace-of-mind that comes from knowing a
skilled nursing unit is available on site at no additional cost if needed.
Residents enjoy warm fellowship, a home-like atmosphere, delicious meals,
diverse activities, as well as weekly worship in the Home's chapel.
We are pleased to include the HCH in our tithing program. For more information,
contact the Holland Christian Home, 151 Graham Avenue, North Haledon, NJ 07508
or visit their website: www.hollandchristianhome.org.
[PHOTO]
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o Stewardship Financial Corporation and Subsidiary o
OUR 2004 TITHING PROGRAM
Each one should use whatever gift he has received to serve others,
faithfully administering God's grace in its various forms.
1 PETER 4:10
Every year the Atlantic Stewardship Bank makes hundreds of donations under the
Bank's unique Tithing Program. Our tithe recipients often ask us about this
program... what is it and how did it come about?
The concept of tithing is a Biblical one, dating as far back as Genesis (14:20,
28:22), and detailed in Leviticus (27:30-33). Tithing means giving or devoting
one-tenth to God. As faithful stewards of God's blessings, the Bank takes
tithing very seriously. In fact, the Tithing Program is an integral part of the
Bank's corporate by-laws, and provides for the Bank to share 10% of its earnings
annually with Christian and local non-profit organizations selected by the
Bank's Board of Directors.
In 2004, the Bank made its largest tithe to date, sharing $582,000 with 345
organizations. This was an increase of $70,000 over 2003. Since the program's
inception in 1988, the Bank has surpassed $3.5 million in total tithe donations.
[PHOTO]
It is because of our ever-growing family of loyal customers that the Bank can
make these donations year after year. As the Bank grows, so does our ability to
help others.
Stewardship Financial Corporation - 2004 Tithe (In Thousands)
2004 $ 582
2003 $ 512
2002 $ 425
2001 $ 351
2000 $ 320
[PHOTO]
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o Annual Report 2004 | Rooted for Strength o
WE ARE PLEASED TO HAVE ASSISTED THE FOLLOWING ORGANIZATIONS WITH OUR 2004 TITHE
DISTRIBUTION:
*Africa Inland Mission
*American Christian School
*Baptist Haiti Mission
*Bergen County Habitat
For Humanity
*Bessie Green Community, Inc.
*Bethany Christian Services
*Bethlehem Ministries
*Bridgeway Community Church
Food Pantry
*Brookdale Christian School
*Calvary Christian Academy
*Calvin College
*Calvin Theological Seminary
*Cary Christian Center, Inc.
*Christian Health Care Center
*Christian Reformed
World Relief Committee
*Christian Schools International Foundation Trust Fund
*CUMAC-ECHO, Inc.
*Dawn Treader School (ECUMP)
*Eastern Christian Children's Retreat
*Eastern Christian School Association
*Eastern Home Mission Board
*Elim Christian School Foundation
*Eva's Village
*Faith Ministries of White Lake NY
*Father's Cupboard
*Fellowship Homes
*Fig Orchard
*First Choice Women's Resource Centers
*Florence Christian Home
*Friendship Ministries
*Gideons International Lakeland Camp
*Gideons International
Passaic Valley Camp
*Gideons International Paterson Camp
*Gideons International Ramapo Camp
*Good Shepherd Mission, Inc.
*Goshen Christian School
*Grace Counseling Ministries
*Harvest Outreach Ministries
*Hawthorne Christian Academy
*Hawthorne Ecumenical
Social Service Fund - Food Pantry
*Holland Christian Home
*Hope For New York
Mercy Ministries
*International Networx
*Life Advocates, Inc.
*Life Givers Network
*Little Sisters of The Poor
*Lord's Day Alliance of NJ
*The Luke Society
*Madison Avenue Baptist Church/ Academy
*Madison Avenue Crossroads Community Ministries
*Mary Help of Christian Academy
*Mid-Atlantic Mercy Ministries
*Mississippi Christian Family Services, Inc.
*Mustard Seed School
*Netherlands Reformed
Christian School
*New City Kids
*New Hope Community Development Center
*New Jersey Family Policy Council
*North Jersey Home School Association
*Northside Community Christian Reformed Church - Day Camp
*Northside Community Christian Reformed Church - Food Pantry
*Northwest Christian School
*Operation Double Harvest School, Haiti
*Partners For Christian Development
*Paterson Habitat For Humanity
*Prison Fellowship Ministries
*Prison Fellowship Ministries
Angel Tree Program
*RACOM Associates -
Back to God Hour
*Reformed Bible Church
*Ridgewood YMCA
*Ringwood Christian School
*Ron Hutchcraft Ministries
*St. Anthony's School
*St. Luke's Community
Development Center
*St. Philip's - Camp Youth Development Program & Coffee Pot Ministry
*St. Paul's Community Development Corp.
*Siena Village at Wayne
*Sonshine Christian Academy
*Star Of Hope Ministries, Inc.
*Strategic Prayer Command
*Sussex Christian School
*Teen Challenge
*The Salvation Army -
Paterson Branch
*Touch The World Ministries
*Trinity Christian School
*United Paterson Development FBO After School Literacy &
Safe Space Programs
*Unity Christian Reformed Church After School Program
*Veritas Christian Academy
*Waldwick Seventh Day
Adventist School
*Wayne Interfaith Network
*Westminster Theological Seminary
*World For Christ Crusade, Inc.
*Wyckoff Christian Pre-School
*Wyckoff Family YMCA
*Wyckoff Reformed Church
Food Pantry
* Denotes Christian Charity
"Thank you for your recent gift for the Business Drive at Calvin College. We
appreciate your thoughtful support of Calvin and its students.
As we look to the future, our goal is to equip our students to be 'agents of
renewal' in our world. The Calvin community seeks to encourage the values of
initiative, accountability, respect, excellence, integrity, and innovation in
each of our graduates. Your gift will help us foster these qualities in our
students as well as strengthen Calvin's position as one of the finest liberal
arts colleges in the country.
Calvin's role - developing and directing young minds for lives of leadership and
service - is made easier through continued support from businesses like yours.
Thank you for joining us in this important and challenging work."
Gaylen J. Byker
President, Calvin College
Grand Rapids, MI
ADDITIONALLY, THE BANK HAS PROVIDED SUPPORT THROUGHOUT 2004 TO THE FOLLOWING
ORGANIZATIONS:
*Abundant Life Worship Center
American Cancer Society
Bergen County
*American Family Association
American Heart Association
American Legion Auxiliary
American Red Cross
Bergen Crossroads
Association for Special Children
and Families
Bergen Community College Foundation
Bergen County Christmas In April - Rebuilding Together
Bergen County Community Housing In Partnership (CHIP)
Bergen County Special Olympics Team
Bergen Philharmonic Orchestra
Bergen Regional Medical Center Foundation
Boys & Girls Club of Hawthorne
Boys & Girls Club of Paterson
Boy Scouts of America
Northern NJ Council
Calvin Coolidge School PTO
Camp Hope of Hackensack Outreach (New Hope)
*Cathedral Choir
Center for Food Action
*Center for Great Expectations
Chancellor Academy
Children's Aid & Family Services, Inc.
Chilton Memorial Hospital Foundation
*Christian Overcomers
*Christian Radio Station WAWZ
Clifton Cobras Softball Organization
Cody's Foundation
Community Blood Services Foundation
Community Meals, Inc.
Co-Operative Nursery School
of Ridgewood
Creative Living Counseling Center
*Crispus Attucks School
Cystic Fibrosis Foundation
Daccks Group for Supportive Housing
Deborah Hospital Foundation
*DePaul Catholic High School
*Don Bosco Prep High School
Emmanuel Cancer Foundation
Executive Women's Golf Association Northern NJ Chapter
Flow Follies Forum School
Foundation For Free Enterprise
Foundation For The Handicapped
Friends of The Hermitage
Friends of The Louis Bay 2nd Library
Friends of The Midland Park
Library Gift of Life - Rotary Clubs
in District 7490
Girl Scout Council of Bergen County
*Grace Church of Ridgewood Mission Trip
9
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(Continued)
Hawthorne Baseball/
Softball Association
Hawthorne Board of Health -
Food Pantry
Hawthorne Caballeros
Hawthorne Chamber of Commerce
Hawthorne Community Library Foundation, Inc.
Hawthorne Cubs Football Association
Hawthorne Domestic Violence Response Team
Hawthorne Education Foundation
Hawthorne High School
Hawthorne High School PTO
Hawthorne High School - Share
Hawthorne Hurricanes
Hawthorne Knights of Columbus
Hawthorne Lions Club
Hawthorne PBA Local #200
Hawthorne Rotary Club
Hawthorne Soccer Association
Hawthorne Special Recreation
Hawthorne Thomas Jefferson
School PTO
Hawthorne VFW District #1
Hawthorne Volunteer Fire Department
Hawthorne Volunteer Fire Department Ladies Auxiliary
Hawthorne Washington School PTO
Hawthorne William B. Mawhinney Memorial Ambulance Corps.
*Healing The Children Midlantic, Inc.
*Hispanic Multi-Purpose
Service Center
*Hosanna Choir Committee
Ho-Ho-Kus Public School
*Holy Cross Nursery School
Hudson Milestones
Hugh O'Brian Youth Leadership (HOBY)
*Interchurch Softball League
*Interfaith Shelter & Community Outreach
Jack Elwood Fund
Jamboree Scholarship Fund, Inc.
*Jersey City Kids
Jewish Family & Children's Service
of Wayne
Jerry Speziale Community Outreach Foundation
Joni and Friends
*Kingdom of Might Ministries
Knights of Columbus
Ramapo Valley Council
Lance Armstrong Foundation
Leukemia & Lymphoma Society
The Love Fund of Midland Park
Lupus Foundation of America
NJ Chapter
Mackenzie Foundation
*Mattaniah Choir Committee
Midland Park Ambulance Corps.
Midland Park Baseball Association
Midland Park Chamber of Commerce
Midland Park Lions Club
Midland Park/Ho-Ho-Kus PBA
Midland Park Volunteer Fire Co.
& Auxiliary
Mohawk Athletic Club of Hawthorne
Molly Foundation for Juvenile Diabetes
Montclair State University
Morris County Boys & Girls Club
*New Bridge Services, Inc.
*New Jersey Christian Ministries
New Jersey Citizen Action
New Jersey Community Development Corporation
New Jersey Community Loan Fund
New Jersey Landscape Contractors Association
New Jersey Organization
of Cystic Fibrosis
Northern New Jersey Youth Orchestra
North Haledon Fire Company #1
North Jersey Chorus
North Jersey Eagles
*North Jersey Home School Association Choral Program
*Our Lady of the Magnificat
*Our Lady of the Valley School
Paramus Association For Competitive Gymnastics
Paramus Girl's Softball Association
Pascack Valley Hospice
Passaic County Council on Alcohol & Drug Abuse
Passaic County PBA Local #197 & #286
*Paterson Christian Community Development
*Paterson YMCA
Paterson Youth Photography Project
People to People Ambassador Program
*Pequannock Holy Spirit School
Pequannock Piranhas Swim Team
Pequannock Township First Aid & Rescue Squad
Pequannock Township Food Pantry
Pequannock Township High School
Pequannock Township High School Marching Band
Pequannock Township High School Panther Football
Pequannock Township Little League
Pequannock Township PBA
Local #172
Pequannock Township Public Library
Pequannock Township Regional Chamber of Commerce
Pequannock UNICO
Pequannock Volunteer Fire Department Engine #1
Pequannock Volunteer Fire Department Engine #2
The Phoenix Center
Pompton Falls Fire Department #3
Project Children
Project Lovematch
*Project Timothy
Prospect Park Volunteer
Fire Department
*Puritan Reformed
Theological Seminary
Ramapo High School Boosters Association
Ridgewood Baseball Association
Ridgewood Chamber of Commerce
Ridgewood Choral
Ridgewood Downtown
For The Holidays
Ridgewood Education Foundation
Ridgewood Emergency Services
Ridgewood Fire Department Association
Ridgewood Fourth of July Committee
Ridgewood Gilbert & Sullivan
Opera Company
Ridgewood High School
Ridgewood Lacrosse Association
*Ridgewood Our Lady of
Mount Carmel
Ridgewood PBA Local #20
Ridgewood Public Library
Ridgewood Rotary Club
Ridgewood SHARE
Ridgewood Softball
Ridgewood Somerville-Hawes
Dads' Night
*Ridgewood United Methodist Church
Ridgewood Woman's Club
*Ridgewood YWCA/YMCA
Rotary Foundation
Annual Programs Fund
Ruth Estrin Goldberg Memorial
Saddle River Day School Development Fund
*St. Joseph's Church - Haiti Ministry
*St. Joseph's Paterson Hospital Foundation
*St. Leon Armenian Church
*St. Luke's Church
*St. Philip's Academy
*St. Spyridon Greek Orthodox Church
Salamm Shrine Circus Program
*Several Sources Foundation
Social Service Association of Ridgewood & Vicinity
Sons of the American Legion Post
Sounding Bells
Special Olympics of New Jersey
Special Projects for Underprivileged and Disabled
Suburban Woman's Club
of Pompton Plains
Summit Speech School
Temple Israel
The Arc of Bergen
And Passaic Counties
The Order of the Lamp
*Timothy Christian School
Tomorrow's Children's Fund
Torpedoes Soccer Club
Tri County Chamber
of Commerce-Wayne
*Turning Point
Upper Saddle River-Allendale Football & Cheerleading Association
*United Methodist Church in Wayne
Valley Hospital
Veritans Camp
Waldwick Baseball Association
Waldwick Borough
Waldwick Chamber of Commerce
Waldwick Education Foundation
Waldwick Fire Department
Waldwick High School
Waldwick High School Booster Club
Waldwick Julia A. Traphagen
School PTO
Waldwick Lions Club
Waldwick PBA
Waldwick Public Library
Waldwick Recreation Trust Fund
Waldwick Volunteer Ambulance Corps.
Wayne Adult Community Center
Wayne Albert Payson Terhune School, PTO
Wayne Boys And Girls Club
Wayne Community Volunteer
Fire Company
Wayne Counseling
and Family Services
Wayne Hills High School
Wayne Hills High School
Band Boosters
Wayne Lafayette School PTO
Wayne Lions Club
Wayne Little League
Wayne Little League - NJ District 2
Wayne Police Athletic League
Wayne Public Library
Wayne Rotary Club Foundation
*Wayne St. Joseph's Hospital Foundation
Wayne Schuyler Colfax PTO
Wayne Township Memorial
First Aid Squad
Wayne Township Parks and Recreation Department
Wayne Valley High School Football Booster Club
Wayne Valley Ice Hockey
Booster Club
West Bergen Mental Healthcare, Inc.
*Westside/Mt. Bethel Baptist
MLK Jr. Day
William Paterson University
Wyckoff Education Foundation
Wyckoff Fire Department
Wyckoff Fire Department
Ladies Auxiliary
Wyckoff-Midland Park Rotary Club
*Wyckoff Reformed Church
Youth Ministry
Wyckoff Volunteer Ambulance Corps.
YM-YWHA of North Jersey
*YWCA of Bergen
Youth Consultation Service
Youth Self Development, Inc.
* Denotes Christian Charity
10
o Annual Report 2004 l Rooted for Strength o
CUSTOMER CORNER
The Atlantic Stewardship Bank is well-known for its outstanding customer
service, and that's no accident. It's our duty. We are rooted in God's Word, and
it's a blessing for us to hold our customers in high regard, give them respect,
and get to know each and every one by name. Our customers are our lifeblood, and
we believe they should be treated as such. So when they take the time to tell us
of their appreciation, it truly makes our day.
[PHOTO]
"We're a family business that's over 50 years old. We've been banking with ASB
for about 10 years, and all my accounts, both business and personal, are with
them. Their service is exceptionally personal; they know my name and they know
my employees' names. With ASB, I know they're looking out for me. I'm not
forgotten and I'm not just a number, and that's very, very important to me. So
much so that when other banks ask for my business, I ask them how big of a
crowbar they brought along, because they'd need an awfully big one to pry me
away from Atlantic Stewardship!"
Bob Seela
Seela's Paint & Wallpaper, Inc., Wayne, NJ
- --------------------------------------------------------------------------------
[PHOTO]
"I've been performing a ministry of illusions and puzzles with a Christian
gospel message for about 45 years, and I've been banking with Atlantic
Stewardship for about 17 of those years. The bank is always there to help me.
They're pleasant, they smile, and they remember me - they always follow up with
genuine concern and ask me how things are going. The bank has become like a
family to me. Plus, it's great to see them give some of their profits to
charitable organizations.I do a lot of charity work, and to see a bank share its
profits like that is absolutely wonderful."
Peter Everitt
Illusionist with a Message, Hawthorne, NJ
- --------------------------------------------------------------------------------
"We're a medium size business that supplies quality linen products and
accessories throughout northern New Jersey. We've been with Atlantic Stewardship
Bank since they started up in 1985. They're friendly and personal, and they take
good care of me. And their service is top-notch; very attentive. I've heard
nightmare stories from my customers about other banks and how they're always
changing, but in my 19 years of dealing with ASB I've never been disappointed. I
try to steer as many of my customers as possible to Atlantic Stewardship. I
don't know any other bank that could stand up to them."
Herb Allen, Jr.
Allen Linen Supply, Paterson, NJ
[PHOTO]
"Mississippi Christian Family Services, Inc. is pleased to accept
your donation as part of your Tithing Program. This letter serves
as appreciation for your dedication and support of our ministry.
Your support aids the continuation of services to disabled persons, as we
provide a training program that extends itself to helping the disabled live and
work independently within the community. Thank you for your time and
consideration of those we love to serve.
Please continue in prayer for the work of this ministry."
Susie Evans
Executive Director, Mississippi Christian Family Services, Inc.
Rolling Fork, MS
11
o Stewardship Financial Corporation and Subsidiary o
PRODUCTS AND SERVICES
The Atlantic Stewardship Bank offers a complete line of products and services
for individuals and businesses. Online banking, automatic bill payment, and
debit cards complement the traditional line of checking, savings, and
certificates of deposit.
Additionally, we offer an ample line of lending products designed to assist
customers in northern New Jersey. Lending products include car loans, mortgages,
home equities, business loans, and credit cards. We offer a complete range of
commercial services appropriate for businesses of all sizes; our relationship
managers will help you select the best checking and lending products to serve
your business needs.
NEW FOR 2004
EQUITY +PLUS
Maximize the equity you've built up in your home, and get instant cash resources
that you can access at any time by simply writing a check. Equity +plus is an
interest-only home equity line of credit with no principal reduction required
during the initial five-year term of the loan. You pay only the monthly interest
that will float at the low prime rate.
The interest-only feature is perfect for short-term borrowing needs as it allows
the use of the equity in your home at a lower monthly payment than a
conventional home equity line of credit.
INTEREST-ONLY
FIXED RATE MORTGAGE
Maximize your purchasing power by qualifying at the interest-only payment. Make
interest-only payments for the first 15 years, and then a monthly payment based
on a 15 year loan for the remaining term on the then unpaid principal balance.
During the interest-only period, you can prepay the principal at any time and
reduce your next monthly payment.
It's great for borrowers wanting more control of cash flow, first time
homebuyers, relocation borrowers going into a high-cost area, such as New
Jersey, and self-employed borrowers with seasonal income variances.
STERLING LIFESTYLE CLUB
If you're 55 or more you've learned to recognize a good thing when you see it.
So have a look at the Sterling Lifestyle Club.
The Sterling Lifestyle Club Account is a fully liquid, interest-bearing checking
account for seniors, with three balance tiers and a premium interest rate. A
minimum daily balance of $10,000 must be maintained in the Sterling Lifestyle
Club Account or in linked accounts to avoid a $10.00 monthly service fee. Up to
five accounts may be linked, including checking, statement savings, CDs, IRAs,
Money Market, and PGA accounts.
In addition to the many free services, Sterling Lifestyle CDs pay 0.30% over
ASB's current rates for an 18 to 60 month Power CD.
You'll enjoy a wide range of Sterling Lifestyle benefits, including unlimited
monthly checking, free ASB logo checks, no annual fees for ASB Debit and Credit
Cards, plus a lot more.
IDEAL CHECKING
Why is this free personal checking account called Ideal? Because with all the
benefits and bonuses, it's an ideal checking account for just about anyone.
With an opening balance of just $25, your first year is free (no monthly service
fee). Your first order of ASB logo checks is free, and so is online banking.
Plus, you'll get a $25.00 credit at the time of opening. Get another $25.00
credit upon approval of a MasterMoney Debit Card. And another $25.00 credit if
you sign up for Direct Deposit within 3 months. And still another $25.00 credit
if within 3 months you enroll in Payment Partner and make 3 bill payments.
After your first year, maintain just a $50 minimum balance and there are no
service fees.
That's why it's called Ideal!
[PHOTO]
For information about Atlantic Stewardship Bank products and services, speak
with an ASB relationship manager or visit us on the web, at www.asbnow.com.
12
o Annual Report 2004 l Rooted for Strength o
OFFICERS
STEWARDSHIP FINANCIAL CORPORATION OFFICERS
Arie Leegwater
Chairman of the
Board of Directors
John L. Steen
Vice Chairman of the
Board of Directors
Paul Van Ostenbridge
President and
Chief Executive Officer
Robert J. Turner
Secretary
Julie E. Holland
Vice President and Treasurer
Timothy G. Madden
Vice President
Angela Turi
Assistant Vice President
Ellie King
Assistant Secretary
"Thank you for your gift!
Giving to the Luke Society is an effective way to fund indigenous pastors,
nurses, and physicians around the world. Each in their communities, our
directors are living out their vision to provide spiritual and physical healing
to their own people. By teaching health education and providing quality clinical
care, they are fighting the effects of poverty and saving lives. Best of all,
they are sharing the gospel, giving hope for eternal life.
Thank you for your support of the Luke Society!"
The Luke Society
Sioux Falls, SD
ATLANTIC STEWARDSHIP BANK OFFICERS
[PHOTO]
Paul Van Ostenbridge
President and
Chief Executive Officer
Julie E. Holland
Vice President and Treasurer
M. Bernard Joustra
Vice President
Timothy G. Madden
Vice President
Alma M. Baxter
Assistant Vice President
James S. Donado
Assistant Vice President
Robert A. Giannetti
Assistant Vice President
Diane Ingrassia
Assistant Vice President
John S. Krantz
Assistant Vice President
Elizabeth M. Lamb
Assistant Vice President
James O'Brien
Assistant Vice President
Cynthia Perrotta
Assistant Vice President
Richard D. Powers
Assistant Vice President
Raymond J. Santhouse
Assistant Vice President
Gail K. Tilstra
Assistant Vice President
Angela P. Turi
Assistant Vice President
David J. Van Lenten
Assistant Vice President
Christine Fiduccia
Assistant Secretary
Ellie King
Assistant Secretary
Grace Lobbregt
Assistant Secretary
Kristine Rasile
Assistant Secretary
Louise H. Rohner
Assistant Secretary
David A. Struck
Assistant Secretary
Patricia M. Weinstein
Assistant Secretary
Virginia M. Lowe
Compliance Officer
Judi Rothwell
Administrative Assistant
Jean M. Schaver
Administrative Assistant
Mary Beth Steiginga
Administrative Assistant
William J. Tussi
Administrative Assistant
Peggy Weber
Administrative Assistant
Jerry Wells
Administrative Assistant
Cynthia Woods-Daisley
Administrative Assistant
13
Stewardship Financial Corporation and Subsidiary
STEWARDSHIP FINANCIAL CORPORATION
SHAREHOLDER VALUE - ORIGINAL INVESTOR
The graph below portrays the growth in stock value for investors who purchased
stock when it was originally issued.
Prior to the establishment of the Stewardship Financial Corporation holding
company, the stock was originally issued in the name of Atlantic Stewardship
Bank. The initial offering required a minimum purchase of 200 shares at a price
of $10.00 per share.
The Corporation declared its first cash dividend in 1990 and cash dividends have
since been paid annually. To assist interested shareholders in purchasing
additional shares of stock, the Board of Directors introduced a Dividend
Reinvestment Plan in 1994. The graph assumes that shareholders have taken
advantage of the Dividend Reinvestment Plan. Adjustments have been made for
stock splits and stock dividends.
The original investments of 200 shares have grown to 1,486 shares, and based on
year-end market price, the annual growth rate equates to 15.6%.
[GRAPHIC OMITTED]
CORPORATE ATTORNEYS
Stewardship Financial Corporation
McCarter & English, LLP
Attorneys at Law
4 Gateway Center
Newark, NJ 07102
973-622-4444
Atlantic Stewardship Bank
Hanse & Hanse
2035 E. Hamburg Turnpike
Wayne, NJ 07470
973-831-8700
STEWARDSHIP FINANCIAL CORPORATION STOCK
We are pleased to advise the following brokers make a market in Stewardship
Financial Corporation stock:
Highlander Capital Group, Inc.
119 Littleton Road
Parsippany, NJ 07054
973-402-2700
McConnell, Budd & Romano
365 South Street
Morristown, NJ 07960
800-538-6957
Ryan Beck & Company
220 South Orange Avenue
Livingston, NJ 07039
800-342-2325
and
222 Lakeview Avenue, 7th Floor
West Palm Beach, FL 33401
800-793-7226
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL SUMMARY OF SELECTED FINANCIAL DATA
December 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Earnings Summary:
Net interest income ................... $ 16,367 $ 14,324 $ 12,507 $ 10,866 $ 10,349
Provision for loan losses ............. (540) (425) (160) (420) (410)
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses .......... 15,827 13,899 12,347 10,446 9,939
Noninterest income .................... 2,726 2,894 2,250 1,695 1,279
Noninterest expense ................... 12,501 11,394 9,847 8,279 7,558
--------- --------- --------- --------- ---------
Income before income tax expense ...... 6,052 5,399 4,750 3,862 3,660
Income tax expense .................... 2,204 1,908 1,634 1,304 1,240
--------- --------- --------- --------- ---------
Net income ............................ $ 3,848 $ 3,491 $ 3,116 $ 2,558 $ 2,420
========= ========= ========= ========= =========
Common Share Data: (1)
Basic net income ...................... $ 1.15 $ 1.06 $ 0.96 $ 0.81 $ 0.77
Diluted net income .................... 1.14 1.04 0.96 0.80 0.77
Cash dividends declared ............... 0.30 0.25 0.21 0.18 0.15
Book value at year end ................ 9.05 8.17 7.29 6.47 5.78
Average shares outstanding ............ 3,341 3,297 3,231 3,171 3,123
Shares outstanding at year end ........ 3,366 3,323 3,267 3,176 3,152
Dividend payout ratio ................. 26.46% 23.37% 21.41% 21.81% 18.84%
Selected Consolidated Ratios:
Return on average assets .............. 0.95% 0.97% 1.03% 1.01% 1.11%
Return on average stockholders' equity 13.48% 13.68% 14.01% 13.09% 14.52%
Average stockholders' equity as
a percentage of average total assets 7.06% 7.12% 7.36% 7.74% 7.67%
Tier-I capital leverage (2) ........... 9.08% 8.89% 7.02% 7.45% 7.87%
Tier-I risk based capital (3) ......... 12.48% 12.93% 10.53% 10.65% 11.01%
Total risk based capital (3) .......... 13.57% 14.03% 11.74% 11.90% 12.26%
Allowance for loan loss to total loans 1.11% 1.10% 1.24% 1.40% 1.30%
Nonperforming loans to total loans .... 0.48% 0.42% 0.62% 0.52% 0.45%
Selected Year-end Balances:
Total assets .......................... $ 424,306 $ 401,768 $ 331,087 $ 278,523 $ 231,159
Total loans, net of allowance
for loan loss ...................... 292,909 258,776 213,579 182,930 169,052
Total deposits ........................ 356,918 341,538 302,735 255,684 210,135
Stockholders' equity .................. 30,460 27,149 23,817 20,553 18,208
(1) All share and per share amounts have been restated to reflect a 5% stock
dividend paid November 2000, 2001, 2002, 2003 and 2004 and a 3 for 2 stock
split that occurred in July 2003.
(2) As a percentage of average quarterly assets.
(3) As a percentage of total risk-weighted assets.
A-1
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This section provides an analysis of the Stewardship Financial Corporation's
(the "Corporation") consolidated financial condition and results of operations
for the years ended December 31, 2004, 2003 and 2002. The analysis should be
read in conjunction with the related audited consolidated financial statements
and the accompanying notes presented elsewhere herein.
This annual report 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," "plan," "estimate," 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 annual report, "we" and "us" and "our" refer to
Stewardship Financial Corporation and its consolidated subsidiary, Atlantic
Stewardship Bank, depending on the context.
Introduction
The Corporation, organized in January 1995, as a business corporation under the
laws of the State of New Jersey, was established by the Board of Directors of
Atlantic Stewardship Bank (the "Bank") to become a holding company for the Bank.
The shareholders of the Bank approved the holding company formation at the
annual meeting in 1996. After obtaining approval and submitting appropriate
applications, the Corporation, on November 22, 1996, acquired all of the shares
of the Bank in exchange for its own shares, on a share per share basis. The
Bank, and its subsidiary, Stewardship Investment Corp., is now the wholly-owned
subsidiary of the Corporation. The Corporation also formed a second subsidiary
in 2003, Stewardship Statutory Trust I (the "Trust"). The Trust was formed to
issue Trust Preferred Securities to enhance the capital position of the
Corporation. The Trust is not consolidated with the Corporation's financial
statements due to the adoption of Financial Accounting Standards Board (FASB)
Interpretation No. 46 (revised December 2003) "Consolidation of Variable
Interest Entities" ("FIN 46R").
The Corporation conducts a general commercial and retail banking business
encompassing a wide range of traditional deposit and lending functions along
with the other customary banking services. Stewardship Investment Corporation is
a wholly-owned nonbank subsidiary of Atlantic Stewardship Bank, whose primary
business is to own and manage the Bank's investment portfolio. The Corporation
earns income and generates cash primarily through the deposit gathering
activities of the branch network. These deposits are then utilized to fund the
Corporation's lending and investing activities.
The Corporation is affected by the overall economic conditions in northern New
Jersey, interest rate and yield curve environment, and the overall national
economy. These factors are relevant because they will affect our ability to
attract specific deposit products, our ability to invest in loan and investment
products, and our ability to earn acceptable profits without incurring increased
risks.
When evaluating the financial condition and operating performance of the
organization, management reviews historical trends and peer comparisons of the
growth of the organization, asset and deposit concentrations, interest margin
analysis, adequacy of loan loss reserve and loan quality performance, adequacy
of capital under current positions as well as to support future expansion,
adequacy of liquidity, and overall quality of earnings performance.
The Corporation has developed a strong deposit base with good franchise value.
One of our challenges is to continue to grow the existing branch levels, explore
new branch opportunities, provide adequate technology enhancements to achieve
efficiencies and provide strong products, and provide the highest level of
customer service.
The Corporation implemented a strategy to raise capital during 2003 to support
the future growth of the organization. In September 2003, the Corporation formed
a new subsidiary, Stewardship Statutory Trust I (the "Trust"). The Trust, a
statutory business trust, issued $7.0 million Fixed/Floating Rate Capital
Securities ("Capital Securities") due September 17, 2033. The proceeds from this
issuance were used to purchase from the Corporation, $7.2 million of
Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures
("Debentures") also maturing September 17, 2033. The Capital Securities and the
Debentures both bear a fixed interest rate of 6.75% until September 17, 2008 and
thereafter shall float quarterly at a rate of 3-Month LIBOR plus 2.95%. Both the
Capital Securities and the Debentures are redeemable quarterly beginning
September 17, 2008. In addition, the Debentures are included in the financial
statements of the Corporation in accordance with FIN 46R.
The proceeds from the Debentures were use to provide a capital infusion into the
Bank and to purchase investment securities. The Corporation purchased 1.5
million shares of common stock of the Bank at $20.00 per share. In December
2003, the
A-2
Corporation entered into a $20.0 million leveraging strategy to help cover the
cost of raising capital. The leveraging strategy consisted of $20.0 million in
Federal Home Loan Bank ("FHLB") borrowings, the proceeds of which were utilized
to purchase U.S. government sponsored agency and mortgage-backed securities.
Recent Accounting Pronouncements
On September 30, 2004 the Financial Accounting Standards Board ("FASB") issued
Staff Position Emerging Issues Task Force ("EITF") issue No. 03-01, "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-temporary impairments as required by existing authoritative
literature. The disclosure guidance in paragraphs 21 and 22 of EITF Issue No.
03-01 remains effective. The delay will be superseded concurrent with the final
issuance of EITF Issue No. 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.
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 153, "Exchanges of Nonmonetary Assets," which amends APB Opinion
No. 29, "Accounting for Nonmonetary Transactions." SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in Opinion No. 29 and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. It is not expected that the adoption of SFAS No.
153 will have a material impact on the financial condition or results of
operations of the Corporation.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related guidance. SFAS No. 123 (revised 2004) established
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. This Statement also establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans. This statement is
effective for public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The adoption of SFAS No. 123 (revised 2004) is not expected to
have a material impact on our financial condition or results of operations.
Critical Accounting Policies And Estimates
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," is 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, 2004 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. This critical policy and its
application are periodically reviewed with the Audit Committee and the Board of
Directors.
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, given 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, which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's allowance
for loan losses. Such agencies may require the Corporation to make additional
provisions for loan losses based upon information available to them at the time
of their examination.
A-3
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 experiences 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.
Earnings Summary
The Corporation reported net income of $3.8 million, or $1.15 basic earnings per
share, for the year ended December 31, 2004, an increase of $357,000, or 10.2%,
above the $3.5 million recorded for 2003. Earnings for 2003 had increased
$375,000, or 12.0%, over the 2002 earnings of $3.1 million. Earnings have
increased in both years as a result of increases in net interest income offset
by increases in noninterest expense.
The Federal Reserve began a period of measured increases in interest rates in
June 2004. The targeted federal funds rate began the year at 1.00% and increased
0.25% in June, August, September, November, and December, ending the year at
2.25%. This period of rising interest rates increased the earnings on liquid
short term funds, improved earnings on variable rate assets and on new fixed
rate assets but put pressure on costs of deposits. The Corporation's net
interest income increased $2.0 million. An increase in the average loan and
investment volume as well as an improvement in net interest spread contributed
to this increase.
The return on average assets decreased in 2004 to 0.95% from 0.97% in 2003. The
return on average equity decreased to 13.48% in 2004 from 13.68% in 2003.
Results of Operations
Net Interest Income
The Corporation's principal source of revenue is the net interest income derived
from the Bank, which represents the difference between the interest earned on
assets and interest paid on funds acquired to support those assets. Net interest
income is affected by the balances and mix of interest-earning assets and
interest-bearing liabilities, changes in their corresponding yields and costs,
and by the volume of interest-earning assets funded by noninterest-bearing
deposits. The Corporation's principal interest-earning assets are loans made to
businesses and individuals, investment securities, and federal funds sold.
In 2004, net interest income, on a tax equivalent basis, increased to $16.7
million from $14.6 million in 2003, an increase of $2.0 million, or 13.7%. This
was caused by an increase of $9.2 million, or 11.3%, in net average
interest-earning assets (average interest-earning assets less average
interest-bearing liabilities).
Interest income, on a tax equivalent basis, increased $2.2 million, or 11.5%,
during 2004 to $21.4 million from $19.2 million earned during 2003. The increase
was due to an increase in the average volume of interest-earning assets
partially offset by a decrease in yields on interest-earning assets. Average
interest-earning assets increased $43.7 million in 2004, or 12.9%, over the 2003
amount with average loans attributing $32.8 million of the increase due
primarily to the Corporation's competitiveness within the marketplace and the
attractive level of interest rates.
Interest expense increased $194,000, or 4.2%, during 2004 to $4.8 million. The
increase was due to an increase in average interest-bearing liabilities of $34.5
million, or 13.3%, to $292.8 million during 2004. Yields on interest-bearing
liabilities decreased to 1.63% during 2004 from 1.78% during 2003. Despite
customer movements to interest bearing deposits, average noninterest-bearing
demand deposits increased $8.2 million, or 11.3%, to $80.9 million during 2004.
In 2003, net interest income, on a tax equivalent basis, increased to $14.6
million from $12.8 million in 2002, an increase of $1.8 million, or 14.2%.
Interest income, on a tax equivalent basis, increased $1.1 million, or 6.3%,
during 2003 to $19.2 million from $18.1 million earned in 2002. The increase was
due to an increase in the average volume of interest-earning assets partially
offset by a decrease in yields on interest-earning assets. Average
interest-earning assets increased $54.1 million in 2003, or 18.9%, over the 2002
amount. Interest expense decreased $680,000 or 12.9%, during 2003. The decrease
was due to the declining interest rate environment partially offset by an
increase in average interest-bearing liabilities. Average noninterest-bearing
demand deposits increased $12.9 million, or 21.6%, to $72.7 million during 2003.
The following table reflects the components of the Corporation's net interest
income for the years ended December 31, 2004, 2003 and 2002 including, (1)
average assets, liabilities, and stockholders' equity, (2) interest income
earned on interest-earning assets and interest expense paid on interest-bearing
liabilities, (3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, and (4) net yield on
interest-earning assets. Nontaxable income from investment securities and loans
is presented on a tax-equivalent basis assuming a statutory tax rate of 34% and
compliance with Section 291 of the Internal Revenue Code for 2004, 2003 and
2002. This was accomplished by adjusting this income upward to make it
equivalent to the level of taxable income required to earn the same amount after
taxes.
A-4
2004 2003 2002
----------------------------- ---------------------------- ----------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
--------- -------- -------- --------- -------- ------- --------- -------- -------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) .......................... $ 275,334 $ 17,346 6.30% $ 242,530 $ 16,091 6.63% $ 198,737 $ 14,673 7.38%
Taxable investment securities (1) .. 84,641 3,101 3.66 59,097 1,929 3.26 41,026 1,970 4.80
Tax-exempt investment
securities (1) (2) ............... 20,134 952 4.73 20,385 1,051 5.16 19,766 1,075 5.44
Other interest-earning assets ...... 3,270 48 1.47 17,680 168 0.95 26,106 380 1.46
--------- -------- -------- --------- -------- ------- --------- -------- -------
Total interest-earning assets ...... 383,379 21,447 5.59 339,692 19,239 5.66 285,635 18,098 6.34
--------- -------- -------- --------- -------- ------- --------- -------- -------
Non-interest-earning assets:
Allowance for loan losses .......... (3,086) (2,839) (2,663)
Other assets ....................... 24,139 21,816 19,424
--------- --------- ---------
Total assets ....................... $ 404,432 $ 358,669 $ 302,396
========= ========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits .................. $ 122,459 $ 810 0.66% $ 115,383 $ 1,058 0.92% $ 98,503 $ 1,314 1.33%
Savings deposits ................... 49,432 344 0.70 41,767 325 0.78 31,486 336 1.07
Time deposits ...................... 91,714 2,450 2.67 94,047 2,975 3.16 87,296 3,592 4.11
Repurchase agreements .............. 2,832 37 1.31 3,998 57 1.43 1,030 29 2.82
FHLB borrowings .................... 19,138 657 3.43 1,041 35 3.36 -- -- --
Subordinated debenture ............. 7,217 487 6.75 2,097 141 6.72 -- -- --
--------- -------- -------- --------- -------- ------- --------- -------- -------
Total interest-bearing
liabilities ...................... 292,792 4,785 1.63 258,333 4,591 1.78 218,315 5,271 2.41
--------- -------- -------- --------- -------- ------- --------- -------- -------
Non-interest-bearing liabilities:
Demand deposits .................... 80,926 72,687 59,784
Other liabilities .................. 2,167 2,126 2,047
Stockholders' equity ............... 28,547 25,523 22,250
--------- --------- ---------
Total liabilities and
stockholders' equity ............. $ 404,432 $ 358,669 $ 302,396
========= ========= =========
Net interest income
(taxable equivalent basis) ....... 16,662 14,648 12,827
Tax equivalent adjustment .......... (295) (324) (320)
-------- -------- --------
Net interest income ................ $ 16,367 $ 14,324 $ 12,507
======== ======== ========
Net interest spread
(taxable equivalent basis) ....... 3.96% 3.88% 3.93%
======== ======= =======
Net yield on interest-earning assets
(taxable equivalent basis) (3) ... 4.35% 4.31% 4.49%
======== ======= =======
_________________
(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.
A-5
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields earned and rates paid on such assets and liabilities on a tax
equivalent basis. The table reflects the extent to which changes in the
Corporation's interest income and interest expense are attributable to changes
in volume (changes in volume multiplied by prior year rate) and changes in rate
(changes in rate multiplied by prior year volume). Changes attributable to the
combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
2004 Versus 2003 2003 Versus 2002
-------------------------------------- --------------------------------------
(In thousands)
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------ ------------------------
Volume Rate Net Volume Rate Net
---------- ---------- ---------- ---------- ---------- ----------
Interest income:
Loans .................................. $ 2,096 $ (841) $ 1,255 $ 3,009 $ (1,591) $ 1,418
Taxable investment securities .......... 913 259 1,172 707 (748) (41)
Tax-exempt investment securities ....... (13) (86) (99) 33 (57) (24)
Other interest-earning assets .......... (182) 62 (120) (102) (110) (212)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets ........ 2,814 (606) 2,208 3,647 (2,506) 1,141
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
Interest-bearing demand deposits ....... $ 62 $ (310) $ (248) $ 200 $ (456) $ (256)
Savings deposits ....................... 56 (37) 19 93 (104) (11)
Time deposits .......................... (72) (453) (525) 262 (879) (617)
Repurchase agreements .................. (16) (4) (20) 48 (20) 28
FHLB borrowings ........................ 621 1 622 35 -- 35
Subordinated debenture ................. 346 -- 346 141 -- 141
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities ... 997 (803) 194 779 (1,459) (680)
---------- ---------- ---------- ---------- ---------- ----------
Net change in net interest income ...... $ 1,817 $ 197 $ 2,014 $ 2,868 $ (1,047) $ 1,821
========== ========== ========== ========== ========== ==========
Provision for Loan Losses
The Corporation maintains an allowance for loan losses considered by management
to be adequate to cover the inherent risk of loss associated with its loan
portfolio. On an ongoing basis, management analyzes the adequacy of this
allowance by considering the nature and volume of the Corporation's loan
activity, financial condition of the borrower, fair market value of underlying
collateral, and changes in general market conditions. Additions to the allowance
for loan losses are charged to operations in the appropriate period. Actual loan
losses, net of recoveries, serve to reduce the allowance. The appropriate level
of the allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates.
The loan loss provision totaled $540,000 in 2004, representing a 27.1% increase
from the 2003 provision of $425,000. The 2003 provision increased 165.6% from
the 2002 provision of $160,000. The increases were due to the strong growth in
the loan portfolio experienced in 2004 and 2003.
Noninterest Income
Noninterest income consists of all income other than interest income and is
principally derived from service charges on deposits, gain on sales of mortgage
loans, fees on safe deposit boxes, credit card merchant income and income
derived from debit cards and ATM usage.
Noninterest income decreased $168,000, or 5.8%, to $2.7 million during the year
ended December 31, 2004, when compared with $2.9 million during the 2003 period.
The decrease in noninterest income resulted primarily from a decrease of
$316,000 in gain on sales of mortgage loans due to a decline in the volume of
mortgage loans originated for sale. During 2003, the Corporation experienced a
strong increase in the volume of loan originations brought about by the strong
refinancing activity associated with the low mortgage interest rate environment.
As the mortgage rates firmed up and refinancing activity slowed during 2004, the
Corporation experienced a decline in the volume of loan originations. The
Corporation also experienced an increase
A-6
in 2003 noninterest income due to gains on sales of securities of $49,000 and a
gain on sale of real estate of $54,000 that were not repeated in 2004. Increases
in fees and service charges on deposit accounts of $266,000 to $2.4 million for
the year ended December 31, 2004 were due to an increase in the deposit base and
income derived from merchant card processing.
Noninterest income increased by $644,000, or 28.6%, to $2.9 million during the
year ended December 31, 2003, when compared with $2.3 million during the 2002
period. The increase resulted primarily from an increase in fees and service
charges on deposit accounts, income derived from merchant card processing, and
increases in gains on mortgages sold.
Noninterest Expense
Although management is committed to containing noninterest expense, the
continued growth of the Corporation has caused noninterest expense to increase
by $1.1 million, or 9.7%, to $12.5 million for the year ended December 31, 2004,
compared to $11.4 million for the same period in 2003. Salaries and employee
benefits, the major component of noninterest expense, increased $262,000, or
4.9%. The increase was due primarily to additions to staffing for the new Wayne
branch, opened in November 2003 and general increases for merit and performance.
Occupancy and equipment increased $267,000, or 18.6%, primarily due to the
increase in our branch facilities. Data processing expense increased $98,000, or
10.7%, due to the increase in our deposit base, the upgrade to check imaging and
the outsourcing of the statement rendering process which occurred in the second
quarter of 2003 and the installation of new check fraud services. Miscellaneous
expenses increased $399,000, or 15.7%, due to increased activity in credit card
merchant processing and overall support of the general growth of the
Corporation.
In accordance with its By-laws to tithe ten percent (10%) of its pre-tax profits
to various charities, the Corporation had charitable contributions totaling
$582,000 for the year ended December 31, 2004, an increase of $70,000 or 13.7%,
over the same period in 2003.
Noninterest expense increased $1.5 million, or 15.7%, to $11.4 million for the
year ended December 31, 2003, compared to $9.8 million for the same period in
2002. Increases in salaries and employee benefits were primarily a result of
additions to staff for lending, branch administration, and deposit operations,
staffing for the new branch office opened in November 2003 in Wayne, New Jersey,
and general merit and salary increases. Data processing expense increased due to
the increase in our deposit base, the conversion to a check imaging platform,
the outsourcing of our statement rendering function and the enhancements to our
online banking product.
Income Taxes
Income tax expense totaled $2.2 million for the year ended December 31, 2004,
for an effective tax rate of 36.4%, compared to $1.9 million, for an effective
tax rate of 35.3% for the year ended December 31, 2003. The increase in the
effective tax rate can be attributed to less income being generated through the
investment subsidiary and more earnings from taxable assets. Income tax expense
totaled $1.6 million for the year ended December 31, 2002, for an effective tax
rate of 34.4%.
Financial Condition
Total assets at December 31, 2004 were $424.3 million, an increase of $22.5
million, or 5.6%, over the $401.8 million at December 31, 2003. This increase in
assets reflects, among other things, a $34.1 million increase in net loans held
for portfolio and an increase of $5.7 in cash and cash equivalents, partially
offset by a decreases of $12.2 million in securities held to maturity and $4.8
million in securities available for sale. The Corporation continued to
experience strong loan origination and redeployed funds out of the investments
into the lending portfolio.
Loan Portfolio
The Corporation's loan portfolio at December 31, 2004, net of allowance for loan
losses, totaled $292.9 million, an increase of $34.1 million, or 13.2%, over the
$258.8 million at December 31, 2003. Commercial real estate mortgage loans
consisting of $130.8 million, or 44.1% of the total portfolio, comprised the
largest portion of the loan portfolio. This represented an increase of $21.1
million from $109.7 million, or 41.9% of the total commercial real estate
portfolio at December 31, 2003. Commercial loans increased $6.3 million and
consumer installment and home equity lines increased $6.2 million and $4.3
million, respectively. Residential real estate mortgages decreased $3.3 million.
The Corporation continued its policy of selling the majority of its fixed rate
residential real estate loans in the secondary market.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey and therefore collectibility of the loan
portfolio is susceptible to changes in real estate market conditions in the
northern New Jersey market. The Corporation has not made loans to borrowers
outside the United States.
A-7
At December 31, 2004, there were no concentrations of loans exceeding 10% of
total loans outstanding. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
related conditions.
The following table sets forth the classification of the Corporation's loans by
major category at the end of the last five years:
December 31,
---------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(In thousands)
Real estate mortgage:
Residential ................. $ 41,569 $ 44,835 $ 39,705 $ 36,394 $ 34,652
Commercial .................. 130,762 109,708 88,593 72,262 64,473
Commercial loans .............. 55,252 48,950 38,228 32,871 30,326
Consumer loans:
Installment (1) ............. 47,218 41,067 37,293 35,961 35,011
Home equity ................. 21,484 17,181 12,471 7,944 6,699
Other ....................... 260 238 241 243 234
--------- --------- --------- --------- ---------
Total loans ................... 296,545 261,979 216,531 185,675 171,395
Less: Allowance for loan losses 3,299 2,888 2,689 2,602 2,223
Deferred loan fees ........ 337 315 263 143 120
--------- --------- --------- --------- ---------
Net loans ..................... $ 292,909 $ 258,776 $ 213,579 $ 182,930 $ 169,052
========= ========= ========= ========= =========
_____________________
(1) Includes automobile, home improvement, second mortgages and unsecured
loans.
The following table sets forth certain categories of gross loans as of December
31, 2004 by contractual maturity. Borrowers may have the right to prepay
obligations with or without prepayment penalties. This might cause actual
maturities to differ from the contractual maturities summarized below.
After 1 Year
Within But Within After
1 Year 5 Years 5 Years Total
--------- ------------ --------- ---------
(In thousands)
Real estate mortgage ... $ 24,851 $ 18,850 $ 128,630 $ 172,331
Commercial ............. 27,554 23,585 4,113 55,252
Consumer ............... 3,667 11,582 53,713 68,962
--------- ------------ --------- ---------
Total gross loans ...... $ 56,072 $ 54,017 $ 186,456 $ 296,545
========= ============ ========= =========
The following table sets forth the dollar amount of all gross loans due one year
or more after December 31, 2004, which have predetermined interest rates or
floating or adjustable interest rates:
Floating or
Predetermined Adjustable
Rates Rates Total
------------- ------------ ------------
(In thousands)
Real estate mortgage ... $ 66,989 $ 80,491 $ 147,480
Commercial ............. 15,862 11,836 27,698
Consumer ............... 40,236 25,059 65,295
------------- ------------ ------------
$ 123,087 $ 117,386 $ 240,473
============= ============ ============
A-8
Asset Quality
The Corporation's principal earning asset is its loan portfolio. Inherent in the
lending function is the risk of deterioration in a borrower's ability to repay
loans under existing loan agreements. Management realizes that because of this
risk, reserves are maintained to absorb potential loan losses. In determining
the adequacy of the allowance for loan losses, management of the Corporation
considers the risks inherent in its loan portfolio and changes in the nature and
volume of its loan activities, along with general economic and real estate
market conditions. Although management attempts to establish a reserve
sufficient to offset potential losses in the portfolio, changes in economic
conditions, regulatory policies and borrower's performance could require future
changes to the allowance.
The Corporation utilizes a two tier approach by (1) identifying problem loans
and allocating specific loss allowances on such loans and (2) establishing a
general valuation allowance on the remainder of its loan portfolio. The
Corporation maintains a loan review system that allows for a periodic review of
its loan portfolio and the early identification of potential problem loans. Such
a system takes into consideration, among other things, delinquency status, size
of loans, type of collateral and financial condition of the borrowers.
Allocations of specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
The Corporation's accounting policies are set forth in Note 1 to the audited
financial statements. The application of certain of these policies require
significant management judgment and the utilization of estimates. Actual results
could differ from these judgments and estimates resulting in a significant
impact on the financial statements. A critical accounting policy for the
Corporation is the policy utilized in determining the adequacy of the allowance
for loan losses. Although management uses the best information available, the
level of the allowance for loan losses remains an estimate which is subject to
significant judgment and short-term change. Various regulatory agencies, as an
integral part of their examination process, periodically review the
Corporation's allowance for loan losses. Such agencies may require the
Corporation to 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 the 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 may be necessary due to economic, operating,
regulatory, and other conditions beyond the Corporation's control. The allowance
for loan losses represents 1.11% of total loans, or 2.3 times non-performing
loans at December 31, 2004, compared with 1.10% of total loans or 2.6 times
non-performing loans at December 31, 2003. In management's opinion, the
allowance for loan losses totaling $3.3 million is adequate to cover losses
inherent in the portfolio at December 31, 2004.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, restructured loans, loans past
due 90 days or more and accruing, and other real estate owned. The Corporation's
loans are generally placed in a nonaccrual status when they become past due in
excess of 90 days as to payment of principal and interest. Interest previously
accrued on these loans and not yet paid is charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash. Loans past due 90 days or more and accruing
represent those loans which are sufficiently collateralized and management
believes all interest and principal owed will be collected. Restructured loans
are loans that have been renegotiated to permit a borrower, who has incurred
adverse financial circumstances, to continue to perform. Management can reduce
the contractual interest rates to below market rates or make significant
concessions to the terms of the loan in order for the borrower to continue to
make payments.
A-9
The following table sets forth certain information regarding the Corporation's
nonperforming loans as of December 31 of each of the preceding five years:
December 31,
----------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual loans:(1)
Commercial real estate ........................... $ 56 $ 83 $ 80 $ 77 $ --
Commercial ....................................... 159 163 326 -- 728
Consumer ......................................... 47 11 89 86 --
------ ------ ------ ------ ------
Total nonaccrual loans ......................... 262 257 495 163 728
------ ------ ------ ------ ------
Loans past due ninety days or more and accruing:(2)
Construction ..................................... 940 -- -- -- --
Commercial ....................................... -- 314 -- 14 18
Consumer ......................................... 7 6 4 8 --
------ ------ ------ ------ ------
Total loans past due ninety days or more and
accruing ..................................... 947 320 4 22 18
------ ------ ------ ------ ------
Restructured loans:
Commercial ....................................... -- 269 451 357 19
Consumer ......................................... 215 244 397 430 --
------ ------ ------ ------ ------
Total restructured loans ....................... 215 513 848 787 19
------ ------ ------ ------ ------
Total nonperforming loans .......................... $1,424 $1,090 $1,347 $ 972 $ 765
====== ====== ====== ====== ======
Nonaccrual loans to total gross loans .............. 0.09% 0.10% 0.23% 0.09% 0.42%
Nonperforming loans to total gross loans ........... 0.48% 0.42% 0.62% 0.52% 0.45%
Nonperforming loans to total assets ................ 0.34% 0.27% 0.41% 0.35% 0.33%
Allowance for loan losses to nonperforming loans ... 231.67% 264.95% 199.63% 267.70% 290.59%
___________________
(1) Restructured loans classified as nonaccrual for the years ended December
31, 2004 and 2003 were $162,000 and $174,000, respectively.
(2) There were no restructured loans classified as loans past due ninety days
or more and accruing at December 31, 2004. Restructured loans classified
as loans past due ninety days or more and accruing at December 31, 2003
totaled $150,000.
There were no loans, other than those included in the above table, where the
Corporation was aware of any credit conditions of any borrowers that would
indicate a strong possibility of the borrowers not complying with the present
terms and conditions of repayment and which may result in such loans being
included as nonaccrual, past due or restructured at a future date.
A-10
The following table sets forth, for the years ended December 31, 2004, 2003,
2002, 2001 and 2000, the historical relationships among the allowance for loan
losses, the provision for loan losses, the amount of loans charged off and the
amount of loan recoveries:
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period ..................... $2,888 $2,689 $2,602 $2,223 $1,874
Loans charged off:
Commercial ....................................... 49 173 65 -- 37
Consumer ......................................... 92 56 25 49 29
------ ------ ------ ------ ------
Total loans charged off ........................ 141 229 90 49 66
------ ------ ------ ------ ------
Recoveries of loans previously charged off:
Commercial ....................................... 3 1 9 5 5
Consumer ......................................... 9 2 8 3 --
------ ------ ------ ------ ------
Total recoveries of loans previously charged off 12 3 17 8 5
------ ------ ------ ------ ------
Net loans charged off .............................. 129 226 73 41 61
Provisions charged to operations ................... 540 425 160 420 410
------ ------ ------ ------ ------
Balance at end of period ........................... $3,299 $2,888 $2,689 $2,602 $2,223
====== ====== ====== ====== ======
Net charge offs during the period to average
loans outstanding during the period .............. 0.05% 0.10% 0.04% 0.02% 0.04%
====== ====== ====== ====== ======
Balance of allowance for loan losses at the
end of year to gross year end loans .............. 1.11% 1.10% 1.24% 1.40% 1.30%
====== ====== ====== ====== ======
The following table sets forth the allocation of the allowance for loan losses
at the dates indicated by category loans:
2004 2003 2002
--------------------- --------------------- ---------------------
Percent to Percent to Percent to
Amount Total (1) Amount Total (1) Amount Total (1)
--------------------- --------------------- ---------------------
(Dollars in thousands)
Real estate - residential ....... $ 297 14.0% $ 306 17.1% $ 289 18.3%
Real estate - commercial ........ 1,272 44.1% 1,038 41.9% 911 40.9%
Commercial ...................... 979 18.6% 910 18.7% 906 17.7%
Consumer ........................ 751 23.3% 634 22.3% 583 23.1%
-------- ---------- -------- ---------- -------- ----------
Total allowance for loan losses $ 3,299 100.0% $ 2,888 100.0% $ 2,689 100.0%
======== ========== ======== ========== ======== ==========
2001 2000
--------------------- ---------------------
Percent to Percent to
Amount Total (1) Amount Total (1)
-------- ---------- -------- ----------
(Dollars in thousands)
Real estate - residential ....... $ 316 19.6% $ 278 20.2%
Real estate - commercial ........ 857 38.9% 699 37.6%
Commercial ...................... 849 17.7% 741 17.7%
Consumer ........................ 580 23.8% 505 24.5%
-------- ---------- -------- ----------
Total allowance for loan losses $ 2,602 100.0% $ 2,223 100.0%
======== ========== ======== ==========
(1) Represents percentage of loan balance in category to total gross loans.
Investment Portfolio
The Corporation maintains an investment portfolio to enhance its yields and to
provide a secondary source of liquidity. The portfolio is comprised of U.S.
Treasury securities, U.S. government sponsored agency obligations,
mortgage-backed securities, and state and political subdivision obligations and
has been classified as held to maturity or available for sale. Investments in
debt securities that the Corporation has the positive intent and the ability to
hold to maturity are classified as held to maturity securities and reported at
amortized cost. All other securities are classified as available for sale
securities and reported at fair value, with unrealized holding gains or losses
reported in a separate component of stockholders' equity. Securities in the
available for sale category may be held for indefinite periods of time and
include securities that management intends to use as part of its Asset/Liability
strategy or that may be sold in response to changes in interest rates, changes
in prepayment risks, the need to provide liquidity, the need to increase
regulatory capital or similar factors. Securities available for sale decreased
to $56.5 million at December 31, 2004, from $61.3 million at December 31, 2003,
a decrease of $4.8 million, or 7.8%. Securities held to maturity decreased $12.2
million, or 23.3%, to $40.1 million at December 31, 2004 from $52.4 million at
December 31, 2003. Maturities, principal paydowns, and calls were reinvested in
the lending portfolio.
A-11
The following table sets forth the classification of the Corporation's
investment securities by major category at the end of the last three years:
December 31,
----------------------------------------------------------------------
2004 2003 2002
----------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
Securities available for sale:
U.S. Treasury ................. $ 495 0.9% $ 500 0.8% $ -- --
U.S. government
sponsored agencies .......... 23,344 41.3% 22,144 36.1% 2,733 21.3%
Obligations of state and
political subdivisions ..... 1,915 3.4% 1,406 2.3% 821 6.4%
Mortgage-backed securities .... 29,730 52.6% 37,255 60.8% 9,258 72.3%
Community Reinvestment Act Fund 1,030 1.8% -- -- -- --
-------- ------- -------- ------- -------- -------
Total ........................... $ 56,514 100.0% $ 61,305 100.0% $ 12,812 100.0%
======== ======= ======== ======= ======== =======
Securities held to maturity:
U.S. Treasury ................. $ 1,007 2.5% $ 1,011 1.9% $ 1,514 2.5%
U.S. government
sponsored agencies .......... 8,655 21.6% 12,756 24.4% 13,125 21.6%
Obligations of state and
political subdivisions ...... 17,688 44.1% 19,686 37.6% 20,060 32.9%
Mortgage-backed securities .... 12,761 31.8% 18,907 36.1% 26,188 43.0%
-------- ------- -------- ------- -------- -------
Total ........................... $ 40,111 100.0% $ 52,360 100.0% $ 60,887 100.0%
======== ======= ======== ======= ======== =======
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities available for
sale as of December 31, 2004. Issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. This might cause
actual maturities to differ from contractual maturities.
After 1 Year After 5 Years
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years Total
---------- ------------ -------------- ---------- ----------
(Dollars in thousands)
U.S. Treasury :
Carrying value ................................ $ -- $ 495 $ -- $ -- $ 495
Yield ......................................... -- 1.61% -- -- 1.61%
U.S. government sponsored agencies :
Carrying value ................................ -- 23,344 -- -- 23,344
Yield ......................................... -- 2.95% -- -- 2.95%
Obligations of state and political subdivisions :
Carrying value ................................ 158 1,757 -- -- 1,915
Yield ......................................... 4.43% 1.72% -- -- 1.94%
Mortgage-backed securities :
Carrying value ................................ -- 194 8,669 20,867 29,730
Yield ......................................... -- 3.92% 3.85% 4.66% 4.42%
Community Reinvestment Act Fund:
Carrying value ................................ 1,030 -- -- -- 1,030
Yield ......................................... 5.00% -- -- -- 5.00%
---------- ------------ -------------- ---------- ----------
Total carrying value ............................ $ 1,188 $ 25,790 $ 8,669 $ 20,867 $ 56,514
========== ============ ============== ========== ==========
Weighted average yield .......................... 4.92% 2.85% 3.85% 4.66% 3.71%
========== ============ ============== ========== ==========
A-12
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of stated yields to maturity, considering
applicable premium or discount) of the Corporation's securities held to maturity
as of December 31, 2004. Issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. This might cause
actual maturities to differ from contractual maturities.
After 1 Year After 5 Years
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years Total
---------- ------------ -------------- ---------- ----------
(Dollars in thousands)
U.S. Treasury :
Carrying value ................................ $ -- $ 1,007 $ -- $ -- $ 1,007
Yield ......................................... -- 4.28% -- -- 4.28%
U.S. government sponsored agencies :
Carrying value ................................ 511 8,144 -- -- 8,655
Yield ......................................... 2.79% 2.89% -- -- 2.88%
Obligations of state and political subdivisions :
Carrying value ................................ 3,517 13,613 558 -- 17,688
Yield ......................................... 4.04% 3.12% 2.62% -- 3.29%
Mortgage-backed securities :
Carrying value ................................ -- 424 3,020 9,317 12,761
Yield ......................................... -- 4.91% 4.57% 4.91% 4.83%
---------- ------------ -------------- ---------- ----------
Total carrying value ............................ $ 4,028 $ 23,188 $ 3,578 $ 9,317 $ 40,111
========== ============ ============== ========== ==========
Weighted average yield .......................... 3.88% 3.12% 4.27% 4.91% 3.72%
========== ============ ============== ========== ==========
Deposits
Corporation deposits at December 31, 2004 totaled $356.9 million, an increase of
$15.4 million, or 4.5%, over the comparable period of 2003, when deposits
totaled $341.5 million. The Corporation relied on its existing market area and
current competitive products and services to provide growth during 2004. The
economic and interest rate environment along with our inability to open a branch
in a new market area inhibited our ability to experience growth in deposits
similar to 2003 and 2002. During the fourth quarter of 2004, management
introduced two new deposit products to spur growth in 2005. The Sterling NOW
account provides a package of services to customers over the age of 55 which
includes an interest bearing NOW account. The Ideal Checking Account provides a
free, low balance checking account to compete with other financial institutions'
products.
The following table sets forth the classification of the Corporation's deposits
by major category as of December 31 of each of the preceding years:
December 31,
-----------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
(Dollars in thousands)
Noninterest-bearing demand $ 90,241 25.3% $ 80,845 23.7% $ 69,344 22.9%
Interest-bearing demand .. 124,185 34.8% 119,663 35.0% 101,191 33.5%
Saving deposits .......... 49,966 14.0% 45,051 13.2% 38,242 12.6%
Time deposits ............ 92,526 25.9% 95,979 28.1% 93,958 31.0%
--------- ------- --------- ------- --------- -------
Total .................... $ 356,918 100.0% $ 341,538 100.0% $ 302,735 100.0%
========= ======= ========= ======= ========= =======
As of December 31, 2004, the aggregate amount of outstanding time deposits
issued in amounts of $100,000 or more, broken down by time remaining to
maturity, was as follows (In thousands):
Three months or less ............. $ 12,501
Four months through six months ... 5,205
Seven months through twelve months 6,028
Over twelve months ............... 8,480
--------
Total ........................ $ 32,214
========
A-13
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Corporation's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. Management actively monitors and
manages its interest rate risk exposure.
The Corporation's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Corporation's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Corporation monitors the impact of changes in interest rates on its
net interest income using several tools. One measure of the Corporation's
exposure to differential changes in interest rates between assets and
liabilities is shown in the Corporation's Maturity and Repricing Analysis under
the Interest Rate Sensitivity caption below.
The Corporation's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Corporation's
net interest income and capital, while maintaining the asset-liability structure
to obtain the maximum yield-cost spread on that structure. The Corporation
relies primarily on its asset-liability structure to control interest rate risk.
The Corporation continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost effective,
and therefore, has focused its efforts on increasing the Corporation's
yield-cost spread through retail growth opportunities.
The following table shows the Corporation's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 2004. Market rate sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments. Expected maturities are contractual maturities
adjusted for projected payments of principal. The actual maturities of these
instruments could vary substantially if future prepayments differ from the
projections. For non-maturity deposit liabilities, in accordance with standard
industry practice, "decay factors" were used to estimate deposit runoff.
Average
Interest
Rate 2005 2006 2007 2008 2009 Thereafter Balance Fair Value
-------- -------- ------- ------- ------- -------- ---------- -------- ----------
(Dollars in thousands)
Interest-Sensitive Assets:
Federal funds sold ............ 2.06% $ 9,000 $ -- $ -- $ -- $ -- $ -- $ 9,000 $ 9,000
Interest-bearing due from banks 1.89% 495 -- -- -- -- -- 495 495
Loans:
Real estate mortgage ........ 6.46% 32,840 9,796 17,233 10,797 10,131 91,534 172,331 172,901
Commercial .................. 6.60% 31,244 9,509 6,209 4,211 1,880 2,199 55,252 54,937
Consumer .................... 5.85% 12,990 6,226 6,347 5,540 5,125 32,734 68,962 69,167
Mortgage loans held for sale .. 5.38% 228 -- -- -- -- -- 228 228
Investment securities (1) ..... 3.65% 38,682 27,065 13,066 10,517 5,457 3,481 98,268 98,658
-------- -------- ------- ------- ------- -------- ---------- -------- ----------
5.59% 125,479 52,596 42,855 31,065 22,593 129,948 404,536 405,386
Interest-Sensitive Liabilities:
Savings ....................... 0.60% 10,213 9,963 9,963 9,963 9,864 -- 49,966 49,966
Interest-bearing .............. 0.88% 24,905 24,882 24,882 24,882 24,634 -- 124,185 124,185
Time deposits ................. 2.59% 57,743 25,362 4,795 2,662 873 1,091 92,526 92,708
Securites sold under agreement
to repurchase ............... 1.99% 3,370 -- -- -- -- -- 3,370 3,370
FHLB borrowings ............... 3.24% 8,741 1,282 1,324 1,368 1,414 10,000 24,129 23,654
Subordinated debentures ....... 6.75% -- -- -- -- -- 7,217 7,217 7,503
-------- -------- ------- ------- ------- -------- ---------- -------- ----------
1.70% 104,972 61,489 40,964 38,875 36,785 18,308 301,393 301,386
-------- -------- ------- ------- ------- -------- ---------- -------- ----------
Net Interest-Sensitive
Assets (Liabilities) .......... $ 20,507 $(8,893) $ 1,891 $(7,810) $(14,192) $ 111,640 $103,143 $ 104,000
======== ======= ======= ======= ======== ========== ======== ==========
_________________
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
A-14
Interest Rate Sensitivity
Interest rate movements and deregulation of interest rates have made managing
the Corporation's interest rate sensitivity increasingly important. The
Corporation attempts to maintain stable net interest margins by generally
matching the volume of assets and liabilities maturing, or subject to repricing,
by adjusting interest rates to market conditions, and by developing new
products. One method of measuring the Corporation's exposure to changes in
interest rates is the maturity and repricing gap analysis. The difference
between the volume of assets and liabilities that reprice in a given period is
the interest sensitivity gap. A "positive" gap results when more assets than
liabilities mature or are subject to repricing in a given time frame.
Conversely, a "negative" gap results when there are more liabilities than assets
maturing or subject to repricing in a given period of time. The smaller the gap,
the less the effect of the market volatility on net interest income. During a
period of rising interest rates, an institution with a negative gap position
would not be in as favorable a position, as compared to an institution with a
positive gap, to invest in higher yielding assets. This may result in yields on
its assets increasing at a slower rate than the increase in its costs of
interest-bearing liabilities than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap would experience a
repricing of its assets at a slower rate than its interest-bearing liabilities,
which consequently may result in its net interest income growing at a faster
rate than an institution with a positive gap position.
The following tables sets forth estimated maturity/repricing structure of the
Corporation's interest-earning assets and interest-bearing liabilities as of
December 31, 2004. The amounts of assets or liabilities shown which reprice or
mature during a particular period were determined in accordance with the
contractual terms of each asset or liability and adjusted for prepayment
assumptions where applicable. The table does not necessarily indicate the impact
of general interest rate movements on the Corporation's net interest income
because the repricing of certain categories of assets and liabilities, for
example, prepayments of loans and withdrawals of deposits, is beyond the
Corporation's control. As a result, certain assets and liabilities indicated as
repricing within a period may in fact reprice at different times and at
different rate levels.
More than
Three Months
Three Months Through After Noninterest
or Less One Year One Year Sensitive Total
----------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Loans:
Real estate mortgage ........ $ 7,730 $ 28,189 $ 136,412 $ -- $ 172,331
Commercial .................. 12,219 19,037 23,996 -- 55,252
Consumer .................... 25,933 6,354 36,675 -- 68,962
Mortgage loans held for sale .. 228 -- -- -- 228
Investment securities (1) ..... 21,488 19,579 57,201 -- 98,268
Federal funds sold ............ 9,000 -- -- -- 9,000
Other assets .................. 8,504 -- -- 11,761 20,265
----------------------------------------------------------------------------
Total assets ............. $ 85,102 $ 73,159 $ 254,284 $ 11,761 $ 424,306
----------------------------------------------------------------------------
Source of funds:
Savings ....................... $ -- $ 49,966 $ -- $ -- $ 49,966
Interest-bearing .............. 60,025 64,160 -- -- 124,185
Time deposits ................. 20,879 37,396 34,251 -- 92,526
Securities sold under agreement
to repurchase ............... 2,662 708 -- -- 3,370
Borrowings .................... 7,807 934 15,388 -- 24,129
Subordinated debenture ........ -- -- 7,217 -- 7,217
Other liabilities ............. -- -- -- 92,453 92,453
Stockholders' equity .......... -- -- -- 30,460 30,460
----------------------------------------------------------------------------
Total source of funds ..... $ 91,373 $ 153,164 $ 56,856 $ 122,913 $ 424,306
----------------------------------------------------------------------------
Interest rate sensitivity gap ... $ (6,271) $ (80,005) $ 197,428 $ (111,152)
============================================================
Cumulative interest rate
sensitivity gap ............... $ (6,271) $ (86,276) $ 111,152 $ --
============================================================
Ratio of GAP to total assets .... -1.5% -18.9% 46.5% -26.1%
============================================================
Ratio of cumulative GAP assets to
total assets .................. -1.5% -20.4% 26.1% --
============================================================
________________
(1) Includes securities held to maturity, securities available for sale and
FHLB-NY stock.
A-15
The Corporation also uses a simulation model to analyze the sensitivity of net
interest income to movements in interest rates. The simulation model projects
net interest income, net income, net interest margin, and capital to asset
ratios based on various interest rate scenarios over a twelve month period. The
model is based on the actual maturity and repricing characteristics of all rate
sensitive assets and liabilities. Management incorporates into the model certain
assumptions regarding prepayments of certain assets and liabilities. The model
assumes an immediate rate shock to interest rates without management's ability
to proactively change the mix of assets or liabilities. According to the reports
generated for year end 2004, an immediate interest rate increase of 200 basis
points resulted in a decrease in net interest income of 11.1%, or $2.2 million,
while an immediate interest rate decrease of 200 basis points resulted in a
decrease in net interest income of 1.6% or $320,000. Management has a goal to
maintain a percentage change of no more than 15% given a 200 basis point change
in interest rates. Management cannot provide any assurance about the actual
effect of changes in interest rates on the Corporation's net interest income.
Assumptions have been built into the model for prepayments for assets and decay
rates for nonmaturity deposits such as savings and interest-bearing demand.
Liquidity
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided by operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
are a relatively predictable source of funds, deposit flow and prepayments on
loan and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition.
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. These activities
are summarized below:
Year Ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
Cash and cash equivalents - beginning .............. $ 19,138 $ 33,418 $ 34,074
Operating activities:
Net income ....................................... 3,848 3,491 3,116
Adjustments to reconcile net income
to net cash provided by operating
activities ..................................... 2,160 2,582 2,429
-------- -------- --------
Net cash provided by operating activities .......... 6,008 6,073 5,545
Net cash used in investing activities .............. (19,182) (87,362) (55,050)
Net cash provided by financing activities .......... 18,828 67,009 48,849
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,654 (14,280) (656)
-------- -------- --------
Cash and cash equivalents - ending ................. $ 24,792 $ 19,138 $ 33,418
======== ======== ========
Cash was generated by operating activities in each of the above periods. The
primary source of cash from operating activities during each period was net
income.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as federal funds sold.
The Corporation enters into commitments to extend credit, such as letters of
credit, which are not reflected in the consolidated financial statements.
A-16
The Corporation has various contractual obligations that may require future cash
payments. The following table summarizes the Corporation's contractual
obligations at December 31, 2004 and the effect such obligations is expected to
have on our liquidity and cash flows in future periods.
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
------------ ------------ ------------ ------------ ------------
(In thousands)
Contractual obligations
Operating lease obligations .................. $ 3,717 $ 467 $ 914 $ 747 $ 1,589
------------ ------------ ------------ ------------ ------------
Total contracted cost obligations .............. $ 3,717 $ 467 $ 914 $ 747 $ 1,589
============ ============ ============ ============ ============
Other long-term liabilities/long-term debt
Time deposits ................................ $ 92,526 $ 58,819 $ 30,169 $ 3,538 $ --
Federal Home Loan Bank advances .............. 24,129 9,043 3,241 1,845 10,000
Subordinated debentures ...................... 7,217 -- -- -- 7,217
------------ ------------ ------------ ------------ ------------
Total other long-term liabilities/long-term debt $ 123,872 $ 67,862 $ 33,410 $ 5,383 $ 17,217
============ ============ ============ ============ ============
Other commitments - off balance sheet
Letter of credit ............................. $ 1,525 $ 1,493 $ 10 $ 22 $ --
Other commitments - off balance sheet ........ 24,155 24,155 -- -- --
Unused lines of credit ....................... 76,257 76,257 -- -- --
------------ ------------ ------------ ------------ ------------
Total off balance sheet arrangements and
contractual obligations ...................... $ 101,937 $ 101,905 $ 10 $ 22 $ --
============ ============ ============ ============ ============
________________
For further information, see Note 16 of Notes to Consolidated Financial
Statements.
Management believes that a significant portion of the time deposits will remain
with the Corporation. In addition, management does not believe that all of the
unused lines of credit will be exercised. The Corporation anticipates that it
will have sufficient funds available to meet its current contractual
commitments. Should the Corporation need temporary funding, the Corporation has
an overnight line of credit with the FHLB-NY for a maximum of $39.6 million.
Capital
The Corporation is subject to capital adequacy guidelines promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The FRB has issued
regulations to define the adequacy of capital based upon the sensitivity of
assets and off-balance sheet exposures to risk factors. Four categories of risk
weights (0%, 20%, 50% and 100%) were established to be applied to different
types of balance sheet assets and off-balance sheet exposures. The aggregate of
the risk weighted items (risk-based assets) is the denominator of the ratio,
while the numerator is risk-based capital. Under the regulations, risk-based
capital has been classified into two categories. Tier 1 capital includes common
and qualifying perpetual preferred stockholders' equity less goodwill. Tier 2
capital includes mandatory convertible debt, allowance for loan losses, subject
to certain limitations, and certain subordinated and term debt securities. Total
qualifying capital consists of Tier 1 capital and Tier 2 capital, however, the
amount of Tier 2 capital may not exceed the amount of Tier 1 capital. The FRB
has also issued leverage capital adequacy standards. Under these standards, in
addition to the risk-based capital ratios, a corporation must also compute a
ratio of Tier 1 capital (using the risk-based capital definition) to total
quarterly average assets. The following table reflects the Corporation's capital
ratios at December 31, 2004. The Bank Federal regulator has promulgated
substantially similar capital regulations applicable to the Bank.
Required Actual Excess
-------------------------------
Risk-based capital:
Tier 1 ........... 4.00% 12.48% 8.48%
Total ............ 8.00% 13.57% 5.57%
Leverage ratio* ... 4.00% 9.08% 5.08%
_________________
* The minimum leverage ratio set by the FRB is 3.00%. Institutions, which
are not "top-rated", will be expected to maintain a ratio of approximately
100 to 200 basis points above this ratio.
A-17
A-18
[LOGO]
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Stewardship Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Stewardship Financial Corporation and subsidiary as of December 31, 2004 and
2003, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stewardship
Financial Corporation and subsidiary as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
March 25, 2005
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
December 31,
----------------------------------
2004 2003
----------------------------------
Assets
Cash and due from banks (note 2).............................................. $ 15,297,000 $ 15,640,000
Other interest-earning assets................................................. 495,000 2,198,000
Federal funds sold............................................................ 9,000,000 1,300,000
----------------------------------
Cash and cash equivalents................................................... 24,792,000 19,138,000
Securities available for sale (notes 3 and 9)................................. 56,514,000 61,305,000
Securities held to maturity; estimated market value
of $40,501,000 (2004) and $53,370,000 (2003) (notes 4 and 9)................ 40,111,000 52,360,000
FHLB-NY stock, at cost........................................................ 1,643,000 1,322,000
Loans, net of allowance for loan losses of $3,299,000 (2004)
and $2,888,000 (2003) (notes 5 and 6)....................................... 292,909,000 258,776,000
Mortgage loans held for sale.................................................. 228,000 576,000
Premises and equipment, net (note 7).......................................... 3,433,000 3,637,000
Accrued interest receivable................................................... 1,922,000 1,863,000
Intangible assets, net of accumulated amortization of $571,000 and
$530,000 at December 31, 2004 and 2003, respectively ...................... 179,000 220,000
Other assets (note 15)........................................................ 2,575,000 2,571,000
----------------------------------
Total assets............................................................ $ 424,306,000 $ 401,768,000
==================================
Liabilities and Stockholders' equity
Liabilities
Deposits: (note 8)
Noninterest-bearing......................................................... $ 90,241,000 $ 80,845,000
Interest-bearing............................................................ 266,677,000 260,693,000
----------------------------------
Total deposits.......................................................... 356,918,000 341,538,000
Other borrowings (note 9)..................................................... 24,129,000 20,000,000
Subordinated debenture (note 10).............................................. 7,217,000 7,217,000
Securities sold under agreements to repurchase (note 9)....................... 3,370,000 3,547,000
Accrued expenses and other liabilities........................................ 2,212,000 2,317,000
----------------------------------
Total liabilities....................................................... 393,846,000 374,619,000
----------------------------------
Commitments and contingencies (note 16)....................................... -- --
Stockholders' equity (notes 11 and 17)
Common stock, no par value 10,000,000 shares authorized
3,365,983 and 3,165,233 shares issued and outstanding at
December 31, 2004 and 2003, respectively.................................... 23,893,000 19,552,000
Retained earnings............................................................. 6,746,000 7,593,000
Accumulated other comprehensive (loss) income, net............................ (179,000) 4,000
----------------------------------
Total Stockholders' equity................................................ 30,460,000 27,149,000
----------------------------------
Total liabilities and Stockholders' equity................................ $ 424,306,000 $ 401,768,000
==================================
See accompanying notes to consolidated financial statements.
A-20
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
Years Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
Interest income:
Loans .............................................. $ 17,346,000 $ 16,091,000 $ 14,673,000
Securities held to maturity:
Taxable ......................................... 1,011,000 1,248,000 1,379,000
Nontaxable ...................................... 622,000 700,000 713,000
Securities available for sale ...................... 2,125,000 708,000 633,000
Other interest-earning assets ...................... 48,000 168,000 380,000
----------------------------------------------
Total interest income .................. 21,152,000 18,915,000 17,778,000
----------------------------------------------
Interest expense:
Deposits (note 8) .................................. 3,604,000 4,358,000 5,242,000
Borrowed money ..................................... 1,181,000 233,000 29,000
----------------------------------------------
Total interest expense ................. 4,785,000 4,591,000 5,271,000
----------------------------------------------
Net interest income before provision for loan losses 16,367,000 14,324,000 12,507,000
Provision for loan losses (note 5) ................. 540,000 425,000 160,000
----------------------------------------------
Net interest income after provision for loan losses 15,827,000 13,899,000 12,347,000
----------------------------------------------
Noninterest income:
Fees and service charges ........................... 2,372,000 2,106,000 1,789,000
(Loss)/gain on calls and sales of securities,
net (notes 3 and 4) .............................. (3,000) 49,000 (4,000)
Gain on sales of mortgage loans .................... 135,000 451,000 248,000
Miscellaneous ...................................... 222,000 288,000 217,000
----------------------------------------------
Total noninterest income ............... 2,726,000 2,894,000 2,250,000
----------------------------------------------
Noninterest expense:
Salaries and employee benefits (note 12) ........... 5,639,000 5,377,000 4,650,000
Occupancy, net (note 16) ........................... 969,000 758,000 657,000
Equipment .......................................... 736,000 680,000 640,000
Data processing .................................... 1,016,000 918,000 682,000
Advertising ........................................ 285,000 270,000 269,000
FDIC insurance premium ............................. 49,000 48,000 43,000
Amortization of intangible assets .................. 41,000 44,000 45,000
Charitable contributions ........................... 582,000 512,000 425,000
Stationery and supplies ............................ 239,000 241,000 235,000
Miscellaneous ...................................... 2,945,000 2,546,000 2,201,000
----------------------------------------------
Total noninterest expenses ............. 12,501,000 11,394,000 9,847,000
----------------------------------------------
Income before income tax expense ................... 6,052,000 5,399,000 4,750,000
Income tax expense (note 15) ....................... 2,204,000 1,908,000 1,634,000
----------------------------------------------
Net income ......................................... $ 3,848,000 $ 3,491,000 $ 3,116,000
==============================================
Basic earnings per share (note 14) ................. $ 1.15 $ 1.06 $ 0.96
==============================================
Diluted earnings per share (note 14) ............... $ 1.14 $ 1.04 $ 0.96
==============================================
Cash dividends per share ........................... $ 0.30 $ 0.25 $ 0.21
==============================================
Weighted average number of common shares
outstanding (note 14) .......................... 3,341,089 3,297,466 3,230,601
==============================================
Weighted average number of diluted common
shares outstanding (note 14) ................... 3,389,350 3,344,310 3,256,178
==============================================
See accompanying notes to consolidated financial statements.
A-21
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2004, 2003, and 2002
-------------------------------------------------------------
Common Stock Treasury Stock
----------------------- Retained ---------------------
Shares Amount Earnings Shares Amount
-------------------------------------------------------------
Balance -- December 31, 2001 .................. 2,826,360 $12,638,000 $ 7,886,000 -- $ --
Cash dividends paid ($0.21 per share) ....... -- -- (667,000) -- --
5% Stock dividend ........................... 93,654 1,734,000 (1,735,000) -- --
Common stock issued under
stock plans ............................... 18,467 315,000 -- 8,832 164,000
Stock options exercised ..................... 34,085 371,000 -- -- --
Repurchase common stock ..................... -- -- -- (8,832) (164,000)
Comprehensive income:
Net income for the year
ended December 31, 2002 ................... -- -- 3,116,000 -- --
Unrealized holding gains on securities
available for sale arising during the
period (net tax of $84,000) .............. -- -- -- -- --
Reclassification adjustment for losses in net
income (net tax benefit of $1,000) ........ -- -- -- -- --
Total comprehensive income ..................
-------------------------------------------------------------
Balance -- December 31, 2002 .................. 2,972,566 $15,058,000 $ 8,600,000 -- $ --
Cash dividends paid ($0.25 per share) ....... -- -- (817,000) -- --
5% Stock dividend ........................... 150,162 3,679,000 (3,681,000) -- --
Common stock issued
under stock plans ......................... 30,216 570,000 -- -- --
Stock options exercised ..................... 12,289 126,000 -- -- --
Tax benefit on stock options exercised ...... -- 119,000 -- -- --
Comprehensive income:
Net income for the year
ended December 31, 2003 ................... -- -- 3,491,000 -- --
Unrealized holding losses on securities
available for sale arising during the
period (net tax benefit of $117,000) ...... -- -- -- -- --
Reclassification adjustment for gains in net
income (net tax of $19,000) ............... -- -- -- -- --
Total comprehensive income ....................
-------------------------------------------------------------
Balance -- December 31, 2003 .................. 3,165,233 $19,552,000 $ 7,593,000 -- $ --
Cash dividends paid ($0.30 per share) ....... -- -- (1,016,000) -- --
5% Stock dividend ........................... 155,502 3,577,000 (3,679,000) 4,339 100,000
Common stock issued
under stock plans ......................... 14,892 322,000 -- 15,661 354,000
Stock options exercised ..................... 30,356 292,000 -- -- --
Tax benefit on stock options exercised ...... -- 150,000 -- -- --
Repurchase common stock ..................... -- -- -- (20,000) (454,000)
Comprehensive income:
Net income for the year
ended December 31, 2004 ................... -- -- 3,848,000 -- --
Unrealized holding losses on securities
available for sale arising during the
period (net tax benefit of $113,000) ...... -- -- -- -- --
Reclassification adjustment for losses in net
income (net tax benefit of $1,000) ........ -- -- -- -- --
Total comprehensive income ....................
-------------------------------------------------------------
Balance -- December 31, 2004 .................. 3,365,983 $23,893,000 $ 6,746,000 -- $ --
=============================================================
Years Ended December 31,
2004, 2003, and 2002
---------------------------
Accumulated
Other
Comprehensive
Income/(Loss),
Net Total
---------------------------
Balance -- December 31, 2001 .................. $ 29,000 $ 20,553,000
Cash dividends paid ($0.21 per share) ....... -- (667,000)
5% Stock dividend ........................... -- (1,000)
Common stock issued under
stock plans ............................... -- 479,000
Stock options exercised ..................... -- 371,000
Repurchase common stock ..................... -- (164,000)
Comprehensive income:
Net income for the year
ended December 31, 2002 ................... -- 3,116,000
Unrealized holding gains on securities
available for sale arising during the
period (net tax of $84,000) .............. 133,000 133,000
Reclassification adjustment for losses in net
income (net tax benefit of $1,000) ........ (3,000) (3,000)
------------
Total comprehensive income .................. 3,246,000
---------------------------
Balance -- December 31, 2002 .................. $ 159,000 $ 23,817,000
Cash dividends paid ($0.25 per share) ....... -- (817,000)
5% Stock dividend ........................... -- (2,000)
Common stock issued
under stock plans ......................... -- 570,000
Stock options exercised ..................... -- 126,000
Tax benefit on stock options exercised ...... -- 119,000
Comprehensive income:
Net income for the year
ended December 31, 2003 ................... -- 3,491,000
Unrealized holding losses on securities
available for sale arising during the
period (net tax benefit of $117,000) ...... (185,000) (185,000)
Reclassification adjustment for gains in net
income (net tax of $19,000) ............... 30,000 30,000
------------
Total comprehensive income .................... 3,336,000
---------------------------
Balance -- December 31, 2003 .................. $ 4,000 $ 27,149,000
Cash dividends paid ($0.30 per share) ....... -- (1,016,000)
5% Stock dividend ........................... -- (2,000)
Common stock issued
under stock plans ......................... -- 676,000
Stock options exercised ..................... -- 292,000
Tax benefit on stock options exercised ...... -- 150,000
Repurchase common stock ..................... -- (454,000)
Comprehensive income:
Net income for the year
ended December 31, 2004 ................... -- 3,848,000
Unrealized holding losses on securities
available for sale arising during the
period (net tax benefit of $113,000) ...... (181,000) (181,000)
Reclassification adjustment for losses in net
income (net tax benefit of $1,000) ........ (2,000) (2,000)
------------
Total comprehensive income .................... 3,665,000
---------------------------
Balance -- December 31, 2004 .................. $ (179,000) $ 30,460,000
===========================
See accompanying notes to consolidated financial statements.
A-22
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------------------
2004 2003 2002
-----------------------------------------------
Cash flows from operating activities:
Net income ......................................................... $ 3,848,000 $ 3,491,000 $ 3,116,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment........ 622,000 619,000 561,000
Amortization of premiums and accretion of discounts, net....... 593,000 791,000 424,000
Accretion of deferred loan fees ............................... (142,000) (172,000) (53,000)
Provision for loan losses ..................................... 540,000 425,000 160,000
Originations of mortgage loans held for sale .................. (12,032,000) (37,063,000) (23,102,000)
Proceeds from sale of mortgage loans .......................... 12,515,000 39,037,000 24,490,000
Gain on sale of loans ......................................... (135,000) (451,000) (248,000)
Loss on write off of fixed asset .............................. 63,000 -- --
Loss (gain) on call and sale of securities .................... 3,000 (49,000) (4,000)
Gain on sale of fixed assets .................................. -- (54,000) --
Deferred income tax benefit ................................... (254,000) (44,000) (71,000)
Amortization of intangible assets ............................. 41,000 44,000 45,000
Increase in accrued interest receivable ....................... (59,000) (223,000) (132,000)
Tax benefit of stock plans .................................... 150,000 119,000 --
Decrease (increase) in other assets ........................... 360,000 (614,000) (111,000)
(Decrease) increase in other liabilities ....................... (105,000) 217,000 470,000
-----------------------------------------------
Net cash provided by operating activities ................... 6,008,000 6,073,000 5,545,000
-----------------------------------------------
Cash flows from investing activities:
Purchase of securities available for sale ..................... (13,689,000) (58,690,000) (7,185,000)
Proceeds from maturities and principal repayments
on securities available for sale ............................ 8,699,000 5,552,000 3,431,000
Proceeds from sales and calls on securities
available for sale .......................................... 9,211,000 4,270,000 3,653,000
Purchase of securities held to maturity ....................... (3,273,000) (24,317,000) (44,427,000)
Proceeds from maturities and principal repayments on
securities held to maturity ................................. 9,968,000 17,097,000 9,206,000
Proceeds from calls of securities held to maurity ............. 5,235,000 15,125,000 11,830,000
Purchase of FHLB-NY stock ..................................... (321,000) (263,000) (173,000)
Investment in special purpose subsidiary ...................... -- (217,000) --
Net increase in loans ......................................... (34,531,000) (45,450,000) (30,757,000)
Sales of premises and equipment ............................... -- 227,000 --
Additions to premises and equipment ........................... (481,000) (696,000) (628,000)
-----------------------------------------------
Net cash used in investing activities ....................... (19,182,000) (87,362,000) (55,050,000)
-----------------------------------------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits .................. 9,396,000 11,501,000 11,763,000
Net increase in interest-bearing deposits ..................... 5,984,000 27,302,000 35,288,000
Net decrease (increase) in securities sold
under agreement to repurchase ............................... (177,000) 1,112,000 1,780,000
Net increase in short term borrowings ......................... 5,500,000 20,000,000 --
Payments on long term borrowings .............................. (1,371,000) -- --
Issuance of subordinated debentures ........................... -- 7,217,000 --
Cash dividends paid on common stock ........................... (1,018,000) (819,000) (668,000)
Purchase of treasury stock .................................... (454,000) -- (164,000)
Exercise of stock options ..................................... 292,000 126,000 371,000
Issuance of common stock ...................................... 676,000 570,000 479,000
-----------------------------------------------
Net cash provided by financing activities ................... 18,828,000 67,009,000 48,849,000
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents .......... 5,654,000 (14,280,000) (656,000)
Cash and cash equivalents - beginning ......................... 19,138,000 33,418,000 34,074,000
-----------------------------------------------
Cash and cash equivalents - ending ............................ $ 24,792,000 $ 19,138,000 $ 33,418,000
===============================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ........................ 4,831,000 4,676,000 5,487,000
Cash paid during the year for income taxes .................... 2,260,000 1,934,000 1,698,000
See accompanying notes to consolidated financial statements.
A-23
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Note 1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Stewardship
Financial Corporation ("the Corporation") and its wholly-owned subsidiary,
Atlantic Stewardship Bank (`the Bank"). Atlantic Stewardship Bank includes its
wholly-owned subsidiary, Stewardship Investment Corp. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current presentation.
Basis of consolidated financial statements presentation
The consolidated financial statements of the Corporation have been prepared in
conformity with U.S. generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the statements of financial condition and revenues and expenses during the
reporting periods. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks, commercial paper,
interest-bearing deposits in other banks, money market funds and federal funds
sold. Generally, federal funds are sold for one-day periods.
Securities available for sale and held to maturity
The Corporation classifies its securities as securities held to maturity or
securities available for sale. Investments in debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as securities held to maturity and are carried at cost, adjusted for
amortization of premium and accretion of discount, which are recognized as
adjustments to income, on a level yield basis. All other securities are
classified as securities available for sale. Securities available for sale may
be sold prior to maturity in response to changes in interest rates or prepayment
risk, for asset/liability management purposes, or other similar factors. These
securities are carried at fair value with unrealized holding gains or losses
reported in a separate component of stockholders' equity, net of the related tax
effects. Realized gains or losses on sales of securities are based upon the
specific identification method. Management evaluates securities for other than
temporary impairment and records such adjustments as necessary.
Federal Home Loan Bank of New York Stock
As a condition of membership, the Corporation is required to maintain shares of
stock in the Federal Home Loan Bank of New York (FHLB-NY) based on the
Corporation's level of residential mortgage loans and mortgage-backed securities
or outstanding advances from the FHLB-NY, whichever is larger. Such shares are
carried at cost.
Mortgage loans held for sale
Mortgage loans held for sale are reported at the lower of cost or market on an
aggregate basis. Mortgage loans held for sale are carried net of deferred fees,
which are recognized as income at the time the loans are sold to permanent
investors. Gains or losses on the sale of mortgage loans held for sale are
recognized at the settlement date and are determined by the difference between
the net proceeds and the amortized cost.
A-24
Loans
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey and therefore collectibility of the loan
portfolio is susceptible to changes in real estate market conditions in the
northern New Jersey market. The Corporation has not made loans to borrowers
outside the United States.
Loans are carried at the principal amount outstanding, net of unearned discounts
and deferred loan fees and costs. Interest on loans is accrued and credited to
interest income as earned.
Loans are considered delinquent when contractual principal and interest has not
been paid for more than 30 days. The accrual of interest income is discontinued
on a loan when certain factors indicate reasonable doubt as to the
collectibility of principal and interest. At the time a loan is placed on
nonaccrual status, previously accrued and uncollected interest is reversed
against interest income in the current period. Interest collections on
nonaccrual loans are generally credited to interest income when received. Such
loans are restored to an accrual status only if the loan is brought
contractually current and the borrower has demonstrated an ability to make
future payments of principal and interest.
The Corporation defined the population of impaired loans to include nonaccrual
loans, loans more than 90 days past due and restructured loans. Impaired loans
are individually assessed to determine that the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows.
Loan fees collected and certain costs incurred related to loan originations are
deferred and amortized as an adjustment to interest income over the life of the
related loans. The deferred fees and costs are recorded as an adjustment to
loans outstanding.
Allowance for loan losses
An allowance for loan losses is maintained at a level considered adequate to
absorb inherent loan losses. Management of the Corporation, in determining the
provision for loan losses, considers the risks inherent in its loan portfolio
and changes in the nature and volume of its loan activities, along with general
economic and real estate market conditions. The allowance is maintained through
provisions for loan loss that are charged to income. Losses on loans are charged
against the allowance for loan losses when it is believed the collection of
principal is unlikely and the collateral is not adequate.
The Corporation utilizes a two tier approach: (1) identification of problem
loans and the establishment of specific loss allowances on such loans; and (2)
establishment of general allowances on the remainder of its loan portfolio based
on historical loss experience and other economic data management believes
relevant. The Corporation maintains a loan review system, which allows for a
periodic review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other things,
delinquency status, size of loans, types of collateral and financial condition
of the borrowers. Specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination of factors
including, but not limited to, actual loan loss experience, composition of loan
portfolio, current economic conditions and management's judgment.
Although management believes that adequate specific and general loan losses are
established, actual losses are dependent upon future events and, as such,
further additions to the level of the specific and general loan loss allowance
may be necessary.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.
Premises and equipment
Land is stated at cost. Buildings and improvements and furniture, fixtures and
equipment are stated at cost, less accumulated depreciation computed on the
straight-line method over the estimated lives of each type of asset. Estimated
useful lives are three to forty years for buildings and improvements and three
to twenty-five years for furniture, fixtures and equipment. Leasehold
improvements are stated at cost less accumulated amortization computed on the
straight-line method over the shorter of the term of the lease or useful life.
Significant renewals and improvements are capitalized. Maintenance and repairs
are charged to operations as incurred. Rental income is netted against occupancy
costs in the Consolidated Statements of Income.
Other real estate owned
Other real estate owned (OREO) consists of foreclosed property and is carried at
the lower of cost or fair value less estimated selling costs. When a property is
acquired, the excess of the carrying amount over fair value, if any, is charged
to the allowance
A-25
for loan losses. Subsequent adjustments to the carrying value are recorded in an
allowance for OREO and charged to OREO expense. Operating results for OREO,
including rental income, operating expenses, and gains and losses realized from
the sale of property owned, are also recorded in OREO expense. As of December
31, 2004 and 2003, the Corporation had no OREO.
Income taxes
The Corporation accounts for taxes under the asset/liability method. Under this
method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Other comprehensive income
The Corporation's other comprehensive income is comprised of unrealized gains
and losses on securities available for sale. Disclosure of comprehensive income
for the years end 2004, 2003 and 2002 is presented in the accompanying
consolidated statements of changes in Stockholders' Equity.
Stock plans
At December 31, 2004, the Corporation has two stock-based employee compensation
plans and two director compensation plans, which are described more fully in
Note 13. The Corporation accounts for these 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 compensation.
2004 2003 2002
-----------------------------------------
Net Income:
Net income as reported ................................... $ 3,848,000 $ 3,491,000 $ 3,116,000
Stock-based compensation included
in net income, net of related tax effects .............. 22,000 32,000 29,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects ............................. (88,000) (91,000) (82,000)
-----------------------------------------
Pro forma net income ..................................... $ 3,782,000 $ 3,432,000 $ 3,063,000
=========================================
Earnings per share:
As reported basic earnings per share ..................... $ 1.15 $ 1.06 $ 0.96
As reported diluted earnings per share ................... 1.14 1.04 0.96
Pro forma basic earnings per share ....................... 1.13 1.04 0.95
Pro forma diluted earnings per share ..................... 1.12 1.03 0.94
Weighted average fair value of options granted during year $ -- $ 8.75 $ --
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
Stock Options
-------------
2003
-------------
Dividend yield ......................... 2.02%
Expected volatility .................... 51.65%
Risk-free interest rate ................ 3.40%
Expected life .......................... 7 years
Fair value at grant date ............... $ 8.75
A-26
Earnings per share
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of the basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued.
All share and per share amounts have been restated to reflect a 5% stock
dividend paid November 2002, 2003 and 2004 and a 3 for 2 stock split that
occurred in July 2003.
Intangible assets
Intangible assets are comprised of other intangible assets and core deposit
intangibles. Other intangible assets represent the excess of the fair value of
liabilities assumed over the fair value of tangible assets acquired through a
branch acquisition, completed in 1995, which did not qualify as a business
combination. Other intangible assets amounted to $166,000 and $198,000 at
December 31, 2004 and December 31, 2003, respectively, and are amortized on a
straight-line method over a period of fifteen years.
The core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in the same
acquisition. The core deposit intangible amounted to $13,000 and $22,000 at
December 31, 2004 and December 31, 2003, respectively, and is amortized on an
accelerated basis over a period of twelve years.
Note 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash reserves are required to be maintained on deposit with the Federal Reserve
Bank based on deposits. The average amount of the reserves on deposit for the
years ended December 31, 2004 and 2003 was approximately $5.9 million and $4.9
million, respectively.
Note 3. SECURITIES AVAILABLE FOR SALE
The following is a summary of the contractual maturities and related unrealized
gains and losses of securities available for sale:
December 31, 2004
---------------------------------------------------------
Gross Unrealized
Amortized --------------------------- Market
Cost Gains Losses Value
---------------------------------------------------------
U.S. Treasury:
After one but within five years .............. $ 503,000 $ -- $ 8,000 $ 495,000
U.S. government sponsored agencies:
After one but within five years .............. 23,556,000 29,000 241,000 23,344,000
Obligations of state and political subdivisions:
Within one year .............................. 156,000 2,000 -- 158,000
After one but within five years .............. 1,787,000 -- 30,000 1,757,000
---------------------------------------------------------
1,943,000 2,000 30,000 1,915,000
---------------------------------------------------------
Mortgage-backed securities:
After one but within five years .............. 193,000 2,000 1,000 194,000
After five years ............................. 29,587,000 126,000 177,000 29,536,000
---------------------------------------------------------
29,780,000 128,000 178,000 29,730,000
---------------------------------------------------------
Community Reinvestment Act Fund:
Within one year .............................. 1,021,000 9,000 -- 1,030,000
---------------------------------------------------------
$ 56,803,000 $ 168,000 $ 457,000 $ 56,514,000
=========================================================
A-27
December 31, 2003
---------------------------------------------------------
Gross Unrealized
Amortized --------------------------- Market
Cost Gains Losses Value
---------------------------------------------------------
U.S. Treasury:
After one but within five years .............. $ 505,000 $ -- $ 5,000 $ 500,000
U.S. government sponsored agencies:
After one but within five years .............. 20,210,000 48,000 112,000 20,146,000
After five years ............................. 2,000,000 3,000 5,000 1,998,000
---------------------------------------------------------
22,210,000 51,000 117,000 22,144,000
---------------------------------------------------------
Obligations of state and political subdivisions:
Within one year .............................. 176,000 3,000 -- 179,000
After one but within five years .............. 1,224,000 8,000 5,000 1,227,000
---------------------------------------------------------
1,400,000 11,000 5,000 1,406,000
---------------------------------------------------------
Mortgage-backed securities:
After one but within five years .............. 736,000 11,000 1,000 746,000
After five years ............................. 36,449,000 201,000 141,000 36,509,000
---------------------------------------------------------
37,185,000 212,000 142,000 37,255,000
---------------------------------------------------------
$ 61,300,000 $ 274,000 $ 269,000 $ 61,305,000
=========================================================
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
Mortgage-backed securities are comprised primarily of government agencies such
as the Government National Mortgage Association ("GNMA") and government
sponsored agencies such as the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC").
The following tables summarize the fair value and unrealized losses of those
investment securities which reported an unrealized loss at December 31, 2004 and
2003, and if the unrealized loss position was continuous for the twelve months
prior to December 31, 2004 and 2003.
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Unrealized Unrealized Unrealized
2004 Fair Value Losses Fair Value Losses Fair Value Losses
--------------------------- --------------------------- ---------------------------
U.S. Treasury .................... $ 495,000 $ (8,000) $ -- $ -- $ 495,000 $ (8,000)
U.S. government
sponsored agencies ............. 15,394,000 (200,000) 1,693,000 (41,000) 17,087,000 (241,000)
Obligations of state and
political subdivisions ......... 1,526,000 (27,000) 231,000 (3,000) 1,757,000 (30,000)
Mortgage-backed securities ....... 9,443,000 (70,000) 3,857,000 (108,000) 13,300,000 (178,000)
-----------------------------------------------------------------------------------------
Total temporarily impaired
securities ................. $ 26,858,000 $ (305,000) $ 5,781,000 $ (152,000) $ 32,639,000 $ (457,000)
=========================================================================================
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Unrealized Unrealized Unrealized
2003 Fair Value Losses Fair Value Losses Fair Value Losses
--------------------------- --------------------------- ---------------------------
U.S. Treasury .................... $ 500,000 $ (5,000) $ -- $ -- $ 500,000 $ (5,000)
U.S. government
sponsored agencies ............. 11,595,000 (117,000) -- -- 11,595,000 (117,000)
Obligations of state and
political subdivisions ......... 712,000 (5,000) -- -- 712,000 (5,000)
Mortgage-backed securities ....... 12,379,000 (142,000) -- -- 12,379,000 (142,000)
-----------------------------------------------------------------------------------------
Total temporarily impaired
securities ................. $ 25,186,000 $ (269,000) $ -- $ -- $ 25,186,000 $ (269,000)
=========================================================================================
A-28
The unrealized losses are primarily due to the changes in interest rates. These
securities have not been considered impaired as scheduled principal and interest
payments have been made and management anticipates collecting the entire
principal balance as scheduled. Management believes the price variation is
temporary in nature and has the ability and intent to hold these securities to
maturity or for a sufficient amount of time to recover the recorded principal.
Cash proceeds realized from sales and calls of securities available for sale for
the years ended December 31, 2004, 2003 and 2002 were $9,211,000, $4,270,000 and
$3,653,000 respectively. Gross gains totaling $4,000 and gross losses totaling
$9,000 were realized on sales and calls of securities during the year ended
December 31, 2004. Gross gains totaling $49,000 and no losses were realized on
sales and calls of securities during the year ended December 31, 2003. Gross
gains totaling $10,000 and gross losses totaling $14,000 were realized on sales
and calls of securities during the year ended December 31, 2002.
See Note 9 to financial statements regarding securities pledged as collateral
for securities sold under agreements to repurchase.
Note 4. SECURITIES HELD TO MATURITY
The following is a summary of the contractual maturities and related unrealized
gains and losses of securities held to maturity:
December 31, 2004
---------------------------------------------------------
Gross Unrealized
Carrying --------------------------- Estimated
Value Gains Losses Market Value
---------------------------------------------------------
U.S. Treasury:
After one but within five years .............. $ 1,007,000 $ 30,000 $ -- $ 1,037,000
U.S. government sponsored agencies:
Within one year .............................. 511,000 1,000 -- 512,000
After one but within five years .............. 8,144,000 21,000 76,000 8,089,000
---------------------------------------------------------
8,655,000 22,000 76,000 8,601,000
---------------------------------------------------------
Obligations of state and political subdivisions:
Within one year .............................. 3,517,000 36,000 1,000 3,552,000
After one but within five years .............. 13,613,000 210,000 14,000 13,809,000
After five years ............................. 558,000 -- 2,000 556,000
---------------------------------------------------------
17,688,000 246,000 17,000 17,917,000
---------------------------------------------------------
Mortgage-backed securities:
After one but within five years .............. 424,000 6,000 -- 430,000
After five years ............................. 12,337,000 202,000 23,000 12,516,000
---------------------------------------------------------
12,761,000 208,000 23,000 12,946,000
---------------------------------------------------------
$ 40,111,000 $ 506,000 $ 116,000 $ 40,501,000
=========================================================
December 31, 2003
---------------------------------------------------------
Gross Unrealized
Carrying --------------------------- Estimated
Value Gains Losses Market Value
---------------------------------------------------------
U.S. Treasury:
After one but within five years................ $ 1,011,000 $ 56,000 $ -- $ 1,067,000
U.S. government sponsored agencies:
Within one year................................ 250,000 10,000 -- 260,000
After one but within five years................ 12,506,000 64,000 26,000 12,544,000
---------------------------------------------------------
12,756,000 74,000 26,000 12,804,000
---------------------------------------------------------
Obligations of state and political subdivisions:
Within one year................................ 3,725,000 54,000 -- 3,779,000
After one but within five years................ 15,961,000 600,000 -- 16,561,000
---------------------------------------------------------
19,686,000 654,000 -- 20,340,000
---------------------------------------------------------
Mortgage-backed securities:
Within one year................................ 81,000 1,000 -- 82,000
After one but within five years................ 461,000 10,000 -- 471,000
After five years............................... 18,365,000 284,000 43,000 18,606,000
---------------------------------------------------------
18,907,000 295,000 43,000 19,159,000
---------------------------------------------------------
$ 52,360,000 $ 1,079,000 $ 69,000 $ 53,370,000
=========================================================
Issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.
A-29
Mortgage-backed securities are comprised primarily of government agencies such
as GNMA and government sponsored agencies such as FNMA and FHLMC.
The following tables summarize the fair value and unrealized losses of those
investment securities which reported an unrealized loss at December 31, 2004 and
2003, and if the unrealized loss position was continuous for the twelve months
prior to December 31, 2004 and 2003.
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Unrealized Unrealized Unrealized
2004 Fair Value Losses Fair Value Losses Fair Value Losses
--------------------------- --------------------------- ---------------------------
U.S. government
sponsored agencies ............. $ 5,627,000 $ (63,000) $ 486,000 $ (13,000) $ 6,113,000 $ (76,000)
Obligations of state and
political subdivisions ......... 3,335,000 (17,000) -- -- 3,335,000 (17,000)
Mortgage-backed securities ....... 2,254,000 (11,000) 1,013,000 (12,000) 3,267,000 (23,000)
-----------------------------------------------------------------------------------------
Total temporarily impaired
securities ................. $ 11,216,000 $ (91,000) $ 1,499,000 $ (25,000) $ 12,715,000 $ (116,000)
=========================================================================================
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Unrealized Unrealized Unrealized
2003 Fair Value Losses Fair Value Losses Fair Value Losses
--------------------------- --------------------------- ---------------------------
U.S. government
sponsored agencies ............. $ 4,214,000 $ (26,000) $ -- $ -- $ 4,214,000 $ (26,000)
Mortgage-backed securities ....... 3,511,000 (43,000) -- -- 3,511,000 (43,000)
-----------------------------------------------------------------------------------------
Total temporarily impaired
securities ................. $ 7,725,000 $ (69,000) $ -- $ -- $ 7,725,000 $ (69,000)
=========================================================================================
The unrealized losses are primarily due to the changes in interest rates. These
securities have not been considered impaired as scheduled principal and interest
payments have been made and management anticipates collecting the entire
principal balance as scheduled. Management believes the price variation is
temporary in nature and has the ability and intent to hold these securities to
maturity.
Cash proceeds realized from calls of securities held to maturity for the years
ended December 31, 2004, 2003 and 2002 were $5,235,000, $15,125,000 and
$11,830,000, respectively. Gross gains totaling $2,000 and no losses were
realized from calls for the year ended December 31, 2004. There were no gains or
losses realized on calls for the years ended December 31, 2003 and 2002.
The carrying value of securities pledged to secure treasury tax and loan
deposits and public deposits for the three years ended December 31, 2004, 2003
and 2002 were $1,003,000, $1,004,000 and $1,004,000, respectively. See also Note
9 to financial statements regarding securities pledged as collateral for
securities sold under agreements to repurchase.
A-30
Note 5. LOANS
The loan portfolio consisted of the following:
December 31,
-----------------------------
2004 2003
-----------------------------
Mortgage:
Residential ................. $ 41,569,000 $ 44,835,000
Commercial .................. 130,762,000 109,708,000
Commercial .................... 55,252,000 48,950,000
Equity ........................ 21,484,000 17,181,000
Installment ................... 47,218,000 41,067,000
Other ......................... 260,000 238,000
-----------------------------
Total loans ............. 296,545,000 261,979,000
-----------------------------
Less: Deferred loan fees ...... 337,000 315,000
Allowance for loan losses 3,299,000 2,888,000
-----------------------------
3,636,000 3,203,000
-----------------------------
Loans, net .................... $ 292,909,000 $ 258,776,000
=============================
At December 31, 2004, 2003 and 2002, loans serviced by the Corporation for the
benefit of others totaled approximately $5,730,000, $5,983,000 and $2,809,000,
respectively.
Activity in the allowance for loan losses is summarized as follows:
December 31,
---------------------------------------------
2004 2003 2002
---------------------------------------------
Balance, beginning ............ $ 2,888,000 $ 2,689,000 $ 2,602,000
Provision charged to operations 540,000 425,000 160,000
Recoveries of loans charged off 12,000 3,000 17,000
Loans charged off ............. (141,000) (229,000) (90,000)
---------------------------------------------
Balance, ending ............... $ 3,299,000 $ 2,888,000 $ 2,689,000
=============================================
The Corporation has entered into lending transactions in the ordinary course of
business with directors, executive officers and principal stockholders of the
Corporation and their affiliates on the same terms as those prevailing for
comparable transactions with other borrowers. At December 31, 2004 and 2003,
these loans aggregated approximately $444,000 and $436,000, respectively. During
the year ended December 31, 2004, new loans totaling $64,000 were granted and
repayments totaled approximately $56,000. The loans, at December 31, 2004, were
current as to principal and interest payments, and do not involve more than
normal risk of collectibility.
Note 6. NONPERFORMING ASSETS
Nonperforming assets include the following:
December 31,
-------------------------
2004 2003
-------------------------
Nonaccrual loans .............................. $ 262,000 $ 257,000
Loans past due ninety days or more and accruing 947,000 320,000
Restructured loans ............................ 215,000 513,000
-------------------------
Total nonperforming loans ................. $ 1,424,000 $ 1,090,000
=========================
Restructured loans classified as nonaccrual for the years ended December 31,
2004 and 2003 were $162,000 and $174,000, respectively.
A-31
There were no restructured loans classified as loans past due ninety days or
more and accruing for the year ended December 31, 2004. Restructured loans
classified as loans past due ninety days or more and accruing for the year ended
December 31, 2003 totaled $150,000.
The following information is presented for loans classified as nonaccrual and
restructured:
Year ended December 31,
------------------------------
2004 2003 2002
------------------------------
Income that would have been recorded under
contractual terms ............................ $ 47,000 $ 57,000 $ 69,000
Less interest income received .................. 20,000 13,000 48,000
------------------------------
Lost income on nonperforming loans at year end.. $ 27,000 $ 44,000 $ 21,000
==============================
Impaired loans consisted of the following:
December 31,
------------------------------------------
2004 2003 2002
------------------------------------------
Impaired Loans
With related allowance for loan loss ..... $ 477,000 $ 1,073,000 $ 499,000
Without related allowance for loan loss .. 947,000 17,000 848,000
------------------------------------------
Total impaired loans ....................... $ 1,424,000 $ 1,090,000 $ 1,347,000
==========================================
Related allowance for possible credit losses $ 44,000 $ 100,000 $ 189,000
==========================================
Average investment in impaired loans ....... $ 1,431,000 $ 1,258,000 $ 1,370,000
==========================================
Interest recognized on impaired loans ...... $ 71,000 $ 44,000 $ 81,000
==========================================
Note 7. PREMISES AND EQUIPMENT, NET
December 31,
-------------------------
2004 2003
-------------------------
Land ......................................... $ 1,116,000 $ 1,116,000
Buildings and improvements ................... 1,971,000 1,899,000
Leasehold improvements ....................... 732,000 748,000
Furniture, fixtures and equipment ............ 3,335,000 3,061,000
-------------------------
7,154,000 6,824,000
Less accumulated depreciation and amortization 3,721,000 3,187,000
-------------------------
Total premises & equipment, net .............. $ 3,433,000 $ 3,637,000
=========================
Amounts charged to net occupancy expense for depreciation and amortization of
banking premises and equipment amounted to $622,000, $619,000 and $561,000 in
2004, 2003 and 2002, respectively.
A-32
Note 8. DEPOSITS
December 31, 2004 December 31, 2003
-----------------------------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-----------------------------------------------------
Noninterest-bearing demand ............. 0% $ 90,241,000 0% $ 80,845,000
NOW accounts ........................... 1.02% 60,025,000 0.57% 41,436,000
Money market accounts .................. 0.74% 64,160,000 0.78% 78,227,000
-----------------------------------------------------
Total interest-bearing demand .......... 0.88% 124,185,000 0.71% 119,663,000
Statement savings and clubs ............ 0.61% 45,492,000 0.77% 41,258,000
Business savings ....................... 0.49% 4,474,000 0.49% 3,793,000
-----------------------------------------------------
Total savings .......................... 0.60% 49,966,000 0.75% 45,051,000
IRA investment and variable rate savings 3.43% 19,490,000 3.81% 19,070,000
Money market certificates .............. 2.36% 73,036,000 2.61% 76,909,000
-----------------------------------------------------
Total certificates of deposit .......... 2.59% 92,526,000 2.85% 95,979,000
-----------------------------------------------------
Total interest-bearing deposits ........ 1.42% 266,677,000 1.50% 260,693,000
-----------------------------------------------------
Total deposits ......................... 1.06% $ 356,918,000 1.15% $ 341,538,000
=====================================================
Certificates of deposit with balances of $100,000 or more at December 31, 2004
and 2003, totaled approximately $32,214,000 and $29,355,000, respectively.
Interest on certificates of deposit with balances of $100,000 or more totaled
$798,000, $908,000, and $925,000, for the years ended December 31, 2004, 2003
and 2002, respectively.
The scheduled maturities of certificates of deposit were as follows:
December 31,
-------------------------
2004 2003
-------------------------
One year or less ....................... $58,819,000 $55,542,000
After one to three years ............... 30,169,000 36,087,000
After three years ...................... 3,538,000 4,350,000
-------------------------
$92,526,000 $95,979,000
=========================
Note 9. OTHER BORROWINGS
Federal Home Loan Bank of New York Advances
During the years 2004 and 2003, the maximum amount of FHLB-NY advances
outstanding at any month end was $24.1 million and $20.0 million, respectively.
The average amount of advances outstanding during the year ended December 31,
2004 and 2003 was $19.1 million and $1.0 million, respectively. As of December
31, 2004, all FHLB-NY advances had fixed rates. The advances are scheduled for
repayment as follows:
December 31, 2004
----------------------
Weighted
Average
Maturity Amount Rate
-------------------------------------------
2005 ............. $ 7,500,000 2.45%
2008 ............. 6,629,000 3.26%
2013 ............. 10,000,000 3.82%
----------------------
$24,129,000 3.24%
A-33
Advances totaling $10.0 million are convertible by the FHLB-NY quarterly into
any FHLB-NY advance at the then current market rate. This conversion feature is
only available if the three month LIBOR resets at or above 7.50%.
Advances from the FHLB-NY were secured by a blanket assignment of the
Corporation's unpledged, qualifying mortgage loans, mortgage-backed securities
and investment securities. Such loans and securities remain under the control of
the Corporation.
The Corporation had an available overnight line of credit with the FHLB-NY for a
maximum of $39.6 million at December 31, 2004.
Securities Sold Under Agreement to Repurchase
At December 31, 2004 and 2003, securities sold under agreements to repurchase
were collateralized by U.S. Treasury and U.S. government sponsored agency
securities having a carrying value of approximately $5,776,000 and $5,838,000,
respectively. These securities were maintained in a separate safekeeping account
within the Corporation's control.
December 31,
------------------------
2004 2003
------------------------
Balance .......................................... $3,370,000 $3,547,000
Weighted average interest rate ................... 1.99% 1.05%
Weighted average length of maturity .............. 108 days 90 days
Maximum amount outstanding at any month end
during the year ................................ $3,950,000 $5,155,000
Average amount outstanding during the year ....... $2,832,000 $3,998,000
Average interest rate during the year ............ 1.31% 1.44%
Note 10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
On September 17, 2003, Stewardship Statutory Trust I (the "Trust"), a statutory
business trust, whose common stock was 100% owned by Stewardship Financial
Corporation, issued $7,000,000 Fixed/Floating Rate Capital Securities ("Capital
Securities"), the proceeds from which the Trust used to purchase from the
Corporation, $7,217,000 of Fixed/Floating Rate Junior Subordinated Deferrable
Interest Debentures ("Debentures") maturing September 17, 2033. The Trust is
obligated to distribute all proceeds of a redemption whether voluntary or upon
maturity, to holders of the Capital Securities. Stewardship Financial
Corporation's obligation with respect to the Capital Securities, and the
subordinated debentures, when taken together, provide a full and unconditional
guarantee on a subordinated basis by Stewardship Financial Corporation of the
Trust's obligations to pay amounts when due on the Capital Securities.
The Capital Securities and the Debentures both bear a fixed interest rate of
6.75% until September 17, 2008 and thereafter shall float quarterly at a rate of
3-Month LIBOR plus 2.95%.
The Capital Securities and the Debentures both may be redeemed at par beginning
September 17, 2008 and quarterly thereafter. In addition, the Capital Securities
and the Debentures may be redeemed prior to September 17, 2008 upon the
occurrence of a special event. A special event includes a change to laws or
regulations which would preclude the Corporation to treat the Capital Securities
as Tier 1 Capital for purposes of capital adequacy guidelines of the Federal
Reserve, subject the Trust to U.S. federal income tax with respect to income
received or accrued, limit the deductibility of interest payable, or the Trust
would be considered an investment company that is required to be registered
under the Investment Company Act.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" was
issued in January 2003 and was reissued as FASB Interpretation No. 46 (revised
December 2003) ("FIN 46R"). FIN 46 and FIN 46R provide guidance on the
identification of entities controlled through means other than voting rights and
specify how the Corporation should evaluate its interest in a variable interest
entity for purposes of determining whether to consolidate that entity. If a
variable interest entity does not effectively disperse risk among the parties
involved, it must be consolidated by its primary beneficiary.
The Corporation adopted FIN 46R on December 31, 2003, deconsolidating its
investment in Stewardship Statutory Trust I, the subsidiary trust formed in
connection with the issuance of subordinated debentures (trust preferred
securities). In July 2003, the Board of Governors of the Federal Reserve System
instructed bank holding companies to continue to include trust preferred
securities in their Tier I capital for regulatory purposes until notice is given
to the contrary. There can be no assurance that the Federal Reserve System will
continue to allow bank holding companies to include trust preferred securities
in Tier I capital for regulatory purposes. As of December 31, 2004, assuming the
Corporation was not allowed to include the $7,000,000 in trust preferred
securities issued by Stewardship Statutory Trust I in Tier I capital, the
Corporation would remain "well capitalized".
A-34
Note 11. REGULATORY CAPITAL REQUIREMENTS
Regulations of the Board of Governors of the Federal Reserve System ("FRB")
require bank holding companies to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 2004, the Corporation was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0% and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively. The Bank must comply with
substantially similar capital regulations promulgated by the FDIC.
Under its prompt corrective action regulations, the FRB is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FRB about capital components, risk
weightings and other factors.
Management believes that, as of December 31, 2004, the Bank and the Corporation
have met all capital adequacy requirements to which they are subject.
The following is a summary of the Corporation's actual capital amounts and
ratios as of December 31, 2004 and 2003, compared to the FRB minimum capital
adequacy requirements and the FRB requirements for classification as a well
capitalized institution:
FRB Requirements
------------------------------------------
Minimum Capital For Classification
Actual Adequacy as Well Capitalized
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ------------------- -------------------
December 31, 2004
Leverage (Tier 1) capital .............. $37,460,000 9.08% $16,169,000 4.00% $20,211,000 5.00%
Risk-based capital:
Tier 1 ............................... 37,460,000 12.48% 12,018,000 4.00% 18,027,000 6.00%
Total ................................ 40,758,000 13.57% 24,036,000 8.00% 30,045,000 10.00%
December 31, 2003
Leverage (Tier 1) capital .............. $33,925,000 8.89% $15,265,000 4.00% $19,082,000 5.00%
Risk-based capital:
Tier 1 ............................... 33,925,000 12.93% 10,497,000 4.00% 15,746,000 6.00%
Total ................................ 36,812,000 14.03% 20,994,000 8.00% 26,243,000 10.00%
Note 12. BENEFIT PLANS
The Corporation has a noncontributory profit sharing plan covering all eligible
employees. Contributions are determined by the Corporation's Board of Directors
on an annual basis. Total profit sharing plan expense for the years ended
December 31, 2004, 2003 and 2002 amounted to approximately $327,000, $290,000
and $221,000, respectively.
The Corporation also has a 401(k) plan which covers all eligible employees.
Participants may elect to contribute up to 15% of their salaries, not to exceed
the applicable limitations as per the Internal Revenue Code. The Corporation, on
an annual basis, may elect to match 50% of the participant's first 5%
contribution. Total 401(k) expense for the years ended December 31, 2004, 2003
and 2002 amounted to approximately $59,000, $50,000 and $42,000, respectively.
During 1996, the Corporation adopted an Employee Stock Purchase Plan which
allows all eligible employees to authorize a specific payroll deduction from his
or her base compensation. Total stock purchases amounted to 1,504, 1,897 and
2,890 shares during 2004, 2003 and 2002, respectively.
A-35
Note 13. STOCK-BASED COMPENSATION
At December 31, 2004, the Corporation had four types of stock award programs
referred to as the Employee Stock Bonus Plan, the Director Stock Plan, an
Employee Stock Option Plan and a Stock Option Plan for Non-Employee Directors.
The Employee Stock Bonus Plan is intended to provide incentives which will
retain highly competent key management employees of the Corporation by providing
them with a bonus in the form of shares of the common stock of the Corporation.
The Corporation has not granted shares during 2004 and 2003 under this plan.
The Director Stock Plan permits members of the Board of Directors of the Bank to
receive any monthly Board of Directors' fees in shares of the Corporation's
common stock, rather than in cash. The Corporation issued 1,485, 3,733 and 4,541
shares during 2004, 2003 and 2002, respectively.
The Employee Stock Option Plan provides for options to purchase shares of Common
Stock to be issued to key employees of the Corporation at the discretion of the
Stock Option Committee. The committee has the authority to determine the terms
and conditions of the options granted, the exercise price thereof, and whether
the options are incentive or non-statutory options. The Employee Stock Option
Plan has reserved 142,469 shares of common stock for issuance. The options were
issued with an exercise price which represented market price of the stock at the
date of grant. Options are exercisable starting one year from the date of the
grant and expire between five and ten years from the date of grant and are
subject to a vesting schedule. There were no options granted during 2004.
Options were granted to all full-time employees on July 15, 2003. A summary of
the status of the qualified stock options as of December 31, 2004, 2003 and 2002
and changes during the years then ended on those dates is presented below:
2004 2003 2002
----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------
Outstanding at beginning of year ....... 57,277 $ 9.12 54,595 $ 7.17 $ 63,000 $ 7.03
Granted ................................ -- -- 9,592 19.05 -- --
Exercised .............................. 2,703 9.76 6,469 6.68 8,405 6.11
Forfeited .............................. 1,225 14.04 441 19.05 -- --
----------------------------------------------------------------
Outstanding at end of year ............. 53,349 $ 8.98 57,277 $ 9.12 54,595 $ 7.17
Options exercisable at year end ........ 44,681 42,510 43,978
Weighted average fair value of
options granted during the year ...... $ -- $ 8.75 $ --
The following table summarizes information about the qualified employee stock
options outstanding at December 31, 2004:
Options Outstanding
---------------------------------------------------------------
Number Weighted Avg. Weighted Number
Outstanding Remaining Average Exercisable
at 12/31/04 Contractual Life Exercise Price 12/31/04
---------------------------------------------------------------
Range of Exercise Prices:
$ 5 - 8 .......................... 30,967 2.50 $ 5.96 30,967
$ 8 - 12 .......................... 13,893 4.75 9.55 12,016
$ 12 - 16 .......................... -- -- -- --
$ 16 - 20 .......................... 8,489 8.54 19.05 1,698
--------- ---------------------------------------------------------------
$ 5 - 20 .......................... 53,349 4.05 $ 8.98 44,681
===============================================================
A-36
The 1995 Stock Option Plan for Non-Employee Directors had reserved 142,469
shares of common stock for issuance. During 1997 each participant was granted
the option to purchase 12,949 shares of common stock. No option could be
exercised more than five years after the date of its grant. The options were
issued with an exercise price of $5.55, 95% of the fair market value on the date
the options were granted. During 2001, an option to purchase the remaining
shares available under this plan, 12,948 shares, were granted to a new director.
The option to purchase these shares was issued with an exercise price of $8.92,
95% of the fair market value on the date the options were granted. Options to
purchase 48,919 shares were exercised in 2002. All options to purchase shares
have been exercised under this plan.
In May 2001, the shareholders approved the 2001 Stock Option Plan for
Non-Employee Directors that would allow the Corporation to grant a maximum of
9,116 shares to each director. The plan reserved 109,396 shares of common stock
for issuance. Options would be exercisable 20% each year for five years. No
option may be exercised more than five years after the date of its grant.
Options to purchase 82,044 shares were granted in 2001 with an exercise price of
$9.12. In September 2003 options to purchase 5,469 shares were granted with an
exercise price of $19.05. Options to purchase 29,171, 9,114 and 1,822 shares
were exercised during 2004, 2003 and 2002, respectively. Options to purchase
13,860 shares were exercisable at December 31, 2004.
The Corporation applies the "intrinsic value based method" as described in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation cost has been recognized for these
stock option plans. Consistent with SFAS 123, if compensation cost for the plans
was included, the Corporation's net income and earnings per share would have
been reduced to the proforma amounts as disclosed in Note 1.
Note 14: EARNINGS PER SHARE
The following reconciles the income available to common shareholders (numerator)
and the weighted average common stock outstanding (denominator) for both basic
and diluted earnings per share for 2004, 2003 and 2002:
2004 2003 2002
------------------------------------
Net income .................................. $3,848,000 $3,491,000 $3,116,000
====================================
Income available to common stockholders
basic and diluted ......................... $3,848,000 $3,491,000 $3,116,000
====================================
Weighted average common shares
outstanding - basic ....................... 3,341,089 3,297,466 3,230,601
Effect of dilutive securities - stock options 48,261 46,844 25,577
------------------------------------
Weighted average common shares
outstanding - diluted ..................... 3,389,350 3,344,310 3,256,178
====================================
Basic earnings per share .................... $ 1.15 $ 1.06 $ 0.96
====================================
Dilute earnings per share ................... $ 1.14 $ 1.04 $ 0.96
====================================
Note 15. INCOME TAXES
The components of income taxes (benefit) are summarized as follows:
Year ended December 31,
------------------------------------
2004 2003 2002
------------------------------------
Current tax expense:
Federal ................................ $1,877,000 $1,497,000 $1,321,000
State .................................. 581,000 455,000 384,000
------------------------------------
2,458,000 1,952,000 1,705,000
Deferred tax benefit:
Federal ................................ (216,000) (37,000) (61,000)
State .................................. (38,000) (7,000) (10,000)
------------------------------------
(254,000) (44,000) (71,000)
------------------------------------
$2,204,000 $1,908,000 $1,634,000
====================================
A-37
Not included in the above table is income tax (benefit) expense relating to
unrealized (losses) gains on securities available for sale recognized in
stockholders' equity amounting to ($114,000), ($98,000) and $83,000 for the
years ended December 31, 2004, 2003, and 2002, respectively.
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate (34%) to income before income taxes:
Year ended December 31,
----------------------------------------
2004 2003 2002
----------------------------------------
Federal income tax ......................................... $ 2,058,000 $ 1,836,000 $ 1,615,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect ..... 359,000 296,000 247,000
Nontaxable interest income ............................... (215,000) (230,000) (236,000)
Other items, net ......................................... 2,000 6,000 8,000
----------------------------------------
Effective federal income taxes ............................. $ 2,204,000 $ 1,908,000 $ 1,634,000
========================================
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
December 31,
--------------------------
2004 2003
--------------------------
Deferred tax assets/liabilities:
Allowance for loan losses ................................ $ 1,317,000 $ 1,153,000
Accrued reserves ......................................... 109,000 36,000
Core deposit intangible amortization ..................... 19,000 23,000
Nonaccrual loan interest ................................ 22,000 28,000
Depreciation ............................................ 80,000 58,000
--------------------------
$ 1,547,000 $ 1,298,000
--------------------------
Deferred tax liabilities:
Unrealized (losses) gains on securities available for sale (112,000) 2,000
Other .................................................... -- 5,000
--------------------------
$ (112,000) $ 7,000
--------------------------
Net deferred tax assets .................................... $ 1,659,000 $ 1,291,000
==========================
The Corporation has determined that it is not required to establish a valuation
reserve for the deferred tax tax asset, since it is more likely than not that
the deferred tax asset will be principally realized through carrybacks to
taxable income in prior years, a history of growth in earnings and the prospects
for continued growth in the future.
Note 16. COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated financial statements. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
At December 31, 2004, the Corporation had mortgage commitments to extend credit
aggregating approximately $2.6 million at fixed rates averaging 5.72%. Of these
loan commitments, $1.8 million will be sold to investors upon closing.
Commercial, construction and home equity loan commitments of approximately $16.5
million were extended with variable rates currently averaging 5.62% and $5.0
million were extended at fixed rates averaging 6.06%. All commitments were due
to expire within approximately 90 days.
A-38
Additionally, at December 31, 2004, the Corporation was committed for
approximately $76.3 million of unused lines of credit, consisting of $22.2
million relating to a home equity line of credit program and an unsecured line
of credit program (cash reserve), $10.9 million relating to credit cards, and
$43.2 million relating to commercial and construction lines of credit. Amounts
drawn on the unused lines of credit are predominantly assessed interest at rates
which fluctuate with the base rate.
Commitments under standby and commercial letters of credit aggregated
approximately $1.5 million at December 31, 2004, of which $1.5 million expires
within one year. Should any letter of credit be drawn on, the interest rate
charged on the resulting note would fluctuate with the Corporation's base rate.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Corporation evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Corporation upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby and commercial letters of credit are conditional commitments issued by
the Corporation to guarantee payment or performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation obtains collateral supporting those commitments for which
collateral is deemed necessary.
Rentals under long-term operating lease for branch offices amounted to
approximately $463,000, $363,000 and $273,000 during the years ended December
31, 2004, 2003 and 2002, respectively. At December 31, 2004, the minimum rental
commitments on the noncancellable leases with an initial term of one year and
expiring thereafter is as follows:
Year Ending Minimum
December 31 Rent
--------------------------------------------
2005 ..................... $ 467,000
2006 ..................... 477,000
2007 ..................... 437,000
2008 ..................... 411,000
2009 ..................... 336,000
Thereafter ............... 1,589,000
----------
$3,717,000
==========
The Corporation is also subject to litigation which arises primarily in the
ordinary course of business. In the opinion of management the ultimate
disposition of such litigation should not have a material adverse effect on the
financial position of the Corporation.
Note 17. DIVIDEND LIMITATION
The Corporation's ability to pay cash dividends is based on its ability to
receive cash from its bank subsidiary. New Jersey law provides that no dividend
shall be paid by the Bank on its capital stock unless, following the payment of
such dividend, the capital stock of the Bank will be unimpaired, and the Bank
will have a surplus of not less than 50% of its capital stock, or if not, the
payment of such dividend will not reduce the surplus of the Bank. At December
31, 2004, this restriction did not result in any effective limitation in the
manner in which the Bank is currently operating.
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Note 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107) Disclosures
About Fair Value of Financial Instruments, requires that the Corporation
disclose the estimated fair value of its financial instruments whether or not
recognized in the consolidated balance sheet. Fair value estimates, methods and
assumptions are set forth below for the Corporation's financial instruments.
December 31,
-------------------------------------------------
2004 2003
-------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents ...... $ 24,792 $ 24,792 $ 19,138 $ 19,138
Securities available for sale .. 56,514 56,514 61,305 61,305
Securities held to maturity .... 40,111 40,501 52,360 53,370
FHLB-NY stock .................. 1,643 1,643 1,322 1,322
Net loans ...................... 292,909 293,623 258,776 259,463
Mortgage loans held for sale ... 228 228 576 576
Financial liabilities:
Deposits ....................... 356,918 357,100 341,538 343,576
Securities sold under agreements
to repurchase ................ 3,370 3,370 3,547 3,547
Other borrowings ............... 24,129 23,654 20,000 19,483
Subordinated debentures ........ 7,217 7,503 7,217 7,264
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents
The carrying amount approximates fair value.
Securities available for sale
All securities available for sale are actively traded and have been valued using
quoted market prices.
Securities held to maturity
All securities held to maturity are actively traded and have been valued using
quoted market prices.
FHLB-NY stock
The carrying amount approximates fair value.
Net loans
Fair values are estimated for portfolios of loan with similar financial
characteristics. Loans are segregated by type such as residential and commercial
mortgages, commercial and other installment. The fair value of loans is
estimated by discounting cash flows using estimated market discount rates which
reflect the credit and interest rate risk inherent in the loans.
Mortgage loans held for sale
Loans in this category have been committed for sale to investors at the current
carrying amount.
Deposits
The fair value of deposits, with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW and money market accounts, is equal to the amount
payable on demand as of December 31, 2004 and 2003, respectively. The fair value
of the certificates of deposit is based on the discounted value of cash flows.
The discount rate is estimated using market discount rates which reflect
interest rate risk inherent in the certificates of deposit.
Securities sold under agreements to repurchase
The carrying value approximates fair value due to the relatively short time
before maturity.
A-40
Other borrowings
Fair values are based on the discounted value of cash flows. The discount rate
is estimated using market discount rates which reflect the interest rate risk
inherent in the borrowings.
Subordinated debentures
Fair value is based on the discounted value of cash flows. The discount rate is
estimated using market discount rates which reflect the interest rate risk
inherent in the debentures.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties, and at
December 31, 2004 and 2003, such amounts were not material.
Limitations
The preceding fair value estimates were made at December 31, 2004 and 2003,
based on pertinent market data and relevant information on the financial
instruments. These estimates do not include any premium or discount that could
result from an offer to sell at one time the Corporation's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Corporation's financial instruments, fair value
estimates were necessarily based on judgments with respect to future expected
loss experience, current economic conditions, risk assessments of various
financial instruments, and other factors. Given the subjective nature of these
estimates, the uncertainties surrounding them and the matters of significant
judgment that must be applied, these fair value estimates cannot be calculated
with precision. Modifications in such assumptions could meaningfully alter these
estimates.
Since these fair value approximations were made solely for on and off balance
sheet financial instruments at December 31, 2004 and 2003, no attempt was made
to estimate the value of anticipated future business. Furthermore, certain tax
implications related to the realization of unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.
Note 19. PARENT COMPANY ONLY
The Corporation was formed in January, 1995 to operate its subsidiary, Atlantic
Stewardship Bank. The earnings of the bank are recognized by the Corporation
using the equity method of accounting. Accordingly, the bank dividends paid
reduce the Corporation's investment in the subsidiary. In 2003, the Corporation
formed its second subsidiary, Stewardship Statutory Trust, to offer trust
preferred securities. The following information should be read in conjuction
with the other notes to the consolidated financial statements. Condensed
financial statements of the Corporation at December 31, 2004 and 2003 are
presented below:
Condensed Statements of Financial Condition
Years ended December 31,
-------------------------
2004 2003
-------------------------
Assets
Cash and due from banks .......................... $ 49,000 $ 277,000
Securities available for sale .................... 4,483,000 3,812,000
Securities held to maturity ...................... -- 1,000,000
Investment in subsidiary ......................... 32,767,000 28,961,000
Accrued interest receivable ...................... 45,000 44,000
Other assets ..................................... 376,000 314,000
-------------------------
Total assets .............................. $37,720,000 $34,408,000
=========================
Liabilities and Stockholders' equity
Subordinated debentures .......................... $ 7,217,000 $ 7,217,000
Other liabilities ................................ 43,000 42,000
Stockholders' equity ............................. 30,460,000 27,149,000
-------------------------
Total liabilities and Stockholders' equity $37,720,000 $34,408,000
=========================
A-41
Condensed Statements of Income
Years ended December 31,
-----------------------------------------
2004 2003 2002
-----------------------------------------
Interest income - securities available for sale ................. $ 160,000 $ 33,000 $ --
Interest income - securities held to maturity ................... 4,000 26,000 24,000
Dividend income ................................................. 325,000 275,000 575,000
Other income .................................................... 11,000 9,000 --
-----------------------------------------
Total income ............................................ 500,000 343,000 599,000
Interest expense ................................................ 487,000 141,000 --
Other expenses .................................................. 145,000 106,000 106,000
-----------------------------------------
Total expenses .......................................... 632,000 247,000 106,000
Income before income tax benefit ................................ (132,000) 96,000 493,000
Tax benefit ..................................................... (155,000) (61,000) (28,000)
-----------------------------------------
Income before equity in undistributed earnings
of subsidiary ................................................. 23,000 157,000 521,000
Equity in undistributed earnings of subsidiary .................. 3,825,000 3,334,000 2,595,000
-----------------------------------------
Net income ...................................................... $ 3,848,000 $ 3,491,000 $ 3,116,000
=========================================
Condensed Statements of Cash Flows
-----------------------------------------
Years ended December 31,
-----------------------------------------
2004 2003 2002
-----------------------------------------
Cash flows from operating activities:
Net income ................................................... $ 3,848,000 $ 3,491,000 $ 3,116,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary .......... (3,825,000) (3,334,000) (2,595,000)
Loss on sale of securities available for sale ........... 4,000 -- --
Accretion of discounts .................................. (1,000) -- --
Decrease (increase) in accrued interest receivable ...... (1,000) (44,000) 7,000
(Increase) decrease in other assets ..................... (55,000) 2,000 47,000
Increase (decrease) in other liabilities ................ 1,000 (7,000) 11,000
-----------------------------------------
Net cash (used in) provided by operating activities (29,000) 108,000 586,000
-----------------------------------------
Cash flows from investing activities:
Purchase of security held to maturity ........................ -- (1,000,000) (300,000)
Proceeds from calls on securities held to maturity ........... 1,000,000 -- --
Purchase of securities available for sale .................... (1,991,000) (3,800,000) --
Investment in bank subsidiary ................................ -- (3,000,000) --
Investment in special purpose subsidiary ..................... -- (217,000) --
Proceeds from sales and calls on securities available for sale 1,296,000 -- 650,000
-----------------------------------------
Net cash provided by (used in) investing activities 305,000 (8,017,000) 350,000
-----------------------------------------
Cash flows from financing activities:
Issuance of subordinated debentures .......................... -- 7,217,000 --
Cash dividends paid on common stock .......................... (1,018,000) (819,000) (669,000)
Exercise of stock options .................................... 292,000 126,000 371,000
Purchase of treasury Stock ................................... (454,000) -- (164,000)
Issuance of common stock ..................................... 676,000 570,000 480,000
-----------------------------------------
Net cash (used in) provided by investing activities (504,000) 7,094,000 18,000
-----------------------------------------
Net (decrease) increase in cash and cash equivalents .............. (228,000) (815,000) 954,000
Cash and cash equivalents - beginning ............................. 277,000 1,092,000 138,000
-----------------------------------------
Cash and cash equivalents - ending ................................ $ 49,000 $ 277,000 $ 1,092,000
=========================================
A-42
NOTE 20. RECENT ACCOUNTING PRONOUNCEMENTS
No. 03-01, Staff Position Emerging Issues Task Force Issue No. 03-01 "Effective
Date or Paragraphs 10-20 of EITF Issue No.03-01, The Meaning of
Other-than-Temporary Impairment and its Application to Certain Investments"
On September 30, 2004 the Financial Accounting Standards Board ("FASB") issued
Staff Position Emerging Issues Task Force ("EITF") issue No. 03-01, "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-temporary impairments as required by existing authoritative
literature. The disclosure guidance in paragraphs 21 and 22 of EITF Issue No.
03-01 remains effective. The delay will be superseded concurrent with the final
issuance of EITF Issue No. 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.
FASB No. 153, "Exchanges of Nonmonetary Assets"
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 153, "Exchanges of Nonmonetary Assets," which amends APB Opinion
No. 29, "Accounting for Nonmonetary Transactions." SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in Opinion No. 29 and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. It is not expected that the adoption of SFAS No.
153 will have a material impact on the financial condition or results of
operations of the Corporation.
FASB No. 123 (Revised 2004), "Share-Based Payment"
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related guidance. SFAS No. 123 (revised 2004) established
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. This Statement also establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans. This statement is
effective for public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The adoption of SFAS No. 123 (revised 2004) is not expected to
have a material impact on our financial condition or results of operations.
A-43
Note 21. QUARTERLY FINANCIAL DATA (Unaudited)
The following table contains quarterly financial data for the years ended
December 31, 2004 and 2003 (Dollars in thousands).
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------------
Year ended December 31, 2004:
Interest income .................... $ 5,168 $ 5,167 $ 5,308 $ 5,509 $ 21,152
Interest expense ................... 1,259 1,182 1,137 1,207 4,785
---------------------------------------------------------
Net interest income before
provision for loan losses .... 3,909 3,985 4,171 4,302 16,367
Provision for loan losses .......... 120 120 150 150 540
---------------------------------------------------------
Net interest income after
provision for loan losses .... 3,789 3,865 4,021 4,152 15,827
Noninterest income ................. 594 760 674 698 2,726
Noninterest expense ................ 3,033 3,153 3,097 3,218 12,501
---------------------------------------------------------
Net income before
income tax expense ........... 1,350 1,472 1,598 1,632 6,052
Federal and state income tax expense 483 535 584 602 2,204
---------------------------------------------------------
Net income ......................... $ 867 $ 937 $ 1,014 $ 1,030 $ 3,848
=========================================================
Basic earnings per share ........... $ 0.26 $ 0.28 $ 0.30 $ 0.31 $ $1.15
=========================================================
Diluted earnings per share ......... $ 0.26 $ 0.28 $ 0.30 $ 0.30 $ $1.14
=========================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------------
Year ended December 31, 2003:
Interest income .................... $ 4,604 $ 4,632 $ 4,705 $ 4,974 $ 18,915
Interest expense ................... 1,180 1,175 1,070 1,166 4,591
---------------------------------------------------------
Net interest income before
provision for loan losses .... 3,424 3,457 3,635 3,808 14,324
Provision for loan losses .......... 115 110 90 110 425
---------------------------------------------------------
Net interest income after
provision for loan losses .... 3,309 3,347 3,545 3,698 13,899
Noninterest income ................. 696 778 777 643 2,894
Noninterest expense ................ 2,694 2,794 2,935 2,971 11,394
---------------------------------------------------------
Net income before
income tax expense ........... 1,311 1,331 1,387 1,370 5,399
Federal and state income tax expense 458 469 492 489 1,908
---------------------------------------------------------
Net income ......................... $ 853 $ 862 $ 895 $ 881 $ 3,491
=========================================================
Basic earnings per share ........... $ 0.26 $ 0.26 $ 0.27 $ 0.27 $ $1.06
=========================================================
Diluted earnings per share ......... $ 0.26 $ 0.26 $ 0.26 $ 0.26 $ $1.04
=========================================================
A-44