UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
|_| TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to ______________
Commission file number 0-21855
Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
New Jersey 22-3351447
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
630 Godwin Avenue, Midland Park, NJ 07432
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(201) 444-7100
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by a checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No X
The number of shares outstanding of the Issuer's Common Stock, no par
value, as of August 3, 2005 was 4,536,155.
Stewardship Financial Corporation
INDEX
PAGE
NUMBER
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PART I - CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at June 30, 2005 (Unaudited) and December 31, 2004 ......... 1
Consolidated Statements of Income for the Six
Months ended June 30, 2005 and 2004 (Unaudited) ............ 2
Consolidated Statements of Income for the Three
Months ended June 30, 2005 and 2004 (Unaudited) ............ 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2005 and 2004 (Unaudited) ............ 4
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended June 30, 2005 and
June 30, 2004 (Unaudited) .................................. 5
Notes to Consolidated Financial Statements (Unaudited) ..... 6 - 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................. 13 - 23
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK .......................................... 24
ITEM 4 - CONTROLS AND PROCEDURES .................................... 24
PART II - OTHER INFORMATION
- ---------------------------
ITEM 4 - Submission of Matters to a Vote of Security Holders ........ 25
ITEM 6 - EXHIBITS ................................................... 25
SIGNATURES .......................................................... 26
- ----------
EXHIBIT INDEX ....................................................... 27 -30
- -------------
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
June 30, December 31,
2005 2004
---------------------------------
(Unaudited)
Assets
Cash and due from banks $ 12,392,000 $ 15,297,000
Other interest-earning assets 12,537,000 495,000
Federal funds sold 12,650,000 9,000,000
---------------------------------
Cash and cash equivalents 37,579,000 24,792,000
Securities available for sale 54,796,000 56,514,000
Securities held to maturity; estimated fair value
of $38,646,000 (2005) and $40,501,000 (2004) 38,627,000 40,111,000
FHLB-NY stock, at cost 1,646,000 1,643,000
Loans, net of allowance for loan losses of
of $ 3,570,000 (2005) and $3,299,000 (2004) 311,216,000 292,909,000
Mortgage loans held for sale 0 228,000
Premises and equipment, net 4,069,000 3,433,000
Accrued interest receivable 2,011,000 1,922,000
Intangible assets, net of accumulated amortization of
$590,000 (2005) and $571,000 (2004) 160,000 179,000
Bank owned life insurance 8,055,000 --
Other assets 2,794,000 2,575,000
---------------------------------
Total assets $ 460,953,000 $ 424,306,000
=================================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 88,976,000 $ 90,241,000
Interest-bearing 311,947,000 266,677,000
---------------------------------
Total deposits 400,923,000 356,918,000
Other borrowings 15,864,000 24,129,000
Subordinated debentures 7,217,000 7,217,000
Securities sold under agreements to repurchase 2,111,000 3,370,000
Accrued expenses and other liabilities 2,384,000 2,212,000
---------------------------------
Total liabilities 428,499,000 393,846,000
---------------------------------
Commitments and contingencies -- --
Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
4,535,047 and 4,487,977 shares issued outstanding at
June 30, 2005 and December 31, 2004, respectively 24,480,000 23,893,000
Retained earnings 8,282,000 6,746,000
Accumulated other comprehensive loss (308,000) (179,000)
---------------------------------
Total stockholders' equity 32,454,000 30,460,000
---------------------------------
Total liabilities and stockholders' equity $ 460,953,000 $ 424,306,000
=================================
See notes to unaudited consolidated financial statements.
Share data has been restated to reflect a 5% stock dividend paid November 15,
2004 and a 4 for 3 stock split declared on May 11, 2005 and issued July 1, 2005.
1
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Six Months Ended
June 30,
--------------------------------
2005 2004
--------------------------------
Interest income:
Loans $ 9,869,000 $ 8,384,000
Securities held to maturity
Taxable 448,000 538,000
Non-taxable 286,000 321,000
Securities available for sale
Taxable 994,000 1,048,000
Non-taxable 17,000 19,000
Other interest-earning assets 101,000 25,000
--------------------------------
Total interest income 11,715,000 10,335,000
--------------------------------
Interest expense:
Deposits 2,240,000 1,850,000
Borrowed money 594,000 591,000
--------------------------------
Total interest expense 2,834,000 2,441,000
--------------------------------
Net interest income before provision for loan losses 8,881,000 7,894,000
Provision for loan losses 300,000 240,000
--------------------------------
Net interest income after provision for loan losses 8,581,000 7,654,000
--------------------------------
Noninterest income:
Fees and service charges 1,243,000 1,154,000
Gain on sales of mortgage loans 101,000 67,000
(Loss) gain on sales of securities -- (4,000)
Miscellaneous 201,000 137,000
--------------------------------
Total noninterest income 1,545,000 1,354,000
--------------------------------
Noninterest expenses:
Salaries and employee benefits 2,978,000 2,736,000
Occupancy, net 488,000 490,000
Equipment 379,000 441,000
Data processing 552,000 495,000
Advertising 228,000 138,000
FDIC insurance premium 24,000 25,000
Amortization of intangible assets 19,000 21,000
Charitable contributions 370,000 262,000
Stationery and supplies 137,000 114,000
Miscellaneous 1,591,000 1,464,000
--------------------------------
Total noninterest expenses 6,766,000 6,186,000
--------------------------------
Income before income tax expense 3,360,000 2,822,000
Income tax expense 1,217,000 1,018,000
--------------------------------
Net income $ 2,143,000 $ 1,804,000
================================
Basic earnings per share $ 0.48 $ 0.41
================================
Diluted earnings per share $ 0.47 $ 0.40
================================
Weighted average number of common shares outstanding 4,507,823 4,438,209
================================
Weighted average number of diluted common
shares outstanding 4,559,590 4,506,353
================================
Share data has been restated to reflect a 5% stock dividend paid November 15,
2004 and a 4 for 3 stock split declared on May 11, 2005 and issued July 1, 2005.
See notes to unaudited consolidated financial statements.
2
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three Months Ended
June 30,
------------------------------
2005 2004
------------------------------
Interest income:
Loans $ 5,082,000 $ 4,212,000
Securities held to maturity
Taxable 224,000 251,000
Non-taxable 142,000 157,000
Securities available for sale
Taxable 494,000 523,000
Non-taxable 9,000 10,000
Other interest-earning assets 75,000 14,000
------------------------------
Total interest income 6,026,000 5,167,000
------------------------------
Interest expense:
Deposits 1,265,000 889,000
Borrowed money 282,000 293,000
------------------------------
Total interest expense 1,547,000 1,182,000
------------------------------
Net interest income before provision for loan losses 4,479,000 3,985,000
Provision for loan losses 150,000 120,000
------------------------------
Net interest income after provision for loan losses 4,329,000 3,865,000
------------------------------
Noninterest income:
Fees and service charges 658,000 616,000
Gain on sales of mortgage loans 83,000 49,000
Loss on sales of securities -- 0
Miscellaneous 155,000 95,000
------------------------------
Total noninterest income 896,000 760,000
------------------------------
Noninterest expenses:
Salaries and employee benefits 1,540,000 1,370,000
Occupancy, net 237,000 234,000
Equipment 186,000 219,000
Data processing 281,000 250,000
Advertising 97,000 86,000
FDIC insurance premium 12,000 12,000
Amortization of intangible assets 9,000 11,000
Charitable contributions 205,000 134,000
Stationery and supplies 67,000 66,000
Miscellaneous 817,000 771,000
------------------------------
Total noninterest expenses 3,451,000 3,153,000
------------------------------
Income before income tax expense 1,774,000 1,472,000
Income tax expense 635,000 535,000
------------------------------
Net income $ 1,139,000 $ 937,000
==============================
Basic earnings per share $ 0.25 $ 0.21
==============================
Diluted earnings per share $ 0.25 $ 0.21
==============================
Weighted average number of common shares outstanding 4,517,972 4,438,209
==============================
Weighted average number of diluted common
shares outstanding 4,570,223 4,506,353
==============================
Share data has been restated to reflect a 5% stock dividend paid November 15,
2004 and a 4 for 3 stock split declared on May 11, 2005 and issued July 1, 2005.
See notes to unaudited consolidated financial statements.
3
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
-----------------------------------
2005 2004
-----------------------------------
Cash flows from operating activities:
Net income $ 2,143,000 $ 1,804,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 304,000 392,000
Amortization of premiums and accretion of discounts, net 226,000 322,000
Accretion of deferred loan fees (78,000) (58,000)
Provision for loan losses 300,000 240,000
Originations of mortgage loans held for sale (9,725,000) (6,672,000)
Proceeds from sale of mortgage loans 10,054,000 6,422,000
Gain on sale of loans (101,000) (67,000)
Loss on sale of securities available for sale -- 4,000
Deferred income tax benefit (117,000) (59,000)
Amortization of intangible assets 19,000 21,000
(Increase) decrease in accrued interest receivable (89,000) 29,000
Increase in bank owned life insurance (55,000) --
(Increase) decrease in other assets (23,000) 431,000
Increase (decrease) in other liabilities 243,000 (295,000)
-------------- --------------
Net cash provided by operating activities 3,101,000 2,514,000
-------------- --------------
Cash flows from investing activities:
Purchase of securities available for sale (2,321,000) (9,915,000)
Proceeds from maturities and principal repayments
on securities available for sale 3,234,000 4,495,000
Proceeds from sales and calls on securities available for sale 500,000 6,996,000
Purchase of securities held to maturity (1,288,000) (767,000)
Proceeds from maturities and principal repayments on
securities held to maturity 2,640,000 5,230,000
Proceeds from calls of securities held to maturity -- 4,735,000
Purchase of FHLB-NY stock (3,000) (321,000)
Net increase in loans (18,528,000) (13,741,000)
Purchase of bank owned life insurance (8,000,000) --
Additions to premises and equipment (940,000) (264,000)
-------------- --------------
Net cash used in investing activities (24,706,000) (3,552,000)
-------------- --------------
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits (1,264,000) 609,000
Net increase in interest-bearing deposits 45,270,000 6,510,000
Net decrease in securities sold under agreement
to repurchase (1,259,000) (702,000)
Net decrease in short term borrowings (7,500,000) (2,618,000)
Payments on long term borrowings (765,000)
Cash dividends paid on common stock (607,000) (506,000)
Purchase of treasury stock -- (454,000)
Exercise of stock options 143,000 240,000
Issuance of common stock 374,000 338,000
-------------- --------------
Net cash provided by financing activities 34,392,000 3,417,000
-------------- --------------
Net increase in cash and cash equivalents 12,787,000 2,379,000
Cash and cash equivalents - beginning 24,792,000 19,138,000
-------------- --------------
Cash and cash equivalents - ending $ 37,579,000 $ 21,517,000
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest 2,650,000 2,508,000
Cash paid during the year for income taxes 1,505,000 980,000
See notes to unaudited consolidated financial statements.
4
Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
For the Six Months Ended June 30, 2005
-----------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Retained Loss,
Shares Amount Earnings Net Total
-----------------------------------------------------------------------------
Balance -- December 31, 2004 4,487,977 $23,893,000 $ 6,746,000 $(179,000) $ 30,460,000
Dividends Paid -- -- (607,000) -- (607,000)
Common stock issued under stock plans 26,150 374,000 -- -- 374,000
Exercise of stock options 20,920 143,000 -- -- 143,000
Tax benefit on stock options exercised -- 70,000 -- -- 70,000
Comprehensive income:
Net income for the six months
ended June 30, 2005 -- -- 2,143,000 -- 2,143,000
Unrealized holding losses on securities
available for sale arising during the period
(net tax benefit of $80,000) -- -- -- (129,000) (129,000)
------------
Total comprehensive income, net of tax 2,014,000
-----------------------------------------------------------------------------
Balance -- June 30, 2005 4,535,047 $24,480,000 $ 8,282,000 $(308,000) $ 32,454,000
=============================================================================
For the Six Months Ended June 30, 2004
---------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Treasury Stock Retained Income (Loss),
Shares Amount Shares Amount Earnings Net Total
---------------------------------------------------------------------------------------------
Balance -- December 31, 2003 4,220,311 $19,552,000 -- $ -- $ 7,593,000 $ 4,000 $ 27,149,000
Dividends Paid -- -- -- -- (505,000) -- (505,000)
Common stock issued under stock
plans 10,628 170,000 10,152 169,000 -- -- 339,000
Exercise of stock options 33,197 239,000 -- -- 239,000
Repurchase common stock -- -- (26,667) (454,000) -- -- (454,000)
Comprehensive income:
Net income for the three months
ended March 31, 2004 -- -- -- -- 1,804,000 -- 1,804,000
Unrealized holding gains on
securities available for sale
arising during the period
(net tax benefit of $483,000) -- -- -- -- -- (765,000) (765,000)
Reclassification adjustment
for losses in net income
(net tax benefit of $1,000) -- -- -- -- -- (3,000) (3,000)
------------
Total comprehensive income,
net of tax 1,036,000
---------------------------------------------------------------------------------------------
Balance -- June 30, 2004 4,264,136 $19,961,000 (16,515) $(285,000) $ 8,892,000 $(761,000) $ 27,804,000
=============================================================================================
See notes to unaudited consolidated financial statements.
5
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2005
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Certain information and footnote disclosures normally included in the unaudited
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Annual Report on Form 10-K for the fiscal year
ended December 31, 2004.
Principles of consolidation
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, (the "Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank (the "Bank"). The Bank includes its wholly owned
subsidiary, Stewardship Investment Corp. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Certain prior period amounts have been reclassified to conform to the current
presentation. The consolidated financial statements of the Corporation have been
prepared in conformity with accounting principles generally accepted in the
United States of America. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the statements of financial condition
and revenues and expenses during the reporting periods. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
relate to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
Stock-Based Compensation
The Corporation has two stock-based employee compensation plans and two director
compensation plans. The Corporation accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. For those plans that
issue options, no stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. For the
stock issued under the Director Stock Plan, compensation expense is recorded at
the fair value of the stock issued and is reflected in net income. The following
table illustrates the effect on net income and earnings per share if the
Corporation had applied the fair
6
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
------------------------------- -------------------------------
Net Income:
Net income as reported $ 1,139,000 $ 937,000 $ 2,143,000 $ 1,804,000
Stock-based compensation expense included in net
Income, net of related tax effects 3,000 6,000 6,000 11,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (18,000) (23,000) (37,000) (46,000)
------------- ------------- ------------- -------------
Pro forma net income $ 1,124,000 $ 920,000 $ 2,112,000 $ 1,769,000
============= ============= ============= =============
Earnings per share:
As reported Basic earnings per share $ 0.25 $ 0.21 $ 0.48 $ 0.41
As reported Diluted earnings per share 0.25 0.21 0.47 0.40
Pro forma Basic earnings per share 0.25 0.21 0.47 0.40
Pro forma Diluted earnings per share 0.25 0.20 0.46 0.39
Share data has been restated to reflect a 5% stock dividend paid November 15,
2004 and a 4 for 3 stock split declared on May 11, 2005 and issued July 1, 2005.
Note 2. Basis of presentation
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-Q and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary for a fair
presentation of the consolidated financial statements, have been included. The
results of operations for the six months ended June 30, 2005 are not necessarily
indicative of the results which may be expected for the entire year. All share
and per share amounts have been restated for stock splits and stock dividends.
7
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 3. Securities Available for Sale
The following table sets forth the amortized cost and market value of the
Corporation's securities available for sale as of June 30, 2005 and December 31,
2004. In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", securities
available for sale are carried at estimated fair value.
June 30, 2005
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
U.S. Treasury securities $ 502,000 $ -- $ 8,000 $ 494,000
U.S. government-sponsored agencies 24,376,000 10,000 341,000 24,045,000
Obligations of state and political
subdivisions 2,239,000 1,000 32,000 2,208,000
Mortgage-backed securities 27,132,000 73,000 209,000 26,996,000
Community Reinvestment Act Fund 1,045,000 8,000 -- 1,053,000
--------------------------------------------------------------
$55,294,000 $ 92,000 $ 590,000 $54,796,000
==============================================================
December 31, 2004
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
--------------------------------------------------------------
U.S. Treasury securities $ 503,000 $ -- $ 8,000 $ 495,000
U.S. government-sponsored agencies 23,556,000 29,000 241,000 23,344,000
Obligations of state and political
subdivisions 1,943,000 2,000 30,000 1,915,000
Mortgage-backed securities 29,780,000 128,000 178,000 29,730,000
Community Reinvestment Act Fund 1,021,000 9,000 -- 1,030,000
--------------------------------------------------------------
$56,803,000 $ 168,000 $ 457,000 $56,514,000
==============================================================
On a quarterly basis, the Corporation makes an assessment to determine whether
there have been any events or economic circumstances to indicate that a security
is impaired on an other-than-temporary basis. The Corporation considers many
factors including the length of time the security has had a market value less
than the cost basis; the intent and ability of the Corporation to hold the
security for a period of time sufficient for a recovery in value; and recent
events specific to the issuer or industry. Management considers the impairment
of these securities to be temporary.
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").
Note 4. Securities Held to Maturity
The following table sets forth the carrying value and estimated market value of
the Corporation's securities held to maturity as June 30, 2005 and December 31,
2004. Securities held to maturity are stated at cost, adjusted for amortization
of premiums and accretion of discounts.
June 30, 2005
--------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
--------------------------------------------------------------
U.S. Treasury securities $ 1,005,000 $ 15,000 $ -- $ 1,020,000
U.S. government-sponsored agencies 8,880,000 8,000 112,000 8,776,000
Obligations of state and political
subdivisions 17,680,000 98,000 64,000 17,714,000
Mortgage-backed securities 11,062,000 116,000 42,000 11,136,000
--------------------------------------------------------------
$38,627,000 $ 237,000 $ 218,000 $38,646,000
==============================================================
December 31, 2004
--------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
--------------------------------------------------------------
U.S. Treasury securities $ 1,007,000 $ 30,000 $ -- $ 1,037,000
U.S. government-sponsored agencies 8,655,000 22,000 76,000 8,601,000
Obligations of state and political
subdivisions 17,688,000 246,000 17,000 17,917,000
Mortgage-backed securities 12,761,000 208,000 23,000 12,946,000
--------------------------------------------------------------
$40,111,000 $ 506,000 $ 116,000 $40,501,000
==============================================================
On a quarterly basis, the Corporation makes an assessment to determine whether
there have been any events or economic circumstances to indicate that a security
is impaired on an other-than-temporary basis. The Corporation considers many
factors including the length of time the security has had a market value less
than the cost basis; the intent and ability of the Corporation to hold the
security for a period of time sufficient for a recovery in value; and recent
events specific to the issuer or industry. Management considers the impairment
of these securities to be temporary.
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").
8
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 5. Loans
The Corporation's primary market area for lending is the small and medium
sized business and professional community, as well as the individuals residing,
working and shopping in Bergen, Passaic and Morris counties, New Jersey. The
following table set forth the composition of loans as of the periods indicated.
June 30, December 31,
2005 2004
---------------------------------
Mortgage
Residential $ 45,134,000 $ 41,569,000
Commercial 141,897,000 130,762,000
Commercial 58,915,000 55,252,000
Equity 21,493,000 21,484,000
Installment 47,148,000 47,218,000
Other 542,000 260,000
---------------------------------
Total loans 315,129,000 296,545,000
---------------------------------
Less: Deferred loan fees 343,000 337,000
Allowance for loan losses 3,570,000 3,299,000
---------------------------------
3,913,000 3,636,000
---------------------------------
Loans, net $ 311,216,000 $ 292,909,000
=================================
Note 6. Allowance for loan losses
Six Months Ended June 30,
2005 2004
---------------------------------
Balance, beginning of period $ 3,299,000 $ 2,888,000
Provision charged to operations 300,000 240,000
Recoveries of loans charged off 3,000 2,000
Loans charged off (32,000) (107,000)
---------------------------------
Balance, end of period $ 3,570,000 $ 3,023,000
=================================
9
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 7. Loan Impairment
The Corporation has defined the population of impaired loans to include all
nonaccrual loans, loans more than 90 days past due and restructured loans. The
following table sets forth information regarding the impaired loans as of the
periods indicated.
June 30, December 31,
2005 2004
----------------------------
Impaired loans
With related allowance for loan losses $ 202,000 $ 477,000
Without related allowance for loan losses 7,000 947,000
------------ ------------
Total impaired loans $ 209,000 $ 1,424,000
============ ============
Related allowance for loan losses $ 25,000 $ 44,000
============ ============
10
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 8. Recent Accounting Pronouncements
In December 2004, the FASB issued Statement 123 (revised 2004) ("SFAS No. 123
(R)"), Share-Based Payment. Among other items, SFAS No. 123 (R) eliminates the
use of APB 25 and the intrinsic value method of accounting and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments, based on the fair value of those awards on the
grant date, in the financial statements. On April 14, 2005, the Securities and
Exchange Commission announced that the effective date for SFAS No. 123 (R) would
be delayed until January 1, 2006, for calendar year companies. The Corporation
plans to adopt this standard as of January 1, 2006, and will begin expensing any
unvested stock options at that time. The Corporation does not anticipate the
adoption of this standard will have any material effect on the Corporation's
financial condition or results of operations.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections: a replacement of APB Opinion No.
20 and FASB Statement 3," (SFAS No. 154) which requires a corporation to apply
voluntary changes in accounting principles retrospectively whenever it is
practicable. The retrospective application requirement replaces the requirement
in APB 20 to recognize most voluntary changes in accounting principles by
including the cumulative effect of the change in net income during the period
the change occurs. Retrospective application will be the required transition
method for new accounting pronouncements in the event that a newly-issued
pronouncement does not specify transition guidance. SFAS No. 154 is effective
for accounting changes made in fiscal years beginning after December 15, 2005.
The American Institute of Certified Public Accountants (AICPA) Accounting
Standards Executive Committee (AcSEC) Statements of Position 03-3, "Accounting
For Certain Loans or Debt Securities Acquired in a Transfer" (SOP 03-3) was
issued in December 2003, effective for loans acquired in fiscal years beginning
after December 15, 2004. SOP 03-3 addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part to credit quality. It
includes loans acquired in business combinations and applies to all
nongovernmental entities, including not-for-profit organization, but does not
apply to loans originated by the entity. A transition provision applies for
certain aspects of loans currently within the Scope of Practice Bulletin 6,
"Amortization of Discounts on Certain Acquired Loans." The Corporation does not
anticipate SOP 03-3 to impact the consolidated financial statements of the
Corporation.
11
Note 9. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the average
daily number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation. Diluted earnings per share is
computed similar to that of basic earnings per share except that the denominator
is increased to include the number of additional common shares that would have
been outstanding if all potential dilutive common shares were issued.
The following is a reconciliation of the calculation of basic and diluted
earnings per share.
Three Months Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income $1,139 $ 937 $2,143 $1,804
Weighted average shares 4,518 4,438 4,508 4,430
Effect of dilutive stock options 52 68 52 68
------ ------ ------ ------
Total weighted average dilutive shares 4,570 4,506 4,560 4,498
Basic earnings per share $ 0.25 $ 0.21 $ 0.48 $ 0.41
Diluted earnings per share $ 0.25 $ 0.21 $ 0.47 $ 0.40
All share and per share amounts have been restated to reflect a 5% stock
dividend paid November 15, 2004 and a 4 for 3 stock split declared on May 11,
2005 and issued July 1, 2005.
Note 10. Comprehensive Income
Total comprehensive income includes net income and other comprehensive income
which is comprised of unrealized holding gains and losses on securities
available for sale, net of taxes. The Corporation's total comprehensive income
for the six months ended June 30, 2005 and 2004 was $2.0 million and $1.0
million, respectively. The difference between the Corporation's net income and
total comprehensive income for these periods relates to the change in the net
unrealized holding gains and losses on securities available for sale during the
applicable period of time.
12
Stewardship Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-Q contains certain "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, and may be identified
by the use of such words as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential." Examples of forward looking statements
include, but are not limited to, estimates with respect to the financial
condition, results of operations and business of the Corporation that are
subject to various factors which could cause actual results to differ materially
from these estimates. These factors include: changes in general, economic, and
market conditions, legislative and regulatory conditions, or the development of
an interest rate environment that adversely affects the Corporation's interest
rate spread or other income anticipated from operations and investments. As used
in this Form 10-Q, "we" and "us" and "our" refer to Stewardship Financial
Corporation and its consolidated subsidiary, Atlantic Stewardship Bank,
depending on the context.
Critical Accounting Policies and Estimates
- ------------------------------------------
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as disclosures found elsewhere in this Form 10-Q, are based
upon the Corporation's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Corporation to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. Note 1 to the Corporation's
Audited Consolidated Financial Statements for the year ended December 31, 2004
included in our Annual Report on Form 10-K for the year ended December 31, 2004,
as supplemented by this report, contains a summary of the Corporation's
significant accounting policies. Management also believes the Corporation's
policy with respect to the methodology for the determination of the allowance
for loan losses involves a higher degree of complexity and requires management
to make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could materially impact results of operations. The
Audit Committee and the Board of Directors periodically review this critical
policy and its application.
The allowance for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate that is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the
13
Corporation's allowance for loan losses. Such agencies may require the
Corporation to make additional provisions for loan losses based upon information
available to them at the time of their examination. Furthermore, the majority of
the Corporation's loans are secured by real estate in the State of New Jersey.
Accordingly, the collectibility of a substantial portion of the carrying value
of the Corporation's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the northern New Jersey area experience an adverse economic shock. Future
adjustments to the allowance for loan losses may be necessary due to economic,
operating, regulatory and other conditions beyond the Corporation's control.
Financial Condition
- -------------------
Total assets increased by $36.6 million, or 8.6%, from $424.3 million at
December 31, 2004 to $461.0 million at June 30, 2005. Net loans increased by
$18.3 million and cash and cash equivalents increased by $12.8 million,
partially offset by a $1.7 million decrease in securities available for sale and
a $1.5 million decrease in securities held to maturity. The composition of the
loan portfolio is basically unchanged at June 30, 2005 when compared with the
portfolio at December 31, 2004. The Corporation deployed a deposit
reclassification software that allowed the Corporation to minimize the balances
needed to be held at the Federal Reserve to maintain required reserve balances.
This improved the levels of earning assets and provided funds to support the
loan growth. The Corporation has also purchased Bank owned life insurance on key
management personnel. The increase in the cash surrender value of the insurance
policies is included in non-interest income and is tax deferred. The income
provided from these policies is used to help offset the rising costs of employee
benefit expense.
Deposits totaled $400.9 million at June 30, 2005, an increase of $44.0 million,
or 12.3%, from $356.9 million at December 31, 2004. Interest-bearing deposits
increased by $45.3 million, or 17.0%, to $311.9 million at June 30, 2005
partially offset by a decrease in noninterest-bearing deposits of $1.3 million,
or 1.4%, to $89.0 million at June 30, 2005. The Corporation continued to see the
success of two new deposit products developed in the fourth quarter of 2004. The
Ideal Checking Product is offered to consumers and provides a low minimum
balance checking product for consumers. The Sterling Lifestyle Package of
Services was designed to serve the needs of consumers who are age 55 and older.
It offers an interest-bearing checking account with three balance tiers. A
minimum balance must be maintained in the account or in linked accounts in order
to avoid a service fee. In addition to many free services, this product provides
for premium rates on Certificates of Deposit. During April of 2005, the
Corporation introduced two new Certificate of Deposit products that were
extremely successful in bringing new customers to our organization. Our new
Power Flex CD is offered with terms of 20 or 30 months and provides for monthly
deposits and withdrawals and the ability to increase the interest rate once
during the term, should interest rates rise. The second product known as the IRA
Stepup CD allows for a 3-year term where the rate increases 100 basis points
each year. Both of these products were successful in attracting new money and
providing existing customers with strong investment alternatives.
14
The Corporation has received approvals to proceed with the relocation of the
Waldwick Branch to 64 Franklin Turnpike, Waldwick, Bergen County, New Jersey and
the opening of a new branch at 2 Changebridge Road, Montville, Morris County,
New Jersey. Both of these branches require building modifications and it is
anticipated that they will be opened during the fourth quarter of 2005. Both
branch locations will allow for safe deposit boxes, drive-up facilities, and
drive-up ATMs. In addition, the Corporation has begun the preliminary analysis
for another new branch which would be opened in 2006. Management believes that
the new products and branch locations complement the existing services offered
to consumer and business customers and will allow us to expand our presence in
our existing market area.
Results of Operations
- ---------------------
Six Months Ended June 30, 2005 and 2004
- ---------------------------------------
General
- -------
The Corporation reported net income of $2.1 million, or $0.48 diluted earnings
per share for the six months ended June 30, 2005, compared to $1.8 million, or
$0.41 diluted earnings per share for the same period in 2004. The $339,000
increase was primarily due to increases in net interest income and noninterest
income, partially offset by an increase in noninterest expense and provision for
loan loss.
Net interest income
- -------------------
Net interest income increased by $987,000, or 12.5%, for the six months ended
June 30, 2005 as compared with the corresponding period in 2004. The increase
was primarily due to an increase in average net interest-earning assets and an
increase in the net interest margin.
Total interest income on a tax equivalent basis increased by $1.4 million, or
13.1%, primarily due to an increase in the average earning assets and an
increase in yields on interest-earning assets. Due to an increase in yields in
the loan portfolio and continued growth in loans, tax equivalent yields on
interest earning assets increased by 31 basis points from 5.56% for the six
months ended June 30, 2004 to 5.87% for the same period in 2005. The average
balance of interest-earning assets increased by $28.1 million, or 7.4%, from
$379.5 million for the six months ended June 30, 2004 to $407.6 million for the
same period in 2005, primarily due to strong loan demand. The Corporation
continued to experience an increase in loan demand which caused loans on average
to increase by $36.5 million to an average of $303.8 million for the six months
ended June 30, 2005, from an average of $267.4 million for the comparable period
in 2004. Taxable investment securities decreased by $10.4 million to an average
of $76.9 million as the Corporation redeployed payments on these assets into its
lending portfolio.
Interest paid on deposits and borrowed money increased by $394,000, or 16.1%,
due to an increase in deposits, an increase in rates paid on certain deposit
products, and a shift into higher yielding deposit products. The average balance
of total interest-bearing deposits and borrowed money increased to $311.2
million for the six months ended June 30, 2005 from $292.9 million
15
for the comparable 2004 period, primarily as a result of the Corporation's
expanding customer base and new product offerings. Yields on deposits and
borrowed money increased from 1.68% for the six month period ended June 30, 2004
to 1.84% for the comparable period in 2005.
The following table reflects the components of the Corporation's net interest
income for the six months ended June 30, 2005 and 2004 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. This was accomplished
by adjusting non-taxable income upward to make it equivalent to the level of
taxable income required to earn the same amount after taxes.
Analysis of Net Interest Income (Unaudited)
For the Six Months Ended June 30,
2005 2004
------------------------------------ -------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) $ 303,839 $ 9,870 6.55% $ 267,365 $ 8,384 6.31%
Taxable investment securities (1) 76,912 1,442 3.78 87,360 1,586 3.65
Tax-exempt investment securities (1) (2) 19,526 447 4.58 20,452 494 4.86
Other interest-earning assets 7,318 101 2.78 4,351 25 1.16
--------- --------- --------- ---------
Total interest-earning assets 407,595 11,860 5.87 379,528 10,489 5.56
--------- ---------
Non-interest-earning assets:
Allowance for loan losses (3,459) (2,990)
Other assets 26,620 23,639
--------- ---------
Total assets $ 430,756 $ 400,177
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 134,713 $ 716 1.07% $ 121,584 $ 389 0.64%
Savings deposits 49,703 147 0.60 48,317 191 0.79
Time deposits 98,417 1,377 2.82 92,820 1,270 2.75
Repurchase agreements 2,938 33 2.27 3,249 17 1.05
FHLB Borrowing 18,129 318 3.54 19,672 330 3.37
Subordinated debenture 7,259 244 6.78 7,259 244 6.76
--------- --------- --------- ---------
Total interest-bearing liabilities 311,159 2,835 1.84 292,901 2,441 1.68
--------- ---------
Non-interest-bearing liabilities:
Demand deposits 86,038 77,624
Other liabilities 2,133 1,954
Stockholders' equity 31,426 27,698
--------- ---------
Total liabilities and stockholders' equity $ 430,756 $ 400,177
========= =========
Net interest income (taxable equivalent basis) $ 9,025 $ 8,048
Tax equivalent adjustment (144) (154)
--------- ---------
Net interest income 8,881 7,894
Net interest spread (taxable equivalent basis) 4.03% 3.88%
==== ====
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.47% 4.26%
==== ====
- ----------
(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%.
(3) Net interest income (taxable equivalent basis) divided by average
interest-earning assets.
16
Provision for loan losses
- -------------------------
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent losses associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and provisions are charged to operations
during the period in which such additions are deemed necessary.
The provision charged to operations totaled $300,000 and $240,000 during the six
months ended June 30, 2005 and 2004, respectively. The increase in the provision
was primarily due to the continued growth in the loan portfolio. See "Asset
Quality" section for summary of allowance for loan losses and nonperforming
assets. The Corporation monitors its loan portfolio and intends to continue to
provide for loan loss reserves based on its ongoing periodic review of the loan
portfolio and general market conditions.
Noninterest income
- ------------------
Noninterest income increased by $191,000, or 14.1%, from $1.4 million for the
six month period ended June 30, 2004 to $1.5 million for the comparable period
in 2005. Deposit related fees increased by $89,000 for the six month period
ended June 30, 2005 due to increases in the deposit base and income derived from
the merchant credit card processing program. Gains on sales of mortgage loans
improved by $34,000 compared to the first six months of 2004 due to an increase
in the volume of loans originated for sale. Included in miscellaneous income is
the recognition of an increase in the cash surrender value of the bank owned
life insurance which totaled $55,000 for the first six months of 2005.
Noninterest expense
- -------------------
Noninterest expense increased by approximately $580,000, or 9.4%, to $6.8
million for the six months ended June 30, 2005, compared to $6.2 million for the
same period in 2004. Salaries and employee benefits, the major component of
noninterest expense, increased by $242,000, or 8.8%, during the six months ended
June 30, 2005. This increase was due to general increases for merit and
performance and increases in benefit related expenses. Advertising expense
increased by $90,000 to support the new product offerings. Miscellaneous
expenses increased by $127,000, or 8.6%, as a result of the general growth of
the merchant card processing business and the growth of the Corporation.
Income taxes
- ------------
Income tax expense totaled $1.2 million for the six months ended June 30, 2005,
for an effective tax rate of 36.2%. For the six months ended June 30, 2004,
income tax expense totaled $1.0 million, for an effective tax rate of 36.1%.
17
Results of Operations
- ---------------------
Three Months Ended June 30, 2005 and 2004
- -----------------------------------------
General
- -------
The Corporation reported net income of $1.1 million, or $0.25 diluted earnings
per share for the three months ended June 30, 2005, compared to $937,000, or
$0.21 diluted earnings per share for the same period in 2004. The $202,000
increase was primarily caused by increases in net interest income and
noninterest income, partially offset by an increase in noninterest expense and
the provision for loan loss.
Net interest income
- -------------------
Net interest income increased by $494,000, or 12.4%, for the three months ended
June 30, 2005 as compared with the corresponding period in 2004. The increase
was primarily due to an increase in average net interest-earning assets and an
increase in the net interest margin.
Total interest income on a tax equivalent basis increased by $855,000, or 16.3%,
primarily due to an increase in the average earning assets and an increase in
yields on interest-earning assets. Due to an increase in yields in the loan and
investment portfolio and a shift in assets into loans, tax equivalent yields on
interest earning assets increased 33 basis points from 5.54% for the three
months ended March 31, 2004 to 5.87% for the same period in 2005. The average
balance of interest-earning assets increased $36.0 million, or 9.4%, from $380.8
million for the three months ended June 30, 2004 to $416.8 million for the same
period in 2005, primarily due to strong loan demand. The Corporation continued
to experience an increase in loan demand which caused loans on average to
increase by $39.9 million to an average of $310.8 million for the three months
ended June 30, 2005, from an average of $271.0 million for the comparable period
in 2004. Taxable investment securities decreased by $8.5 million to an average
of $75.8 million as the Corporation redeployed payments on these assets into its
lending portfolio.
Interest paid on deposits and borrowed money increased by $366,000, or 31.0%,
due primarily to an increase in deposits, partially offset by a slight decrease
in rates paid on deposits. The average balance of total interest-bearing
deposits and borrowed money increased to $319.0 million for the three months
ended June 30, 2005 from $292.4 million for the comparable period in 2004,
primarily as a result of the Corporation's expanding customer base and new
product offerings. Yields on deposits and borrowed money increased from 1.63%
for the three month period ended March 31, 2004 to 1.95% for the comparable
period in 2005.
18
The following table reflects the components of the Corporation's net interest
income for the three months ended June 30, 2005 and 2004, 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. This was accomplished
by adjusting non-taxable income upward to make it equivalent to the level of
taxable income required to earn the same amount after taxes.
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended June 30,
2005 2004
------------------------------------ -------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) $ 310,836 $ 5,082 6.56% $ 270,982 $ 4,212 6.25%
Taxable investment securities (1) 75,807 718 3.80 84,260 774 3.69
Tax-exempt investment securities (1) (2) 19,581 223 4.56 20,238 243 4.83
Other interest-earning assets 10,542 76 2.89 5,315 15 1.14
--------- --------- --------- ---------
Total interest-earning assets 416,766 6,099 5.87 380,795 5,244 5.54
--------- ---------
Non-interest-earning assets:
Allowance for loan losses (3,526) (3,025)
Other assets 26,589 24,065
--------- ---------
Total assets $ 439,829 $ 401,835
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 137,600 $ 396 1.15% $ 122,346 $ 182 0.60%
Savings deposits 49,283 73 0.59 49,899 100 0.81
Time deposits 106,292 796 3.00 90,792 607 2.69
Repurchase agreements 2,477 15 2.43 2,840 8 1.13
FHLB Borrowing 16,075 146 3.64 19,217 163 3.41
Subordinated debenture 7,260 122 6.74 7,260 122 6.76
--------- --------- --------- ---------
Total interest-bearing liabilities 318,987 1,548 1.95 292,354 1,182 1.63
--------- ---------
Non-interest-bearing liabilities:
Demand deposits 86,746 79,677
Other liabilities 2,340 1,916
Stockholders' equity 31,756 27,888
--------- ---------
Total liabilities and stockholders' equity $ 439,829 $ 401,835
========= =========
Net interest income (taxable equivalent basis) $ 4,551 $ 4,062
Tax equivalent adjustment (72) (77)
--------- ---------
Net interest income 4,479 3,985
========= =========
Net interest spread (taxable equivalent basis) 3.92% 3.91%
==== ====
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.38% 4.29%
==== ====
- ----------
(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%.
(3) Net interest income (taxable equivalent basis) divided by average
interest-earning assets.
19
Provision for loan losses
- -------------------------
The Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent losses associated with its loan
portfolio, after giving consideration to changes in general market conditions
and in the nature and volume of the Corporation's loan activity. The allowance
for loan losses is based on estimates, and provisions are charged to operations
during the period in which such additions are deemed necessary.
The provision charged to operations totaled $150,000 and $120,000 during the
three months ended June 30, 2005 and 2004, respectively. The increase in the
provision was primarily due to the continued growth in the loan portfolio. See
"Asset Quality" section for summary of allowance for loan losses and
nonperforming assets. The Corporation monitors its loan portfolio and intends to
continue to provide for loan loss reserves based on its ongoing periodic review
of the loan portfolio and general market conditions.
Noninterest income
- ------------------
Noninterest income increased by $136,000, or 17.9%, from $760,000 for the three
month period ended June 30, 2004 to $896,000 for the comparable period in 2005.
Deposit related fees increased by $42,000 for the three month period ended June
30, 2005 compared to the same period for 2004 due to an increase in the deposit
base and income derived from the merchant credit card processing program. Gains
on sales of mortgage loans increased by $34,000 due to the increase in the
volume of loans originated and sold during the quarter ended June 30, 2005.
Miscellaneous income increased by $60,000 for the three month period ended June
30, 2005 when compared with the comparable period in 2004. Income on bank owned
life insurance in the amount of $55,000 contributed to this increase.
Noninterest expense
- -------------------
Noninterest expense increased by approximately $298,000, or 9.5%, to $3.5
million for the three months ended June 30, 2005, compared to $3.2 million for
the same 2004 period. Salaries and employee benefits, the major component of
noninterest expense, increased by $170,000, or 12.4%, during the three months
ended June 30, 2005. This increase was due to general increases for merit and
performance and increases in benefit related expenses. Charitable contributions
increased by $71,000 due to the Bank's tithing program. The tithing program
commits the Bank to donate 10% of pretax profits to charities during each year.
Miscellaneous expenses increased by $46,000, or 6.0% as a result of the general
growth of the merchant card processing business and the growth of the
Corporation.
Income taxes
- ------------
Income tax expense totaled $635,000 for the three months ended June 30, 2005,
for an effective tax rate of 35.8%. For the three months ended June 30, 2004,
income tax expense totaled
20
$535,000, for an effective tax rate of 36.3%. The effective tax rate has
decreased due to a slight change in the mix of taxable versus nontaxable earning
assets and the income derived from the bank owned life insurance is earned on a
tax deferred basis.
Asset Quality
- -------------
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrowers' ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
06/30/05 03/31/05 12/31/04 09/30/04
--------- --------- --------- ---------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 202 $ 270 $ 262 $ 164
Loans past due 90 days or more: (2) 7 7 947 1,374
Restructured loans: -- -- 215 453
--------- --------- --------- ---------
Total nonperforming loans $ 209 $ 277 $ 1,424 $ 1,991
========= ========= ========= =========
Allowance for loan losses $ 3,570 $ 3,438 $ 3,299 $ 3,155
========= ========= ========= =========
Nonaccrual loans to total loans 0.06% 0.09% 0.09% 0.06%
Nonperforming loans to total loans 0.07% 0.09% 0.48% 0.72%
Nonperforming loans to total assets 0.05% 0.07% 0.34% 0.50%
Allowance for loan losses to total loans 1.13% 1.13% 1.11% 1.14%
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged against income during the
current period.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing income
at the contractually stated rates. A determination is made to continue accruing
income on those loans which are sufficiently collateralized and on which
management believes all interest and principal owed will be collected.
There were no loans at June 30, 2005 other than those included in the above
table, where the Corporation was aware of any credit conditions of any borrowers
that would indicate a strong possibility of the borrowers not complying with the
present terms and conditions of repayment and which may result in such loans
being included as non-accrual, past due or restructured at a future date.
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey. Accordingly, the collectibility of a
substantial portion of the Corporation's loan portfolio is susceptible to
changes in real estate market conditions in northern New Jersey.
21
Market Risk
- -----------
The Corporation's primary exposure to market risk arises from changes in market
interest rates ("interest rate risk"). The Corporation's profitability is
largely dependent upon its ability to manage interest rate risk. Interest rate
risk can be defined as the exposure of the Corporation's net interest income to
adverse movements in interest rates. Although the Corporation manages other
risks, such as credit and liquidity risk, in the normal course of its business,
management considers interest rate risk to be its most significant market risk
and it could potentially have the largest material effect on the Corporation's
financial condition. The Corporation manages its interest rate risk by utilizing
an asset/liability simulation model and by measuring and managing its interest
sensitivity gap. Interest sensitivity gap is determined by analyzing the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within the same period of time. The Asset Liability
Committee reviews and discusses these measurements on a monthly basis.
The Corporation does not have any material exposure to foreign currency exchange
rate risk or commodity price risk. The Corporation did not enter into any market
sensitive instruments for trading purposes nor did it engage in any hedging
transactions utilizing derivative financial instruments during the six months
ended June 30, 2005.
The Corporation is, however, a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These instruments, which include commitments to extend credit and
standby letters of credit, involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statement of condition. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may require
collateral from the borrower if deemed necessary by the Corporation. Standby
letters of credit are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party up to a stipulated
amount and with specified terms and conditions. Commitments to extend credit and
standby letters of credit are not recorded on the Corporation's consolidated
balance sheet until the instrument is exercised.
Capital Adequacy
- ----------------
The Corporation is subject to capital adequacy guidelines promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The Bank is subject to
similar capital adequacy requirements imposed by the Federal Deposit Insurance
Corporation. The FRB has issued regulations to define the adequacy of capital
based upon the sensitivity of assets and off-balance sheet exposures to risk
factors. Four categories of risk weights (0%, 20%, 50%, and 100%) were
established to be applied to different types of balance sheet assets and
off-balance sheet exposures. The aggregate of the risk-weighted items
(risk-based assets) is the denominator of the ratio, the numerator is risk-based
capital. Under the regulations, risk-based capital has been classified into two
categories. Tier 1 capital includes common and qualifying perpetual
22
preferred stockholders' equity less goodwill. Tier 2 capital includes mandatory
convertible debt, allowance for loan losses, subject to certain limitations, and
certain subordinated and term debt securities. Total qualifying capital consists
of Tier 1 capital and Tier 2 capital, however, the amount of Tier 2 capital may
not exceed the amount of Tier 1 capital. At June 30, 2005, the minimum
risk-based capital requirements to be considered adequately capitalized were 4%
for Tier 1 capital and 8% for total capital.
Federal banking regulators have also adopted leverage capital guidelines to
supplement the risk-based measures. The leverage ratio is determined by dividing
Tier 1 capital as defined under the risk-based guidelines by average total
assets (non risk-adjusted) for the preceding quarter. At June 30, 2005 the
minimum leverage ratio requirement to be considered well capitalized was 4%. The
following table reflects the Corporation's capital ratios at June 30, 2005.
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 11.84% 7.84%
Total 8.00% 12.91% 4.91%
Leverage Ratio 4.00% 9.01% 5.01%
Liquidity and Capital Resources
- -------------------------------
The Corporation's primary sources of funds are deposits, repayments of loans and
mortgage-backed securities, maturities of investment securities and funds
provided from operations. While scheduled loan and mortgage-backed securities
amortization and maturities of investment securities are a relatively
predictable source of funds, deposit flow and prepayments on loans and
mortgage-backed securities are greatly influenced by market interest rates,
economic conditions and competition. The Corporation's liquidity, represented by
cash and cash equivalents, is a product of its operating, investing and
financing activities.
The primary source of cash from operating activities is net income. Liquidity
management is both a daily and long-term function of business management. Excess
liquidity is generally invested in short-term investments, such as federal funds
sold. The Corporation anticipates that it will have sufficient funds available
to meet its current loan commitments. At June 30, 2005, the Corporation has
outstanding loan commitments of $42.4 million and unused lines and letters of
credit totaling $88.6 million. Certificates of deposit scheduled to mature in
one year or less, at June 30, 2005, totaled $48.4 million. Management believes
that a significant portion of such deposits will remain with the Corporation.
Cash and cash equivalents increased by $12.8 million during the first six months
of 2005. Financing activities and operating activities provided $34.3 million
and $3.1 million, respectively and investing activities used $24.7 million.
23
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure about quantitative and qualitative market risk is located in the
Market Risk section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 4. Controls and Procedures
The Corporation's management, with the participation of the Corporation's chief
executive officer and principal accounting officer, has evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of June
30, 2005. Based on this evaluation, the Corporation's chief executive officer
and principal accounting officer concluded that the Corporation disclosure
controls and procedures are effective for recording, processing, summarizing and
reporting the information the Corporation is required to disclose in the reports
it files under the Securities Exchange Act of 1934, within the time periods
specified in the SEC's rules and forms. Such evaluation did not identify any
change in the Corporation's internal control over financial reporting that
occurred during the quarter ended June 30, 2005 that has materially affected, or
is reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
24
Stewardship Financial Corporation
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Corporation held an Annual Meeting of Shareholders on May 10, 2004. At
that meeting, the Corporation's shareholders elected four directors for a three
year term that will expire in May 2008, or until their successors are duly
elected and qualified. The voting results were as follows:
Votes for Votes Withheld
--------- --------------
Election of Director
William C. Hanse 2,435,680 4,746
Margo Lane 2,353,330 87,068
Arie Leegwater 2,330,534 109,894
John L. Steen 2,364,825 75,601
There were no broker non-votes on any of the above matters. The following
individuals whose terms expire in either 2006 or 2007, or until their successors
are duly elected and qualified, continue to serve as directors: Harold Dyer,
Robert J. Turner, William J. Vander Eems, Paul Van Ostenbridge and Abe Van
Wingerden.
Item 6. Exhibits
--------
(a) Exhibits
See Exhibit Index following this report.
25
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Stewardship Financial Corporation
Date: August 12, 2005 By: /s/ Paul Van Ostenbridge
------------------ ------------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
(authorized officer on behalf
of registrant)
Date: August 12, 2005 By: /s/ Julie E. Holland
------------------ ------------------------------------
Julie E. Holland
Vice President and Treasurer
(principal accounting officer)
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Paul Van Ostenbridge required by Rule 13a-14(a) or
Rule 15d-14(a)
31.2 Certification of Julie Holland required by Rule 13a-14(a) or Rule
15d-14(a)
32.1 Certification of Paul Van Ostenbridge and Julie Holland required by
Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
27