UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Issuer's Common Stock, no par
value, as of November 10, 2005 was 4,787,627, as adjusted for a 5% stock
dividend payable November 15, 2005.
Stewardship Financial Corporation
INDEX
PAGE
NUMBER
------
PART I - CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at September 30, 2005 (Unaudited) and December 31, 2004 ...... 1
Consolidated Statements of Income for the Nine
Months ended September 30, 2005 and 2004 (Unaudited) ......... 2
Consolidated Statements of Income for the Three
Months ended September 30, 2005 and 2004 (Unaudited) ......... 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2005 and 2004 (Unaudited) ......... 4
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended September 30, 2005 and
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 - 25
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK ......................................... 26
ITEM 4 - CONTROLS AND PROCEDURES ..................................... 26
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS ..................................................... 27
SIGNATURES ............................................................ 28
- ----------
EXHIBIT INDEX ......................................................... 29 - 32
- -------------
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
September 30, December 31,
2005 2004
-------------------------------
(Unaudited)
Assets
Cash and due from banks $ 13,102,000 $ 15,297,000
Other interest-earning assets 4,792,000 495,000
Federal funds sold 5,000,000 9,000,000
-------------------------------
Cash and cash equivalents 22,894,000 24,792,000
Securities available for sale 64,947,000 56,514,000
Securities held to maturity; estimated fair value
of $39,524,000 (2005) and $40,501,000 (2004) 39,609,000 40,111,000
FHLB-NY stock, at cost 1,646,000 1,643,000
Loans, net of allowance for loan losses of
of $3,714,000 (2005) and $3,299,000 (2004) 321,843,000 292,909,000
Mortgage loans held for sale 3,426,000 228,000
Premises and equipment, net 5,855,000 3,433,000
Accrued interest receivable 2,198,000 1,922,000
Intangible assets, net of accumulated amortization of
$601,000 (2005) and $571,000 (2004) 149,000 179,000
Bank owned life insurance 8,132,000 --
Other assets 2,894,000 2,575,000
-------------------------------
Total assets $473,593,000 $424,306,000
===============================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 92,411,000 $ 90,241,000
Interest-bearing 317,187,000 266,677,000
-------------------------------
Total deposits 409,598,000 356,918,000
Other borrowings 15,477,000 24,129,000
Subordinated debentures 7,217,000 7,217,000
Securities sold under agreements to repurchase 5,280,000 3,370,000
Accrued expenses and other liabilities 2,709,000 2,212,000
-------------------------------
Total liabilities 440,281,000 393,846,000
-------------------------------
Commitments and contingencies -- --
Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
4,774,834 and 3,365,983 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively 28,022,000 23,893,000
Retained earnings 5,786,000 6,746,000
Accumulated other comprehensive loss (496,000) (179,000)
-------------------------------
Total stockholders' equity 33,312,000 30,460,000
-------------------------------
Total liabilities and stockholders' equity $473,593,000 $424,306,000
===============================
Share data has been restated to reflect a 5% stock dividend payable November 15,
2005, a 5% stock dividend paid November 15, 2004 and a 4 for 3 stock split
issued July 1, 2005.
See notes to unaudited consolidated financial statements.
1
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Nine Months Ended
September 30,
-------------------------------
2005 2004
-------------------------------
Interest income:
Loans $ 15,268,000 $ 12,741,000
Securities held to maturity:
Taxable 679,000 777,000
Non-taxable 421,000 474,000
Securities available for sale:
Taxable 1,580,000 1,588,000
Non-taxable 26,000 27,000
Other interest-earning assets 202,000 36,000
-------------------------------
Total interest income 18,176,000 15,643,000
-------------------------------
Interest expense:
Deposits 3,802,000 2,699,000
Borrowed money 879,000 879,000
-------------------------------
Total interest expense 4,681,000 3,578,000
-------------------------------
Net interest income before provision for loan losses 13,495,000 12,065,000
Provision for loan losses 450,000 390,000
-------------------------------
Net interest income after provision for loan losses 13,045,000 11,675,000
-------------------------------
Noninterest income:
Fees and service charges 1,912,000 1,755,000
Gain on sales of mortgage loans 167,000 97,000
Loss on sales of securities -- (4,000)
Bank owned life insurance 132,000 --
Miscellaneous 188,000 180,000
-------------------------------
Total noninterest income 2,399,000 2,028,000
-------------------------------
Noninterest expenses:
Salaries and employee benefits 4,565,000 4,160,000
Occupancy, net 742,000 730,000
Equipment 547,000 617,000
Data processing 850,000 749,000
Advertising 341,000 218,000
FDIC insurance premium 35,000 37,000
Amortization of intangible assets 30,000 30,000
Charitable contributions 580,000 397,000
Stationery and supplies 196,000 172,000
Merchant processing 598,000 512,000
Bank-card related services 329,000 273,000
Miscellaneous 1,505,000 1,388,000
-------------------------------
Total noninterest expenses 10,318,000 9,283,000
-------------------------------
Income before income tax expense 5,126,000 4,420,000
Income tax expense 1,824,000 1,602,000
-------------------------------
Net income $ 3,302,000 $ 2,818,000
===============================
Basic earnings per share $ 0.69 $ 0.60
===============================
Diluted earnings per share $ 0.69 $ 0.59
===============================
Weighted average number of common shares outstanding 4,745,751 4,666,979
===============================
Weighted average number of diluted common
shares outstanding 4,802,029 4,734,847
===============================
Share data has been restated to reflect a 5% stock dividend payable November 15,
2005, a 5% stock dividend paid November 15, 2004 and a 4 for 3 stock split
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
September 30,
--------------------------
2005 2004
--------------------------
Interest income:
Loans $5,399,000 $4,357,000
Securities held to maturity
Taxable 231,000 239,000
Non-taxable 135,000 153,000
Securities available for sale
Taxable 586,000 540,000
Non-taxable 9,000 8,000
Other interest-earning assets 101,000 11,000
--------------------------
Total interest income 6,461,000 5,308,000
--------------------------
Interest expense:
Deposits 1,562,000 849,000
Borrowed money 285,000 288,000
--------------------------
Total interest expense 1,847,000 1,137,000
--------------------------
Net interest income before provision for loan losses 4,614,000 4,171,000
Provision for loan losses 150,000 150,000
--------------------------
Net interest income after provision for loan losses 4,464,000 4,021,000
--------------------------
Noninterest income:
Fees and service charges 669,000 601,000
Gain on sales of mortgage loans 66,000 30,000
Bank owned life insurance 77,000 --
Miscellaneous 42,000 43,000
--------------------------
Total noninterest income 854,000 674,000
--------------------------
Noninterest expenses:
Salaries and employee benefits 1,587,000 1,424,000
Occupancy, net 254,000 240,000
Equipment 168,000 176,000
Data processing 298,000 254,000
Advertising 113,000 80,000
FDIC insurance premium 11,000 12,000
Amortization of intangible assets 11,000 9,000
Charitable contributions 210,000 135,000
Stationery and supplies 59,000 58,000
Merchant processing 214,000 181,000
Bank-card related services 116,000 89,000
Miscellaneous 511,000 439,000
--------------------------
Total noninterest expenses 3,552,000 3,097,000
--------------------------
Income before income tax expense 1,766,000 1,598,000
Income tax expense 607,000 584,000
--------------------------
Net income $1,159,000 $1,014,000
==========================
Basic earnings per share $ 0.24 $ 0.21
==========================
Diluted earnings per share $ 0.24 $ 0.21
==========================
Weighted average number of common shares outstanding 4,770,405 4,696,805
==========================
Weighted average number of diluted common
shares outstanding 4,829,947 4,765,206
==========================
Share data has been restated to reflect a 5% stock dividend payable November 15,
2005, a 5% stock dividend paid November 15, 2004 and a 4 for 3 stock split
issued July 1, 2005.
See notes to unaudited consolidated financial statements.
3
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30, 2005
-------------------------------
2005 2004
-------------------------------
Cash flows from operating activities:
Net income $ 3,302,000 $ 2,818,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 438,000 541,000
Amortization of premiums and accretion of discounts, net 333,000 459,000
Accretion of deferred loan fees (107,000) (97,000)
Provision for loan losses 450,000 390,000
Originations of mortgage loans held for sale (20,105,000) (8,842,000)
Proceeds from sale of mortgage loans 17,074,000 9,417,000
Gain on sale of loans (167,000) (97,000)
Loss on sale of securities available for sale -- 4,000
Loss on writeoff of branch startup costs -- 63,000
Deferred income tax benefit (179,000) (115,000)
Amortization of intangible assets 30,000 30,000
(Increase) decrease in accrued interest receivable (277,000) 33,000
Increase in bank owned life insurance (132,000) --
Decrease in other assets 60,000 245,000
Increase (decrease) in other liabilities 567,000 (78,000)
------------ ------------
Net cash provided by operating activities 1,287,000 4,771,000
------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale (14,910,000) (11,932,000)
Proceeds from maturities and principal repayments
on securities available for sale 5,320,000 6,280,000
Proceeds from sales and calls on securities available for sale 500,000 6,996,000
Purchase of securities held to maturity (5,324,000) (2,434,000)
Proceeds from maturities and principal repayments on
securities held to maturity 5,634,000 8,039,000
Proceeds from calls of securities held to maturity -- 4,735,000
Purchase of FHLB-NY stock (3,000) (321,000)
Net increase in loans (29,277,000) (14,885,000)
Purchase of bank owned life insurance (8,000,000) --
Additions to premises and equipment (2,860,000) (406,000)
------------ ------------
Net cash used in investing activities (48,920,000) (3,928,000)
------------ ------------
Cash flows from financing activities:
Net increase in noninterest-bearing deposits 2,170,000 1,222,000
Net increase (decrease) in interest-bearing deposits 50,510,000 (2,066,000)
Net increase (decrease) in securities sold under
agreement to repurchase 1,910,000 (1,434,000)
Net decrease in short term borrowings (7,500,000) (2,000,000)
Payments on long term borrowings (1,152,000) (993,000)
Cash dividends paid on common stock (926,000) (761,000)
Purchase of treasury stock -- (454,000)
Exercise of stock options 143,000 292,000
Issuance of common stock 580,000 517,000
------------ ------------
Net cash provided by (used in) financing activities 45,735,000 (5,677,000)
------------ ------------
Net decrease in cash and cash equivalents (1,898,000) (4,834,000)
Cash and cash equivalents - beginning 24,792,000 19,138,000
------------ ------------
Cash and cash equivalents - ending $ 22,894,000 $ 14,304,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest 4,124,000 3,686,000
Cash paid during the year for income taxes 1,855,000 1,580,000
See notes to unaudited consolidated financial statements.
4
Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
For the Nine Months Ended September 30, 2005
---------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Retained Loss,
Shares Amount Earnings Net Total
---------------------------------------------------------------------------
Balance -- December 31, 2004 3,365,983 $23,893,000 $ 6,746,000 $ (179,000) $30,460,000
Dividends paid -- -- (926,000) -- (926,000)
Stock Split - 4 for 3 1,133,661 -- -- -- --
5% stock dividend (payable
November 15, 2005) 227,374 3,336,000 (3,336,000) -- --
Common stock issued under stock plans 32,126 580,000 -- -- 580,000
Exercise of stock options 15,690 143,000 -- -- 143,000
Tax benefit on stock options exercised -- 70,000 -- -- 70,000
Comprehensive income:
Net income for the nine months
ended September 30, 2005 -- -- 3,302,000 -- 3,302,000
Unrealized holding losses on securities
available for sale arising during the period
(net tax benefit of $199,000) -- -- -- (317,000) (317,000)
-----------
Total comprehensive income, net of tax 2,985,000
---------------------------------------------------------------------------
Balance -- September 30, 2005 4,774,834 $28,022,000 $ 5,786,000 $ (496,000) $33,312,000
===========================================================================
For the Nine Months Ended September 30, 2004
--------------------------------------------------------
Common Stock Treasury Stock
Shares Amount Shares Amount
--------------------------------------------------------
Balance -- December 31, 2003 4,431,326 $19,552,000 -- $ --
Dividends paid -- -- -- --
Treasury stock -- -- (28,000) (454,000)
5% stock dividend (payable
November 15, 2004) 224,249 3,623,000 (314) (5,000)
Common stock issued under stock plans 11,159 170,000 21,731 347,000
Exercise of stock options 42,498 292,000 -- --
Comprehensive income:
Net income for the nine months
ended September 30, 2004 -- -- -- --
Unrealized holding losses on securities
available for sale arising during the period
(net tax benefit of $1,000) -- -- -- --
Reclassification adjustment for losses in
net income (net tax benefit of $1,000) -- -- -- --
Total comprehensive income, net of tax
--------------------------------------------------------
Balance -- September 30, 2004 4,709,232 $23,637,000 (6,583) $ (112,000)
========================================================
For the Nine Months Ended September 30, 2004
--------------------------------------------
Accumulated
Other
Comprehensive
Retained Income (Loss),
Earnings Net Total
-------------------------------------------
Balance -- December 31, 2003 $ 7,593,000 $ 4,000 $27,149,000
Dividends paid (761,000) -- (761,000)
Treasury stock -- -- (454,000)
5% stock dividend (payable
November 15, 2004) (3,618,000) -- --
Common stock issued under stock plans 517,000
Exercise of stock options 292,000
Comprehensive income:
Net income for the nine months
ended September 30, 2004 2,818,000 -- 2,818,000
Unrealized holding losses on securities
available for sale arising during the period
(net tax benefit of $1,000) -- (2,000) (2,000)
Reclassification adjustment for losses in
net income (net tax benefit of $1,000) -- (3,000) (3,000)
-----------
Total comprehensive income, net of tax 2,813,000
-------------------------------------------
Balance -- September 30, 2004 $ 6,032,000 $ (1,000) $29,556,000
===========================================
See notes to unaudited consolidated financial statements.
5
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
September 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 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
subsidiaries, Stewardship Investment Corp. and Stewardship Realty LLC. 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
6
table illustrates the effect on net income and earnings per share if the
Corporation had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
--------------------------- ---------------------------
Net Income:
Net income as reported $ 1,159,000 $ 1,014,000 $ 3,302,000 $ 2,818,000
Stock-based compensation expense included in net
Income, net of related tax effects 3,000 6,000 9,000 17,000
Total stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (18,000) (22,000) (56,000) (68,000)
----------- ----------- ----------- -----------
Pro forma net income $ 1,144,000 $ 998,000 $ 3,255,000 $ 2,767,000
=========== =========== =========== ===========
Earnings per share:
As reported Basic earnings per share $ 0.24 $ 0.21 $ 0.69 $ 0.60
As reported Diluted earnings per share 0.24 0.21 0.69 0.59
Pro forma Basic earnings per share 0.24 0.21 0.69 0.59
Pro forma Diluted earnings per share 0.24 0.21 0.68 0.58
Share data has been restated to reflect a 5% stock dividend paid November 15,
2004, a 4 for 3 stock split issued July 1, 2005 and a 5% stock dividend payable
November 15, 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 nine months ended September 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 September 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.
September 30, 2005
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------
U.S. Treasury securities $ 501,000 $ -- $ 7,000 $ 494,000
U.S. government-sponsored agencies 32,646,000 14,000 398,000 32,262,000
Obligations of state and political
subdivisions 2,076,000 -- 30,000 2,046,000
Mortgage-backed securities 29,470,000 14,000 386,000 29,098,000
Community Reinvestment Act Fund 1,058,000 -- 11,000 1,047,000
-----------------------------------------------------------
$65,751,000 $ 28,000 $ 832,000 $64,947,000
===========================================================
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 of September 30, 2005 and
December 31, 2004. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
September 30, 2005
-----------------------------------------------------------
Gross Gross Estimated
Carring Unrealized Unrealized Market
Value Gains Losses Value
-----------------------------------------------------------
U.S. Treasury securities $ 1,004,000 $ 10,000 $ -- $ 1,014,000
U.S. government-sponsored agencies 11,873,000 7,000 119,000 11,761,000
Obligations of state and political
subdivisions 16,686,000 66,000 78,000 16,674,000
Mortgage-backed securities 10,046,000 93,000 64,000 10,075,000
-----------------------------------------------------------
$39,609,000 $ 176,000 $ 261,000 $39,524,000
===========================================================
December 31, 2004
-----------------------------------------------------------
Gross Gross Estimated
Carring Unrealized Unrealized Fair
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 sets forth the composition of loans as of the periods indicated.
September 30, December 31,
2005 2004
--------------------------------
Mortgage
Residential $ 46,456,000 $ 41,569,000
Commercial 152,315,000 130,762,000
Commercial 57,394,000 55,252,000
Equity 21,649,000 21,484,000
Installment 48,009,000 47,218,000
Other 119,000 260,000
--------------------------------
Total loans 325,942,000 296,545,000
--------------------------------
Less: Deferred loan fees 385,000 337,000
Allowance for loan losses 3,714,000 3,299,000
--------------------------------
4,099,000 3,636,000
--------------------------------
Loans, net $321,843,000 $292,909,000
================================
Note 6. Allowance for loan losses
Nine Months Ended
September 30,
2005 2004
-------------------------------
Balance, beginning of period $ 3,299,000 $ 2,888,000
Provision charged to operations 450,000 390,000
Recoveries of loans charged off 4,000 5,000
Loans charged off (39,000) (128,000)
-------------------------------
Balance, end of period $ 3,714,000 $ 3,155,000
===============================
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 considered more than 90 days past due and restructured
loans. The following table sets forth information regarding the impaired loans
as of the periods indicated.
September 30, December 31,
2005 2004
----------------------------
Impaired loans
With related allowance for loan losses $ 316,000 $ 477,000
Without related allowance for loan losses 26,000 947,000
---------- ----------
Total impaired loans $ 342,000 $1,424,000
========== ==========
Related allowance for loan losses $ 35,000 $ 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.
123R"), Share-Based Payment. Among other items, SFAS No. 123R 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. 123R 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 company 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.
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 Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income $1,159,000 $1,014,000 $3,302,000 $2,818,000
Weighted average shares 4,770,405 4,696,805 4,745,751 4,666,979
Effect of dilutive stock options 59,542 68,401 56,278 67,868
---------- ---------- ---------- ----------
Total weighted average dilutive shares 4,829,947 4,765,206 4,802,029 4,734,847
Basic earnings per share $ 0.24 $ 0.21 $ 0.69 $ 0.60
Diluted earnings per share $ 0.24 $ 0.21 $ 0.69 $ 0.59
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 issued July 1, 2005
and a 5% stock dividend payable November 15, 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 nine months ended September 30, 2005 and 2004 was $3.0 million and $2.8
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
ITEM 2. 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 $49.3 million, or 11.6%, from $424.3 million at
December 31, 2004 to $473.6 million at September 30, 2005. Net loans increased
by $28.9 million, securities available for sale increased by $8.4 million, bank
owned life insurance increased by $8.1 million, mortgage loans held for sale
increased by $3.2 million and premises and equipment increased by $2.4 million,
partially offset by a $1.9 million decrease in cash and cash equivalents. The
composition of the loan portfolio is basically unchanged at September 30, 2005
when compared with the portfolio at December 31, 2004. In the second quarter of
2005, the Corporation deployed a deposit reclassification software that allows
the balances needed to be held at the Federal Reserve to maintain required
reserve balances to be held at a minimum. This improved the levels of earning
assets and provided funds to support continued loan growth. The Corporation has
also purchased bank owned life insurance on key management personnel in the
second quarter of 2005. The increase in the cash surrender value of the
insurance policies is included in non-interest income and is considered tax
exempt.
Deposits totaled $409.6 million at September 30, 2005, an increase of $52.7
million, or 14.8%, from $356.9 million at December 31, 2004. Interest-bearing
deposits increased by $50.5 million, or 18.9%, to $317.2 million at September
30, 2005 and noninterest-bearing deposits increased by $2.2 million, or 2.4%, to
$92.4 million at September 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 a new Certificate of Deposit product that continues to
bring new customers to our organization and provide a competitive product to
help satisfy the investment needs of our existing customers. 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.
14
The Corporation is nearing completion of it newest branch facility at 64
Franklin Turnpike, Waldwick, Bergen County, New Jersey and the opening of a new
branch at 2 Changebridge Road, Montville, Morris County, New Jersey and
anticipates relocating our current Waldwick branch in early November. A new
branch at 2 Changebridge Road, Montville, Morris County, New Jersey has received
approvals and has begun construction. It is anticipated that this branch will be
open in late December. 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.
In September 2005, the Corporation approved the formation of Stewardship Realty
LLC as a subsidiary of Atlantic Stewardship Bank. On September 30, 2005,
Stewardship Realty LLC closed on the purchase of property adjacent from the main
office at 612 Godwin Avenue, Midland Park, Bergen County, New Jersey. Upon
obtaining all appropriate approvals, this property will eventually provide a new
office building and will allow for future office expansion needs of the
Corporation.
Results of Operations
- ---------------------
Nine Months Ended September 30, 2005 and 2004
- ---------------------------------------------
General
- -------
The Corporation reported net income of $3.3 million, or $0.69 diluted earnings
per share for the nine months ended September 30, 2005, compared to $2.8
million, or $0.59 diluted earnings per share for the same period in 2004. The
$484,000 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 $1.4 million, or 11.9%, for the nine months
ended September 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 $2.5 million, or
15.9%, primarily due to an increase in the average earning assets and an
increase in yields on interest-earning assets. An increase in yields in the loan
portfolio and continued growth in loans helped attribute to tax equivalent
yields on interest earning assets increasing 32 basis points from 5.57% for the
nine months ended September 30, 2004 to 5.89% for the same period in 2005. The
average balance of interest-earning assets increased by $36.5 million, or 9.6%,
from $380.8 million for the nine months ended September 30, 2004 to $417.3
million for the same period in 2005. The Corporation continued to experience an
increase in loan demand which caused loans on average to increase by $38.9
million to an average of $309.7 million for the nine months ended September 30,
2005, from an average of $270.8 million for the comparable period in 2004.
Taxable investment
15
securities decreased by $6.6 million to an average of $79.3 million as the
Corporation redeployed payments on these assets into its lending portfolio.
Interest paid on deposits and borrowed money increased by $1.1 million, or
30.8%, 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
$320.1 million for the nine months ended September 30, 2005 from $292.5 million
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 1.63% for the nine month period ended September
30, 2004 to 1.96% for the comparable period in 2005.
The following table reflects the components of the Corporation's net interest
income for the nine months ended September 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%.
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.
16
Analysis of Net Interest Income (Unaudited)
For the Nine Months Ended September 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) $309,682 $ 15,268 6.59% $270,824 $ 12,741 6.28%
Taxable investment securities (1) 79,347 2,259 3.81 85,936 2,365 3.68
Tax-exempt investment securities (1) (2) 19,349 658 4.55 20,301 726 4.78
Other interest-earning assets 8,923 202 3.03 3,737 36 1.29
-------- -------- -------- --------
Total interest-earning assets 417,301 18,387 5.89 380,798 15,868 5.57
-------- --------
Non-interest-earning assets:
Allowance for loan losses (3,530) (3,031)
Other assets 27,276 23,842
-------- --------
Total assets $441,047 $401,609
======== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $135,276 $ 1,128 1.11% $121,918 $ 571 0.63%
Savings deposits 49,039 217 0.59 49,085 268 0.73
Time deposits 108,454 2,457 3.03 92,265 1,860 2.69
Repurchase agreements 2,784 53 2.55 2,974 26 1.17
FHLB Borrowing 17,293 461 3.56 18,964 488 3.44
Subordinated debenture 7,258 365 6.72 7,260 365 6.72
-------- -------- -------- --------
Total interest-bearing liabilities 320,104 4,681 1.96 292,466 3,578 1.63
-------- --------
Non-interest-bearing liabilities:
Demand deposits 86,769 79,117
Other liabilities 2,260 1,991
Stockholders' equity 31,914 28,035
-------- --------
Total liabilities and stockholders' equity $441,047 $401,609
======== ========
Net interest income (taxable equivalent basis) $ 13,706 $ 12,290
Tax equivalent adjustment (211) (225)
-------- --------
Net interest income 13,495 12,065
======== ========
Net interest spread (taxable equivalent basis) 3.94% 3.93%
==== ====
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.39% 4.31%
==== ====
- ----------
(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.
17
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 $450,000 and $390,000 during the
nine months ended September 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 $371,000, or 18.3%, from $2.0 million for the
nine month period ended September 30, 2004 to $2.4 million for the comparable
period in 2005. Deposit related fees increased by $157,000 for the nine month
period ended September 30, 2005 due to increases in income derived from the
merchant credit card processing program, overdraft and return item fees and ATM
interchange income. Gains on sales of mortgage loans improved by $70,000
compared to the first nine months of 2004 due to an increase in the volume of
loans originated for sale. An increase in the cash surrender value of bank owned
life insurance, purchased in the second quarter of 2005, provided $132,000 in
noninterest income for the nine month period ended September 30, 2005.
Noninterest expense
- -------------------
Noninterest expense increased by approximately $1.0 million, or 11.1%, to $10.3
million for the nine months ended September 30, 2005, compared to $9.3 million
in 2004. Salaries and employee benefits, the major component of noninterest
expense, increased by $405,000, or 9.7%, during the nine months ended September
30, 2005. This increase was due to general increases for merit and performance
and increases in benefit related expenses. Advertising expense increased by
$123,000 to support the new product offerings and the Bank's 20 year anniversary
celebration. Merchant processing and bank-card related services increased by
$142,000, or 18.1%, due to growth in the number of merchants being processed and
due to increases in the number of outstanding debit and credit cards.
Miscellaneous expenses increased by $117,000, or 8.4% as a result of the general
growth of the Corporation and an increase in consulting expenses. The
Corporation hired an outside consulting firm to work with management in the
documentation of internal controls. This will help in the future compliance with
Sarbanes Oxley Section 404 which requires management to document and assess the
adequacy of internal controls.
18
Income taxes
- ------------
Income tax expense totaled $1.8 million for the nine months ended September 30,
2005, for an effective tax rate of 35.6%. For the nine months ended September
30, 2004, income tax expense totaled $1.6 million, for an effective tax rate of
36.3%.
Results of Operations
- ---------------------
Three Months Ended September 30, 2005 and 2004
- ----------------------------------------------
General
- -------
The Corporation reported net income of $1.2 million, or $0.24 diluted earnings
per share for the three months ended September 30, 2005, compared to $1.0
million, or $0.21 diluted earnings per share for the same period in 2004. The
$145,000 increase was primarily caused by increases in net interest income and
noninterest income, partially offset by an increase in noninterest expense.
Net interest income
- -------------------
Net interest income increased by $443,000, or 10.6%, for the three months ended
September 30, 2005 as compared with the corresponding period in 2004. The
increase was primarily due to an increase in average net interest-earning
assets, partially offset by a decrease in the net interest margin.
Total interest income on a tax equivalent basis increased by $1.1 million, or
21.3%, 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 by 35 basis points from
5.58% for the three months ended September 30, 2004 to 5.93% for the same period
in 2005. The average balance of interest-earning assets increased by $53.1
million, or 13.8%, from $383.3 million for the three months ended September 30,
2004 to $436.4 million for the same period in 2005, primarily caused by strong
loan demand. The Corporation continued to experience an increase in loan demand
which caused loans on average to increase by $43.5 million to an average of
$321.2 million for the three months ended September 30, 2005, from an average of
$277.7 million for the comparable period in 2004. Other interest-earning assets
increased from an average of $9.6 million to $12.1 million for the period ended
September 30, 2005.
Interest paid on deposits and borrowed money increased by $709,000, or 62.4%,
due primarily to an increase in deposits, increases in rates paid on deposits
and a shift in deposit mix toward higher yield term deposits. The effects of the
rising interest rate environment and the flattening yield curve has required the
Corporation to provide a competitive time deposit product. The Power Flex
Certificate of Deposit has allowed the organization to remain competitive with
its peers and maintain adequate funding for the loan portfolio. The average
balance of total interest-bearing deposits and borrowed money increased to
$337.7 million for the three months ended September 30, 2005 from $291.6 million
for the comparable 2004 period, primarily as a result of the Corporation's
expanding customer base and new product offerings. Yields on
19
deposits and borrowed money increased from 1.55% for the three month period
ended September 30, 2004 to 2.17% for the comparable period in 2005.
The following table reflects the components of the Corporation's net interest
income for the three months ended September 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%.
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.
20
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended September 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) $321,177 $ 5,399 6.67% $277,675 $ 4,358 6.24%
Taxable investment securities (1) 84,136 817 3.85 83,117 778 3.72
Tax-exempt investment securities (1) (2) 18,999 210 4.39 20,000 232 4.61
Other interest-earning assets 12,081 101 3.32 2,524 11 1.73
-------- -------- -------- --------
Total interest-earning assets 436,393 6,527 5.93 383,316 5,379 5.58
-------- --------
Non-interest-earning assets:
Allowance for loan losses (3,670) (3,112)
Other assets 28,572 24,237
-------- --------
Total assets $461,295 $404,441
======== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $136,384 $ 411 1.20% $122,578 $ 182 0.59%
Savings deposits 47,732 71 0.59 50,606 77 0.61
Time deposits 128,201 1,079 3.34 91,168 590 2.57
Repurchase agreements 2,480 20 3.20 2,431 9 1.47
FHLB Borrowing 15,648 143 3.63 17,563 158 3.58
Subordinated debenture 7,258 122 6.67 7,259 121 6.63
-------- -------- -------- --------
Total interest-bearing liabilities 337,703 1,846 2.17 291,605 1,137 1.55
-------- --------
Non-interest-bearing liabilities:
Demand deposits 88,206 82,072
Other liabilities 2,512 2,063
Stockholders' equity 32,874 28,701
-------- --------
Total liabilities and stockholders' equity $461,295 $404,441
======== ========
Net interest income (taxable equivalent basis) $ 4,681 $ 4,242
Tax equivalent adjustment (67) (71)
-------- --------
Net interest income 4,614 4,171
======== ========
Net interest spread (taxable equivalent basis) 3.77% 4.03%
==== ====
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.27% 4.40%
==== ====
- ----------
(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.
21
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 for both of the three
months ended September 30, 2005 and 2004. 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 $180,000, or 26.7%, from $674,000 for the three
month period ended September 30, 2004 to $854,000 for the comparable period in
2005. Deposit related fees increased by $68,000 for the three month period ended
September 30, 2005 compared to the same period for 2004 due to an increase in
overdraft fee income and income derived from the merchant credit card processing
program. Gains on sales of mortgage loans increased by $36,000 due to the
increase in the volume of loans originated and sold during the quarter ended
September 30, 2005. Income on bank owned life insurance in the amount of $77,000
was earned for the three months ended September 30, 2005.
Noninterest expense
- -------------------
Noninterest expense increased by approximately $455,000, or 14.7%, to $3.6
million for the three months ended September 30, 2005, compared to $3.1 million
for the same 2004 period. Salaries and employee benefits, the major component of
noninterest expense, increased by $163,000, or 11.4%, during the three months
ended September 30, 2005. This increase was due to general increases for merit
and performance and increases in benefit related expenses. Charitable
contributions increased by $75,000 due to the Bank's tithing program. The
tithing program commits the Bank to donate 10% of taxable income to charities
during each year. Miscellaneous expenses increased $72,000, or 16.4% as a result
of the general growth of the Corporation and increases in consulting expense due
to compliance with Sarbanes Oxley.
Income taxes
- ------------
Income tax expense totaled $607,000 for the three months ended September 30,
2005, for an effective tax rate of 34.4%. For the three months ended September
30, 2004, income tax expense
22
totaled $584,000, for an effective tax rate of 36.5%. 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 that is earned
on a tax exempt 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:
09/30/05 06/30/05 03/31/05 12/31/04
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 316 $ 202 $ 270 $ 262
Loans past due 90 days or more: (2) 26 7 7 947
Restructured loans: -- -- -- 215
------ ------ ------ ------
Total nonperforming loans $ 342 $ 209 $ 277 $1,424
====== ====== ====== ======
Allowance for loan losses $3,714 $3,570 $3,438 $3,299
====== ====== ====== ======
Nonaccrual loans to total loans 0.10% 0.06% 0.09% 0.09%
Nonperforming loans to total loans 0.10% 0.07% 0.09% 0.48%
Nonperforming loans to total assets 0.07% 0.05% 0.07% 0.34%
Allowance for loan losses to total loans 1.14% 1.13% 1.13% 1.11%
(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 considered past due 90 days or more but which are currently
accruing income at the contractually stated rates. A determination is made to
continue accruing income on those loans which are sufficiently collateralized
and on which management believes all interest and principal owed will be
collected.
There were no loans at September 30, 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.
23
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 nine months
ended September 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
24
preferred stockholders' equity less goodwill. Tier 2 capital includes mandatory
convertible debt, allowance for loan losses, subject to certain limitations, and
certain subordinated and term debt securities. Total qualifying capital consists
of Tier 1 capital and Tier 2 capital, however, the amount of Tier 2 capital may
not exceed the amount of Tier 1 capital. At September 30, 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 September 30, 2005 the
minimum leverage ratio requirement to be considered well capitalized was 4%. The
following table reflects the Corporation's capital ratios at September 30, 2005.
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 11.58% 7.58%
Total 8.00% 12.64% 4.64%
Leverage Ratio 4.00% 8.81% 4.81%
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 September 30, 2005, the Corporation has
outstanding loan commitments of $31.4 million and unused lines and letters of
credit totaling $96.8 million. Certificates of deposit scheduled to mature in
one year or less, at September 30, 2005, totaled $43.3 million. Management
believes that a significant portion of such deposits will remain with the
Corporation. Cash and cash equivalents decreased by $1.9 million during the
first nine months of 2005. Net investing activities used $48.9 million,
partially offset by operating and financing activities providing $1.3 million
and $45.7 million, respectively.
25
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure about quantitative and qualitative market risk is located in the
Market Risk section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 4. Controls and Procedures
The Corporation's management, with the participation of the Corporation's chief
executive officer and principal accounting officer, has evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of
September 30, 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 September 30, 2005 that has
materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
26
Stewardship Financial Corporation
Part II -- Other Information
ITEM 6. Exhibits
--------
(a) Exhibits
See Exhibit Index following this report.
27
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Stewardship Financial Corporation
Date: November 14, 2005 By: /s/ Paul Van Ostenbridge
----------------- ------------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
(authorized officer on behalf
of registrant)
Date: November 14, 2005 By: /s/ Julie E. Holland
----------------- ------------------------------------
Julie E. Holland
Vice President and Treasurer
(principal accounting officer)
28
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
29