UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
( ) 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
630 Godwin Avenue, Midland Park, NJ 07432
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(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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer[_] Accelerated filer [_] Non-accelerated filer [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, net of treasury stock, of the
Issuer's Common Stock, no par value, as of May 5, 2006 was 4,759,295.
Stewardship Financial Corporation
INDEX
PAGE
NUMBER
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PART I - CONSOLIDATED FINANCIAL INFORMATION
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ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at March 31, 2006 (Unaudited) and December 31, 2005 ...............1
Consolidated Statements of Income for the Three
Months ended March 31, 2006 and 2005 (Unaudited) ..................2
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2006 and 2005 (Unaudited) ..................3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended March 31, 2006 and
2005 (Unaudited) ..................................................4
Notes to Consolidated Financial Statements (Unaudited) .......5 - 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .........................................12 - 20
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK ......................................20
ITEM 4 - CONTROLS AND PROCEDURES .......................................20
PART II - OTHER INFORMATION
- ------------------------------
ITEM 1A. RISK FACTORS ....................................................21
ITEM 6 - EXHIBITS .........................................................21
SIGNATURES ................................................................22
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EXHIBIT INDEX .........................................................23 -26
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Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
(Unaudited)
March 31, December 31,
2006 2005
-------------------------------
Assets
Cash and due from banks $ 10,907,000 $ 13,158,000
Other interest-earning assets 239,000 870,000
-------------------------------
Cash and cash equivalents 11,146,000 14,028,000
Securities available for sale 63,124,000 64,167,000
Securities held to maturity; estimated fair value
of $35,708,000 (2006) and $37,475,000 (2005) 36,117,000 37,817,000
FHLB--NY stock, at cost 1,678,000 1,939,000
Loans, net of allowance for loan losses of
of $ 3,920,000 (2006) and $3,847,000 (2005) 341,841,000 341,976,000
Mortgage loans held for sale 521,000 2,041,000
Premises and equipment, net 6,656,000 6,464,000
Accrued interest receivable 2,422,000 2,432,000
Intangible assets, net of accumulated amortization of
$620,000 (2006) and $610,000 (2005) 130,000 140,000
Bank owned life insurance 8,290,000 8,210,000
Other assets 4,640,000 3,513,000
-------------------------------
Total assets $ 476,565,000 $ 482,727,000
===============================
Liabilities and stockholders' equity
Liabilities
Deposits:
Noninterest-bearing $ 90,786,000 $ 93,924,000
Interest-bearing 309,771,000 310,204,000
-------------------------------
Total deposits 400,557,000 404,128,000
Other borrowings 24,693,000 30,486,000
Subordinated debentures 7,217,000 7,217,000
Securities sold under agreements to repurchase 6,106,000 4,731,000
Accrued expenses and other liabilities 3,841,000 2,781,000
-------------------------------
Total liabilities 442,414,000 449,343,000
---------------------------------
Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
4,787,889 shares issued and outstanding at March 31, 2006
and December 31, 2005. 28,228,000 28,211,000
Treasury stock, 28,981 and 39,581 shares outstanding at
March 31, 2006 and December 31, 2005, respectively (411,000) (556,000)
Retained earnings 7,377,000 6,647,000
Accumulated other comprehensive loss (1,043,000) (918,000)
-------------------------------
Total stockholders' equity 34,151,000 33,384,000
-------------------------------
Total liabilities and stockholders' equity $ 476,565,000 $ 482,727,000
===============================
See notes to unaudited consolidated financial statements.
1
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2006 2005
-------------------------------
Interest income:
Loans $ 5,974,000 $ 4,787,000
Securities held to maturity
Taxable 241,000 224,000
Non-taxable 118,000 144,000
Securities available for sale
Taxable 637,000 500,000
Non-taxable 7,000 8,000
Other interest-earning assets 7,000 26,000
-------------------------------
Total interest income 6,984,000 5,689,000
-------------------------------
Interest expense:
Deposits 1,777,000 975,000
Borrowed money 530,000 312,000
-------------------------------
Total interest expense 2,307,000 1,287,000
-------------------------------
Net interest income before provision for loan losses 4,677,000 4,402,000
Provision for loan losses 50,000 150,000
-------------------------------
Net interest income after provision for loan losses 4,627,000 4,252,000
-------------------------------
Noninterest income:
Fees and service charges 695,000 585,000
Bank owned life insurance 80,000 --
Gain on sales of mortgage loans 50,000 18,000
Miscellaneous 45,000 46,000
-------------------------------
Total noninterest income 870,000 649,000
-------------------------------
Noninterest expenses:
Salaries and employee benefits 1,621,000 1,438,000
Occupancy, net 314,000 251,000
Equipment 242,000 193,000
Data processing 294,000 271,000
Advertising 87,000 131,000
FDIC insurance premium 13,000 12,000
Amortization of intangible assets 10,000 10,000
Charitable contributions 181,000 165,000
Stationery and supplies 76,000 70,000
Merchant processing 242,000 170,000
Bank-card related services 121,000 105,000
Miscellaneous 577,000 499,000
-------------------------------
Total noninterest expenses 3,778,000 3,315,000
-------------------------------
Income before income tax expense 1,719,000 1,586,000
Income tax expense 610,000 582,000
-------------------------------
Net income $ 1,109,000 $ 1,004,000
===============================
Basic earnings per share $0.23 $0.21
===============================
Diluted earnings per share $0.23 $0.21
===============================
Weighted average number of common shares outstanding 4,754,856 4,722,439
===============================
Weighted average number of diluted common
shares outstanding 4,809,776 4,783,456
================================
Share data has been restated to reflect a 4 for 3 stock split that occurred
July, 2005 and a 5% stock dividend paid November 15, 2005.
See notes to unaudited consolidated financial statements.
2
Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
----------------------------
2006 2005
----------------------------
Cash flows from operating activities:
Net income $ 1,109,000 $ 1,004,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 178,000 168,000
Amortization of premiums and accretion of discounts, net 79,000 117,000
Accretion of deferred loan fees (29,000) (45,000)
Provision for loan losses 50,000 150,000
Originations of mortgage loans held for sale (3,419,000) (2,366,000)
Proceeds from sale of mortgage loans 4,989,000 1,722,000
Gain on sale of loans (50,000) (18,000)
Deferred income tax benefit (10,000) (60,000)
Amortization of intangible assets 10,000 9,000
Nonqualified stock option expense 17,000 --
Increase in bank owned life insurance (80,000) --
Decrease (increase) in accrued interest receivable 10,000 (42,000)
Increase in other assets (1,039,000) (7,000)
Increase in other liabilities 1,060,000 146,000
------------ ------------
Net cash provided by operating activities 2,875,000 778,000
------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale (2,093,000) (962,000)
Proceeds from maturities and principal repayments
on securities available for sale 2,902,000 1,768,000
Purchase of securities held to maturity (679,000) (617,000)
Proceeds from maturities and principal repayments on
securities held to maturity 2,331,000 1,422,000
Purchase of FHLB-NY stock 261,000
Net decrease (increase) in loans 114,000 (7,020,000)
Additions to premises and equipment (370,000) (102,000)
------------ ------------
Net cash provided by (used in) investing activities 2,466,000 (5,511,000)
------------ ------------
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits (3,138,000) (7,733,000)
Net (decrease) increase in interest-bearing deposits (433,000) 11,781,000
Net increase (decrease) in securities sold under agreements
to repurchase 1,375,000 (192,000)
Net decrease in short term borrowings (5,400,000) (7,500,000)
Payments on long term borrowings (393,000) (381,000)
Cash dividends paid on common stock (379,000) (303,000)
Purchase of treasury stock (103,000) --
Exercise of stock options -- 10,000
Issuance of common stock 248,000 194,000
------------ ------------
Net cash used in financing activities (8,223,000) (4,124,000)
------------ ------------
Net decrease in cash and cash equivalents (2,882,000) (8,857,000)
Cash and cash equivalents - beginning 14,028,000 24,792,000
------------ ------------
Cash and cash equivalents - ending $ 11,146,000 $ 15,935,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest 1,980,000 1,323,000
Cash paid during the year for income taxes 200,000 --
See notes to unaudited consolidated financial statements.
3
Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
For the Period Ended March 31, 2006
---------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Treasury Stock Retained Loss,
Shares Amount Shares Amount Earnings Net Total
---------------------------------------------------------------------------------------------
Balance -- January 1, 2006 4,787,889 $ 28,211,000 (39,581) $ (556,000) $ 6,647,000 $ (918,000) $ 33,384,000
Dividends Paid -- -- -- -- (379,000) -- (379,000)
Common stock issued under Dividend
Reinvestment Plan 15,396 211,000 211,000
Common stock issued under stock plans 2,574 37,000 37,000
Repurchase common stock -- -- (7,370) (103,000) -- -- (103,000)
Stock options earned 17,000 17,000
Comprehensive income:
Net income for the three months
ended March 31, 2006 -- -- -- -- 1,109,000 -- 1,109,000
Unrealized holding losses on
securities available for sale
arising during the period
(net tax benefit of $78,000) -- -- -- -- -- (125,000) (125,000)
-------------
Total comprehensive income, net of tax 984,000
---------------------------------------------------------------------------------------------
Balance -- March 31, 2006 4,787,889 $ 28,228,000 (28,981) $ (411,000) $ 7,377,000 $ (1,043,000) $ 34,151,000
=============================================================================================
For the Period Ended March 31, 2005
-------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Retained Loss,
Shares Amount Earnings Net Total
-------------------------------------------------------------------------
Balance -- January 1, 2005 3,365,983 $ 23,893,000 $ 6,746,000 $ (17,900) $ 30,460,000
Dividends Paid -- -- (303,000) -- (303,000)
Common stock issued uner Dividend
Reinvestment Plan 8,705 171,000 171,000
Common stock issued under stock plans 1,147 23,000 -- -- 23,000
Exercise of stock options 1,104 10,000 -- -- 10,000
Comprehensive income:
Net income for the three months
ended March 31, 2005 -- -- 1,004,000 -- 1,004,000
Unrealized holding losses on
securities available for sale
arising during the period
(net tax benefit of $332,000) -- -- -- (532,000) (532,000)
-------------
Total comprehensive income, net of tax 472,000
-------------------------------------------------------------------------
Balance -- March 31, 2005 3,376,939 $ 24,097,000 $ 7,447,000 $ (711,000) $ 30,833,000
=========================================================================
See notes to unaudited consolidated financial statements.
4
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2006
(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, 2005.
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.
Share-based Payment Cost
On January 1, 2006, the Corporation adopted Statement of Financial Accounting
Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS No. 123(R)") under
the applied modified perspective method. With limited exceptions, SFAS No.
123(R) requires public companies to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant date
fair value of the award and to recognize such cost over the period during which
an employee is required to provide service in exchange for the award (usually
the vesting period).
Prior to the adoption of SFAS No. 123(R), and in accordance with the provisions
of Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), the Corporation accounted for
share-based payments under the recognition and measurement principles of
Accounting Principle Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and related interpretations.
At March 31, 2006, the Corporation had four types of stock award programs
referred to as the Employee Stock Bonus Plan, the Director Stock Plan, and
Employee Stock Option Plan and a Stock Option Plan for Non-Employee Directors.
The Employee Stock Bonus Plan is intended to provide incentives which will
retain highly competent key management by providing them with a bonus in the
form of shares of common stock of the Corporation. The Corporation did not grant
shares during the first quarter of 2005 or 2006.
5
The Director Stock Plan permits members of the Board of Directors of the Bank to
receive any monthly Board of Directors' fees in shares of the Corporation's
common stock, rather than in cash. The Corporation recorded $16,000 and $5,000
in directors expense for the quarter ended March 31, 2006 and 2005,
respectively.
The Employee Stock Option Plan provides for options to purchase shares of Common
Stock to be issued to employees of the Corporation at the discretion of the
Compensation Committee of the Board of Directors. There were no options granted
during the quarters ended March 31, 2006 and 2005. Options outstanding as of
March 31, 2006 were 72,370 shares with a weighted average exercise price of
$6.33, a weighted average remaining contractual life of 2.74 years and an
aggregate intrinsic value of $165,000. All options were fully vested as of
December 31, 2005. There were no options exercised during the first quarter of
2006 and 1,545 shares exercised during the first quarter of 2005.
The 2001 Stock Option Plan for Non-Employee Directors provided for options to
purchase shares of common stock to be issued to Directors of the Corporation. In
accordance with the provisions of SFAS No. 123(R), the Corporation recorded
$17,000 of director's compensation expense for share-based payments in the first
quarter of 2006, with a related income tax benefit of $7,000. This expense
relates to non-qualified stock options that were outstanding but not yet vested
as of January 1, 2006. Due to the relatively small amount of compensation
expense, basic and diluted earnings per share, income before income tax expense,
net income, cash flow from operations and cash flow from financing activities
were not significantly impacted.
There was no activity in the Corporation's director stock option plan for the
quarters ended March 31, 2006 and 2005. Options outstanding as of March 31, 2006
were 43,398 shares with a weighted average exercise price of $7.47, a weighted
average remaining contractual life of 0.62 years and an aggregate intrinsic
value of $136,000. As of March 31, 2006, there was approximately $7,000 of total
unrecognized compensation costs related to nonvested stock options. These costs
are expected to be recognized over the next quarter.
The following table sets forth the pro forma net income and earnings per share
for the first quarter of 2005 as if the fair value based method set forth in
SFAS No. 123(R) had been applied to all share-based arrangements.
Three Months Ended
March 31, 2005
--------------
Net Income:
Net income as reported $ 1,004,000
Stock-based compensation expense included in net
Income, net of related tax effects 5,000
Total stock-based compensation expense determined
Under fair value based method for all awards,
Net of related tax effects (21,000)
-------------
Pro forma net income $ 988,000
=============
Earnings per share:
As reported basic earnings per share $ 0.21
As reported diluted earnings per share 0.20
Pro forma basic earnings per share 0.20
Pro form diluted earnings per share 0.20
Share data has been restated to reflect a 4 for 3 stock dividend issued July,
2005 and a 5% stock dividend paid in November 15, 2005.
There were no stock options awarded during the first quarter of 2006 and 2005.
The fair value of options granted for Directors is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions used:
Director Director
Stock Options Stock Options
2001 2005
---- ----
Dividend yield 1.62% 1.79%
Expected volatility 39.76% 33.19%
Risk-free interest rate 6.65% 4.34%
Expected life 7 years 5 years
Fair value at grant date $ 2.94 $ 4.50
Note 2. Basis of presentation
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-Q and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include information or footnotes necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary for a fair
presentation of the consolidated financial statements, have been included. The
results of operations for the three months ended March 31, 2006 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.
6
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 March 31, 2006 and December
31, 2005. 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.
March 31, 2006
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------
U.S. Treasury securities $ 500,000 $ -- $ 2,000 $ 498,000
U.S. government-sponsored agencies 33,196,000 -- 729,000 32,467,000
Obligations of state and political
subdivisions 1,367,000 -- 35,000 1,332,000
Mortgage-backed securities 28,673,000 6,000 899,000 27,780,000
Community Reinvestment Act Fund 1,083,000 -- 36,000 1,047,000
-------------------------------------------------------
$ 64,819,000 $ 6,000 $ 1,701,000 $ 63,124,000
=======================================================
December 31, 2005
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
-------------------------------------------------------
U.S. Treasury securities $ 501,000 $ -- $ 5,000 $ 496,000
U.S. government-sponsored agencies 33,140,000 -- 662,000 32,478,000
Obligations of state and political
subdivisions 2,068,000 -- 37,000 2,031,000
Mortgage-backed securities 28,880,000 8,000 777,000 28,111,000
Community Reinvestment Act Fund 1,071,000 -- 20,000 1,051,000
-------------------------------------------------------
$ 65,660,000 $ 8,000 $ 1,501,000 $ 64,167,000
=======================================================
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 March 31, 2006 and December 31,
2005. Securities held to maturity are stated at cost, adjusted for amortization
of premiums and accretion of discounts.
March 31, 2006
-------------------------------------------------------
Gross Gross Estimated
Carrying Unrecognized Unrecognized Market
Value Gains Losses Value
-------------------------------------------------------
U.S. Treasury securities $ 1,003,000 $ -- $ 3,000 $ 1,000,000
U.S. government-sponsored agencies 12,004,000 -- 185,000 11,819,000
Obligations of state and political
subdivisions 14,743,000 16,000 133,000 14,626,000
Mortgage-backed securities 8,367,000 42,000 146,000 8,263,000
-------------------------------------------------------
$ 36,117,000 $ 58,000 $ 467,000 $ 35,708,000
=======================================================
December 31, 2005
-------------------------------------------------------
Gross Gross
Carrying Unrecognized Unrecognized Market
Value Gains Losses Value
-------------------------------------------------------
U.S. Treasury securities $ 1,004,000 $ 2,000 $ 1,000 $ 1,005,000
U.S. government-sponsored agencies 12,113,000 1,000 180,000 11,934,000
Obligations of state and political
subdivisions 15,747,000 27,000 128,000 15,646,000
Mortgage-backed securities 8,953,000 60,000 123,000 8,890,000
-------------------------------------------------------
$ 37,817,000 $ 90,000 $ 432,000 $ 37,475,000
=======================================================
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").
7
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.
March 31, December 31,
2006 2005
--------------------------------
Mortgage
Residential $ 45,650,000 $ 45,604,000
Commercial 159,068,000 163,309,000
Commercial 68,592,000 65,011,000
Equity 19,270,000 20,271,000
Installment 53,157,000 51,540,000
Other 449,000 506,000
----------------------------------
Total loans 347,183,000 346,241,000
----------------------------------
Less: Deferred loan fees 425,000 418,000
Allowance for loan losses 3,920,000 3,847,000
----------------------------------
4,345,000 4,265,000
----------------------------------
Loans, net $ 341,841,000 $ 341,976,000
==================================
Note 6. Allowance for loan losses
Three Months Ended March 31,
2006 2005
-----------------------------------
Balance, beginning of period $ 3,847,000 $ 3,299,000
Provision charged to operations 50,000 150,000
Recoveries of loans charged off 23,000 2,000
Loans charged off - (13,000)
-----------------------------------
Balance, end of period $ 3,920,000 $ 3,438,000
===================================
8
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 7. Loan Impairment
The Corporation has defined the population of impaired loans to include all
nonaccrual loans, loans more than 90 days past due and restructured loans. The
following table sets forth information regarding the impaired loans as of the
periods indicated.
March 31, December 31,
2006 2005
--------------------------------
Impaired loans
With related allowance for loan losses $ 7,000 $ 152,000
Without related allowance for loan losses 177,000 320,000
------------- -------------
Total impaired loans $ 184,000 $ 472,000
============= =============
Related allowance for loan losses $ 7,000 $ 29,000
============= =============
9
Stewardship Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements Continued
(Unaudited)
Note 8. Recent Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140." (SFAS No. 156). SFAS
No. 156 requires the recognition of servicing assets or servicing liabilities
each time an entity undertakes an obligation to service a financial asset;
requires all separately recognized servicing assets and servicing liabilities to
be initially measured at fair value, if practicable; and, permits an entity to
choose either to (1) amortize servicing assets or servicing liabilities in
proportion to and over the period of estimated net servicing income or net
servicing loss and assess servicing assets or servicing liabilities for
impairment or increased obligation based on fair value at each reporting date;
or, (2) measure servicing assets or servicing liabilities at fair value at each
reporting date and report changes in fair value in earnings in the period in
which the changes occur. At its initial adoption, SFAS No. 156 permits a
one-time reclassification of available for sale securities to trading securities
provided that the available for sale securities are identified in some manner as
offsetting exposure to changes in fair value of servicing assets or servicing
liabilities subsequently being measured at fair value. SFAS No. 156 requires
separate financial statement presentation of servicing assets and servicing
liablities subsequently measured at fair value and requires additional
disclosures for all separately recognized servicing assets and servicing
liablilities. SFAS No. 156 is effective for the Corporation on January 1, 2007.
The Corporation does not expect the adoption of SFAS No. 156 to have a
significant impact on the consolidated financial statements, results of
operation or liquidity of the Corporation.
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 March 31,
2006 2005
---- ----
Net income $1,109 $1,004
Weighted average common shares 4,755 4,722
Effect of dilutive stock options 55 61
------ ------
Total weighted average common dilutive shares 4,810 4,783
Basic earnings per share $ 0.23 $ 0.21
Diluted earnings per share $ 0.23 $ 0.21
All share and per share amounts have been restated to reflect a 4 for 3 stock
split issued July, 2005 and a 5% stock dividend paid November 15, 2005.
10
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 three months ended March 31, 2006 and 2005 was $984,000 and $472,000,
respectively. The difference between the Corporation's net income and total
comprehensive income for these periods relates to the change in the net
unrealized holding gains and losses on securities available for sale during the
applicable period of time.
11
Stewardship Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Form 10-Q contains certain "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, and may be identified
by the use of such words as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential." Examples of forward looking statements
include, but are not limited to, estimates with respect to the financial
condition, results of operations and business of the Corporation that are
subject to various factors which could cause actual results to differ materially
from these estimates. These factors include: changes in general, economic, and
market conditions, legislative and regulatory conditions, or the development of
an interest rate environment that adversely affects the Corporation's interest
rate spread or other income anticipated from operations and investments. As used
in this Form 10-Q, "we" and "us" and "our" refer to Stewardship Financial
Corporation and its consolidated subsidiary, Atlantic Stewardship Bank,
depending on the context.
Critical Accounting Policies and Estimates
- ------------------------------------------
"Management's Discussion and Analysis of Financial Condition and Results of
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
management 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, 2005 included
in our Annual Report on Form 10-K for the year ended December 31, 2005, 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
12
Corporation's allowance for loan losses. Such agencies may require the
Corporation to make additional provisions for loan losses based upon information
available to them at the time of their examination. Furthermore, the majority of
the Corporation's loans are secured by real estate in the State of New Jersey.
Accordingly, the collectibility of a substantial portion of the carrying value
of the Corporation's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the northern New Jersey area experience an adverse economic shock. Future
adjustments to the allowance for loan losses may be necessary due to economic,
operating, regulatory and other conditions beyond the Corporation's control.
Financial Condition
- -------------------
Total assets decreased by $6.2 million, or 1.3%, from $482.7 million at December
31, 2005 to $476.6 million at March 31, 2006. Cash and cash equivalents
decreased $2.9 million, securities held to maturity decreased $1.7 million and
securities available for sale decreased $1.0 million. Net loans decreased
$135,000, as a result of the Corporation selling participations totaling
approximately $7.1 million of commercial mortgages. The proceeds from these loan
participations and the principal payments in the investment portfolio were used
to lower the Corporation's dependence on Federal Home Loan Bank borrowings. The
composition of the loan portfolio is basically unchanged at March 31, 2006 when
compared with the portfolio at December 31, 2005.
Deposits totaled $400.6 million at March 31, 2006, a decrease of $3.6 million,
or 0.9%, from $404.1 million at December 31, 2005. Noninterest-bearing deposits
decreased $3.1 million, or 3.3%, to $90.8 million at March 31, 2006 and
interest-bearing deposits decreased $433,000, or 0.1%, to $309.8 million at
March 31, 2006. The Corporation experienced a normal cyclical decline in the
business checking products during the first quarter of 2006 and operated in an
extremely competitive market for attracting deposits. The Corporation opened its
tenth branch in Montville, Morris County, New Jersey in February 2006 and this
new market is helping obtain a strong core deposit base.
The Corporation has received approvals to begin the building of our new Wyckoff
branch, which is anticipated to open in the second quarter of 2007. The
Corporation is also looking at several new deposit products for introduction in
the second quarter to help provide attractive services to existing and new
customers that will fund the loan growth anticipated in the second quarter of
2006. The challenges of the rising interest rate environment and the strong
competitive market for deposits is expected to continue for the remainder of the
year and will require the Corporation to continue to look at a blend of new
deposit products and borrowings in order to fund the balance sheet.
13
Results of Operations
- ---------------------
Three Months Ended March 31, 2006 and 2005
- ------------------------------------------
General
- -------
The Corporation reported net income of $1.1 million, or $0.23 diluted earnings
per share for the three months ended March 31, 2006, compared to $1.0 million,
or $0.21 diluted earnings per share for the same period in 2005. The $105,000
increase was primarily caused by increases in net interest income and
noninterest income and a decrease in the provision for loan loss, partially
offset by an increase in noninterest expense.
Net interest income
- -------------------
Net interest income increased $275,000, or 6.2%, for the three months ended
March 31, 2006 as compared with the corresponding period in 2005. The increase
was primarily due to an increase in average net interest-earning assets and a
decrease in the net interest margin.
Total interest income on a tax equivalent basis increased $1.3 million, or
22.2%, 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 44 basis points from
5.87% for the three months ended March 31, 2005 to 6.31% for the same period in
2006. The average balance of interest-earning assets increased $54.3 million, or
13.6%, from $398.3 million for the three months ended March 31, 2005 to $452.6
million for the same period in 2006, primarily caused by strong loan demand and
an increase in taxable investment securities. The Corporation continued to
experience an increase in loan demand which caused loans on average to increase
$51.9 million to an average of $348.7 million for the three months ended March
31, 2006, from an average of $296.8 million for the comparable period in 2005.
Taxable investment securities increased $8.6 million to an average of $86.6
million as the Corporation deployed short-term assets into securities.
Interest paid on deposits and borrowed money increased by $1.0 million, or
79.3%, due to an increase in deposits as compared to the same period in 2005 and
an increase in rates paid on deposits. The average balance of total
interest-bearing deposits and borrowed money increased to $355.0 million for the
three months ended March 31, 2006 from $303.2 million for the comparable 2005
period, primarily as a result of the Corporation's expanding customer base and
new product offerings. Yields on deposits and borrowed money increased from
1.70% for the three month period ended March 31, 2005 to 2.64% for the
comparable period in 2006. Rising short-term interest rates and an extremely
competitive market has caused the Corporation to raise yields on deposits in
order to fund the asset base.
14
The following table reflects the components of the Corporation's net interest
income for the quarters ended March 31, 2006 and 2005 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.
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended March 31,
2006 2005
------------------------------------ -----------------------------------
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) $ 348,697 $ 5,974 6.9% $ 296,764 $ 4,787 6.54%
Taxable investment securities (1) 86,645 879 4.11 78,030 724 3.76
Tax-exempt investment securities (1) (2) 16,817 181 4.36 19,471 224 4.67
Other interest-earning assets 483 7 5.88 4,058 26 2.60
--------- --------- --------- ---------
Total interest-earning assets 452,642 7,041 6.31 398,323 5,761 5.87
--------- ---------
Non-interest-earning assets:
Allowance for loan losses (3,965) (3,392)
Other assets 31,972 26,651
--------- ---------
Total assets $ 480,649 $ 421,582
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 118,775 $ 407 1.39% $ 131,792 $ 320 0.98%
Savings deposits 44,674 64 0.58 50,127 74 0.60
Time deposits 144,849 1,306 3.66 90,455 581 2.60
Repurchase agreements 5,635 55 3.96 3,404 18 2.14
FHLB borrowing 33,784 353 4.24 20,206 172 3.45
Subordinated debenture 7,255 122 6.82 7,258 122 6.82
--------- --------- --------- ---------
Total interest-bearing liabilities 354,972 2,307 2.64 303,242 1,287 1.70
--------- ---------
Non-interest-bearing liabilities:
Demand deposits 88,953 85,324
Other liabilities 2,717 1,924
Stockholders' equity 34,007 31,092
--------- ---------
Total liabilities and stockholders' equity $ 480,649 $ 421,582
========= =========
Net interest income (taxable equivalent basis) $ 4,734 $ 4,474
Tax Equivalent adjustment (57) (72)
--------- ---------
Net interest income 4,677 4,402
Net interest spread (taxable equivalent basis) 3.67% 4.16%
========= =========
Net yield on interest-earning
assets (taxable equivalent basis) (3) 4.24% 4.56%
========= =========
- -----------------
(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.
15
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,
current charge-off experience, level of nonperforming loans and 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 $50,000 and $150,000 during the
three months ended March 31, 2006 and 2005, respectively. The decrease in the
provision was primarily due to the unchanged balance in the loan portfolio
caused by the loan participations completed during the first quarter and the
improved asset quality. See "Asset Quality" section for a 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 $221,000, or 34.1%, from $649,000 for the three
month period ended March 31, 2005 to $870,000 for the comparable period in 2006.
Income derived from the merchant credit card processing program increased
$76,000 due to an expanding merchant base and deposit related fees increased
$32,000 for the three month period ended March 31, 2006 compared to the same
period for 2005 due to the implementation of an overdraft protection program
which was offered to customers beginning March 1, 2006. This program provides
eligible customers with an overdraft line available for check writing and ATM,
ACH, and Debit card transactions. The Bank purchased bank owned life insurance
in April, 2005 which contributed $80,000 to noninterest income during the first
quarter of 2006. In addition, the increase in mortgage activity allowed the
Corporation to improve the volume of loans held for sale and realize additional
income of $32,000.
Noninterest expense
- -------------------
Noninterest expense increased by approximately $463,000, or 14.0%, to $3.8
million for the three months ended March 31, 2006, compared to $3.3 million for
the same 2005 period. Salaries and employee benefits, the major component of
noninterest expense, increased $183,000, or 12.7%, during the three months ended
March 31, 2006. This increase was due to general increases for merit and
performance and increases in staffing to support the new Montville branch, the
lending department and the executive administration. Occupancy and equipment
expense increased $112,000, or 25.2%, primarily to support the new Montville
branch and the newly relocated Waldwick branch which opened in the fall of 2005.
Advertising expense decreased $44,000 during the period ended March 31, 2006 as
the Corporation had a strong marketing program in 2005 to support new product
offerings. The increase in the merchant card
16
processing business caused merchant processing expense to increase $72,000 in
the first quarter of 2006 as compared to the first quarter of 2005.
Income taxes
- ------------
Income tax expense totaled $610,000 for the three months ended March 31, 2006,
for an effective tax rate of 35.5%. For the three months ended March 31, 2005,
income tax expense totaled $582,000, for an effective tax rate of 36.7%. The
effective tax rate has decreased due to the effect of the tax deferred status of
the bank owned life insurance income.
Asset Quality
- -------------
The Corporation's principal earning assets are its loans to businesses and
individuals located in northern New Jersey. Inherent in the lending function is
the risk of deterioration in the borrowers' ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured loans, potential problem loans, loan concentrations and other
real estate owned. The following table shows the composition of nonperforming
assets at the end of the last four quarters:
03/31/06 12/31/05 09/30/05 06/30/05
--------- --------- --------- ---------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 184 $ 472 $ 316 $ 202
Loans past due 90 days or more: (2) 5 55 26 7
Restructured loans: -- -- -- --
--------- --------- --------- ---------
Total nonperforming loans $ 189 $ 527 $ 342 $ 209
========= ========= ========= =========
Allowance for loan losses $ 3,920 $ 3,847 $ 3,714 $ 3,570
========= ========= ========= =========
Nonaccrual loans to total loans 0.05% 0.14% 0.09% 0.06%
Nonperforming loans to total loans 0.06% 0.15% 0.10% 0.07%
Nonperforming loans to total assets 0.04% 0.11% 0.07% 0.05%
Allowance for loan losses to total loans 1.13% 1.11% 1.14% 1.13%
(1) Generally represents loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged against income during the
current period. Interest earned thereafter is only included in income to the
extent that it is received in cash.
(2) Represents loans to which payments of interest or principal are
contractually past due 90 days or more but which are currently accruing income
at the contractually stated rates. A determination is made to continue accruing
income on those loans which are sufficiently collateralized and on which
management believes all interest and principal owed will be collected.
There were no loans at March 31, 2006 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.
17
The Corporation's lending activities are concentrated in loans secured by real
estate located in northern New Jersey. Accordingly, the collectibility of a
substantial portion of the Corporation's loan portfolio is susceptible to
changes in real estate market conditions in northern New Jersey.
Market Risk
- -----------
The Corporation's primary exposure to market risk arises from changes in market
interest rates ("interest rate risk"). The Corporation's profitability is
largely dependent upon its ability to manage interest rate risk. Interest rate
risk can be defined as the exposure of the Corporation's net interest income to
adverse movements in interest rates. Although the Corporation manages other
risks, 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 three months
ended March 31, 2006.
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-
18
balance sheet exposures to risk factors. Four categories of risk weights (0%,
20%, 50%, and 100%) were established to be applied to different types of balance
sheet assets and off-balance sheet exposures. The aggregate of the risk-weighted
items (risk-based assets) is the denominator of the ratio, the numerator is
risk-based capital. Under the regulations, risk-based capital has been
classified into two categories. Tier 1 capital includes common and qualifying
perpetual preferred stockholders' equity less goodwill. Tier 2 capital includes
mandatory convertible debt, allowance for loan losses, subject to certain
limitations, and certain subordinated and term debt securities. Total qualifying
capital consists of Tier 1 capital and Tier 2 capital; however, the amount of
Tier 2 capital may not exceed the amount of Tier 1 capital. At March 31, 2006,
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 March 31, 2006 the
minimum leverage ratio requirement to be considered well capitalized was 4%. The
following table reflects the Corporation's capital ratios at March 31, 2006.
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 12.36% 8.36%
Total 8.00% 13.47% 5.47%
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 March 31, 2006, the Corporation has
outstanding loan commitments of $28.1 million and unused lines and letters of
credit totaling $95.0 million. Certificates of deposit scheduled to mature in
one year or less, at March 31, 2006, totaled $54.2 million. Management believes
that a significant portion of such deposits will remain with the Corporation.
Cash and cash equivalents decreased $2.9 million
19
during the first three months of 2006. Net operating and investing activities
provided $2.9 million and $2.5 million, respectively, and financing activities
used $8.2 million.
The Corporation had an available overnight line of credit with the FHLB-NY for a
maximum amount of $41.6 million at March 31, 2006.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure about quantitative and qualitative market risk is located in the
Market Risk section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 4. Controls and Procedures
The Corporation's management, with the participation of the Corporation's chief
executive officer and principal accounting officer, has evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of
March 31, 2006. Based on this evaluation, the Corporation's chief executive
officer and principal accounting officer concluded that the Corporation
disclosure controls and procedures are effective for recording, processing,
summarizing and reporting the information the Corporation is required to
disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms. Such evaluation
did not identify any change in the Corporation's internal control over financial
reporting that occurred during the quarter ended March 31, 2006 that has
materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
20
Stewardship Financial Corporation
Part II -- Other Information
Item 1A. Risk Factors
------------
There have been no material changes in risk factors described in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2005.
Item 6. Exhibits
-------
(a) Exhibits
See Exhibit Index following this report.
21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Stewardship Financial Corporation
Date: May 15, 2006 By: /s/ Paul Van Ostenbridge
-------------- -----------------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
(authorized officer on behalf
of registrant)
Date: May 15, 2006 By: /s/ Julie E. Holland
-------------- -----------------------------------------
Julie E. Holland
Senior Vice President and Treasurer
(principal accounting officer)
22
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
23