FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
( ) 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
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(Name of small business issuer as specified in its charter)
New Jersey 22-3351447
------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
630 Godwin Avenue, Midland Park, NJ 07432
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(Address of principal executive offices) (Zip Code)
(201) 444-7100
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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The number of shares outstanding of the Issuer's Common Stock, no par
value, net of treasury stock outstanding as of May 2, 2002 was 1,856,302.
Transitional Small Business Disclosure Format (Check one):
Yes No X
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STEWARDSHIP FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
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PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM I - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at March 31, 2002 (Unaudited) and December 31, 2001 ......... 1
Consolidated Statements of Income for the Three
Months ended March 31, 2002 and 2001 (Unaudited) ............ 2
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2002 and 2001 (Unaudited) ............ 3
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months ended
March 31, 2002 (Unaudited) .................................. 4
Notes to Consolidated Financial Statements (Unaudited) ...... 5 - 10
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ................................................ 11 - 15
ITEM III - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ......................................... 15
PART II - OTHER INFORMATION
ITEM 1 THRU ITEM 6 ................................................... 16
SIGNATURES ........................................................... 17
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
2002 2001
------------------------------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 10,766,000 $ 11,958,000
Other interest-earning assets 4,602,000 4,566,000
Federal funds sold 14,025,000 17,550,000
------------------------------------
Cash and cash equivalents 29,393,000 34,074,000
Securities available for sale 12,687,000 12,549,000
Securities held to maturity; estimated fair value
of $39,845,000 (2002) and $38,110,000 (2001) 39,785,000 37,872,000
FHLB-NY stock, at cost 1,059,000 885,000
Loans, net of allowance for loan losses of
of $2,640,000 (2002) and $2,602,000 (2001) 189,719,000 182,930,000
Mortgage loans held for sale 1,598,000 3,239,000
Premises and equipment, net 3,601,000 3,663,000
Accrued interest receivable 1,557,000 1,508,000
Intangible assets, net of accumulated amortization of
$452,000 (2002) and $441,000 (2001) 297,000 309,000
Other assets 1,697,000 1,494,000
------------------------------------
Total assets $ 281,393,000 $ 278,523,000
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 55,919,000 $ 57,581,000
Interest-bearing 201,724,000 198,103,000
------------------------------------
Total deposits 257,643,000 255,684,000
Securities sold under agreements to repurchase 655,000 655,000
Accrued expenses and other liabilities 1,883,000 1,631,000
------------------------------------
Total liabilities 260,181,000 257,970,000
------------------------------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
1,841,746 and 1,829,231 shares issued outstanding at
March 31, 2002 and December 31, 2001, respectively 12,824,000 12,638,000
Retained earnings 8,426,000 7,886,000
Accumulated other comprehensive (loss) income (38,000) 29,000
------------------------------------
Total stockholders' equity 21,212,000 20,553,000
------------------------------------
Total liabilities and stockholders' equity $ 281,393,000 $ 278,523,000
====================================
See notes to unaudited consolidated financial statements.
1
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------------------------
Interest income:
Loans $ 3,555,000 $ 3,672,000
Securities held to maturity
Taxable 301,000 155,000
Non-taxable 169,000 146,000
Securities available for sale 172,000 262,000
Other interest-earning assets 69,000 65,000
------------------------------
Total interest income 4,266,000 4,300,000
------------------------------
Interest expense:
Deposits 1,312,000 1,675,000
Borrowed money 6,000 16,000
------------------------------
Total interest expense 1,318,000 1,691,000
------------------------------
Net interest income before provision for loan losses 2,948,000 2,609,000
Provision for loan losses 40,000 105,000
------------------------------
Net interest income after provision for loan losses 2,908,000 2,504,000
------------------------------
Noninterest income:
Fees and service charges 432,000 310,000
Gain on sales of mortgage loans 72,000 20,000
Miscellaneous 26,000 29,000
------------------------------
Total noninterest income 530,000 359,000
------------------------------
Noninterest expenses:
Salaries and employee benefits 1,135,000 965,000
Occupancy, net 165,000 140,000
Equipment 151,000 108,000
Data processing 160,000 129,000
Advertising 63,000 17,000
FDIC insurance premium 11,000 9,000
Amortization of intangible assets 11,000 12,000
Charitable contributions 95,000 90,000
Stationery and supplies 58,000 57,000
Miscellaneous 527,000 425,000
------------------------------
Total noninterest expenses 2,376,000 1,952,000
------------------------------
Income before income tax expense 1,062,000 911,000
Income tax expense 357,000 310,000
------------------------------
Net income $ 705,000 $ 601,000
==============================
Basic earnings per share $ 0.38 $ 0.33
==============================
Diluted earnings per share $ 0.38 $ 0.33
==============================
Weighted average number of common shares outstanding 1,838,148 1,821,803
==============================
Weighted average number of diluted common
shares outstanding 1,860,807 1,837,039
==============================
Share data has been restated to reflect a 5% stock dividend paid November, 2001.
See notes to unaudited consolidated financial statements.
2
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2002 2001
----------------------------------
Cash flows from operating activities:
Net income $ 705,000 $ 601,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment 139,000 110,000
Amortization of premiums and accretion of discounts, net 42,000 7,000
Accretion of deferred loan fees (11,000) (6,000)
Provision for loan losses 40,000 105,000
Originations of mortgage loans held for sale (5,613,000) (2,224,000)
Proceeds from sale of mortgage loans 7,326,000 1,771,000
Gain on sale of mortgage loans (72,000) (20,000)
Deferred income tax benefit (115,000) (44,000)
Amortization of intangibles 11,000 12,000
Increase (decrease) in accrued interest receivable (49,000) 86,000
Increase (decrease) in other assets (47,000) 95,000
Increase in other liabilities 253,000 209,000
----------------------------------
Net cash provided by operating activities 2,609,000 702,000
----------------------------------
Cash flows from investing activities:
Purchase of securities available for sale (754,000) --
Proceeds from maturities and principal repayments
on securities available for sale 507,000 768,000
Proceeds from calls and sales of securities available for sale -- 1,700,000
Purchase of securities held to maturity (3,597,000) (1,075,000)
Proceeds from maturities and principal repayments
on securities held to maturity 1,142,000 777,000
Proceeds from call on securities held to maturity 500,000 1,250,000
Purchase of FHLB-NY stock (173,000) (115,000)
Net increase in loans (6,818,000) (3,644,000)
Sales of premises and equipment 19,000 --
Additions to premises and equipment (94,000) (505,000)
----------------------------------
Net cash used in investing activities (9,268,000) (844,000)
----------------------------------
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits (1,662,000) (2,161,000)
Net increase in interest-bearing deposits 3,620,000 8,362,000
Net decrease in securities sold under agreements to repurchase -- (111,000)
Cash dividends paid on common stock (165,000) (138,000)
Options exercised 55,000 31,000
Common stock issued under stock plans 130,000 125,000
----------------------------------
Net cash provided by financing activities 1,978,000 6,108,000
----------------------------------
Net (decrease) increase in cash and cash equivalents (4,681,000) 5,966,000
Cash and cash equivalents - beginning 34,074,000 13,696,000
----------------------------------
Cash and cash equivalents - ending $ 29,393,000 $ 19,662,000
==================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 1,490,000 $ 1,734,000
Cash paid during the year for income taxes 25,000 60,000
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, 2002
------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
------------------------- RETAINED INCOME/(LOSS),
SHARE AMOUNT EARNINGS NET TOTAL
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Balance -- December 31, 2001 1,829,231 $12,638,000 $ 7,886,000 $ 29,000 $20,553,000
Dividends Paid -- -- (165,000) -- (165,000)
Common stock issued under stock plans 7,368 130,000 -- -- 130,000
Exercise of stock options 5,147 56,000 56,000
Comprehensive income:
Net income for the three months
ended March 31, 2002 -- -- 705,000 -- 705,000
Unrealized holding losses on securities
available for sale arising during the period
(net tax benefit of $44,000) -- -- -- (67,000) (67,000)
-----------
Total comprehensive income, net of tax 638,000
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Balance -- March 31, 2002 1,841,746 $12,824,000 $ 8,426,000 $ (38,000) $21,212,000
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4
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stewardship
Financial Corporation, ("the Corporation") and its wholly owned subsidiary,
Atlantic Stewardship Bank ("the Bank"). Atlantic Stewardship Bank includes its
wholly owned subsidiary, Stewardship Investment Corp. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Certain prior period amounts have been reclassified to
conform to the current presentation. 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.
NOTE 2. BASIS OF PRESENTATION
The interim unaudited consolidated financial statements included herein have
been prepared in accordance with instructions for Form 10-QSB 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 three months ended March 31, 2002 are not necessarily
indicative of the results which may be expected for the entire year.
5
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 3. SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and carrying value of the
Corporation's securities available for sale as of March 31, 2002 and December
31, 2001. 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, 2002
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Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
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U.S. Treasury securities $ 500,000 $ 9,000 $ -- $ 509,000
U.S. Government agencies 4,146,000 43,000 81,000 4,108,000
Obligations of state and political
subdivisions 1,051,000 28,000 -- 1,079,000
Mortgage-backed securities 7,055,000 48,000 112,000 6,991,000
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$ 12,752,000 $ 128,000 $ 193,000 $ 12,687,000
================================================================
December 31, 2001
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Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
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U.S. Treasury securities $ 500,000 $ 14,000 $ -- $ 514,000
U.S. Government agencies 4,135,000 61,000 27,000 4,169,000
Obligations of state and political
subdivisions 1,053,000 28,000 -- 1,081,000
Mortgage-backed securities 6,816,000 58,000 89,000 6,785,000
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$ 12,504,000 $ 161,000 $ 116,000 $ 12,549,000
================================================================
NOTE 4. SECURITIES HELD TO MATURITY
The following table sets forth the carrying value and estimated fair value
of the Corporation's securities held to maturity as March 31, 2002 and December
31, 2001. Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
March 31, 2002
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Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
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U.S. Treasury securities $ 1,516,000 $ 14,000 $ 32,000 $ 1,498,000
U.S. Government agencies 7,396,000 47,000 52,000 7,391,000
Obligations of state and political
subdivisions 17,972,000 328,000 48,000 18,252,000
Mortgage-backed securities 12,901,000 28,000 225,000 12,704,000
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$ 39,785,000 $ 417,000 $ 357,000 $ 39,845,000
================================================================
December 31, 2001
----------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
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U.S. Treasury securities $ 1,517,000 $ 19,000 $ 19,000 $ 1,517,000
U.S. Government agencies 7,894,000 95,000 22,000 7,967,000
Obligations of state and political
subdivisions 16,470,000 308,000 54,000 16,724,000
Mortgage-backed securities 11,991,000 41,000 130,000 11,902,000
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$ 37,872,000 $ 463,000 $ 225,000 $ 38,110,000
================================================================
6
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 the Bergen, Passaic and Morris counties, New Jersey
area. The following table set forth the composition of loans as of the periods
indicated.
March 31, December 31,
2002 2001
-------------------------------------
Mortgage
Residential $ 34,356,000 $ 36,394,000
Commercial 76,552,000 72,262,000
Commercial 35,071,000 32,871,000
Equity 9,275,000 7,944,000
Installment 37,000,000 35,961,000
Other 261,000 243,000
-------------------------------------
Total loans 192,515,000 185,675,000
-------------------------------------
Less: Deferred loan fees 156,000 143,000
Allowance for loan losses 2,640,000 2,602,000
-------------------------------------
2,796,000 2,745,000
-------------------------------------
Loans, net $ 189,719,000 $ 182,930,000
=====================================
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Three Months Ended March 31,
2002 2001
---------------------------------
Balance, beginning of period $ 2,602,000 $ 2,223,000
Provision charged to operations 40,000 140,000
Recoveries of loans charged off
9,000 --
Loans charged off (11,000) (4,000)
---------------------------------
Balance, end of period $ 2,640,000 $ 2,359,000
=================================
7
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,
2002 2001
---------------------------
Impaired loans
With related allowance for loan losses $ 514,000 $ 534,000
Without related allowance for loan losses 421,000 438,000
---------------------------
Total impaired loans $ 935,000 $ 972,000
===========================
Related allowance for loan losses $ 196,000 $ 205,000
===========================
8
STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
NOTE 8. 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. Potential dilutive securities totaled 22,659
and 15,236 shares for the three months ended March 31, 2002 and 2001,
respectively.
All share and per share amounts have been restated to reflect a 5% stock
dividend paid November 15, 2001.
NOTE 9. 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, 2002 and 2001 was $638,000 and $791,000,
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 or losses on securities available for sale during the
applicable period of time.
9
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS No. 141) and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies the
criteria that acquired intangible assets must meet to be recognized and reported
apart from goodwill. SFAS No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
SFAS No. 142 requires that goodwill and any intangible asset determined to have
and indefinite useful life acquired after June 30, 2001 will not be amortized,
but will continue to be evaluated for impairment in accordance with the
appropriate pre- SFAS No. 142 accounting literature.
As of March 31, 2002, the Corporation had goodwill and core deposit premium with
definite useful lives that are being amortized. Goodwill represents the excess
of fair value of liabilities assumed over the fair value of tangible assets
acquired through a branch purchase acquisition completed in 1995 and amounted to
$254,000 and $263,000 at March 31, 2002 and December 31, 2001, respectively.
Amortization expense totaled $8,000 for the quarters ended March 31, 2002 and
March 31, 2001, respectively. It is anticipated that amortization expense will
total $32,000 each year for the next five years. The core deposit intangible
represents the intangible value of depositor relationships resulting from
deposit liabilities assumed in the same acquisition. The core deposit intangible
amounted to $43,000 and $46,000 at March 31, 2002 and December 31, 2001,
respectively. Amortization expense totaled $3,000 and $4,000 for the quarters
ended March 31, 2002 and 2001, respectively. It is anticipated that amortization
expense will total $13,000, $11,000, $9,000, $7,000, and $6,000 for each of the
five years beginning with 2002.
10
STEWARDSHIP FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-QSB 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-QSB, "we" and "us" and "our" refer to
Stewardship Financial Corporation and its consolidated subsidiary, Atlantic
Stewardship Bank, depending on the context.
FINANCIAL CONDITION
Total assets increased by $2.9 million, or 1.0%, from $278.5 million at December
31, 2001 to $281.4 million at March 31, 2002. Net loans increased $6.8 million
and securities held to maturity increased $1.9 million, offset by decreases of
$3.5 million in federal funds sold, $1.6 million in mortgage loans held for sale
and $1.2 million in cash and due from banks. The composition of the loan
portfolio is basically unchanged at March 31, 2002 when compared with the
portfolio at December 31, 2001.
Total deposits totaled $257.6 million at March 31, 2002, an increase of $2.0
million, or 0.8% from $255.7 million at December 31, 2001. Interest-bearing
deposits increased $3.6 million, or 1.8%, to $201.7 million at March 31, 2002,
offset by a decrease in noninterest-bearing deposits of $1.7 million, or 2.9%,
to $55.9 million at March 31, 2002. The increase in deposits can be attributed
to a competitive program to attract investment retirement certificates of
deposit accounts, during the first quarter.
The Corporation's main focus during the first three months was to redeploy
federal funds investments into the loan and investment portfolios. The
Corporation continues to enhance the product line of the bank. The debit card,
introduced in November, 2001 continues to be well received with consumers.
Management has worked on a new product to offer debit cards to businesses and
will be able to accomplish this effective May 15, 2002. Management also began an
analysis of the current online and bill pay product and anticipates enhancements
to these systems in third quarter of 2002. The Corporation anticipates opening
its eighth branch during the second quarter. This branch will be a full service
location with drive-up and ATM drive-up facilities. Management believes that the
new branch and continued growth in our product mix will continue to enhance the
delivery channels being offered to existing and new customers.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
General
-------
The Corporation reported net income of $705,000, or $0.38 basic earnings per
share for the three months ended March 31, 2002 compared to $601,000, or $.33
basic earnings per share for the same period in 2001. The $104,000 increase was
primarily caused by increases in net interest income and noninterest income,
partially offset by increases in noninterest expense.
Net interest income
-------------------
Net interest income increased $339,000, or 13.0%, for the three months ended
March 31, 2002 as compared with the corresponding period in 2001. The increase
was primarily due to an increase in average net interest-earning assets, offset
by a decrease in net interest margin.
Total interest income decreased $34,000, or 0.8%, primarily due to a decrease in
the yields on interest-earning assets, offset by an increase in the average
earning assets. Due to the unprecedented drop in interest rates during the last
year, yields on interest earning assets fell 135 basis points from 8.10% for the
three months ended March 31, 2001 to 6.75% for the same period in 2002. The
average balance on interest-earning assets increased $42.2 million, or 19.5%,
from $216.3 million for the three months ended March 31, 2001 to $258.4 million
for the same period in 2002, primarily being funded by an increase to the
Corporation's average deposit base. The Corporation continued to experience an
increase in loan demand which allowed net loans on average to increase $20.4
million to an average $191.5 million for the three months ended March 31, 2002,
from an average $171.1 million for the comparable period in 2001. The
Corporation also increased its investment portfolio $14.3 million to an average
$54.2 million at March 31, 2002.
Interest paid on deposits and borrowed money decreased by $373,000, or 22.1%,
due primarily to a decrease in cost of funds related to the general interest
rate environment. The average balance of total interest-bearing deposits
increased to $198.0 million for the three months ended March 31, 2002 from
$163.6 million for the comparable 2001 period, primarily as a result of the
Corporation's expanding customer base and the overall flight to quality with
investors seeking safe investment alternatives to the stock market. Yields on
deposits and borrowed money decreased from 4.16% for the period ended March 31,
2001 to 2.69% for the comparable period in 2002.
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 risks 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 ultimate losses are charged to
operations during the period in which such additions are deemed necessary.
12
The provision charged to operations totaled $40,000 and $105,000 during the
three months ended March 31, 2002 and 2001. The decrease in the provision was
due to the current level of nonperforming loans, current balance of loan
portfolio and the monitoring of the loan loss reserve as a percent of total
loans. See "Asset Quality" section for summary of allowance for loan losses and
nonperforming assets. The Corporation monitors its loan portfolio and intends to
continue to provide for loan loss reserves based on its ongoing periodic review
of the loan portfolio and general market conditions.
Noninterest income
------------------
Noninterest income increased $171,000, or 47.6% from $359,000 for the three
months period ending March 31, 2001 to $530,000 for the comparable period in
2002. Deposit related fees increased $122,000 due to an increase in the deposit
base and income derived from the consumer debit card program. Increases in
mortgage activity and the volume of mortgage loans sold attributed to an
increase of $52,000 in the gain on sales of mortgage loans.
Noninterest expense
-------------------
Noninterest expense increased by approximately $424,000, or 21.7%, to $2.4
million for the three months ended March 31, 2002, compared to $2.0 million for
the same 2001 period. Salaries and employee benefits, the major component of
noninterest expense, increased $170,000, or 17.6%, during the three months ended
March 31, 2002. This increase was due to increases in staffing in the deposit,
accounting, and branch operations areas and general increases for merit and
performance. Occupancy and equipment increased $68,000, or 27.4% primarily due
to the increase in our branch facilities. Data processing expense increased
$31,000, or 24.0% due to the increase in our deposit base and to the servicing
of our consumer debit card product. Miscellaneous expenses increased $102,000,
or 24.0% due to the necessary support of the general growth of the Corporation.
Income taxes
------------
Income tax expense totaled $357,000 and $310,000 during the three months ended
March 31, 2002 and 2001, respectively.
13
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 borrower's 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:
03/31/02 12/31/01 09/30/01 06/30/01
-------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans: (1) $ 171 $ 163 $ 171 $ 675
Loans past due 90 days or more: (2) 23 22 19 169
Restructured loans: 741 787 15 17
------ ------ ------ ------
Total nonperforming loans $ 935 $ 972 $ 205 $ 861
====== ====== ====== ======
Allowance for loan losses $2,640 $2,602 $2,538 $2,432
====== ====== ====== ======
Nonaccrual loans to total loans 0.09% 0.09% 0.09% 0.37%
Nonperforming loans to total loans 0.49% 0.52% 0.01% 0.47%
Nonperforming loans to total assets 0.33% 0.35% 0.01% 0.33%
Allowance for loan losses to total loans 1.37% 1.40% 1.37% 1.34%
(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, 2002, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
are a relatively predictable source of funds, deposit flow and prepayments on
loans and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions and competition.
14
The Corporation's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. Cash and cash
equivalents decreased $4.7 million during the first three months of 2002, as
operating activities and financing activities provided $2.6 million and $2.0
million, respectively offset by investing activities using $9.3 million.
Liquidity management is a daily and long-term function of business management.
Excess liquidity is generally invested in short-term investments, such as
federal funds.
As of March 31, 2002 the Corporation's capital ratios were as follows:
Required Actual Excess
-------- ------ ------
Risk-based Capital
Tier 1 4.00% 10.78% 6.78%
Total 8.00% 12.03% 4.03%
Leverage Ratio 4.00% 7.56% 3.56%
ITEM III QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 2002, there have been no significant changes in the Corporation's
assessment of market risk as reported in Item 6. of the Corporation's Form
10-KSB.
15
STEWARDSHIP FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is subject to litigation which arises primarily in the
ordinary course of business. In the opinion of management the ultimate
disposition of such litigation should not have a material adverse
effect on the financial position of the Corporation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
None
(b) Reports
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Corporation caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STEWARDSHIP FINANCIAL CORPORATION
DATE: MAY 15, 2002 BY: /s/ PAUL VAN OSTENBRIDGE
------------------ -------------------------------------
Paul Van Ostenbridge
President and Chief Executive
Officer
DATE: MAY 15, 2002 BY: /s/ JULIE E. HOLLAND
------------------ -------------------------------------
Julie E. Holland
Vice President and Treasurer
17