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| SSFN > SEC Filings for SSFN > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
This Quarterly Report on Form 10-Q contains certain "forward looking statements" with respect to Stewardship Financial Corporation (the "Corporation") within the meaning of the Private Securities Litigation Reform Act of 1995, which forward looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "plan," "estimate," and "potential." Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of the Corporation that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include: changes in general, economic and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects the Corporation's interest rate spread or other income anticipated from operations and investments. As used in this Form 10-Q, "we", "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 Quarterly Report on Form 10-Q, are based upon the Corporation's consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements for the year ended December 31, 2011 included in the 2011 Annual Report contains a summary of the Corporation's significant accounting policies. Management believes the Corporation's policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.
The allowance for loan losses is based upon management's evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, 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 collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Corporation's loans are secured by real estate in the State of New Jersey. Accordingly, the collectability 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 adverse economic changes. 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 $8.7 million to $700.1 million at June 30, 2012 from $708.8 million at December 31, 2011. Cash and cash equivalents increased $11.6 million to $25.3 million at June 30, 2012 from $13.7 million at December 31, 2011, reflecting net decreases in the securities portfolio and the loan portfolio. Securities available for sale increased $1.8 million to $172.7 million while securities held to maturity decreased $5.4 million to $33.0 million. Net loans decreased $11.4 million from $444.8 million at December 31, 2011 to $433.4 million at June 30, 2012. Increases due to new loans originated were more than offset by regular principal payments and payoffs in the first six months of 2012. Loans held for sale totaled $3.3 million at June 30, 2012, a decrease from $4.7 million at December 31, 2011. Other real estate owned (OREO) declined $3.3 million primarily reflecting sales of properties partially offset by the foreclosure on another two properties.
Total deposits at June 30, 2012 of $593.5 million were relatively unchanged from December 31, 2011. However, growth of $8.2 million was experienced in noninterest-bearing accounts while interest-bearing accounts declined $8.3 million.
FHLB - NY advances were $25.0 million at June 30, 2012 compared to $32.7 million at December 31, 2011. The decrease in these borrowings was primarily the result of a decrease in assets.
Results of Operations
General
The Corporation reported a net loss of $324,000 or a $0.06 loss per diluted common share for the three months ended June 30, 2012, compared to net income of $585,000, or $0.08 diluted earnings per common share for the three months ended June 30, 2011. For the six months ended June 30, 2012, the Corporation reported net income of $452,000, or $0.06 diluted earnings per common share. These results compare to net income of $1.1 million, or $0.14 per diluted common share, for the six months ended June 30, 2011.
Net Interest Income
Net interest income for the three and six months ended June 30, 2012 was $6.0 million and $12.0 million, respectively, compared to $6.2 million and $12.2 million recorded in the prior year periods. The current year periods reflect increases in average interest-earning assets and declines in the cost of interest bearing liabilities offset by declines in the yield on interest-earning assets. The net interest rate spread and net yield on interest-earning assets for the three months ended June 30, 2012 were 3.47% and 3.69%, respectively, compared to 3.62% and 3.89% for the three months ended June 30, 2011. For the six months ended June 30, 2012, the net interest rate spread and net yield on interest-earning assets were 3.47% and 3.70%, respectively, compared to 3.61% and 3.86% for the six months ended June 30, 2011. The net interest rate spread and net yield on interest-earning assets for the current year period reflects a decline in loan interest rates and yields on securities as well as a decline in the interest rates on deposits. The Corporation continues in its efforts to proactively manage deposit costs in an effort to mitigate the lower asset yields earned. The reduced yields on assets reflect both the elevated level of nonperforming loans as well as the historically low market rates in the current environment.
The following table reflects the components of the Corporation's net interest income for the three and six months ended June 30, 2012 and 2011 including: (1) average assets, liabilities and stockholders' equity based on average daily balances, (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% for the periods presented. This was accomplished by adjusting non-taxable income upward to make it equivalent to the level of taxable income required to earn the same amount after taxes.
Analysis of Net Interest Income (Unaudited)
For the Three Months Ended June 30,
2012 2011
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
(Dollars in thousands) (Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) (2) $ 452,280 $ 6,096 5.41 % $ 463,938 $ 6,677 5.77 %
Taxable investment securities (1) 176,487 954 2.17 159,968 1,085 2.72
Tax-exempt investment securities (1) (2) 33,211 399 4.82 31,878 405 5.10
Other interest-earning assets 829 10 4.35 1,045 9 3.45
Total interest-earning assets 662,807 7,459 4.51 656,829 8,176 4.99
Non-interest-earning assets:
Allowance for loan losses (13,251 ) (10,274 )
Other assets 54,088 50,898
Total assets $ 703,644 $ 697,453
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 247,257 $ 298 0.48 % $ 248,327 $ 484 0.78 %
Savings deposits 61,961 31 0.20 52,262 34 0.26
Time deposits 163,364 565 1.39 173,542 762 1.76
Repurchase agreements 14,342 182 5.09 16,428 184 4.49
FHLB-NY borrowing 27,074 155 2.30 33,001 222 2.70
Subordinated debenture 7,217 126 7.00 7,217 126 7.00
Total interest-bearing liabilities 521,215 1,357 1.04 530,777 1,812 1.37
Non-interest-bearing liabilities:
Demand deposits 120,768 110,758
Other liabilities 2,781 2,502
Stockholders' equity 58,880 53,416
Total liabilities and stockholders' equity $ 703,644 $ 697,453
Net interest income (taxable equivalent basis) 6,102 6,364
Tax Equivalent adjustment (142 ) (143 )
Net interest income $ 5,960 $ 6,221
Net interest spread (taxable equivalent basis) 3.47 % 3.62 %
Net yield on interest-earning
assets (taxable equivalent basis) (3) 3.69 % 3.89 %
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(1) For purpose of these calculations, nonaccruing loans are included in the average balance. 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.
Analysis of Net Interest Income (Unaudited)
For the Six Months Ended June 30,
2012 2011
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
(Dollars in thousands) (Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) (2) $ 456,173 $ 12,366 5.44 % $ 460,133 $ 13,128 5.75 %
Taxable investment securities (1) 175,742 1,934 2.21 157,651 2,145 2.74
Tax-exempt investment securities (1) (2) 33,201 801 4.84 31,456 801 5.14
Other interest-earning assets 1,171 17 2.91 730 17 4.70
Total interest-earning assets 666,287 15,118 4.55 649,970 16,091 4.99
Non-interest-earning assets:
Allowance for loan losses (12,680 ) (9,529 )
Other assets 53,455 51,374
Total assets $ 707,062 $ 691,815
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 250,618 $ 612 0.49 % $ 248,843 $ 959 0.78 %
Savings deposits 60,230 61 0.20 50,326 65 0.26
Time deposits 165,168 1,204 1.46 174,416 1,545 1.79
Repurchase agreements 14,342 365 5.09 15,540 365 4.74
FHLB-NY borrowing 28,608 328 2.30 34,128 454 2.68
Subordinated debenture 7,217 252 7.00 7,217 250 6.99
Total interest-bearing liabilities 526,183 2,822 1.08 530,470 3,638 1.38
Non-interest-bearing liabilities:
Demand deposits 119,236 105,566
Other liabilities 2,986 2,813
Stockholders' equity 58,657 52,966
Total liabilities and stockholders' equity $ 707,062 $ 691,815
Net interest income (taxable equivalent basis) 12,296 12,453
Tax Equivalent adjustment (285 ) (283 )
Net interest income $ 12,011 $ 12,170
Net interest spread (taxable equivalent basis) 3.47 % 3.61 %
Net yield on interest-earning
assets (taxable equivalent basis) (3) 3.70 % 3.86 %
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(1) For purpose of these calculations, nonaccruing loans are included in the average balance. 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.
For the three months ended June 30, 2012, total interest income, on a tax equivalent basis, decreased $820,000 to $7.4 million, or 10.0%, when compared to the same prior year period. The decrease was due to a decrease in yields on interest-earning assets partially offset by an increase in the average balance of interest-earning assets. Total interest income on a tax equivalent basis decreased $973,000 to $15.1 million for the six months ended June 30, 2012, or 6.0%, compared to the same period for 2011. Consistent with the three month period, the decrease in the current six month period is due to a decrease in the overall yield on interest-earning assets, partially offset by an increase in the average interest-earning assets. The average rate earned on interest-earning assets was 4.45% and 4.55% for the three and six months ended June 30, 2012, respectively, compared to an average rate of 4.99% for both the three and six months ended June 30, 2011, respectively. The decline in the asset yield reflects the effect of a prolonged low interest rate environment as well as the impact of nonaccrual loans. Average interest-earning assets increased $6.0 million and $16.3 million for the three and six months ended June 30, 2012 compared to the same prior year periods. The change in average interest-earning assets reflects an increase in average investment securities of $17.9 million and $19.8 million for the current three and six month periods, respectively, partially offset by a decrease in average loans from the comparable periods in 2011 of $11.7 million and $4.0 million.
Interest paid on deposits and borrowed money decreased $455,000 and $816,000 for the three and six months ended June 30, 2012, respectively, compared to the same periods for 2011. The decline is due to general decreases in rates paid on deposits and borrowings coupled with decreases in average interest-bearing liabilities. For the three months ended June 30, 2012, the total cost for interest-bearing liabilities declined to 1.04% representing a 33 basis point decline when compared to the same prior year period. The cost for deposits and borrowed money decreased 30 basis points from 1.38% for the six month period ended June 30, 2011 to 1.08% for the comparable period in 2012. The average balance of total interest-bearing deposits and borrowings decreased $9.6 million and $4.3 million for the three months and six ended June 30, 2012, respectively, from the comparable 2011 periods.
Provision for Loan Losses
The Corporation maintains an allowance for loan losses at a level considered by management to be adequate to cover the probable incurred losses associated with its loan portfolio. On an ongoing basis, management analyzes the adequacy of this allowance by considering the nature and volume of the Corporation's loan activity, financial condition of the borrower, fair market value of the underlying collateral, and changes in general market conditions. Additions to the allowance for loan losses are charged to operations in the appropriate period. Actual loan losses, net of recoveries, serve to reduce the allowance. The appropriate level of the allowance for loan losses is based on estimates, and ultimate losses may vary from current estimates.
The loan loss provision totaled $2.900 million and $4.665 million for the three and six months ended June 30, 2012, respectively, compared to $1.915 million and $3.590 million for the three and six months ended June 30, 2011, respectively. Nonaccrual loans of $29.5 million at June 30, 2012 reflected an increase from $27.7 million of nonaccrual loans at December 31, 2011. The allowance for loan losses related to the impaired loans decreased from $3.1 million at December 31, 2011 to $2.5 million at June 30, 2012. During the first six months of 2012, the Corporation charged off $4.4 million of loan balances and recovered $52,000 in previously charged off loans compared to $871,000 and $21,000, respectively, during the same period in 2011.
The current period loan loss provision primarily is indicative of continuing economic conditions that have contributed to an increase in loan delinquencies and the softness in the real estate market. In addition, based on recent developments occurring in August 2012 surrounding a single borrower, a $3.0 million loan was placed on nonaccrual, which is secured by general business assets of the borrower. Management's evaluation of the collectability of this loan is based on the best information available at the timing of filing but could change in the future as more information becomes available. 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.
See "Asset Quality" section below for a summary of the allowance for loan losses and nonperforming assets.
Noninterest Income
Noninterest income was $911,000 and $2.5 million for the three and six months ended June 30, 2012, respectively, compared to $943,000 and $2.0 million for the comparable prior year periods. On a year to date basis, the increase is primarily due to gains on calls and sales of securities for the six months ended June 30, 2012. There were limited gains recognized in the prior year six month period.
Noninterest Expense
Noninterest expenses for the three and six months ended June 30, 2012 increased slightly to $4.6 million and $9.3 million, respectively, compared to $4.5 million and $9.2 million in the comparable prior year periods. The increase in noninterest expenses reflects higher salary and employee benefits expense, partially associated with the management of nonperforming assets. When comparing the year to date periods, the current six months ended reflects lower FDIC insurance premiums reflecting the change in the quarterly assessment base which became effective in the second quarter in 2011.
Income Tax Expense
For the three months ended June 30, 2012, the Corporation recorded an income tax benefit of $159,000 compared to an income tax expense of $128,000 for the three months ended June 30, 2011. For the six months ended June 30, 2012, income tax expense totaled $467,000 representing an effective tax rate of 24.5% compared to income tax expense of $319,000, or an effective tax rate of 23.0%, for the six months ended June 30, 2011
Asset Quality
The Corporation's principal earning asset is its loan portfolio. Inherent in the lending function is the risk of deterioration in the borrowers' ability to repay loans under existing loan agreements. To address this risk, reserves are maintained to absorb probable incurred loan losses. In determining the adequacy of the allowance for loan losses, management of the Corporation considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with general economic and real estate market conditions. Although management attempts to establish a reserve sufficient to offset probable incurred losses in the portfolio, changes in economic conditions, regulatory policies and borrowers' performance could require future changes to the allowance.
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:
June 30, March 31, December 31, September 30,
2012 2012 2011 2011
(Dollars in thousands)
Nonaccrual loans (1) $ 29,541 $ 26,823 $ 27,736 $ 24,422
Loans past due 90 days or more and accruing (2) 200 - - 2,589
Total nonperforming loans 29,741 26,823 27,736 27,011
Other real estate owned 1,991 3,840 5,288 434
Total nonperforming assets $ 31,732 $ 30,663 $ 33,024 $ 27,445
Performing restructured loans (3) $ 3,716 $ 5,847 $ 5,979 $ 7,339
Allowance for loan losses $ 11,934 $ 13,097 $ 11,604 $ 12,389
Nonperforming loans to total gross loans 6.68 % 5.91 % 6.08 % 5.87 %
Nonperforming assets to total assets 4.53 % 4.31 % 4.66 % 3.89 %
Allowance for loan losses to total gross loans 2.68 % 2.89 % 2.54 % 2.69 %
Allowance for loan losses to
nonperforming loans 40.13 % 48.83 % 41.84 % 45.87 %
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(1) Generally represents loans as to which the payment of principal or interest is 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 as to which payment of principal or interest is 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.
(3) Any restructured loans that are on nonaccrual status are only reported in nonaccrual loans and not reflected in restructured loans.
A loan is generally placed on nonaccrual when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The identification of nonaccrual loans reflects careful monitoring of the loan portfolio. The Corporation is focused on resolving the nonperforming loans and mitigating future losses in the portfolio. All delinquent loans continue to be reviewed by management.
At June 30, 2012, the nonaccrual loans were comprised of 72 loans, primarily commercial real estate loans, commercial loans and construction loans. While the Corporation maintains strong underwriting requirements, the amount of nonaccrual loans is reflective of the prolonged weakened economic conditions and the corresponding effects it has had on our commercial borrowers and the current real estate environment. Certain loans, including restructured loans, are current, but in accordance with applicable guidance and cautious review, management has continued to keep these loans on nonaccrual.
Since December 31, 2011, nonaccrual loans have increased $1.8 million to $29.5 million at the end of the most recent quarter. Included in nonaccrual loans at . . .
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