-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JBTahXY5i44WgFuLH10qdDl39TJ/OCTPmdSIaLLSVSOOR8SLSb6gxfD/y3g5Pxg8 FEdD8Z03LrPqgDqzygK54Q== 0000914317-03-003468.txt : 20031114 0000914317-03-003468.hdr.sgml : 20031114 20031114160610 ACCESSION NUMBER: 0000914317-03-003468 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWARDSHIP FINANCIAL CORP CENTRAL INDEX KEY: 0001023860 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223351447 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21855 FILM NUMBER: 031004718 BUSINESS ADDRESS: STREET 1: 630 GODWIN AVE CITY: MIDLAND PARK STATE: NJ ZIP: 07432 BUSINESS PHONE: 2014447100 MAIL ADDRESS: STREET 1: 603 GODWIN AVE CITY: MIDLAND PARK STATE: NJ ZIP: 07432 10-Q 1 form10q-55470_stewardship.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 |_| TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-21855 Stewardship Financial Corporation (Exact name of registrant as specified in its charter) New Jersey 22-3351447 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 630 Godwin Avenue, Midland Park, NJ 07432 (Address of principal executive offices) (Zip Code) (201) 444-7100 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by a checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| The number of shares outstanding of the Issuer's Common Stock, no par value, as of November 12, 2003 was 3,005,418. Stewardship Financial Corporation INDEX PAGE NUMBER ------ PART I - CONSOLIDATED FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Condition at September 30, 2003 (Unaudited) and December 31, 2002 ..... 1 Consolidated Statements of Income for the Nine Months ended September 30, 2003 and 2002 (Unaudited) ........ 2 Consolidated Statements of Income for the Three Months ended September 30, 2003 and 2002 (Unaudited) ........ 3 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2003 and 2002 (Unaudited) ........ 4 Consolidated Statement of Changes in Stockholders' Equity for the Nine Months ended September 30, 2003 and September 30, 2002 (Unaudited) .............................. 5 Notes to Consolidated Financial Statements (Unaudited) ...... 6 - 14 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................. 15 - 25 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK .......................................... 25 ITEM 4 - CONTROLS AND PROCEDURES ..................................... 25 - 26 PART II - OTHER INFORMATION ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS................... 27 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ............................ 27 Stewardship Financial Corporation and Subsidiary Consolidated Statements of Financial Condition
September 30, December 31, 2003 2002 --------------------------------- (Unaudited) Assets Cash and due from banks $ 16,783,000 $ 14,039,000 Other interest-earning assets 596,000 9,854,000 Federal funds sold 9,150,000 9,525,000 --------------------------------- Cash and cash equivalents 26,529,000 33,418,000 Securities available for sale 35,511,000 12,812,000 Securities held to maturity; estimated fair value of $54,764,000 (2003) and $62,273,000 (2002) 53,641,000 60,887,000 FHLB-NY stock, at cost 1,322,000 1,059,000 Loans, net of allowance for loan losses of of $2,791,000 (2003) and $2,689,000 (2002) 249,696,000 213,579,000 Mortgage loans held for sale 863,000 2,099,000 Premises and equipment, net 3,409,000 3,733,000 Accrued interest receivable 1,704,000 1,640,000 Intangible assets, net of accumulated amortization of $518,000 (2003) and $486,000 (2002) 231,000 264,000 Other assets 2,527,000 1,596,000 --------------------------------- Total assets $ 375,433,000 $ 331,087,000 ================================= Liabilities and stockholders' equity Liabilities Deposits: Noninterest-bearing $ 78,938,000 $ 69,344,000 Interest-bearing 257,171,000 233,391,000 --------------------------------- Total deposits 336,109,000 302,735,000 Securities sold under agreements to repurchase 4,139,000 2,435,000 Trust preferred securities 7,000,000 -- Accrued expenses and other liabilities 2,081,000 2,100,000 --------------------------------- Total liabilities 349,329,000 307,270,000 --------------------------------- Commitments and contingencies -- -- Stockholders' equity Common stock, no par value; 5,000,000 shares authorized; 3,151,979 and 1,975,437 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively 19,079,000 15,058,000 Retained earnings 7,152,000 8,600,000 Accumulated other comprehensive (loss) income (127,000) 159,000 --------------------------------- Total stockholders' equity 26,104,000 23,817,000 --------------------------------- Total liabilities and stockholders' equity $ 375,433,000 $ 331,087,000 =================================
See notes to unaudited consolidated financial statements. 1 Stewardship Financial Corporation and Subsidiary Consolidated Statements of Income (Unaudited)
Nine Months Ended September 30, -------------------------------- 2003 2002 -------------------------------- Interest income: Loans $ 11,931,000 $ 10,908,000 Securities held to maturity Taxable 968,000 998,000 Non-taxable 526,000 534,000 Securities available for sale 361,000 496,000 Other interest-earning assets 155,000 271,000 -------------------------------- Total interest income 13,941,000 13,207,000 -------------------------------- Interest expense: Deposits 3,359,000 3,929,000 Borrowed money 66,000 19,000 -------------------------------- Total interest expense 3,425,000 3,948,000 -------------------------------- Net interest income before provision for loan losses 10,516,000 9,259,000 Provision for loan losses 315,000 100,000 -------------------------------- Net interest income after provision for loan losses 10,201,000 9,159,000 -------------------------------- Noninterest income: Fees and service charges 1,563,000 1,296,000 Gain on sales of mortgage loans 402,000 191,000 Miscellaneous 286,000 175,000 -------------------------------- Total noninterest income 2,251,000 1,662,000 -------------------------------- Noninterest expenses: Salaries and employee benefits 3,990,000 3,426,000 Occupancy, net 537,000 491,000 Equipment 544,000 477,000 Data processing 667,000 498,000 Advertising 197,000 188,000 FDIC insurance premium 36,000 32,000 Amortization of intangible assets 32,000 34,000 Charitable contributions 351,000 327,000 Stationery and supplies 171,000 175,000 Miscellaneous 1,898,000 1,631,000 -------------------------------- Total noninterest expenses 8,423,000 7,279,000 -------------------------------- Income before income tax expense 4,029,000 3,542,000 Income tax expense 1,419,000 1,217,000 -------------------------------- Net income $ 2,610,000 $ 2,325,000 ================================ Basic earnings per share $ 0.83 $ 0.76 ================================ Diluted earnings per share $ 0.82 $ 0.75 ================================ Weighted average number of common shares outstanding 3,134,131 3,066,623 ================================ Weighted average number of diluted common shares outstanding 3,173,463 3,092,527 ================================
Share data has been restated to reflect a 3 for 2 stock split that occured on July 1, 2003 and a 5% stock dividend declared September 16, 2003 and payable November 15, 2003. See notes to unaudited consolidated financial statements. 2 Stewardship Financial Corporation and Subsidiary Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, ------------------------------ 2003 2002 ------------------------------ Interest income: Loans $ 4,061,000 $ 3,762,000 Securities held to maturity Taxable 247,000 360,000 Non-taxable 172,000 183,000 Securities available for sale 179,000 147,000 Other interest-earning assets 46,000 115,000 ------------------------------ Total interest income 4,705,000 4,567,000 ------------------------------ Interest expense: Deposits 1,038,000 1,318,000 Borrowed money 32,000 6,000 ------------------------------ Total interest expense 1,070,000 1,324,000 ------------------------------ Net interest income before provision for loan losses 3,635,000 3,243,000 Provision for loan losses 90,000 30,000 ------------------------------ Net interest income after provision for loan losses 3,545,000 3,213,000 ------------------------------ Noninterest income: Fees and service charges 536,000 437,000 Gain on sales of mortgage loans 164,000 58,000 Miscellaneous 77,000 38,000 ------------------------------ Total noninterest income 777,000 533,000 ------------------------------ Noninterest expenses: Salaries and employee benefits 1,393,000 1,171,000 Occupancy, net 181,000 163,000 Equipment 179,000 164,000 Data processing 251,000 166,000 Advertising 72,000 51,000 FDIC insurance premium 12,000 11,000 Amortization of intangible assets 11,000 11,000 Charitable contributions 117,000 120,000 Stationery and supplies 69,000 59,000 Miscellaneous 650,000 540,000 ------------------------------ Total noninterest expenses 2,935,000 2,456,000 ------------------------------ Income before income tax expense 1,387,000 1,290,000 Income tax expense 492,000 454,000 ------------------------------ Net income $ 895,000 $ 836,000 ============================== Basic earnings per share $ 0.28 $ 0.27 ============================== Diluted earnings per share $ 0.28 $ 0.27 ============================== Weighted average number of common shares outstanding 3,147,443 3,092,036 ============================== Weighted average number of diluted common shares outstanding 3,197,693 3,118,138 ==============================
Share data has been restated to reflect a 3 for 2 stock split that occured on July 1, 2003 and a 5% stock dividend declared September 16, 2003 and payable November 15, 2003. See notes to unaudited consolidated financial statements. 3 Stewardship Financial Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ----------------------------------- 2003 2002 ----------------------------------- Cash flows from operating activities: Net income $ 2,610,000 $ 2,325,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 499,000 421,000 Amortization of premiums and accretion of discounts, net 637,000 229,000 Accretion of deferred loan fees (126,000) (35,000) Provision for loan losses 315,000 100,000 Originations of mortgage loans held for sale (32,317,000) (16,986,000) Proceeds from sale of mortgage loans 33,955,000 19,151,000 Gain on sale of mortgage loans held for sale (402,000) (191,000) Gain on sale of fixed assets (54,000) -- Gain on sale of securities available for sale (49,000) -- Deferred income tax benefit (63,000) (154,000) Amortization of intangibles 32,000 34,000 Increase in accrued interest receivable (64,000) (99,000) (Increase) decrease in other assets (599,000) 57,000 (Decrease) increase in other liabilities (18,000) 291,000 ----------------------------------- Net cash provided by operating activities 4,356,000 5,143,000 ----------------------------------- Cash flows from investing activities: Purchase of securities available for sale (31,643,000) (3,208,000) Proceeds from maturities and principal repayments on securities available for sale 4,138,000 2,344,000 Proceeds from calls and sales of securities available for sale 4,271,000 2,903,000 Purchase of securities held to maturity (21,027,000) (27,318,000) Proceeds from maturities and principal repayments on securities held to maturity 14,374,000 4,600,000 Proceeds from call on securities held to maturity 13,375,000 6,630,000 Purchase of FHLB-NY stock (263,000) (173,000) Net increase in loans (36,306,000) (18,297,000) Sales of premises and equipment 227,000 19,000 Additions to premises and equipment (350,000) (321,000) ----------------------------------- Net cash used in investing activities (53,204,000) (32,821,000) ----------------------------------- Cash flows from financing activities: Net increase in noninterest-bearing deposits 9,594,000 6,444,000 Net increase in interest-bearing deposits 23,779,000 33,326,000 Net increase in securities sold under agreements to repurchase 1,704,000 576,000 Issuance of Trust Preferred Securities 7,000,000 -- Purchase of treasury stock -- (164,000) Cash dividends paid on common stock (606,000) (499,000) Options exercised 59,000 344,000 Common stock issued under stock plans 429,000 369,000 ----------------------------------- Net cash provided by financing activities 41,959,000 40,396,000 ----------------------------------- Net (decrease) increase in cash and cash equivalents (6,889,000) 12,718,000 Cash and cash equivalents - beginning 33,418,000 34,074,000 ----------------------------------- Cash and cash equivalents - ending $ 26,529,000 $ 46,792,000 =================================== Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 3,560,000 $ 3,700,000 Cash paid during the year for income taxes 1,482,000 1,351,000
See notes to unaudited consolidated financial statements. 4 Stewardship Financial Corporation and Subsidiary Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2003 ----------------------------------------------------------------------- Accumulated Other Comprehensive Common Stock Retained Income, Shares Amount Earnings Net Total ----------------------------------------------------------------------- Balance -- December 31, 2002 1,975,437 $ 15,058,000 $ 8,600,000 $ 159,000 $ 23,817,000 Dividends paid -- -- (606,000) -- (606,000) Stock split - 3 for 2 997,129 -- -- -- -- 5% stock dividend (payable November 15, 2003) 150,094 3,452,000 (3,452,000) -- -- Common stock issued under stock plans 23,863 429,000 -- -- 429,000 Exercise of stock options 5,456 59,000 -- -- 59,000 Tax Benefit - exercise of stock options -- 81,000 -- -- 81,000 Comprehensive income: Net income for the nine months ended September 30, 2003 -- -- 2,610,000 -- 2,610,000 Unrealized holding losses on securities available for sale arising during the period (net tax benefit of $184,000) -- -- -- (286,000) (286,000) ------------ Total comprehensive income, net of tax 2,324,000 ----------------------------------------------------------------------- Balance -- September 30, 2003 3,151,979 $ 19,079,000 $ 7,152,000 $ (127,000) $ 26,104,000 ======================================================================= For the Nine Months Ended September 30, 2002 -------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Common Stock Treasury Stock Retained Income, Shares Amount Shares Amount Earnings Net Total -------------------------------------------------------------------------------------------- Balance -- December 31, 2001 1,829,231 $ 12,638,000 -- $ -- $ 7,886,000 $ 29,000 $ 20,553,000 Dividends paid -- -- -- -- (499,000) -- (499,000) Treasury stock (8,832) (164,000) (164,000) 5% stock dividend (payable November 15, 2002) 93,730 1,734,000 (56) (1,000) (1,733,000) -- Common stock issued under stock plans 13,333 234,000 7,723 135,000 -- -- 369,000 Exercise of stock options 32,035 344,000 344,000 Comprehensive income: Net income for the nine months ended September 30, 2002 -- -- -- -- 2,325,000 -- 2,325,000 Unrealized holding gains on securities available for sale arising during the period (net tax of $83,000) -- -- -- -- -- 130,000 130,000 ------------ Total comprehensive income, net of tax 2,455,000 -------------------------------------------------------------------------------------------- Balance -- September 30, 2002 1,968,329 $ 14,950,000 (1,165) $ (30,000) $ 7,979,000 $ 159,000 $ 23,058,000 ============================================================================================
See notes to unaudited consolidated financial statements. 5 Stewardship Financial Corporation and Subsidiary Notes to Consolidated Financial Statements (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-KSB for the fiscal year ended December 31, 2002. Principles of consolidation The consolidated financial statements include the accounts of Stewardship Financial Corporation, (the "Corporation") and its wholly owned subsidiary, Atlantic Stewardship Bank (the "Bank"). The Bank includes its wholly owned subsidiary, Stewardship Investment Corp. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current presentation. The consolidated financial statements of the Corporation have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area. Stock-Based Compensation The Corporation has two stock-based employee compensation plans and two director compensation plans. The Corporation accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. 6
Nine Months Ended Three Months Ended September 30, September 30, 2003 2002 2003 2002 ------------------------------ ---------------------------- Net Income: Net income as reported $ 2,610,000 $ 2,325,000 $ 895,000 $ 836,000 Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (43,000) (29,000) (15,000) (15,000) ------------- ------------- ------------- ------------- Pro forma net income $ 2,567,000 $ 2,296,000 $ 880,000 $ 821,000 ============= ============= ============= ============= Earnings per share: As reported Basic earnings per share $ 0.83 $ 0.76 $ 0.28 $ 0.27 As reported Diluted earnings per share 0.82 0.75 0.28 0.27 Pro forma Basic earnings per share 0.82 0.75 0.28 0.27 Pro forma Diluted earnings per share 0.81 0.74 0.28 0.26
The fair value of options granted for employees and directors is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used:
Directors Employee Employee Employee Employee Stock Options Stock Options Stock Options Stock Options Stock Options 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------- Dividend yield 1.62% 1.57% 1.25% 1.12% 1.15% Expected volatility 39.76% 20.27% 23.63% 16.24% 14.07% Risk-free interest rate 5.07% 5.16% 6.65% 5.58% 6.64% Expected Life 7 years 7 years 7 years 7 years 7 years Fair value at grant date $ 4.04 $ 2.96 $ 3.46 $ 2.03 $ 1.92
7 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 and nine months ended September 30, 2003 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. 8 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 September 30, 2003 and December 31, 2002. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", securities available for sale are carried at estimated fair value.
September 30, 2003 ----------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying Cost Gains Losses Value ----------------------------------------------------------------------- U.S. Treasury securities $ 505,000 $ -- $ 5,000 $ 500,000 U.S. Government agencies 17,024,000 29,000 94,000 16,959,000 Obligations of state and political subdivisions 1,163,000 15,000 5,000 1,173,000 Mortgage-backed securities 17,031,000 62,000 214,000 16,879,000 ----------------------------------------------------------------------- $35,723,000 $106,000 $ 318,000 $35,511,000 ======================================================================= December 31, 2002 ----------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying Cost Gains Losses Value ----------------------------------------------------------------------- U.S. Government agencies 2,706,000 27,000 -- 2,733,000 Obligations of state and political subdivisions 797,000 24,000 -- 821,000 Mortgage-backed securities 9,050,000 208,000 -- 9,258,000 ----------------------------------------------------------------------- $12,553,000 $259,000 $ -- $12,812,000 =======================================================================
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 September 30, 2003 and December 31, 2002. Securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts.
September 30, 2003 ------------------------------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value ------------------------------------------------------------------------- U.S. Treasury securities $ 1,012,000 $ 60,000 $ -- $ 1,072,000 U.S. Government agencies 13,123,000 106,000 23,000 13,206,000 Obligations of state and political subdivisions 19,600,000 281,000 58,000 19,823,000 Mortgage-backed securities 19,906,000 757,000 -- 20,663,000 ------------------------------------------------------------------------- $53,641,000 $1,204,000 $ 81,000 $54,764,000 ========================================================================= December 31, 2002 ------------------------------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value ------------------------------------------------------------------------- U.S. Treasury securities $ 1,514,000 $ 70,000 $ -- $ 1,584,000 U.S. Government agencies 13,125,000 182,000 13,307,000 Obligations of state and political subdivisions 20,060,000 712,000 -- 20,772,000 Mortgage-backed securities 26,188,000 462,000 40,000 26,610,000 ------------------------------------------------------------------------- $60,887,000 $1,426,000 $ 40,000 $62,273,000 =========================================================================
9 Stewardship Financial Corporation and Subsidiary Notes to Consolidated Financial Statements Continued (Unaudited) Note 5. Loans The Corporation's primary market area for lending is the small and medium sized business and professional community, as well as the individuals residing, working and shopping in Bergen, Passaic and Morris counties, New Jersey. The following table set forth the composition of loans as of the periods indicated.
September 30, December 31, 2003 2002 ---------------------------------------- Mortgage Residential $ 43,805,000 $ 39,705,000 Commercial 106,195,000 88,593,000 Commercial 43,903,000 38,228,000 Equity 16,673,000 12,471,000 Installment 42,009,000 37,293,000 Other 221,000 241,000 ---------------------------------------- Total loans 252,806,000 216,531,000 ---------------------------------------- Less: Deferred loan fees 319,000 263,000 Allowance for loan losses 2,791,000 2,689,000 ---------------------------------------- 3,110,000 2,952,000 ---------------------------------------- Loans, net $ 249,696,000 $ 213,579,000 ========================================
Note 6. Allowance for loan losses
Nine Months Ended September 30, 2003 2002 ---------------------------------------- Balance, beginning of period $ 2,689,000 $ 2,602,000 Provision charged to operations 315,000 100,000 Recoveries of loans charged off -- 9,000 Loans charged off (213,000) (18,000) ---------------------------------------- Balance, end of period $ 2,791,000 $ 2,693,000 ========================================
10 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.
September 30, December 31, 2003 2002 ------------- ------------ Impaired loans With related allowance for loan losses $ 906,000 $ 499,000 Without related allowance for loan losses 202,000 848,000 ------------ ------------ Total impaired loans $ 1,108,000 $ 1,347,000 ============ ============ Related allowance for loan losses $ 70,000 $ 189,000 ============ ============
11 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. The following is a reconciliation of the calculation of basic and diluted earnings per share.
Three Months Nine Months Ended September 30, Ended September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income $ 895 $ 836 $2,610 $2,325 Weighted average shares 3,147 3,092 3,134 3,067 Effect of dilutive stock options 51 26 39 26 ------ ------ ------ ------ Total weighted average dilutive shares 3,198 3,118 3,173 3,093 Basic earnings per share $ 0.28 $ 0.27 $ 0.83 $ 0.76 Diluted earnings per share $ 0.28 $ 0.27 $ 0.82 $ 0.75
All share and per share amounts have been restated to reflect a 5% stock dividend payable November 15, 2003 and a 3 for 2 stock split that occurred on July 1, 2003. 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 nine months ended September 30, 2003 and 2002 was $2.3 million and $2.5 million, respectively. The difference between the Corporation's net income and total comprehensive income for these periods relates to the change in the net unrealized holding gains and losses on securities available for sale during the applicable period of time. Note 10. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," ("SFAS No. 150") was issued in May 2003. SFAS No. 150 requires instruments within its scope to be classified as a liability (or, in some cases, as an asset). SFAS No. 150 is generally effective for financial instruments 12 entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (i.e. July 1, 2003 for calendar year entities). For financial instruments created before June 1, 2003 and still existing at the beginning of the interim period of adoption, transition generally should be applied by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attributes of the Statement. The adoption of SFAS No. 150 did not have a significant effect on the Corporation's consolidated financial statements. Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," ("SFAS No. 149") was issued on April 30, 2003. The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of this Statement did not have a significant effect on the Corporation's consolidated financial statements. FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") was issued in January 2003. FIN 46 applies immediately to enterprises that hold a variable interest in variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003 to enterprises that hold a variable interest in variable interest entities created before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period, and it applies to nonpublic enterprises no later than the end of the applicable annual period. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 provides guidance on the identification of entities controlled through means other than voting rights. FIN 46 specifies how a business enterprise should evaluate its interest in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. In its current form, FIN 46 may require the Corporation to de-consolidate its investment in Stewardship Statutory Trust I in future financial statements. The potential de-consolidation of subsidiary trusts of bank holding companies formed in connection with the issuance of trust preferred securities, like Stewardship Statutory Trust I, appears to be an unintended consequence of FIN 46. In July 2003, the Board of Governors of the Federal Reserve System instructed bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. As of September 30, 2003, assuming the Corporation was not allowed to include the $7.0 million in trust preferred securities issued by Stewardship Statutory Trust I in Tier 1 capital, the Corporation would remain "well capitalized." On October 9, 2003, the effective date of FIN 46 was deferred until the end of the first interim or annual period ending after December 15, 2003, for certain interests held by a public entity in certain variable interest entities or potential variable interest entities created before February 1, 2003. 13 The adoption of FIN 46 is not expected to have a significant effect on the Corporation's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 addresses disclosures to be made by a guarantor in its financial statements about its obligations under guarantees. The Corporation met the disclosure requirements as required by FIN 45. The interpretation also requires the recognition, at estimated fair value, of a liability by the guarantor at the inception of certain guarantees issued or modified after December 31, 2002. This recognition requirement did not have a material impact on the Corporation's consolidated financial statements. 14 Stewardship Financial Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations This quartely report on 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 quarterly report on 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 Operation," 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 accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements for the year ended December 31, 2002 included in our Annual Report on Form 10-KSB for the year ended December 31, 2002, as supplemented by this 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. 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 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 15 examination. Furthermore, the majority of the Corporation's loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Corporation's loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the northern New Jersey area experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control. Financial Condition Total assets increased by $44.3 million, or 13.4%, from $331.1 million at December 31, 2002 to $375.4 million at September 30, 2003. Net loans increased $36.1 million and securities available for sale increased $22.7 million, partially offset by a decrease of $7.2 million in securities held to maturity and a decrease of $6.9 million in cash and cash equivalents. The composition of the loan portfolio is basically unchanged at September 30, 2003 when compared with the portfolio at December 31, 2002. Total deposits totaled $336.1 million at September 30, 2003, an increase of $33.4 million, or 11.0%, from $302.7 million at December 31, 2002. Interest-bearing deposits increased $23.8 million, or 10.2%, to $257.2 million at September 30, 2003 and noninterest-bearing deposits increased $9.6 million, or 13.8%, to $78.9 million at September 30, 2003. The net increase in deposits can be attributed to customers being attracted to the safety and liquidity of banking products. The Corporation's main focus during the first nine months was to manage its liquidity position by redeploying principal repayments, maturities and calls in the investment portfolio into the loan portfolio and securities held for sale. The Corporation continues to enhance the product line of the Bank. Management developed an escrow product during the first quarter of 2003 which provides for tracking and accounting for transactions on a subaccount basis. Management completed a conversion to check imaging that provides customers with images of paid checks instead of returning original checks. In addition to creating an efficient research system, the imaging system was integrated into our Online Banking system in June 2003. This provides online customers access to images of paid checks simply by clicking on the detail of their online transaction statement. Management believes that these new products continue to enhance the delivery channels and products being offered to existing and new customers. On September 17, 2003, the Corporation, through a newly formed, wholly-owned subsidiary, Stewardship Statutory Trust I, a Connecticut statutory business trust, completed a private issuance of $7.0 million in trust-preferred securities as part of a pooled re-securitization transaction with several other financial institutions. The trust-preferred securities bear a fixed rate of interest of 6.75% until September 15, 2008, and then convert to a floating rate of LIBOR plus 2.95% reset quarterly until maturity. Under the current capital guidelines of the Federal Reserve, these preferred securities qualify for inclusion in Tier 1 capital. The securities are callable at par value beginning September 2008. Following this transaction, the Corporation completed a capital contribution of $3.0 million to Atlantic Stewardship Bank to be used to support the Bank's growth strategies. 16 The Corporation has also announced the future opening of the ninth branch of the Bank. It is anticipated that this branch will open for operations in November 2003. It is located in Wayne, Passaic County, New Jersey and represents the third branch location in this town. The branch will also house the commercial and consumer lending operations for the organization. Results of Operations Nine Months Ended September 30, 2003 and 2002 General The Corporation reported net income of $2.6 million, or $0.82 diluted earnings per share for the nine months ended September 30, 2003, compared to $2.3 million, or $0.75 diluted earnings per share for the same period in 2002. The $285,000 increase was primarily the result of increases in net interest income and noninterest income, partially offset by increases in noninterest expense and an increase in the provision for loan loss. Net interest income Net interest income increased $1.3 million, or 13.6%, for the nine months ended September 30, 2003 as compared with the corresponding period in 2002. The increase was primarily due to an increase in average net interest-earning assets, partially offset by a decrease in the net interest margin. Total interest income on a tax equivalent basis increased $736,000, or 5.5%, primarily due to an increase in the average earning assets, offset by a decrease in yields on interest-earning assets. Due to the low interest rate environment experienced since the fourth quarter of 2001, tax equivalent yields on interest earning assets continued to fall 80 basis points from 6.50% for the nine months ended September 30, 2002 to 5.70% for the same period in 2003. The average balance on interest-earning assets increased $56.2 million, or 20.3%, from $276.5 million for the nine months ended September 30, 2002 to $332.7 million for the same period in 2003, primarily caused by an increase to the Corporation's average deposit base. The Corporation continued to experience an increase in loan demand which caused loans on average to increase $41.4 million to an average $237.0 million for the nine months ended September 30, 2003, from an average $195.5 million for the comparable period in 2002. The Corporation also increased its taxable investment portfolio by $15.8 million to an average of $74.2 million at September 30, 2003. Interest paid on deposits and borrowed money decreased by $523,000, or 13.2%, due primarily to a decrease in cost of funds related to the general low interest rate environment. The average balance of total interest-bearing deposits increased to $252.7 million for the nine months ended September 30, 2003 from $211.3 million for the comparable 2002 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 2.50% for the nine month period ended September 30, 2002 to 1.81% for the comparable period in 2003. 17 Analysis of Net Interest Income (Unaudited) For the Nine Months Ended September 30,
2003 2002 ------------------------------------ ------------------------------ 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) $236,958 $ 11,931 6.73% $195,509 $10,908 7.46% Taxable investment securities(1) 53,992 1,309 3.24 38,767 1,461 5.04 Tax-exempt investment securities(1)(2) 20,205 788 5.21 19,560 807 5.52 Other interest-earning assets 21,549 155 0.96 22,663 271 1.60 -------- --------- -------- ------- Total interest-earning assets 332,704 14,183 5.70 276,499 13,447 6.50 --------- ------- Non-interest-earning assets: Allowance for loan losses (2,833) (2,652) Other assets 20,918 19,129 -------- -------- Total assets $350,789 $292,976 ======== ======== Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits $113,290 $ 839 0.99% $ 95,947 $ 976 1.36% Savings deposits 40,924 243 0.79 29,629 225 1.02 Time deposits 93,995 2,277 3.24 85,001 2,728 4.29 Borrowing 4,447 66 1.98 772 19 3.29 -------- --------- -------- ------- Total interest-bearing liabilities 252,656 3,425 1.81 211,349 3,948 2.50 --------- ------- Non-interest-bearing liabilities: Demand deposits 70,911 57,929 Other liabilities 2,062 1,857 Stockholders' equity 25,160 21,841 -------- -------- Total liabilities and stockholders' equity $350,789 $292,976 ======== ======== Net interest income(taxable equivalent basis) $ 10,758 $ 9,499 ========= ======= Net interest spread(taxable equivalent basis) 3.89% 4.00% ==== ==== Net yield on interest-earning assets(taxable equivalent basis)(3) 4.32% 4.59% ==== ====
- ---------- (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% and the provisions of Section 291 of the Internal Revenue Code. (3) Net interest income (taxable equivalent basis) divided by average interest-earning assets. 2003 2002 (Dollars in thousands) Reconciliation of net interest income (tax equivalent basis): Net interest income 10,516 9,259 Tax equivalent basis adjustment 242 240 ------ ----- Net interest income (tax equivalent basis) 10,758 9,499 ====== ===== 18 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. The provision charged to operations totaled $315,000 and $100,000 during the nine months ended September 30, 2003 and 2002, respectively. The increase in the provision was primarily due to the strong growth in loans experienced during the first nine months of 2003 and a chargeoff in the amount of $163,000. 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 $589,000, or 35.4%, from $1.7 million for the nine month period ending September 30, 2002 to $2.3 million for the comparable period in 2003. Deposit related fees increased $267,000 due to an increase in the deposit base and income derived from the merchant credit card processing and debit card programs. Increases in mortgage activity and the volume of mortgage loans sold contributed to an increase of $211,000 in the gain on sales of mortgage loans. During the first quarter of 2003, the Corporation sold a property located in Hawthorne, New Jersey and realized a profit of $54,000. This property had been originally purchased in December 2000 as a strategy to improve our branch facility on Lafayette Avenue, Hawthorne, New Jersey. This strategy did not materialize, the Corporation opened a branch on Goffle Road, Hawthorne, New Jersey, and management found it no longer could utilize the additional property. In addition, the Corporation realized gains on sales of securities available for sale in the amount of $49,000. Noninterest expense Noninterest expense increased by approximately $1.1 million, or 15.7%, to $8.4 million for the nine months ended September 30, 2003, compared to $7.3 million for the same period in 2002 . Salaries and employee benefit expense, the major component of noninterest expense, increased $564,000, or 16.5%, during the nine months ended September 30, 2003. This increase was due to increases in staffing in the lending department and deposit and branch operations areas and general increases for merit and performance. Occupancy and equipment expense increased $113,000, or 11.7%, primarily due to the increase in the Corporation's branch facilities. Data processing expense increased $169,000, or 33.9%, due to the increase in the Corporation's deposit base, the enhancements to our online banking and bill payment functions and the implementation of the check imaging upgrade. Miscellaneous expenses increased $267,000, or 16.4% to provide for the general growth of the Corporation. 19 Income taxes Income tax expense totaled $1.4 million for the nine months ended September 30, 2003, for an effective tax rate of 35.2%. For the nine months ended September 30, 2002, income tax expense totaled $1.2 million, for an effective tax rate of 34.4%. Results of Operations Three Months Ended September 30, 2003 and 2002 General The Corporation reported net income of $895,000, or $0.28 diluted earnings per share, for the three months ended September 30, 2003, compared to $836,000, or $0.27, diluted earnings per share for the same period in 2002. The $59,000 increase was primarily the result of increases in net interest income and noninterest income, partially offset by increases in noninterest expense and an increase in the provision for loan loss. Net interest income Net interest income increased $392,000, or 12.1%, for the three months ended September 30, 2003 as compared with the corresponding period in 2002. The increase was primarily due to an increase in average net interest-earning assets, partially offset by a decrease in the net interest margin. Total interest income on a tax equivalent basis increased $135,000, or 2.9%, primarily due to an increase in the average earning assets, offset by a decrease in the yields on interest-earning assets. Due to the low interest rate environment experienced since the fourth quarter of 2001, tax equivalent yields on interest earning assets continued to fall 86 basis points from 6.31% for the three months ended September 30, 2002 to 5.45% for the same period in 2003. The average balance on interest-earning assets increased $56.4 million, or 19.3%, from $292.2 million for the three months ended September 30, 2002 to $348.6 million for the same period in 2003, primarily caused by an increase to the Corporation's average deposit base. The Corporation continued to experience an increase in loan demand which caused loans on average to increase $46.2 million to an average $246.6 million for the three months ended September 30, 2003, from an average $200.3 million for the comparable period in 2002. The Corporation also increased its investment portfolio by $16.1 million to an average $79.3 million at September 30, 2003. Interest paid on deposits and borrowed money decreased by $254,000, or 19.2%, due primarily to a decrease in cost of funds related to the general low interest rate environment. The average balance of total interest-bearing deposits increased to $262.7 million for the three months ended September 30, 2003 from $223.9 million for the comparable 2002 period, primarily as a result of the Corporation's expanding customer base. Yields on deposits and borrowed money decreased from 2.35% for the three month period ended September 30, 2002 to 1.62% for the comparable period in 2003. 20 Analysis of Net Interest Income (Unaudited) For the Three Months Ended September 30,
2003 2002 ----------------------------------- ------------------------------------ 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) $ 246,572 $ 4,061 6.53% $ 200,331 $ 3,762 7.45% Taxable investment securities(1) 59,025 419 2.82 42,724 496 4.61 Tax-exempt investment securities(1)(2) 20,245 259 5.08 20,461 277 5.37 Other interest-earning assets 22,778 46 0.80 28,671 115 1.59 --------- --------- --------- --------- Total interest-earning assets 348,620 4,785 5.45 292,187 4,650 6.31 --------- --------- Non-interest-earning assets: Allowance for loan losses (2,920) (2,679) Other assets 21,289 19,565 --------- --------- Total assets $ 366,989 $ 309,073 ========= ========= Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits $ 120,954 $ 237 0.78% $ 101,314 $ 353 1.38% Savings deposits 42,919 76 0.70 31,507 80 1.01 Time deposits 93,354 725 3.08 90,143 885 3.90 Borrowing 5,469 32 2.32 925 6 2.57 --------- --------- --------- --------- Total interest-bearing liabilities 262,696 1,070 1.62 223,889 1,324 2.35 --------- --------- Non-interest-bearing liabilities: Demand deposits 76,249 60,482 Other liabilities 2,208 2,015 Stockholders' equity 25,836 22,687 --------- --------- Total liabilities and stockholders' equity $ 366,989 $ 309,073 ========= ========= Net interest income(taxable equivalent basis) $ 3,715 $ 3,326 ========= ========= Net interest spread(taxable equivalent basis) 3.83% 3.97% ==== ==== Net yield on interest-earning assets(taxable equivalent basis)(3) 4.23% 4.52% ==== ====
- ---------- (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% and the provisions of Section 291 of the Internal Revenue Code. (3) Net interest income(taxable equivalent basis) divided by average interest-earning assets. 2003 2002 (Dollars in thousands) Reconciliation of net interest income (tax equivalent basis): Net interest income 3,635 3,243 Tax equivalent basis adjustment 80 83 ----- ----- Net interest income(tax equivalent basis) 3,715 3,326 ===== ===== 21 Provision for loan losses The Corporation maintains an allowance for loan losses at a level considered by management to be adequate to cover the inherent 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. The provision charged to operations totaled $90,000 and $30,000 during the three months ended September 30, 2003 and 2002, respectively. The increase in the provision was due primarily to the continued growth in the loan portfolio. In addition, the Corporation experienced a charge off of $163,000. 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 $244,000, or 45.8%, from $533,000 for the three month period ended September 30, 2002 to $777,000 for the comparable period in 2003. Deposit related fees increased $99,000 due to an increase in the deposit base and income derived from the merchant credit card processing and debit card programs. Increases in mortgage activity and the volume of mortgage loans sold attributed to an increase of $106,000 in the gain on sales of mortgage loans. Noninterest expense Noninterest expense increased by approximately $479,000, or 19.5%, to $2.9 million for the three months ended September 30, 2003, compared to $2.5 million for the same period in 2002. Salaries and employee benefit expense, the major component of noninterest expense, increased $222,000, or 19.0%, during the three months ended September 30, 2003. This increase was due to increases in staffing in the lending department and deposit and branch operations areas and general increases for merit and performance. Occupancy and equipment expense increased $33,000, or 10.1%, primarily due to the increase in branch facilities. Data processing expense increased $85,000, or 51.2% due to the increase in the Corporation's deposit base, the enhancements to online banking and bill payment functions and the implementation of a check imaging upgrade. Miscellaneous expenses increased $110,000, or 20.4%, primarily caused by increased costs associated with the general growth of the Corporation. Income taxes Income tax expense totaled $492,000 for the three months ended September 30, 2003, for an effective tax rate of 35.5%. For the three months ended September 30, 2002, income tax expense totaled $454,000, for an effective tax rate of 35.2%. 22 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 ability of borrowers to repay their loans under their existing loan agreements. Risk elements include nonaccrual loans, past due and restructured loans, potential problem loans, loan concentrations and other real estate owned. The following table shows the composition of nonperforming assets at the end of the last four quarters:
09/30/03 06/30/03 03/31/03 12/31/02 -------- -------- -------- -------- (Dollars in Thousands) Nonaccrual loans:(1) $ 245 $ 407 $ 409 $ 495 Loans past due 90 days or more:(2) 22 19 4 4 Restructured loans: 841 832 854 848 -------- -------- -------- -------- Total nonperforming loans $ 1,108 $ 1,258 $ 1,304 $ 1,347 ======== ======== ======== ======== Allowance for loan losses $ 2,791 $ 2,885 $ 2,788 $ 2,689 ======== ======== ======== ======== Nonaccrual loans to total loans 0.10% 0.17% 0.18% 0.23% Nonperforming loans to total loans 0.44% 0.53% 0.56% 0.62% Nonperforming loans to total assets 0.30% 0.35% 0.39% 0.41% Allowance for loan losses to total loans 1.10% 1.22% 1.19% 1.24%
(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 September 30, 2003 other than those included in the above table, where the Corporation was aware of any credit conditions of any borrowers that would indicate a strong possibility of the borrowers not complying with the present terms and conditions of repayment and which may result in such loans being included as non-accrual, past due or restructured at a future date. The Corporation's lending activities are concentrated in loans secured by real estate located in northern New Jersey. Accordingly, the collectibility of a substantial portion of the Corporation's loan portfolio is susceptible to changes in real estate market conditions in northern New Jersey. 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 23 other risks, as in credit and liquidity risk, in the normal course of its business, management considers interest rate risk to be its most significant market risk and 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 of the Board of Directors reviews and discusses these measurements on a monthly basis. The Corporation does not have any material exposure to foreign currency exchange rate risk or commodity price risk. The Corporation did not enter into any market sensitive instruments for trading purposes nor did it engage in any hedging transactions utilizing derivative financial instruments during the nine months ended September 30, 2003. The Corporation is, however, a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of condition. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded on the Corporation's consolidated balance sheet until the instrument is exercised. Capital Adequacy The Corporation is subject to capital adequacy guidelines promulgated by the Board of Governors of the Federal Reserve System ("FRB"). The Bank is subject to similar capital adequacy requirements imposed by the Federal Deposit Insurance Corporation. The FRB has issued regulations to define the adequacy of capital based upon the sensitivity of assets and off-balance sheet exposures to risk factors. Four categories of risk weights (0%, 20%, 50% and 100%) were established for application 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 September 30, 2003, the minimum risk-based capital requirements to be considered adequately capitalized were 4% for Tier 1 capital and 8% for total capital. 24 Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (non risk-adjusted) for the preceding quarter. At September 30, 2003 the minimum leverage ratio requirement to be considered well capitalized was 4%. The following table reflects the Corporation's capital ratios at September 30, 2003. Required Actual Excess -------- ------ ------ Risk-based Capital Tier 1 4.00% 13.11% 9.11% Total 8.00% 14.22% 6.22% Leverage Ratio 4.00% 9.00% 5.00% 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. The Corporation's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The primary source of cash from operating activities is net income. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds sold. The Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. At September 30, 2003, the Corporation has outstanding loan commitments of $32.5 million and unused lines and letters of credit totaling $56.1 million. Certificates of deposit scheduled to mature in one year or less, at September 30, 2003, totaled $52.3 million. Management believes that a significant portion of such deposits will remain with the Corporation. Cash and cash equivalents decreased $6.9 million during the first nine months of 2003. Operating activities and financing activities provided $4.4 million and $42.0 million, respectively. These amounts were offset by $53.2 million in investing activities. 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 25 disclosure controls and procedures as of September 30, 2003. Based on this evaluation, the Corporation's chief executive officer and principal accounting officer concluded that the Corporation disclosure controls and procedures are effective for recording, processing, summarizing and reporting the information the Corporation is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. Such evaluation did not identify any change in the Corporation's internal control over financial reporting that occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. 26 Stewardship Financial Corporation Part II -- Other Information Item 2. Changes in Securities and Use of Proceeds On September 17, 2003, the Corporation, through a newly formed, wholly-owned subsidiary, Stewardship Statutory Trust I (the "Trust"), a Connecticut statutory business trust, completed a private placement of $7.0 million of Fixed/Floating Rate Capital Securities (the "Trust Preferred Securities"). An aggregate of 7,000 Trust Preferred Securities were issued at $1,000.00 per Trust Preferred Security. FTN Financial Capital Markets and Keefe Bruyette & Woods, Inc. were placement agents of the Trust Preferred Securities. The Trust issued and sold the Trust Preferred Securities to Preferred Term Securities XI, Ltd. The Trust Preferred Securities were aggregated with other similar securities for resale to institutional and retail investors. These securities were exempt from registration under Section 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8K (a) Exhibits See exhibit index (b) Reports on Form 8-K 1) On July 21, 2003, the Corporation filed a current report on Form 8-K, attaching a press release reporting results for the quarter ended June 30, 2003. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Stewardship Financial Corporation Date: November 14, 2003 By:/s/ Paul Van Ostenbridge --------------------- ----------------------------------- Paul Van Ostenbridge President and Chief Executive Officer (authorized officer on behalf of registrant) Date: November 14, 2003 By: /s/ Julie E. Holland --------------------- ----------------------------------- Julie E. Holland Vice President and Treasurer (principal accounting officer) 28 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 10.1 Placement Agreement dated September 9, 2003. 31.1 Certification of Paul Van Ostenbridge required by Rule 13a-14(a) or Rule 15d-14(a) 31.2 Certification of Julie Holland required by Rule 13a-14(a) or Rule 15d-14(a) 32.1 Certification of Paul Van Ostenbridge and Julie Holland required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 29 EX-10.1 3 exhibit10-1.txt Exhibit 10.1 STEWARDSHIP FINANCIAL CORPORATION 7,000 Capital Securities Fixed/Floating Rate Capital Securities (Liquidation Amount $1,000.00 per Capital Security) PLACEMENT AGREEMENT ____________________ September 9, 2003 FTN Financial Capital Markets 845 Crossover Lane, Suite 150 Memphis, Tennessee 38117 Keefe, Bruyette & Woods, Inc. 787 7th Avenue 4th Floor New York, New York 10019 Ladies and Gentlemen: Stewardship Financial Corporation, a New Jersey corporation (the "Company"), and its financing subsidiary, Stewardship Statutory Trust I, a Connecticut statutory trust (the "Trust," and hereinafter together with the Company, the "Offerors"), hereby confirm their agreement (this "Agreement") with you as placement agents (the "Placement Agents"), as follows: Section 1. Issuance and Sale of Securities. ------------------------------- 1.1. Introduction. ------------- The Offerors propose to issue and sell at the Closing (as defined in Section 2.3.1 hereof) 7,000 of the Trust's Fixed/Floating Rate Capital Securities, with a liquidation amount of $1,000.00 per capital security (the "Capital Securities"), to Preferred Term Securities XI, Ltd., a company with limited liability established under the laws of the Cayman Islands (the "Purchaser") pursuant to the terms of a Subscription Agreement entered into, or to be entered into on or prior to the Closing Date (as defined in Section 2.3.1 hereof), between the Offerors and the Purchaser (the "Subscription Agreement"), the form of which is attached hereto as Exhibit A and incorporated herein by this reference. 1.2. Operative Agreements. --------------------- The Capital Securities shall be fully and unconditionally guaranteed on a subordinated basis by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment (the "Guarantee") pursuant and subject to the Guarantee Agreement (the "Guarantee Agreement"), to be dated as of the Closing Date and executed and delivered by the Company and U.S. Bank National Association ("U.S. Bank"), as trustee (the "Guarantee Trustee"), for the benefit from time to time of the holders of the Capital Securities. The entire proceeds from the sale by the Trust to the holders of the Capital Securities shall be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the "Common Securities"), and shall be used by the Trust to purchase $7,217,000.00 in principal amount of the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Debentures") of the Company. The Capital Securities and the Common Securities for the Trust shall be issued pursuant to an Amended and Restated Declaration of Trust among U.S. Bank, as institutional trustee (the "Institutional Trustee"), the Administrators named therein, and the Company, to be dated as of the Closing Date and in substantially the form heretofore delivered to the Placement Agents (the "Trust Agreement"). The Debentures shall be issued pursuant to an Indenture (the "Indenture"), to be dated as of the Closing Date, between the Company and U.S. Bank, as indenture trustee (the "Indenture Trustee"). The documents identified in this Section 1.2 and in Section 1.1 are referred to herein as the "Operative Documents." 1.3. Rights of Purchaser. -------------------- The Capital Securities shall be offered and sold by the Trust directly to the Purchaser without registration of any of the Capital Securities, the Debentures or the Guarantee under the Securities Act of 1933, as amended (the "Securities Act"), or any other applicable securities laws in reliance upon exemptions from the registration requirements of the Securities Act and other applicable securities laws. The Offerors agree that this Agreement shall be incorporated by reference into the Subscription Agreement and the Purchaser shall be entitled to each of the benefits of the Placement Agents and the Purchaser under this Agreement and shall be entitled to enforce obligations of the Offerors under this Agreement as fully as if the Purchaser were a party to this Agreement. The Offerors and the Placement Agents have entered into this Agreement to set forth their understanding as to their relationship and their respective rights, duties and obligations. 1.4. Legends. -------- Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, the Capital Securities and Debentures certificates shall each contain a legend as required pursuant to any of the Operative Documents. Section 2. Purchase of Capital Securities. ------------------------------- 2.1. Exclusive Rights; Purchase Price. -------------------------------- From the date hereof until the Closing Date (which date may be extended by mutual agreement of the Offerors and the Placement Agents), the Offerors hereby grant to the Placement Agents the exclusive right to arrange for the sale of the Capital Securities to the Purchaser at a purchase price of $1,000.00 per Capital Security. 2.2. Subscription Agreement. --------------------- The Offerors hereby agree to evidence their acceptance of the subscription by countersigning a copy of the Subscription Agreement and returning the same to the Placement Agents. 2.3. Closing and Delivery of Payment. -------------------------------- 2.3.1. Closing; Closing Date. ---------------------- The sale and purchase of the Capital Securities by the Offerors to the Purchaser shall take place at a closing (the "Closing") at the offices of Lewis, Rice & Fingersh, L.C., at 10:00 a.m. (St. Louis time) on September 17, 2003, or 2 such other business day as may be agreed upon by the Offerors and the Placement Agents (the "Closing Date"); provided, however, that in no event shall the Closing Date occur later than September 30, 2003 unless consented to by the Purchaser. Payment by the Purchaser shall be payable in the manner set forth in the Subscription Agreement and shall be made prior to or on the Closing Date. 2.3.2. Delivery. -------- The certificate for the Capital Securities shall be in definitive form, registered in the name of the Purchaser and in the aggregate amount of the Capital Securities purchased by the Purchaser. 2.3.3. Transfer Agent. --------------- The Offerors shall deposit the certificate representing the Capital Securities with the Institutional Trustee or other appropriate party prior to the Closing Date. 2.4. Placement Agents' Fees and Expenses. ------------------------------------ 2.4.1. Placement Agents' Compensation. ------------------------------- Because the proceeds from the sale of the Capital Securities shall be used to purchase the Debentures from the Company, the Company shall pay an aggregate of $30.00 for each $1,000.00 of principal amount of Debentures sold to the Trust (excluding the Debentures related to the Common Securities purchased by the Company). Of this amount, $15.00 for each $1,000.00 of principal amount of Debentures shall be payable to FTN Financial Capital Markets and $15.00 for each $1,000.00 of principal amount of Debentures shall be payable to Keefe, Bruyette & Woods, Inc. Such amount shall be delivered to the Trustee or such other person designated by the Placement Agents on the Closing Date and shall be allocated between and paid to the respective Placement Agents as directed by the Placement Agents. 2.4.2. Costs and Expenses. ------------------- Whether or not this Agreement is terminated or the sale of the Capital Securities is consummated, the Company hereby covenants and agrees that it shall pay or cause to be paid (directly or by reimbursement) all reasonable costs and expenses incident to the performance of the obligations of the Offerors under this Agreement, including all fees, expenses and disbursements of counsel and accountants for the Offerors; all reasonable expenses incurred by the Offerors incident to the preparation, execution and delivery of the Trust Agreement, the Indenture, and the Guarantee; and all other reasonable costs and expenses incident to the performance of the obligations of the Company hereunder and under the Trust Agreement. 2.5. Failure to Close. ----------------- If any of the conditions to the Closing specified in this Agreement shall not have been fulfilled to the satisfaction of the Placement Agents or if the Closing shall not have occurred on or before 10:00 a.m. (St. Louis time) on September 30, 2003, then each party hereto, notwithstanding anything to the contrary in this Agreement, shall be relieved of all further obligations under this Agreement without thereby waiving any rights it may have by reason of such nonfulfillment or failure; provided, however, that the obligations of the parties under Sections 2.4.2, 7.5 and 9 shall not be so relieved and shall continue in full force and effect. 3 Section 3. Closing Conditions. ------------------ The obligations of the Purchaser and the Placement Agents on the Closing Date shall be subject to the accuracy, at and as of the Closing Date, of the representations and warranties of the Offerors contained in this Agreement, to the accuracy, at and as of the Closing Date, of the statements of the Offerors made in any certificates pursuant to this Agreement, to the performance by the Offerors of their respective obligations under this Agreement, to compliance, at and as of the Closing Date, by the Offerors with their respective agreements herein contained, and to the following further conditions: 3.1. Opinions of Counsel. -------------------- On the Closing Date, the Placement Agents shall have received the following favorable opinions, each dated as of the Closing Date: (a) from McCarter & English, LLP, counsel for the Offerors and addressed to the Purchaser and the Placement Agents in substantially the form set forth on Exhibit B-1 attached hereto and incorporated herein by this reference, (b) from Shipman & Goodwin LLP, special Connecticut counsel to the Offerors and addressed to the Purchaser, the Placement Agents and the Offerors, in substantially the form set forth on Exhibit B-2 attached hereto and incorporated herein by this reference and (c) from Lewis, Rice & Fingersh, L.C., special tax counsel to the Offerors, and addressed to the Placement Agents and the Offerors, in substantially the form set forth on Exhibit B-3 attached hereto and incorporated herein by this reference, subject to the receipt by Lewis, Rice & Fingersh, L.C. of a representation letter from the Company in the form set forth in Exhibit B-3 completed in a manner reasonably satisfactory to Lewis, Rice & Fingersh, L.C. (collectively, the "Offerors' Counsel Opinions"). In rendering the Offerors' Counsel Opinions, counsel to the Offerors may rely as to factual matters upon certificates or other documents furnished by officers, directors and trustees of the Offerors (copies of which shall be delivered to the Placement Agents and the Purchaser) and by government officials, and upon such other documents as counsel to the Offerors may, in their reasonable opinion, deem appropriate as a basis for the Offerors' Counsel Opinions. Counsel to the Offerors may specify the jurisdictions in which they are admitted to practice and that they are not admitted to practice in any other jurisdiction and are not experts in the law of any other jurisdiction. If the Offerors' counsel is not admitted to practice in the State of New York, the opinion of Offerors' counsel may assume, for purposes of the opinion, that the laws of the State of New York are substantively identical, in all respects material to the opinion, to the internal laws of the state in which such counsel is admitted to practice. Such Offerors' Counsel Opinions shall not state that they are to be governed or qualified by, or that they are otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). 3.2. Officer's Certificate. ---------------------- At the Closing Date, the Purchaser and the Placement Agents shall have received certificates from the Chief Executive Officer of the Company, dated as of the Closing Date, stating that (i) the representations and warranties of the Offerors set forth in Section 5 hereof are true and correct as of the Closing Date and that the Offerors have complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Date, (ii) since the date of this Agreement the Offerors have not incurred any liability or obligation, direct or contingent, or entered into any material transactions, other than in the ordinary course of business, which is material to the Offerors, and (iii) covering such other matters as the Placement Agents may reasonably request. 3.3. Administrator's Certificate. ---------------------------- At the Closing Date, the Purchaser and the Placement Agents shall have received a certificate of one or more Administrators of the Trust, dated as of the Closing Date, stating that the representations and warranties of the Trust set forth in Section 5 are true and correct as of the Closing Date and that the Trust has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date. 4 3.4. Purchase Permitted by Applicable Laws; Legal Investment. -------------------------------------------------------- The purchase of and payment for the Capital Securities as described in this Agreement and pursuant to the Subscription Agreement shall (a) not be prohibited by any applicable law or governmental regulation, (b) not subject the Purchaser or the Placement Agents to any penalty or, in the reasonable judgment of the Purchaser and the Placement Agents, other onerous conditions under or pursuant to any applicable law or governmental regulation, and (c) be permitted by the laws and regulations of the jurisdictions to which the Purchaser and the Placement Agents are subject. 3.5. Consents and Permits. --------------------- The Company and the Trust shall have received all consents, permits and other authorizations, and made all such filings and declarations, as may be required from any person or entity pursuant to any law, statute, regulation or rule (federal, state, local and foreign), or pursuant to any agreement, order or decree to which the Company or the Trust is a party or to which either is subject, in connection with the transactions contemplated by this Agreement. 3.6. Sale of Purchaser Securities. ----------------------------- The Purchaser shall have sold securities issued by the Purchaser in an amount such that the net proceeds of such sale shall be (i) available on the Closing Date and (ii) in an amount sufficient to purchase the Capital Securities and all other capital or similar securities contemplated in agreements similar to this Agreement and the Subscription Agreement. 3.7. Information. ----------- Prior to or on the Closing Date, the Offerors shall have furnished to the Placement Agents such further information, certificates, opinions and documents addressed to the Purchaser and the Placement Agents, which the Placement Agents may reasonably request, including, without limitation, a complete set of the Operative Documents or any other documents or certificates required by this Section 3; and all proceedings taken by the Offerors in connection with the issuance, offer and sale of the Capital Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Placement Agents. If any condition specified in this Section 3 shall not have been fulfilled when and as required in this Agreement, or if any of the opinions or certificates mentioned above or elsewhere in this Agreement shall not be reasonably satisfactory in form and substance to the Placement Agents, this Agreement may be terminated by the Placement Agents by notice to the Offerors at any time at or prior to the Closing Date. Notice of such termination shall be given to the Offerors in writing or by telephone or facsimile confirmed in writing. Section 4. Conditions to the Offerors' Obligations. --------------------------------------- The obligations of the Offerors to sell the Capital Securities to the Purchaser and consummate the transactions contemplated by this Agreement shall be subject to the accuracy, at and as of the Closing Date, of the representations and warranties of the Placement Agents contained in this Agreement and to the following further conditions: 4.1. Executed Agreement. ------------------- The Offerors shall have received from the Placement Agents an executed copy of this Agreement. 5 4.2. Fulfillment of Other Obligations. -------------------------------- The Placement Agents shall have fulfilled all of their other obligations and duties required to be fulfilled under this Agreement prior to or at the Closing. Section 5. Representations and Warranties of the Offerors. ---------------------------------------------- Except as set forth on the Disclosure Schedule (as defined in Section 11.1) attached hereto, if any, the Offerors jointly and severally represent and warrant to the Placement Agents and the Purchaser as of the date hereof and as of the Closing Date as follows: 5.1. Securities Law Matters. ---------------------- (a) Neither the Company nor the Trust, nor any of their "Affiliates" (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")), nor any person acting on any of their behalf has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration under the Securities Act of any of the Capital Securities, the Guarantee or the Debentures (collectively, the "Securities") or any other securities to be issued, or which may be issued, by the Purchaser. (b) Neither the Company nor the Trust, nor any of their Affiliates, nor any person acting on its or their behalf has (i) other than the Placement Agents, offered for sale or solicited offers to purchase the Securities, (ii) engaged or will engage, in any "directed selling efforts" within the meaning of Regulation S under the Securities Act ("Regulation S") with respect to the Securities, or (iii) engaged in any form of offering, general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of any of the Securities. (c) The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. (d) Neither the Company nor the Trust is or, after giving effect to the offering and sale of the Capital Securities and the consummation of the transactions described in this Agreement, will be an "investment company" or an entity "controlled" by an "investment company," in each case within the meaning of Section 3(a) of the Investment Company Act of 1940, as amended (the "Investment Company Act") without regard to Section 3(c) of the Investment Company Act. (e) Neither the Company nor the Trust has paid or agreed to pay to any person or entity (other than the Placement Agents) any compensation for soliciting another to purchase any of the Securities. 5.2. Organization, Standing and Qualification of the Trust. ------------------------------------------------------ The Trust has been duly created and is validly existing in good standing as a statutory trust under the Connecticut Statutory Trust Act (the "Statutory Trust Act") with the power and authority to own property and to conduct the business it transacts and proposes to transact and to enter into and perform its obligations under the Operative Documents. The Trust is duly qualified to transact business as a foreign entity and is in good standing in each jurisdiction in which such qualification is necessary, except where the failure 6 to so qualify or be in good standing would not have a material adverse effect on the Trust. The Trust is not a party to or otherwise bound by any agreement other than the Operative Documents. The Trust is and will, under current law, be classified for federal income tax purposes as a grantor trust and not as an association taxable as a corporation. 5.3. Trust Agreement. --------------- The Trust Agreement has been duly authorized by the Company and, on the Closing Date, will have been duly executed and delivered by the Company and the Administrators of the Trust, and, assuming due authorization, execution and delivery by the Institutional Trustee, will be a valid and binding obligation of the Company and such Administrators, enforceable against them in accordance with its terms, subject to (a) applicable bankruptcy, insolvency, moratorium, receivership, reorganization, liquidation and other laws relating to or affecting creditors' rights generally, and (b) general principles of equity (regardless of whether considered and applied in a proceeding in equity or at law) ("Bankruptcy and Equity"). Each of the Administrators of the Trust is an employee or a director of the Company or of a financial institution subsidiary of the Company and has been duly authorized by the Company to execute and deliver the Trust Agreement. 5.4. Guarantee Agreement and the Indenture. -------------------------------------- Each of the Guarantee and the Indenture has been duly authorized by the Company and, on the Closing Date will have been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery by the Guarantee Trustee, in the case of the Guarantee, and by the Indenture Trustee, in the case of the Indenture, will be a valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to Bankruptcy and Equity. 5.5. Capital Securities and Common Securities. ----------------------------------------- The Capital Securities and the Common Securities have been duly authorized by the Trust Agreement and, when issued and delivered against payment therefor on the Closing Date to the Purchaser, in the case of the Capital Securities, and to the Company, in the case of the Common Securities, will be validly issued and represent undivided beneficial interests in the assets of the Trust. None of the Capital Securities or the Common Securities is subject to preemptive or other similar rights. On the Closing Date, all of the issued and outstanding Common Securities will be directly owned by the Company free and clear of any pledge, security interest, claim, lien or other encumbrance. 5.6. Debentures. ----------- The Debentures have been duly authorized by the Company and, at the Closing Date, will have been duly executed and delivered to the Indenture Trustee for authentication in accordance with the Indenture, and, when authenticated in the manner provided for in the Indenture and delivered against payment therefor by the Trust, will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture enforceable against the Company in accordance with their terms, subject to Bankruptcy and Equity. 5.7. Power and Authority. ------------------- This Agreement has been duly authorized, executed and delivered by the Company and the Trust and constitutes the valid and binding obligation of the Company and the Trust, enforceable against the Company and the Trust in accordance with its terms, subject to Bankruptcy and Equity. 7 5.8. No Defaults. ------------ The Trust is not in violation of the Trust Agreement or, to the knowledge of the Administrators, any provision of the Statutory Trust Act. The execution, delivery and performance by the Company or the Trust of this Agreement or the Operative Documents to which it is a party, and the consummation of the transactions contemplated herein or therein and the use of the proceeds therefrom, will not conflict with or constitute a breach of, or a default under, or result in the creation or imposition of any lien, charge or other encumbrance upon any property or assets of the Trust, the Company or any of the Company's Subsidiaries (as defined in Section 5.11 hereof) pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Trust, the Company or any of its Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of any of them is subject, except for a conflict, breach, default, lien, charge or encumbrance which could not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect nor will such action result in any violation of the Trust Agreement or the Statutory Trust Act or require the consent, approval, authorization or order of any court or governmental agency or body. As used herein, the term "Material Adverse Effect" means any one or more effects that individually or in the aggregate are material and adverse to the Offeror's ability to consummate the transactions contemplated herein or in the Operative Documents or any one or more effects that individually or in the aggregate are material and adverse to the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company and its Subsidiaries taken as whole, whether or not occurring in the ordinary course of business. 5.9. Organization, Standing and Qualification of the Company. ------------------------------------------------------- The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of New Jersey, with all requisite corporate power and authority to own its properties and conduct the business it transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its activities requires such qualification, except where the failure of the Company to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect. 5.10. Subsidiaries of the Company. ---------------------------- Each of the Company's significant subsidiaries (as defined in Section 1-02(w) of Regulation S-X to the Securities Act (the "Significant Subsidiaries")) is listed in Exhibit C attached hereto and incorporated herein by this reference. Each Significant Subsidiary has been duly organized and is validly existing and in good standing under the laws of the jurisdiction in which it is chartered or organized, with all requisite power and authority to own its properties and conduct the business it transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign entity in each jurisdiction where the nature of its activities requires such qualification, except where the failure of any such Significant Subsidiary to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect. All of the issued and outstanding shares of capital stock of the Significant Subsidiaries (a) have been duly authorized and are validly issued, (b) are fully paid and nonassessable, and (c) are wholly owned, directly or indirectly, by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, restriction upon voting or transfer, preemptive rights, claim, equity or other defect. 5.11. Permits. --------- The Company and each of its subsidiaries (as defined in Section 1-02(x) of Regulation S-X to the Securities Act) (the "Subsidiaries") have all requisite power and authority, and all necessary authorizations, approvals, orders, licenses, certificates and permits of and from regulatory or governmental officials, bodies and tribunals, to own or lease their respective properties and to conduct their respective businesses as now being conducted, except such authorizations, approvals, orders, licenses, certificates and permits which, if not obtained and maintained, would not, singly or in the aggregate, have a Material Adverse Effect, and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such authorizations, approvals, orders, licenses, certificates or permits which, singly or in the aggregate, if the failure to be so licensed or approved is the subject of an unfavorable decision, ruling or finding, would, singly or in the aggregate, have a Material Adverse Effect; and the Company and its Subsidiaries are in compliance with all applicable laws, rules, regulations and orders and consents, the violation of which would, singly or in the aggregate, have a Material Adverse Effect. 8 5.12. Conflicts, Authorizations and Approvals. ---------------------------------------- Neither the Company nor any of its Subsidiaries is in violation of its respective articles or certificate of incorporation, charter or by-laws or similar organizational documents or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which either the Company or any of its Subsidiaries is a party, or by which it or any of them may be bound or to which any of the property or assets of the Company or any of its Subsidiaries is subject, the effect of which violation or default in performance or observance would have, singly or in the aggregate, a Material Adverse Effect. 5.13. Holding Company Registration and Deposit Insurance. --------------------------------------------------- The Company is duly registered (i) as a bank holding company or financial holding company under the Bank Holding Company Act of 1956, as amended, and the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve") or (ii) as a savings and loan holding company under the Home Owners' Loan Act of 1933, as amended, and the regulations of the Office of Thrift Supervision (the "OTS"), and the deposit accounts of the Company's Subsidiary depository institutions are insured by the Federal Deposit Insurance Corporation ("FDIC") to the fullest extent permitted by law and the rules and regulations of the FDIC, and no proceedings for the termination of such insurance are pending or threatened. 5.14. Financial Statements. --------------------- (a) The consolidated balance sheets of the Company and all of its Subsidiaries as of December 31, 2002 and December 31, 2001 and related consolidated income statements and statements of changes in shareholders' equity for the 3 years ended December 31, 2002 together with the notes thereto, and the consolidated balance sheets of the Company and all of its Subsidiaries as of June 30, 2003 and the related consolidated income statements and statements of changes in shareholders' equity for the 6 months then ended, copies of each of which have been provided to the Placement Agents (together, the "Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be disclosed therein) and fairly present in all material respects the financial position and the results of operations and changes in shareholders' equity of the Company and all of its Subsidiaries as of the dates and for the periods indicated (subject, in the case of interim financial statements, to normal recurring year-end adjustments, none of which shall be material). The books and records of the Company and all of its Subsidiaries have been, and are being, maintained in all material respects in accordance with generally accepted accounting principles and any other applicable legal and accounting requirements and reflect only actual transactions. 9 (b) The information in the Company's most recently filed (i) FR Y-9C filed with the Federal Reserve if the Company is a bank holding company, (ii) FR Y-9SP filed with the Federal Reserve if the Company is a small bank holding company or (iii) H-(b)11 filed with the OTS if the Company is a savings and loan holding company (the "Regulatory Report"), previously provided to the Placement Agents fairly presents in all material respects the financial position of the Company and, where applicable, all of its Subsidiaries as of the end of the period represented by such Regulatory Report. (c) Since the respective dates of the Financial Statements and the Regulatory Report, there has been no material adverse change or development with respect to the financial condition or earnings of the Company and all of its Subsidiaries, taken as a whole. (d) The accountants of the Company who certified the Financial Statements are independent public accountants of the Company and its Subsidiaries within the meaning of the Securities Act and the rules and regulations thereunder. 5.15. Regulatory Enforcement Matters. -------------------------------- Neither the Company nor any of its Subsidiaries is subject or is party to, or has received any notice or advice that any of them may become subject or party to, any investigation with respect to, any cease-and-desist order, agreement, consent agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been since January 1, 2000, a recipient of any supervisory letter from, or since January 1, 2000, has adopted any board resolutions at the request of, any Regulatory Agency (as defined below) that currently restricts in any material respect the conduct of their business or that in any material manner relates to their capital adequacy, their credit policies, their ability or authority to pay dividends or make distributions to their shareholders or make payments of principal or interest on their debt obligations, their management or their business (each, a "Regulatory Agreement"), nor has the Company or any of its Subsidiaries been advised since January 1, 2000, by any Regulatory Agency that it is considering issuing or requesting any such Regulatory Agreement. There is no material unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of the Company or any of its Subsidiaries. As used herein, the term "Regulatory Agency" means any federal or state agency charged with the supervision or regulation of depository institutions, bank, financial or savings and loan holding companies, or engaged in the insurance of depository institution deposits, or any court, administrative agency or commission or other governmental agency, authority or instrumentality having supervisory or regulatory authority with respect to the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is restricted, prohibited or otherwise limited, whether by statute or otherwise, in their ability or authority to pay dividends or make distributions to their shareholders or make payments of principal or interest on their debt obligations, and no event has occurred or circumstance exists that would be reasonably likely to give rise to or serve as the basis for any such restriction, prohibition or limitation. 5.16. No Material Change. -------------------- Since December 31, 2002, there has been no material adverse change or development with respect to the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company or its Subsidiaries on a consolidated basis, whether or not arising in the ordinary course of business. 10 5.17. No Undisclosed Liabilities. --------------------------- Neither the Company nor any of its Subsidiaries has any material liability, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes (and there is no past or present fact, situation, circumstance, condition or other basis for any present or future action, suit, proceeding, hearing, charge, complaint, claim or demand against the Company or its Subsidiaries giving rise to any such liability), except (i) for liabilities set forth in the Financial Statements and (ii) normal fluctuation in the amount of the liabilities referred to in clause (i) above occurring in the ordinary course of business of the Company and all of its Subsidiaries since the date of the most recent balance sheet included in the Financial Statements. 5.18. Litigation. ---------- No charge, investigation, action, suit or proceeding is pending or, to the knowledge of the Offerors, threatened, against or affecting the Company or its Subsidiaries or any of their respective properties before or by any courts or any regulatory, administrative or governmental official, commission, board, agency or other authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could have, singly or in the aggregate, a Material Adverse Effect. 5.19. Deferral of Interest Payments on Debentures. --------------------------------------------- The Company has no present intention to exercise its option to defer payments of interest on the Debentures as provided in the Indenture. The Company believes that the likelihood that it would exercise its right to defer payments of interest on the Debentures as provided in the Indenture at any time during which the Debentures are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's capital stock and on the Company's ability to make any payments of principal, interest or premium on, or repay, repurchase or redeem, any of its debt securities that rank pari passu in all respects with, or junior in interest to, the Debentures. Section 6. Representations and Warranties of the Placement Agents. ------------------------------------------------------ Each Placement Agent represents and warrants to the Offerors as to itself (but not as to the other Placement Agent) as follows: 6.1. Organization, Standing and Qualification. ---------------------------------------- (a) FTN Financial Capital Markets is a division of First Tennessee Bank National Association, a national banking association duly organized, validly existing and in good standing under the laws of the United States, with full power and authority to own, lease and operate its properties and conduct its business as currently being conducted. FTN Financial Capital Markets is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property or conducts its business so as to require such qualification and in which the failure to so qualify would, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or results of operations of FTN Financial Capital Markets. 11 (b) Keefe, Bruyette & Woods, Inc. is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, with full power and authority to own, lease and operate its properties and conduct its business as currently being conducted. Keefe, Bruyette & Woods, Inc. is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property or conducts its business so as to require such qualification and in which the failure to so qualify would, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or results of operations of Keefe, Bruyette & Woods, Inc. 6.2. Power and Authority. ------------------- The Placement Agent has all requisite power and authority to enter into this Agreement, and this Agreement has been duly and validly authorized, executed and delivered by the Placement Agent and constitutes the legal, valid and binding agreement of the Placement Agent, enforceable against the Placement Agent in accordance with its terms, subject to Bankruptcy and Equity and except as any indemnification or contribution provisions thereof may be limited under applicable securities laws. 6.3. General Solicitation. -------------------- In the case of the offer and sale of the Capital Securities, no form of general solicitation or general advertising was used by the Placement Agent or its representatives including, but not limited to, advertisements, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. Neither the Placement Agent nor its representatives have engaged or will engage in any "directed selling efforts" within the meaning of Regulation S with respect to the Capital Securities. 6.4. Purchaser. --------- The Placement Agent has made such reasonable inquiry as is necessary to determine that the Purchaser is acquiring the Capital Securities for its own account, that the Purchaser does not intend to distribute the Capital Securities in contravention of the Securities Act or any other applicable securities laws, and that the Purchaser is not a "U.S. person" as that term is defined under Rule 902 of the Securities Act. 6.5. Qualified Purchasers. -------------------- The Placement Agent has not offered or sold and will not arrange for the offer or sale of the Capital Securities except (i) in an offshore transaction complying with Rule 903 of Regulation S, or (ii) to those the Placement Agent reasonably believes are "accredited investors" (as defined in Rule 501 of Regulation D), or (iii) in any other manner that does not require registration of the Capital Securities under the Securities Act. In connection with each such sale, the Placement Agent has taken or will take reasonable steps to ensure that the Purchaser is aware that (a) such sale is being made in reliance on an exemption under the Securities Act and (b) future transfers of the Capital Securities will not be made except in compliance with applicable securities laws. 6.6. Offering Circulars. ------------------ Neither the Placement Agent nor its representatives will include any non-public information about the Company, the Trust or any of their affiliates in any registration statement, prospectus, offering circular or private placement memorandum used in connection with any purchase of Capital Securities without the prior written consent of the Trust and the Company. 12 Section 7. Covenants of the Offerors. -------------------------- The Offerors covenant and agree with the Placement Agents and the Purchaser as follows: 7.1. Compliance with Representations and Warranties. ---------------------------------------------- During the period from the date of this Agreement to the Closing Date, the Offerors shall use their best efforts and take all action necessary or appropriate to cause their representations and warranties contained in Section 5 hereof to be true as of the Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of the Closing Date. 7.2. Sale and Registration of Securities. ----------------------------------- The Offerors and their Affiliates shall not nor shall any of them permit any person acting on their behalf (other than the Placement Agents), to directly or indirectly (i) sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) that would or could be integrated with the sale of the Capital Securities in a manner that would require the registration under the Securities Act of the Securities or (ii) make offers or sales of any such Security, or solicit offers to buy any such Security, under circumstances that would require the registration of any of such Securities under the Securities Act. 7.3. Use of Proceeds. --------------- The Trust shall use the proceeds from the sale of the Capital Securities to purchase the Debentures from the Company. 7.4. Investment Company. ------------------ The Offerors shall not engage, or permit any Subsidiary to engage, in any activity which would cause it or any Subsidiary to be an "investment company" under the provisions of the Investment Company Act. 7.5. Reimbursement of Expenses. ------------------------- If the sale of the Capital Securities provided for herein is not consummated (i) because any condition set forth in Section 3 hereof is not satisfied, or (ii) because of any refusal, inability or failure on the part of the Company or the Trust to perform any agreement herein or comply with any provision hereof other than by reason of a breach by the Placement Agents, the Company shall reimburse the Placement Agents upon demand for all of their pro rata share of out-of-pocket expenses (including reasonable fees and disbursements of counsel) in an amount not to exceed $50,000.00 that shall have been incurred by them in connection with the proposed purchase and sale of the Capital Securities. Notwithstanding the foregoing, the Company shall have no obligation to reimburse the Placement Agents for their out-of-pocket expenses if the sale of the Capital Securities fails to occur because the condition set forth in Section 3.6 is not satisfied or because either of the Placement Agents fails to fulfill a condition set forth in Section 4. 7.6. Directed Selling Efforts, Solicitation and Advertising. ------------------------------------------------------ In connection with any offer or sale of any of the Securities, the Offerors shall not, nor shall either of them permit any of their Affiliates or any person acting on their behalf, other than the Placement Agents, to, (i) engage in any "directed selling efforts" within the meaning of Regulation S, or (ii) engage in any form of general solicitation or general advertising (as defined in Regulation D). 13 7.7. Compliance with Rule 144A(d)(4) under the Securities Act. -------------------------------------------------------- So long as any of the Securities are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Offerors will, during any period in which they are not subject to and in compliance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the Offerors are not exempt from such reporting requirements pursuant to and in compliance with Rule 12g3-2(b) under the Exchange Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser in connection with any proposed transfer, any information required to be provided by Rule 144A(d)(4) under the Securities Act, if applicable. This covenant is intended to be for the benefit of the holders, and the prospective purchasers designated by such holders, from time to time of such restricted securities. The information provided by the Offerors pursuant to this Section 7.7 will not, at the date thereof, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.8. Quarterly Reports. ------------------ Within 50 days of the end of each calendar year quarter and within 100 days of the end of each calendar year during which the Debentures are issued and outstanding, the Offerors shall submit to The Bank of New York a completed quarterly report in the form attached hereto as Exhibit D. The Offerors acknowledge and agree that The Bank of New York and its successors and assigns is a third party beneficiary of this Section 7.8 Section 8. Covenants of the Placement Agents. ---------------------------------- The Placement Agents covenant and agree with the Offerors that, during the period from the date of this Agreement to the Closing Date, the Placement Agents shall use their best efforts and take all action necessary or appropriate to cause their representations and warranties contained in Section 6 to be true as of Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of the Closing Date. The Placement Agents further covenant and agree not to engage in hedging transactions with respect to the Capital Securities unless such transactions are conducted in compliance with the Securities Act. Section 9. Indemnification. ----------------- 9.1. Indemnification Obligation. -------------------------- The Offerors shall jointly and severally indemnify and hold harmless the Placement Agents and the Purchaser and each of their respective agents, employees, officers and directors and each person that controls either of the Placement Agents or the Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and agents, employees, officers and directors or any such controlling person of either of the Placement Agents or the Purchaser (each such person or entity, an "Indemnified Party") from and against any and all losses, claims, damages, judgments, liabilities or expenses, joint or several, to which such Indemnified Party may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Offerors), insofar as such losses, claims, damages, judgments, liabilities or expenses (or actions in respect thereof) arise out of, or are based upon, or relate to, in whole or in part, (a) any untrue statement or alleged untrue statement of a material fact contained in any information (whether written or oral) or documents executed in favor of, furnished or made available to the Placement Agents or the Purchaser by the Offerors, or (b) any omission or alleged omission to state in any information (whether written or oral) or 14 documents executed in favor of, furnished or made available to the Placement Agents or the Purchaser by the Offerors a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each Indemnified Party for any legal and other expenses as such expenses are reasonably incurred by such Indemnified Party in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, judgments, liability, expense or action described in this Section 9.1. In addition to their other obligations under this Section 9, the Offerors hereby agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of, or based upon, or related to the matters described above in this Section 9.1, they shall reimburse each Indemnified Party on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Indemnified Party shall promptly return such amounts to the Offerors together with interest, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by First Tennessee Bank National Association (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Indemnified Party within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. 9.2. Conduct of Indemnification Proceedings. -------------------------------------- Promptly after receipt by an Indemnified Party under this Section 9 of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the Offerors under this Section 9, notify the Offerors in writing of the commencement thereof; but, subject to Section 9.4, the omission to so notify the Offerors shall not relieve them from any liability pursuant to Section 9.1 which the Offerors may have to any Indemnified Party unless and to the extent that the Offerors did not otherwise learn of such action and such failure by the Indemnified Party results in the forfeiture by the Offerors of substantial rights and defenses. In case any such action is brought against any Indemnified Party and such Indemnified Party seeks or intends to seek indemnity from the Offerors, the Offerors shall be entitled to participate in, and, to the extent that they may wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party; provided, however, if the defendants in any such action include both the Indemnified Party and the Offerors and the Indemnified Party shall have reasonably concluded that there may be a conflict between the positions of the Offerors and the Indemnified Party in conducting the defense of any such action or that there may be legal defenses available to it and/or other Indemnified Parties which are different from or additional to those available to the Offerors, the Indemnified Party shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such Indemnified Party. Upon receipt of notice from the Offerors to such Indemnified Party of their election to so assume the defense of such action and approval by the Indemnified Party of counsel, the Offerors shall not be liable to such Indemnified Party under this Section 9 for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof unless (i) the Indemnified Party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso in the preceding sentence (it being understood, however, that the Offerors shall not be liable for the expenses of more than one separate counsel representing the Indemnified Parties who are parties to such action), or (ii) the Offerors shall not have employed counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel of such Indemnified Party shall be at the expense of the Offerors. 15 9.3. Contribution. ------------- If the indemnification provided for in this Section 9 is required by its terms, but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an Indemnified Party under Section 9.1 in respect of any losses, claims, damages, liabilities or expenses referred to herein or therein, then the Offerors shall contribute to the amount paid or payable by such Indemnified Party as a result of any losses, claims, damages, judgments, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Offerors, on the one hand, and the Indemnified Party, on the other hand, from the offering of such Capital Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Offerors, on the one hand, and the Placement Agents, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein or other breaches which resulted in such losses, claims, damages, judgments, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Offerors, on the one hand, and the Placement Agents, on the other hand, shall be deemed to be in the same proportion, in the case of the Offerors, as the total price paid to the Offerors for the Capital Securities sold by the Offerors to the Purchaser (net of the compensation paid to the Placement Agents hereunder, but before deducting expenses), and in the case of the Placement Agents, as the compensation received by them, bears to the total of such amounts paid to the Offerors and received by the Placement Agents as compensation. The relative fault of the Offerors and the Placement Agents shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or the omission or alleged omission of a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Offerors or the Placement Agents and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The provisions set forth in Section 9.2 with respect to notice of commencement of any action shall apply if a claim for contribution is made under this Section 9.3; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 9.2 for purposes of indemnification. The Offerors and the Placement Agents agree that it would not be just and equitable if contribution pursuant to this Section 9.3 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 9.3. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, judgments, liabilities or expenses referred to in this Section 9.3 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. In no event shall the liability of the Placement Agents hereunder be greater in amount than the dollar amount of the compensation (net of payment of all expenses) received by the Placement Agents upon the sale of the Capital Securities giving rise to such obligation. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. 9.4. Additional Remedies. -------------------- The indemnity and contribution agreements contained in this Section 9 are in addition to any liability that the Offerors may otherwise have to any Indemnified Party. 9.5. Additional Indemnification. -------------------------- The Company shall indemnify and hold harmless the Trust against all loss, liability, claim, damage and expense whatsoever, as due from the Trust under Sections 9.1 through 9.4 hereof. Section 10. Rights and Responsibilities of Placement Agents. ----------------------------------------------- 16 10.1. Reliance. ---------- In performing their duties under this Agreement, the Placement Agents shall be entitled to rely upon any notice, signature or writing which they shall in good faith believe to be genuine and to be signed or presented by a proper party or parties. The Placement Agents may rely upon any opinions or certificates or other documents delivered by the Offerors or their counsel or designees to either the Placement Agents or the Purchaser. 10.2. Rights of Placement Agents. ---------------------------- In connection with the performance of their duties under this Agreement, the Placement Agents shall not be liable for any error of judgment or any action taken or omitted to be taken unless the Placement Agents were grossly negligent or engaged in willful misconduct in connection with such performance or non-performance. No provision of this Agreement shall require the Placement Agents to expend or risk their own funds or otherwise incur any financial liability on behalf of the Purchaser in connection with the performance of any of their duties hereunder. The Placement Agents shall be under no obligation to exercise any of the rights or powers vested in them by this Agreement. Section 11. Miscellaneous. -------------- 11.1. Disclosure Schedule. --------------------- The term "Disclosure Schedule," as used herein, means the schedule, if any, attached to this Agreement that sets forth items the disclosure of which is necessary or appropriate as an exception to one or more representations or warranties contained in Section 5 hereof; provided, that any item set forth in the Disclosure Schedule as an exception to a representation or warranty shall be deemed an admission by the Offerors that such item represents an exception, fact, event or circumstance that is reasonably likely to result in a Material Adverse Effect. The Disclosure Schedule shall be arranged in paragraphs corresponding to the section numbers contained in Section 5. Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Disclosure Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the immediately preceding sentence, the mere listing (or inclusion of a copy) of a document or other item in the Disclosure Schedule shall not be deemed adequate to disclose an exception to a representation or warranty made herein unless the representation or warranty has to do with the existence of the document or other item itself. Information provided by the Company in response to any due diligence questionnaire shall not be deemed part of the Disclosure Schedule and shall not be deemed to be an exception to one or more representations or warranties contained in Section 5 hereof unless such information is specifically included on the Disclosure Schedule in accordance with the provisions of this Section 11.1. 11.2. Legal Expenses. --------------- At Closing, the Placement Agents shall provide a credit for the Offerors' transaction-related legal expenses in the amount of $10,000.00. 11.3. Notices. --------- Prior to the Closing, and thereafter with respect to matters pertaining to this Agreement only, all notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier or overnight air courier guaranteeing next day delivery: 17 if to the Placement Agents, to: FTN Financial Capital Markets 845 Crossover Lane, Suite 150 Memphis, Tennessee 38117 Telecopier: 901-435-4706 Telephone: 800-456-5460 Attention: James D. Wingett and Keefe, Bruyette & Woods, Inc. 787 7th Avenue 4th Floor New York, New York 10019 Telecopier: 212-403-2000 Telephone: 212-403-1004 Attention: Mitchell Kleinman, General Counsel with a copy to: Lewis, Rice & Fingersh, L.C. 500 North Broadway, Suite 2000 St. Louis, Missouri 63102 Telecopier: 314-241-6056 Telephone: 314-444-7600 Attention: Thomas C. Erb, Esq. and Sidley Austin Brown & Wood LLP 787 7th Avenue New York, New York 10019 Telecopier: 212-839-5599 Telephone: 212-839-5300 Attention: Renwick Martin, Esq. if to the Offerors, to: Stewardship Financial Corporation 630 Godwin Avenue Midland Park, New Jersey 07432 Telecopier: 201-251-9570 Telephone: 201-444-7100 Ext. 7125 Attention: Julie Holland with a copy to: McCarter & English, LLP Four Gateway Center 100 Mulberry Street Newark, New Jersey 07101-0652 Telecopier: 973-624-7071 Telephone: 973-622-4444 Attention: Todd M. Poland, Esq. 18 All such notices and communications shall be deemed to have been duly given (i) at the time delivered by hand, if personally delivered, (ii) five business days after being deposited in the mail, postage prepaid, if mailed, (iii) when answered back, if telexed, (iv) the next business day after being telecopied, or (v) the next business day after timely delivery to a courier, if sent by overnight air courier guaranteeing next day delivery. From and after the Closing, the foregoing notice provisions shall be superseded by any notice provisions of the Operative Documents under which notice is given. The Placement Agents, the Company, and their respective counsel, may change their respective notice addresses from time to time by written notice to all of the foregoing persons. 11.4. Parties in Interest, Successors and Assigns. ------------------------------------------- Except as expressly set forth herein, this Agreement is made solely for the benefit of the Placement Agents, the Purchaser and the Offerors and any person controlling the Placement Agents, the Purchaser or the Offerors and their respective successors and assigns; and no other person shall acquire or have any right under or by virtue of this Agreement. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 11.5. Counterparts. ------------ This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.6. Headings. -------- The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 11.7. Governing Law. ------------- THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAWS PERTAINING TO CONFLICTS OF LAWS) OF THE STATE OF NEW YORK. 11.8. Entire Agreement. ---------------- This Agreement, together with the Operative Documents and the other documents delivered in connection with the transactions contemplated by this Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Operative Documents and the other documents 19 delivered in connection with the transaction contemplated by this Agreement, supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.9. Severability. ------------ In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Placement Agents' and the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. 11.10. Survival. -------- The Placement Agents and the Offerors, respectively, agree that the representations, warranties and agreements made by each of them in this Agreement and in any certificate or other instrument delivered pursuant hereto shall remain in full force and effect and shall survive the delivery of, and payment for, the Capital Securities. Signatures appear on the following page 20 If this Agreement is satisfactory to you, please so indicate by signing the acceptance of this Agreement and deliver such counterpart to the Offerors whereupon this Agreement will become binding between us in accordance with its terms. Very truly yours, STEWARDSHIP FINANCIAL CORPORATION By: /s/ Paul Van Ostenbridge ---------------------------------------- Name: Paul Van Ostenbridge ---------------------------------------- Title: President / CEO ---------------------------------------- STEWARDSHIP STATUTORY TRUST I By: /s/ Paul Van Ostenbridge ---------------------------------------- Name: Paul Van Ostenbridge ---------------------------------------- Title: Administrator ---------------------------------------- CONFIRMED AND ACCEPTED, as of the date first set forth above FTN FINANCIAL CAPITAL MARKETS, a division of First Tennessee Bank National Association, as a Placement Agent By: /s/ James D. Wingett ---------------------------------------- Name: James D. Wingett ---------------------------------------- Title: Senior Vice President ---------------------------------------- KEEFE, BRUYETTE & WOODS, INC., a New York corporation, as a Placement Agent By: /s/ Peter J. Wirth ---------------------------------------- Name: Peter J. Wirth ---------------------------------------- Title: Managing Director ---------------------------------------- 21 EX-31.1 4 exhibit31-1.txt Exhibit 31.1 Certification of Quarterly Report I, Paul Van Ostenbridge, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Stewardship Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003. /s/ Paul Van Ostenbridge ------------------------ Paul Van Ostenbridge Chief Executive Officer 30 EX-31.2 5 exhibit31-2.txt Exhibit 31.2 Certification of Quarterly Report I, Julie Holland, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Stewardship Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003. /s/ Julie Holland ----------------- Julie Holland Vice President and Treasurer 31 EX-32.1 6 exhibit32-1.txt Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Stewardship Financial Corporation (the "Company"), certifies that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ Paul Van Ostenbridge ------------------------------- Paul Van Ostenbridge Chief Executive Officer Dated: November 14, 2003 /s/ Julie Holland ------------------------------- Julie Holland Vice President and Treasurer This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. 32 -----END PRIVACY-ENHANCED MESSAGE-----