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      6   A N N U A L   R E P O R T





*Streams
      of Living Water*














*S* *treams
        of* *L* *iving* *W* *ater*
 
 When
        the
        Atlantic StewardshipBank was founded in 1985, it was but a seedling planted
        by a
        group of Christian businessmen in hopes of fulfilling their shared vision.
        The
        Bank’s founding fathers were committed to their goal of forming a community bank
        based on solid Christian principles and today, twenty-one years and ten branches
        later, the Lord continues to enrich us abundantly allowing the Bank to grow
        and
        prosper.
 
 We
        remain
        true to our mission of giving back to the community. Atlantic Stewardship
        Bank
        continues to tithe or give back ten percent of its earnings to Christian
        and
        local non-profit organizations.
 
 As
        we
        look back on a prosperous 2006, we thank the Lord, Jesus Christ for enabling
        us
        to be an institution that our customers and shareholders can trust and depend
        upon. We thank our shareholders for their belief in our mission. We thank
        our
        expanding family of customers for their loyalty and support.
 
 
 OUR
        MISSION
 
 The
        Atlantic Stewardship Bank was established to serve the northern New Jersey
        community’s financial needs and to give back, or tithe, one-tenth of our
        earnings to the community.
 
 We
        are a
        confident and progressive institution that meets business and individual
        banking
        deposit and borrowing needs. We understand the value of each and every customer
        and make it a priority to treat each customer fairly and with respect. By
        investing prudently we safeguard assets, provide ample capital growth and
        recognize our shareholders with a proper return. As a responsible and
        accountable employer, we cultivate a caring professional environment where
        our
        associates can be productive and are encouraged to grow.
 
 We
        are an
        independent commercial bank that stands on solid Christian principles and
        the
        American banking regulations established by the Board of Governors of the
        Federal Reserve System, the Federal Deposit Insurance Corporation, and the
        State
        of New Jersey. We hold these fundamentals paramount in every decisionwemake;
        for
        the good of our customers, our shareholders, and our employees.
  
  “On
        behalf of our church congregation and our school, thank you very much for
        your
        generous donation again this year. We are amazed at your bank’s Tithing Program.
        What a tremendous blessing!




May
      I
      also say that your bank’s personnel are always very professional, courteous, and
      helpful. We are happy to recommend Atlantic Stewardship Bank to anyone, knowing
      that they will receive the best of service.




Thank
      you
      again for including us in your Tithing Program. May the Lord continue to richly
      bless your organization as you seek to honor Him.”





Jay
      Harvey


*Pastor/Administrator,
      Madison Avenue Baptist Church & Academy*


*Paterson,
      NJ*









“On
      behalf of the youth program at theWyckoff Reformed Church I would like to thank
      you so very much for your donation to our Youth Mission Trip.The Atlantic
      Stewardship Bank’s continued support of our mission trip helps to ensure that
      every student who wants to go on the mission trip is able to go.




Thank
      you
      again for your generous support as we try to teach our youth that it is up
      to
      each of us to help our neighbors.”





Leslie
      Rubacky


*Interim
      Youth Director, Wyckoff Reformed Church*









“Your
      generous contribution to the work of Siena Village makes one of our unique
      projects possible. We are deeply interested in furnishing our residents with
      access to a quality meal each day. It is important for their nutrition and
      even
      more important to afford them the opportunity to get out of their apartments
      and
      socialize in a hospitable environment. In order to bring the cost of the meal
      within their fixed income reach, we subsidize part of each meal purchased.
      This
      would not be possible without your help.




It
      is
      wonderful to hear that 2006 was a good year for the bank. It is a reflection
      of
      the wonderful service you render as well as a reward for the gifts that you
      share.”





Sister
      Alice Matthew, O.P.


*Director,
      Siena Village at Wayne*








“We
      are
      very appreciative of your generosity and faithfulness towards the Father’s
      Cupboard Food Pantry at His Word Ministries. Because of your gift we can better
      serve the approximately 40 families that come into our pantry each week. Many
      of
      these families are low-income, and the help they receive from us allows them
      to
      use their funds for other expenses.




These
      finances will allow us to purchase more food and health care items for these
      families as well as allow us to serve more families in our community.





We
      greatly appreciate your support of our work here in Wanaque.”





Christine
      Brown


*Coordinator,
      His Word Ministries*


*Wanaque,
      NJ*








“Your
      gift is such a blessing for the adults and children with developmental
      disabilities served at Elim Christian Services. Thank you! Your gift not only
      helps us continue providing the excellent services and planning that Elim is
      known to provide but also allows us to continue researching new and more
      effective ways to help everyone we serve.





We
      know
      that you share in that passion for helping individuals with developmental
      disabilities reach their full potential. We thank you for your commitment and
      support of Elim Christian Services!”





Bill
      Lodewyk


*President,
      Elim Christian Services*


*Palos
      Heights, IL*







We
      are
      most blessed to be sharing in your Tithing Program. Because of your concern
      we
      are able to continuously provide for the needs of our Boonton and Montville
      residents. Those, who avail themselves of the pantry, are grateful to you for
      the thoughts, which you have extended to them, for the blessings you have shared
      with them.





Again,
      thank you for your help in order that we can help others.”





Lucille
      H. Rockis


*Director,
      Social Services*


*Boonton,
      NJ*





2006
      ANNUAL REPORT - STREAMS  OF LIVING WATER





FINANCIAL
      HIGHLIGHTS


**2006**
            
            **2005**
            
            **%
                CHANGE****FOR
              THE YEAR ENDED DECEMBER 31**
            
            *(Dollars
                in thousands, except per share amounts)*Net
                income
            
            $
            4,753
            
            $
            4,480
            
            
            6.1
            %Average
                shares outstanding
            
            
            5,021
            
            
            4,991
            
            
            0.6
            %Per
                common shareBasic
                net income
            
            
            0.95
            
            
            0.90
            
            
            5.6
            %Diluted
                net income
            
            
            0.94
            
            
            0.89
            
            
            5.6
            %Cash
                dividends declared
            
            
            0.30
            
            
            0.25
            
            
            20.0
            %Book
                value at year end
            
            
            7.43
            
            
            6.70
            
            
            10.9
            %**BALANCE
                SHEET DATA AT DECEMBER 31**Total
                assets
            
            
            519,749
            
            
            482,727
            
            
            7.7
            %Total
                gross loans
            
            
            369,544
            
            
            345,823
            
            
            6.9
            %Allowance
                for loan losses
            
            
            4,101
            
            
            3,847
            
            
            6.6
            %Total
                deposits
            
            
            434,223
            
            
            403,466
            
            
            7.6
            %Stockholders'
                equity
            
            
            37,306
            
            
            33,384
            
            
            11.7
            %**CONSOLIDATED
                RATIOS**Return
                on average assets
            
            
            0.96
            %
            
            1.00
            %
            
            -4.0
            %Return
                on average equity
            
            
            13.41
            %
            
            13.86
            %
            
            -3.2
            %Tier
                1 capital to average assets (leverage)
            
            
            8.85
            %
            
            8.71
            %
            
            1.6
            %Tier
                1 capital to risk-adjusted assets
            
            
            11.25
            %
            
            11.16
            %
            
            0.8
            %Total
                capital to risk-adjusted assets
            
            
            12.28
            %
            
            12.21
            %
            
            0.6
            %





*All
      share data has been restated to include the effects of 5% stock dividends issued
      in November 2005 and November 2006, and a* *4
      for
      3 stock split issued in July 2005.*







1


STEWARDSHIP  FINANCIAL  CORPORATION  AND SUBSIDIARY





BOARD
      OF
      DIRECOTRS





**STEWARDSHIP
      FINANCIAL CORPORATION AND ATLANTIC STEWARDSHIP BANK**









**Standing
      left to right: John L Steen; Howard R. Yeaton, CPA; Paul Van Ostenbridge; Margo
      Lane; Arie Leegwater; Michael A. Westra, CPA; Robert J. Turner. Seated left
      to
      right: William C. Hanse, Esq.; William J. Vander Eems; Abe Van Wingerden; Harold
      Dyer.**




William
                  C. Hanse, Esq., Chairman
                *Partner,
                  Hanse & Hanse*
                
                Harold
                  Dyer
                *Retired*
                
                Margo
                  Lane
                *Sales
                  and Market Coordinator*
                *PBI
                  - Dansensor America, Inc.*
                
                Arie
                  Leegwater
                Retired
              
              John
                  L. Steen
                *President,
                  Steen Sales, Inc*
                *President,
                  Dutch Valley Throwing Co., Inc.*
                
                Robert
                  J. Turner, Secretary
                *Retired*
                
                William
                  J. Vander Eems
                *President,
                  William Van Der Eems, Inc*
                
                Paul
                  Van Ostenbridge
                *President
                  and Chief Executive Officer*
                *Stewardship
                  Financial Corporation and*
                *Atlantic
                  Stewardship Bank*
              
              Abe
                  Van Wingerden, Vice Chairman
                *President,
                  Abe Van Wingerden Co., Inc*
                *T/A
                  Van Wingerden Farms*
                
                Michael
                  A. Westra, CPA
                *General
                  Manager, Wayne Tile Company*
                
                Howard
                  R. Yeaton, CPA
                *Managing
                  Principal,*
                *Financial
                  Consulting Strategies*




2




2006
      ANNUAL REPORT - STREAMS  OF LIVING WATER








It
                is our pleasure to announce that the Board of Directorsappointed
                William C. Hanse, Esq. as Chairman of the Boardof
                Directors for the Corporation and the Bank followingthe
                retirement of Arie Leegwater who served as Chairman since 1993. Director
                Leegwater will continue to serve as aDirector
                of the Corporation and the Bank. Under DirectorLeegwater's
                term as Chairman, the Bank grew from twobranches
                to ten, with our eleventh branch scheduled toopen
                in early 2007, and total assets grew from $75.5 million to $509.1
                million.**William
                C. Hanse, Esq.,**
              **Chairman
                of the**
              **Board
                of Directors**
            We
                are extremely grateful to Director Arie Leegwaterfor
                leading the Stewardship Financial Corporation andAtlantic
                Stewardship Bank to unprecedented levels.Chairman
                William C. Hanse has been a strong, contributing Director since the
                Corporation's inception.
                Chairman Hanse has a great vision for the future of the Corporation
                and
                the Bank, continuing in the tradition of dedication and commitment
                to our
                shareholders as well as our unique Tithing Program.
            **Arie
                Leegwater, Director**






“On
                behalf of
                the children of the Mustard Seed School,thank
                you for your continued support of the financial aidfund
                at the Mustard Seed School. Your gift allows us toprovide
                an extraordinary education to children in ourcommunity
                who otherwise would not be able to attendMustard
                Seed School.
              
              Students
                at the Mustard Seed School don't just read aboutsubjects,
                they experience them! As part of our mission to"stimulate
                and broaden experiences of city children," the 4thgrade
                recently spent two nights and three days in Lebanon,Pennsylvania
                as part of agriculture studies.
              
              They
                visited farms and a school and interviewed studentsabout
                their rural community. For many of our city children,this
                was their first farming experience.
              
              Your
                generosity makes it possible for us to offer these expe-riences
                to all children regardless of their financial situation.More
                than half of our students are here only becauseof
                generous contributions like yours. Thank you foryour
                faithful support.”
              
              Christine
                Metzger
              
              *Head
                of School,*
              *Mustard
                Seed School, Hoboken, NJ*
            “On
                behalf of
                the Pequannock Township Public Library,I
                would like to thank you for your generous donation tothe
                Library. The Library Board has decided to put your gifttoward
                our annual ArtsFest, a spring celebration of the arts
              in
                our community.
              
              This
                year marks the Library's 10th anniversary.Your
                support will "light a candle" in the Library'sbirthday
                cake, enabling us to engage quality performersfor
                this special event.
              
              We
                will be proud to list Atlantic Stewardship Bankas
                a special sponsor for the ArtsFest. It is scheduled forApril
                22, 2007.
              
              Your
                generosity and thoughtfulness toward the Libraryis
                very much appreciated.”
              
              Rosemary
                Garwood
              *Director,
                Pequannock Township Public
                Library*




3




STEWARDSHIP  FINANCIAL  CORPORATION  AND SUBSIDIARY





MESSAGE
      TO THE SHAREHOLDERS





**DEAR
      SHAREHOLDERS AND** **FRIENDS** **|** We
      are pleased to announce that 2006 was another record year for Stewardship
      Financial Corporation and its wholly owned subsidiary, Atlantic Stewardship
      Bank. Earnings remained strong despite an inverted yield curve and competitive
      interest rate environment. Steady loan growth, enhanced fee income
      and prudent management of the Corporation's net interest margin all contributed
      to our success.





Net
      income for the year ending December 31, 2006 was $4.75 million, a 6.1% increase
      when compared to the $4.48 million earned a year
      earlier. The return on Average Assets was 0.96% and the Return on Average Equity
      was 13.41% for the year ending December 31,2006. Earnings
      per diluted share in 2006 were $0.94 compared to the $0.89 in 2005.





It
      is
      with great pride that we report the Bank surpassed the milestone of $500 million
      in total assets. Stewardship Financial Corporation's total
      assets reached $519.7 million at December 31, 2006, compared to $482.7 million
      at December 31,2005, resulting in growth of 7.7%. Total
      deposits grew 7.6% to $434.2 million and total net loans grew 6.9% to $365.4
      million. Total shareholder equity grew 11.7% to reach $37.3
      million at December 31,2006.





During
      the quarter ended December 31, 2006, Atlantic Stewardship Bank successfully
      completed the sale of its $3.4 million credit card portfolio
      to Elan Financial Services ("Elan"), a national credit card issuer. Under the
      purchase agreement, Elan will issue credit cards under the
      name
      of Atlantic Stewardship Bank and will provide customers with a choice selection
      of credit card products. As part of our overall strategy
      to improve income and overall efficiency of our lending area, the sale provides
      an opportunity to redirect resources to more profitable
      lending areas while continuing to provide our customers with strong credit
      card
      products through Elan. The Corporation also completed a sale of $17.3 million
      of
      available for sale securities that were yielding less than 5 percent. The
      proceeds of the sale were used
      to
      purchase higher yielding securities and to fund loan growth that should reduce
      exposure to future interest rate risk and enhance long-term
      financial performance. The gain from the sale of the credit card portfolio
      and
      the loss from the sale of the securities had a net impact of increasing basic
      and fully diluted earnings per share by $0.03 for the year ended December 31,
      2006.





The
      Atlantic Stewardship Bank Tithing Program increased 9.6% to $755,000 in
      2006,
      surpassing $5 million in total donations. Four hundred deserving organizations
      shared in the Tithe with the Board of Directors once again placing
      particular emphasis on local food banks as well as Christian missions,
      schools and health care facilities. The Bank recognizes the importance
      of local civic and non-profit organizations by supporting them with donations
      as
      well.





In
      2006
      we were pleased to open our tenth branch office at 2 Changebridge Road in
      Montville, NJ. The full service branch includes a drive-up ATM, safe deposit
      boxes, a coin counting machine and a night drop. Located at the busy
      intersection of Route 202 and Changebridge Road, the Montville branch already
      attracted $6.7 million in deposits as of 12/31/06. In keeping with our growth
      strategy, we are building our eleventh branch office in Wyckoff, at 378
      Franklin Avenue. Scheduled to open in the spring of 2007, Wyckoff will be
      a full
      service branch offering a drive-up ATM, safe deposit boxes, a
      coin
      counting machine and a night drop. We look forward to serving our
      new,
      as well as existing, Wyckoff customers.





We
      introduced several new products and services during 2006 in an effort to
      improve our customer's banking experience. In March, we introduced




"Thank
                you for your generous gift to the Children's Aidand
                Family Services. Because of your demonstrable beliefin
                the agency, we can continue to make a difference inthe
                lives of the vulnerable children and families we serve.You
                make it possible for us to help children who have been through trauma
                heal
                from a difficult past and find aloving,
                adoptive family. You make it possible for us toprovide
                vitally needed basics, such as diapers, wipes and formula, to families
                of
                babies who are struggling to makeends
                meet. You make it possible for us to teach coping skills to children
                who
                are struggling with self-esteem issue and need to improve their
                communication skills.Together,
                we helped 12,000 children and familieslast
                year. On behalf of the staff and Board of Children's Aid and Family
                Services, I thank youfor
                making so much possible for so many."Robert
                B. Jones, Ph.D.*President
                & CEO,**Children's
                Aid and Family Services, Inc.**Paramus,
                NJ*




4


2006
      ANNUAL REPORT ~ STREAMS OF LIVING WATER




a
      special
      overdraft service called Overdraft Privilege for our consumer checking account
      customers. Overdraft Privilege provides customers with
      a
      safety net up to $500 to prevent the unnecessary embarrassment and additional
      charges of having a check returned to a merchant.





For
      our
      small and mid-sized business customers we introduced the Business Freedom
      Checking Account. The Business Freedom Checking
      Account is free for the first five years and offers unlimited transactions.
      Plus, the customer receives a credit of up to $100 toward the
      first
      order of business checks. This offer also includes free checking accounts for
      the employees of Business Freedom Checking customers.





In
      an
      effort to attract more youth savings accounts, we introduced a kid's only
      webpage and re-branded our Save It @ Atlantic Stewardship Bank kids
      statement savings account.







Our
                      investment in technology continued in 2006 as we upgraded our
                      Online
                      Bankingproduct
                      with a new security service to further help protect our customers
                      fromidentity
                      theft and fraud. This superior security technology protects
                      customers'
                      accounts from unauthorized access, identifies the true owner
                      of the
                      computer by recognizing notonly
                      the password, but the computer, as well as providing security
                      from any
                      computer,in
                      any location.
                  
                  **ABOVE
                      LEFT TO RIGHT**
                    
                    **Director
                      Abe Van Wingerden and****ASB
                      Tithing Coordinator Diane Kerner.**
                    
                    **Atlantic
                      Stewardship Bank's Montville Branch.**
                    
                    **The
                      Montville Branch Ribbon Cutting
                      Ceremony.**
  Our
        investment in technology continued in 2006 as we upgraded our Online Banking product
        with a new security service to further help protect our customers from identity
        theft and fraud. This superior security technology protects customers' accounts
        from unauthorized access, identifies the true owner of the computer by
        recognizing not only
        the
        password, but the computer, as well as providing security from any computer, in
        any
        location.
  In
        November 2006, the Stewardship Financial Corporation and Atlantic Stewardship Bank
        announced the retirement of Arie Leegwater as Chairman of the Board of both
        the
        Corporation and the Bank and the appointment of
        William C. Hanse, Esq. as the new Chairman of the Board of Directors for
        the
        Corporation and the Bank. We are pleased to report Mr.
        Leegwater will continue to serve as a Director of the Corporation and the
        Bank.





In
      an
      effort to address the business needs of each of our markets, an additional
      New
      Business Development Board was formed to focus solely
      on
      expanding the Morris County market. This Morris Board will assist management
      in
      growing deposits as well as provide leads for commercial loans.





In
      closing, we wish to thank our ever-growing family of customers for banking
      at
      the Atlantic Stewardship Bank for as our customer base grows
      so
      does our ability to share with those who are in need. Our continued success
      is
      made possible by the hard work and dedication of all
      Bank
      associates, at every level of the organization. We are grateful to our
      shareholders for their loyal support of the Bank and its mission. Finally,
      we are most thankful to our Lord, Jesus Christ, from whom all good things
      come.





/s/
                William C. Hanse
            /s/
                Paul Van OstenbridgeWilliam
                C. Hanse, Esq.
            Paul
                Van Ostenbridge*Chairman
                of the Board of Directors*
            *President
                and Chief Executive Officer*




5





STEWARDSHIP  FINANCIAL  CORPORATION  AND SUBSIDIARY





SHAREHOLDER
      INFORMATION





The
      Annual Shareholders' Meeting for Stewardship Financial Corporation will be
      held
      at the Christian Health Care Center, 301
      Sicomac Avenue, Wyckoff, NJ on Tuesday, May 8, 2007 at 7:00 pm (please
      use the Mountain Avenue entrance). The Corporation had
      982
      Shareholders of Record on December 31, 2006.




Registrar
      and Transfer Company, 10 Commerce Drive, Cranford, NJ
      07016,
      is the transfer agent for Stewardship Financial Corporation common
      stock. We invite you to contact them at 800-368-5948 should
      you wish to transfer stock or to join the Dividend Reinvestment
      Plan.





**DIVIDEND** **** **REINVESTMENT
      PLAN**





A
      total
      of 759 Shareholders currently participate in the Corporation's Shareholder
      Dividend Reinvestment Plan, representing 1,777,000 or 35.4% of all shares
      outstanding. Plan participants reinvest cash dividends
      to purchase new shares of stock at 95% of the market value,
      based on the most recent trades. Shareholders interested in
      joining the Dividend Reinvestment Plan may request a Plan Membership
      Form from Registrar and Transfer Company.





**ANNUAL
      REPORT**





Stewardship
      Financial Corporation will provide a copy of the Annual
      Report on Form 10K, free of charge to any shareholder upon
      written request, including the financial statements and schedules
      which have been filed with the Securities and Exchange Commission.
      Requests should be addressed to Stewardship Financial
      Corporation, Att: Corporate Services, 630 Godwin Avenue,
      Midland Park, NJ 07432-1405.














**Madison
      Avenue Crossroads Mission. Pictured from left to right: Alma Baxter,** **Assistant
      Vice President; Thomas Henion; Pastor John Algera; Richard Schuurman, New
      Business Development; and Colin Watson.**





**CORPORATE
      GOVERNANCE**




The
      Board
      of Directors' Audit, Nominating and Compensation Committee
      Charters, as well as the Code of Ethical Conduct for
      Senior Financial Managers, are available for viewing at www.asbnow.com.
      Visit the "Home" page and refer to "Investor Relations"
      section. The above-mentioned information is also available
      in print to shareholders requesting the same in writing.





**RECENT
      HISTORY OF DIVIDENDS PAID**




The
      Board
      of Directors of the Stewardship Financial Corporation is
      pleased to pay, on February 1, 2007, a quarterly dividend to Shareholders
      of Record on January 15, 2007, in the amount of $0.09. Future
      dividends are expected to be paid on May 1, August 1, and
      November 1, subject to Board approval.





November
                  15, 2006
              5%
                  stock dividendNovember
                  1, 2006
              $0.08August
                  1, 2006
              $0.08May
                  1, 2006
              $0.07February
                  1, 2006
              $0.07November
                  15, 2005
              5%
                  stock dividendNovember
                  1, 2005
              $0.07August
                  1, 2005
              $0.06July
                  1, 2005
              4
                  for 3 splitMay
                  2, 2005
              $0.06February
                  1, 2005
              $0.06
  6


2006
      ANNUAL REPORT - STREAMS OF LIVING WATER




OUR
      2006
      TITHING PROGRAM





**EACH** **ONE** **SHOULD USE WHATEVER** **GIFT** **HE
      HAS** **RECEIVED** **TO SERVE OTHERS,** **FAITHFULLY** **ADMINISTERING** **** **GOD'S** **GRACE** **IN** **ITS** **** **VARIOUS** **FORMS.**




**1
      PETER 4:10**





A
      bank
      that gives away 10% of its pre-tax earnings every year
      is
      highly unusual. In fact, it's what makes Atlantic Stewardship
      Bank unique; the Bank was founded on the Biblical
      Old Testament tenet of tithing or giving back one-tenth to
      God.
      Each year, Atlantic Stewardship Bank tithes, or shares ten
      percent of its pre-tax earnings with Christian and local non-profit
      organizations selected by the Board of Directors. The
      original founders of the Bank were so deeply committed to this concept that
      the
      Tithing Program defines our mission and
      is
      part of our corporate-by-laws.





In
      2006,
      the Bank made its largest tithe to date, sharing over $755,000 with 400
      recipients. Since the program's inception, Atlantic
      Stewardship Bank has distributed over $5 million in total
      tithe donations.





We
      thank
      God for His continued blessings which allow us to grow
      and
      prosper, and for our ever-growing loyal customer base.








**BELOW
      LEFT TO RIGHT**




**ASB
      associates brave the rainy weather to work at Paterson** **Habitat
      for Humanity Corporate Challenge.**





**Pictured
      from left to right Richard Densel, Midland Park Assistant Branch Manager and
      Kelly Nienhouse, Waldwick** **Branch
      Manager presenting a Tithing check to Susan Kuiken of Touch the World
      Ministries.**





"On
                  behalf of the homeless children and their families, the staff and
                  trustees
                  of Interfaith, I would like to express our appreciation and gratitude
                  for
                  your generous support. Your generous gift directly impacts the
                  lives of
                  our community's most needy individuals, homeless children and their
                  families.Your
                  contribution not only helps us meet an immediate need,it
                  lays the groundwork for long-term self-sufficiency for many of
                  our
                  clients. In 2006, contributions such as yours allowed ICHF to serve
                  13
                  families (20 adults & 24 children), 5 single women,85%
                  of which were successful in moving forward out of the
                  shelter.Once
                  again, on behalf of everyone at ICHF, thank you."Joann
                  Bjornson, MSW*Executive
                  Director,**Interfaith
                  Council for Homeless Families of Morris County**Morristown,
                  NJ*





**Thanks
      to our ever-growing family of customers, ASB's Tithing Program** **has
      increased its donations every year.**


7


STEWARDSHIP  FINANCIAL  CORPORATION  AND SUBSIDIARY





**WE
      ARE PLEASED TO HAVE ASSISTED THE FOLLOWING ORGANIZATIONS WITH OUR 2006 TITHE
      DISTRIBUTION:**




*Africa
                  Inland Mission
                *American
                  Christian School
                The
                  Back to God Hour
                *Baptist
                  Haiti Mission
                *Bessie
                  Green Community, Inc.
                *Bethany
                  Christian Services
                *Calvary
                  Christian Academy
                *Calvin
                  College
                *Calvin
                  Theological Seminary
                *Care-A-Lot
                  Christian Nursery School
                *Cary
                  Christian Center, Inc.
                *Cathedral
                  Choir
                *Christian
                  Health Care Center
                *Christian
                  ReformedWorld
                  Relief Committee
                *Christian
                  Schools InternationalFoundation
                  Trust Fund
                *CUMAC-ECHO,
                  Inc.
                *Dawn
                  Treader Christian School(ECUMP)
                *Don
                  Bosco Preparatory High School
                *Double
                  Harvest, Haiti
                *Eastern
                  Christian Children's Retreat
                *Eastern
                  Christian School Association"Elim
                  Christian Services
                *Eva's
                  Village
                *Faith
                  Ministries of White Lake, NY
                *Father's
                  Cupboard
                *Fellowship
                  Homes
                *Fig
                  Orchard
                *First
                  African Methodist EpiscopalZion
                  Church Feeding Program
                *First
                  Choice Women'sResource
                  Centers
                *Florence
                  Christian Home
              
              *Friendship
                  Ministries
                *Gideons
                  InternationalLakeland
                  Camp
                *Gideons
                  InternationalPassaic
                  Valley Camp
                *Gideons
                  InternationalPaterson
                  Camp
                *Gideons
                  InternationalRamapo
                  Camp
                *Good
                  Shepherd Mission, Inc.
                *Goshen
                  Christian School
                *Grace
                  Counseling Ministries
                *Habitat
                  for Humanityof
                  Bergen County
                *Harvest
                  Outreach Ministries
                *Hawthorne
                  Christian Academy
                *Hawthorne
                  EcumenicalSocial
                  Service Fund - Food Pantry
                *Holistic
                  Ministries Team
                *Holland
                  Christian Home
                *Hope
                  Haven
                *International
                  Networx
                *Kuyper
                  College
                *Lancaster
                  Bible College
                *Life
                  Givers Network
                *Lighthouse
                  PregnancyResource
                  Center
                *Little
                  Sisters of The Poor &St.
                  Joseph's Home for the Elderly
                *Lord's
                  Day Alliance of NJ
                *The
                  Luke Society
                *Madison
                  AvenueBaptist
                  Church/Academy
                *Madison
                  Avenue CrossroadsCommunity
                  Ministries
                *Mary
                  Help of Christians Academy
              
              *Mid
                  Atlantic Ministries
                *Mississippi
                  ChristianFamily
                  Services, Inc.
                *Mt.
                  Hope Camp
                *Mustard
                  Seed School
                *Netherlands
                  ReformedChristian
                  School
                *New
                  City Kids
                *New
                  Hope CommunityDevelopment
                  Center
                *New
                  Hope Ministries
                *New
                  Jersey Family Policy Council
                *North
                  Jersey Home SchoolAssociation
                *Northside
                  Community ChristianReformed
                  Church - Day Camp
                *Northside
                  Community ChristianReformed
                  Church - Food Pantry
                *Northwest
                  Christian School
                *Nyack
                  College
                *Paterson
                  Habitat For Humanity
                *Puritan
                  ReformedTheological
                  Seminary
                *Prison
                  Fellowship Ministries
                *Prison
                  Fellowship Ministries -Angel
                  Tree Program
                *Ridgewood
                  YMCA
                *Ringwood
                  Christian School
                *Ron
                  Hutchcraft Ministries
                *St.
                  Anthony's School
                *St.
                  Augustine Presbyterian ChurchMulti
                  Service Center
                *St.
                  Elizabeth's Interparochial School
                *St.
                  Joseph's RegionalMedical
                  Center Foundation
              
              *St.
                  Joseph's Wayne HospitalFoundation
                *St.
                  Luke CommunityDevelopment
                  Center
                *St.
                  Philip's - Camp YouthDevelopment
                  Program &Coffee
                  Pot Ministry
                *St.
                  Pius X School
                *The
                  Salvation Army -Paterson
                  Branch
                *Siena
                  Village At Wayne
                *Sonshine
                  Christian Academy
                *Star
                  of Hope Ministries, Inc.
                *Strategic
                  Prayer Command
                *Sussex
                  Christian School
                *Teen
                  Challenge of NJ
                *Touch
                  The World Ministries
                *Trinity
                  Christian School
                *United
                  Paterson DevelopmentCorporation
                  - After SchoolLiteracy
                  & Safe Space Programs
                *Unity
                  Christian Reformed ChurchAfter
                  School Program
                *Veritas
                  Christian Academy
                *Waldwick
                  Seventh DayAdventist
                  School
                *Wayne
                  Interfaith Network
                *Western
                  Theological Seminary
                *Westminster
                  Theological Seminary
                *World
                  For Christ Crusade, Inc.
                *Wyckoff
                  Christian Pre-School
                *Wyckoff
                  Family YMCA
                *Wyckoff
                  Reformed ChurchFood
                  Pantry
                *YWCA
                  of Bergen County




**ADDITIONALLY,
      THE BANK HAS PROVIDED SUPPORT THROUGHOUT 2006 TO THE FOLLOWING
      ORGANIZATIONS:**




ABS
                  CBN Foundation, Inc.
                *Academy
                  of Our Lady School
                American
                  Cancer SocietyBergen
                  County
                American
                  Diabetes Foundation
                American
                  Heart Association
                American
                  Legion Auxiliary
                American
                  Legion Post 53
                American
                  Red Cross Bergen Hudson Chapter
                Barnert
                  Hospital Foundation
                Bergen
                  Community CollegeFoundation
                Bergen
                  County Housing Coalition
                Bergen
                  County Mounted
                Deputy
                  Sheriff Association, Inc.
                Bergen
                  County United Way -Warm
                  Homes Program
                Bergen
                  County Wildcats
                Special
                  Olympics Program
                Bergen
                  Philharmonic Orchestra
                Bergen
                  Raiders Soccer Club
                *Bethlehem
                  Lutheran ChurchUpward
                  Christian Basketball League
                Boonton
                  Food Pantry
                Boys
                  & Girls Club of Morris County
                Boys
                  & Girls Club of Paterson
              
              Boys
                  & Girls Club of Wayne
                Boy
                  Scouts of America Northern NJ Council
                Camp
                  Hope of Hackensack
                Center
                  for Food Action
                Children's
                  Aid & Family Services, Inc.
                Chilton
                  Memorial Hospital Foundation
                *Christian
                  Overcomers
                Cody's
                  Foundation
                Community
                  Blood ServicesFoundation
                *Community
                  Church at Upper Ridgewood - Project Hope, HaitiCommunity
                  Housingin
                  Partnership (CHIP)
                Community
                  Meals, Inc.
                *Concerts
                  of Prayer -Greater
                  New YorkCo-Operative
                  Nursery Schoolof
                  Ridgewood
                Creative
                  Living Counseling Center
                Cut
                  Shot Volleyball
                Cystic
                  Fibrosis Foundation
                DACCKs
                  Groupfor
                  Supportive Housing
                Dan
                  Galorenzo Foundation
                Deborah
                  Hospital Foundation
              
              *DePaul
                  Catholic High School
                *Emmanuel
                  Baptist Church -Women
                  of Emmanuel
                Emmanuel
                  Cancer Foundation
                Fair
                  Lawn All SportsRecreation
                  Department
                *Faith
                  Chapel Reformed Church Youth Ministry
                Flow
                  Follies
                Forum
                  School
                Foundation
                  For Free Enterprise
                Foundation
                  for the Handicapped
                Franklin
                  Lakes Chamber of Commerce
                Friends
                  of Charlene Vine
                Friends
                  of the Hermitage
                Friends
                  of the Louis Bay 2nd Library
                Friends
                  of the Midland Park Library
                Frost
                  Valley YMCA
                Gift
                  of Life - Rotary Clubsin
                  District 7490
                Gift
                  of Life - Abbott & CasertaRealtor
                  Golf Outing
                Girl
                  Scout Council of Bergen County
                Hawthorne
                  Baseball/Softball Association
              
              Hawthorne
                  Board of Health -Food
                  Pantry
                Hawthorne
                  Caballeros
                Hawthorne
                  Chamber of Commerce
                Hawthorne
                  Community Library Foundation, Inc.
                Hawthorne
                  Cubs Football Association
                Hawthorne
                  Domestic ViolenceResponse
                  Team
                Hawthorne
                  Education Foundation
                Hawthorne
                  Fall Baseball
                *Hawthorne
                  Gospel Church -Ecuador
                  Mission Trip
                Hawthorne
                  High School
                Hawthorne
                  High School PTO
                Hawthorne
                  High School - Share
                Hawthorne
                  Hurricane
                Hawthorne
                  Knights of Columbus
                Hawthorne
                  Lions Club
                Hawthorne
                  North Haledon Firefighters
                Hawthorne
                  PBA Local #200
                Hawthorne
                  Rotary Club
                Hawthorne
                  Soccer Association
                Hawthorne
                  Special Recreation
                Hawthorne
                  - Thomas JeffersonSchool
                  PTO
                Hawthorne
                  VFW District #1


8




2006
      ANNUAL REPORT - STREAMS  OF LIVING WATER





Hawthorne
                Volunteer
              Ambulance
                Corps.
              Hawthorne
                Volunteer Fire Department
              Hawthorne
                - Washington School PTO
              Healing
                The Children Midlantic, Inc.
              *Hispanic
                Multi-Purpose
              Service
                Center
              *Hope
                House
              *Hosanna
                Choir Committee Fund
              *Interchurch
                Softball League
              *Interfaith
                Shelter &
              Community
                Outreach
              Jack
                Elwood Fund
              Jamboree
                Scholarship Fund, Inc.
              Jenna
                Staup Memorial Fund
              Jerry
                SpezialeCommunity
              OutreachFoundation
              Jewish
                Family & Children's Service
              of
                Wayne
              Knights
                of Columbus #5257 -
              Waldwick
              Leukemia
                & Lymphoma Society
              Lodi/Garfield
                UNICO
              The
                Love Fund of Midland Park
              The
                Love Fund of Wyckoff
              Mahwah
                Youth Sports Boosters
              March
                of Dimes NJ Chapter
              Maroons
                Soccer Club of Ridgewood
              *Mattaniah
                Choir Committee
              Memorial
                Sloan-Kettering
              Cancer
                Center
              Midland
                Park Ambulance Corps.
              Midland
                Park Baseball Association
              Midland
                Park Boy Scout Troup #157
              Midland
                Park High School
              Midland
                Park Junior Football &
              Cheerleading
                Association
              Midland
                Park Lions Club
              Midland
                Park PBA
              Midland
                Park Public Education
              Foundation
              Midland
                Park Volunteer Fire Company
              Mohawk
                Athletic Club of Hawthorne
              Molly
                Foundation for
              Juvenile
                Diabetes
              Montclair
                State University
              Montville
                Baseball Softball
              Association
              Montville
                Educational Foundation
              Montville
                Kiwanis Club
              Montville
                Township Chamber
              of
                Commerce
              Montville
                Township
              Drug
                Awareness Council
              Montville
                Township First Aid Squad
              Montville
                Township
              Fourth
                of July Committee
              Montville
                Township High School
              Montville
                Township
              High
                School DECA
              Montville
                Township
              High
                School Ice Hockey
              Montville
                Township Historical Society
              Montville
                Township
              Literacy
                Foundation
              Montville
                Township PBA
              Montville
                Township Social Services
              *Mount
                Bethel Baptist Church -
              MLK.Jr.
                Day
            
            Muscular
                Dystrophy
              New
                Bridge Services, Inc.
              New
                Jersey Citizen Action
              New
                Jersey Citizen Action
              Education
                Fund
              New
                Jersey Community
              Development
                Corporation
              New
                Jersey Community Loan Fund
              *New
                Jersey District-Lutheran Church
              Missouri
                Synod
              New
                Jersey International Film &
              Screenplay
                Festival
              New
                Jersey State Organization
              of
                Cystic Fibrosis
              North
                Jersey Chorus
              *North
                Jersey Home School
              Association
                Choral Program
              North
                Stars Association for
              Competitive
                Gymnastics
              Oasis
              Operation
                Smile
              Order
                of the Lamp Scholarship Fund
              *Our
                Lady of Consolation Church
              Youth
                Ministry
              *0ur
                Lady of the Magnificat Church
              Ministry
                Programs
              *0ur
                Lady of the Valley School
              PackanackCommunity
                Church
              Mission
                Trip
              Paramus
                Association for
              Competitive
                Gymnastics
              Paramus
                Girls' Softball Association
              *Parish
                Nursing Inter-Faith Training
              and
                Outreach Program
              Passaic
                County Bar Association
              Passaic
                County Council on Alcohol
              &
                Drub Abuse
              Passaic
                County Technical Institute
              Passaic
                Valley Fraternal Order
              of
                Police Lodge #181
              *Paterson
                YMCA
              Paterson
                Youth Photography Project
              *Pequannock
                - Holy Spirit School
              Pequannock
                Street Fair
              Pequannock
                Township First Aid
              &
                Rescue Squad
              Pequannock
                Township Food Pantry
              Pequannock
                Township High School
              Pequannock
                Township High School
              Marching
                Band
              Pequannock
                Township Little League
              Pequannock
                Township PBA
              Local
                #172
              Pequannock
                Township Public Library
              Pequannock
                Township Volunteer
              Fire
                Department Engine Co. #1
              Pequannock
                Township Volunteer
              Fire
                Department Engine Co. #2
              Pequannock
                UNICO
              Pequannock
                Valley Middle School
              *Portersville
                Christian School
              Project
                Lovematch
              *Project
                Timothy
              Prospect
                Park Volunteer
              Fire
                Department
              Ramapo-Bergen
                Animal Refuge, Inc.
              Ramapo
                Boosters Association
              Ramapo
                High School
              Ridgewood
                Baseball Association, Inc.
            
            Ridgewood
                Biddy Basketball
              Ridgewood
                Boys
              Lacrosse
                Association
              Ridgewood
                Chamber of Commerce
              Ridgewood
                Downtown
              for
                the Holidays
              Ridgewood
                Education Foundation
              Ridgewood
                Emergency Services
              Ridgewood
                Fire Department
              Association
              Ridgewood
                First Night
              Ridgewood
                Fourth of July Committee
              Ridgewood
                Fred d'Elia Run
              Ridgewood
                High School Football
              Scholarship
                Committee
              Ridgewood
                Maple Park Turf
              Ridgewood
                PBA Local #20
              Ridgewood
                Public Library
              Ridgewood
                Rotary Clubs
              Ridgewood
                SHARE
              Ridgewood
                Singers
              Ridgewood
                Softball
              *Ridgewood
                United Methodist Church
              Outreach
                Programs
              Ridgewood
                Woman's Club
              Robert
                P. Giaimo Memorial Fund
              Royal
                Family Kids Camp
              Ruth
                Estrin Goldberg Memorial
              Saddle
                River Day School
              Development
                Fund
              *St.
                Joseph Church - Haiti Ministry
              *St.
                Jude Children's
              Research
                Hospital
              *St.
                Leon Armenian Church
              Youth
                Programs
              *St.
                Nicholas Church
              Outreach
                Programs
              *St.
                Peter's College
              Several
                Sources Foundation
              Shomrei
                Torah - Wayne Congregation
              Social
                Service Association
              of
                Ridgewood & Vicinity
              Sons
                of the American Legion Post
              Special
                Olympics of New Jersey
              Special
                Projects for Underprivileged
              and
                Disabled
              Suburban
                Woman's Club
              of
                Pompton Plains
              Summit
                Speech School
              Temple
                Beth Tikvah
              Temple
                Israel
              Theo'sWork,
                Inc.
              Tomorrow's
                Children's Fund
              Torpedoes
                Soccer Club
              Tri
                County Chamber of Commerce -
              Wayne
              Tri-County
                Cruisers, Inc.
              *Turning
                Point
              UFC
                Bergen Bike Tour
              *United
                Methodist Church of Wayne
              Mission
                Programs
              Valley
                Hospital
              Veritans
                Camp
              Waldwick
                Baseball Association
              Waldwick
                Borough
              Waldwick
                Community Alliance
              Waldwick
                Education Foundation
              Waldwick
                Fire Department
            
            Waldwick
                High School
              Waldwick
                High School Booster Club
              Waldwick
                High School and
              Middle
                School
              Waldwick
                - Julia A.Traphagen
              School
                PTO
              Waldwick
                Lions Club
              Waldwick
                PBA
              Waldwick
                Police Department
              Waldwick
                Public Library
              Waldwick
                Soccer Association
              Waldwick
                Travel Baseball
              Waldwick
                Volunteer
              Ambulance
                Corps.
              Wayne
                Adult Community Center
              Wayne
                - Albert Payson Terhune
              School
                PTO
              Wayne
                Community Volunteer
              Fire
                Company #1
              Wayne
                Counseling and
              Family
                Services
              Wayne
                Day
              Wayne
                Elks Lodge #2181
              Wayne
                Hills High School
              Wayne
                Hills High School
              Band
                Boosters
              Wayne
                Hills High School Boys
              Basketball
                Parents Booster Club
              Wayne
                Hills High School
              Cheerleading
                Parents Association
              Wayne
                - Lafayette Elementary
              School
                PTO
              Wayne
                Lions Club
              Wayne
                Little League - NJ District 2
              Wayne
                Police Athletic League
              Wayne
                PBA Local 136
              Wayne
                - Pompton Falls Volunteer
              Fire
                Department #3
              Wayne
                - Preakness Volunteer
              Fire
                Company #4
              Wayne
                Public Library
              Wayne
                Rotary Club Foundation
              Wayne
                Schools - All-Wayne Orchestra
              Wayne
                - Schuyler Colfax
              Middle
                School PTO
              Wayne
                Township Memorial
              First
                Aid Squad
              Wayne
                Valley High School PTO
              West
                Bergen Mental Healthcare
              William
                Paterson University
              Wyckoff
                Education Foundation
              Wyckoff
                Fire Department
              Wyckoff
                Fire Department
              Ladies
                Auxiliary
              Wyckoff-Midland
                Park Rotary Club
              *Wyckoff
                Reformed Church
              Youth
                Ministry
              Wyckoff
                Volunteer Ambulance Corps.
              Wyckoff
                Volunteer Fire Department
              Company
                #2
              YM-YWHA
                of North Jersey
              Youth
                Consultation Service
              
              **Denotes
                Christian Charity*


9


STEWARDSHIP FINANCIAL CORPORATION AND
      SUBSIDIARY




2006
      TITHING PROGRAM RECIPIENTS





The
      Atlantic Stewardship Bank is pleased to feature three outstanding organizations
      that serve the Bank's local communities. It is an honor for
      us to
      help support their work.





**FOUNDATION
      FOR THE HANDICAPPED,** **INC.** **(FOUNDATION
      INDUSTRIES)**





Wayne,
      NJ
      - www.foundationhand.com





The
      Foundation for the Handicapped, in Wayne, NJ, has been helping the
      mentally, emotionally and physically disabled and special needs adults
      in
      the community through rehabilitation and vocational training for
      40
      years. The sheltered workshop has allowed well over 200 handicapped
      people gain confidence, self-sufficiency and purpose by giving them the
      opportunity to earn a wage in a supportive envi- ronment.
      Their caring and dedicated staff is constantly adapting and
      improving the programmatic components of the organization to
      best
      serve special needs workers and to best service clientele. A
      501 (C)
      3 organization, the Foundation for the Handicapped is supported
      by the work it does and the generous donations of companies
      like Atlantic Stewardship Bank and contributions from caring
      individuals.







**The
      Foundation for the Handicapped.**




**CHRISTIAN
      HEALTH CARE CENTER**


Wyckoff,
      NJ - www.christianhealthcare.org




The
      Christian Health Care Center was founded in 1911 by a group of deacons
      from the Reformed tradition. Today, CHCC - a non-profit organization
      open to anyone regardless of race, sex, or religion - provides
      a continuum of high-quality, family-centered elder-care and
      mental-health services in a compassionate and loving environment
      consistent with the Christian principles on which the
      institution was founded.




Elder-care
      services include Heritage Manor; Southgate; The
      Longview; Hillcrest Residence; Evergreen Court; and Christian
      Health Care Adult Day Services of Wayne and Wyckoff.







**Christian
      Health Care Center.**





Mental-health
      services include Ramapo Ridge Psychiatric Hospital; Christian
      Health Care Counseling Center; Ramapo Ridge Partial Program;
      and Pathways.


**CUMAC
      ECHO,** **INC.**


Paterson,
      NJ - www.cumacecho.org





CUMAC
      is
      a non-profit, outreach ministry of the United Methodist Church
      dedicated to the alleviation of poverty and hunger in Paterson,
      Passaic County and northern New Jersey.





Begun
      in
      the late 1970s, CUMAC has grown from a tiny food pantry in
      a
      church closet, to a 28,000 square foot facility in downtown Paterson
      that houses a job training facility, a thrift shop, food storage
      for other local agencies and a busy food pantry providing both ongoing and
      emergency relief to clients. In addition, CUMAC sponsors
      an after-school tutorial program in conjunction with the
      South-West Paterson Cooperative Parish of the United Methodist
      Church.





Their
      work relies heavily on donations from individuals and groups, and
      is
      also made possible by state, county and agency grants, income
      from their thrift shop and proceeds from fundraising events.







**CUMAC
      Echo, Inc.**  10


2006
      ANNUAL REPORT - STREAMS OF LIVING WATER




CUSTOMER
      CORNER





The
      Atlantic Stewardship Bank is known throughout northern New Jersey not only
      for
      its unique Tithing Program, but also for delivering exceptional
      customer service. We understand that happy, satisfied customers allow the Bank
      to continue to grow. We take great pride in the fact
      that
      we remain one of the few truly local banks, striving to know each and every
      customer by name. As our customer base grows, so
      does
      our ability to help those most in need. Each year we take this opportunity
      to
      feature testimonials from our loyal customers.








**Barclay
      family**





"We
      bank
      at Atlantic Stewardship Bank because they are one of a
      kind -
      a bank that can count their customers as friends and does so forever. They
      are
      respected throughout the region for remaining true
      to
      their long time commitment to the community with their generous
      support of local religious, civic and charitable groups. We
      have
      kept our personal and business accounts at ASB for many years. Other banks
      can't
      come close to matching their special brand of
      personal service.





We've
      lived in Ridgewood for most of our lives. It's a wonderful place to
      raise
      a family. Contributing to worthwhile causes brings out the best
      in
      all of us. 'Doing good in the neighborhood' adds purpose to
      our
      lives and gives us an opportunity to make a difference, however
      small in someone's life."





Rich
      Barclay


*Ridgewood,
      NJ*





Aviation
      International News was founded in 1972. Today AIN publishes
      34 print and online editions, including the AIN monthly and
      on-site daily issues at NBAA, EBACE and Heli-Expo, and the
      four
      major International Air Show Events around the world-the Paris,
      Farnborough, Singapore and Dubai Air Shows. In 2003 AIN launched
      Business Jet Traveler, the first-ever publication directed to the actual end
      users of business jets. In 2006 the company launched AINtv,
      offering online TV coverage of all major aerospace events.








**Wilson
      Leach**





Wilson
      Leach, Managing Director/Founding
      Publisher of
      Aviation International News, has
      this
      to say about Atlantic Stewardship
      Bank: "We've been
      banking with Atlantic Stewardship
      Bank for seven years.
      When Irene Flannagan came
      aboard as my Administra- tion
      Manager, she introduced me
      to
      Raymond Santhouse, Vice
      President and Branch Man- ager
      at
      the Midland Park office. The
      rest
      is history. We started with
      a
      few business accounts


and
      because of their exceptional customer service, we now have our entire
      relationship with Atlantic Stewardship Bank."





Mr.
      Leach
      is an active 4,000-hour commercial pilot. He is also on the board
      of
      directors of Turnstile Publishing Company, publisher of Golfweek
      magazine, and the Corporate Angel Network, a nonprofit organization that
      arranges free air transportation for cancer patients traveling
      to treatment centers by using empty seats on corporate jets.
      Aviation International News is a publication of the Convention News
      Company, Inc., located in Midland Park, N.J.





Wilson
      Leach


*Aviation
      International News*  11




STEWARDSHIP  FINANCIAL  CORPORATION  AND SUBSIDIARY





THE
      BEACH
      CLUB




The
      BEACH
      Club was established in 1992 as an extension of Atlantic Stewardship
      Bank's tithing program as a way for the Bank's employ-ees to reach out and
      help
      those less fortunate. The Bank Employees Assisting
      Charities, or BEACH Club, volunteer members meet after hours
      to
      conduct a variety of activities to benefit the communities in
      which
      the Bank maintains branch offices. Many of the activities are
      branch-oriented and the Bank's customers are always willing to generously lend
      their support.





The
      Club
      conducts annual programs such as a November food drive
      to
      replenish local food pantries, Christmas wish tree, holiday card collection,
      Easter dinner baskets, a supper for the homeless, school
      supply drive, blood drive and more.





Some
      of
      the organizations, which have benefited from the BEACH Club
      programs include Social Service Association of Ridgewood, Star
      of
      Hope Ministries, OASIS Haven for Women & Children, Emmanuel
      Cancer Foundation, Holland Christian Home, as well as local
      food pantries.








**Pictured
      from left to right: Diane Schmitt, Tonni von Schaumburg, Bill Tussi** **and
      Mary Beth Steiginga.**







NEW
      BUSINESS DEVELOPMENT BOARDS




**BERGEN
                BOARD**
              Janyce
                Bandstra
              Richard
                Barclay
              Mark
                Borst
              Douglas
                Bushoven, CPA
              William
                R. Cook
              Thomas
                G. Dykhouse
              Paul
                D. Heerema
              Ruth
                Knyfd
              Bartel
                Leegwater
              Edward
                Nieuwenhuis, Jr., M.D.
              Roger
                Steiginga
              Allen
                Stiles
              James
                D. Vaughan III, Esq.
              David
                Visbeen
              
              **MORRIS
                BOARD**
              Andreas
                Comodromos, CPAAntonia
                Daughtry
            
            David
                De Vries
              Robert
                E. Fazekas
              Garrett
                S. Hoogerhyde, CPA
              Vernon
                Kuiken
              Arie
                Van Vugt
              Anita
                Van Wingerden
              
              **PASSAIC
                BOARD**
              Vince
                Brosnan
              Ernest
                P. De Marco, CPA
              Shanti
                Jost
              Ruth
                Kuder
              Wayne
                R. Kuiken
              William
                A. Monaghan III, Esq.
              Darryl
                Siss, Esq.
              Benard
                W. Thomas, Jr.
              Clifford
                Vander May
              Steve
                Van Der Stad
              Charles
                Verhoog
              Ralph
                Wiegers
            
            **SPECIAL
                APPRECIATION**
              
              We
                extend a heartfelt thank you to ourfriends
                and associates who successfullycompleted
                their terms as members of theBank's
                New Business Development Boards:William
                Bartlett, Janet Braen, DonaldDeBruin,
                George Forshay, Robert Fylstraand
                Dr. Robert Galorenzo. We greatlyappreciate
                all of their efforts in promotingthe
                Bank within the community and lookforward
                to their continued support.




12


ANNUAL REPORT  STREAMS  OF LIVING WATER





OFFICERS





**STEWARDSHIP****FINANCIAL****CORPORATION****OFFICERS**
              
              William
                C. Hanse, Esq.
              *Chairman
                of the*
              *Board
                of Directors*
              
              Abe
                Van Wingerden
              *Vice
                Chairman of the*
              *Board
                of Directors*
              
              Paul
                Van Ostenbridge
              *President
                and*
              *Chief
                Executive Officer*
              
              Robert
                J. Turner
              *Secretary*
              
              Julie
                E. Holland
              *Senior**Vice
                President*
              *and
                Treasurer*
              
              Timothy
                G. Madden
              *SeniorVice
                President*
            
            Angela
                P. Turi
              *Vice
                President*
              
              Mary
                Beth Steiginga
              *Assistant
                Secretary*
              
              **ATLANTIC****STEWARDSHIP****BANK****OFFICERS**
              
              Paul
                Van Ostenbridge
              *President
                and*
              *Chief
                Executive Officer*
              
              Julie
                E. Holland
              *SeniorVice
                President*
              *and
                Treasurer*
              
              Timothy
                G. Madden
              *Senior**Vice
                President*
              
              James
                S. Donado
              *Vice
                President*
              
              Robert
                A. Giannetti
              *Vice
                President*
              
              M.
                Bernard Joustra
              *Vice
                President*
            
            Cynthia
                A. Perrotta
              *Vice
                President*
              
              Richard
                D. Powers
              *Vice
                President*
              
              Raymond
                J. Santhouse
              *Vice
                President*
              
              Gail
                K. Tilstra
              *Vice
                President*
              
              Angela
                P. Turi
              *Vice
                President*
              
              David
                J. Van Lenten
              *Vice
                President*
              
              Robert
                C. Vliet
              *Vice
                President*
              
              Alma
                M. Baxter
              *Assistant
                Vice President*
              
              Richard
                Densel
              *Assistant
                Vice President*
              
              Diane
                Ingrassia
              *Assistant
                Vice President*
              
              John
                S. Krantz
              *Assistant
                Vice President*
              
              Thomas
                A. Maselli
              *Assistant
                Vice President*
              
              James
                O'Brien
              *Assistant
                Vice President*
              
              Louise
                Rohner
              *Assistant
                Vice President*
              
              Ellie
                King
              *Assistant
                Secretary*
              
              Grace
                Lobbregt
              *Assistant
                Secretary*
              
              Michael
                Mangine
              *Assistant
                Secretary*
            
            Kristine
                Rasile
              *Assistant
                Secretary*
              
              Mary
                Beth Steiginga
              *Assistant
                Secretary*
              
              Tonni
                von Schaumburg
              *Assistant
                Secretary*
              
              Peggy
                Weber
              *Assistant
                Secretary*
              
              Virginia
                M. Lowe
              *Compliance
                Officer*
              
              Amanda
                Bialy
              *Administrative
                Assistant*
              
              Yanet
                Cordero de Marti
              *Administrative
                Assistant*
              
              Daniel
                J. Girlando
              *Administrative
                Assistant*
              
              LarryMarra
              *Administrative
                Assistant*
              
              Amy
                Miller
              *Administrative
                Assistant*
              
              Kelly
                Nienhouse
              *Administrative
                Assistant*
              
              Jed
                Paterson
              *Administrative
                Assistant*
              
              Judi
                Rothwell
              *Administrative
                Assistant*
              
              Jean
                M. Schaver
              *Administrative
                Assistant*
              
              William
                J. Tussi
              *Administrative
                Assistant*
              
              Kenneth
                C. Wehinger
              *Administrative
                Assistant*





**BELOW
      LEFT TO RIGHT**





**Pictured
      left to right: James O'Brien, Assistant Vice President &** **Mortgage
      Loan Manager and Robert C. Vliet, Vice President & Consumer Loan
      Manager.**





**Members
      of the ASB Commercial Lending Team: David Van Lenten,** **Vice
      President & Commercial Mortgage/Construction Loan Manager;** **James
      Donado, Vice President/Relationship Manager; Timothy Madden, Senior Vice
      President & Senior Commercial Loan Manager; M. Bernard Joustra, Vice
      President/Relationship Manager; Cynthia Perrotta, Vice President/Relationship
      Manager.**








13




STEWARD SHIP  FINANCIAL  CORPORATION  AND SUBSIDIARY




STEWARDSHIP
      FINANCIAL CORPORATION




Prior
      to
      the establishment of the Stewardship Financial Corporation
      holding company, the stock was originally issued in the name of Atlantic
      Stewardship Bank. The initial offering required
      a minimum purchase of 200 shares at a price of $10.00
      per share.





The
      Corporation declared its first cash dividend in 1990 and cash
      dividends have been paid annually. To assist interested  shareholders
      in purchasing additional shares of stock, the Board of
      Directors introduced a Dividend Reinvestment Plan in 1994.





We
      are
      pleased to report the original investment of $2,000 was worth
      $30,280 as of year-end 2006 when the assumption was made that the shareholder
      took advantage of the Dividend Reinvestment
      Plan; stock splits as well as stock dividends. The
      twenty-one year return to the original investor is 13.8%.





**CORPORATE
                ATTORNEYS**
              
              **Stewardship
                Financial Corporation**
              McCarter
                & English, LLP
              Attorneys
                at Law
              4
                Gateway CenterNewark,
                NJ 07102 973-622-4444
              
              **Atlantic
                Stewardship Bank**
              Hanse
                & Hanse
              2035
                E. Hamburg Turnpike
              Wayne,
                NJ 07470
              973-831-8700
            
            **STEWARDSHIP
                FINANCIAL**
              **C****ORPORATION
                STOCK**
              We
                are proud to advise the followingbrokers
                make a market in StewardshipFinancial
                Corporation stock:
              
              **Highlander
                Capital Group, Inc.**
              119
                Littleton Road
              Parsippany,
                NJ 07054
              973-402-2700
              
              **Ryan
                Beck & Company**
              18
                Columbia Turnpike
              Florham
                Park, NJ 07932
              800-342-2325
            
            **TRANSFER
                AGENT REGISTRAR AND**
              **DIVIDEND
                REIMBURSEMENT AGENT**
              To
                report a change of name or address, ora
                lost stock certificate or dividend check, contact:
              
              **Registrar
                and Transfer Company**
              10
                Commerce Drive
              Cranford,
                NJ 07016
              800-368-5948
              
              **Shareholder
                Relations**
              Stewardship
                Financial Corporation
              Corporate
                Division
              201-444-7100
              www.asbnow.com









BRANCH
      LOCATIONS AND STAFF





**Headquarters
                - Midland Park**
              630
                Godwin Avenue
              
              Raymond
                J. Santhouse
              *Branch
                Manager, Vice President*
              *&
                Regional Manager*
              
              Richard
                Densel
              *Assistant
                Branch Manager*
              *&
                Assistant Vice President*
              
              **Hawthorne**
              1111
                Goffle Road
              Paula
                Scott
              *Branch
                Operations Manager*
              
              **Hawthorne**
              386
                Lafayette Avenue
              Diane
                Ingrassia
              *Branch
                Manager & Assistant Vice President*
              
              Grace
                Lobbregt
              *Assistant
                Branch Manager*
              *&
                Assistant Secretary*
            
            **Montville**
              2
                Changebridge Road
              Judi
                Rothwell
              *Branch
                Manager & Administrative Assistant*
              
              **Pequannock**
              249
                Newark-Pompton Turnpike
              Louise
                Rohner
              *Branch
                Manager & Assistant Vice President*
              
              Joan
                Van Houten
              *Assistant
                Branch Manager*
              
              **Ridgewood**
              190
                Franklin Avenue
              Amanda
                Bialy
              *Branch
                Manager & Administrative Assistant*
              
              Catherine
                Bobadilla
              *Assistant
                Branch Manager*
              
              **Waldwick**
              64
                Franklin Turnpike
              Kelly
                Nienhouse
              *Branch
                Manager & Administrative Assistant*
            
            **Wayne**
              400
                Hamburg Turnpike
              Robert
                A. Giannetti
              *Branch
                Manager, Vice President*
              *&
                Regional Manager*
              
              Amy
                Miller
              *Assistant
                Branch Manager*
              *&
                Administrative Assistant*
              
              **Wayne
                Hills**
              87
                Berdan Avenue
              Daniel
                J. Girlando
              *Branch
                Manager & Administrative Assistant*
              
              Douglas
                Gordon
              *Assistant
                Branch Manager*
              
              **Wayne
                Valley**
              311
                Valley Road
              Kristine
                Rasile
              *Branch
                Manager & Assistant Secretary*
              
              **Wyckoff**
              **(To
                be Introduced First Quarter 2007)**
              378
                Franklin Avenue
              Thomas
                A. Maselli
              *Branch
                Manager & Assistant Vice
                President*





14


**STEWARDSHIP
          FINANCIAL CORPORATION AND SUBSIDIARY**
 **STOCK
          PERFORMANCE GRAPH**
  
    The
          following graph compares the cumulative total return on a hypothetical
          $100
          investment made on December 31, 2001 in: (a) Stewardship Financial Corporation’s
          common stock; (b) Nasdaq Composite Index; and (c) Peer index. The Peer
          index
          consists of ten banks located in New Jersey and Pennsylvania with total
          asset
          size and operating performance comparable with the Corporation. The peer
          group
          consists of 1st Constitution Bancorp, Boardwalk Bancorp, Inc., Central
          Jersey
          Bancorp, Codorus Valley Bancorp, Inc., Community Bank of Bergen County,
          Mid Pen
          Bancorp, Somerset Hills Bancorp, Sterling Bank, Sussex Bancorp, and Unity
          Bancorp, Inc. The information provided is not necessarily indicative of
          the
          Corporation’s future performance.
 
 
 **Period
                    Ending****Index**
                
                **12/31/01**
                
                **12/31/02**
                
                **12/31/03**
                
                **12/31/04**
                
                **12/31/05**
                
                **12/31/06**Stewardship
                    Financial Corporation
                
                $
                100.00
                
                $
                104.14
                
                $
                199.11
                
                $
                197.86
                
                $
                194.82
                
                $
                191.22Nasdaq
                    Composite Index
                
                
                100.00
                
                
                68.80
                
                
                103.64
                
                
                113.07
                
                
                115.43
                
                
                127.36Peer
                    Index
                
                
                100.00
                
                
                113.54
                
                
                170.37
                
                
                207.19
                
                
                212.37
                
                
                214.56
  A-1
  **STEWARDSHIP
          FINANCIAL CORPORATION AND SUBSIDIARY**
 **CONSOLIDATED
          FINANCIAL SUMMARY OF SELECTED FINANCIAL DATA**
 
 **December****31,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002**(Dollars
                    in thousands,
                    exceptper
                    share amounts)**Earnings
                    Summary:**Net
                    interest income
                
                $
                19,084
                
                $
                18,211
                
                $
                16,367
                
                $
                14,324
                
                $
                12,507Provision
                    for loan losses
                
                
                (264
                )
                
                (600
                )
                
                (540
                )
                
                (425
                )
                
                (160
                )Net
                    interest income after provision for loan losses
                
                
                18,820
                
                
                17,611
                
                
                15,827
                
                
                13,899
                
                
                12,347Noninterest
                    income
                
                
                4,189
                
                
                3,240
                
                
                2,726
                
                
                2,894
                
                
                2,250Noninterest
                    expense
                
                
                15,629
                
                
                13,867
                
                
                12,501
                
                
                11,394
                
                
                9,847Income
                    before income tax expense
                
                
                7,380
                
                
                6,984
                
                
                6,052
                
                
                5,399
                
                
                4,750Income
                    tax expense
                
                
                2,627
                
                
                2,504
                
                
                2,204
                
                
                1,908
                
                
                1,634Net
                    income
                
                $
                4,753
                
                $
                4,480
                
                $
                3,848
                
                $
                3,491
                
                $
                3,116**Common
                    Share Data: (1)**Basic
                    net income
                
                $
                0.95
                
                $
                0.90
                
                $
                0.78
                
                $
                0.72
                
                $
                0.66Diluted
                    net income
                
                
                0.94
                
                
                0.89
                
                
                0.77
                
                
                0.71
                
                
                0.65Cash
                    dividends declared
                
                
                0.30
                
                
                0.25
                
                
                0.21
                
                
                0.17
                
                
                0.14Book
                    value at year end
                
                
                7.43
                
                
                6.70
                
                
                6.16
                
                
                5.56
                
                
                4.96Average
                    shares outstanding, net of treasury stock
                
                
                5,021
                
                
                4,991
                
                
                4,911
                
                
                4,847
                
                
                4,749Shares
                    outstanding at year end
                
                
                5,018
                
                
                4,986
                
                
                4,948
                
                
                4,886
                
                
                4,802Dividend
                    payout ratio
                
                
                32.19
                %
                
                27.79
                %
                
                26.46
                %
                
                23.37
                %
                
                21.41
                %**Selected
                    Consolidated Ratios:**Return
                    on average assets
                
                
                0.96
                %
                
                1.00
                %
                
                0.95
                %
                
                0.97
                %
                
                1.03
                %Return
                    on average stockholders' equity
                
                
                13.41
                %
                
                13.86
                %
                
                13.48
                %
                
                13.68
                %
                
                14.01
                %Average
                    stockholders' equity as a percentage of average total assets
                
                
                7.19
                %
                
                7.20
                %
                
                7.06
                %
                
                7.12
                %
                
                7.36
                %Tier-l
                    capital leverage (2)
                
                
                8.85
                %
                
                8.71
                %
                
                9.08
                %
                
                8.89
                %
                
                7.02
                %Tier-l
                    risk based capital (3)
                
                
                11.25
                %
                
                11.16
                %
                
                12.48
                %
                
                12.93
                %
                
                10.53
                %Total
                    risk based capital (3)
                
                
                12.28
                %
                
                12.21
                %
                
                13.57
                %
                
                14.03
                %
                
                11.74
                %Allowance
                    for loan loss to total loans
                
                
                1.11
                %
                
                1.11
                %
                
                1.11
                %
                
                1.10
                %
                
                1.24
                %Nonperforming
                    loans to total loans
                
                
                0.41
                %
                
                0.15
                %
                
                0.48
                %
                
                0.42
                %
                
                0.62
                %**Selected
                    Year-end Balances:**Total
                    assets
                
                $
                519,749
                
                $
                482,727
                
                $
                424,306
                
                $
                401,768
                
                $
                331,087Total
                    loans, net of allowance for loan loss
                
                
                365,443
                
                
                341,976
                
                
                292,909
                
                
                258,776
                
                
                213,579Total
                    deposits
                
                
                434,223
                
                
                403,466
                
                
                356,730
                
                
                341,335
                
                
                302,304Stockholders'
                    equity
                
                
                37,306
                
                
                33,384
                
                
                30,460
                
                
                27,149
                
                
                23,817
 
 (1)
                All
                    share and per share amounts have been restated to reflect a 5%
                    stock
                    dividend paid November 2002, 2003, 2004, 2005 and 2006, respectively,
                    a 3
                    for 2 stock split that occurred July 2003 and a 4 for 3 stock
                    split that
                    occurred July 2005.
 
 (2)
                As
                    a percentage of average quarterly assets.
 
 (3)
                As
                    a percentage of total risk-weighted assets.
  A-2
  **Management’s
          Discussion and Analysis of Financial Condition and Results of Operations**
 
 This
          section provides an analysis of the Stewardship Financial Corporation’s (the
“Corporation”) consolidated financial condition and results of operations for
          the years ended December 31, 2006, 2005 and 2004. The analysis should be
          read in
          conjunction with the related audited consolidated financial statements
          and the
          accompanying notes presented elsewhere herein.
 
 This
          annual report 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,” “plan,”
“estimate,” and “potential.” Examples of forward looking statements include, but
          are not limited to, estimates with respect to the financial condition,
          results
          of operations and business of the Corporation that are subject to various
          factors which could cause actual results to differ materially from these
          estimates. These factors include: changes in general, economic and market
          conditions, legislative and regulatory conditions, or the development of
          an
          interest rate environment that adversely affects the Corporation’s interest rate
          spread or other income anticipated from operations and investments. As
          used in
          this annual report, “we” and “us” and “our” refer to Stewardship Financial
          Corporation and its consolidated subsidiary, Atlantic Stewardship Bank,
          depending on the context.
 
 **Introduction**
 
 The
          Corporation, organized in January 1995, as a business corporation under
          the laws
          of the State of New Jersey, was established by the Board of Directors of
          Atlantic Stewardship Bank (the “Bank”) to become a holding company for the Bank.
          The shareholders of the Bank approved the holding company formation at
          the
          annual meeting in 1996. After obtaining approval and submitting appropriate
          applications, the Corporation, on November 22, 1996, acquired all of the
          shares
          of the Bank in exchange for its own shares, on a share per share basis.
          The
          Bank, and its subsidiaries, Stewardship Investment Corporation and Stewardship
          Realty Corporation LLC, are wholly-owned subsidiaries of the Corporation.
          The
          Corporation also formed a second subsidiary in 2003, Stewardship Statutory
          Trust
          I (the "Trust”). The Trust was formed to issue Trust Preferred Securities to
          enhance the capital position of the Corporation. The Trust is not consolidated
          with the Corporation’s financial statements due to the adoption of Financial
          Accounting Standards Board (FASB) Interpretation No. 46 (revised December
          2003)
“Consolidation of Variable Interest Entities” (“FIN 46R”).
 
 The
          Corporation conducts a general commercial and retail banking business
          encompassing a wide range of traditional deposit and lending functions
          along
          with the other customary banking services. Stewardship Investment Corporation
          is
          a wholly-owned nonbank subsidiary of the Bank, whose primary business is
          to own
          and manage the Bank’s investment portfolio. Stewardship Realty Corporation, a
          subsidiary of the Bank was formed in September 2005 to purchase a property
          located at 612 Godwin Avenue, Midland Park, Bergen County, New Jersey.
          The
          property, located next to the main office of the Corporation, will be used
          for
          future office space for the administrative area of the Bank. The Corporation
          earns income and generates cash primarily through the deposit gathering
          activities of the branch network. These deposits are then utilized to fund
          the
          Corporation’s lending and investing activities.
 
 The
          Corporation is affected by the overall economic conditions in northern
          New
          Jersey, the interest rate and yield curve environment, and the overall
          national
          economy. These factors are relevant because they will affect our ability
          to
          attract specific deposit products, our ability to invest in loan and investment
          products, and our ability to earn acceptable profits without incurring
          increased
          risks.
 
 When
          evaluating the financial condition and operating performance of the
          organization, management reviews historical trends, peer comparisons, asset
          and
          deposit concentrations, interest margin analysis, adequacy of loan loss
          reserve
          and loan quality performance, adequacy of capital under current positions
          as
          well as to support future expansion, adequacy of liquidity, and overall
          quality
          of earnings performance.
 
 The
          Corporation has developed a strong deposit base with good franchise value.
          Several challenges are to continue to grow the existing branch levels,
          explore
          new branch opportunities, provide adequate technology enhancements to achieve
          efficiencies, provide strong products, and provide the highest level of
          customer
          service.
 
 During
          2006, the Corporation opened its tenth branch location at 2 Changebridge
          Road,
          Montville, Morris County, New Jersey. This is a full service facility offering
          safe deposits, a two lane drive-up and an ATM drive-up facility. This represents
          a new market area for the Corporation where our products and services have
          been
          well accepted.
 
 The
          Corporation also worked during the second half of 2006 to build its eleventh
          branch location at 378 Franklin Avenue, Wyckoff, Bergen County, New Jersey.
          This
          branch opened in March 2007, with its grand opening scheduled in April
          and is
          expected to be a convenient location to service existing as well as new
          customers. It will also be a full service facility offering safe deposits,
          a two
          lane drive-up and an ATM drive-up facility.
  A-3
  Early
          in
          January 2007, the Corporation signed a lease for its twelfth branch to
          be
          located in Westwood, Bergen County, New Jersey and, pending all appropriate
          approvals, plans to provide services to a new market area beginning in
          the third
          quarter of 2007. The branch network built by the Corporation covers a strong
          market area designed to attract a diversified customer base that has and
          will
          continue to utilize our strong base of loan and deposit products.
 
 During
          the fourth quarter of 2006, Management completed two transactions that
          positioned the Corporation to improve future profitability and asset yields.
          The
          Corporation successfully completed a sale of its $3.4 million credit card
          portfolio to Elan Financial Services (“Elan”). Elan, a national provider of
          credit card services, purchased the portfolio and will continue to service
          and
          offer credit card products in the name of Atlantic Stewardship Bank. The
          proceeds from the sale were reinvested in other lending opportunities.
          The
          Corporation will realize, in addition to the premium paid on the portfolio,
          future income from Elan based on new card production and customer activity.
 
 Management
          also completed the sale of $17.3 million available for sale securities
          that were
          yielding less than 5%. The proceeds realized from the sale were used to
          purchase
          higher yielding securities and to fund loan growth. Management anticipates
          that
          this transaction will improve portfolio yields and reduce exposure to future
          interest rate risk.
 
 **Recent
          Accounting Pronouncements**
 
 A
          discussion of recent pronouncements and their effect on the Corporation’s
          financial statements can be found in Note 20 of the financial statements.
 
 **Critical
          Accounting Policies And Estimates**
 
 “Management’s
          Discussion and Analysis of Financial Condition and Results of Operation,” is
          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,
          2006
          contains a summary of the Corporation’s significant accounting policies.
          Management believes the Corporation’s policy with respect to the methodology for
          the determination of the allowance for loan losses involves a higher degree
          of
          complexity and requires management to make difficult and subjective judgments,
          which often require assumptions or estimates about highly uncertain matters.
          Changes in these judgments, assumptions or estimates could materially impact
          results of operations. This critical policy and its application are periodically
          reviewed with the Audit Committee and the Board of Directors.
 
 The
          allowance for loan losses is based upon management’s evaluation of the adequacy
          of the allowance, including an assessment of known and inherent risks in
          the
          portfolio, giving consideration to the size and composition of the loan
          portfolio, actual loan loss experience, level of delinquencies, detailed
          analysis of individual loans for which full 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, which is subject to significant
          judgment and short-term change. Various regulatory agencies, as an integral
          part
          of their examination process, periodically review the Corporation’s allowance
          for loan losses. Such agencies may require the Corporation to make additional
          provisions for loan losses based upon information available to them at
          the time
          of their examination. Furthermore, the majority of the Corporation’s loans are
          secured by real estate in the State of New Jersey. Accordingly, the
          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.
 
 **Earnings
          Summary**
 
 The
          Corporation reported net income of $4.75 million, or $0.95 basic earnings
          per
          share, for the year ended December 31, 2006, an increase of $273,000, or
          6.1%,
          above the $4.48 million recorded for 2005. Earnings for 2005 had increased
          $632,000, or 16.4%, over the 2004 earnings of $3.85 million. Earnings have
          increased in both years as a result of increases in net interest income
          and
          noninterest income, offset by increases in noninterest expense.
 
 The
          Federal Reserve began a period of measured increases in interest rates
          in June
          2004 that continued through June 2006. For 2004, the targeted federal funds
          rate
          began at 1.00% and increased 0.25% at each Federal Open Market Committee
          meeting
          in 2004 and 2005 and paused at the June 2006 meeting at 5.25%. Short-term
          interest rates increased as a result of the increases by the Federal Reserve,
          while market driven longer term interest rates remained mostly unchanged
          at
          historically low levels creating an inverted yield curve. The level of
          interest
          rates, inverted yield curve and competitive loan and deposit environment
          created
          pressure on net interest margins. The Corporation’s net interest income
          increased $873,000. An increase in the average loan volume partially offset
          by
          the rising costs of deposits and borrowings contributed to this increase.
  A-4
  The
          return on average assets decreased in 2006 to 0.96% from 1.00% in 2005.
          The
          return on average equity decreased to 13.41% in 2006 from 13.86% in 2005.
 
 **Results
          of Operations**
 
 **Net
          Interest Income**
 
 The
          Corporation’s principal source of revenue is the net interest income derived
          from the Bank, which represents the difference between the interest earned
          on
          assets and interest paid on funds acquired to support those assets. Net
          interest
          income is affected by the balances and mix of interest-earning assets and
          interest-bearing liabilities, changes in their corresponding yields and
          costs,
          and by the volume of interest-earning assets funded by noninterest-bearing
          deposits. The Corporation’s principal interest-earning assets are loans made to
          businesses and individuals, investment securities, and federal funds sold.
 
 In
          2006,
          net interest income, on a tax equivalent basis, increased to $19.35 million
          from
          $18.48 million in 2005, an increase of $872,000, or 4.7%. This was caused
          by an
          increase of $3.6 million, or 3.6%, in net average interest-earning assets
          (average interest-earning assets less average interest-bearing liabilities).
 
 Interest
          income, on a tax equivalent basis, increased $5.1 million, or 20.3%, during
          2006
          to $30.27 million from $25.17 million earned during 2005. The increase
          was due
          to an increase in the average volume of interest-earning assets and an
          increase
          in yields on interest-earning assets. Average interest-earning assets increased
          $40.4 million in 2006, or 9.5%, over the 2005 amount with average loans
          attributing to $44.2 million of the increase due primarily to the Corporation’s
          competitiveness within the marketplace. Yields on interest earning assets
          increased 59 basis points from 5.93% in 2005 to 6.52% in 2006.
 
 Interest
          expense increased $4.2 million, or 63.2%, during 2006 to $10.92 million.
          The
          increase was due to an increase in average interest-bearing liabilities
          of $36.8
          million, or 11.3%, to $361.50 million during 2006. Yields on interest-bearing
          liabilities increased to 3.02% during 2006 from 2.06% during 2005. The
          competitive interest rate environment created a challenging deposit market.
          With
          the rise in short-term interest rates, customers have become very interest
          rate
          sensitive, demanding higher interest rates on short-term investments. The
          Corporation experienced a shift from interest-bearing demand and savings
          deposits into certificate of deposits. In order to supplement funding needs,
          the
          Corporation utilized the brokered certificate of deposit market. As of
          December
          31, 2006, the Corporation had $19.67 million brokered certificates with
          average
          yields of 5.37% and average maturities of 0.64 years. The Corporation also
          encouraged depositors by enhancing our Kids Savings product and introducing
          our
          Business Freedom Checking Account. The Corporation anticipates that new
          branches
          and products will provide future core deposit growth for the Corporation.
 
 In
          2005,
          net interest income, on a tax equivalent basis, increased to $18.48 million
          from
          $16.66 million in 2004, an increase of $1.8 million, or 10.9%. Interest
          income,
          on a tax equivalent basis, increased $3.7 million, or 17.4%, during 2005
          to
          $25.17 million from $21.45 million earned in 2004 and yields increased
          34 basis
          points to 5.93% for 2006. The increase was due to an increase in the average
          volume of interest-earning assets and an increase in yields on interest-earning
          assets. Average interest-earning assets increased $40.8 million in 2005,
          or
          10.6%, over the 2004 amount. Interest expense increased $1.9 million, or
          39.8%,
          during 2005. The increase was due to an increase in average interest-bearing
          liabilities and an increase in yields on interest-bearing liabilities.
          Average
          noninterest-bearing demand deposits increased $7.5 million, or 9.3% to
          $88.86
          million during 2005 and yields increased 42 basis points to 2.06% for 2006.
 
 The
          following table reflects the components of the Corporation’s net interest income
          for the years ended December 31, 2006, 2005 and 2004 including, (1) average
          assets, liabilities, and stockholders’ equity, (2) interest income earned on
          interest-earning assets and interest expense paid on interest-bearing
          liabilities, (3) average yields earned on interest-earning assets and average
          rates paid on interest-bearing liabilities, and (4) net yield on
          interest-earning assets. Nontaxable income from investment securities is
          presented on a tax-equivalent basis assuming a statutory tax rate of 34%
          for the
          years presented. This was accomplished by adjusting this income upward
          to make
          it equivalent to the level of taxable income required to earn the same
          amount
          after taxes.
  A-5
  **2006**
                  
                  **2005**
                  
                  **2004****Average
                      Balance**
                  
                  **Interest
                      Income/ Expense**
                  
                  **Average
                      Rates Earned Paid**
                  
                  **Average
                      Balance**
                  
                  **Interest
                      Income/ Expense**
                  
                  **Average
                      Rates Earned / Paid**
                  
                  **Average
                      Balance**
                  
                  **Interest
                      Income/ Expense**
                  
                  **Average
                      Rates Earned/ Paid**(Dollars
                      in thousands)**Assets**Interest-earning
                      assets:Loans
                      (1)
                  
                  $
                  359,806
                  
                  $
                  25,619
                  
                  
                  7.12
                  %
                  $
                  315,605
                  
                  $
                  20,927
                  
                  
                  6.63
                  %
                  $
                  275,334
                  
                  $
                  17,346
                  
                  
                  6.30
                  %Taxable
                      investment securities (1)
                  
                  
                  85,322
                  
                  
                  3,732
                  
                  
                  4.37
                  
                  
                  81,332
                  
                  
                  3,130
                  
                  
                  3.85
                  
                  
                  84,641
                  
                  
                  3,103
                  
                  
                  3.67Tax-exempt
                      investment securities (1) (2)
                  
                  
                  18,702
                  
                  
                  868
                  
                  
                  4.64
                  
                  
                  18,998
                  
                  
                  852
                  
                  
                  4.48
                  
                  
                  20,134
                  
                  
                  952
                  
                  
                  4.73Other
                      interest-earning assets
                  
                  
                  741
                  
                  
                  51
                  
                  
                  6.88
                  
                  
                  8,200
                  
                  
                  262
                  
                  
                  3.20
                  
                  
                  3,270
                  
                  
                  46
                  
                  
                  1.41Total
                      interest-earning assets
                  
                  
                  464,571
                  
                  
                  30,270
                  
                  
                  6.52
                  
                  
                  424,135
                  
                  
                  25,171
                  
                  
                  5.93
                  
                  
                  383,379
                  
                  
                  21,447
                  
                  
                  5.59Non-interest-earning
                      assets:Allowance
                      for loan losses
                  
                  
                  (4,020
                  )
                  
                  
                  
                  
                  
                  
                  
                  (3,600
                  )
                  
                  
                  
                  
                  
                  
                  
                  (3,086
                  )Other
                      assets
                  
                  
                  32,862
                  
                  
                  
                  
                  
                  
                  
                  
                  28,442
                  
                  
                  
                  
                  
                  
                  
                  
                  24,139Total
                      assets
                  
                  $
                  493,413
                  
                  
                  
                  
                  
                  
                  
                  $
                  448,977
                  
                  
                  
                  
                  
                  
                  
                  $
                  404,432**Liabilities
                      and Stockholders' Equity**Interest-bearing
                      liabilities:Interest-bearing
                      demand deposits
                  
                  $
                  116,405
                  
                  $
                  2,064
                  
                  
                  1.77
                  %
                  $
                  133,968
                  
                  $
                  1,531
                  
                  
                  1.14
                  %
                  $
                  122,426
                  
                  $
                  810
                  
                  
                  0.66
                  %Savings
                      deposits
                  
                  
                  41,682
                  
                  
                  256
                  
                  
                  0.61
                  
                  
                  48,300
                  
                  
                  286
                  
                  
                  0.59
                  
                  
                  49,390
                  
                  
                  344
                  
                  
                  0.70Time
                      deposits
                  
                  
                  160,816
                  
                  
                  6,560
                  
                  
                  4.08
                  
                  
                  114,763
                  
                  
                  3,673
                  
                  
                  3.20
                  
                  
                  91,163
                  
                  
                  2,450
                  
                  
                  2.69Repurchase
                      agreements
                  
                  
                  7,461
                  
                  
                  331
                  
                  
                  4.44
                  
                  
                  3,371
                  
                  
                  98
                  
                  
                  2.91
                  
                  
                  2,832
                  
                  
                  37
                  
                  
                  1.31FHLB
                      borrowings
                  
                  
                  27,923
                  
                  
                  1,218
                  
                  
                  4.36
                  
                  
                  17,054
                  
                  
                  614
                  
                  
                  3.60
                  
                  
                  19,138
                  
                  
                  657
                  
                  
                  3.43Subordinated
                      debenture
                  
                  
                  7,217
                  
                  
                  487
                  
                  
                  6.75
                  
                  
                  7,217
                  
                  
                  487
                  
                  
                  6.75
                  
                  
                  7,217
                  
                  
                  487
                  
                  
                  6.75Total
                      interest-bearing liabilities
                  
                  
                  361,504
                  
                  
                  10,916
                  
                  
                  3.02
                  
                  
                  324,673
                  
                  
                  6,689
                  
                  
                  2.06
                  
                  
                  292,166
                  
                  
                  4,785
                  
                  
                  1.64Noninterest-bearing
                      liabilities:Demand
                      deposits
                  
                  
                  92,217
                  
                  
                  
                  
                  
                  
                  
                  
                  88,863
                  
                  
                  
                  
                  
                  
                  
                  
                  81,321Other
                      liabilities
                  
                  
                  4,234
                  
                  
                  
                  
                  
                  
                  
                  
                  3,120
                  
                  
                  
                  
                  
                  
                  
                  
                  2,398Stockholders'
                      equity
                  
                  
                  35,458
                  
                  
                  
                  
                  
                  
                  
                  
                  32,321
                  
                  
                  
                  
                  
                  
                  
                  
                  28,547Total
                      liabilities and stockholders' equity
                  
                  $
                  493,413
                  
                  
                  
                  
                  
                  
                  
                  $
                  448,977
                  
                  
                  
                  
                  
                  
                  
                  $
                  404,432Net
                      interest income (taxable equivalent basis)
                  
                  
                  
                  
                  
                  19,354
                  
                  
                  
                  
                  
                  
                  
                  
                  18,482
                  
                  
                  
                  
                  
                  
                  
                  
                  16,662Tax
                      equivalent adjustment
                  
                  
                  
                  
                  
                  (270
                  )
                  
                  
                  
                  
                  
                  
                  
                  (271
                  )
                  
                  
                  
                  
                  
                  
                  
                  (295
                  )Net
                      interest income
                  
                  
                  
                  
                  $
                  19,084
                  
                  
                  
                  
                  
                  
                  
                  $
                  18,211
                  
                  
                  
                  
                  
                  
                  
                  $
                  16,367Net
                      interest spread (taxable equivalent basis)
                  
                  
                  
                  
                  
                  
                  
                  
                  3.50
                  %
                  
                  
                  
                  
                  
                  
                  
                  3.87
                  %
                  
                  
                  
                  
                  
                  
                  
                  3.95
                  %Net
                      yield on interest-earning assets (taxable equivalent basis)
                      (3)
                  
                  
                  
                  
                  
                  
                  
                  
                  4.17
                  %
                  
                  
                  
                  
                  
                  
                  
                  4.36
                  %
                  
                  
                  
                  
                  
                  
                  
                  4.35
                  %
 
 (1)
                For
                    purpose of these calculations, nonaccruing loans are included
                    in the
                    average balance. Fees are included in loan interest. Loans and
                    total
                    interest-earning assets are net of unearned income. Securities
                    are
                    included at amortized cost.
 
 (2)
                The
                    tax equivalent adjustments are based on a marginal tax rate of
                    34%.
 
 (3)
                Net
                    interest income (taxable equivalent basis) divided by average
                    interest-earning assets.
  A-6
  The
          following table analyzes net interest income in terms of changes in the
          volume
          of interest-earning assets and interest-bearing liabilities and changes
          in
          yields earned and rates paid on such assets and liabilities on a tax equivalent
          basis. The table reflects the extent to which changes in the Corporation’s
          interest income and interest expense are attributable to changes in volume
          (changes in volume multiplied by prior year rate) and changes in rate (changes
          in rate multiplied by prior year volume). Changes attributable to the combined
          impact of volume and rate have been allocated proportionately to changes
          due to
          volume and changes due to rate.
 
 **2006
                    Versus 2005**
                
                **2005
                    Versus 2004**(In
                    thousands)**Increase
                    (Decrease)****Due
                    to Change in**
                
                ****
                
                **Increase
                    (Decrease)Due
                    to Change in****Volume**
                
                **Rate**
                
                **Net**
                
                **Volume**
                
                **Rate**
                
                **Net**Interest
                    income:Loans.
                
                $
                3,073
                
                $
                1,619
                
                $
                4,692
                
                $
                2,635
                
                $
                946
                
                $
                3,581Taxable
                    investment securities
                
                
                159
                
                
                443
                
                
                602
                
                
                (230
                )
                
                257
                
                
                27Tax-exempt
                    investment securities
                
                
                (13
                )
                
                29
                
                
                16
                
                
                (52
                )
                
                (48
                )
                
                (100
                )Other
                    interest-earning assets
                
                
                (360
                )
                
                149
                
                
                (211
                )
                
                117
                
                
                99
                
                
                216Total
                    interest-earning assets.
                
                
                2,859
                
                
                2,240
                
                
                5,099
                
                
                2,470
                
                
                1,254
                
                
                3,724Interest
                    expense:Interest-bearing
                    demand deposits
                
                $
                (222
                )
                $
                755
                
                $
                533
                
                $
                83
                
                $
                638
                
                $
                721Savings
                    deposits
                
                
                (40
                )
                
                10
                
                
                (30
                )
                
                (7
                )
                
                (51
                )
                
                (58
                )Time
                    deposits
                
                
                1,714
                
                
                1,173
                
                
                2,887
                
                
                704
                
                
                519
                
                
                1,223Repurchase
                    agreements
                
                
                163
                
                
                70
                
                
                233
                
                
                8
                
                
                53
                
                
                61FHLB
                    borrowings
                
                
                453
                
                
                151
                
                
                604
                
                
                (74
                )
                
                31
                
                
                (43
                )Total
                    interest-bearing liabilities
                
                
                2,068
                
                
                2,159
                
                
                4,227
                
                
                714
                
                
                1,190
                
                
                1,904Net
                    change in net interest income.
                
                $
                791
                
                $
                81
                
                $
                872
                
                $
                1,756
                
                $
                64
                
                $
                1,820
 
 **Provision
          for Loan Losses**
 
 The
          Corporation maintains an allowance for loan losses considered by management
          to
          be adequate to cover the inherent risk of loss associated with its loan
          portfolio. On an ongoing basis, management analyzes the adequacy of this
          allowance by considering the nature and volume of the Corporation’s loan
          activity, financial condition of the borrower, fair market value of underlying
          collateral, and changes in general market conditions. Additions to the
          allowance
          for loan losses are charged to operations in the appropriate period. Actual
          loan
          losses, net of recoveries, serve to reduce the allowance. The appropriate
          level
          of the allowance for loan losses is based on estimates, and ultimate losses
          may
          vary from current estimates.
 
 The
          loan
          loss provision totaled $264,000 in 2006 representing a 56.0% decrease from
          the
          2005 provision of $600,000. The 2005 provision increased 11.1% from the
          2004
          provision of $540,000. The loan loss provision for 2006 contained an $86,000
          reversal of loan loss due to the sale of the credit card portfolio. The
          provision expense for each year is a reflection of loan growth, loan mix,
          net
          chargeoffs, and the overall level of nonperforming loans.
 
 **Noninterest
          Income**
 
 Noninterest
          income consists of all income other than interest income and is principally
          derived from service charges on deposits, gain on sales of mortgage loans,
          income derived from bank owned life insurance, fees on safe deposit boxes,
          credit card merchant income and income derived from debit cards and ATM
          usage.
 
 Noninterest
          income increased $949,000, or 29.3%, to $4.19 million during the year ended
          December 31, 2006, when compared with $3.24 million during the comparable
          2005
          period. The increase in noninterest income resulted primarily from the
          gain on
          the sale of the credit card portfolio of $746,000, an increase of $214,000
          in
          fees and service charges primarily caused by the implementation of an overdraft
          protection program for personal customers, an increase of $102,000 representing
          the full year effect of purchasing bank owned life insurance in 2005 and
          an
          increase of $323,000 in merchant processing, partially offset by the loss
          on the
          sale of available for sale securities of $435,000. The sale of the credit
          card
          portfolio was completed during the fourth quarter of 2006, pursuant to
          which
          management sold $3.4 million credit card loans to Elan. Under the agreement,
          Elan
  A-7
 
 purchased
          the portfolio for a 19% premium and agreed to honor the existing award
          program
          offered to customers. Under the terms of the agreement, cards will still
          be
          offered in the name of Atlantic Stewardship Bank. The Corporation will
          share in
          future income as new cards are issued and as cardholders complete transactions.
          Management’s analysis revealed that proceeds could be reinvested and resources
          reallocated to other more profitable lending products and customers could
          retain
          strong credit card products and services.
 
 The
          investment restructuring completed during the fourth quarter of 2006 resulted
          in
          the sale of $17.3 million available for sale securities yielding less than
          5%
          with a loss of $435,000. Proceeds were reinvested in higher yielding investments
          and loans that should improve earning asset yields and decrease future
          interest
          rate risk.
 
 Noninterest
          income increased by $514,000, or 18.9%, to $3.24 million during the year
          ended
          December 31, 2005, when compared with $2.73 million during the 2004 period.
          The
          increase resulted from an increase of $104,000 in gains on sales of mortgage
          loans due to an increase in the volume of loans originated for sale. In
          April
          2005, the Corporation purchased $8.0 million in bank owned life insurance
          on key
          management personnel. The increase in the cash surrender value of the insurance
          policies was recognized in income for 2005 in the amount of $210,000. Income
          from merchant card processing increased by $135,000 in 2005 compared with
          the
          year ended 2004 due to an increase in the number of customers using this
          service.
 
 **Noninterest
          Expense**
 
 Although
          management is committed to containing noninterest expense, the continued
          growth
          of the Corporation has caused noninterest expense to increase by $1.8 million
          or
          12.7%, to $15.63 million for the year ended December 31, 2006, compared
          to
          $13.87 million for the same period in 2005. Salaries and employee benefits,
          the
          major component of noninterest expense, increased $712,000, or 11.7%. The
          increase was due primarily to staffing increases in lending, new business
          development, and the new Montville branch and for general merit and performance
          increases. Occupancy and equipment expenses increased $467,000 primarily
          due to
          the expenses relating to the new Montville and Wyckoff branches. Data processing
          expenses increased $122,000 due to continued growth of deposit and loan
          processing and merchant processing expenses increased $309,000 due to the
          growth
          in the merchant business.
 
 In
          accordance with its By-laws to tithe ten percent (10%) of its pre-tax profits
          to
          various charities, the Corporation had charitable contributions totaling
          $755,000 for the year ended December 31, 2006, an increase of $66,000,
          or 9.6%,
          over the same period in 2005.
 
 Noninterest
          expense increased $1.4 million, or 10.9%, to $13.87 million for the year
          ended
          December 31, 2005, compared to $12.50 million for the same period in 2004.
          Increases in salaries and employee benefits totaling $441,000, or 7.8%,
          were
          primarily a result of general merit and performance increases and increases
          in
          benefit related expenses. Data processing expenses increased $134,000,
          or 13.2%,
          due to increases in our deposit and lending base and advertising increased
          $137,000 to support product offerings and the 20th anniversary celebration.
          Merchant expense increased $101,000 due to increased merchant business
          and
          donation expense increased $107,000 due to the increase in pretax earnings.
          Miscellaneous expenses increased $346,000, or 19.0%, as a result of increases
          in
          consulting expense and the general growth of the Corporation. During 2005,
          the
          Corporation hired an outside consulting firm to work with management in
          the
          documentation of internal controls. This has helped in moving the Corporation
          towards compliance with Sarbanes Oxley Act Section 404 which requires management
          to assess and document the adequacy of internal controls. Management anticipates
          that the consulting firm will continue their work in 2007.
 
 **Income
          Taxes**
 
 Income
          tax expense totaled $2.63 million for the year ended December 31, 2006,
          for an
          effective tax rate of 35.6%, compared to $2.50 million, for an effective
          tax
          rate of 35.9% for the year ended December 31, 2005, and $2.20 million,
          for an
          effective tax rate of 36.4% for the year ended December 31, 2004. The decrease
          in the effective tax rate can be attributed primarily to the tax deferred
          income
          derived from bank owned life insurance.
 
 **Financial
          Condition**
 
 Total
          assets at December 31, 2006 were $519.75 million, an increase of $37.0
          million,
          or 7.7%, over the $482.73 million at December 31, 2005. This increase in
          assets
          reflects, among other things, a $23.5 million increase in net loans held
          for
          portfolio, and an $8.6 million increase in securities available for sale.
  A-8
  **Loan
          Portfolio**
 
 The
          Corporation’s loan portfolio at December 31, 2006, net of allowance for loan
          losses, totaled $365.44 million, an increase of $23.5 million, or 6.9%,
          over the
          $341.98 million at December 31, 2005. Commercial real estate mortgage loans
          consisting of $177.41 million, or 47.9% of the total portfolio, comprised
          the
          largest portion of the loan portfolio. This represented an increase of
          $14.1
          million from $163.31 million, or 47.2% of the total loan portfolio at December
          31, 2005. Commercial loans increased $7.6 million to $72.61 million,
          representing 19.6% of the total loan portfolio. Consumer installment loans
          increased $849,000, despite the sale of $3.4 million of credit cards.
          Residential real estate mortgages increased $1.4 million. The Corporation
          continued its policy of selling the majority of its residential real estate
          loans in the secondary market. All of these loans have been sold with servicing
          released.
 
 The
          Corporation’s lending activities are concentrated in loans secured by real
          estate located in northern New Jersey and therefore collectibility of the
          loan
          portfolio is susceptible to changes in real estate market conditions in
          the
          northern New Jersey market. The Corporation has not made loans to borrowers
          outside the United States.
 
 At
          December 31, 2006, there were no concentrations of loans exceeding 10%
          of total
          loans outstanding. Loan concentrations are considered to exist when there
          are
          amounts loaned to a multiple number of borrowers engaged in similar activities
          which would cause them to be similarly impacted by economic or other related
          conditions.
 
 The
          following table sets forth the classification of the Corporation’s loans by
          major category at the end of the last five years:
 
 **December
                    31,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002**(In
                    thousands)Real
                    estate mortgage:Residential
                
                $
                47,020
                
                $
                45,604
                
                $
                41,569
                
                $
                44,835
                
                $
                39,705Commercial
                
                
                177,411
                
                
                163,309
                
                
                130,762
                
                
                109,708
                
                
                88,593Commercial
                    loans
                
                
                72,606
                
                
                65,011
                
                
                55,252
                
                
                48,950
                
                
                38,228Consumer
                    loans:Installment
                    (1).
                
                
                52,389
                
                
                51,540
                
                
                47,218
                
                
                41,067
                
                
                37,293Home
                    equity.
                
                
                20,010
                
                
                20,271
                
                
                21,484
                
                
                17,181
                
                
                12,471Other
                
                
                560
                
                
                506
                
                
                260
                
                
                238
                
                
                241Total
                    gross loans
                
                
                369,996
                
                
                346,241
                
                
                296,545
                
                
                261,979
                
                
                216,531Less:
                    Allowance for loan losses
                
                
                4,101
                
                
                3,847
                
                
                3,299
                
                
                2,888
                
                
                2,689Deferred
                    loan fees
                
                
                452
                
                
                418
                
                
                337
                
                
                315
                
                
                263Net
                    loans
                
                $
                365,443
                
                $
                341,976
                
                $
                292,909
                
                $
                258,776
                
                $
                216,579
 
 (1)
                Includes
                    automobile, home improvement, second mortgages and unsecured
                    loans. Credit
                    card loans are also included for all years prior to December
                    31, 2006.
 
 The
          following table sets forth certain categories of gross loans as of December
          31,
          2006 by contractual maturity. Borrowers may have the right to prepay obligations
          with or without prepayment penalties. This might cause actual maturities
          to
          differ from the contractual maturities summarized below.
 
 **Within**
                  **1
                    Year**
                
                **After
                    1 Year**
                  **But
                    Within**
                  **5
                    Years**
                
                **After**
                  **5
                    Years**
                
                **Total**(In
                    thousands)Real
                    estate mortgage
                
                $
                38,616
                
                $
                15,240
                
                $
                170,575
                
                $
                224,431Commercial
                
                
                33,429
                
                
                32,251
                
                
                6,926
                
                
                72,606Consumer
                
                
                1,143
                
                
                8,697
                
                
                63,119
                
                
                72,959Total
                    gross loans
                
                $
                73,188
                
                $
                56,188
                
                $
                240,620
                
                $
                369,996
  A-9
  The
          following table sets forth the dollar amount of all gross loans due one
          year or
          more after December 31, 2006, which have predetermined interest rates or
          floating or adjustable interest rates:
 
 **Predetermined**
                  **Rates**
                
                **Floating
                    or**
                  **Adjustable**
                  **Rates**
                
                **Total**(In
                    thousands)Real
                    estate mortgage
                
                $
                63,679
                
                $
                122,136
                
                $
                185,815Commercial
                
                
                22,184
                
                
                16,993
                
                
                39,177Consumer
                
                
                51,680
                
                
                20,136
                
                
                71,816$
                137,543
                
                $
                159,265
                
                $
                296,808
 
 **Asset
          Quality**
 
 The
          Corporation’s principal earning asset is its loan portfolio. Inherent in the
          lending function is the risk of deterioration in a borrower’s ability to repay
          loans under existing loan agreements. Management realizes that because
          of this
          risk, reserves are maintained to absorb loan losses. In determining the
          adequacy
          of the allowance for loan losses, management of the Corporation considers
          the
          risks inherent in its loan portfolio and changes in the nature and volume
          of its
          loan activities, along with general economic and real estate market conditions.
          Although management attempts to establish a reserve sufficient to offset
          probable incurred losses in the portfolio, changes in economic conditions,
          regulatory policies and borrower’s performance could require future changes to
          the allowance.
 
 The
          Corporation utilizes a two tier approach by (1) identifying problem loans
          and
          allocating specific loss allowances on such loans and (2) establishing
          a general
          valuation allowance on the remainder of its loan portfolio. The Corporation
          maintains a loan review system that allows for a periodic review of its
          loan
          portfolio and the early identification of potential problem loans. Such
          a system
          takes into consideration, among other things, delinquency status, size
          of loans,
          type of collateral and financial condition of the borrowers. Allocations
          of
          specific loan loss allowances are established for identified loans based
          on a
          review of such information and/or appraisals of underlying collateral.
          General
          loan loss allowances are based upon a combination of factors including,
          but not
          limited to, actual loss experience, composition of loan portfolio, current
          economic conditions and management’s judgment.
 
 The
          Corporation’s accounting policies are set forth in Note 1 to the audited
          financial statements. The application of some of these policies require
          significant management judgment and the utilization of estimates. Actual
          results
          could differ from these judgments and estimates resulting in a significant
          impact on the financial statements. A critical accounting policy for the
          Corporation is the policy utilized in determining the adequacy of the allowance
          for loan losses. Although management uses the best information available,
          the
          level of the allowance for loan losses remains an estimate which is subject
          to
          significant judgment and short-term change. Various regulatory agencies,
          as an
          integral part of their examination process, periodically review the
          Corporation’s allowance for loan losses. Such agencies may require the
          Corporation to make additional provisions for loan losses based upon information
          available to them at the time of their examination. Furthermore, the majority
          of
          the Corporation’s loans are secured by real estate in the state of New Jersey.
          Accordingly, the collectibility of a substantial portion of the carrying
          value
          of the Corporation’s loan portfolio is susceptible to changes in the 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 may be necessary due to economic, operating,
          regulatory, and other conditions beyond the Corporation’s control. The allowance
          for loan losses represents 1.11% of total loans, or 2.7 times non-performing
          loans at December 31, 2006, compared with 1.11% of total loans or 7.3 times
          non-performing loans at December 31, 2005. In management’s opinion, the
          allowance for loan losses totaling $4.1 million is adequate to cover losses
          inherent in the portfolio at December 31, 2006.
 
 **Nonperforming
          Assets**
 
 Nonperforming
          assets include nonaccrual loans, restructured loans, loans past due 90
          days or
          more and accruing, and other real estate owned. There were no other real
          estate
          owned assets for the periods presented. The Corporation’s loans are generally
          placed in a nonaccrual status when they become past due in excess of 90
          days as
          to payment of principal and interest. Interest previously accrued on these
          loans
          and not yet paid is charged against income during the current period. Interest
          earned thereafter is only included in income to the extent that it is received
          in cash. Loans past due 90 days or more and accruing represent those loans
          which
          are sufficiently collateralized and management believes all interest and
          principal owed will be collected. Restructured loans are loans that have
          been
          renegotiated to permit a borrower, who has incurred adverse financial
          circumstances, to continue to perform. Management can reduce the contractual
          interest rates to below market rates or make significant concessions to
          the
          terms of the loan in order for the borrower to continue to make payments.
  A-10
  The
          following table sets forth certain information regarding the Corporation’s
          nonperforming assets as of December 31 of each of the preceding five years:
 
 **December
                    31,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002**(Dollars
                    in thousands)Nonaccrual
                    loans: (1)Commercial
                    real estate
                
                $
                123
                
                $
                122
                
                $
                56
                
                $
                83
                
                $
                80Commercial
                
                
                167
                
                
                258
                
                
                159
                
                
                163
                
                
                326Consumer
                
                
                154
                
                
                92
                
                
                47
                
                
                11
                
                
                89Total
                    nonaccrual loans
                
                
                444
                
                
                472
                
                
                262
                
                
                257
                
                
                495Loans
                    past due ninety days or more and accruing: (2)Construction
                
                
                840
                
                
                -
                
                
                940
                
                
                -
                
                
                -Commercial
                
                
                241
                
                
                -
                
                
                -
                
                
                314
                
                
                -Consumer
                
                
                9
                
                
                55
                
                
                7
                
                
                6
                
                
                4Total
                    loans past due ninety days or more and accruing.
                
                
                1,090
                
                
                55
                
                
                947
                
                
                320
                
                
                4Restructured
                    loans:Commercial
                
                
                -
                
                
                -
                
                
                -
                
                
                269
                
                
                451Consumer
                
                
                -
                
                
                -
                
                
                215
                
                
                244
                
                
                397Total
                    restructured loans
                
                
                -
                
                
                -
                
                
                215
                
                
                513
                
                
                848Total
                    nonperforming loans
                
                $
                1,534
                
                $
                527
                
                $
                1,424
                
                $
                1,090
                
                $
                1,347Nonaccrual
                    loans to total gross loans
                
                
                0.12
                %
                
                0.14
                %
                
                0.09
                %
                
                0.10
                %
                
                0.23
                %Nonperforming
                    loans to total gross loans
                
                
                0.41
                %
                
                0.15
                %
                
                0.48
                %
                
                0.42
                %
                
                0.62
                %Nonperforming
                    loans to total assets
                
                
                0.30
                %
                
                0.11
                %
                
                0.34
                %
                
                0.27
                %
                
                0.41
                %Allowance
                    for loan losses to nonperforming loans
                
                
                267.34
                %
                
                729.98
                %
                
                231.67
                %
                
                264.95
                %
                
                199.63
                %
 
 ___________________________________________
 
 (1)
                There
                    were no restructured loans classified as nonaccrual for the year
                    ended
                    December 31, 2006. Restructured loans classified in the nonaccrual
                    category totaled $152,000, $162,000, $174,000 and $329,000 for
                    2005, 2004,
                    2003 and 2002, respectively.
 
 (2)
                There
                    were no restructured loans classified in the past due ninety
                    days or more
                    and accruing for the years ended 2006, 2005, 2004 and 2002. In
                    2003,
                    restructured loans totaling $150,000 were classified in the past
                    due
                    ninety days or more and accruing category.
 
 The
          construction loan balance of $840,000 shown as past due ninety days or
          more and
          accruing at December 31, 2006 represented one loan which was fully satisfied
          in
          February 2007.
 
 There
          were no loans, 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 nonaccrual, past due or restructured at a future date.
  A-11
  The
          following table sets forth, for each of the preceding five years, the historical
          relationships among the amount of loans outstanding, the allowance for
          loan
          losses, the provision for loan losses, the amount of loans charged off
          and the
          amount of loan recoveries:
 
 **2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002**(Dollars
                    in thousands)Balance
                    at beginning of period
                
                $
                3,847
                
                $
                3,299
                
                $
                2,888
                
                $
                2,689
                
                $
                2,602Loans
                    charged off:Commercial
                
                
                7
                
                
                -
                
                
                49
                
                
                173
                
                
                65Consumer
                
                
                33
                
                
                57
                
                
                92
                
                
                56
                
                
                25Total
                    loans charged off
                
                
                40
                
                
                57
                
                
                141
                
                
                229
                
                
                90Recoveries
                    of loans previously charged off:Commercial
                
                
                23
                
                
                -
                
                
                3
                
                
                1
                
                
                9Consumer
                
                
                7
                
                
                5
                
                
                9
                
                
                2
                
                
                8Total
                    recoveries of loans previously charged off
                
                
                30
                
                
                5
                
                
                12
                
                
                3
                
                
                17Net
                    loans charged off
                
                
                10
                
                
                52
                
                
                129
                
                
                226
                
                
                73Provisions
                    charged to operations
                
                
                264
                
                
                600
                
                
                540
                
                
                425
                
                
                160Balance
                    at end of period
                
                $
                4,101
                
                $
                3,847
                
                $
                3,299
                
                $
                2,888
                
                $
                2,689Net
                    charge offs during the period to average loans outstanding during
                    the
                    period
                
                
                0.00
                %
                
                0.02
                %
                
                0.05
                %
                
                0.10
                %
                
                0.04
                %Balance
                    of allowance for loan losses at the end of year to gross year
                    end loans
                
                
                1.11
                %
                
                1.11
                %
                
                1.11
                %
                
                1.10
                %
                
                1.24
                %
 
 The
          following table sets forth the allocation of the allowance for loan losses, for
          each of the preceding five years, as indicated by loan categories:
 
 **2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****Amount**
                
                **Percent
                    to Total (1)**
                
                **Amount**
                
                **Percent
                    to Total (1)**
                
                **Amount**
                
                **Percent
                    to Total (1)**
                
                **Amount**
                
                **Percent
                    to Total (1)**
                
                **Amount**
                
                **Percent
                    to Total (1)**(Dollars
                    in thousands)Real
                    estate - residential
                
                $
                298
                
                
                12.7
                %
                $
                320
                
                
                13.2
                %
                $
                297
                
                
                14.0
                %
                $
                306
                
                
                17.1
                %
                $
                289
                
                
                18.3
                %Real
                    estate - commercial
                
                
                1,705
                
                
                48.0
                %
                
                1,562
                
                
                47.1
                %
                
                1,272
                
                
                44.1
                %
                
                1,038
                
                
                41.9
                %
                
                911
                
                
                40.9
                %Commercial
                
                
                1,407
                
                
                19.6
                %
                
                1,192
                
                
                18.8
                %
                
                979
                
                
                18.6
                %
                
                910
                
                
                18.7
                %
                
                906
                
                
                17.7
                %Consumer
                
                
                691
                
                
                19.7
                %
                
                773
                
                
                20.9
                %
                
                751
                
                
                23.3
                %
                
                634
                
                
                22.3
                %
                
                583
                
                
                23.1
                %Total
                    allowance for loan losses
                
                $
                4,101
                
                
                100.0
                %
                $
                3,847
                
                
                100.0
                %
                $
                3,299
                
                
                100.0
                %
                $
                2,888
                
                
                100.0
                %
                $
                2,689
                
                
                100.0
                %
 
 (1)
                Represents
                    percentage of loan balance in category to total gross
                    loans.
 
 **Investment
          Portfolio**
 
 The
          Corporation maintains an investment portfolio to enhance its yields and
          to
          provide a secondary source of liquidity. The portfolio is comprised of
          U.S.
          Treasury securities, U.S. government and agency obligations, mortgage-backed
          securities, and state and political subdivision obligations and has been
          classified as held to maturity or available for sale. Investments in debt
          securities that the Corporation has the positive intent and the ability
          to hold
          to maturity are classified as held to maturity securities and reported
          at
          amortized cost. All other securities are classified as available for sale
          securities and reported at fair value, with unrecognized holding gains
          or losses
          reported in a separate component of stockholders’ equity. Securities in the
          available for sale category may be held for indefinite periods of time
          and
          include securities that management intends to use as part of its Asset/Liability
          strategy or that may be sold in response to changes in interest rates,
          changes
          in prepayment risks, the need to provide liquidity, the need to increase
          regulatory capital or similar factors. Securities available for sale increased
          to $72.75 million at December 31, 2006, from $64.17 million at December
          31,
          2005, an increase of $8.6 million, or 13.4%. Securities held to maturity
          increased $1.4 million, or 3.6%, to $39.16 million at December 31, 2006
          from
          $37.80 million at December 31, 2005.
  A-12
  During
          the fourth quarter of 2006, the Corporation completed an investment
          restructuring consisting of the sale of $17.3 million available for sale
          securities with yields of less than 5.0%. Proceeds from the sale were used
          to
          purchase higher yielding investments and to fund loan growth.
 
 The
          following table sets forth the classification of the Corporation’s investment
          securities by major category at the end of the last three years:
 
 **December
                    31,****2006**
                
                **2005**
                
                **2004****Carrying
                    Value**
                
                **Percent**
                
                **Carrying
                    Value**
                
                **Percent**
                
                **Carrying
                    Value**
                
                **Percent**(Dollars
                    in thousands)Securities
                    available for sale:U.S.
                    Treasury
                
                $
                —
                
                
                0.0
                %
                $
                496
                
                
                0.8
                %
                $
                495
                
                
                0.9
                %U.S.
                    government-sponsored agencies
                
                
                32,117
                
                
                44.2
                %
                
                32,478
                
                
                50.6
                %
                
                23,344
                
                
                41.3
                %Obligations
                    of state and political subdivisions
                
                
                1,823
                
                
                2.5
                %
                
                2,031
                
                
                3.2
                %
                
                1,915
                
                
                3.4
                %Mortgage-backed
                    securities
                
                
                37,707
                
                
                51.8
                %
                
                28,110
                
                
                43.8
                %
                
                29,730
                
                
                52.6
                %Community
                    Reinvestment Act Fund
                
                
                1,099
                
                
                1.5
                %
                
                1,051
                
                
                1.6
                %
                
                1,030
                
                
                1.8
                %Total
                
                $
                72,746
                
                
                100.0
                %
                $
                64,166
                
                
                100.0
                %
                $
                56,514
                
                
                100.0
                %Securities
                    held to maturity:U.S.
                    Treasury
                
                $
                502
                
                
                1.3
                %
                $
                1,004
                
                
                2.7
                %
                $
                1,007
                
                
                2.5
                %U.S.
                    government- sponsored agencies
                
                
                10,776
                
                
                27.5
                %
                
                12,113
                
                
                32.0
                %
                
                8,655
                
                
                21.6
                %Obligations
                    of state and political subdivisions
                
                
                20,516
                
                
                52.4
                %
                
                15,747
                
                
                41.7
                %
                
                17,688
                
                
                44.1
                %Mortgage-backed
                    securities
                
                
                7,369
                
                
                18.8
                %
                
                8,937
                
                
                23.6
                %
                
                12,761
                
                
                31.8
                %Total
                
                $
                39,163
                
                
                100.0
                %
                $
                37,801
                
                
                100.0
                %
                $
                40,111
                
                
                100.0
                %
 
 The
          following table sets forth the maturity distribution and weighted average
          yields
          (calculated on the basis of stated yields to maturity, considering applicable
          premium or discount) of the Corporation’s securities available for sale as of
          December 31, 2006. Issuers may have the right to call or prepay obligations
          with
          or without call or prepayment penalties. This might cause actual maturities
          to
          differ from contractual maturities.
 
 **After
                    1 Year**
                
                **After
                    5 Years****Within**
                
                **Through**
                
                **Through**
                
                **After****1
                    Year**
                
                **5
                    Years**
                
                **10
                    Years**
                
                **10
                    Years**
                
                **Total**(Dollars
                    in thousands)U.S.
                    government sponsored agencies :Carrying
                    value
                
                $
                4,180
                
                $
                11,375
                
                $
                8,384
                
                $
                8,178
                
                $
                32,117Yield
                
                
                2.70
                %
                
                4.83
                %
                
                5.78
                %
                
                5.89
                %
                
                5.07
                %Obligations
                    of state and political subdivisions :Carrying
                    value
                
                
                —
                
                
                1,331
                
                
                143
                
                
                349
                
                
                1,823Yield
                
                
                —
                
                
                3.07
                %
                
                3.75
                %
                
                3.88
                %
                
                3.28
                %Mortgage-backed
                    securities :Carrying
                    value
                
                
                4
                
                
                2,190
                
                
                6,376
                
                
                29,137
                
                
                37,707Yield
                
                
                8.00
                %
                
                3.79
                %
                
                4.41
                %
                
                5.26
                %
                
                5.03
                %Community
                    Reinvestment Act Fund:Carrying
                    value
                
                
                1,099
                
                
                —
                
                
                —
                
                
                —
                
                
                1,099Yield
                
                
                3.75
                %
                
                —
                
                
                —
                
                
                —
                
                
                3.75
                %Total
                    carrying value
                
                $
                5,283
                
                $
                14,896
                
                $
                14,903
                
                $
                37,664
                
                $
                72,746Weighted
                    average yield
                
                
                2.92
                %
                
                4.52
                %
                
                5.17
                %
                
                5.38
                %
                
                4.99
                %
  A-13
  The
          following table sets forth the maturity distribution and weighted average
          yields
          (calculated on the basis of stated yields to maturity, considering applicable
          premium or discount) of the Corporation’s securities held to maturity as of
          December 31, 2006. Issuers may have the right to call or prepay obligations
          with
          or without call or prepayment penalties. This might cause actual maturities
          to
          differ from contractual maturities.
 
 **After
                    1 Year**
                
                **After
                    5 Years****Within**
                
                **Through**
                
                **Through**
                
                **After****1
                    Year**
                
                **5
                    Years**
                
                **10
                    Years**
                
                **10
                    Years**
                
                **Total**(Dollars
                    in thousands)U.S.
                    Treasury :Carrying
                    value
                
                $
                —
                
                $
                502
                
                $
                —
                
                $
                —
                
                $
                502Yield
                
                
                —
                
                
                4.57
                %
                
                —
                
                
                —
                
                
                4.57
                %U.S.
                    government-sponsored agencies :Carrying
                    value.
                
                
                1,455
                
                
                5,091
                
                
                2,748
                
                
                1,482
                
                
                10,776Yield
                
                
                2.90
                %
                
                4.67
                %
                
                5.91
                %
                
                5.83
                %
                
                4.91
                %Obligations
                    of state and political subdivisions :Carrying
                    value
                
                
                4,596
                
                
                4,475
                
                
                6,499
                
                
                4,946
                
                
                20,516Yield
                
                
                3.18
                %
                
                2.99
                %
                
                3.76
                %
                
                3.82
                %
                
                3.48
                %Mortgage-backed
                    securities :Carrying
                    value
                
                
                20
                
                
                698
                
                
                1,725
                
                
                4,926
                
                
                7,369Yield
                
                
                5.34
                %
                
                4.38
                %
                
                5.19
                %
                
                5.20
                %
                
                5.12
                %Total
                    carrying value
                
                $
                6,071
                
                $
                10,766
                
                $
                10,972
                
                $
                11,354
                
                $
                39,163Weighted
                    average yield
                
                
                3.12
                %
                
                3.95
                %
                
                4.52
                %
                
                4.68
                %
                
                4.19
                %
 
 **Deposits**
 
 Corporation
          deposits at December 31, 2006 totaled $434.22 million, an increase of $30.8
          million, or 7.6%, over the comparable period of 2005, when deposits totaled
          $403.47 million. The Corporation relied on its existing market area and
          current
          competitive products and services to provide growth during 2006. The economic
          and interest rate environment made it difficult to attract core deposits.
          In
          addition, the Corporation utilized the brokered certificate of deposit
          market
          with $19.67 million included in the time deposit balances as of December
          31,
          2006.
 
 The
          following table sets forth the classification of the Corporation’s deposits by
          major category as of December 31 of each of the three preceding years:
 
 **December
                    31,****2006**
                
                **2005**
                
                **2004****Amount**
                
                **Percent**
                
                **Amount**
                
                **Percent**
                
                **Amount**
                
                **Percent**(Dollars
                    in thousands)Noninterest-bearing
                    demand
                
                $
                92,105
                
                
                21.2
                %
                $
                94,331
                
                
                23.4
                %
                $
                90,635
                
                
                25.4
                %Interest-bearing
                    demand
                
                
                120,899
                
                
                27.8
                %
                
                122,867
                
                
                30.5
                %
                
                124,161
                
                
                34.8
                %Saving
                    deposits
                
                
                37,324
                
                
                8.6
                %
                
                45,779
                
                
                11.3
                %
                
                49,967
                
                
                14.0
                %Certificates
                    of deposit
                
                
                183,895
                
                
                42.4
                %
                
                140,489
                
                
                34.8
                %
                
                91,967
                
                
                25.8
                %Total
                
                $
                434,223
                
                
                100.0
                %
                $
                403,466
                
                
                100.0
                %
                $
                356,730
                
                
                100.0
                %
 
 As
          of
          December 31, 2006, the aggregate amount of outstanding time deposits issued
          in
          amounts of $100,000 or more, broken down by time remaining to maturity,
          was as
          follows (In thousands):
 
 Three
                    months or less
                
                $
                14,402Four
                    months through six months
                
                
                11,536Seven
                    months through twelve months
                
                
                29,021Over
                    twelve months
                
                
                14,943Total
                
                $
                69,902
  A-14
  **Market
          Risk**
 
 Market
          risk is the risk of loss from adverse changes in market prices and rates.
          The
          Corporation’s market risk arises primarily from interest rate risk inherent in
          its lending and deposit taking activities. Management actively monitors
          and
          manages its interest rate risk exposure.
 
 The
          Corporation’s profitability is affected by fluctuations in interest rates. A
          sudden and substantial increase or decrease in interest rates may adversely
          impact the Corporation’s earnings to the extent that the interest rates borne by
          assets and liabilities do not change at the same speed, to the same extent,
          or
          on the same basis. The Corporation monitors the impact of changes in interest
          rates on its net interest income using several tools. One measure of the
          Corporation’s exposure to differential changes in interest rates between assets
          and liabilities is shown in the Corporation’s Maturity and Repricing Analysis
          under the Interest Rate Sensitivity caption below.
 
 The
          Corporation’s primary objective in managing interest rate risk is to minimize
          the adverse impact of changes in interest rates on the Corporation’s net
          interest income and capital, while maintaining the asset-liability structure
          to
          obtain the maximum yield- cost spread on that structure. The Corporation
          relies
          primarily on its asset-liability structure to control interest rate risk.
 
 The
          Corporation continually evaluates interest rate risk management opportunities,
          including the use of derivative financial instruments. Management believes
          that
          hedging instruments currently available are not cost effective, and therefore,
          has focused its efforts on increasing the Corporation’s yield-cost spread
          through retail growth opportunities.
 
 The
          following table shows the Corporation’s financial instruments that are sensitive
          to changes in interest rates, categorized by expected maturity, and the
          instruments’ fair values at December 31, 2006. Market rate sensitive instruments
          are generally defined as on and off balance sheet derivatives and other
          financial instruments. Expected maturities are contractual maturities adjusted
          for projected payments of principal. The actual maturities of these instruments
          could vary substantially if future prepayments differ from the projections.
          For
          non-maturity deposit liabilities, in accordance with standard industry
          practice,
“decay factors” were used to estimate deposit runoff.
 
 **Average
                    Interest Rate**
                
                **2007**
                
                **2008**
                
                **2009**
                
                **2010**
                
                **2011**
                
                **Thereafter**
                
                **Balance**
                
                **Fair
                    Value**(Dollars
                    in thousands)**Interest-Sensitive
                    Assets:**Interest-bearing
                    due from banks.
                
                
                4.92
                %
                $
                836
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                836
                
                $
                836Loans:Real
                    estate mortgage
                
                
                6.82
                %
                
                49,339
                
                
                11,982
                
                
                10,115
                
                
                8,656
                
                
                8,982
                
                
                135,357
                
                
                224,431
                
                
                223,165Commercial
                
                
                8.42
                %
                
                39,263
                
                
                12,091
                
                
                8,297
                
                
                4,951
                
                
                4,194
                
                
                3,810
                
                
                72,606
                
                
                72,507Consumer
                
                
                6.68
                %
                
                7,462
                
                
                6,443
                
                
                6,311
                
                
                6,525
                
                
                6,055
                
                
                40,163
                
                
                72,959
                
                
                70,924Mortgage
                    loans held for sale
                
                
                6.12
                %
                
                2,155
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,155
                
                
                2,155Investment
                    securities (1)
                
                
                4.63
                %
                
                41,458
                
                
                15,606
                
                
                12,368
                
                
                7,570
                
                
                8,647
                
                
                28,159
                
                
                113,808
                
                
                113,5266.52
                %
                
                140,513
                
                
                46,122
                
                
                37,091
                
                
                27,702
                
                
                27,878
                
                
                207,489
                
                
                486,795
                
                
                483,113**Interest-Sensitive
                    Liabilities:**Savings
                
                
                0.74
                %
                
                3,969
                
                
                2,739
                
                
                2,315
                
                
                1,998
                
                
                1,747
                
                
                24,556
                
                
                37,324
                
                
                37,324Interest-bearing
                
                
                2.09
                %
                
                12,945
                
                
                8,639
                
                
                7,040
                
                
                5,817
                
                
                4,887
                
                
                81,571
                
                
                120,899
                
                
                120,899Time
                    deposits
                
                
                4.47
                %
                
                142,138
                
                
                25,129
                
                
                6,490
                
                
                9,202
                
                
                780
                
                
                156
                
                
                183,895
                
                
                183,987Securites
                    sold under agreement to repurchase
                
                
                5.28
                %
                
                9,023
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                9,023
                
                
                9,023FHLB
                    borrowings
                
                
                4.53
                %
                
                15,054
                
                
                675
                
                
                698
                
                
                721
                
                
                744
                
                
                10,000
                
                
                27,892
                
                
                26,655Subordinated
                    debentures
                
                
                6.75
                %
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                7,217
                
                
                7,217
                
                
                7,4363.43
                %
                
                183,129
                
                
                37,182
                
                
                16,543
                
                
                17,738
                
                
                8,158
                
                
                123,500
                
                
                386,250
                
                
                385,324**Net
                    Interest-Sensitive Assets (Liabilities)**
                
                
                
                
                $
                (42,616
                )
                $
                8,940
                
                $
                20,548
                
                $
                9,964
                
                $
                19,720
                
                $
                83,989
                
                $
                100,545
                
                $
                97,789
  
 (1)
                Includes
                    securities held to maturity, securities available for sale and
                    FHLB-NY
                    stock.
  A-15
  **Interest
          Rate Sensitivity**
 
 Interest
          rate movements and deregulation of interest rates have made managing the
          Corporation’s interest rate sensitivity increasingly important. The Corporation
          attempts to maintain stable net interest margins by generally matching
          the
          volume of assets and liabilities maturing, or subject to repricing, by
          adjusting
          interest rates to market conditions, and by developing new products. One
          method
          of measuring the Corporation’s exposure to changes in interest rates is the
          maturity and repricing gap analysis. The difference between the volume
          of assets
          and liabilities that reprice in a given period is the interest sensitivity
          gap.
          A “positive” gap results when more assets than liabilities mature or are
          repricing in a given time frame. Conversely, a “negative” gap results when there
          are more liabilities than assets maturing or repricing in a given period
          of
          time. The smaller the gap, the less the effect of the market volatility
          on net
          interest income. During a period of rising interest rates, an institution
          with a
          negative gap position would not be in as favorable a position, as compared
          to an
          institution with a positive gap, to invest in higher yielding assets. This
          may
          result in yields on its assets increasing at a slower rate than the increase
          in
          its costs of interest-bearing liabilities than if it had a positive gap.
          During
          a period of falling interest rates, an institution with a negative gap
          would
          experience a repricing of its assets at a slower rate than its interest-bearing
          liabilities, which consequently may result in its net interest income growing
          at
          a faster rate than an institution with a positive gap position.
 
 The
          following tables sets forth estimated maturity/repricing structure of the
          Corporation’s interest-earning assets and interest- bearing liabilities as of
          December 31, 2006. The amounts of assets or liabilities shown which reprice
          or
          mature during a particular period were determined in accordance with the
          contractual terms of each asset or liability and adjusted for prepayment
          assumptions where applicable. The table does not necessarily indicate the
          impact
          of general interest rate movements on the Corporation’s net interest income
          because the repricing of certain categories of assets and liabilities,
          for
          example, prepayments of loans and withdrawal of deposits, is beyond the
          Corporation’s control. As a result, certain assets and liabilities indicated as
          repricing within a period may in fact reprice at different times and at
          different rate levels.
 
 **Three
                    Months or Less**
                
                **More
                    than Three Months Through One Year**
                
                **After
                    One Year**
                
                **Noninterest
                    Sensitive**
                
                **Total**(Dollars
                    in thousands)**Assets:**Loans:Real
                    estate mortgage
                
                $
                17,064
                
                $
                39,850
                
                $
                167,517
                
                $
                —
                
                $
                224,431Commercial
                
                
                11,931
                
                
                28,279
                
                
                32,396
                
                
                —
                
                
                72,606Consumer
                
                
                21,334
                
                
                5,097
                
                
                46,528
                
                
                —
                
                
                72,959Mortgage
                    loans held for sale
                
                
                2,155
                
                
                —
                
                
                —
                
                
                —
                
                
                2,155Investment
                    securities (1)
                
                
                21,703
                
                
                22,442
                
                
                69,663
                
                
                —
                
                
                113,808Other
                    assets
                
                
                836
                
                
                —
                
                
                —
                
                
                32,954
                
                
                33,790Total
                    assets
                
                $
                75,023
                
                $
                95,668
                
                $
                316,104
                
                $
                32,954
                
                $
                519,749**Source
                    of funds:**Savings
                
                $
                —
                
                $
                37,324
                
                $
                —
                
                $
                —
                
                $
                37,324Interest-bearing
                
                
                120,899
                
                
                —
                
                
                —
                
                
                —
                
                
                120,899Certificates
                    of deposit
                
                
                32,747
                
                
                109,604
                
                
                41,544
                
                
                —
                
                
                183,895Repurchase
                    agreements
                
                
                8,277
                
                
                746
                
                
                —
                
                
                —
                
                
                9,023Borrowings
                
                
                14,561
                
                
                492
                
                
                12,839
                
                
                —
                
                
                27,892Subordinated
                    debenture
                
                
                —
                
                
                —
                
                
                7,217
                
                
                —
                
                
                7,217Other
                    liabilities
                
                
                —
                
                
                —
                
                
                —
                
                
                96,193
                
                
                96,193Stockholders’
                    equity
                
                
                —
                
                
                —
                
                
                —
                
                
                37,306
                
                
                37,306Total
                    source of funds
                
                $
                176,484
                
                $
                148,166
                
                $
                61,600
                
                $
                133,499
                
                $
                519,749Interest
                    rate sensitivity gap
                
                $
                (101,461
                )
                $
                (52,498
                )
                $
                254,504
                
                $
                (100,545
                )Cumulative
                    interest rate sensitivity gap
                
                $
                (101,461
                )
                $
                (153,959
                )
                $
                100,545
                
                $
                —Ratio
                    of GAP to total assets
                
                
                -19.5
                %
                
                -10.1
                %
                
                49.0
                %
                
                -19.4
                %Ratio
                    of cumulative GAP assets to total assets
                
                
                -
                    19.5
                %
                
                -29.6
                %
                
                19.4
                %
                
                —
 ______________________________________
 (1)
                Includes
                    securities held to maturity, securities available for sale and
                    FHLB-NY
                    stock.
  A-16
  The
          Corporation also uses a simulation model to analyze the sensitivity of
          net
          interest income to movements in interest rates. The simulation model projects
          net interest income, net income, net interest margin, and capital to asset
          ratios based on various interest rate scenarios over a twelve month period.
          The
          model is based on the actual maturity and repricing characteristics of
          all rate
          sensitive assets and liabilities. Management incorporates into the model
          certain
          assumptions regarding prepayments of certain assets and liabilities. The
          model
          assumes an immediate rate shock to interest rates without management’s ability
          to proactively change the mix of assets or liabilities. According to the
          reports
          generated for year end 2006, an immediate interest rate increase of 200
          basis
          points resulted in a decrease in net interest income of 12.1%, or $2.5
          million,
          while an immediate interest rate decrease of 200 basis points resulted
          in an
          increase in net interest income of 2.9% or $614,000. Management has a goal
          to
          maintain a percentage change of no more than 15% given a 200 basis point
          change
          in interest rates. Management cannot provide any assurance about the actual
          effect of changes in interest rates on the Corporation’s net interest income.
          Assumptions have been built into the model for prepayments for assets and
          decay
          rates for nonmaturity deposits such as savings and interest bearing demand.
 
 **Liquidity**
 
 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 by 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
          loan 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. These activities
          are
          summarized below:
 
 **Years
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**(In
                    thousands)Cash
                    and cash equivalents - beginning
                
                $
                14,028
                
                $
                24,792
                
                $
                19,138Operating
                    activities:Net
                    income
                
                
                4,753
                
                
                4,480
                
                
                3,848Adjustments
                    to reconcile net income to net cash provided by operating
                    activities
                
                
                (70
                )
                
                (921
                )
                
                2,010Net
                    cash provided by operating activities
                
                
                4,683
                
                
                3,559
                
                
                5,858Net
                    cash used in investing activities
                
                
                (34,261
                )
                
                (68,436
                )
                
                (19,182
                )Net
                    cash provided by financing activities
                
                
                31,247
                
                
                54,113
                
                
                18,978Net
                    increase (decrease) in cash and cash equivalents
                
                
                1,669
                
                
                (10,764
                )
                
                5,654Cash
                    and cash equivalents - ending
                
                $
                15,697
                
                $
                14,028
                
                $
                24,792
 
 Cash
          was
          generated by operating activities in each of the above periods. The primary
          source of cash from operating activities during each period was 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 enters into commitments to extend credit, such as letters of
          credit,
          which are not reflected in the consolidated financial statements.
  A-17
  The
          Corporation has various contractual obligations that may require future
          cash
          payments. The following table summarizes the Corporation’s contractual
          obligations at December 31, 2006 and the effect of such obligations is
          expected
          to have on our liquidity and cash flows in future periods
 
 **Total**
                
                **Less
                    than 1 Year**
                
                **1-3
                    Years**
                
                **4-5
                    Years**
                
                **After
                    5 Years**(In
                    thousands)Contractual
                    obligationsOperating
                    lease obligations
                
                $
                5,058
                
                $
                545
                
                $
                1,099
                
                $
                997
                
                $
                2,417Total
                    contracted cost obligations
                
                $
                5,058
                
                $
                545
                
                $
                1,099
                
                $
                997
                
                $
                2,417Other
                    long-term liabilities/long-term debtTime
                    deposits
                
                $
                183,895
                
                $
                142,351
                
                $
                31,587
                
                $
                9,957
                
                $
                -Federal
                    Home Loan Bank advances
                
                
                27,892
                
                
                14,400
                
                
                3,492
                
                
                -
                
                
                10,000Subordinated
                    debentures
                
                
                7,217
                
                
                -
                
                
                -
                
                
                -
                
                
                7,217Total
                    other long-term liabilities/long-term debt
                
                $
                219,004
                
                $
                156,751
                
                $
                35,079
                
                $
                9,957
                
                $
                17,217Other
                    commitments - off balance sheetLetter
                    of credit
                
                $
                3,126
                
                $
                2,248
                
                $
                861
                
                $
                17
                
                $
                -Other
                    commitments - off balance sheet
                
                
                11,459
                
                
                11,459
                
                
                -
                
                
                -
                
                
                -Unused
                    lines of credit
                
                
                83,387
                
                
                83,387
                
                
                -
                
                
                -
                
                
                -Total
                    off balance sheet arrangements and contractual obligations
                
                $
                97,972
                
                $
                97,094
                
                $
                861
                
                $
                17
                
                $
                -
 
 For
          further information, see Note 16 of Notes to Consolidated Financial Statements.
 
 Management
          believes that a significant portion of the time deposits will remain with
          the
          Corporation. In addition, management does not believe that all of the unused
          lines of credit will be exercised. The Corporation anticipates that it
          will have
          sufficient funds available to meet its current contractual commitments.
          Should
          the Corporation need temporary funding, the Corporation has an overnight
          line of
          credit with the FHLB-NY for a maximum of $47.1 million.
 
 **Capital**
 
 Banks
          and
          bank holding companies are subject to regulatory capital requirements
          administered by federal banking agencies. Capital adequacy guidelines and,
          additionally for banks, prompt corrective action regulations, involve
          quantitative measures of assets, liabilities, and certain off-balance-sheet
          items calculated under regulatory accounting practices. Capital amounts
          and
          classifications are also subject to qualitative judgments by regulators.
          Failure
          to meet capital requirements can initiate regulatory action. Regulations
          of the
          Board of Governors of the Federal Reserve System (“FRB”) require bank holding
          companies to maintain minimum levels of regulatory capital. Under the
          regulations in effect at December 31, 2006, the Corporation was required
          to
          maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted
          assets
          of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
          assets of 4.0% and 8.0%, respectively. The Bank must comply with substantially
          similar capital regulations promulgated by the FDIC. The following table
          summarizes the capital ratios for the Corporation and the Bank at December
          31,
          2006.
 
 **Required**
                
                **Actual**
                
                **Excess**Risk-based
                    capital:Tier
                    1Corporation
                
                
                4.00
                %
                
                11.25
                %
                
                7.25
                %Bank
                
                
                4.00
                %
                
                10.01
                %
                
                6.01
                %TotalCorporation
                
                
                8.00
                %
                
                12.28
                %
                
                4.28
                %Bank
                
                
                8.00
                %
                
                11.04
                %
                
                3.04
                %Leverage
                    ratio*Corporation
                
                
                4.00
                %
                
                8.85
                %
                
                4.85
                %Bank
                
                
                4.00
                %
                
                7.91
                %
                
                3.91
                %
 
 *
                The
                    minimum leverage ratio set by the FRB and the FDIC is 3.00%.
                    Institutions
                    which are not “top-rated” will be expected to maintain a ratio of
                    approximately 100 to 200 basis points above this ratio.
  A-18
 A-19
 
  
 
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 Board
          of
          Directors and Shareholders
 Stewardship
          Financial Corporation
 Midland
          Park, New Jersey:
 
 We
          have
          audited the accompanying consolidated statement of financial condition
          of
          Stewardship Financial Corporation as of December 31, 2006 and the related
          consolidated statement of income, changes in stockholders' equity, and
          cash
          flows for the year then ended. These financial statements are the responsibility
          of the Corporation’s management. Our responsibility is to express an opinion on
          these financial statements based on our audit.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audit provides a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of Stewardship Financial Corporation
          as of December 31, 2006 and the results of its operations and its cash
          flows for
          the year then ended in conformity with U.S. generally accepted accounting
          principles.
 
 /s/
          Crowe
          Chizek and Company LLC
  
  
 
 
 **Report
          of Independent Registered Public Accounting Firm**
 
 The
          Board
          of Directors and Stockholders
 Stewardship
          Financial Corporation:
 
 We
          have
          audited the accompanying consolidated statement of financial condition
          of
          Stewardship Financial Corporation and subsidiary (the Company) as of December
          31, 2005, and the related consolidated statements of income, changes in
          stockholders’ equity, and cash flows for each of the years in the two-year
          period ended December 31, 2005. These consolidated financial statements
          are the
          responsibility of the Company’s management. Our responsibility is to express an
          opinion on these consolidated financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Stewardship Financial
          Corporation and subsidiary as of December 31, 2005, and the results of
          their
          operations and their cash flows for each of the years in the two-year period
          ended December 31, 2005, in conformity with U.S. generally accepted accounting
          principles.
  
  March
          29,
          2006
  A-21
  **Stewardship
          Financial Corporation and Subsidiary**
 **Consolidated
          Statements of Financial Condition**
 
 **December
                    31,****2006**
                
                **2005****Assets**Cash
                    and due from banks
                
                $
                14,861,000
                
                $
                13,158,000Other
                    interest-earning assets
                
                
                836,000
                
                
                870,000Cash
                    and cash equivalents
                
                
                15,697,000
                
                
                14,028,000Securities
                    available for sale
                
                
                72,746,000
                
                
                64,166,000Securities
                    held to maturity, estimated fair valueof
                    $38,881,000 (2006) and $37,459,000 (2005)
                
                
                39,163,000
                
                
                37,801,000FHLB-NY
                    stock, at cost
                
                
                1,899,000
                
                
                1,939,000Loans,
                    net of allowance for loan losses of $4,101,000 (2006)and
                    $3,847,000 (2005)
                
                
                365,443,000
                
                
                341,976,000Mortgage
                    loans held for sale
                
                
                2,155,000
                
                
                2,041,000Premises
                    and equipment, net
                
                
                7,098,000
                
                
                6,464,000Accrued
                    interest receivable
                
                
                2,912,000
                
                
                2,432,000Intangible
                    assets
                
                
                102,000
                
                
                140,000Bank
                    owned life insurance
                
                
                8,522,000
                
                
                8,210,000Other
                    assets
                
                
                4,012,000
                
                
                3,530,000Total
                    assets
                
                $
                519,749,000
                
                $
                482,727,000**Liabilities
                    and Stockholders' equity****Liabilities**Deposits:Noninterest-bearing
                
                $
                92,105,000
                
                $
                94,331,000Interest-bearing
                
                
                342,118,000
                
                
                309,135,000Total
                    deposits
                
                
                434,223,000
                
                
                403,466,000Other
                    borrowings
                
                
                27,892,000
                
                
                30,486,000Subordinated
                    debentures
                
                
                7,217,000
                
                
                7,217,000Securities
                    sold under agreements to repurchase
                
                
                9,023,000
                
                
                4,731,000Accrued
                    interest payable
                
                
                1,721,000
                
                
                1,145,000Accrued
                    expenses and other liabilities
                
                
                2,367,000
                
                
                2,298,000Total
                    liabilities
                
                
                482,443,000
                
                
                449,343,000Commitments
                    and contingencies
                
                
                —
                
                
                —**Stockholders'
                    equity**Common
                    stock, no par value, 10,000,000 shares authorized, 5,017,919
                    and 4,787,889
                    shares issued and outstanding atDecember 31, 2006 and 2005, respectively
                
                
                31,148,000
                
                
                28,211,000Treasury
                    stock, 39,581 outstanding at December 31, 2005
                
                
                —
                
                
                (556,000
                )Retained
                    earnings
                
                
                6,750,000
                
                
                6,647,000Accumulated
                    other comprehensive loss, net
                
                
                (592,000
                )
                
                (918,000
                )Total
                    Stockholders' equity
                
                
                37,306,000
                
                
                33,384,000Total
                    liabilities and Stockholders' equity
                
                $
                519,749,000
                
                $
                482,727,000
 
 *See
          accompanying notes to consolidated financial statements.*
  A-22
  **Stewardship
          Financial Corporation and Subsidiary**
 **Consolidated
          Statements of Income**
 
 **Years****Ended
                    December****31,****2006**
                
                **2005**
                
                **2004****Interest
                    income:**Loans
                
                $
                25,619,000
                
                $
                20,927,000
                
                $
                17,346,000Securities
                    held to maturity:Taxable
                
                
                879,000
                
                
                849,000
                
                
                983,000Nontaxable
                
                
                562,000
                
                
                546,000
                
                
                622,000Securities
                    available for sale:Taxable
                
                
                2,746,000
                
                
                2,207,000
                
                
                2,092,000Nontaxable
                
                
                36,000
                
                
                35,000
                
                
                35,000FHLB
                    dividends
                
                
                107,000
                
                
                74,000
                
                
                28,000Other
                    interest-earning assets
                
                
                51,000
                
                
                262,000
                
                
                46,000Total
                    interest income
                
                
                30,000,000
                
                
                24,900,000
                
                
                21,152,000**Interest
                    expense:**Deposits
                
                
                8,880,000
                
                
                5,490,000
                
                
                3,604,000Borrowed
                    money
                
                
                2,036,000
                
                
                1,199,000
                
                
                1,181,000Total
                    interest expense
                
                
                10,916,000
                
                
                6,689,000
                
                
                4,785,000Net
                    interest income before provision for loan losses
                
                
                19,084,000
                
                
                18,211,000
                
                
                16,367,000Provision
                    for loan losses
                
                
                264,000
                
                
                600,000
                
                
                540,000Net
                    interest income after provision for loan losses
                
                
                18,820,000
                
                
                17,611,000
                
                
                15,827,000**Noninterest
                    income:**Fees
                    and service charges
                
                
                1,660,000
                
                
                1,446,000
                
                
                1,413,000Bank
                    owned life insurance
                
                
                312,000
                
                
                210,000
                
                
                -Loss
                    on calls and sales of securities, net
                
                
                (435,000
                )
                
                -
                
                
                (3,000
                )Gain
                    on sales of mortgage loans
                
                
                235,000
                
                
                239,000
                
                
                135,000Gain
                    on sale of credit card loans
                
                
                746,000
                
                
                -
                
                
                -Merchant
                    processing
                
                
                1,237,000
                
                
                914,000
                
                
                779,000Miscellaneous
                
                
                434,000
                
                
                431,000
                
                
                402,000Total
                    noninterest income
                
                
                4,189,000
                
                
                3,240,000
                
                
                2,726,000**Noninterest
                    expense:**Salaries
                    and employee benefits
                
                
                6,792,000
                
                
                6,080,000
                
                
                5,639,000Occupancy,
                    net
                
                
                1,312,000
                
                
                1,010,000
                
                
                969,000Equipment
                
                
                893,000
                
                
                728,000
                
                
                736,000Data
                    processing
                
                
                1,272,000
                
                
                1,150,000
                
                
                1,016,000Advertising
                
                
                383,000
                
                
                422,000
                
                
                285,000FDIC
                    insurance premium
                
                
                51,000
                
                
                49,000
                
                
                49,000Amortization
                    of intangible assets
                
                
                38,000
                
                
                39,000
                
                
                41,000Charitable
                    contributions
                
                
                755,000
                
                
                689,000
                
                
                582,000Stationery
                    and supplies
                
                
                338,000
                
                
                263,000
                
                
                239,000Merchant
                    processing
                
                
                1,122,000
                
                
                813,000
                
                
                712,000Bank-card
                    related services
                
                
                483,000
                
                
                454,000
                
                
                409,000Miscellaneous
                
                
                2,190,000
                
                
                2,170,000
                
                
                1,824,000Total
                    noninterest expenses
                
                
                15,629,000
                
                
                13,867,000
                
                
                12,501,000Income
                    before income tax expense
                
                
                7,380,000
                
                
                6,984,000
                
                
                6,052,000Income
                    tax expense
                
                
                2,627,000
                
                
                2,504,000
                
                
                2,204,000Net
                    income
                
                $
                4,753,000
                
                $
                4,480,000
                
                $
                3,848,000Basic
                    earnings per share
                
                $
                0.95
                
                $
                0.90
                
                $
                0.78Diluted
                    earnings per share
                
                $
                0.94
                
                $
                0.89
                
                $
                0.77Cash
                    dividends per share
                
                $
                0.30
                
                $
                0.25
                
                $
                0.21Weighted
                    average number of common shares outstanding
                
                
                5,020,939
                
                
                4,990,916
                
                
                4,911,401Weighted
                    average number of diluted commonshares outstanding
                
                
                5,067,743
                
                
                5,049,681
                
                
                4,982,345
 
 *See
          accompanying notes to consolidated financial statements.*
  A-23
  **Stewardship
          Financial Corporation and Subsidiary**
 **Consolidated
          Statements of Changes in Stockholders’ Equity**
 
 **Years
                    Ended December 31, 2006, 2005, and 2004****Accumulated****Other****Comprehensive****Comm****on
                    Stock**
                
                **Retained**
                
                **Treasu****ry
                    Stock**
                
                **Income/(Loss),****Shares**
                
                **Amount**
                
                **Earnings**
                
                **Shares**
                
                **Amount**
                
                **Net**
                
                **Total**Balance
                    — January 1, 2004
                
                
                4,298,894
                
                $
                19,552,000
                
                $
                7,593,000
                
                
                —
                
                $
                —
                
                $
                4,000
                
                $
                27,149,000Cash
                    dividends paid ($0.21 per share)
                
                
                —
                
                
                —
                
                
                (1,016,000
                )
                
                —
                
                
                —
                
                
                —
                
                
                (1,016,000
                )5%
                    Stock dividend
                
                
                155,502
                
                
                3,577,000
                
                
                (3,679,000
                )
                
                4,339
                
                
                100,000
                
                
                —
                
                
                (2,000
                )Common
                    stock issued under stock plans
                
                
                14,892
                
                
                322,000
                
                
                —
                
                
                15,661
                
                
                354,000
                
                
                —
                
                
                676,000Stock
                    options exercised
                
                
                30,356
                
                
                292,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                292,000Tax
                    benefit on stock options exercised
                
                
                —
                
                
                150,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                150,000Repurchase
                    common stock
                
                
                —
                
                
                —
                
                
                —
                
                
                (20,000
                )
                
                (
                    454,000
                )
                
                —
                
                
                (454,000
                )Comprehensive
                    income:Net
                    income for the year ended December 31, 2004
                
                
                —
                
                
                —
                
                
                3,848,000
                
                
                —
                
                
                —
                
                
                —
                
                
                3,848,000Unrealized
                    holding losses on securitiesavailable sale arising during theperiod
                    (net tax benefit of $110,000)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (181,000
                )
                
                (181,000
                )Reclassification
                    adjustment for losses innet income (net tax benefit of $1,000)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,000
                )
                
                (2,000
                )Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,665,000Balance
                    — December 31, 2004
                
                
                4,499,644
                
                $
                23,893,000
                
                $
                6,746,000
                
                
                —
                
                $
                —
                
                $
                (179,000
                )
                $
                30,460,000Cash
                    dividends paid ($0.25 per share)
                
                
                —
                
                
                
                
                
                (1,244,000
                )
                
                —
                
                
                —
                
                
                —
                
                
                (1,244,000
                )5%
                    Stock dividend
                
                
                227,275
                
                
                3,334,000
                
                
                (3,335,000
                )
                
                
                
                
                
                
                
                
                
                
                (1,000
                )Common
                    stock issued under stock plans
                
                
                45,280
                
                
                771,000
                
                
                
                
                
                379
                
                
                5,000
                
                
                —
                
                
                776,000Stock
                    options exercised
                
                
                15,690
                
                
                143,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                143,000Tax
                    benefit on stock options exercised
                
                
                —
                
                
                70,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                70,000Repurchase
                    common stock
                
                
                —
                
                
                —
                
                
                —
                
                
                (39,960
                )
                
                (561,000
                )
                
                —
                
                
                (561,000
                )Comprehensive
                    income:Net
                    income for the year ended December 31, 2005
                
                
                —
                
                
                —
                
                
                4,480,000
                
                
                —
                
                
                —
                
                
                —
                
                
                4,480,000Unrealized
                    holding losses on securitiesavailable for sale arising during the period (net tax benefit
                    of
                    $462,000)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (739,000
                )
                
                (739,000
                )Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,741,000Balance
                    — December 31, 2005
                
                
                4,787,889
                
                $
                28,211,000
                
                $
                6,647,000
                
                
                (39,581
                )
                $
                (556,000
                )
                $
                (918,000
                )
                $
                33,384,000Cash
                    dividends paid ($0.30 per share)
                
                
                —
                
                
                —
                
                
                (1,529,000
                )
                
                —
                
                
                —
                
                
                —
                
                
                (1,529,000
                )Common
                    stock issued under dividend reinvestment plan
                
                
                —
                
                
                (3,000
                )
                
                —
                
                
                29,773
                
                
                415,000
                
                
                —
                
                
                412,000Payment
                    of discount on dividendreinvestment plan
                
                
                —
                
                
                (19,000
                )
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (19,000
                )5%
                    Stock dividend
                
                
                194,294
                
                
                2,501,000
                
                
                (3,121,000
                )
                
                45,684
                
                
                619,000
                
                
                —
                
                
                (1,000
                )Common
                    stock issued under stock plans
                
                
                —
                
                
                —
                
                
                —
                
                
                4,865
                
                
                69,000
                
                
                —
                
                
                69,000Stock
                    option compensation expense
                
                
                
                
                
                51,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                51,000Stock
                    options exercised
                
                
                35,736
                
                
                233,000
                
                
                —
                
                
                (9,000
                )
                
                (132,000
                )
                
                —
                
                
                101,000Tax
                    benefit on stock options exercised
                
                
                —
                
                
                174,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                174,000Repurchase
                    common stock
                
                
                —
                
                
                —
                
                
                —
                
                
                (31,741
                )
                
                (415,000
                )
                
                —
                
                
                (415,000
                )Comprehensive
                    income:Net
                    income for the year ended December 31, 2006
                
                
                —
                
                
                —
                
                
                4,753,000
                
                
                —
                
                
                —
                
                
                —
                
                
                4,753,000Unrealized
                    holding gains on securitiesavailable for sale arising during the period (net of taxes of
                    $351,000)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                605,000
                
                
                605,000Reclassification
                    adjustment for losses innet income (net tax benefit of $156,000)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (279,000
                )
                
                (279,000
                )Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,079,000Balance
                    — December 31, 2006
                
                
                5,017,919
                
                $
                31,148,000
                
                $
                6,750,000
                
                
                —
                
                $
                —
                
                $
                (592,000
                )
                $
                37,306,000
 
 *See
          accompanying notes to consolidated financial statements.*
  A-24
  **Stewardship
          Financial Corporation and Subsidiary**
 **Consolidated
          Statements of Cash Flows**
  **Years********Ended
                      December********31,****2006**
                  
                  **2005**
                  
                  **2004****Cash
                      flows from operating activities:**Net
                      income
                  
                  $
                  4,753,000
                  
                  $
                  4,480,000
                  
                  $
                  3,848,000Adjustments
                      to reconcile net income to net cash provided by operating
                      activities:Depreciation
                      and amortization of premisesand equipment
                  
                  
                  712,000
                  
                  
                  577,000
                  
                  
                  622,000Amortization
                      of premiums and accretion ofdiscounts, net
                  
                  
                  244,000
                  
                  
                  428,000
                  
                  
                  593,000Accretion
                      of deferred loan fees
                  
                  
                  (130,000
                  )
                  
                  (127,000
                  )
                  
                  (142,000
                  )Provision
                      for loan losses
                  
                  
                  264,000
                  
                  
                  600,000
                  
                  
                  540,000Originations
                      of mortgage loans held for sale
                  
                  
                  (23,462,000
                  )
                  
                  (27,897,000
                  )
                  
                  (12,032,000
                  )Proceeds
                      from sale of mortgage loans
                  
                  
                  23,583,000
                  
                  
                  26,323,000
                  
                  
                  12,515,000Gain
                      on sale of loans
                  
                  
                  (235,000
                  )
                  
                  (239,000
                  )
                  
                  (135,000
                  )Loss
                      on sale of securities available for sale
                  
                  
                  435,000
                  
                  
                  —
                  
                  
                  3,000Loss
                      on writeoff of fixed asset
                  
                  
                  —
                  
                  
                  —
                  
                  
                  63,000Gain
                      on sale of credit card portfolio
                  
                  
                  (746,000
                  )
                  
                  —
                  
                  
                  —Deferred
                      income tax benefit
                  
                  
                  (115,000
                  )
                  
                  (343,000
                  )
                  
                  (254,000
                  )Amortization
                      of intangible assets
                  
                  
                  38,000
                  
                  
                  39,000
                  
                  
                  41,000Increase
                      in accrued interest receivable
                  
                  
                  (480,000
                  )
                  
                  (510,000
                  )
                  
                  (59,000
                  )Increase
                      (decrease) in accrued interest payable
                  
                  
                  576,000
                  
                  
                  422,000
                  
                  
                  (46,000
                  )Increase
                      in bank owned life insurance
                  
                  
                  (312,000
                  )
                  
                  (210,000
                  )
                  
                  —Nonqualified
                      stock option expense
                  
                  
                  51,000
                  
                  
                  —
                  
                  
                  —(Increase)
                      decrease in other assets
                  
                  
                  (562,000
                  )
                  
                  (131,000
                  )
                  
                  360,000Increase
                      (decrease) in other liabilities
                  
                  
                  69,000
                  
                  
                  147,000
                  
                  
                  (59,000
                  )Net
                      cash provided by operating activities
                  
                  
                  4,683,000
                  
                  
                  3,559,000
                  
                  
                  5,858,000**Cash
                      flows from investing activities:**Purchase
                      of securities available for sale
                  
                  
                  (37,817,000
                  )
                  
                  (17,175,000
                  )
                  
                  (13,689,000
                  )Proceeds
                      from maturities and principal repaymentson
                      securities available for sale
                  
                  
                  12,373,000
                  
                  
                  7,637,000
                  
                  
                  8,699,000Proceeds
                      from sales and calls on securitiesavailable for sale
                  
                  
                  16,867,000
                  
                  
                  500,000
                  
                  
                  9,211,000Purchase
                      of securities held to maturity
                  
                  
                  (16,250,000
                  )
                  
                  (6,060,000
                  )
                  
                  (3,273,000
                  )Proceeds
                      from maturities and principal repayments on securities held
                      to
                      maturity
                  
                  
                  13,777,000
                  
                  
                  8,107,000
                  
                  
                  9,968,000Proceeds
                      from calls of securities held to maturity
                  
                  
                  950,000
                  
                  
                  -
                  
                  
                  5,235,000Redemption
                      (purchase) of FHLB— NY stock
                  
                  
                  40,000
                  
                  
                  (296,000
                  )
                  
                  (321,000
                  )Net
                      increase in loans
                  
                  
                  (27,051,000
                  )
                  
                  (49,540,000
                  )
                  
                  (34,531,000
                  )Proceeds
                      from sale of credit card portfolio
                  
                  
                  4,196,000
                  
                  
                  —
                  
                  
                  —Purchase
                      of bank owned life insurance
                  
                  
                  —
                  
                  
                  (8,000,000
                  )
                  
                  —Additions
                      to premises and equipment
                  
                  
                  (1,346,000
                  )
                  
                  (3,609,000
                  )
                  
                  (481,000
                  )Net
                      cash used in investing activities
                  
                  
                  (34,261,000
                  )
                  
                  (68,436,000
                  )
                  
                  (19,182,000
                  )**Cash
                      flows from financing activities:**Net
                      (decrease) increase in noninterest - bearing deposits
                  
                  
                  (2,226,000
                  )
                  
                  3,683,000
                  
                  
                  9,396,000Net
                      increase in interest - bearing deposits
                  
                  
                  32,983,000
                  
                  
                  43,527,000
                  
                  
                  5,984,000Net
                      (increase) decrease in securities soldunder agreement to repurchase
                  
                  
                  4,292,000
                  
                  
                  1,361,000
                  
                  
                  (177,000
                  )Net
                      (decrease) increase in short term borrowings
                  
                  
                  (1,000,000
                  )
                  
                  7,900,000
                  
                  
                  5,500,000Payments
                      on long term borrowings
                  
                  
                  (1,594,000
                  )
                  
                  (1,543,000
                  )
                  
                  (1,371,000
                  )Cash
                      dividends paid on common stock
                  
                  
                  (1,118,000
                  )
                  
                  (535,000
                  )
                  
                  (410,000
                  )Payment
                      of discount on dividend reinvestment plan
                  
                  
                  (19,000
                  )
                  
                  —
                  
                  
                  —Purchase
                      of treasury stock
                  
                  
                  (415,000
                  )
                  
                  (561,000
                  )
                  
                  (454,000
                  )Exercise
                      of stock options
                  
                  
                  101,000
                  
                  
                  143,000
                  
                  
                  292,000Tax
                      benefit of stock options
                  
                  
                  174,000
                  
                  
                  70,000
                  
                  
                  150,000Issuance
                      of common stock
                  
                  
                  69,000
                  
                  
                  68,000
                  
                  
                  68,000Net
                      cash provided by financing activities
                  
                  
                  31,247,000
                  
                  
                  54,113,000
                  
                  
                  18,978,000Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  1,669,000
                  
                  
                  (10,764,000
                  )
                  
                  5,654,000Cash
                      and cash equivalents - beginning
                  
                  
                  14,028,000
                  
                  
                  24,792,000
                  
                  
                  19,138,000Cash
                      and cash equivalents - ending
                  
                  $
                  15,697,000
                  
                  $
                  14,028,000
                  
                  $
                  24,792,000**Supplemental
                      disclosures of cash flow information:**Cash
                      paid during the year for interest
                  
                  
                  10,341,000
                  
                  
                  6,209,000
                  
                  
                  4,831,000Cash
                      paid during the year for income taxes
                  
                  
                  2,799,000
                  
                  
                  2,620,000
                  
                  
                  2,260,000Noncash
                      financing activities - issuance of common stock under dividend
                      reinvestment plan
                  
                  
                  412,000
                  
                  
                  710,000
                  
                  
                  608,000
 
 *See
          accompanying notes to consolidated financial statements.*
  A-25
  **Stewardship
          Financial Corporation and Subsidiary**
 **Notes
          to Consolidated Financial Statements**
 
 **Note
          1. SIGNIFICANT ACCOUNTING POLICIES**
 
 **Nature
          of Operations and Principles of Consolidation**
 
 The
          consolidated financial statements include the accounts of Stewardship Financial
          Corporation and its wholly owned subsidiary, Atlantic Stewardship Bank,
          (‘the
          Bank”), together referred to as “the Corporation”. Atlantic Stewardship Bank
          includes its wholly owned subsidiaries, Stewardship Investment Corporation
          and
          Stewardship Realty LLC. All significant intercompany accounts and transactions
          have been eliminated in the consolidated financial statements. Certain
          prior
          period amounts have been reclassified to conform to the current presentation.
 
 The
          Corporation provides financial services through its offices in Bergen,
          Passaic,
          and Morris Counties, New Jersey. Its primary products are checking, savings,
          and
          term certificate accounts, and its primary lending products are commercial,
          residential mortgage and installment loans. Substantially all loans are
          secured
          by specific items of collateral including business assets, consumer assets,
          and
          commercial and residential real estate. Commercial loans are expected to
          be
          repaid from cash flow generated from the operations of businesses. There
          are no
          significant concentrations of loans to any one industry or customer. The
          Corporation’s lending activities are concentrated in loans secured by real
          estate located in northern New Jersey and therefore collectibility of the
          loan
          portfolio is susceptible to changes in real estate market conditions in
          the
          northern New Jersey market. The Corporation has not made loans to borrowers
          outside the United States.
 
 **Basis
          of consolidated financial statements presentation**
 
 The
          consolidated financial statements of the Corporation have been prepared
          in
          conformity with U.S. generally accepted accounting principles. In preparing
          the
          financial statements, management is required to make estimates and assumptions
          that affect the amounts reported in the financial statements and the disclosures
          provided. Actual results could differ significantly from those estimates.
          The
          allowance for loan losses and fair values of financial instruments are
          particularly subject to change.
 
 **Cash
          and cash equivalents**
 
 Cash
          and
          cash equivalents include cash and deposits with other financial institutions
          under 90 days, interest-bearing deposits in other banks under 90 days and
          federal funds sold. Generally, federal funds are sold for one-day periods.
          Net
          cash flows are reported for customer loan and deposit transactions and
          federal
          funds purchased and repurchase agreements.
 
 **Securities
          available for sale and held to maturity**
 
 The
          Corporation classifies its securities as securities held to maturity or
          securities available for sale. Investments in debt securities that the
          Corporation has the positive intent and ability to hold to maturity are
          classified as securities held to maturity and are carried at cost, adjusted
          for
          amortization of premium and accretion of discount, which are recognized
          as
          adjustments to income, on a level yield basis. All other securities are
          classified as securities available for sale. Securities available for sale
          may
          be sold prior to maturity in response to changes in interest rates or prepayment
          risk, for asset/liability management purposes, or other similar factors.
          These
          securities are carried at fair value with unrealized holding gains or losses
          reported in a separate component of stockholders’ equity, net of the related tax
          effects. Interest income includes amortization of purchase premium or discount.
          Realized gains or losses on sales of securities are based upon the specific
          identification method.
 
 Declines
          in the fair value of securities below their cost that are other than temporary
          are reflected as realized losses. In estimating other-than-temporary losses,
          management considers the length of time and extent that fair value has
          been less
          than cost, the financial condition and near term prospects of the issuer,
          and
          the Corporation’s ability and intent to hold the security for a period
          sufficient to allow for any anticipated recovery in fair value.
 
 **Federal
          Home Loan Bank (FHLB) stock**
 
 The
          Bank
          is a member of the FHLB system. Members are required to own a certain amount
          of
          stock based on the level of borrowings and other factors. FHLB stock is
          carried
          at cost, classified as a restricted security, and periodically evaluated
          for
          impairment based on the ultimate recovery of par value. Cash dividends
          are
          reported as income.
  A-26
  **Mortgage
          loans held for sale**
 
 Mortgage
          loans held for sale are reported at the lower of cost or market on an aggregate
          basis. Mortgage loans held for sale are carried net of deferred fees, which
          are
          recognized as income at the time the loans are sold to permanent investors.
          Gains or losses on the sale of mortgage loans held for sale are recognized
          at
          the settlement date and are determined by the difference between the net
          proceeds and the amortized cost. All loans are sold with servicing rights
          released to the buyer.
 
 **Loans**
 
 Loans
          that management has the intent and ability to hold for the foreseeable
          future or
          until maturity or payoff are reported at the principal amount outstanding,
          net
          of unearned interest, deferred loan fees and costs and an allowance for
          loan
          losses. Interest income is accrued on the unpaid principal balance. Loan
          origination fees, net of certain direct origination costs are deferred
          and
          recognized in interest income using the level-yield method without anticipating
          prepayments.
 
 Loans
          are
          considered nonperforming when contractual principal and interest has not
          been
          paid for more than 90 days. The accrual of interest income is discontinued
          on a
          loan when certain factors indicate reasonable doubt as to the collectibility
          of
          principal and interest. At the time a loan is placed on nonaccrual status,
          previously accrued and uncollected interest is reversed against interest
          income
          in the current period. Interest received on such loans is accounted for
          on the
          cash-basis or cost-recovery method until qualifying for return to accrual.
          Loans
          are returned to an accrual status when all the principal and interest amounts
          contractually due are brought current and future payments are reasonably
          assured.
 
 **Allowance
          for loan losses**
 
 The
          allowance for loan losses is a valuation allowance for probable incurred
          credit
          losses. Loan losses are charged against the allowance when management believes
          the uncollectibility of a loan balance is confirmed. Subsequent recoveries,
          if
          any, are credited to the allowance. Management estimates the allowance
          balance
          required using past loan loss experience, the nature and volume of the
          portfolio, information about specific borrower situations and estimated
          collateral values, economic factors and other factors. Allocations of the
          allowance may be made for specific loans, but the entire allowance is available
          for any loan that, in management’s judgment, should be charged off.
 
 The
          allowance consists of specific and general components. The specific component
          relates to loans that are individually classified as impaired or loans
          otherwise
          classified as substandard or doubtful. The general component covers
          non-classified loans and is based on historical loss experience adjusted
          for
          current factors.
 
 A
          loan is
          considered impaired when, based on current information and events, it is
          probable that the Corporation will be unable to collect the scheduled payments
          of principal or interest when due according to the contractual terms of
          the loan
          agreement. Factors considered by management in determining impairment include
          payment status, collateral value, and the probability of collecting scheduled
          principal and interest payments when due. Loans that experience insignificant
          payment delays and payment shortfalls generally are not classified as impaired.
          Management determines the significance of payment delays and payment shortfalls
          on a case-by-case basis, taking into consideration all of the circumstances
          surrounding the loan and the borrower, including the length of the delay,
          the
          reasons for the delay, the borrower’s prior payment record, and the amount of
          the shortfall in relation to the principal and interest owed. Impairment
          is
          measured on a loan by loan basis by either the present value of expected
          future
          cash flows discounted at the loan’s effective interest rate, the loans
          obtainable market price, or the fair value of the collateral if the loan
          is
          collateral dependent. Large groups of smaller balance homogeneous loans,
          such as
          consumer and residential real estate loans are collectively evaluated for
          impairment and accordingly, they are not separately identified for impairment
          disclosures.
 
 **Premises
          and equipment**
 
 Land
          is
          stated at cost. Buildings and improvements and furniture, fixtures and
          equipment
          are stated at cost, less accumulated depreciation computed on the straight-line
          method over the estimated lives of each type of asset. Estimated useful
          lives
          are three to forty years for buildings and improvements and three to twenty-five
          years for furniture, fixtures and equipment. Leasehold improvements are
          stated
          at cost less accumulated amortization computed on the straight-line method
          over
          the shorter of the term of the lease or useful life. Significant renewals
          and
          improvements are capitalized. Maintenance and repairs are charged to operations
          as incurred.
 
 **Other
          real estate owned**
 
 Other
          real estate owned (OREO) consists of foreclosed property and is carried
          at the
          lower of cost or fair value less estimated selling costs. When a property
          is
          acquired, the excess of the carrying amount over fair value, if any, is
          charged
          to the allowance for loan losses. Subsequent adjustments to the carrying
          value
          are recorded in an allowance for OREO and charged to OREO expense. As of
          December 31, 2006 and 2005, the Corporation had no OREO.
  A-27
  **Intangible
          assets**
 
 Gross
          intangible assets totaled $750,000 with accumulated amortization of $648,000
          and
          $610,000 at December 31, 2006 and 2005, respectively. Intangible assets
          are
          comprised of other intangible assets and core deposit intangibles. Other
          intangible assets represent the excess of the fair value of liabilities
          assumed
          over the fair value of tangible assets acquired through a branch acquisition,
          completed in 1995, which did not qualify as a business combination. Other
          intangible assets amounted to $102,000 and $134,000 at December 31, 2006
          and
          December 31, 2005, respectively, and are amortized on a straight-line method
          over a period of fifteen years.
 
 The
          core
          deposit intangible represents the intangible value of depositor relationships
          resulting from deposit liabilities assumed in the same acquisition. The
          core
          deposit intangible amounted to $6,000 at December 31, 2005, and is amortized
          on
          an accelerated basis over a period of twelve years. The intangible was
          fully
          amortized at December 31, 2006.
 
 **Bank
          owned life insurance**
 
 The
          Corporation has purchased life insurance policies on certain key officers.
          Bank
          owned life insurance is recorded at its cash surrender value which is the
          amount
          that can be realized.
 
 **Treasury
          Stock**
 
 Repurchases
          of common stock are recorded as treasury stock at cost. Treasury stock
          is
          reissued using the first in first out method. Treasury stock may be reissued
          for
          exercise of stock options, dividend reinvestment plans, stock dividends
          or other
          stock issuances. The difference between the cost and the market value at
          the
          time the treasury stock is reissued is shown as an adjustment to common
          stock.
 
 **Dividend
          Reinvestment Plan**
 
 The
          Corporation offers shareholders the opportunity to participate in a dividend
          reinvestment plan. Plan participants may reinvest cash dividends to purchase
          new
          shares of stock at 95% of the market value, based on the most recent trades.
          Previously, the Corporation purchased treasury stock or issued authorized
          but
          unissued shares to fund the dividend reinvestment plan and issued stock
          to the
          plan participants in place of cash dividends. Effective May 16, 2006, the
          Corporation changed the policy to purchase shares for the dividend reinvestment
          participants on the open market through an approved broker. The Corporation
          uses
          the cash dividends due the plan participants to purchase shares from the
          broker.
          The Corporation reimburses the broker for the 5% discount when the purchase
          of
          the Corporation’s stock is completed.
 
 **Stock-based
          compensation**
 
 Effective
          January 1, 2006, the Corporation adopted Statement of Financial Accounting
          Standards No. 123(R), “Share Based Payment” (SFAS No. 123(R)), using the
          modified prospective transition method. Accordingly, the Corporation has
          recorded stock-based compensation cost using the fair value method starting
          in
          2006. For 2006, adopting this standard resulted in a reduction of income
          before
          taxes of $51,000 and a reduction in net income of $31,000. Due to the relatively
          small amount of compensation expense, basic and diluted earnings per share,
          cash
          flow from operations and cash flow from financing activities were not
          significantly impacted.
 
 Prior
          to
          January 1, 2006, stock compensation expense under stock options was reported
          using the intrinsic value method; therefore, no stock-based compensation
          cost is
          reflected in net income for the years ending December 31, 2005 and 2004,
          as all
          options granted had an exercise price equal to or greater than the market
          price
          of the underlying common stock at date of grant.
 
 The
          following table illustrates the effect on net income and earnings per share
          if
          expense was measured using the fair value recognition provisions of FASB
          Statement No. 123, “Accounting for Stock-Based Compensation”, for the years
          ending December 31.
 
 **2005**
                
                **2004****Net
                    Income:**Net
                    income as reported
                
                $
                4,480,000
                
                $
                3,848,000Stock-based
                    compensation included in net income, net of related tax
                    effects
                
                
                19,000
                
                
                22,000Total
                    stock-based compensation expense determined under fair value
                    based method
                    for all awards, net of related tax effects
                
                
                (100,000
                )
                
                (88,000
                )Pro
                    forma net income
                
                $
                4,399,000
                
                $
                3,782,000
  A-28
  **Earnings
          per share:**
 **2005**
                
                **2004****Net
                    Income:**As
                    reported basic earnings per share
                
                $
                0.90
                
                $
                0.78As
                    reported diluted earnings per share
                
                
                0.89
                
                
                0.77Pro
                    forma basic earnings per share
                
                
                0.89
                
                
                0.77Pro
                    forma diluted earnings per share.
                
                
                0.87
                
                
                0.76
  **Income
          taxes**
 
 Income
          tax expense is the total of the current year income tax due or refundable
          and
          the change in deferred tax assets and liabilities. Deferred tax assets
          and
          liabilities are the expected future tax amounts for the temporary differences
          between carrying amounts and tax bases of assets and liabilities, computed
          using
          enacted tax rates. A valuation allowance, if needed, reduces deferred tax
          assets
          to the amount expected to be realized.
 
 **Other
          comprehensive income**
 
 Comprehensive
          income consists of net income and other comprehensive income. Other
          comprehensive income includes unrealized gains and losses on securities
          available for sale which are also recognized as separate components of
          equity.
 
 **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 the 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.
 
 All
          share
          and per share amounts have been restated to reflect a 5% stock dividend
          paid
          November, 2004, 2005 and 2006 and a 4 for 3 stock split issued in July
          2005.
 
 **Loss
          contingencies**
 
 Loss
          contingencies, including claims and legal actions arising in the ordinary
          course
          of business, are recorded as liabilities when the likelihood of loss is
          probable
          and an amount or range of loss can be reasonably estimated. Management
          does not
          believe there are such matters that will have a material effect on the
          financial
          statements.
 
 **Dividend
          restriction**
 
 Banking
          regulations require maintaining certain capital levels and may limit the
          dividends paid by the bank to the holding company or by the holding company
          to
          shareholders.
 
 **Fair
          value of financial instruments**
 
 Fair
          values of financial instruments are estimated using relevant market information
          and other assumptions, as more fully disclosed in a separate note. Fair
          value
          estimates involve uncertainties and matters of significant judgment regarding
          interest rates, credit risk, prepayments, and other factors, especially
          in the
          absence of broad markets for particular items. Changes in assumptions or
          in
          market conditions could significantly affect the estimates.
 
 **Note
          2. RESTRICTIONS ON CASH AND DUE FROM BANKS**
 
 Cash
          reserves are required to be maintained on deposit with the Federal Reserve
          Bank
          based on deposits. In March 2005, the Corporation deployed a deposit
          reclassification software system that allowed the Corporation to minimize
          the
          balances needed to be held at the Federal Reserve Bank to maintain required
          reserve balances. The average amount of the reserves on deposit for the
          years
          ended December 31, 2006 and 2005 was approximately $300,000 and $2.2 million,
          respectively.
  A-29
  **Note
          3. SECURITIES AVAILABLE FOR SALE**
 
 The
          fair
          value of available for sale securities and the related gross unrealized
          gains
          and losses recognized in accumulated other comprehensive income were as
          follows:
 
 **December
                    31,********2006****Fair**
                
                **Gros****s
                    Unrealized****Value**
                
                **Gains**
                
                **Losses**U.S.
                    government-sponsored agencies:Within
                    one year
                
                $
                4,180,000
                
                $
                —
                
                $
                20,000After
                    one year through five years
                
                
                11,375,000
                
                
                1,000
                
                
                138,000After
                    five years through ten years
                
                
                8,384,000
                
                
                27,000
                
                
                35,000After
                    ten years
                
                
                8,178,000
                
                
                —
                
                
                154,00032,117,000
                
                
                28,000
                
                
                347,000Obligations
                    of state and political subdivisions:After
                    one year through five years
                
                
                1,331,000
                
                
                —
                
                
                25,000After
                    five years through ten years
                
                
                143,000
                
                
                —
                
                
                —After
                    ten years
                
                
                349,000
                
                
                —
                
                
                5,0001,823,000
                
                
                —
                
                
                30,000Mortgage
                    - backed securities:Within
                    one year
                
                
                4,000
                
                
                —
                
                
                —After
                    one year through five years
                
                
                2,190,000
                
                
                —
                
                
                75,000After
                    five years through ten years
                
                
                6,376,000
                
                
                5,000
                
                
                154,000After
                    ten years
                
                
                29,137,000
                
                
                35,000
                
                
                412,00037,707,000
                
                
                40,000
                
                
                641,000Community
                    Reinvestment Act Fund:Within
                    one year
                
                
                1,099,000
                
                
                —
                
                
                21,000$
                72,746,000
                
                $
                68,000
                
                $
                1,039,000
 
 **December
                    31,********2005****Fair**
                
                **Gross****Unrealized****Value**
                
                **Gains**
                
                **Losses**U.S.
                    Treasury:Within
                    one year
                
                $
                496,000
                
                $
                —
                
                $
                5,000U.S.
                    government - sponsored agencies:Within
                    one year
                
                
                5,043,000
                
                
                —
                
                
                75,000After
                    one year through five years
                
                
                26,456,000
                
                
                —
                
                
                567,000After
                    five years through ten years
                
                
                979,000
                
                
                —
                
                
                20,00032,478,000
                
                
                —
                
                
                662,000Obligations
                    of state and politicalsubdivisions:Within
                    one year
                
                
                694,000
                
                
                —
                
                
                2,000After
                    one year through five years
                
                
                1,032,000
                
                
                —
                
                
                30,000After
                    five years through ten years
                
                
                305,000
                
                
                —
                
                
                5,0002,031,000
                
                
                —
                
                
                37,000Mortgage
                    - backed securities:After
                    one year through five years
                
                
                1,933,000
                
                
                —
                
                
                77,000After
                    five years through ten years
                
                
                7,138,000
                
                
                4,000
                
                
                233,000After
                    ten years
                
                
                19,039,000
                
                
                4,000
                
                
                467,00028,110,000
                
                
                8,000
                
                
                777,000Community
                    Reinvestment Act Fund:Within
                    one year
                
                
                1,051,000
                
                
                —
                
                
                20,000$
                64,166,000
                
                $
                8,000
                
                $
                1,501,000
 
 Issuers
          may have the right to call or prepay obligations with or without call or
          prepayment penalties. This might cause actual maturities to differ from
          the
          contractual maturities summarized above.
  A-30
  Mortgage—backed
          securities are comprised primarily of government agencies such as the Government
          National Mortgage Association ("GNMA") and government sponsored agencies
          such as
          the Federal National Mortgage Association ("FNMA"), the Federal Home Loan
          Banks
          ("FHLB") and the Federal Home Loan Mortgage Corporation ("FHLMC"). At year
          end
          2006 and 2005, there were no holdings of securities of any one issuer other
          than
          the U.S. government and its agencies in an amount greater than 10% of
          stockholders' equity.
 
 The
          following tables summarize the fair value and unrealized losses of those
          investment securities which reported an unrealized loss at December 31,
          2006 and
          2005, and if the unrealized loss position was continuous for the twelve
          months
          prior to December 31, 2006 and 2005.
 
 **Less
                    than****12
                    Months**
                
                **12
                    Months****or
                    Longer**
                
                **Total****Unrealized**
                
                
                
                **Unrealized**
                
                
                
                **Unrealized****2006******
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**U.S.
                    governmentsponsored
                    agencies
                
                $
                16,551,000
                
                $
                (181,000
                )
                $
                11,980,000
                
                $
                (166,000
                )
                $
                28,531,000
                
                $
                (347,000
                )Obligations
                    of state andpolitical
                    subdivisions
                
                
                492,000
                
                
                (5,000
                )
                
                1,071,000
                
                
                (25,000
                )
                
                1,563,000
                
                
                (30,000
                )Mortgage-backed
                    securities
                
                
                7,433,000
                
                
                (59,000
                )
                
                20,546,000
                
                
                (582,000
                )
                
                27,979,000
                
                
                (641,000
                )Community
                    ReinvestmentAct
                    Fund
                
                
                —
                
                
                —
                
                
                1,099,000
                
                
                (21,000
                )
                
                1,099,000
                
                
                (21,000
                )Total
                    temporarily impairedsecurities
                
                $
                24,476,000
                
                $
                (245,000
                )
                $
                34,696,000
                
                $
                (794,000
                )
                $
                59,172,000
                
                $
                (1,039,000
                )
 
  **Less
                    than 12****Months**
                
                **12
                    Months****or
                    Longer**
                
                **Tota****1****Unrealized**
                
                
                
                **Unrealized**
                
                
                
                **Unrealized****2005******
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**U.S.
                    Treasury
                
                $
                —
                
                $
                —
                
                $
                496,000
                
                $
                (5,000
                )
                $
                496,000
                
                $
                (5,000
                )U.S.
                    governmentsponsored
                    agencies
                
                
                16,095,000
                
                
                (267,000
                )
                
                16,383,000
                
                
                (395,000
                )
                
                32,478,000
                
                
                (662,000
                )Obligations
                    of state andpolitical
                    subdivisions
                
                
                304,000
                
                
                (5,000
                )
                
                1,727,000
                
                
                (32,000
                )
                
                2,031,000
                
                
                (37,000
                )Mortgage-backed
                    securities
                
                
                19,432,000
                
                
                (428,000
                )
                
                8,280,000
                
                
                (349,000
                )
                
                27,712,000
                
                
                (777,000
                )Community
                    ReinvestmentAct
                    Fund
                
                
                1,051,000
                
                
                (20,000
                )
                
                —
                
                
                —
                
                
                1,051,000
                
                
                (20,000
                )Total
                    temporarily impairedsecurities
                
                $
                36,882,000
                
                $
                (720,000
                )
                $
                26,886,000
                
                $
                (781,000
                )
                $
                63,768,000
                
                $
                (1,501,000
                )
 
 The
          unrealized losses are primarily due to the changes in interest rates. These
          securities have not been considered other than temporarily impaired as
          scheduled
          principal and interest payments have been made and management anticipates
          collecting the entire principal balance as scheduled. Management believes
          the
          price variation is temporary in nature and has the ability and intent to
          hold
          these securities to maturity or for a sufficient amount of time to recover
          the
          recorded principal.
 
 Cash
          proceeds realized from sales and calls of securities available for sale
          for the
          years ended December 31, 2006, 2005 and 2004 were $16,867,000, $500,000
          and
          $9,211,000, respectively. There were no gross gains and no losses realized
          on
          sales or calls during the year ended December 31, 2005. Gross gains totaling
          $4,000 and gross losses totaling $9,000 were realized on sales and calls
          of
          securities during the year ended December 31, 2004.
 
 See
          Note
          9 to financial statements regarding securities pledged as collateral for
          securities sold under agreements to repurchase.
  A-31
  **Note
          4. SECURITIES HELD TO MATURITY**
 
 The
          following is a summary of the contractual maturities and related unrecognized
          gains and losses of securities held to maturity:
 
 **December********31,
                    2006****Carrying******
                
                **Gross
                    Unre****cognized****Amount******
                
                **Gains******
                
                **Losses******
                
                **Fair
                    Value******U.S.
                    Treasury:After
                    one year through five years
                
                $
                502,000
                
                $
                —
                
                $
                2,000
                
                $
                500,000502,000
                
                
                —
                
                
                2,000
                
                
                500,000U.S.
                    government sponsored agencies:Within
                    one year
                
                
                1,455,000
                
                
                —
                
                
                22,000
                
                
                1,433,000After
                    one year through five years
                
                
                5,091,000
                
                
                3,000
                
                
                56,000
                
                
                5,038,000After
                    five years through ten years
                
                
                2,748,000
                
                
                5,000
                
                
                5,000
                
                
                2,748,000After
                    ten years
                
                
                1,482,000
                
                
                —
                
                
                26,000
                
                
                1,456,00010,776,000
                
                
                8,000
                
                
                109,000
                
                
                10,675,000Obligations
                    of state and political subdivisions:Within
                    one year
                
                
                4,596,000
                
                
                2,000
                
                
                14,000
                
                
                4,584,000After
                    one year through five years
                
                
                4,475,000
                
                
                1,000
                
                
                73,000
                
                
                4,403,000After
                    five years through ten years
                
                
                6,499,000
                
                
                32,000
                
                
                25,000
                
                
                6,506,000After
                    ten years
                
                
                4,946,000
                
                
                18,000
                
                
                42,000
                
                
                4,922,00020,516,000
                
                
                53,000
                
                
                154,000
                
                
                20,415,000Mortgage-backed
                    securities:Within
                    one year
                
                
                20,000
                
                
                —
                
                
                —
                
                
                20,000After
                    one but within five years
                
                
                698,000
                
                
                —
                
                
                13,000
                
                
                685,000After
                    five years through ten years
                
                
                1,725,000
                
                
                10,000
                
                
                17,000
                
                
                1,718,000After
                    ten years
                
                
                4,926,000
                
                
                22,000
                
                
                80,000
                
                
                4,868,0007,369,000
                
                
                32,000
                
                
                110,000
                
                
                7,291,000$
                39,163,000
                
                $
                93,000
                
                $
                375,000
                
                $
                38,881,000
  **December****31,
                    2005****Carrying**
                
                **Gross
                    Unre****cognized****Amount**
                
                **Gains**
                
                **Losses**
                
                **Fair
                    Value**U.S.
                    Treasury:Within
                    one year
                
                $
                502,000
                
                $
                —
                
                $
                1,000
                
                $
                501,000After
                    one year through five years
                
                
                502,000
                
                
                2,000
                
                
                —
                
                
                504,0001,004,000
                
                
                2,000
                
                
                1,000
                
                
                1,005,000U.S.
                    government sponsored agencies:Within
                    one year
                
                
                5,211,000
                
                
                1,000
                
                
                70,000
                
                
                5,142,000After
                    one year through five years
                
                
                5,902,000
                
                
                —
                
                
                98,000
                
                
                5,804,000After
                    five years through ten years
                
                
                1,000,000
                
                
                —
                
                
                12,000
                
                
                988,00012,113,000
                
                
                1,000
                
                
                180,000
                
                
                11,934,000Obligations
                    of state and political subdivisions:Within
                    one year
                
                
                6,078,000
                
                
                7,000
                
                
                12,000
                
                
                6,073,000After
                    one year through five years
                
                
                8,439,000
                
                
                20,000
                
                
                90,000
                
                
                8,369,000After
                    five years through ten years
                
                
                903,000
                
                
                —
                
                
                18,000
                
                
                885,000After
                    ten years
                
                
                327,000
                
                
                —
                
                
                8,000
                
                
                319,00015,747,000
                
                
                27,000
                
                
                128,000
                
                
                15,646,000Mortgage-backed
                    securities:After
                    one year through five years
                
                
                917,000
                
                
                —
                
                
                22,000
                
                
                895,000After
                    five years through ten years
                
                
                1,720,000
                
                
                17,000
                
                
                23,000
                
                
                1,714,000After
                    ten years
                
                
                6,300,000
                
                
                43,000
                
                
                78,000
                
                
                6,265,0008,937,000
                
                
                60,000
                
                
                123,000
                
                
                8,874,000$
                37,801,000
                
                $
                90,000
                
                $
                432,000
                
                $
                37,459,000
 
 Issuers
          may have the right to call or prepay obligations with or without call or
          prepayment penalties. This might cause actual maturities to differ from
          the
          contractual maturities summarized above.
 
 Mortgage-backed
          securities are comprised primarily of government agencies such as GNMA
          and
          government sponsored agencies such as FNMA, FHLB and FHLMC. At year end
          2006 and
          2005, there were no holdings of securities of any one issuer other than
          the U.S.
          government and its agencies in an amount greater than 10% of stockholders'
          equity.
  A-32
  The
          following tables summarize the fair value and unrealized losses of those
          investment securities which reported an unrealized loss at December 31,
          2006 and
          2005, and if the unrealized loss position was continuous for the twelve
          months
          prior to December 31, 2006 and 2005.
 
 **Less
                    than****12
                    Months**
                
                **12
                    Months****or
                    Longer**
                
                **Total****Unrealized**
                
                
                
                **Unrealized**
                
                
                
                **Unrealized****2006******
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**U.S.
                    Treasury
                
                $
                500,000
                
                $
                (2,000
                )
                $
                —
                
                $
                —
                
                $
                500,000
                
                $
                (2,000
                )U.S.
                    governmentsponsored
                    agencies
                
                
                2,950,000
                
                
                (31,000
                )
                
                6,069,000
                
                
                (78,000
                )
                
                9,019,000
                
                
                (109,000
                )Obligations
                    of state andpolitical
                    subdivisions
                
                
                6,238,000
                
                
                (62,000
                )
                
                6,083,000
                
                
                (92,000
                )
                
                12,321,000
                
                
                (154,000
                )Mortgage-backed
                    securities
                
                
                973,000
                
                
                (9,000
                )
                
                3,956,000
                
                
                (101,000
                )
                
                4,929,000
                
                
                (110,000
                )Total
                    temporarily impairedsecurities
                
                $
                10,661,000
                
                $
                (104,000
                )
                $
                16,108,000
                
                $
                (271,000
                )
                $
                26,769,000
                
                $
                (375,000
                )
 
 **Less
                    than****12
                    Months**
                
                **12
                    Months****or
                    Longer**
                
                **Total****Unrealized**
                
                
                
                **Unrealized**
                
                
                
                **Unrealized****2005******
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**
                
                **Fair
                    Value**
                
                **Losses**U.S.
                    Treasury
                
                $
                501,000
                
                $
                (1,000
                )
                $
                —
                
                $
                —
                
                $
                501,000
                
                $
                (1,000
                )U.S.
                    governmentsponsored
                    agencies
                
                
                5,380,000
                
                
                (62,000
                )
                
                6,051,000
                
                
                (118,000
                )
                
                11,431,000
                
                
                (180,000
                )Obligations
                    of state andpolitical
                    subdivisions
                
                
                7,379,000
                
                
                (88,000
                )
                
                2,280,000
                
                
                (40,000
                )
                
                9,659,000
                
                
                (128,000
                )Mortgage-backed
                    securities
                
                
                2,902,000
                
                
                (47,000
                )
                
                2,515,000
                
                
                (76,000
                )
                
                5,417,000
                
                
                (123,000
                )Total
                    temporarily impairedsecurities
                
                $
                16,162,000
                
                $
                (198,000
                )
                $
                10,846,000
                
                $
                (234,000
                )
                $
                27,008,000
                
                $
                (432,000
                )
 
 The
          unrealized losses are primarily due to the changes in interest rates. These
          securities have not been considered other than temporarily impaired as
          scheduled
          principal and interest payments have been made and management anticipates
          collecting the entire principal balance as scheduled. Management believes
          the
          price variation is temporary in nature and has the ability and intent to
          hold
          these securities to maturity.
 
 Cash
          proceeds realized from calls of securities held to maturity for the year
          ended
          December 31, 2006 were $950,000. There were no cash proceeds realized on
          calls
          for the year ended December 31, 2005. Cash proceeds realized from calls
          of
          securities held to maturity for the year ended December 31, 2004 were
          $5,235,000.
 
 There
          were no gains or losses realized on calls for the years ended December
          31, 2006
          and 2005. Gross gains totaling $2,000 and no losses were realized from
          calls for
          the year ended December 31, 2004. The carrying value of securities pledged
          to
          secure treasury tax and loan deposits and public deposits for the three
          years
          ended December 31, 2006, 2005 and 2004 were $1,002,000, $1,002,000 and
          $1,003,000, respectively. See also Note 9 to financial statements regarding
          securities pledged as collateral for securities sold under agreements to
          repurchase.
  A-33
  **Note
          5. LOANS**
 
 The
          loan
          portfolio consisted of the following:
 
 **December
                    31,****2006******
                
                **2005******Mortgage:Residential
                
                $
                47,020,000
                
                $
                45,604,000Commercial
                
                
                177,411,000
                
                
                163,309,000Commercial
                
                
                72,606,000
                
                
                65,011,000Equity
                
                
                20,010,000
                
                
                20,271,000Installment
                
                
                52,389,000
                
                
                51,540,000Other
                
                
                560,000
                
                
                506,000Total
                    gross loans
                
                
                369,996,000
                
                
                346,241,000Less:
                    Deferred loan fees, net of costs
                
                
                452,000
                
                
                418,000Allowance
                    for loan losses
                
                
                4,101,000
                
                
                3,847,0004,553,000
                
                
                4,265,000Loans,
                    net
                
                $
                365,443,000
                
                $
                341,976,000
 
 At
          December 31, 2006, 2005 and 2004, loans participated by the Corporation
          to other
          organizations totaled approximately $13,704,000, $6,017,000 and $5,730,000,
          respectively.
 
 Included
          in the installment loan category for December 31, 2005 was the Corporation’s
          credit card portfolio. During the fourth quarter of 2006, the Corporation
          sold
          its $3.4 million portfolio to Elan Financial Services (“Elan”). Elan will
          continue to offer credit card service under the name of Atlantic Stewardship
          Bank. As part of the sale agreement, the Corporation will continue to service
          the portfolio until March 16, 2007. At December 31, 2006, the credit cards
          serviced for Elan totaled $3.8 million.
 
 Activity
          in the allowance for loan losses is summarized as follows::
 
 **December
                    31.****2006******
                
                **2005******
                
                **2004******Balance,
                    beginning
                
                $
                3,847,000
                
                $
                3,299,000
                
                $
                2,888,000Provision
                    charged to operations
                
                
                264,000
                
                
                600,000
                
                
                540,000Recoveries
                    of loans charged off
                
                
                30,000
                
                
                5,000
                
                
                12,000Loans
                    charged off
                
                
                (40,000
                )
                
                (57,000
                )
                
                (141,000
                )Balance,
                    ending
                
                $
                4,101,000
                
                $
                3,847,000
                
                $
                3,299,000
 
 The
          Corporation has entered into lending transactions in the ordinary course
          of
          business with directors, executive officers and principal stockholders
          of the
          Corporation and their affiliates. At December 31, 2006 and 2005, these
          loans
          aggregated approximately $1,617,000 and $1,684,000, respectively. During
          the
          year ended December 31, 2006, new loans totaling $258,000 were granted
          and
          repayments totaled approximately $325,000. The loans, at December 31, 2006,
          were
          current as to principal and interest payments.
 
 **Note
          6. NONPERFORMING LOANS**
 
 Nonperforming
          loans include the following:
 
 **Decem****ber
                    31,****2006******
                
                **2005******Nonaccrual
                    loans
                
                $
                444,000
                
                $
                472,000Loans
                    past due ninety days or more and accruing
                
                
                1,090,000
                
                
                55,000Total
                    nonperforming loans
                
                $
                1,534,000
                
                $
                527,000
 
 There
          were no restructured loans classified as nonaccrual for the year ended
          December
          31, 2006. Restructured loans classified as nonaccrual for the year ended
          December 31, 2005 were $152,000.
  A-34
  The
          following information is presented for loans classified as nonaccrual and
          restructured:
 
 **Year
                    end****ed
                    Decem****ber
                    31,****2006******
                
                **2005******
                
                **2004******Income
                    that would have been recorded undercontractual
                    terms
                
                $
                37,000
                
                $
                44,000
                
                $
                47,000Less
                    interest income received
                
                
                14,000
                
                
                6,000
                
                
                20,000Lost
                    income on nonperforming loans during the year
                
                $
                23,000
                
                $
                38,000
                
                $
                27,000
 
 Impaired
          loans consisted of the following:
 
 **December
                    31,********2006******
                
                **2005******
                
                **2004******Impaired
                    LoansWith
                    related allowance for loan loss
                
                $
                223,000
                
                $
                152,000
                
                $
                477,000Without
                    related allowance for loan loss
                
                $
                221,000
                
                $
                320,000
                
                
                947,000Total
                    impaired loans
                
                $
                444,000
                
                $
                472,000
                
                $
                1,424,000Related
                    allowance for possible credit losses
                
                $
                110,000
                
                $
                29,000
                
                $
                44,000Average
                    investment in impaired loans
                
                $
                455,000
                
                $
                430,000
                
                $
                1,431,000Interest
                    recognized on impaired loans
                
                $
                14,000
                
                $
                6,000
                
                $
                71,000
 
 **Note
          7. PREMISES AND EQUIPMENT, NET**
 
 **December********31,****2006******
                
                **2005******Land
                
                $
                2,999,000
                
                $
                2,999,000Buildings
                    and improvements
                
                
                2,758,000
                
                
                2,698,000Leasehold
                    improvements
                
                
                1,771,000
                
                
                972,000Furniture,
                    fixtures and equipment
                
                
                3,798,000
                
                
                3,509,00011,326,000
                
                
                10,178,000Less
                    accumulated depreciation and amortization
                
                
                4,228,000
                
                
                3,714,000Total
                    premises & equipment, net
                
                $
                7,098,000
                
                $
                6,464,000
 
 Amounts
          charged to net occupancy expense for depreciation and amortization of banking
          premises and equipment amounted to $712,000, $577,000 and $622,000 in 2006,
          2005
          and 2004, respectively.
  A-35
  **Note
          8. DEPOSITS**
 
 **December****31,
                    2006**
                
                **December****31,
                    2005****Weighted**
                
                
                
                **Weighted****Average**
                
                
                
                **Average****Rate**
                
                **Amount**
                
                **Rate**
                
                **Amount**Noninterest-bearing
                    demand
                
                
                0
                %
                $
                92,105,000
                
                
                0
                %
                $
                94,331,000NOW
                    accounts
                
                
                1.59
                %
                
                64,493,000
                
                
                1.29
                %
                
                71,986,000Money
                    market accounts
                
                
                2.67
                %
                
                56,406,000
                
                
                1.07
                %
                
                50,881,000Total
                    interest-bearing demand
                
                
                2.09
                %
                
                120,899,000
                
                
                1.20
                %
                
                122,867,000Statement
                    savings and clubs
                
                
                0.77
                %
                
                33,546,000
                
                
                0.59
                %
                
                41,395,000Business
                    savings
                
                
                0.51
                %
                
                3,778,000
                
                
                0.51
                %
                
                4,384,000Total
                    savings
                
                
                0.74
                %
                
                37,324,000
                
                
                0.58
                %
                
                45,779,000IRA
                    investment and variable rate savings
                
                
                4.31
                %
                
                23,012,000
                
                
                3.62
                %
                
                21,145,000Brokered
                    certificates
                
                
                5.37
                %
                
                19,671,000
                
                
                0
                %
                
                —Money
                    market certificates
                
                
                4.36
                %
                
                141,212,000
                
                
                3.61
                %
                
                119,344,000Total
                    certificates of deposit
                
                
                4.46
                %
                
                183,895,000
                
                
                3.61
                %
                
                140,489,000Total
                    interest-bearing deposits
                
                
                3.22
                %
                
                342,118,000
                
                
                2.20
                %
                
                309,135,000Total
                    deposits
                
                
                2.54
                %
                $
                434,223,000
                
                
                1.69
                %
                $
                403,466,000
 
 Certificates
          of deposit with balances of $100,000 or more at December 31, 2006 and 2005,
          totaled approximately $69,902,000 and $62,343,000, respectively. Interest
          on
          certificates of deposit with balances of $100,000 or more totaled $2,718,000,
          $1,562,000, and $798,000 for the years ended December 31, 2006, 2005 and
          2004,
          respectively.
 
 The
          scheduled maturities of certificates of deposit were as follows:
 
 **December
                    31,****2006**2007
                
                $
                142,351,0002008
                
                
                25,112,0002009
                
                
                6,475,0002010
                
                
                9,188,0002011
                
                
                769,000$
                183,895,000
 
 **Note
          9. OTHER BORROWINGS**
 
 **Federal
          Home Loan Bank of New York Advances**
 
 During
          the years 2006 and 2005, the maximum amount of FHLB-NY advances outstanding
          at
          any month end was $40.4 million and $30.5 million, respectively. The average
          amount of advances outstanding during the year ended December 31, 2006
          and 2005
          was $27.9 million and $17.1 million, respectively. As of December 31, 2006,
          all
          FHLB-NY advances had fixed rates. The advances are scheduled for repayment
          as
          follows:
 
 December
          31, 2006 December 31, 2005
 
 **December********31,
                    2006**
                
                **December********31,
                    2005****Weighted******
                
                
                
                **Weighted********Average******
                
                
                
                **Average********Advances
                    Maturing******
                
                **Amount******
                
                **Rate******
                
                **Amount******
                
                **Rate******2006
                
                $
                -
                
                
                -
                
                $
                15,400,000
                
                
                4.34
                %2007
                
                
                14,400,000
                
                
                5.33
                %
                
                —
                
                
                —2008
                
                
                3,492,000
                
                
                3.26
                %
                
                5,086,000
                
                
                3.26
                %Thereafter
                
                
                10,000,000
                
                
                3.82
                %
                
                10,000,000
                
                
                3.82
                %$
                27,892,000
                
                
                4.53
                %
                $
                30,486,000
                
                
                3.99
                %
  A-36
  Advances
          totaling $10.0 million are convertible by the FHLB -NY quarterly thereafter
          into
          any FHLB-NY advance at current market rate. This conversion feature is
          only
          available if the three month LIBOR resets at or above 7.50%.
 
 Advances
          from the FHLB-NY were secured by a blanket assignment of the Corporation's
          unpledged, qualifying mortgage loans, mortgage-backed securities and investment
          securities. Such loans and securities remain under the control of the
          Corporation.
 
 The
          Corporation had an available overnight line of credit with the FHLB-NY
          for a
          maximum of $47.1 million at December 31, 2006.
 
 **Securities
          Sold Under Agreement to Repurchase**
 
 At
          December 31, 2006 and 2005, securities sold under agreements to repurchase
          were
          collateralized by U.S. Treasury and agency securities having a carrying
          value of
          approximately $24,531,000 and $10,089,000, respectively. These securities
          were
          maintained in a separate safekeeping account within the Corporation's control.
 
 **December****31,****2006**
                
                **2005**Balance
                
                $
                9,023,000
                
                $
                4,731,000Weighted
                    average interest rate
                
                
                4.70
                %
                
                3.48
                %Weighted
                    average length of maturity
                
                
                42
                    days
                
                
                69
                    daysMaximum
                    amount outstanding at any month endduring the year
                
                $
                9,757,000
                
                $
                5,422,000Average
                    amount outstanding during the year
                
                $
                7,461,000
                
                $
                3,371,000Average
                    interest rate during the year
                
                
                4.43
                %
                
                2.91
                %
 
 
 **Note
          10. SUBORDINATED DEBENTURES**
 
 On
          September 17, 2003, Stewardship Statutory Trust I (the “Trust”), a statutory
          business trust, and a wholly owned subsidiary of Stewardship Financial
          Corporation, issued $7,000,000 Fixed/Floating Rate Capital Securities (“Capital
          Securities”), the proceeds from which the Trust used to purchase from the
          Corporation $7,217,000 of Fixed/Floating Rate Junior Subordinated Deferrable
          Interest Debentures (“Debentures”) maturing on September 17, 2033. The Trust is
          obligated to distribute all proceeds of a redemption whether voluntary
          or upon
          maturity, to holders of the Capital Securities. Stewardship Financial
          Corporation’s obligation with respect to the Capital Securities, and the
          subordinated debentures, when taken together, provide a full and unconditional
          guarantee on a subordinated basis by Stewardship Financial Corporation
          of the
          Trust’s obligations to pay amounts when due on the Capital Securities.
 
 The
          Capital Securities and the Debentures both bear a fixed interest rate of
          6.75%
          until September 17, 2008 and thereafter shall float quarterly at a rate
          of
          3-Month LIBOR plus 2.95%.
 
 FASB
          Interpretation No. 46, “Consolidation of Variable Interest Entities” was issued
          in January 2003 and was reissued as FASB Interpretation No. 46 (revised
          December
          2003) (“FIN 46R”). FIN 46 and FIN 46R provide guidance on the identification of
          entities controlled through means other than voting rights and specify
          how the
          Corporation should evaluate its interest in a variable interest entity
          for
          purposes of determining whether to consolidate that entity. If a variable
          interest entity does not effectively disperse risk among the parties involved,
          it must be consolidated by its primary beneficiary.
 
 The
          Corporation adopted FIN 46R on December 31, 2003, deconsolidating its investment
          in Stewardship Statutory Trust I, the subsidiary trust formed in connection
          with
          the issuance of subordinated debentures (trust preferred securities). In
          July
          2003, the Board of Governors of the Federal Reserve System instructed bank
          holding companies to continue to include trust preferred securities in
          their
          Tier I capital for regulatory purposes until notice is given to the contrary.
          There can be no assurance that the Federal Reserve System will continue
          to allow
          bank holding companies to include trust preferred securities in Tier I
          capital
          for regulatory purposes. As of December 31, 2006, assuming the Corporation
          was
          not allowed to include the $7,000,000 in trust preferred securities issued
          by
          Stewardship Statutory Trust I in Tier I capital, the Corporation would
          remain
“well capitalized”.
  A-37
  **Note
          11. REGULATORY CAPITAL REQUIREMENTS**
 
 Banks
          and
          bank holding companies are subject to regulatory capital requirements
          administered by federal banking agencies. Capital adequacy guidelines and,
          additionally for banks, prompt corrective action regulations, involve
          quantitative measures of assets, liabilities, and certain off-balance-sheet
          items calculated under regulatory accounting practices. Capital amounts
          and
          classifications are also subject to qualitative judgments by regulators.
          Failure
          to meet capital requirements can initiate regulatory action. Regulations
          of the
          Board of Governors of the Federal Reserve System (“FRB”) require bank holding
          companies to maintain minimum levels of regulatory capital. Under the
          regulations in effect at December 31, 2006, the Corporation was required
          to
          maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted
          assets
          of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
          assets of 4.0% and 8.0%, respectively. The Bank must comply with substantially
          similar capital regulations promulgated by the FDIC.
 
 Prompt
          corrective action regulations provide five classifications: well capitalized,
          adequately capitalized, undercapitalized, significantly undercapitalized,
          and
          critically undercapitalized, although these terms are not used to represent
          overall financial condition. If adequately categorized, regulatory approval
          is
          required to accept brokered deposits. If undercapitalized, capital distributions
          are limited, as is asset growth and expansion, and capital restoration
          plans are
          required.
 
 At
          year
          end 2006 and 2005, the most recent regulatory notifications categorized
          the Bank
          as well capitalized under the regulatory framework for prompt corrective
          action.
          There are no conditions or events since that notification that management
          believes changed the institution’s category.
 
 Management
          believes that, as of December 31, 2006, the Bank and the Corporation have
          met
          all capital adequacy requirements to which they are subject. The following
          is a
          summary of the Corporation’s and the Bank’s actual capital amounts and ratios as
          of December 31, 2006 and 2005, compared to the minimum capital adequacy
          requirements and the requirements for classification as a well capitalized
          institution under the prompt corrective action regulations:
 
 **To
                    Be Well Ca****pitalized****Required
                    for********Capital**
                
                **Under
                    Prompt****Corrective****Actual**
                
                **Adequacy
                    Pu****rposes**
                
                **Action
                    Re****gulations****Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio****December
                    31, 2006**Leverage
                    (Tier 1) capitalConsolidated
                
                
                44,783,000
                
                
                8.85
                %
                
                20,252,000
                
                
                4.00
                %
                
                N/A
                
                
                N/ABank
                
                
                39,765,000
                
                
                7.91
                %
                
                20,096,000
                
                
                4.00
                %
                
                25,120,000
                
                
                5.00
                %Risk-based
                    capital:Tier
                    1Consolidated
                
                
                44,783,000
                
                
                11.25
                %
                
                15,930,000
                
                
                4.00
                %
                
                N/A
                
                
                N/ABank
                
                
                39,765,000
                
                
                10.01
                %
                
                15,890,000
                
                
                4.00
                %
                
                23,836,000
                
                
                6.00
                %TotalConsolidated
                
                
                48,884,000
                
                
                12.28
                %
                
                31,859,000
                
                
                8.00
                %
                
                N/A
                
                
                N/ABank
                
                
                43,866,000
                
                
                11.04
                %
                
                31,781,000
                
                
                8.00
                %
                
                39,726,000
                
                
                10.00
                %**December
                    31, 2005**Leverage
                    (Tier 1) capitalConsolidated
                
                
                41,143,000
                
                
                8.71
                %
                
                18,899,000
                
                
                4.00
                %
                
                N/A
                
                
                N/ABank
                
                
                36,226,000
                
                
                7.75
                %
                
                18,707,000
                
                
                4.00
                %
                
                23,384,000
                
                
                5.00
                %Risk-based
                    capital:Tier
                    1Consolidated
                
                
                41,143,000
                
                
                11.16
                %
                
                14,741,000
                
                
                4.00
                %
                
                N/A
                
                
                N/ABank
                
                
                36,226,000
                
                
                9.86
                %
                
                14,697,000
                
                
                4.00
                %
                
                22,046,000
                
                
                6.00
                %TotalConsolidated
                
                
                44,990,000
                
                
                12.21
                %
                
                29,482,000
                
                
                8.00
                %
                
                N/A
                
                
                N/ABank
                
                
                40,072,000
                
                
                10.91
                %
                
                29,394,000
                
                
                8.00
                %
                
                36,743,000
                
                
                10.00
                %
  A-38
  **Note
          12. BENEFIT PLANS**
 
 The
          Corporation has a noncontributory profit sharing plan covering all eligible
          employees. Contributions are determined by the Corporation’s Board of Directors
          on an annual basis. Total profit sharing plan expense for the years ended
          December 31, 2006, 2005 and 2004 amounted to approximately $394,000, $395,000,
          and $327,000, respectively.
 
 The
          Corporation also has a 401(k) plan which covers all eligible employees.
          Participants may elect to contribute up to 15% of their salaries, not to
          exceed
          the applicable limitations as per the Internal Revenue Code. The Corporation,
          on
          an annual basis, may elect to match 50% of the participant’s first 5%
          contribution. Total 401(k) expense for the years ended December 31, 2006,
          2005
          and 2004 amounted to approximately $67,000, $65,000, and $59,000, respectively.
 
 During
          1996, the Corporation adopted an Employee Stock Purchase Plan which allows
          all
          eligible employees to authorize a specific payroll deduction from his or
          her
          base compensation. Total stock purchases amounted to 3,077, 2,503 and 2,211
          shares during 2006, 2005 and 2004, respectively.
 
 **Note
          13. STOCK-BASED COMPENSATION**
 
 At
          December 31, 2006, the Corporation had four types of stock award programs
          referred to as the Employee Stock Bonus Plan, the Director Stock Plan,
          an
          Employee Stock Option Plan and Stock Option Plans for Non-Employee Directors.
 
 The
          Employee Stock Bonus Plan is intended to provide incentives which will
          retain
          highly competent key management employees of the Corporation by providing
          them
          with a bonus in the form of shares of the common stock of the Corporation.
          Compensation expense is based on the fair value of shares awarded on the
          date of
          the grant. The Corporation has not granted shares during 2006, 2005 and
          2004
          under this plan.
 
 The
          Director Stock Plan permits members of the Board of Directors of the Bank
          to
          receive any monthly Board of Directors’ fees in shares of the Corporation’s
          common stock, rather than in cash. Compensation expense is based on the
          fair
          value of shares awarded on the date of the grant. The Corporation issued
          2,026,
          2,343 and 2,371 shares during 2006, 2005 and 2004, respectively through
          reissued
          treasury shares or through authorized, unissued shares. Beginning in June
          2006,
          3,017 additional shares were purchased for Directors in the open market.
 
 The
          Employee Stock Option Plan provides for options to purchase shares of Common
          Stock to be issued to key employees of the Corporation at the discretion
          of the
          Stock Option Committee. The committee has the authority to determine the
          terms
          and conditions of the options granted, the exercise price thereof, and
          whether
          the options are incentive or non-statutory options. The Employee Stock
          Option
          Plan has reserved 209,429 shares of common stock for issuance. The options
          were
          issued with an exercise price which represented market price of the stock
          at the
          date of grant. Options are exercisable, subject to a vesting schedule,
          with the
          first vesting starting one year from the date of the grant and expire between
          five and ten years from the date of grant. There were no options granted
          during
          2006, 2005, or 2004. In December 2005, the Compensation Committee of the
          Board
          approved an acceleration of the vesting of all options granted on July
          15, 2003
          to full vesting. A summary of the status of the qualified stock options
          as of
          December 31, 2006, 2005 and 2004 and changes during the years then ended
          on
          those dates is presented on the following page:
  A-39
  **2006**
                
                
                
                **2005**
                
                
                
                **2004****Weighted**
                
                
                
                **Weighted**
                
                
                
                **Weighted****Average**
                
                
                
                **Average**
                
                
                
                **Average****Exercise**
                
                
                
                **Exercise**
                
                
                
                **Exercise****Shares**
                
                **Price**
                
                **Shares**
                
                **Price**
                
                **Shares**
                
                **Price**Outstanding
                    at beginning of year
                
                
                75,989
                
                $
                6.03
                
                
                78,423
                
                $
                6.11
                
                
                84,197
                
                $
                6.21Exercised
                
                
                —
                
                
                —
                
                
                (1,622
                )
                
                6.21
                
                
                (
                    3,973
                )
                
                6.64Forfeited
                
                
                (
                    567
                )
                
                13.61
                
                
                (
                    810
                )
                
                12.96
                
                
                (1,801
                )
                
                9.55Outstanding
                    at end of year
                
                
                75,422
                
                $
                5.98
                
                
                75,989
                
                $
                6.03
                
                
                78,423
                
                $
                6.11Intrinsic
                    valueat
                    year end
                
                $
                518,000
                
                
                
                
                $
                591,000
                
                
                
                
                $
                619,000Options
                    exercisable at year end
                
                
                75,422
                
                
                
                
                
                75,989
                
                
                
                
                
                65,681Intrinsic
                    value ofoptions exercisable
                
                $
                518,000
                
                
                
                
                $
                591,000
                
                
                
                
                $
                619,000Weighted
                    average remainingcontractual terms (years)
                
                
                1.96
                
                
                
                
                
                2.99
                
                
                
                
                
                4.05Intrinsic
                    value ofoptions exercised
                
                $
                -
                
                
                
                
                $
                12,000
                
                
                
                
                $
                34,000Cash
                    received fromoptions exercised
                
                $
                -
                
                
                
                
                $
                10,000
                
                
                
                
                $
                26,000
  The
          following table summarizes information about the qualified employee stock
          options outstanding at December 31, 2006:
 
 **Options****Outstanding****Number
                    Outstanding at 12/31/06**
                
                **Weighted
                    Avg. Remaining Contractual Life**
                
                **Weighted
                    Average Exercise Price**
                
                **Number
                    Exercisable 12/31/06**Range
                    of Exercise Prices:$
                    3- 5
                
                
                45,521
                
                
                0.50
                
                $
                4.06
                
                
                45,521$
                    5- 8
                
                
                18,799
                
                
                2.78
                
                
                6.52
                
                
                18,799$8-11
                
                
                —
                
                
                —
                
                
                —
                
                
                —$11-14
                
                
                11,102
                
                
                6.54
                
                
                12.96
                
                
                11,102$3-14
                
                
                75,422
                
                
                1.96
                
                $
                5.98
                
                
                75,422
 
 The
          2001
          Stock Option Plan for Non-Employee Directors provided for options to purchase
          shares of common stock to be issued to Directors of the Corporation. The
          plan
          reserved 160,811 shares of common stock for issuance. The plan allows for
          the
          exercise of options to be paid for in cash or with shares already owned.
          During
          2006, 9,000 shares were used to satisfy the exercise of options.
 
 On
          May 9,
          2006 the shareholders approved the 2006 Stock Option Plan for Non-Employee
          Directors. The Plan provides for options to purchase shares of common stock
          to
          be issued to Non-Employee Directors of the Corporation. The Plan reserved
          63,000
          shares of common stock for issuance, 20% of such options are exercisable
          each
          year for five years. Options expire on the earlier of the sixth anniversary
          of
          the date of the grant or May 15, 2012. Options were granted on June 30,
          2006 to
          all Non- Employee Directors.
  A-40
  A
          summary
          of the status of the nonqualified stock options as of December 31, 2006,
          2005,
          and 2004 and changes during the years then ended on those dates is presented
          below:
 
 **2006**
                
                **2005**
                
                **2004****Shares**
                
                **Weighted-Average
                    Exercise Price**
                
                **Shares**
                
                **Weighted
                    Average-Exercise Price**
                
                **Shares**
                
                **Weighted
                    Average-Exercise**
                  **Price**Outstanding
                    at beginning of year
                
                
                45,568
                
                $
                7.12
                
                
                69,690
                
                $
                6.98
                
                
                112,571
                
                $
                6.69Granted
                
                
                52,500
                
                
                12.86
                
                
                5,360
                
                
                13.97
                
                
                —
                
                
                —Exercised
                
                
                (37,523
                )
                
                6.20
                
                
                (21,441
                )
                
                6.20
                
                
                (42,881
                )
                
                6.20Forfeited
                
                
                (2,685
                )
                
                6.20
                
                
                (8,041
                )
                
                12.96
                
                
                —
                
                
                —Outstanding
                    at end of year
                
                
                57,860
                
                $
                12.96
                
                
                45,568
                
                $
                7.12
                
                
                69,690
                
                $
                6.98Intrinsic
                    value at end of year
                
                $
                17,000
                
                
                
                
                $
                305,000
                
                
                
                
                $
                489,000Options
                    exercisable at year end
                
                
                5,360
                
                
                
                
                
                18,766
                
                
                
                
                
                13,403Weighted
                    average fair value of options granted during the year
                
                $
                4.55
                
                
                
                
                $
                4.29
                
                
                
                
                $
                -Intrinsic
                    value of options exercisable
                
                $
                -
                
                
                
                
                $
                143,000
                
                
                
                
                $
                105,000Weighted
                    average remainingcontractual terms (years)
                
                
                5.23
                
                
                
                
                
                0.87
                
                
                
                
                
                1.62Cash
                    received fromoptions exercised
                
                $
                101,000
                
                
                
                
                $
                133,000
                
                
                
                
                $
                266,000Tax
                    benefit realized fromoptions exercised
                
                $
                174,000
                
                
                
                
                $
                70,000
                
                
                
                
                $
                150,000
 
 The
          fair
          value of the options granted for the 2006 Stock Option Plan for Non-Employee
          Directors was estimated on the date of the grant using the Black -Scholes
          option
          pricing model with the following assumptions used:
 
 Dividend
                    Yield
                
                
                2.25
                %Expected
                    Volatility
                
                
                36.72
                %Risk-Free
                    Interest Rate
                
                
                5.21
                %Expected
                    Life
                
                
                6
                    yearsFair
                    Value at Grant Date
                
                
                $4.55
 
 The
          following table summarizes information about the nonqualified Non-Employee
          Director stock options outstanding at December 31, 2006:
 
 **Options****Outstanding****Number**
                  **Outstanding**
                  **at
                    12/31/06**
                
                **Weighted
                    Avg.**
                  **Remaining**
                  **Contractual
                    Life**
                
                **Weighted**
                  **Average**
                  **Exercise
                    Price**
                
                **Number**
                  **Exercisable**
                  **12/31/06**Range
                    of Exercise Prices:$11-15
                
                
                52,500
                
                
                5.38
                
                $
                12.86
                
                
                —$13-15
                
                
                5,360
                
                
                3.80
                
                
                13.97
                
                
                5,360$11-15
                
                
                57,860
                
                
                5.23
                
                $
                12.96
                
                
                5,360
 
 On
          January 1, 2006, the Corporation adopted Statement of Financial Accounting
          Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123(R)”) under
          the applied modified prospective method. With limited exceptions, SFAS
          No.
          123(R) requires public companies to measure the cost of employee services
          received in exchange for an award of equity instruments based on the grant
          date
          fair value of the award and to recognized such cost over the period during
          which
          an employee is required to provide service in exchange for the award (usually
          the vesting period). Unrecognized compensation expense totaled $212,000
          and will
          be recognized over the next 4.4 years.
  A-41
  **Note
          14: EARNINGS PER SHARE**
 
 The
          following reconciles the income available to common shareholders (numerator)
          and
          the weighted average common stock outstanding (denominator) for both basic
          and
          diluted earnings per share for 2006, 2005 and 2004:
 
 **2006**
                
                **2005**
                
                **2004**Net
                    income
                
                $
                4,753,000
                
                $
                4,480,000
                
                $
                3,848,000Weighted
                    average common sharesoutstanding
                    - basic
                
                
                5,020,939
                
                
                4,990,916
                
                
                4,911,401Effect
                    of dilative securities - stock options
                
                
                46,804
                
                
                58,765
                
                
                70,944Weighted
                    average common sharesoutstanding
                    - diluted
                
                
                5,067,743
                
                
                5,049,681
                
                
                4,982,345Basic
                    earnings per share
                
                $
                0.95
                
                $
                0.90
                
                $
                0.78Diluted
                    earnings per share
                
                $
                0.94
                
                $
                0.89
                
                $
                0.77
 
 Stock
          options for 31,826 shares of common stock were not considered in computing
          diluted earnings per share for 2006 because they were antidilutive. There
          were
          no stock options considered antidilutive for 2005 and 2004.
 
 **Note
          15. INCOME TAXES**
 
 The
          components of income taxes (benefit) are summarized as follows:
 
 **Year
                    ended Decem****ber
                    31,****2006**
                
                **2005**
                
                **2004**Current
                    tax expense:Federal
                
                $
                4,753,000
                
                $
                2,218,000
                
                $
                1,877,000State
                
                
                650,000
                
                
                630,000
                
                
                581,0002,742,000
                
                
                2,848,000
                
                
                2,458,000Deferred
                    tax benefit:Federal
                
                
                (80,000
                )
                
                (293,000
                )
                
                (216,000
                )State
                
                
                (35,000
                )
                
                (51,000
                )
                
                (38,000
                )(115,000
                )
                
                (344,000
                )
                
                (254,000
                )$
                2,627,000
                
                $
                2,504,000
                
                $
                2,204,000
 
 The
          following table presents a reconciliation between the reported income taxes
          and
          the income taxes which would be computed by applying the normal federal
          income
          tax rate (34%) to income before income taxes:
  **Year********ended
                    Decem****ber
                    31,****2006**
                
                **2005**
                
                **2004**Federal
                    income tax
                
                $
                2,509,000
                
                $
                2,375,000
                
                $
                2,058,000Add
                    (deduct) effect of:State
                    income taxes, net of federal income tax effect
                
                
                406,000
                
                
                382,000
                
                
                359,000Nontaxable
                    interest income
                
                
                (246,000
                )
                
                (252,000
                )
                
                (215,000
                )Life
                    insurance
                
                
                (109,000
                )
                
                (74,000
                )
                
                —Nondeductible
                    expenses
                
                
                73,000
                
                
                76,000
                
                
                —Change
                    in valuation reserve - federal
                
                
                17,000
                
                
                —
                
                
                —Other
                    items, net
                
                
                (23,000
                )
                
                (3,000
                )
                
                2,000Effective
                    federal income taxes
                
                $
                2,627,000
                
                $
                2,504,000
                
                $
                2,204,000
  A-42
  The
          tax
          effects of existing temporary differences that give rise to significant
          portions
          of the deferred tax assets and deferred tax liabilities are as follows:
 
 **December********31,****2006**
                
                **2005**Deferred
                    tax assets:Allowance
                    for loan losses
                
                $
                1,638,000
                
                $
                1,536,000Accrued
                    reserves
                
                
                122,000
                
                
                149,000Core
                    deposit intangible amortization
                
                
                10,000
                
                
                15,000Stock
                    compensation
                
                
                20,000
                
                
                —Nonaccrual
                    loan interest
                
                
                12,000
                
                
                37,000Depreciation
                
                
                203,000
                
                
                153,000Contribution
                    carry forward
                
                
                34,000
                
                
                14,000State
                    capital loss carry forward
                
                
                7,000
                
                
                —Unrealized
                    losses on securities available for sale
                
                
                381,000
                
                
                576,000Other
                
                
                1,000
                
                
                1,000$
                2,428,000
                
                $
                2,481,000Valuation
                    reserve
                
                
                (41,000
                )
                
                (14,000
                )Net
                    deferred tax assets
                
                $
                2,387,000
                
                $
                2,467,000
 
 **Note
          16. COMMITMENTS AND CONTINGENCIES**
 
 The
          Corporation is 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 financial instruments include commitments to extend credit and standby
          letters of credit. Those instruments involve, to varying degrees, elements
          of
          credit and interest rate risk in excess of the amount recognized in the
          consolidated financial statements. The contract or notional amounts of
          those
          instruments reflect the extent of involvement the Corporation has in particular
          classes of financial instruments.
 
 The
          Corporation's exposure to credit loss in the event of nonperformance by
          the
          other party to the financial instrument for commitments to extend credit
          and
          standby letters of credit is represented by the contractual notional amount
          of
          those instruments. The Corporation uses the same credit policies in making
          commitments and conditional obligations as it does for on-balance sheet
          instruments.
 
 At
          December 31, 2006, the Corporation had mortgage commitments to extend credit
          aggregating approximately $2.5 million at fixed rates averaging 6.02%.
          Of these
          loan commitments, $1.9 million will be sold to investors upon closing.
          Commercial, construction, and home equity loan commitments of approximately
          $3.7
          million were extended with variable rates currently averaging 7.39% and
          $5.3
          million were extended at fixed rates averaging 7.47%. All commitments were
          due
          to expire within approximately 120 days.
 
 Additionally,
          at December 31, 2006, the Corporation was committed for approximately $83.4
          million of unused lines of credit, consisting of $27.1 million relating
          to a
          home equity line of credit program and an unsecured line of credit program
          (cash
          reserve), and $56.3 million relating to commercial and construction lines
          of
          credit. Amounts drawn on the unused lines of credit are predominantly assessed
          interest at rates which fluctuate with the base rate.
 
 Commitments
          under standby and commercial letters of credit aggregated approximately
          $3.1
          million at December 31, 2006, of which $2.2 million expires within one
          year.
          Should any letter of credit be drawn on, the interest rate charged on the
          resulting note would fluctuate with the Corporation's base rate. 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 or other termination clauses and may require
          payment
          of a fee. Since many of the commitments may expire without being drawn
          upon, the
          total commitment amounts do not necessarily represent future cash requirements.
          The Corporation evaluates each customer's creditworthiness on a case-by-case
          basis. The amount of collateral obtained, if deemed necessary by the Corporation
          upon extension of credit, is based on management's credit evaluation of
          the
          counter-party. Collateral held varies, but may include accounts receivable,
          inventory, property, plant and equipment, and income-producing commercial
          properties.
 
 Standby
          and commercial letters of credit are conditional commitments issued by
          the
          Corporation to guarantee payment or performance of a customer to a third
          party.
          Those guarantees are primarily issued to support public and private borrowing
          arrangements, including commercial paper, bond financing and similar
          transactions. The credit risk involved in issuing letters of credit is
          essentially the same as that involved in extending loan facilities to customers.
          The Corporation obtains collateral supporting those commitments for which
          collateral is deemed necessary.
  A-43
  As
          discussed in Footnote 5, the Corporation sold its credit card portfolio
          to Elan
          during the fourth quarter of 2006. As part of the agreement, the Corporation
          may
          be required to repurchase certain accounts identified at closing should
          those
          accounts be deemed uncollectible by Elan within one year from the closing
          date.
          The Corporation has estimated this obligation to be approximately $120,000
          and
          has accordingly reserved this amount.
 
 Rentals
          under long-term operating lease for branch offices amounted to approximately
          $642,000 and $460,000 during the years ended December 31, 2006 and 2005,
          respectively. At December 31, 2006, the minimum rental commitments on the
          noncancellable leases with an initial term of one year and expiring thereafter
          is as follows:
 
 **Year
                    Ending********December
                    31******
                
                **Minimum********Rent******2007
                
                $
                545,0002008
                
                
                575,0002009
                
                
                524,0002010
                
                
                505,0002011
                
                
                492,000Thereafter
                
                
                2,417,000$
                5,058,000
 
 The
          Corporation is also subject to litigation which arises primarily in the
          ordinary
          course of business In the opinion of management the ultimate disposition
          of such
          litigation should not have a material adverse effect on the financial position
          of the Corporation.
 
 **Note
          17. DIVIDEND LIMITATION**
 
 The
          Corporation's ability to pay cash dividends is based on its ability to
          receive
          cash from its bank subsidiary. Banking regulations limit the amount of
          dividends
          that may be paid without prior approval of regulatory agencies. Under these
          regulations, the amount of dividends that may be paid in any calendar year
          is
          limited to the current year’s profits, combined with the retained net profits of
          the proceeding two years. At December 31, 2006, this restriction did not
          result
          in any effective limitation in the manner in which the Bank is currently
          operating.
 
 **Note
          18. FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 Statement
          of Financial Accounting Standards No. 107 (SFAS No. 107) Disclosures About
          Fair
          Value of Financial Instruments, requires that the Corporation disclose
          the
          estimated fair value of its financial instruments whether or not recognized
          in
          the consolidated balance sheet. Fair value estimates, methods and assumptions
          are set forth below for the Corporation's financial instruments.
  **Dece****mber
                    31,****20****0****6**
                
                **2005****Carrying
                    Amount**
                
                **Estimated
                    Fair Value**
                
                **Carrying
                    Amount**
                
                **Estimated
                    Fair Value**(Dollars
                    in thousands)Financial
                    assets:Cash
                    and cash equivalents
                
                $
                15,697
                
                $
                15,697
                
                $
                14,028
                
                $
                14,028Securities
                    available for sale
                
                
                72,746
                
                
                72,746
                
                
                64,166
                
                
                64,166Securities
                    held to maturity
                
                
                39,163
                
                
                38,881
                
                
                37,801
                
                
                37,459FHLB-NY
                    stock
                
                
                1,899
                
                
                1,899
                
                
                1,939
                
                
                1,939Net
                    loans
                
                
                365,443
                
                
                362,043
                
                
                341,976
                
                
                341,156Mortgage
                    loans held for sale
                
                
                2,155
                
                
                2,183
                
                
                2,041
                
                
                2,041Accrued
                    interest receivable
                
                
                2,912
                
                
                2,912
                
                
                2,432
                
                
                2,432Financial
                    liabilities:Deposits
                
                
                434,223
                
                
                434,223
                
                
                403,466
                
                
                403,731Securities
                    sold under agreementsto
                    repurchase
                
                
                9,023
                
                
                9,023
                
                
                4,731
                
                
                4,731Other
                    borrowings
                
                
                27,892
                
                
                26,655
                
                
                30,486
                
                
                29,644Subordinated
                    debenture
                
                
                7,217
                
                
                7,436
                
                
                7,217
                
                
                7,731Accrued
                    interest payable
                
                
                1,721
                
                
                1,721
                
                
                1,145
                
                
                1,145
  A-44
  The
          following methods and assumptions were used to estimate the fair value
          of each
          class of financial instruments:
 
 **Cash
          and cash equivalents**
 
 The
          carrying amount approximates fair value.
 
 **Securities
          available for sale**
 
 All
          securities available for sale are actively traded and have been valued
          using
          quoted market prices.
 
 **Securities
          held to maturity**
 
 All
          securities held to maturity are actively traded and have been valued using
          quoted market prices.
 
 **FHLB-NY
          stock**
 
 The
          carrying amount approximates fair value.
 
 **Net
          loans**
 
 Fair
          values are estimated for portfolios of loan with similar financial
          characteristics. Loans are segregated by type such as residential and commercial
          mortgages, commercial and other installment. The fair value of loans is
          estimated by discounting cash flows using estimated market discount rates
          which
          reflect the credit and interest rate risk inherent in the loans.
 
 **Mortgage
          loans held for sale**
 
 Loans
          in
          this category have been committed for sale to investors at the current
          carrying
          amount.
 
 **Accrued
          interest receivable**
 
 The
          carrying amount approximates fair value
 
 **Deposits**
 
 The
          fair
          value of deposits, with no stated maturity, such as noninterest-bearing
          demand
          deposits, savings, NOW and money market accounts, is equal to the amount
          payable
          on demand as of December 31, 2006 and 2005, respectively. The fair value
          of the
          certificates of deposit is based on the discounted value of cash flows.
          The
          discount rate is estimated using market discount rates which reflect interest
          rate risk inherent in the certificates of deposit.
 
 **Securities
          sold under agreements to repurchase**
 
 The
          carrying value approximates fair value due to the relatively short time
          before
          maturity.
 
 **Accrued
          interest payable**
 
 The
          carrying valve approximates fair value.
 
 **Commitments
          to extend credit**
 
 The
          fair
          value of commitments is estimated using the fees currently charged to enter
          into
          similar agreements, taking into account the remaining terms of the agreements
          and the present credit worthiness of the counter parties, and at December
          31,
          2006 and 2005 were not material.
 
 **Limitations**
 
 The
          preceding fair value estimates were made at December 31, 2006 and 2005,
          based on
          pertinent market data and relevant information on the financial instruments.
          These estimates do not include any premium or discount that could result
          from an
          offer to sell at one time the Corporation's entire holdings of a particular
          financial instrument or category thereof. Since no market exists for a
          substantial portion of the Corporation's financial instruments, fair value
          estimates were necessarily based on judgments with respect to future expected
          loss experience, current economic conditions, risk assessments of various
          financial instruments, and other factors. Given the subjective nature of
          these
          estimates, the uncertainties surrounding them and the matters of significant
          judgment that must be applied, these fair value estimates cannot be calculated
          with precision. Modifications in such assumptions could meaningfully alter
          these
          estimates.
 
 Since
          these fair value approximations were made solely for on and off balance
          sheet
          financial instruments at December 31, 2006 and 2005, no attempt was made
          to
          estimate the value of anticipated future business. Furthermore, certain
          tax
          implications related to the realization of unrealized gains and losses
          could
          have a substantial impact on these fair value estimates and have not been
          incorporated into the estimates.
  A-45
  **Note
          19. PARENT COMPANY ONLY**
 
 The
          Corporation was formed in January, 1995 to operate its subsidiary, Atlantic
          Stewardship Bank. The earnings of the bank are recognized by the Corporation
          using the equity method of accounting. Accordingly, the bank dividends
          paid
          reduce the Corporation's investment in the subsidiary. In 2003, the Corporation
          formed its second subsidiary, Stewardship Statutory Trust, to offer trust
          preferred securities. The following information should be read in conjunction
          with the other notes to the consolidated financial statements. Condensed
          financial statements of the Corporation at December 31, 2006 and 2005 and
          for
          the years ended December 31, 2006, 2005 and 2004 are presented below:
 
 **Condensed
                    Statements of Financial Condition******
                
                **Years
                    ended********December
                    31,****2006**
                
                **2005****Assets******Cash
                    and due from banks
                
                $
                306,000
                
                $
                286,000Securities
                    available for sale
                
                
                4,470,000
                
                
                4,387,000Investment
                    in subsidiary
                
                
                39,307,000
                
                
                35,537,000Accrued
                    interest receivable
                
                
                40,000
                
                
                45,000Other
                    assets
                
                
                441,000
                
                
                421,000Total
                    assets
                
                $
                44,564,000
                
                $
                40,676,000**Liabilities
                    and Stockholders' equity**Subordinated
                    debenture
                
                $
                7,217,000
                
                $
                7,217,000Other
                    liabilities
                
                
                41,000
                
                
                75,000Stockholders'
                    equity
                
                
                37,306,000
                
                
                33,384,000Total
                    liabilities and Stockholders' equity
                
                $
                44,564,000
                
                $
                40,676,000
 
  **Condensed
                    Statements of Income******
                
                **Years********ended
                    Decem****ber
                    31,****2006**
                
                **2005**
                
                **2004**Interest
                    income - securities available for sale
                
                $
                177,000
                
                $
                174,000
                
                $
                160,000Interest
                    income - securities held to maturity
                
                
                -
                
                
                -
                
                
                4,000Dividend
                    income
                
                
                1,853,000
                
                
                1,386,000
                
                
                325,000Loss
                    on sale of available for sale securities
                
                
                (90,000
                )
                
                —
                
                
                —Other
                    income
                
                
                15,000
                
                
                14,000
                
                
                11,000Total
                    income
                
                
                1,955,000
                
                
                1,574,000
                
                
                500,000Interest
                    expense
                
                
                487,000
                
                
                487,000
                
                
                487,000Other
                    expenses
                
                
                173,000
                
                
                127,000
                
                
                145,000Total
                    expenses
                
                
                660,000
                
                
                614,000
                
                
                632,000Income
                    before income tax expense (benefit)
                
                
                1,295,000
                
                
                960,000
                
                
                (132,000
                )Tax
                    benefit
                
                
                (190,000
                )
                
                (145,000
                )
                
                (155,000
                )Income
                    before equity in undistributed earningsof
                    subsidiary
                
                
                1,485,000
                
                
                1,105,000
                
                
                23,000Equity
                    in undistributed earnings of subsidiary
                
                
                3,268,000
                
                
                3,375,000
                
                
                3,825,000Net
                    income
                
                $
                4,753,000
                
                $
                4,480,000
                
                $
                3,848,000
  A-46
 
 **Condensed
                    Statements of Cash Flows******
                
                **Years
                    e****nded
                    Decem****ber
                    31,****2006**
                
                **2005**
                
                **2004**Cash
                    flows from operating activities:Net
                    income
                
                $
                4,753,000
                
                $
                4,480,000
                
                $
                3,848,000Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Equity
                    in undistributed earnings of subsidiary
                
                
                (3,268,000
                )
                
                (3,375,000
                )
                
                (3,825,000
                )Loss
                    on sale of securities available for sale
                
                
                90,000
                
                
                —
                
                
                4,000Accretion
                    of discounts
                
                
                (2,000
                )
                
                (2,000
                )
                
                (1,000
                )Decrease
                    (increase) in accrued interest receivable
                
                
                5,000
                
                
                —
                
                
                (1,000
                )Increase
                    in other assets
                
                
                (47,000
                )
                
                (11,000
                )
                
                (55,000
                )Increase
                    in other liabilities
                
                
                (33,000
                )
                
                30,000
                
                
                1,000Net
                    cash provided by used in operating activities
                
                
                1,498,000
                
                
                1,122,000
                
                
                (29,000
                )Cash
                    flows from investing activities:Proceeds
                    from calls on securities held to maturity
                
                
                —
                
                
                —
                
                
                1,000,000Purchase
                    of securities available for sale
                
                
                (3,500,000
                )
                
                —
                
                
                (1,991,000
                )Proceeds
                    from sales and calls on securities available for sale
                
                
                3,404,000
                
                
                —
                
                
                1,296,000Net
                    cash provided by investing activities
                
                
                (96,000
                )
                
                —
                
                
                305,000Cash
                    flows from financing activities:Cash
                    dividends paid on common stock
                
                
                (1,118,000
                )
                
                (535,000
                )
                
                (410,000
                )Payment
                    of discount on dividend reinvestment plan
                
                
                (19,000
                )
                
                —
                
                
                —Exercise
                    of stock options
                
                
                101,000
                
                
                143,000
                
                
                292,000Purchase
                    of treasury stock
                
                
                (415,000
                )
                
                (561,000
                )
                
                (454,000
                )Issuance
                    of common stock
                
                
                69,000
                
                
                68,000
                
                
                68,000Net
                    cash (used in) provided by investing activities
                
                
                (1,382,000
                )
                
                (885,000
                )
                
                (504,000
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                20,000
                
                
                237,000
                
                
                (228,000
                )Cash
                       and cash equivalents - beginning
                
                
                286,000
                
                
                49,000
                
                
                277,000Cash
                    and cash equivalents - ending
                
                $
                306,000
                
                $
                286,000
                
                $
                49,000Supplemental
                    disclosures of cash flow information:Noncash
                    financing activities - issuance of common stockunder dividend reinvestment plan
                
                
                412,000
                
                
                710,000
                
                
                608,000
 
 **NOTE
          20. RECENT ACCOUNTING PRONOUNCEMENTS**
 
 **FASB
          Statement of Financial Accounting Standard No. 158 “Employers’ Accounting for
          Defined Benefit Pension and Other Postretirement Plans - an amendment of
          FASB
          Statements No. 87, 88, 106 and 132(R)”**
 
 In
          September 2006, the Financial Accounting Standards Board (FASB) issued
          Statement
          of Financial Accounting Standard No. 158, “Employers’ Accounting for Defined
          Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
          No. 87, 88, 106 and 132(R)” (SFAS No. 158). This Statement requires an employer
          to recognize the overfunded or underfunded status of a defined benefit
          postretirement plan (other than a multiemployer plan) as an asset or liability
          in its balance sheet, beginning with year end 2006, and to recognize changes
          in
          the funded status in the year in which the changes occur through comprehensive
          income beginning in 2007. Additionally, defined benefit plan assets and
          obligations are to be measured as of the date of the employer’s fiscal year-end,
          starting in 2008. SFAS No. 158 has not had and is not expected to have
          a
          material impact on our financial statements as the Corporation does not
          currently offer a defined benefit plan for its employees.
  A-47
  **Securities
          and Exchange Commission Staff Accounting Bulletin No. 108, “Considering the
          Effects of Prior Year Misstatements when Quantifying Misstatements in Current
          Year Financial Statements”**
 
 In
          September 2006, the Securities and Exchange Commission (SEC) released Staff
          Accounting Bulletin No. 108, “Considering the Effects of Prior Year
          Misstatements when Quantifying Misstatements in Current Year Financial
          Statements” (SAB 108), which is effective for fiscal years ending on or after
          November 15, 2006. SAB 108 provides guidance on how the effects of prior-year
          uncorrected financial statement misstatements should be considered in
          quantifying a current year misstatement. SAB 108 requires public companies
          to
          quantify misstatements using both an income statement (rollover) and balance
          sheet (iron curtain) approach and evaluate whether either approach results
          in a
          misstatement that, when all relevant quantitative and qualitative factors
          are
          considered, is material. If prior year errors that had been previously
          considered immaterial now are considered material based on either approach,
          no
          restatement is required so long as management properly applied its previous
          approach and all relevant facts and circumstances were considered. Adjustments
          considered immaterial in prior years under the method previously used,
          but now
          considered material under the dual approach required by SAB 108, are to
          be
          recorded upon initial adoption of SAB 108. The amount so recorded is shown
          as a
          cumulative effect adjustment is recorded in opening retained earnings as
          of
          January 1, 2006. The adoption of SAB 108 had no effect on the Corporation’s
          financial statements for the year ending December 31, 2006.
 
 **FASB
          Statement of Financial Accounting Standard No. 155, “Accounting for Certain
          Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and
          140”**
 
 In
          February 2006, the Financial Accounting Standards Board (FASB) issued Statement
          of Financial Accounting Standard No. 155, “Accounting for Certain Hybrid
          Financial Instruments-an amendment to FASB Statements No. 133 and 140” (SFAS No.
          155). This Statement permits fair value re-measurement for any hybrid financial
          instruments, clarifies which instruments are subject to the requirements
          of
          Statement No. 133, and establishes a requirement to evaluate interests
          in
          securitized financial assets and other items. The new standard is effective
          for
          financial assets acquired or issued after the beginning of the entity's
          first
          fiscal year that begins after September 15, 2006. The adoption of this
          statement
          has not had a material impact on the Corporation’s consolidated financial
          position or results of operations.
 
 **FASB
          Statement of Financial Accounting Standard No. 156, “Accounting for Servicing of
          Financial Assets-an amendment of FASB Statement No. 140”**
 
 In
          March
          2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial
          Assets-an amendment of FASB Statement No. 140”. This Statement provides the
          following: 1) revised guidance on when a servicing asset and servicing
          liability
          should be recognized; 2) requires all separately recognized servicing assets
          and
          servicing liabilities to be initially measured at fair value, if practicable;
          3)
          permits an entity to elect to measure servicing assets and servicing liabilities
          at fair value each reporting date and report changes in fair value in earnings
          in the period in which the changes occur; 4) upon initial adoption, permits
          a
          onetime reclassification of available-for-sale securities to trading securities
          for securities which are identified as offsetting the entity's exposure
          to
          changes in the fair value of servicing assets or liabilities that a servicer
          elects to subsequently measure at fair value; and 5) requires separate
          presentation of servicing assets and servicing liabilities subsequently
          measured
          at fair value in the statement of financial position and additional footnote
          disclosures. This standard is effective as of the beginning of an entity's
          first
          fiscal year that begins after September 15, 2006 with the effects of initial
          adoption being reported as a cumulative-effect adjustment to retained earnings.
          The adoption of this statement has not had a material impact on the
          Corporation’s consolidated financial position or results of operations.
 
 **FASB
          Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” ”**
 
 In
          September 2006, the FASB issued Statement of Financial Accounting Standard
          No.
          157,” Fair Value Measurements”. This Statement defines fair value, establishes a
          framework for measuring fair value and expands disclosures about fair value
          measurements. This Statement establishes a fair value hierarchy about the
          assumptions used to measure fair value and clarifies assumptions about
          risk and
          the effect of a restriction on the sale or use of an asset. The standard
          is
          effective for fiscal years beginning after November 15, 2007. The Corporation
          has not completed its evaluation of the impact of the adoption of this
          standard.
 
 **FASB
          Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
          interpretation of FASB Statement No. 109”**
 
 In
          July
          2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
          Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48), which
          prescribes a recognition threshold and measurement attribute for a tax
          position
          taken or expected to be taken in a tax return. FIN 48 also provides guidance
          on
          derecognition, classification, interest and penalties, accounting in interim
          periods, disclosure and transition. FIN 48 is effective for fiscal years
          beginning after December 15, 2006. The Corporation has not completed its
          evaluation of the impact of adopting this standard.
  A-48
  **FASB
          Emerging Issues Task Force Issue No. 06-4, “Accounting for Deferred Compensation
          and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
          Arrangements”**
 
 In
          September 2006, the FASB Emerging Issues Task Force finalized Issue No.
          06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects
          of
          Endorsement Split-Dollar Life Insurance Arrangements”. This issue requires that
          a liability be recorded during the service period when a split-dollar life
          insurance agreement continues after participants’ employment or retirement. The
          required accrued liability will be based on either the post-employment
          benefit
          cost for the continuing life insurance or based on the future death benefit
          depending on the contractual terms of the underlying agreement. This issue
          is
          effective for fiscal years beginning after December 15, 2007. The Corporation
          has determined that adoption of EITF 06-4 will not have a material impact
          on the
          financial statements.
 
 **FASB
          Emerging Issues Task Force Issue No. 06-5, “Accounting for Purchases of life
          Insurance - Determining the Amount That Could Be Realized in Accordance
          with
          FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance)”**
 
 In
          September 2006, the FASB Emerging Issues Task Force finalized Issue No.
          06-5,
“Accounting for Purchases of Life Insurance -Determining the Amount That
          Could
          Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting
          for
          Purchases of Life Insurance)”. This issue requires that a policyholder consider
          contractual terms of a life insurance policy in determining the amount
          that
          could be realized under the insurance contract. It also requires that if
          the
          contract provides for a greater surrender value if all individual policies
          in a
          group are surrendered at the same time, that the surrender value be determined
          based on the assumption that policies will be surrendered on an individual
          basis. Lastly, the issue discusses whether the cash surrender value should
          be
          discounted when the policyholder is contractually limited in its ability
          to
          surrender a policy. This issue is effective for fiscal years beginning
          after
          December 15, 2006. The Corporation does not believe the adoption of this
          issue
          will have a material impact on the financial statements.
  A-49
  **Note
          21. QUARTERLY FINANCIAL DATA (Unaudited)**
 
 The
          following table contains quarterly financial data for the years ended December
          31, 2006 and 2005 (Dollars in thousands).
 
 **First**
                  **Quarter**
                
                **Second**
                  **Quarter**
                
                **Third**
                  **Quarter**
                
                **Fourth**
                  **Quarter**
                
                **Total****Year
                    ended December 31, 2006:******Interest
                    income
                
                $
                6,984
                
                $
                7,334
                
                $
                7,793
                
                $
                7,889
                
                $
                30,000Interest
                    expense
                
                
                2,307
                
                
                2,572
                
                
                2,928
                
                
                3,109
                
                
                10,916Net
                    interest income beforeprovision for loan losses
                
                
                4,677
                
                
                4,762
                
                
                4,865
                
                
                4,780
                
                
                19,084Provision
                    for loan losses
                
                
                50
                
                
                110
                
                
                90
                
                
                14
                
                
                264Net
                    interest income afterprovision for loan losses
                
                
                4,627
                
                
                4,652
                
                
                4,775
                
                
                4,766
                
                
                18,820Noninterest
                    income
                
                
                870
                
                
                1,032
                
                
                983
                
                
                1,304
                
                
                4,189Noninterest
                    expense
                
                
                3,778
                
                
                3,863
                
                
                3,868
                
                
                4,120
                
                
                15,629Net
                    income before income tax expense
                
                
                1,719
                
                
                1,821
                
                
                1,890
                
                
                1,950
                
                
                7,380Federal
                    and state income tax expense
                
                
                610
                
                
                654
                
                
                665
                
                
                698
                
                
                2,627Net
                    income
                
                $
                1,109
                
                $
                1,167
                
                $
                1,225
                
                $
                1,252
                
                $
                4,753Basic
                    earnings per share
                
                $
                0.22
                
                $
                0.23
                
                $
                0.25
                
                $
                0.25
                
                $
                0.95Diluted
                    earnings per share
                
                $
                0.22
                
                $
                0.23
                
                $
                0.24
                
                $
                0.25
                
                $
                0.94
  **First**
                  **Quarter**
                
                **Second**
                  **Quarter**
                
                **Third**
                  **Quarter**
                
                **Fourth**
                  **Quarter**
                
                **Total****Year
                    ended December 31, 2005:******Interest
                    income
                
                $
                5,689
                
                $
                6,026
                
                $
                6,461
                
                $
                6,724
                
                $
                24,900Interest
                    expense
                
                
                1,287
                
                
                1,547
                
                
                1,847
                
                
                2,008
                
                
                6,689Net
                    interest income beforeprovision for loan losses
                
                
                4,402
                
                
                4,479
                
                
                4,614
                
                
                4,716
                
                
                18,211Provision
                    for loan losses
                
                
                150
                
                
                150
                
                
                150
                
                
                150
                
                
                600Net
                    interest income afterprovision for loan losses
                
                
                4,252
                
                
                4,329
                
                
                4,464
                
                
                4,566
                
                
                17,611Noninterest
                    income
                
                
                649
                
                
                896
                
                
                854
                
                
                841
                
                
                3,240Noninterest
                    expense
                
                
                3,315
                
                
                3,451
                
                
                3,552
                
                
                3,549
                
                
                13,867Net
                    income before income tax expense
                
                
                1,586
                
                
                1,774
                
                
                1,766
                
                
                1,858
                
                
                6,984Federal
                    and state income tax expense
                
                
                582
                
                
                635
                
                
                607
                
                
                680
                
                
                2,504Net
                    income
                
                $
                1,004
                
                $
                1,139
                
                $
                1,159
                
                $
                1,178
                
                $
                4,480Basic
                    earnings per share
                
                $
                0.20
                
                $
                0.23
                
                $
                0.23
                
                $
                0.24
                
                $
                0.90Diluted
                    earnings per share
                
                $
                0.20
                
                $
                0.23
                
                $
                0.23
                
                $
                0.23
                
                $
                0.89


A-50











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