UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





T ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
fiscal year ended December 31, 2008




OR




£ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from  
to





Commission
file number 0-21855





Stewardship
      Financial Corporation(Exact
      name of registrant as specified in its
charter)





New Jersey
                                
                                22-3351447(State
      or other jurisdiction of incorporation or organization)
                                
                                (I.R.S.
      Employer Identification No.)630 Godwin Avenue, Midland Park,
      NJ
                                
                                07432(Address
      of principal executive offices)
                                
                                (Zip
      Code)





Registrant’s
telephone number, including area code, (201) 444-7100





Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to Section 12(g) of the Act:





Common Stock, no par
  valueTitle
      of each class





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes £
No T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes £
No T





Note -Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.





Indicate
by check mark whether the Registrant: (1) has filed reports required to be filed
by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes T
No £





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer £
              Accelerated
      filer £Non-accelerated
      filer £
              Smaller
      reporting company T





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


Yes £
No T





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, as of June 30, 2008 was
$55,124,000.





As of
March 23, 2009, 5,553,646 shares of the registrant’s common stock, net of
treasury stock, were outstanding.







1
 Table of Contents




DOCUMENTS
INCORPORATED BY REFERENCE





Item
      10
                          
                          Directors,
      ExecutiveOfficers
      and CorporateGovernance
                          
                          Proxy
      Statement for 2009 Annual Meeting of Shareholders under the captions,
      “Election of Directors” and “Compliance with Section 16(a) Beneficial
      Ownership Reporting,” to be filed no later than April 30,
      2009.Item
      11
                          
                          Executive
      Compensation
                          
                          Proxy
      Statement for 2009 Annual Meeting of Shareholders under the captions,
      “Compensation of Executive Officers” and “Annual Management Compensation
      and All Other Compensation,” to be filed no later than April 30,
      2009.Item
      12
                          
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                          
                          Proxy
      Statement for 2009 Annual Meeting of Shareholders under the caption,
      “Stock Ownership of Management and Principal Shareholders,” to be filed no
      later than April 30, 2009.Item
      13
                          
                          Certain
      Relationships andRelated
      Transactions, andDirector
      Independence
                          
                          Proxy
      Statement for 2009 Annual Meeting of Shareholders under the captions,
      “Election of Directors” and “Certain Relationships and Related
      Transactions,” to be filed no later than April 30,
2009.Item
      14
                          
                          Principal
      AccountantFees
      and Services
                          
                          Proxy
      Statement for 2009 Annual Meeting of Shareholders under the caption, “Fees
      Billed by Accounting Firms During Fiscal 2008 and Fiscal 2007,” to be
      filed no later than April 30,
2009.




2






FORM 10-K


STEWARDSHIP
FINANCIAL CORPORATION


for
the Year Ended December 31, 2008





Table of
Contents




PART
      IItem
      1.
                          Business
                          5Item
      1A.
                          Risk Factors
                          11Item
      1B.
                          Unresolved Staff Comments
                          14Item
      2.
                          Properties
                          15Item
      3.
                          Legal Proceedings
                          15Item
      4.
                          Submission of Matters to a Vote of Security
      Holders
                          15PART
      IIItem
      5.
                          Market for the Registrant’s Common Equity, Related
      Stockholder Matters and Issue Purchases of Equity
      Securities
                          16Item
      6.
                          Selected Financial Data
                          17Item
      7.
                          Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                          19Item
      7A.
                          Quantitative and Qualitative Disclosures About Market
      Risk
                          34Item
      8.
                          Financial Statements and Supplementary
    Data
                          34Item
      9.
                          Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                          67Item
      9A.
                          Controls and Procedures
                          67Item
      9B.
                          Other Information
                          67PART
      IIIItem
      10.
                          Directors, Executive Officers and Corporate
      Governance
                          67Item
      11.
                          Executive Compensation
                          68Item
      12.
                          Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                          68Item
      13.
                          Certain Relationships and Related Transactions, and
      Director Independence
                          69Item
      14.
                          Principal Accountant Fees and Services
                          69PART
      IVItem
      15.
                          Exhibits and Financial Statement
    Schedules
                          69Signatures




3
 Table of Contents


Cautionary
Note Regarding Forward-Looking Statements
 
 This
Annual Report on Form 10-K may contain certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with respect
to the financial condition, results of operations and business of the
Corporation. Such statements are not historical facts and include expressions
about the Corporation’s confidence, strategies and expectations about earnings,
new and existing programs and products, relationships, opportunities, technology
and market conditions and are based on current beliefs and are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. These statements
may be identified by forward-looking terminology such as “expect,” “believe,” or
“anticipate,” or expressions of confidence like “strong,” or “on-going,” or
similar statements or variations of such terms. Factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include, among others, the following possibilities:
 
 •
              Impairment
      charges with respect to securities.
 •
              Unanticipated
      costs in connection with new branch
openings.
 •
              Further
      deterioration of the economy.
 •
              Decline
      in commercial and residential real estate
  values.
 •
              Unexpected
      changes in interest rates.
 •
              Inability
      to manage growth in commercial
loans.
 •
              Unexpected
      loan prepayment volume.
 •
              Unanticipated
      exposure to credit risks.
 •
              Insufficient
      allowance for loan losses.
 •
              Competition
      from other financial institutions.
 •
              Adverse
      effects of government regulation or different than anticipated effects
      from existing regulations.
 •
              Passage
      by Congress of a law which unilaterally amends the terms of the Treasury’s
      investment in us in a way that adversely affects
  us.
 •
              A
      decline in the levels of loan quality and origination
    volume.
 •
              A
      decline in deposits. •
                Other
      unexpected events.
 The
Corporation undertakes no obligation to update or revise any forward-looking
statements in the future.
  4
 Table of
Contents


Part
I





Item 1. Business





General





Stewardship
Financial Corporation (the “Corporation” or “Registrant”) is a one-bank holding
company, which was incorporated under the laws of the State of New Jersey in
January 1995 to serve as a holding company for Atlantic Stewardship Bank (the
“Bank”). The Corporation was organized at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock of
the Bank (the “Acquisition”). Pursuant to the New Jersey Banking Act of 1948, as
amended (the “New Jersey Banking Act”), and pursuant to approval of the
shareholders of the Bank, the Corporation acquired the Bank and became its
holding company on November 22, 1996. As part of the Acquisition, shareholders
of the Bank received one share of common stock, no par value (“Common Stock”) of
the Corporation for each outstanding share of the common stock of the Bank. The
only significant activity of the Corporation is ownership and supervision of the
Bank.





The Bank
is a commercial bank formed under the laws of the State of New Jersey on April
26, 1984. At December 31, 2008 the Bank operated from its main office at 630
Godwin Avenue, Midland Park, New Jersey, and its twelve branches.





The
Corporation is subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System (the “FRB”). The Bank’s deposits are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable
limits. The operations of the Corporation and the Bank are subject to the
supervision and regulation of the FRB, the FDIC and the New Jersey Department of
Banking and Insurance (the “Department”).





Stewardship
Investment Corp. is a wholly-owned non-bank subsidiary of the Bank, whose
primary business is to own and manage an investment portfolio. Stewardship
Realty, LLC is a subsidiary of the Bank, whose primary business is to own and
manage property at 612 Godwin Avenue, Midland Park, New Jersey. Atlantic
Stewardship Insurance Company, LLC is a subsidiary of the Bank, whose primary
business is insurance. In addition to the Bank, in 2003, the Corporation formed
a second subsidiary, Stewardship Statutory Trust I for the purpose of issuing
trust preferred securities.





The
principal executive offices of the Corporation are located at 630 Godwin Avenue,
Midland Park, New Jersey 07432, and the telephone number is (201)
444-7100.





Business
of the Corporation





The
Corporation’s primary business is the ownership and supervision of the Bank. The
Corporation, through the Bank, conducts a traditional commercial banking
business, and offers services including personal and business checking accounts
and time deposits, money market accounts and regular savings accounts. The
Corporation structures its specific products and services in a manner designed
to attract the business of the small and medium sized business and professional
community as well as that of individuals residing, working and shopping in
Bergen, Morris and Passaic counties, New Jersey. The Corporation engages in a
wide range of lending activities and offers commercial, consumer, mortgage, home
equity and personal loans.





In
addition, in forming the Bank, the members of the Board of Directors envisioned
a community-based institution which would serve the local communities
surrounding its branches, while also providing a return to its shareholders.
This vision has been reflected in the Bank’s tithing policy, under which the
Bank tithes 10% of its pre-tax profits to worthy Christian organizations and
civic organizations in the communities where the Bank maintains
branches.





Service
Area





The
Corporation’s service area primarily consists of the Bergen, Passaic and Morris
counties in the New Jersey market, although the Corporation makes loans
throughout New Jersey. At December 31, 2008, the Corporation operated its main
office in Midland Park, New Jersey and twelve existing branch offices in
Hawthorne (2), Ridgewood, Montville, North Haledon, Pequannock, Waldwick, Wayne
(3), Westwood and Wyckoff, New Jersey.





Competition





The
Corporation competes for deposits and loans with commercial banks, thrifts and
other financial institutions, many of which have greater financial resources
than the Corporation. Many large financial institutions in New York City and
other parts of New Jersey compete for the business of New Jersey residents and
companies located in the Corporation’s service area. Certain of these
institutions have significantly higher lending limits than the Corporation and
provide services to their customers that the Corporation does not
offer.





5
 Table of Contents




Management
believes the Corporation is able to compete on a substantially equal basis with
its competitors because it provides responsive, personalized services through
management’s knowledge and awareness of the Corporation’s service area,
customers and business.





Employees





At
December 31, 2008 the Corporation employed 115 full-time employees and 38
part-time employees. None of these employees is covered by a collective
bargaining agreement and the Corporation believes that its employee relations
are good.





Supervision
and Regulation




General





Bank
holding companies and banks are extensively regulated under both federal and
state law. These laws and regulations are intended to protect depositors, not
stockholders. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions and is not intended to be an
exhaustive description of the statutes or regulations applicable to the
Corporation’s business. Any change in the applicable law or regulation may have
a material effect on the business and prospects of the Corporation and the
Bank.





Regulation
of the Corporation





BANK
HOLDING COMPANY ACT. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the “BHCA”), the Corporation is subject to the
regulation and supervision of the FRB. The Corporation is required to file with
the FRB annual reports and other information showing that its business
operations and those of its subsidiaries are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries or engaging in any other activity which the FRB determines to be so
closely related to banking or managing or controlling banks as to be properly
incident thereto.





The BHCA
requires, among other things, the prior approval of the FRB in any case where a
bank holding company proposes to (i) acquire all or substantially all of the
assets of any other bank, (ii) acquire direct or indirect ownership or control
of more than 5% of the outstanding voting stock of any bank (unless it owns a
majority of such bank’s voting shares), or (iii) merge or consolidate with any
other bank holding company. The FRB will not approve any merger, acquisition, or
consolidation that would have a substantially anti-competitive effect, unless
the anti-competitive impact of the proposed transaction is clearly outweighed by
a greater public interest in meeting the convenience and needs of the community
to be served. The FRB also considers capital adequacy and other financial and
managerial resources and future prospects of the companies and the banks
concerned, together with the convenience and needs of the community to be
served.





Additionally,
the BHCA prohibits a bank holding company, with certain limited exceptions, from
(i) acquiring or retaining direct or indirect ownership or control of more than
5% of the outstanding voting stock of any company which is not a bank or bank
holding company, or (ii) engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or performing services for
its subsidiaries; unless such non-banking business is determined by the FRB to
be so closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such determinations, the FRB is required to
weigh the expected benefits to the public, such as greater convenience,
increased competition or gains in efficiency, against the possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.





There are
a number of obligations and restrictions imposed on bank holding companies and
their depository institution subsidiaries by law and regulatory policy that are
designed to minimize potential loss to the depositors of such depository
institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. The FRB also has the authority under the BHCA to require a
bank holding company to terminate any activity or to relinquish control of a
non-bank subsidiary upon the FRB’s determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.





CAPITAL
ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The FRB has adopted risk-based
capital guidelines for bank holding companies. The risk-based capital guidelines
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies, to account
for off-balance sheet exposure, and to minimize disincentives for holding liquid
assets. Under these guidelines, assets and off-balance sheet items are assigned
to broad risk categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.





6
 Table of Contents




The
risk-based guidelines apply on a consolidated basis to bank holding companies
with consolidated assets of $150 million or more. The minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) is 8%. At least 4% of the total capital is
required to be “Tier I” capital, consisting of common stockholders’ equity and
certain preferred stock, less certain goodwill items and other intangible
assets. The remainder, “Tier II Capital,” may consist of (a) the allowance for
loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying
preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory
convertible securities, and (f) qualifying subordinated debt. Total capital is
the sum of Tier I and Tier II capital less reciprocal holdings of other banking
organizations’ capital instruments, investments in unconsolidated subsidiaries
and any other deductions as determined by the FRB (determined on a case-by-case
basis or as a matter of policy after formal rule-making).





Bank
holding company assets are given risk-weights of 0%, 20%, 50%, and 100%. In
addition, certain off-balance sheet items are given similar credit conversion
factors to convert them to asset equivalent amounts to which an appropriate
risk-weight will apply. These computations result in the total risk-weighted
assets. Most loans are assigned to the 100% risk category, except for performing
first mortgage loans fully secured by residential property which carry a 50%
risk-weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. treasury
or obligations backed by the full faith and credit of the U.S. Government, which
have a 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes, including general guarantees and standby letters of credit backing
nonfinancial obligations, and undrawn commitments (including commercial credit
lines with an initial maturity of more than one year) have a 50% risk-weighting.
Short term commercial letters of credit have a 20% risk-weighting and certain
short-term unconditionally cancelable commitments have a 0%
risk-weighting.





In
addition to the risk-based capital guidelines, the FRB has adopted a minimum
Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.





FINANCIAL
SERVICES MODERNIZATION LEGISLATION. On November 12, 1999, President Clinton
signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of
1999 (“FSMA”). The passage of the FSMA removes the barriers to affiliations
among financial service companies by repealing restrictions imposed under the
Glass-Steagall Act of 1933 on banks affiliating with securities firms and by
creating a new financial holding company (“FHC”) under the BHCA. A company may
form an FHC if all of its insured depository institution subsidiaries are
considered well-capitalized and well-managed, and hold a satisfactory rating
under the Community Reinvestment Act of 1977, as amended (“CRA”). An FHC can
engage in a prescribed list of financial services, including insurance and
securities underwriting and agency activities, merchant banking, insurance
company portfolio investment activities and “complementary” financial
activities.





To insure
consistency in the treatment of banks and other financial institutions, FSMA
reorganizes regulatory authority of federal agencies over securities and
investment activities.





In the
area of insurance, FSMA designates the insurance products that banks and
subsidiaries may provide, prohibits national banks from underwriting or selling
title insurance if they did not actively conduct those activities before FSMA
and permits national banks to sell title insurance in states where state banks
are specifically authorized to do so. FSMA requires Federal banking agencies to
prescribe consumer protection regulations for insurance sales by banks. FSMA
preempts state laws that interfere with affiliations between banks and insurance
companies. It also initiates a process for creating a uniformity in licensing of
insurance agents on a national level.





In
addition to enabling banks and their holding companies to conduct a wide range
of financial activities, the FSMA also contained a number of privacy
requirements with which banks and other financial institutions must comply.
Under the FSMA, all financial institutions must adopt a privacy policy and make
its policy known to those who became new customers and provide annual disclosure
of its policy to all of its customers. The Bank had to provide initial privacy
notices to all existing customers by July 1, 2001. Prior to disclosing a
consumer’s nonpublic personal information (not covered by an exception) with
nonaffiliated third parties, financial institutions must provide a reasonable
means and opportunity to opt out of having information shared. The exceptions
include disclosures of nonpublic personal information: (i) made in connection
with certain processing and servicing transactions; (ii) with the consent, or at
the direction, of a customer or consumer; (iii) to protect against potential
fraud or unauthorized transactions; (iv) to respond to judicial process; and (v)
to provide the information to an employee of the institution who happens also to
be an employee of a nonaffiliated third party.





The FSMA
also required the issuance of regulations establishing standards governing the
administrative, technical and physical safeguards of customer information. By
July 1, 2001, all financial institutions had to have an information security
program. Institutions are required to identify and assess the risks that may
threaten customer information, develop a written plan containing





7
 Table of Contents





policies
and procedures to manage and control these risks, implement and test the plan,
and adjust the plan on a continuing basis to account for changes in technology,
sensitivity of customer information, and internal or external threats to
information security.





Additional
proposals to change the regulations and laws governing the banking and financial
services industry are frequently introduced in the state legislatures, before
various banking regulatory agencies, and in Congress. The likelihood and timing
of any such changes and the impact of such changes might have on the Corporation
cannot be determined at this time.





Regulation
of the Bank





As a New
Jersey-chartered commercial bank, the Bank is subject to the regulation,
supervision, and control of the Department. As a FDIC-insured institution, the
Bank is subject to regulation, supervision and control by the FDIC, an agency of
the federal government. The regulations of the FDIC and the Department impact
virtually all activities of the Bank, including the minimum level of capital the
Bank must maintain, the ability of the Bank to pay dividends, the ability of the
Bank to expand through new branches or acquisitions, and various other
matters.





INSURANCE
OF DEPOSITS. Substantially all of the deposits of the Bank are insured up to
applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are
subject to deposit insurance assessments to maintain the DIF.





The FDIC
utilizes a risk-based assessment system where by insured institutions are
assigned to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors. An institution’s assessment
rate depends on the category to which it is assigned. Assessment rates are
determined by the FDIC and during 2008 and 2007 ranged from five to seven basis
points for the healthiest institutions (Risk Category I). Institutions in Risk
Category II, III, and IV have been assessed at annual rates of 10, 28 and 43
basis points, respectively. The FDIC may increase or decrease the assessment
rate schedule on a semi-annual basis.





The
Federal Deposit Insurance Reform Act of 2005 provided for a one-time credit for
eligible institutions based on their assessment base as of December 31, 1996.
Subject to certain limitations with respect to institutions that were exhibiting
weaknesses, credits could be used to offset assessments until exhausted. The
Bank’s one-time credit was $157,000, which was recognized in 2007. The Bank’s
assessment for the year ended December 31, 2008 was $252,000 compared to an
assessment in 2007 of $11,000, after utilization of the one-time
credit.





In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation
(FICO) issued in connection with the failure of certain savings and loan
associations. This payment is established quarterly and averaged 1.12 basis
points and 1.16 basis points for the years ended December 31, 2008 and 2007,
respectively. The Corporation paid $54,000 and $51,000 for the years ended
December 31, 2008 and 2007, respectively, under this assessment. These
assessments will continue until the FICO bonds mature in 2017.





In an
effort to restore capitalization levels and to ensure the DIF will adequately
cover projected losses from future bank failures, in October 2008 the FDIC
proposed a rule to alter the way in which it differentiates for risk in the
risk-based assessment system and to revise deposit insurance assessment rates,
including base assessment rates. New interim assessment rates increase the
current rates uniformly by seven basis points for the assessment for the first
quarter of 2009 resulting in annualized assessment rates for Risk Category I
institutions ranging form 12 to 14 basis points. Effective April 1, 2009, the
initial base assessment rates for Risk Category I institutions range from 12 to
16 basis points. To determine initial base assessment rates, the FDIC proposes
to (1) introduce a new financial ratio into the financial ratios method
applicable to most Risk Category I institutions to include brokered deposits
above a threshold that are used to fund rapid asset growth; (2) for a large Risk
Category I institution with long-term debt issuer ratings, combine weighted
average CAMELS component rating, the debt issuer ratings, and the financial
ratios method assessment rate; and (3) use a new uniform amount and pricing
multipliers for each method. In February 2009, the FDIC also adopted an interim
rule that imposes a 20 basis point emergency special assessment on all insured
depository institutions on June 30, 2009. The special assessment will be
collected on September 30, 2009, at the same time that the risk-based
assessments for the second quarter of 2009 are collected. The interim rule also
permits the Board of Directors of the FDIC to impose an emergency special
assessment of up to 10 basis points on all insured depository institutions
whenever, after June 30, 2009, the FDIC estimates that the fund reserve ratio
will fall to a level that the FDIC believes would adversely affect public
confidence or to a level close to zero or negative at the end of a calendar
quarter. The FDIC also proposes to introduce three adjustments that could be
made to an institution’s initial base assessment rate: (1) a potential decrease
for long-term unsecured debt, including senior and subordinated debt and, for
small institutions, a portion of Tier 1 capital; (2) a potential increase for
secured liabilities above a threshold amount; and (3) for non-Risk Category I
institutions, a potential increase for brokered deposits above a threshold
amount. The Corporation cannot provide any assurance as to the amount of any
proposed increase in its deposit insurance premium rates, should such an
increase occur, as such changes are dependent upon a variety of factors, some of
which are beyond the control of the Corporation.





8
 Table of Contents




DIVIDEND
RIGHTS. Under the New Jersey Banking Act, a Bank may declare and pay dividends
only if, after payment of the dividend, the capital stock of the Bank will be
unimpaired and either the Bank will have a surplus of not less than 50% of its
capital stock or the payment of the dividend will not reduce the Bank’s
surplus.





CHECK
CLEARING FOR THE 21ST CENTURY ACT (“Check 21 Act”). Effective October 28, 2004,
the Federal Reserve adopted final amendments to Regulation CC and its commentary
to implement the Check 21 Act. The Check 21 Act was enacted on October 28, 2003,
and became effective on October 28, 2005.





To
facilitate check truncation and electronic check exchange, the Check 21 Act
authorizes a new negotiable instrument called a “substitute check” and provides
that a properly prepared substitute check is the legal equivalent of the
original check for all purposes. A substitute check is a paper reproduction of
the original check that can be processed just like the original check . The
Check 21 Act does not require any bank to create substitute checks or to accept
checks electronically. The Federal Reserve’s amendments: (i) set forth the
requirements of the Check 21 Act that apply to all banks, including those that
choose not to create substitute checks; (ii) provide a model disclosure and
model notices relating to substitute checks; and (iii) set forth bank
endorsement and identification requirements for substitute checks. The
amendments to Regulation CC also clarify some existing provisions of the rule
and commentary.





USA
PATRIOT ACT OF 2001 (“Patriot Act”). On October 26, 2001, the Patriot Act was
signed into law. Enacted in response to the terrorist attacks in New York,
Pennsylvania, and Washington D.C. on September 11, 2001, the Patriot Act is
intended to strengthen the ability of U.S. law enforcement and the intelligence
community to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide-ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various regulations,
including, but not limited to: (a) due diligence requirements for financial
institutions that administer, maintain, or manage private bank accounts or
correspondent accounts for non-U.S. persons; (b) standards for verifying
customer identification at account opening; (c) rules to promote cooperation
among financial institutions, regulators and law enforcement entities in
identifying parties that may be involved in terrorism or money laundering; (d)
reports of nonfinancial trades and business filed with the Treasury Department’s
Financial Crimes Enforcement Network for transactions exceeding $10,000; and (e)
filing of suspicious activities reports by brokers and dealers if they believe a
customer may be violating U.S. laws and regulations.





Legislation
Implemented in Response to Recent Periods of Economic Conditions





On
October 3, 2008, in response to the financial crises affecting the banking
system and financial markets and going concern threats to investment banks and
other financial institutions, the Emergency Economic Stabilization Act of 2008
(the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury (the
“Treasury”) was given the authority to, among other things, purchase up to $700
billion of mortgages, mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. Pursuant to the EESA, the
Treasury was initially authorized to use $350 billion for the Troubled Asset
Relief Program (“TARP”). On October 14, 2008, the Secretary of the U.S.
Department of the Treasury announced that the Treasury would purchase equity
stakes in a wide variety of banks and thrifts. Under the program, known as the
Capital Purchase Program, from the $700 billion authorized by the EESA, the
Treasury made $250 billion of capital available to U.S. financial institutions
in the form of purchases of preferred stock. In addition to the preferred stock,
the Treasury received, from participating financial institutions, warrants to
purchase common stock with an aggregate market price equal to 15% of the
preferred investment. Participating financial institutions were required to
adopt the Treasury’s standards for executive compensation and corporate
governance for the period during which the Treasury holds equity issued under
the Capital Purchase Program. Although we believed that our capital position was
sound, we concluded that the Capital Purchase Program would allow us to raise
additional capital on favorable terms in comparison with other available
alternatives. Accordingly, we applied to participate in the Capital Purchase
Program. As described elsewhere in this Annual Report on Form 10-K, in January,
2009, the Treasury purchased $10 million of the Corporation’s preferred stock
(the “Preferred Shares”) under the TARP Capital Purchase Program.





We
received $10 million in proceeds from the sale of 10,000 shares of cumulative
perpetual preferred stock with a liquidation value of $1,000 per share to the
Treasury on January 30, 2009. The preferred stock issued to the Treasury pays a
dividend of 5% for the first five years and 9% thereafter. As part of the
transaction, we also granted the Treasury a ten-year warrant to purchase up to
127,119 shares of our common stock at an exercise price of $11.80.





Under the
terms of the Capital Purchase Program, the Treasury’s consent will be required
for any increase in our dividends paid to common stockholders (above a quarterly
dividend of $0.095 per common share) or the Corporation’s redemption, purchase
or acquisition of common stock or any trust preferred securities issued by the
Corporation’s capital trusts until the third anniversary of the senior preferred
share issuance to the Treasury unless prior to such third anniversary the senior
preferred shares are redeemed in whole or the Treasury has transferred all of
these shares to third parties.





9
 Table of Contents





Participants
in the Capital Purchase Program were required to accept several
compensation-related limitations associated with this Program. In January 2009,
each of our senior executive officers agreed in writing to accept the
compensation standards in existence at that time under the Capital Purchase
Program and thereby cap or eliminate some of their contractual or legal rights.
The provisions agreed to were as follows:





No Golden Parachute Payments.For purposes of the Capital Purchase Program, “golden parachute payment”
was defined to mean a severance payment resulting from involuntary termination
of employment or from a bankruptcy event of the employer, which exceeds three
times the terminated employee’s average annual base salary over the five years
prior to termination. Our senior executive officers have agreed to forego all
golden parachute payments for as long as two conditions remain true: they remain
“senior executive officers” (CEO, CFO and the next three highest-paid executive
officers), and the Treasury continues to hold our equity or debt securities
issued under the Capital Purchase Program. The period during which the Treasury
holds those securities is the “Capital Purchase Program Covered
Period.”





Recovery of Incentive Compensation
if Based on Certain Material Inaccuracies.Our senior executive officers
have also agreed to a “clawback provision,” which means that we can recover
incentive compensation paid during the Capital Purchase Program Covered Period
that is later found to have been paid based on materially inaccurate financial
statements or other materially inaccurate measurements of
performance.





No Compensation Arrangements That
Encourage Excessive Risks.During the Capital Purchase Program Covered
Period, we are not allowed to enter into compensation arrangements that
encourage senior executive officers to take “unnecessary and excessive risks
that threaten the value” of our Corporation. To make sure this does not happen,
the Corporation’s Compensation Committee is required to meet at least once a
year with our senior risk officer to review our executive compensation
arrangements in light of our risk management policies and practices. Our senior
executive officers’ written agreements include their obligation to accept any
changes in our incentive compensation arrangements resulting from the
Compensation Committee’s review.





Limit on Federal Income Tax
Deductions.During the Capital Purchase Program Covered Period, we are
not allowed to take federal income tax deductions for compensation paid to
senior executive officers in excess of $500,000 per year, with certain
exceptions that do not apply to our senior executive officers.





On
February 17, 2009, President Obama signed the American Recovery and Reinvestment
Act of 2009 (the “Stimulus Act”) into law. The Stimulus Act modified the
compensation-related limitations contained in the Capital Purchase Program and
created additional compensation-related limitations. The limitations in the
Stimulus Act apply to all participants in the Troubled Asset Relief Program
(under which the Capital Purchase Program was created), regardless of when
participation commenced. Thus, the newly enacted compensation-related
limitations are applicable to the Corporation, subject to the Treasury
Department’s issuance of implementing regulations. The compensation-related
limitations applicable to the Corporation which have been added or modified by
the Stimulus Act are as follows:





No Severance Payments.Under
the Stimulus Act, the definition of “golden parachute” was expanded to include
any severance payment resulting from termination of employment, except for
payments for services performed or benefits accrued. In addition, the Stimulus
Act expanded the group of employees to which such restrictions apply.
Consequently, under the Stimulus Act, we are prohibited from making any
severance payment to our “senior executive officers” (defined in the Stimulus
Act as the five highest paid senior executive officers) and our next five most
highly compensated employees during the Capital Purchase Program Covered
Period.





Recovery of Incentive Compensation
if Based on Certain Material Inaccuracies.The Stimulus Act also contains
the “clawback provision” discussed above, but extends its application to our
next 20 most highly compensated employees.





No Compensation Arrangements That
Encourage Earnings Manipulation.In addition to the Capital Purchase
Program prohibition on compensation arrangements that encourage unnecessary and
excessive risk, the Stimulus Act prohibits us during the Capital Purchase
Program Covered Period from entering into compensation arrangements that
encourage manipulation of reported earnings to enhance the compensation of any
of our employees.





Limit on Incentive Compensation.The Stimulus Act contains a provision that prohibits the payment or
accrual of any bonus, retention award or incentive compensation to certain
employees during the Capital Purchase Program Covered Period, other than awards
of long-term restricted stock that (i) do not fully vest during the Capital
Purchase Program Covered Period, (ii) have a value not greater than one-third of
the total annual compensation of the awardee and (iii) are subject to such other
restrictions as determined by the Secretary of the Treasury. The prohibition on
bonus, incentive compensation and retention awards does not preclude payments
required under written employment contracts entered into on or prior to February
11, 2009. As a recipient of less than $25 million of funds from the Capital
Purchase Program, the limit applies only to the most highly compensated
employee.





10
 Table of Contents




Compensation Committee Functions.The Stimulus Act requires that our Compensation Committee be comprised
solely of independent directors and that it meet at least semiannually to
discuss and evaluate our employee compensation plans in light of an assessment
of any risk posed to us from such compensation plans.





Compliance Certifications.The Stimulus Act also requires a written certification by our Chief
Executive Officer and Chief Financial Officer of our compliance with the
provisions of the Stimulus Act. In the future, these certifications will be
contained in our Annual Report on Form 10-K.





Treasury Review of Excessive Bonuses
Previously Paid.The Stimulus Act directs the Secretary of the Treasury
to review all compensation paid to our senior executive officers and the next 20
most highly compensated employees prior to adoption of the Stimulus Act to
determine whether any such payments were inconsistent with the purposes of the
Capital Purchase Program or the Stimulus Act or were otherwise contrary to the
public interest. If the Secretary of the Treasury makes such a finding, the
Secretary of the Treasury is directed to negotiate with the Capital Purchase
Program recipient and the employee recipient for appropriate reimbursements to
the federal government with respect to the compensation.





Say on Pay.Under the
Stimulus Act, during the Capital Purchase Program Covered Period, we must
include in the proxy statement for our annual meeting of shareholders a
non-binding say on pay vote by the shareholders on executive
compensation.





Limitation on Luxury Expenditures.The Stimulus Act requires us to adopt a company-wide policy regarding
excessive or luxury expenditures, such as entertainment expenses, office or
facility renovation expenses and transportation services expenses.





Item 1A. Risk Factors





Investments
in the common stock of Stewardship Financial Corporation involve risk. The
following discussion highlights the risks management believes are material for
our Corporation, but does not necessarily include all risks that we may
face.





Our
operations are subject to interest rate risk and changes in interest rates may
negatively affect financial performance.





Our
earnings and cash flows are largely dependent upon our net interest income. Net
interest income is the difference between interest income earned on
interest-earning assets, such as loans and securities, and interest expense paid
on interest-bearing liabilities, such as deposits and borrowed money. To be
profitable we must earn more interest from our interest-earning assets than we
pay on our interest-bearing liabilities. Changes in the general level of
interest rates may have an adverse affect on our business, financial condition
and results of operations. Interest rates are highly sensitive to many factors
that are beyond our control, including general economic conditions and the
policies of governmental and regulatory agencies such as the Federal Reserve
Bank. Changes in monetary policy and interest rates can also adversely affect
our ability to originate loans and deposits, the fair value of financial assets
and liabilities and the average duration of our assets and
liabilities.





Our
allowance for loan losses may be insufficient.





There are
inherent risks associated with our lending activities. There are risks inherent
in making any loan, including dealing with individual borrowers, nonpayment,
uncertainties as to the future value of collateral and changes in economic and
industry conditions. We attempt to mitigate and manage credit risk through
prudent loan underwriting and approval procedures, monitoring of loan
concentrations and periodic independent review of outstanding loans. We cannot
be assured that these procedures will reduce credit risk inherent in the
business.





We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and assets serving as collateral for loan repayments. In determining
the size of our allowance for loan loss, we rely on our experience and our
evaluation of economic conditions. If our assumptions prove to be incorrect, our
current allowance may not be sufficient to cover probable incurred loan losses
and adjustments may be necessary to allow for different economic conditions or
adverse developments in our portfolio. Significant additions to our allowance
for loan losses would materially decrease our net income.





11
 Table of Contents





A
persistent, deepening economic recession and unstable financial markets have
adversely affected our industry and, because of our geographic concentration in
northern New Jersey, we could be impacted by adverse changes in local economic
conditions.





Our
success depends on the general economic conditions of the nation, the state of
New Jersey, and the northern New Jersey area. The nation’s current economic
recession and the related instability of the financial markets have severely
adversely affected the banking industry and may adversely affect our business,
financial condition, results of operations and stock price. We do not believe
these difficult economic conditions are likely to improve in the near future and
if the efforts of the federal government to stabilize the economy are
unsuccessful the recession could deepen. Unlike larger banks that are more
geographically diversified, we provide financial services to customers primarily
in the market areas in which we operate. The local economic conditions of these
areas have a significant impact on our commercial, real estate and construction
loans, the ability of our borrowers to repay these loans and the value of the
collateral securing these loans. While we did not and do not have a sub-prime
lending program, any significant decline in the real estate market in our
primary market area would hurt our business and mean that collateral for our
loans would have less value. As a consequence, our ability to recover on
defaulted loans by selling the real estate securing the loan would be diminished
and we would be more likely to suffer losses on defaulted loans. Any of the
foregoing events and conditions could have a material adverse effect on our
business, results of operations and financial condition.





Competition
within the financial services industry could adversely affect our
profitability.





We face
strong competition from banks, other financial institutions, money market mutual
funds and brokerage firms within the New York metropolitan area. A number of
these entities have substantially greater resources and lending limits, larger
branch systems and a wider array of banking services. Competition among
depository institutions for customer deposits has increased significantly in the
current difficult economic situation. If we are unsuccessful in competing
effectively, we will lose market share and may suffer a reduction in our margins
and suffer adverse consequences to our business, results of operations and
financial condition.





Federal
and State regulations could restrict our business and increase our costs and
non-compliance would result in penalties, litigation and damage to our
reputation.





We
operate in a highly regulated environment and are subject to extensive
regulation, supervision, and examination by the FDIC, the FRB and the State of
New Jersey. The significant federal and state banking regulations that we are
subject to are described herein under “Item 1. Business.” Such regulation and
supervision of the activities in which an institution may engage is primarily
intended for the protection of the depositors and the federal deposit insurance
funds. These regulations affect our lending practices, capital structure,
investment practices, dividend policy and overall operations. These statutes,
regulations, regulatory policies, and interpretations of policies and
regulations are constantly evolving and may change significantly over time. Any
such changes could subject the Corporation to additional costs, limit the types
of financial services and products we may offer and/or increase the ability of
non-banks to offer competing financial services and products, among other
things. Due to our nation’s current economic recession and the lack of
confidence in the financial markets, it is highly probable new federal and/or
state laws and regulations of lending and funding practices and liquidity
standards will be forthcoming. Bank regulatory agencies are expected to be very
aggressive in responding to concerns and trends identified in bank examinations
with respect to bank capital requirements. Any increased government oversight
may increase our costs and limit our business opportunities. We may be required
to pay even higher FDIC premiums than the recently increased level. Our failure
to comply with law, regulations or policies applicable to our business could
result in sanctions against us by regulatory agencies, civil money penalties
and/or reputation damage, which could have a material adverse effect on our
business, financial condition and results of operations. While we have polices
and procedures designed to prevent any such violations, there can be no
assurances that such violations will not occur.





A
breach of information security or compliance breach by one of our vendors could
negatively affect our reputation and business.





We rely
upon a variety of computing platforms and networks over the internet for the
purpose of data processing, communication and information exchange. Despite the
safeguards instituted by management, such systems are susceptible to a breach of
security. In addition, we rely on the service of a variety of third-party
vendors to meet our processing needs. If confidential information is
compromised, financial losses, costs and damages could occur. Such costs and or
losses could materially affect our earnings. In addition, the negative affect on
our reputation could affect our ability to deliver products and services
successfully to new and existing customers.





12
 Table of Contents





The
trading volume of our stock remains low which could impact stock
prices.





The
trading history of our common stock has been characterized by relatively low
trading volume. The value of a shareholder’s investment may be subject to
decreases due to the volatility of the price of our common stock which trades on
the NASDAQ Capital Market.





The
market price of our common stock may be volatile and subject to fluctuations in
response to numerous factors, including, but not limited to, the factors
discussed in the other risk factors and the following:





•
            actual
      or anticipated fluctuation in operating
results;


•
            changes
      in interest rates;


•
            changes
      in legal or regulatory environment;


•
            press
      releases, publicity, or
announcements;


•
            changes
      in expectation of our future financial
  performance;


•
            future
      sales of our common stock;


•
            changes
      in economic conditions; and


•
            other
      developments affecting us or our
competitors





These
factors may adversely affect the trading price of our common stock, regardless
of our actual operating performance, and could prevent a shareholder from
selling common stock at or above the current market price.





Because
of our participation in the Treasury’s Capital Purchase Program, the Corporation
is subject to certain restrictions including limitations on the payment of
dividends on and the repurchase of our Common Stock.





The
Corporation has traditionally paid a quarterly cash dividend to shareholders. In
the future, we may not be able to declare or pay cash dividends other than
regular quarterly cash dividends of not more than $0.095 per share, which was
the amount of the last regular quarterly dividend declared and paid by the
Corporation, or even to declare or pay cash dividends at all in accordance with
past practice, due to restrictions on the payment of dividends and the
repurchase of our Common Stock contained in the Securities Purchase Agreement
between the Corporation and the Treasury. These restrictions on declaring or
paying dividends could negatively effect the value of our Common Stock. Until
the earlier of the third anniversary of the Treasury’s investment in our Series
A Preferred Stock or when all of the shares of Series A Preferred Stock have
been redeemed by us or transferred by the Treasury to third parties, we may not,
without the consent of the Treasury, increase the cash dividend on our Common
Stock or, purchase, redeem or otherwise acquire for consideration shares of our
Common Stock or, purchase, redeem or otherwise acquire for consideration shares
of our Common Stock or any preferred stock (other than the Series A Preferred
Stock), subject to limited exceptions, most significantly purchases in
connection with benefit plans. We are prohibited from declaring dividend
payments on common, junior preferred or pari passu preferred shares unless we
are current in our dividend payments on the Series A Preferred Stock. Further,
common, junior preferred or pari passu preferred shares may not be repurchased
by us unless we are current in our dividend payments on the Series A Preferred
Stock.





Moreover,
our ability to pay dividends is always subject to legal and regulatory
restrictions. Any payment of dividends in the future will depend, in large part,
on the Corporation’s earnings, capital requirements, financial condition and
other factors considered relevant by the Corporation’s Board of Directors.
Although we have historically paid cash dividends on our Common Stock, we are
not required to do so and our Board of Directors could reduce or eliminate our
Common Stock dividend in the future.





If
we are unable to redeem the Series A Preferred Stock issued to the Treasury in
connection with our participation in the Treasury’s Capital Purchase Program
within five years, the cost of the capital received will increase
significantly.





The
Series A Preferred Stock pays cumulative dividends at the rate of 5% per annum
for the first five years and 9% per annum thereafter. The Series A Preferred
Stock has no maturity date. If we are unable to redeem the Series A Preferred
Stock prior to February 15, 2014, the dividend payable thereon will increase on
that date from 5% per annum (approximately $500,000 annually) to 9% per annum
(approximately $900,000 annually). If we are unable to redeem our Series A
Preferred Stock by February 15, 2014, this increase in the annual dividend rate
on the Series A Preferred Stock could have a material negative effect on our
liquidity.





13
 Table of Contents





The
Series A Preferred Stock issued to the Treasury in connection with our
participation in the Treasury’s Capital Purchase Program reduces our net income
and earnings per share of Common Stock and the Warrant issued to the Treasury
may be dilutive to the ownership interests of holders of the Common
Stock.





The
shares of Series A Preferred Stock pay cumulative dividends at the rate of 5%
per annum for the first five years and 9% per annum thereafter. These dividends
will reduce our net income and earnings per common share. The Series A Preferred
Stock ranks senior to the Common Stock and, as such, will receive preferential
treatment in the event of liquidation, dissolution or winding up of the
Corporation. In the event that the Warrant issued to the Treasury is exercised
in whole or part, the ownership interest of our existing shareholders will be
diluted accordingly. The shares of Common Stock underlying the warrant represent
approximately 2.2% of the shares of the Corporation’s Common Stock outstanding
as of February 26, 2009 (included in total shares outstanding are the shares
issuable upon exercise of the Warrant). The Treasury has agreed not to vote any
of the shares of Common Stock it receives upon exercise of the Warrant, but any
third party to which the Treasury transfers the Warrant or any portion of the
Warrant or any shares of Common Stock underlying the Warrant is not similarly
bound by this voting restriction.





Item 1B. Unresolved Staff Comments





None





14
 Table of Contents





Item 2. Properties





The
Corporation conducts its business through its main office located at 630 Godwin
Avenue, Midland Park, New Jersey and its twelve branch offices. The property
located at 612 Godwin Avenue is to be used for future administrative offices,
pending the obtainment of all appropriate approvals and completing construction.
The following table sets forth certain information regarding the Corporation’s
properties as of December 31, 2008.








Location
                                                            
                                                            Leased
                                                              or Owned
                                                            
                                                            Date of Lease
                                                              Expiration612
      Godwin Avenue
                                                              Midland
      Park, NJ
                                                            
                                                            Owned
                                                            
                                                            —630
      Godwin Avenue
                                                              Midland
      Park, NJ
                                                            
                                                            Owned
                                                            
                                                            —386
      Lafayette Avenue
                                                              Hawthorne,
      NJ
                                                            
                                                            Owned
                                                            
                                                            —1111
      Goffle Road
                                                              Hawthorne,
      NJ
                                                            
                                                            Leased
                                                            
                                                            05/31/112
      Changebridge Road
                                                              Montville,
      NJ
                                                            
                                                            Leased
                                                            
                                                            06/30/15249
      Newark-Pompton Turnpike
                                                              Pequannock,
      NJ
                                                            
                                                            Owned
                                                            
                                                            —190
      Franklin Avenue
                                                              Ridgewood,
      NJ
                                                            
                                                            Leased
                                                            
                                                            09/30/1264
      Franklin Turnpike
                                                              Waldwick,
      NJ
                                                            
                                                            Owned
                                                            
                                                            —87
      Berdan Avenue
                                                              Wayne,
      NJ
                                                            
                                                            Leased
                                                            
                                                            06/30/14311
      Valley Road
                                                              Wayne,
      NJ
                                                            
                                                            Leased
                                                            
                                                            11/30/13400
      Hamburg Turnpike
                                                              Wayne,
      NJ
                                                            
                                                            Leased
                                                            
                                                            04/30/14378
      Franklin Avenue
                                                              Wyckoff,
      NJ
                                                            
                                                            Leased
                                                            
                                                            05/31/26200
      Kinderkamack Road
                                                              Westwood,
      NJ
                                                            
                                                            Leased
                                                            
                                                            05/20/2633
      Sicomac Avenue North
                                                              Haledon,
      NJ
                                                            
                                                            Leased
                                                            
                                                            10/31/14





Item 3. Legal Proceedings





The
Corporation and the Bank are periodically parties to or otherwise involved in
legal proceedings arising in the normal course of business, such as claims to
enforce liens, claims involving the making and servicing of real property loans,
and other issues incident to the Bank’s business. Management does not believe
that there is any pending or threatened proceeding against the Corporation or
the Bank which, if determined adversely, would have a material effect on the
business or financial position of the Corporation or the Bank.





Item 4. Submission of Matters to a Vote of Security
Holders





No
matters were submitted for a vote of the Registrant’s shareholders during the
fourth quarter of fiscal 2008.





15
 Table of Contents





Part
II





Item 5. Market for the Registrant’s Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity Securities





Until
March 27, 2007, the Corporation’s Common Stock traded on the OTC Bulletin Board
under the symbol “SSFN”. As of March 28, 2007, the Corporation’s Common Stock
has been traded on the Nasdaq Capital Market under the same symbol. As of
December 31, 2008, there were approximately 1,013 shareholders of record of the
Common Stock.





The
following table sets forth the quarterly high and low bid prices of the Common
Stock as reported on the OTC Bulletin Board and the Nasdaq Capital Market for
the quarterly periods presented. The prices below reflect inter-dealer prices,
without retail markup, markdown or commissions, and may not represent actual
transactions. The stock prices and cash dividends set forth below also reflect
adjustments related to 5% stock dividends paid in November, 2008 and
2007.








Bid
                    
                    
                    CashHigh
                    
                    
                    Low
                    
                    
                    DividendYear
      Ended December 31, 2008Fourth
      quarter
                    
                    $
                    13.75
                    
                    
                    $
                    7.60
                    
                    
                    $
                    0.090Third
      quarter
                    
                    
                    13.10
                    
                    
                    
                    11.43
                    
                    
                    
                    0.090Second
      quarter
                    
                    
                    13.81
                    
                    
                    
                    11.64
                    
                    
                    
                    0.086First
      quarter
                    
                    
                    14.29
                    
                    
                    
                    12.38
                    
                    
                    
                    0.086Year
      Ended December 31, 2007Fourth
      quarter
                    
                    $
                    14.48
                    
                    
                    $
                    12.34
                    
                    
                    $
                    0.082Third
      quarter
                    
                    
                    14.97
                    
                    
                    
                    12.02
                    
                    
                    
                    0.082Second
      quarter
                    
                    
                    14.54
                    
                    
                    
                    12.06
                    
                    
                    
                    0.082First
      quarter
                    
                    
                    12.48
                    
                    
                    
                    11.52
                    
                    
                    
                    0.082





The
Corporation may pay dividends as declared from time to time by the Corporation’s
Board of Directors out of funds legally available therefore, subject to certain
restrictions. Since dividends from the Bank will be the Corporation’s main
source of income, any restriction on the Bank’s ability to pay dividends will
act as a restriction on the Corporation’s ability to pay dividends. Under the
New Jersey Banking Act, the Bank may not pay a cash dividend unless, following
the payment of such dividend, the capital stock of the Bank will be unimpaired
and (i) the Bank will have a surplus of no less than 50% of its capital stock,
or (ii) the payment of such dividend will not reduce the surplus of the Bank. In
addition, the Bank cannot pay dividends if doing so would reduce its capital
below the regulatory imposed minimums.





Also, our
ability to pay future cash dividends is subject to the provision contained in
the agreement that covers our participation in the Treasury’s Capital Purchase
Program. Specifically, the Corporation may not declare a dividend that exceeds
$0.095 per common share until the earlier of the third anniversary of the
Treasury’s investment or our redemption or the transfer of our Preferred Stock
to a third party.





During
fiscal 2008, the Corporation paid quarterly cash dividends totaling $0.35 per
share for an annual dividend payout ratio of 56.2%. During fiscal 2007, the
Corporation paid quarterly cash dividends totaling $0.33 per share for an annual
dividend payout ratio of 39.4%.





16
 Table of Contents




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, 2003 in: (a) Stewardship Financial Corporation’s
common stock; (b) Nasdaq Bank Index; (c) Peer index; and (d) Nasdaq Composite
Index. The Peer index consists of eleven New Jersey based commercial banks with
total asset size and operating performance comparable with the Corporation. The
peer group consists of 1st Constitution Bancorp, BCB Bancorp, Inc., Center
Bancorp, Central Jersey Bancorp, Community Bank of Bergen County, Parke Bancorp,
Inc., Peapack-Gladstone Financial Corporation, Somerset Hills Bancorp, Sterling
Banks, Inc., Sussex Bancorp, and Unity Bancorp, Inc. The information provided is
not necessarily indicative of the Corporation’s future performance.









Period
      EndingIndex
                
                12/31/03
                
                
                12/31/04
                
                
                12/31/05
                
                
                12/31/06
                
                
                12/31/07
                
                
                12/31/08Stewardship
      Financial Corporation
                
                $
                100.00
                
                
                $
                99.38
                
                
                $
                97.84
                
                
                $
                96.04
                
                
                $
                103.45
                
                
                $
                84.87Nasdaq
      Bank Index
                
                
                100.00
                
                
                
                113.44
                
                
                
                111.19
                
                
                
                126.36
                
                
                
                101.57
                
                
                
                80.03Peer
      Index
                
                
                100.00
                
                
                
                115.35
                
                
                
                118.89
                
                
                
                122.90
                
                
                
                107.20
                
                
                
                66.49Nasdaq
      Composite Index
                
                
                100.00
                
                
                
                109.10
                
                
                
                111.38
                
                
                
                122.89
                
                
                
                135.95
                
                
                
                81.85





Item 6. Selected Financial Data





The
following selected consolidated financial data of the Corporation is qualified
in its entirety by, and should be read in conjunction with, the consolidated
financial statements, including notes, thereto, included elsewhere in this
document.





17
 Table of Contents




STEWARDSHIP
FINANCIAL CORPORATION AND SUBSIDIARY


CONSOLIDATED
FINANCIAL SUMMARY OF SELECTED FINANCIAL DATA





December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(Dollars
      in thousands, except per share amounts)Earnings
      Summary:Net
      interest income
                  
                  $
                  22,303
                  
                  
                  $
                  19,430
                  
                  
                  $
                  19,084
                  
                  
                  $
                  18,211
                  
                  
                  $
                  16,367Provision
      for loan losses
                  
                  
                  (3,585
                  )
                  
                  
                  (530
                  )
                  
                  
                  (264
                  )
                  
                  
                  (600
                  )
                  
                  
                  (540
                  )Net
      interest income after provision for loan losses
                  
                  
                  18,718
                  
                  
                  
                  18,900
                  
                  
                  
                  18,820
                  
                  
                  
                  17,611
                  
                  
                  
                  15,827Noninterest
      income
                  
                  
                  4,217
                  
                  
                  
                  4,414
                  
                  
                  
                  4,189
                  
                  
                  
                  3,240
                  
                  
                  
                  2,726Noninterest
      expense
                  
                  
                  17,986
                  
                  
                  
                  16,629
                  
                  
                  
                  15,629
                  
                  
                  
                  13,867
                  
                  
                  
                  12,501Income
      before income tax expense
                  
                  
                  4,949
                  
                  
                  
                  6,685
                  
                  
                  
                  7,380
                  
                  
                  
                  6,984
                  
                  
                  
                  6,052Income
      tax expense
                  
                  
                  1,448
                  
                  
                  
                  2,078
                  
                  
                  
                  2,627
                  
                  
                  
                  2,504
                  
                  
                  
                  2,204Net
      income
                  
                  $
                  3,501
                  
                  
                  $
                  4,607
                  
                  
                  $
                  4,753
                  
                  
                  $
                  4,480
                  
                  
                  $
                  3,848Common
      Share Data: (1)Basic
      net income
                  
                  $
                  0.63
                  
                  
                  $
                  0.83
                  
                  
                  $
                  0.86
                  
                  
                  $
                  0.81
                  
                  
                  $
                  0.71Diluted
      net income
                  
                  
                  0.63
                  
                  
                  
                  0.82
                  
                  
                  
                  0.85
                  
                  
                  
                  0.81
                  
                  
                  
                  0.70Cash
      dividends declared
                  
                  
                  0.35
                  
                  
                  
                  0.33
                  
                  
                  
                  0.28
                  
                  
                  
                  0.23
                  
                  
                  
                  0.19Book
      value at year end
                  
                  
                  7.68
                  
                  
                  
                  7.37
                  
                  
                  
                  6.74
                  
                  
                  
                  6.07
                  
                  
                  
                  5.58Average
      shares outstanding net of treasury stock
                  
                  
                  5,575
                  
                  
                  
                  5,558
                  
                  
                  
                  5,536
                  
                  
                  
                  5,502
                  
                  
                  
                  5,415Shares
      outstanding at year end
                  
                  
                  5,575
                  
                  
                  
                  5,572
                  
                  
                  
                  5,532
                  
                  
                  
                  5,497
                  
                  
                  
                  5,455Dividend
      payout ratio
                  
                  
                  56.18
                  %
                  
                  
                  39.35
                  %
                  
                  
                  32.19
                  %
                  
                  
                  27.79
                  %
                  
                  
                  26.46
                  %Selected
      Consolidated Ratios:Return
      on average assets
                  
                  
                  0.58
                  %
                  
                  
                  0.86
                  %
                  
                  
                  0.96
                  %
                  
                  
                  1.00
                  %
                  
                  
                  0.95
                  %Return
      on average stockholders’
      equity
                  
                  
                  8.34
                  %
                  
                  
                  11.76
                  %
                  
                  
                  13.41
                  %
                  
                  
                  13.86
                  %
                  
                  
                  13.48
                  %Average
      stockholders’ equity as a
      percentage of average total assets
                  
                  
                  6.98
                  %
                  
                  
                  7.34
                  %
                  
                  
                  7.19
                  %
                  
                  
                  7.20
                  %
                  
                  
                  7.06
                  %Leverage
      (Tier 1) capital (2)
                  
                  
                  8.01
                  %
                  
                  
                  8.56
                  %
                  
                  
                  8.85
                  %
                  
                  
                  8.71
                  %
                  
                  
                  9.08
                  %Tier-I
      risk based capital (3)
                  
                  
                  10.50
                  %
                  
                  
                  10.76
                  %
                  
                  
                  11.25
                  %
                  
                  
                  11.16
                  %
                  
                  
                  12.48
                  %Total
      risk based capital (3)
                  
                  
                  11.60
                  %
                  
                  
                  11.76
                  %
                  
                  
                  12.28
                  %
                  
                  
                  12.21
                  %
                  
                  
                  13.57
                  %Allowance
      for loan loss to total loans
                  
                  
                  1.18
                  %
                  
                  
                  1.06
                  %
                  
                  
                  1.11
                  %
                  
                  
                  1.11
                  %
                  
                  
                  1.11
                  %Nonperforming
      loans to total loans
                  
                  
                  1.46
                  %
                  
                  
                  0.11
                  %
                  
                  
                  0.41
                  %
                  
                  
                  0.15
                  %
                  
                  
                  0.48
                  %Selected
      Year-end Balances:Total
      assets
                  
                  $
                  611,816
                  
                  
                  $
                  571,905
                  
                  
                  $
                  519,749
                  
                  
                  $
                  482,727
                  
                  
                  $
                  424,306Total
      loans, net of allowance for loan loss
                  
                  
                  434,103
                  
                  
                  
                  415,690
                  
                  
                  
                  365,443
                  
                  
                  
                  341,976
                  
                  
                  
                  292,909Total
      deposits
                  
                  
                  506,531
                  
                  
                  
                  472,299
                  
                  
                  
                  434,223
                  
                  
                  
                  403,466
                  
                  
                  
                  356,730Stockholders’
      equity
                  
                  
                  42,796
                  
                  
                  
                  41,090
                  
                  
                  
                  37,306
                  
                  
                  
                  33,384
                  
                  
                  
                  30,460


__________________




(1)
            All
      share and per share amounts have been restated to reflect a 5% stock
      dividend paid November 2004, 2005, 2006, 2007 and 2008 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.





18
 Table of Contents





Item 7. 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, 2008 and 2007. The analysis should be read in
conjunction with the related audited consolidated financial statements and the
accompanying notes presented elsewhere herein.





Cautionary
Note Regarding Foward-Looking Statements





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’s
primary business is the ownership and supervision of the Bank and, through the
Bank, the Corporation has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Corporation
currently has 13 full service branches offices located in Bergen, Passaic and
Morris counties in New Jersey. 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. The
Corporation earns income and generates cash primarily through the deposit
gathering activities of the branch network. These deposits gathered from the
general public are then utilized to fund the Corporation’s lending and investing
activities.





The
Corporation has developed a strong deposit base with good franchise value. A mix
of a variety of different deposit products, along with a strong focus on
customer service, is used to attract customers and build depositor
relationships. Challenges facing the organization are to continue to grow the
existing branch deposit levels, provide adequate technology enhancements to
achieve efficiencies and expand services, offer a competitive product line, and
provide the highest level of customer service.





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.





There
continues to be strong competition to attract deposit balances, with customers
opting out of low or no interest bearing core deposits into higher yielding
certificates of deposits. During 2008, competing financial institutions looking
to grow their balance sheets and fund loan activity continued to be aggressive
in offering above market rates to attract new money to their organizations. This
has put tremendous pressure on the net interest margins at community banks and
has negatively impacted banks’ abilities to grow core deposits and
earnings.





When
evaluating the financial condition and operating performance of the Corporation,
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.





In March
2007 the Corporation moved its stock from trading on the bulletin board of
Nasdaq to the Nasdaq Capital Market, providing improved visibility to the stock,
better pricing to market and overall liquidity in the stock
trading.





During
2007, the Corporation began to further develop the infrastructure needed to
allow the entity to continue to build franchise value, expand its customer base,
and offer appropriate products and services to its existing and future customer
base. In March 2007 the Corporation opened its eleventh branch location at 378
Franklin Avenue, Wyckoff, Bergen County, New Jersey. This branch is a convenient
location to service existing as well as new customers. It operates as a full
service facility offering safe deposit boxes, a two lane drive-up and an ATM
drive-up facility. In September 2007 the Corporation successfully opened its
twelfth branch in Westwood, Bergen County, New Jersey. This represented a new
market for the Corporation, located in the eastern part of Bergen County.
Westwood is a strong local community with a diversified mix of small business
and retail markets. Finally, the Corporation successfully negotiated a lease in
the town of North Haledon, Passaic County and opened its thirteenth branch in
December 2007. This branch is located between the Midland Park and Wayne area
branches and services existing customers as well as attracts a new customer
base.





19
 Table of Contents





Management
is encouraged by the positive reception received in these communities and
believes that each of these branches contribute to a strong branch network. The
branch network provides for solid coverage in both existing and new markets in
strong towns in the three counties in which we operate. As the branches mature,
they will provide a strong diverse customer base to provide for both consumer
and business customers. This investment in these areas should provide benefits
in the future in providing for new deposit and lending
relationships.





Our
initiatives for 2008 primarily focused on efficiencies. In early 2008 we
completed our conversion to a new core processing system. The new system
provides the branches and the back-office with significant enhancements and
efficiencies over the prior system. Improvements and upgrades of our online
banking continue to be a priority. For example, the 2008 introduction of
E-Statements provides for an efficient, cost effective distribution channel.
Additional development of our online banking features continues, with a
significant amount of testing performed in 2008 leading to a 2009
rollout.





In late
2008, the Bank consummated the sale of our existing merchant services portfolio
to Elavon, Inc. (“Elavon”), a leading merchant processor. Under the agreement,
Elavon services the merchants previously serviced by the Bank. Prior to the
transaction, the Bank provided servicing for approximately 280 merchants. A gain
of $509,000 was recorded on the transaction. The Bank will continue to earn
certain fees from ongoing portfolio and marketing activity.





In 2008,
the Corporation, like all financial institutions, experienced a difficult and
complicated economic and operating environment. The Corporation’s results have
been affected by the economic downturn through higher loan loss provisions. In
addition, competition in the northern New Jersey market continues to be intense
and the challenges of operating most of the year in a flat interest rate market
made it very difficult to attract deposits at appropriate interest rate levels.
Although the area in which the bank operates has been somewhat shielded from the
national economic downturn, management continues to find it challenging to
attract low cost core deposits and remains cautiously optimistic regarding the
lending opportunities. The Corporation has not been involved in the subprime
lending area.





Considering
these factors, the Corporation continued to perform well when compared with peer
group performance. The Corporation will continue to concentrate its efforts on
growing and maturing its existing branch network, developing new products and
services, capitalizing on technology and focusing on improved efficiencies
during 2009.





Recent
Accounting Pronouncements





A
discussion of recent pronouncements and their effect on the Corporation’s
financial statements can be found in Note 1 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, 2008
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.





20
 Table of Contents





Earnings
Summary





The
Corporation reported net income of $3.5 million, or $0.63 basic earnings per
share, for the year ended December 31, 2008, a decrease of $1.1 million, or
24.0%, from the $4.6 million recorded for 2007. The decrease in earnings was
primarily the result of increases in the provision for loan losses and
noninterest expenses, and a decrease in noninterest income, partially offset by
an increase in net interest income.





The
return on average assets decreased in 2008 to 0.58% from 0.86% in 2007. The
return on average equity decreased to 8.34% for 2008 from 11.76% in
2007.





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 and investment securities.





For the
year ended December 31, 2008, net interest income, on a tax equivalent basis,
increased to $22.8 million from $19.8 million for the year ended December 31,
2007, reflecting an increase of $3.0 million, or 15.2%. The increase in the
current year is due to both an increase in the net yield on interest-earning
assets and an increase of $3.8 million, or 3.5%, in net average interest-earning
assets (average interest-earning assets less average interest-bearing
liabilities). The net interest rate spread and net yield on interest earning
assets for the year ended December 31, 2008 were 3.43% and 4.00%, respectively,
an increase from 3.16% and 3.93% for the year ended December 31, 2007. The
increase in the net yield on interest earning assets during the current year
period has been the result of a period where the interest rates on deposits and
borrowings have declined at a faster pace than loan interest rates.





Interest
income, on a tax equivalent basis, increased $1.9 million, or 5.7%, during the
year ended December 31, 2008 to $35.6 million from $33.7 million earned during
the prior year. The increase was due to an increase in the average balance of
interest-earning assets partially offset by a decrease in yields on
interest-earning assets. Average interest-earning assets increased $67.4 million
in 2008, or 13.4%, over the 2007 amount with average loans accounting for $51.9
million of the increase which reflects the Corporation’s competitiveness within
the marketplace. Yields on interest earning assets decreased 46 basis points
from 6.69% for the year ended December 31, 2007 to 6.23% in the current
year.





Interest
expense decreased $1.1 million, or 8.0%, during the year ended December 31, 2008
to $12.8 million. The decrease was attributable to a decline in the average rate
paid on liabilities somewhat offset by an increase in average interest-bearing
liabilities. The cost of interest-bearing liabilities decreased to 2.80% for the
year ended December 31, 2008 compared to 3.53% during 2007. Average
interest-bearing liabilities were $456.8 million for the year ended December 31,
2008, reflecting an increase of $63.6 million, or 16.2%, when compared to $393.2
million for the year ended December 31, 2007. The Corporation continued to
experience a shift from low cost demand and savings to higher yielding money
market accounts and certificates of deposit. In addition, the Corporation
continues to supplement its branch deposit network with a mix of brokered
certificates of deposit, wholesale repurchase agreements and Federal Home Loan
Bank borrowings. These alternative funding sources help to lower cost of funds
and provide for better management of interest rate risk.





The
following table reflects the components of the Corporation’s net interest income
for the years ended December 31, 2008 and 2007 including, (1) average assets,
liabilities and stockholders’ equity based on average daily balances, (2)
interest income earned on interest-earning assets and interest expense paid on
interest-bearing liabilities, (3) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, and (4) net yield
on interest-earning assets. Nontaxable income from investment securities 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.





21
 Table of Contents




2008
                                                                                                                                
                                                                                                                                
                                                                                                                                2007Average
                                                                                                                                  Balance
                                                                                                                                
                                                                                                                                
                                                                                                                                Interest
                                                                                                                                  Income/
                                                                                                                                  Expense
                                                                                                                                
                                                                                                                                
                                                                                                                                Average
                                                                                                                                  Rates
                                                                                                                                  Earned/
                                                                                                                                  Paid
                                                                                                                                
                                                                                                                                
                                                                                                                                Average
                                                                                                                                  Balance
                                                                                                                                
                                                                                                                                
                                                                                                                                Interest
                                                                                                                                  Income/
                                                                                                                                  Expense
                                                                                                                                
                                                                                                                                
                                                                                                                                Average
                                                                                                                                  Rates
                                                                                                                                  Earned/
                                                                                                                                  Paid(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
      (1)
                                                                                                                                
                                                                                                                                $
                                                                                                                                437,812
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                28,664
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                6.55
                                                                                                                                %
                                                                                                                                
                                                                                                                                $
                                                                                                                                385,954
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                27,517
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                7.13
                                                                                                                                %Taxable
      investment securities (1)
                                                                                                                                
                                                                                                                                
                                                                                                                                102,930
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                5,377
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                5.22
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                93,732
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4,921
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                5.25Tax-exempt
      investment securities (1) (2)
                                                                                                                                
                                                                                                                                
                                                                                                                                27,765
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1,482
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                5.34
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                23,372
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1,200
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                5.13Other
      interest-earning assets
                                                                                                                                
                                                                                                                                
                                                                                                                                2,624
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                66
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                2.52
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                631
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                45
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                7.13Total
      interest-earning assets
                                                                                                                                
                                                                                                                                
                                                                                                                                571,131
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                35,589
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                6.23
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                503,689
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                33,683
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                6.69Non-interest-earning
      assets:Allowance
      for loan losses
                                                                                                                                
                                                                                                                                
                                                                                                                                (5,045
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (4,184
                                                                                                                                )Other
      assets
                                                                                                                                
                                                                                                                                
                                                                                                                                34,799
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                34,084Total
      assets
                                                                                                                                
                                                                                                                                $
                                                                                                                                600,885
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                533,589Liabilities
      and Stockholders’
      EquityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                                                                                                
                                                                                                                                $
                                                                                                                                164,000
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                2,731
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1.67
                                                                                                                                %
                                                                                                                                
                                                                                                                                $
                                                                                                                                134,219
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                3,432
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                2.56
                                                                                                                                %Savings
      deposits
                                                                                                                                
                                                                                                                                
                                                                                                                                37,750
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                237
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                0.63
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                37,171
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                282
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                0.76Time
      deposits
                                                                                                                                
                                                                                                                                
                                                                                                                                187,195
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                7,566
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4.04
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                181,973
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                8,297
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4.56Repurchase
      agreements
                                                                                                                                
                                                                                                                                
                                                                                                                                16,259
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                626
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                3.85
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                12,192
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                505
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4.14FHLB
      borrowings
                                                                                                                                
                                                                                                                                
                                                                                                                                44,350
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                1,145
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                2.58
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                20,379
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                877
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4.30Subordinated
      debentures
                                                                                                                                
                                                                                                                                
                                                                                                                                7,217
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                466
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                6.46
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                7,217
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                487
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                6.75Total
      interest-bearing liabilities
                                                                                                                                
                                                                                                                                
                                                                                                                                456,771
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                12,771
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                2.80
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                393,151
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                13,880
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                3.53Noninterest-bearing
      liabilities:Demand
      deposits
                                                                                                                                
                                                                                                                                
                                                                                                                                97,316
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                96,659Other
      liabilities
                                                                                                                                
                                                                                                                                
                                                                                                                                4,830
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4,624Stockholders'
      equity
                                                                                                                                
                                                                                                                                
                                                                                                                                41,968
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                39,155Total
      liabilities and stockholders’
      equity
                                                                                                                                
                                                                                                                                $
                                                                                                                                600,885
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                533,589Net
      interest income (taxable equivalent basis)
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                22,818
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                19,803Tax
      equivalent adjustment
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (515
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (373
                                                                                                                                )Net
      interest income
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                22,303
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                19,430Net
      interest spread (taxable equivalent basis)
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                3.43
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                3.16
                                                                                                                                %Net
      yield on interest-earning assets (taxable equivalent basis)
      (3)
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                4.00
                                                                                                                                %
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                3.93
                                                                                                                                %


_______________




(1)
            For
      purpose of these calculations, nonaccruing loans are included in the
      average balance. Fees are included in loan interest. Loan 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.





22
 Table of Contents




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.





2008 Versus 2007(In
      thousands)Increase (Decrease)
                  Due to Change inVolume
                
                
                Rate
                
                
                NetInterest
      income:Loans
                
                $
                3,509
                
                
                $
                (2,362
                )
                
                $
                1,147Taxable
      investment securities
                
                
                481
                
                
                
                (25
                )
                
                
                456Tax-exempt
      investment securities
                
                
                233
                
                
                
                49
                
                
                
                282Other
      interest-earning assets
                
                
                66
                
                
                
                (45
                )
                
                
                21Total
      interest-earning assets.
                
                
                4,289
                
                
                
                (2,383
                )
                
                
                1,906Interest
      expense:Interest-bearing
      demand deposits
                
                $
                658
                
                
                $
                (1,359
                )
                
                $
                (701
                )Savings
      deposits
                
                
                4
                
                
                
                (49
                )
                
                
                (45
                )Time
      deposits
                
                
                233
                
                
                
                (964
                )
                
                
                (731
                )Repurchase
      agreements
                
                
                159
                
                
                
                (38
                )
                
                
                121FHLB
      borrowings
                
                
                724
                
                
                
                (456
                )
                
                
                268Subordinated
      debentures
                
                
                —
                
                
                
                (21
                )
                
                
                (21
                )Total
      interest-bearing liabilities
                
                
                1,778
                
                
                
                (2,887
                )
                
                
                (1,109
                )Net
      change in net interest income
                
                $
                2,511
                
                
                $
                504
                
                
                $
                3,015





Provision
for Loan Losses





The
Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the probable incurred losses associated with
its loan portfolio. On an ongoing basis, management analyzes the adequacy of
this allowance by considering the nature and volume of the Corporation’s loan
activity, financial condition of the borrower, fair market value of 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 $3.6 million for the year ended December 31, 2008
compared to a loan loss provision of $530,000 for the year ended December 31,
2007. The allowance for loan loss was $5.2 million, or 1.18% of total loans as
of December 31, 2008 compared to of $4.5 million, or 1.06% of total loans a year
earlier. Nonaccrual loans increased from $455,000, or 0.11% of total loans at
December 31, 2007 to $4.2 million at December 31, 2008, or 0.96% of total loans.
The allowance for loan losses related to the impaired loans increased from
$39,000 at December 31, 2007 to $481,000 at December 31, 2008. In addition,
during the year ended December 31, 2008, the Corporation charged off loans
totaling $2.9 million compared to loans charged off of $185,000 in the prior
year. The most significant portion of the increase in the loan loss provision
and loans charged off was related to a group of loans to one
borrower.





In
addition, increases in the provision reflect the growth in the loan portfolio.
Gross loans increased $19.1 million in 2008, from $420.6 million at December 31,
2007 to $439.7 million at December 31, 2008, with majority of the noted growth
in the categories of commercial real estate and commercial loans. This loan
growth was a significant factor in establishing the appropriate level of
allowance and the loan loss provision for the year. In addition to the overall
growth noted, the Corporation considered the types of loans associated with the
growth, as well as the overall seasoning of the new loans to determine the
appropriate risk that was inherent in the portfolio.





23
 Table of Contents





In
addition to these factors, the Corporation evaluated the economic conditions and
overall real estate climate in the primary business markets in which it operates
in when considering the overall risk of the lending portfolio. Although it is
clear that there has been deterioration in the economy and real estate market on
a national level, the local market where the Corporation operates has not been
impacted as significantly. The Corporation monitors its loan portfolio and
intends to continue to provide for loan loss reserves based on its ongoing
periodic review of the loan portfolio and general market
conditions.





Noninterest
Income





Noninterest
income 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, merchant processing income and
income derived from debit cards and ATM usage.





Noninterest
income decreased $197,000, or 4.4%, to $4.2 million for the year ended December
31, 2008, when compared with $4.4 million for the comparable 2007 period. Fees
and service charge income declined $223,000, or 14.3%, as consumers and small
business continue to shift to free or low balance maintenance checking products.
Gains on calls and sales of securities, net were $103,000 and $4,000 for the
years ended December 31, 2008 and 2007, respectively. The increase in 2008
primarily reflects the sale of certain securities at gains in the more recent
interest rate environment. For tax purposes, the gains realized can be offset
against the carryforward of unutilized capital losses. Gains on sales of
mortgage loans were $193,000 for the year ended December 31, 2008, a decrease
when compared to $318,000 for prior year. For the current year, the Corporation
has experienced a decrease in mortgage activity due to the challenging real
estate market. This decrease in activity resulted in a decline in the volume of
loans sold and ultimately, a decline in gains on mortgages sold.





Noninterest
income for the year ended December 31, 2008 included a gain of $509,000 related
to the sale of the Corporation’s existing merchant services portfolio. While the
Corporation will no longer service the merchants’ card activities, the
Corporation will continue to earn certain fees from ongoing portfolio and
marketing activity.





Noninterest
income for the prior year included a $459,000 death benefit insurance payment
received.





Noninterest
Expense





Noninterest
expense increased by $1.4 million or 8.2%, to $18.0 million for the year ended
December 31, 2008, compared to $16.6 million for the same period in 2007.
Salaries and employee benefits, the major component of noninterest expense,
increased $776,000 or 10.6%. The increase was due primarily to salary and
benefits costs associated with the Westwood and North Haledon branches which
opened in the second half of 2007. In addition, the increase in salary and
benefits reflects certain newly created positions and general merit and
performance increases. Occupancy and equipment expenses increased $432,000
primarily due to the expenses relating to the new branches. In addition, FDIC
insurance premiums increased $196,000 for the year ended December 31, 2008 when
compared to the prior year ended December 31, 2007. FDIC premiums in 2008
reflected a full assessment of insurance, while FDIC premiums assessed in 2007
were significantly reduced by the utilization of a one-time credit issued to
deposit institutions in 2007. The one-time credit received by Stewardship
Financial Corporation helped reduce premiums for the first nine months of
2007.





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
$627,000 for the year ended December 31, 2008, a decrease of $78,000, or 11.1%,
over the same period in 2007.





Income
Taxes





Income
tax expense totaled $1.4 million for the year ended December 31, 2008, for an
effective tax rate of 29.3%, compared to $2.1 million, for an effective tax rate
of 31.1% for the year ended December 31, 2007. The decrease was a result of an
increase in the percentage of nontaxable income to total income.





Financial
Condition





Total
assets at December 31, 2008 were $611.8 million, an increase of $39.9 million,
or 7.0%, over the $571.9 million at December 31, 2007. This increase in assets
reflects, among other things, an $18.4 million increase in net loans held for
portfolio.





24
 Table of Contents





Loan
Portfolio





The
Corporation’s loan portfolio at December 31, 2008, net of allowance for loan
losses, totaled $434.1 million, an increase of $18.4 million, or 4.4%, over the
$415.7 million at December 31, 2007. Commercial real estate mortgage loans
consisting of $226.2 million, or 51.4% of the total portfolio, represented the
largest portion of the loan portfolio. This reflected an increase of $17.1
million from $209.1 million, or 49.7% of the total loan portfolio at December
31, 2007. Commercial loans increased $10.4 million to $100.3 million,
representing 22.8% of the total loan portfolio. Consumer installment loans
decreased $5.5 million and residential real estate mortgages decreased $4.4
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, 2008, 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 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(In
      thousands)Real
      estate mortgage:Residential
                  
                  $
                  40,337
                  
                  
                  $
                  44,719
                  
                  
                  $
                  47,020
                  
                  
                  $
                  45,604
                  
                  
                  $
                  41,569Commercial
                  
                  
                  226,183
                  
                  
                  
                  209,082
                  
                  
                  
                  177,411
                  
                  
                  
                  163,309
                  
                  
                  
                  130,762Commercial
      loans
                  
                  
                  100,282
                  
                  
                  
                  89,845
                  
                  
                  
                  72,606
                  
                  
                  
                  65,011
                  
                  
                  
                  55,252Consumer
      loans:Installment
      (1)
                  
                  
                  51,290
                  
                  
                  
                  56,796
                  
                  
                  
                  52,389
                  
                  
                  
                  51,540
                  
                  
                  
                  47,218Home
      equity
                  
                  
                  21,208
                  
                  
                  
                  19,723
                  
                  
                  
                  20,010
                  
                  
                  
                  20,271
                  
                  
                  
                  21,484Other
                  
                  
                  356
                  
                  
                  
                  424
                  
                  
                  
                  560
                  
                  
                  
                  506
                  
                  
                  
                  260Total
      gross loans
                  
                  
                  439,656
                  
                  
                  
                  420,589
                  
                  
                  
                  369,996
                  
                  
                  
                  346,241
                  
                  
                  
                  296,545Less:
      Allowance for loan losses
                  
                  
                  5,166
                  
                  
                  
                  4,457
                  
                  
                  
                  4,101
                  
                  
                  
                  3,847
                  
                  
                  
                  3,299Deferred loan fees
                  
                  
                  387
                  
                  
                  
                  442
                  
                  
                  
                  452
                  
                  
                  
                  418
                  
                  
                  
                  337Net
      loans
                  
                  $
                  434,103
                  
                  
                  $
                  415,690
                  
                  
                  $
                  365,443
                  
                  
                  $
                  341,976
                  
                  
                  $
                  292,909


__________________




(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,
2008 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
                      
                      $
                      46,863
                      
                      
                      $
                      15,161
                      
                      
                      $
                      204,496
                      
                      
                      $
                      266,520Commercial
                      
                      
                      38,300
                      
                      
                      
                      46,360
                      
                      
                      
                      15,622
                      
                      
                      
                      100,282Consumer
                      
                      
                      1,024
                      
                      
                      
                      6,883
                      
                      
                      
                      64,947
                      
                      
                      
                      72,854Total
      gross loans
                      
                      $
                      86,187
                      
                      
                      $
                      68,404
                      
                      
                      $
                      285,065
                      
                      
                      $
                      439,656




25
 Table of Contents








The
following table sets forth the dollar amount of all gross loans due one year or
more after December 31, 2008, which have predetermined interest rates or
floating or adjustable interest rates:





Predetermined
                    Rates
                  
                  
                  Floating or
                    Adjustable
                    Rates
                  
                  
                  Total(In
      thousands)Real
      estate mortgage
                  
                  $
                  47,561
                  
                  
                  $
                  172,096
                  
                  
                  $
                  219,657Commercial
                  
                  
                  27,794
                  
                  
                  
                  34,188
                  
                  
                  
                  61,982Consumer
                  
                  
                  52,508
                  
                  
                  
                  19,322
                  
                  
                  
                  71,830$
                  127,863
                  
                  
                  $
                  225,606
                  
                  
                  $
                  353,469








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 requires
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.
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 1.18% of total loans, or 80.2% of non-performing
loans at December 31, 2008, compared with 1.06% of total loans or 926.6% times
non-performing loans at December 31, 2007. In management’s opinion, the
allowance for loan losses totaling $5.2 million is adequate to cover probable
incurred losses inherent in the portfolio at December 31, 2008.





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.





26
 Table of Contents





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 31,2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005
                          
                          
                          2004(Dollars
      in thousands)Nonaccrual
      loans: (1)Construction
                          
                          $
                          2,575
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —Commercial
      real estate
                          
                          
                          291
                          
                          
                          
                          73
                          
                          
                          
                          123
                          
                          
                          
                          122
                          
                          
                          
                          56Commercial
                          
                          
                          825
                          
                          
                          
                          307
                          
                          
                          
                          167
                          
                          
                          
                          258
                          
                          
                          
                          159Consumer
                          
                          
                          539
                          
                          
                          
                          75
                          
                          
                          
                          154
                          
                          
                          
                          92
                          
                          
                          
                          47Total
      nonaccrual loans
                          
                          
                          4,230
                          
                          
                          
                          455
                          
                          
                          
                          444
                          
                          
                          
                          472
                          
                          
                          
                          262Loans
      past due 90 days or more and accruing: (2)Commercial
      real estate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          840
                          
                          
                          
                          —
                          
                          
                          
                          940Commercial
                          
                          
                          353
                          
                          
                          
                          25
                          
                          
                          
                          241
                          
                          
                          
                          —
                          
                          
                          
                          —Consumer
                          
                          
                          —
                          
                          
                          
                          1
                          
                          
                          
                          9
                          
                          
                          
                          55
                          
                          
                          
                          7Total
      loans past due ninety days or more and accruing
                          
                          
                          353
                          
                          
                          
                          26
                          
                          
                          
                          1,090
                          
                          
                          
                          55
                          
                          
                          
                          947Restructured
      loans:Commercial
      real estate
                          
                          
                          1,483
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Commercial
                          
                          
                          372
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Consumer
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          215Total
      restructured loans
                          
                          
                          1,855
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          215Total
      nonperforming loans
                          
                          $
                          6,438
                          
                          
                          $
                          481
                          
                          
                          $
                          1,534
                          
                          
                          $
                          527
                          
                          
                          $
                          1,424Nonaccrual
      loans to total gross loans
                          
                          
                          0.96
                          %
                          
                          
                          0.11
                          %
                          
                          
                          0.12
                          %
                          
                          
                          0.14
                          %
                          
                          
                          0.09
                          %Nonperforming
      loans to total gross loans
                          
                          
                          1.46
                          %
                          
                          
                          0.11
                          %
                          
                          
                          0.41
                          %
                          
                          
                          0.15
                          %
                          
                          
                          0.48
                          %Nonperforming
      loans to total assets
                          
                          
                          1.05
                          %
                          
                          
                          0.08
                          %
                          
                          
                          0.30
                          %
                          
                          
                          0.11
                          %
                          
                          
                          0.34
                          %Allowance
      for loan losses to nonperforming loans
                          
                          
                          80.24
                          %
                          
                          
                          926.61
                          %
                          
                          
                          267.34
                          %
                          
                          
                          729.98
                          %
                          
                          
                          231.67
                          %


_____________


(1)
            Restructured
      loans classified in the nonaccrual category totaled $22,000 and $73,000
      for the years ended December 31, 2008 and December 31, 2007, respectively.
      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 and $162,000 for the years ended December 31,
      2005 and 2004, respectively.





(2)
            There
      were no restructured loans classified in the past due 90 days or more and
      accruing for any years presented.





As of
December 31, 2008 there were $15.7 million of other loans not included in the
above table, where credit conditions of borrowers caused management to have
concerns about the possibility of the borrowers not complying with the present
terms and conditions of repayment and which may result in disclosure of such
loans at a future date. These loans have been considered by management in
conjunction with the analysis of the adequacy of the allowance for loan
losses.





27
 Table of Contents





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:





2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004(Dollars
      in thousands)Balance
      at beginning of period
                        
                        $
                        4,457
                        
                        
                        $
                        4,101
                        
                        
                        $
                        3,847
                        
                        
                        $
                        3,299
                        
                        
                        $
                        2,888Loans
      charged off:Commercial
                        
                        
                        2,841
                        
                        
                        
                        82
                        
                        
                        
                        7
                        
                        
                        
                        —
                        
                        
                        
                        49Consumer
                        
                        
                        61
                        
                        
                        
                        103
                        
                        
                        
                        33
                        
                        
                        
                        57
                        
                        
                        
                        92Total
      loans charged off
                        
                        
                        2,902
                        
                        
                        
                        185
                        
                        
                        
                        40
                        
                        
                        
                        57
                        
                        
                        
                        141Recoveries
      of loans previously charged off:Commercial
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        23
                        
                        
                        
                        —
                        
                        
                        
                        3Consumer
                        
                        
                        26
                        
                        
                        
                        11
                        
                        
                        
                        7
                        
                        
                        
                        5
                        
                        
                        
                        9Total
      recoveries of loans previously charged off
                        
                        
                        26
                        
                        
                        
                        11
                        
                        
                        
                        30
                        
                        
                        
                        5
                        
                        
                        
                        12Net
      loans charged off
                        
                        
                        2,876
                        
                        
                        
                        174
                        
                        
                        
                        10
                        
                        
                        
                        52
                        
                        
                        
                        129Provisions
      charged to operations
                        
                        
                        3,585
                        
                        
                        
                        530
                        
                        
                        
                        264
                        
                        
                        
                        600
                        
                        
                        
                        540Balance
      at end of period
                        
                        $
                        5,166
                        
                        
                        $
                        4,457
                        
                        
                        $
                        4,101
                        
                        
                        $
                        3,847
                        
                        
                        $
                        3,299Net
      charge offs during the period to average loans outstanding during the
      period
                        
                        
                        0.66
                        %
                        
                        
                        0.05
                        %
                        
                        
                        0.00
                        %
                        
                        
                        0.02
                        %
                        
                        
                        0.05
                        %Balance
      of allowance for loan losses at the end of year to gross year end
      loans
                        
                        
                        1.18
                        %
                        
                        
                        1.06
                        %
                        
                        
                        1.11
                        %
                        
                        
                        1.11
                        %
                        
                        
                        1.11
                        %





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:





2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006
                                    
                                    
                                    2005
                                    
                                    
                                    2004Amount
                                    
                                    
                                    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
                                    
                                    $
                                    245
                                    
                                    
                                    
                                    9.2
                                    %
                                    
                                    $
                                    256
                                    
                                    
                                    
                                    10.6
                                    %
                                    
                                    $
                                    298
                                    
                                    
                                    
                                    12.7
                                    %
                                    
                                    $
                                    320
                                    
                                    
                                    
                                    13.2
                                    %
                                    
                                    $
                                    297
                                    
                                    
                                    
                                    14.0
                                    %Real
      estate - commercial
                                    
                                    
                                    2,164
                                    
                                    
                                    
                                    51.4
                                    %
                                    
                                    
                                    1,900
                                    
                                    
                                    
                                    49.7
                                    %
                                    
                                    
                                    1,705
                                    
                                    
                                    
                                    48.0
                                    %
                                    
                                    
                                    1,562
                                    
                                    
                                    
                                    47.1
                                    %
                                    
                                    
                                    1,272
                                    
                                    
                                    
                                    44.1
                                    %Commercial
                                    
                                    
                                    2,086
                                    
                                    
                                    
                                    22.8
                                    %
                                    
                                    
                                    1,640
                                    
                                    
                                    
                                    21.4
                                    %
                                    
                                    
                                    1,407
                                    
                                    
                                    
                                    19.6
                                    %
                                    
                                    
                                    1,192
                                    
                                    
                                    
                                    18.8
                                    %
                                    
                                    
                                    979
                                    
                                    
                                    
                                    18.6
                                    %Consumer
                                    
                                    
                                    671
                                    
                                    
                                    
                                    16.6
                                    %
                                    
                                    
                                    661
                                    
                                    
                                    
                                    18.3
                                    %
                                    
                                    
                                    691
                                    
                                    
                                    
                                    19.7
                                    %
                                    
                                    
                                    773
                                    
                                    
                                    
                                    20.9
                                    %
                                    
                                    
                                    751
                                    
                                    
                                    
                                    23.3
                                    %Total
      allowance for loan losses
                                    
                                    $
                                    5,166
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    4,457
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    4,101
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    3,847
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    3,299
                                    
                                    
                                    
                                    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, state and political subdivision obligations and other equity
investments, 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 unrealized 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 $90.0 million at December 31, 2008, from $77.0 million at December 31, 2007,
an increase of $13.0 million, or 17.0%. Securities held to maturity increased
$7.7 million, or 18.6%, to $48.9 million at December 31, 2008 from $41.2 million
at December 31, 2007.





28
 Table of Contents





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 31,2008
                
                
                2007
                
                
                2006Carrying
                  Value
                
                
                Percent
                
                
                Carrying
                  Value
                
                
                Percent
                
                
                Carrying
                  Value
                
                
                Percent(Dollars
      in thousands)Securities
      available for sale:U.S.
      government-sponsored agencies
                
                $
                49,660
                
                
                
                55.2
                %
                
                $
                35,693
                
                
                
                46.4
                %
                
                $
                32,117
                
                
                
                44.2
                %Obligations
      of state and political subdivisions
                
                
                5,820
                
                
                
                6.4
                
                
                
                2,903
                
                
                
                3.8
                
                
                
                1,823
                
                
                
                2.5Mortgage-backed
      securities
                
                
                31,670
                
                
                
                35.2
                
                
                
                37,131
                
                
                
                48.2
                
                
                
                37,707
                
                
                
                51.8Other
      equity investments
                
                
                2,873
                
                
                
                3.2
                
                
                
                1,230
                
                
                
                1.6
                
                
                
                1,099
                
                
                
                1.5Total
                
                $
                90,023
                
                
                
                100.0
                %
                
                $
                76,957
                
                
                
                100.0
                %
                
                $
                72,746
                
                
                
                100.0
                %Securities
      held to maturity:U.S.
      Treasury
                
                $
                —
                
                
                
                —
                %
                
                $
                501
                
                
                
                1.2
                %
                
                $
                502
                
                
                
                1.3
                %U.S.
      government-sponsored agencies
                
                
                10,290
                
                
                
                21.0
                
                
                
                12,331
                
                
                
                29.9
                
                
                
                10,776
                
                
                
                27.5Obligations
      of state and political subdivisions
                
                
                23,048
                
                
                
                47.2
                
                
                
                22,569
                
                
                
                54.8
                
                
                
                20,516
                
                
                
                52.4Mortgage-backed
      securities
                
                
                15,518
                
                
                
                31.8
                
                
                
                5,788
                
                
                
                14.1
                
                
                
                7,369
                
                
                
                18.8Total
                
                $
                48,856
                
                
                
                100.0
                %
                
                $
                41,189
                
                
                
                100.0
                %
                
                $
                39,163
                
                
                
                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, 2008. 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.





Within
                  1 Year
                
                
                After 1 Year
                  Through
                  5 Years
                
                
                After 5 Years
                  Through
                  10 Years
                
                
                After
                  10 Years
                
                
                Total(Dollars
      in thousands)U.S.
      government-sponsored agencies :Carrying
      value
                
                $
                —
                
                
                $
                1,513
                
                
                $
                21,878
                
                
                $
                26,269
                
                
                $
                49,660Yield
                
                
                —
                
                
                
                5.49
                %
                
                
                5.22
                %
                
                
                5.47
                %
                
                
                5.36
                %Obligations
      of state and political subdivisions :Carrying
      value
                
                
                712
                
                
                
                307
                
                
                
                2,180
                
                
                
                2,621
                
                
                
                5,820Yield
                
                
                3.40
                %
                
                
                3.26
                %
                
                
                3.50
                %
                
                
                3.91
                %
                
                
                3.66
                %Mortgage-backed
      securities:Carrying
      value
                
                
                —
                
                
                
                4,238
                
                
                
                4,457
                
                
                
                22,975
                
                
                
                31,670Yield
                
                
                —
                
                
                
                4.08
                %
                
                
                4.73
                %
                
                
                5.29
                %
                
                
                5.05
                %Other
      equity investments:Carrying
      value
                
                
                2,873
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,873Yield
                
                
                3.89
                %
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3.89
                %Total
      carrying value
                
                $
                3,585
                
                
                $
                6,058
                
                
                $
                28,515
                
                
                $
                51,865
                
                
                $
                90,023Weighted
      average yield
                
                
                3.79
                %
                
                
                4.39
                %
                
                
                5.01
                %
                
                
                5.31
                %
                
                
                5.09
                %





29
 Table of Contents




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, 2008. 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.





Within
                          1 Year
                        
                        
                        After 1 Year
                          Through
                          5 Years
                        
                        
                        After 5 Years
                          Through
                          10 Years
                        
                        
                        After
                          10 Years
                        
                        
                        Total(Dollars
      in thousands)U.S.
      government-sponsored agencies :Carrying
      value
                        
                        $
                        —
                        
                        
                        $
                        399
                        
                        
                        $
                        3,009
                        
                        
                        $
                        6,882
                        
                        
                        $
                        10,290Yield
                        
                        
                        —
                        
                        
                        
                        5.14
                        %
                        
                        
                        4.81
                        %
                        
                        
                        5.75
                        %
                        
                        
                        5.45
                        %Obligations
      of state and political subdivisions :Carrying
      value
                        
                        
                        1,149
                        
                        
                        
                        2,392
                        
                        
                        
                        13,981
                        
                        
                        
                        5,526
                        
                        
                        
                        23,048Yield
                        
                        
                        2.85
                        %
                        
                        
                        3.28
                        %
                        
                        
                        3.76
                        %
                        
                        
                        3.87
                        %
                        
                        
                        3.69
                        %Mortgage-backed
      securities :Carrying
      value
                        
                        
                        60
                        
                        
                        
                        801
                        
                        
                        
                        1,575
                        
                        
                        
                        13,082
                        
                        
                        
                        15,518Yield
                        
                        
                        4.72
                        %
                        
                        
                        4.51
                        %
                        
                        
                        5.14
                        %
                        
                        
                        4.63
                        %
                        
                        
                        4.68
                        %Total
      carrying value
                        
                        $
                        1,209
                        
                        
                        $
                        3,592
                        
                        
                        $
                        18,565
                        
                        
                        $
                        25,490
                        
                        
                        $
                        48,856Weighted
      average yield
                        
                        
                        2.94
                        %
                        
                        
                        3.76
                        %
                        
                        
                        4.05
                        %
                        
                        
                        4.77
                        %
                        
                        
                        4.37
                        %








Deposits





Corporation
deposits at December 31, 2008 totaled $506.5 million, an increase of $34.2
million, or 7.2%, over the comparable period of 2007, when deposits totaled
$472.3 million. The Corporation relied on its expanding branch network and
current competitive products and services to provide growth during 2008. The
economic and interest rate environment made it difficult to attract core
deposits. During 2008 and 2007, the Corporation utilized the brokered
certificate of deposit market, with $30.7 million and $15.4 million included in
the time deposit balances as of December 31, 2008 and 2007,
respectively.





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
      31,2008
                      
                      
                      2007
                      
                      
                      2006Amount
                      
                      
                      Percent
                      
                      
                      Amount
                      
                      
                      Percent
                      
                      
                      Amount
                      
                      
                      Percent(Dollars
      in thousands)Noninterest-bearing
      demand
                      
                      $
                      99,099
                      
                      
                      
                      19.6
                      %
                      
                      $
                      101,993
                      
                      
                      
                      21.6
                      %
                      
                      $
                      92,105
                      
                      
                      
                      21.2
                      %Interest-bearing
      demand
                      
                      
                      160,768
                      
                      
                      
                      31.7
                      
                      
                      
                      153,713
                      
                      
                      
                      32.6
                      
                      
                      
                      120,899
                      
                      
                      
                      27.8Saving
      deposits
                      
                      
                      39,627
                      
                      
                      
                      7.8
                      
                      
                      
                      37,010
                      
                      
                      
                      7.8
                      
                      
                      
                      37,324
                      
                      
                      
                      8.6Certificates
      of deposit
                      
                      
                      207,037
                      
                      
                      
                      40.9
                      
                      
                      
                      179,583
                      
                      
                      
                      38.0
                      
                      
                      
                      183,895
                      
                      
                      
                      42.4Total
                      
                      $
                      506,531
                      
                      
                      
                      100.0
                      %
                      
                      $
                      472,299
                      
                      
                      
                      100.0
                      %
                      
                      $
                      434,223
                      
                      
                      
                      100.0
                      %








As of
December 31, 2008, 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
                  
                  $
                  15,646Four
      months through six months
                  
                  
                  8,194Seven
      months through twelve months
                  
                  
                  24,489Over
      twelve months
                  
                  
                  31,997Total
                  
                  $
                  80,326





30
 Table of Contents




Interest
Rate Sensitivity





Interest
rate movements 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 interest-earning assets and
interest-bearing 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 or mismatch between the
amount of assets and liabilities that mature or reprice in a given period is
defined as the interest rate sensitivity gap. A “negative” gap results when the
amount of interest-bearing liabilities within a specified time period exceed the
amount of interest-earning assets maturing or repricing within the same period
of time. Conversely, a “positive” gap results when the amount of
interest-earning assets maturing or repricing exceed the amount of
interest-bearing liabilities mature or are repricing in the same given time
frame. 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 table sets forth estimated maturity/repricing structure of the
Corporation’s interest-earning assets and interest-bearing liabilities as of
December 31, 2008. 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
                  
                  $
                  46,153
                  
                  
                  $
                  22,005
                  
                  
                  $
                  198,362
                  
                  
                  $
                  —
                  
                  
                  $
                  266,520Commercial
                  
                  
                  56,612
                  
                  
                  
                  8,002
                  
                  
                  
                  35,668
                  
                  
                  
                  —
                  
                  
                  
                  100,282Consumer
                  
                  
                  21,103
                  
                  
                  
                  4,407
                  
                  
                  
                  47,344
                  
                  
                  
                  —
                  
                  
                  
                  72,854Mortgage
      loans held for sale
                  
                  
                  394
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  394Investment
      securities (1)
                  
                  
                  35,222
                  
                  
                  
                  32,363
                  
                  
                  
                  73,714
                  
                  
                  
                  —
                  
                  
                  
                  141,299Other
      assets
                  
                  
                  95
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  30,372
                  
                  
                  
                  30,467Total
      assets
                  
                  $
                  159,579
                  
                  
                  $
                  66,777
                  
                  
                  $
                  355,088
                  
                  
                  $
                  30,372
                  
                  
                  $
                  611,816Source
      of funds:Interest-bearing
      demand
                  
                  $
                  160,768
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  160,768Savings
                  
                  
                  39,627
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  39,627Certificate
      of deposit
                  
                  
                  40,701
                  
                  
                  
                  91,705
                  
                  
                  
                  74,631
                  
                  
                  
                  —
                  
                  
                  
                  207,037FHLB
      of NY advances
                  
                  
                  6,900
                  
                  
                  
                  —
                  
                  
                  
                  30,000
                  
                  
                  
                  —
                  
                  
                  
                  36,900Repurchase
      agreements
                  
                  
                  14,376
                  
                  
                  
                  784
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,160Subordinated
      debenture
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,217
                  
                  
                  
                  —
                  
                  
                  
                  7,217Other
      liabilities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  102,311
                  
                  
                  
                  102,311Stockholders’
      equity
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  42,796
                  
                  
                  
                  42,796Total
      source of funds
                  
                  $
                  262,372
                  
                  
                  $
                  92,489
                  
                  
                  $
                  111,848
                  
                  
                  $
                  145,107
                  
                  
                  $
                  611,816Interest
      rate sensitivity gap
                  
                  $
                  (102,793
                  )
                  
                  $
                  (25,712
                  )
                  
                  $
                  243,240
                  
                  
                  $
                  (114,735
                  )Cumulative
      interest rate sensitivity gap
                  
                  $
                  (102,793
                  )
                  
                  $
                  (128,505
                  )
                  
                  $
                  114,735
                  
                  
                  $
                  —Ratio
      of GAP to total assets
                  
                  
                  -16.8
                  %
                  
                  
                  -4.2
                  %
                  
                  
                  39.8
                  %
                  
                  
                  -18.8
                  %Ratio
      of cumulative GAP assets to total assets
                  
                  
                  -16.8
                  %
                  
                  
                  -21.0
                  %
                  
                  
                  18.8
                  %
                  
                  
                  —
                  %






(1)
            Includes
      securities held to maturity, securities available for sale and FHLB-NY
      stock.





31
 Table of Contents




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. Assumptions
have been built into the model for prepayments for assets and decay rates for
nonmaturity deposits such as savings and interest bearing demand. 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 December 31, 2008, an immediate interest rate increase of 200
basis points results in a decrease in net interest income of 6.3%, or $1.6
million, while an immediate interest rate decrease of 200 basis points resulted
in an increase in net interest income of 3.0% or $729,000. Management has a goal
to maintain a percentage change of no more than 17.5% 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.





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 31,2008
                  
                  
                  2007(In
      thousands)Cash
      and cash equivalents – beginning
                  
                  $
                  11,932
                  
                  
                  $
                  15,697Operating
      activities:Net
      income
                  
                  
                  3,501
                  
                  
                  
                  4,607Adjustments
      to reconcile net income to net cash provided by operating
      activities
                  
                  
                  2,947
                  
                  
                  
                  1,573Net
      cash provided by operating activities
                  
                  
                  6,448
                  
                  
                  
                  6,180Net
      cash used in investing activities
                  
                  
                  (43,640
                  )
                  
                  
                  (55,293
                  )Net
      cash provided by financing activities
                  
                  
                  38,074
                  
                  
                  
                  45,348Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  882
                  
                  
                  
                  (3,765
                  )Cash
      and cash equivalents – ending.
                  
                  $
                  12,814
                  
                  
                  $
                  11,932








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.





32
 Table of Contents





The
Corporation has various contractual obligations that may require future cash
payments. The following table summarizes the Corporation’s contractual
obligations at December 31, 2008 and the effect such obligations are 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
                
                $
                7,454
                
                
                $
                863
                
                
                $
                1,732
                
                
                $
                1,659
                
                
                $
                3,200Total
      contracted cost obligations
                
                $
                7,454
                
                
                $
                863
                
                
                $
                1,732
                
                
                $
                1,659
                
                
                $
                3,200Other
      long-term liabilities/long-term debtTime
      deposits
                
                $
                207,037
                
                
                $
                132,405
                
                
                $
                67,485
                
                
                $
                7,147
                
                
                $
                —Federal
      Home Loan Bank advances
                
                
                36,900
                
                
                
                6,900
                
                
                
                —
                
                
                
                15,000
                
                
                
                15,000Subordinated
      debentures
                
                
                7,217
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                7,217Total
      other long-term liabilities/long-term debt
                
                $
                251,154
                
                
                $
                139,305
                
                
                $
                67,485
                
                
                $
                22,147
                
                
                $
                22,217Other
      commitments - off balance sheetLetter
      of credit
                
                $
                3,503
                
                
                $
                3,415
                
                
                $
                88
                
                
                $
                —
                
                
                $
                —Commitments
      to extend credit
                
                
                17,775
                
                
                
                17,775
                
                
                
                —
                
                
                
                —
                
                
                
                —Unused
      lines of credit
                
                
                86,864
                
                
                
                86,864
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      off balance sheet arrangements and contractual obligations
                
                $
                108,142
                
                
                $
                108,054
                
                
                $
                88
                
                
                $
                —
                
                
                $
                —






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 and a one-month overnight repricing line of credit with the FHLB-NY, each
in the amount of $58.5 million. In addition, the Corporation had  available
overnight variable repricing lines of credit with other correspondent banks
totaling $22 million on an unsecured basis.





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.





Of the
$3.5 million commitments under standby and commercial letters of credit, $3.4
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.





At
December 31, 2008, the Corporation had residential mortgage commitments to
extend credit aggregating approximately $1.6 million at fixed rates averaging
6.14%. All these loan commitments will be sold to investors upon closing.
Commercial, construction, and home equity loan commitments of approximately
$11.1 million were extended with variable rates averaging 5.95% and $5.1 million
were extended at fixed rates averaging 6.55%. All commitments were due to expire
within approximately 120 days.




33
 Table of Contents




The
unused lines of credit consist of $22.2 million relating to a home equity line
of credit program and an unsecured line of credit program (cash reserve), $3.7
million relating to an
unsecured overdraft protection program, and $61.0 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.


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, 2008, 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,
2008.
 
 Required
                    
                    
                    Actual
                    
                    
                    ExcessRisk-based
      capital:Tier
      1Corporation
                    
                    
                    4.00
                    %
                    
                    
                    10.50
                    %
                    
                    
                    6.50
                    %Bank
                    
                    
                    4.00
                    %
                    
                    
                    9.46
                    %
                    
                    
                    5.46
                    %TotalCorporation
                    
                    
                    8.00
                    %
                    
                    
                    11.60
                    %
                    
                    
                    3.60
                    %Bank
                    
                    
                    8.00
                    %
                    
                    
                    10.57
                    %
                    
                    
                    2.57
                    %Leverage
      ratio*Corporation
                    
                    
                    4.00
                    %
                    
                    
                    8.01
                    %
                    
                    
                    4.01
                    %Bank
                    
                    
                    4.00
                    %
                    
                    
                    7.26
                    %
                    
                    
                    3.26
                    %
 _________
 *
              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.
 
 Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
 
 Not
applicable to smaller reporting companies.
 
 Item 8. Financial Statements and Supplementary
Data
  34
 Table of Contents
  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 statements of financial condition of
Stewardship Financial Corporation as of December 31, 2008 and 2007 and the
related consolidated statements of income, changes in stockholders’ equity, and
cash flows for the years 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 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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 financial statements referred to above present fairly, in all
material respects, the financial position of Stewardship Financial Corporation
as of December 31, 2008 and 2007 and the results of its operations and its cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
 
 
 
 
 Crowe
      Horwath LLP
 
 
 Livingston,
New Jersey
 March 30,
2009
  35
 Table of Contents
  Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Financial Condition





December 31,2008
                    
                    
                    2007AssetsCash
      and due from banks
                    
                    $
                    12,719,000
                    
                    
                    $
                    11,789,000Other
      interest-earning assets
                    
                    
                    95,000
                    
                    
                    
                    143,000Cash
      and cash equivalents
                    
                    
                    12,814,000
                    
                    
                    
                    11,932,000Securities
      available for sale
                    
                    
                    90,023,000
                    
                    
                    
                    76,957,000Securities
      held to maturity; estimated fair value of $49,150,000 (2008) and
      $41,508,000 (2007)
                    
                    
                    48,856,000
                    
                    
                    
                    41,189,000Federal
      Home Loan Bank of New York stock, at cost
                    
                    
                    2,420,000
                    
                    
                    
                    1,983,000Loans,
      net of allowance for loan losses of $5,166,000 (2008) and $4,457,000
      (2007)
                    
                    
                    434,103,000
                    
                    
                    
                    415,690,000Mortgage
      loans held for sale
                    
                    
                    394,000
                    
                    
                    
                    1,284,000Premises
      and equipment, net
                    
                    
                    7,470,000
                    
                    
                    
                    7,950,000Accrued
      interest receivable
                    
                    
                    3,371,000
                    
                    
                    
                    3,112,000Intangible
      assets
                    
                    
                    37,000
                    
                    
                    
                    70,000Bank
      owned life insurance
                    
                    
                    8,599,000
                    
                    
                    
                    8,273,000Other
      assets
                    
                    
                    3,729,000
                    
                    
                    
                    3,465,000Total
      assets
                    
                    $
                    611,816,000
                    
                    
                    $
                    571,905,000Liabilities
      and Stockholders’ equityLiabilitiesDeposits:Noninterest-bearing
                    
                    $
                    99,099,000
                    
                    
                    $
                    101,993,000Interest-bearing
                    
                    
                    407,432,000
                    
                    
                    
                    370,306,000Total
      deposits
                    
                    
                    506,531,000
                    
                    
                    
                    472,299,000Federal
      Home Loan Bank of New York Advances
                    
                    
                    36,900,000
                    
                    
                    
                    28,645,000Securities
      sold under agreements to repurchase
                    
                    
                    15,160,000
                    
                    
                    
                    17,283,000Subordinated
      debentures
                    
                    
                    7,217,000
                    
                    
                    
                    7,217,000Accrued
      interest payable
                    
                    
                    1,582,000
                    
                    
                    
                    2,080,000Accrued
      expenses and other liabilities
                    
                    
                    1,630,000
                    
                    
                    
                    3,291,000Total
      liabilities
                    
                    
                    569,020,000
                    
                    
                    
                    530,815,000Commitments
      and contingencies
                    
                    
                    —
                    
                    
                    
                    —Stockholder’
      equityPreferred
      stock, no par value; 2,500,000 shares authorized
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, no par value; 10,000,000 shares authorized; 5,575,095 and 5,306,828
      shares issued and outstanding at December 31, 2008 and 2007,
      respectively
                    
                    
                    37,962,000
                    
                    
                    
                    34,871,000Treasury
      stock, 20,000 shares at December 31, 2008
                    
                    
                    (272,000
                    )
                    
                    
                    —Retained
      earnings
                    
                    
                    4,383,000
                    
                    
                    
                    5,943,000Accumulated
      other comprehensive income, net
                    
                    
                    723,000
                    
                    
                    
                    276,000Total
      Stockholders’ equity
                    
                    
                    42,796,000
                    
                    
                    
                    41,090,000Total
      liabilities and Stockholders’ equity
                    
                    $
                    611,816,000
                    
                    
                    $
                    571,905,000





See
accompanying notes to consolidated financial statements.





36
 Table of Contents





Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Income




Years Ended December 31,2008
                  
                  
                  2007Interest
      income:Loans
                  
                  $
                  28,617,000
                  
                  
                  $
                  27,517,000Securities
      held to maturity:Taxable
                  
                  
                  751,000
                  
                  
                  
                  927,000Nontaxable
                  
                  
                  840,000
                  
                  
                  
                  757,000Securities
      available for sale:Taxable
                  
                  
                  4,470,000
                  
                  
                  
                  3,877,000Nontaxable
                  
                  
                  174,000
                  
                  
                  
                  70,000FHLB
      dividends
                  
                  
                  156,000
                  
                  
                  
                  117,000Other
      interest-earning assets
                  
                  
                  66,000
                  
                  
                  
                  45,000Total
      interest income
                  
                  
                  35,074,000
                  
                  
                  
                  33,310,000Interest
      expense:Deposits
                  
                  
                  10,534,000
                  
                  
                  
                  12,011,000Borrowed
      money
                  
                  
                  2,237,000
                  
                  
                  
                  1,869,000Total
      interest expense
                  
                  
                  12,771,000
                  
                  
                  
                  13,880,000Net
      interest income before provision for loan losses
                  
                  
                  22,303,000
                  
                  
                  
                  19,430,000Provision
      for loan losses
                  
                  
                  3,585,000
                  
                  
                  
                  530,000Net
      interest income after provision for loan losses
                  
                  
                  18,718,000
                  
                  
                  
                  18,900,000Noninterest
      income:Fees
      and service charges
                  
                  
                  1,333,000
                  
                  
                  
                  1,556,000Bank
      owned life insurance
                  
                  
                  326,000
                  
                  
                  
                  322,000Gain
      on life insurance proceeds
                  
                  
                  —
                  
                  
                  
                  459,000Gain
      on calls and sales of securities, net
                  
                  
                  103,000
                  
                  
                  
                  4,000Gain
      on sales of mortgage loans
                  
                  
                  193,000
                  
                  
                  
                  318,000Merchant
      processing
                  
                  
                  1,417,000
                  
                  
                  
                  1,456,000Gain
      on sale of merchant portfolio
                  
                  
                  509,000
                  
                  
                  
                  —Miscellaneous
                  
                  
                  336,000
                  
                  
                  
                  299,000Total
      noninterest income
                  
                  
                  4,217,000
                  
                  
                  
                  4,414,000Noninterest
      expense:Salaries
      and employee benefits
                  
                  
                  8,129,000
                  
                  
                  
                  7,353,000Occupancy,
      net
                  
                  
                  1,802,000
                  
                  
                  
                  1,525,000Equipment
                  
                  
                  1,127,000
                  
                  
                  
                  972,000Data
      processing
                  
                  
                  1,209,000
                  
                  
                  
                  1,221,000Advertising
                  
                  
                  487,000
                  
                  
                  
                  525,000FDIC
      insurance premium
                  
                  
                  317,000
                  
                  
                  
                  121,000Amortization
      of intangible assets
                  
                  
                  32,000
                  
                  
                  
                  32,000Charitable
      contributions
                  
                  
                  627,000
                  
                  
                  
                  705,000Stationery
      and supplies
                  
                  
                  399,000
                  
                  
                  
                  368,000Merchant
      processing
                  
                  
                  1,258,000
                  
                  
                  
                  1,306,000Bank-card
      related services
                  
                  
                  317,000
                  
                  
                  
                  348,000Other
      real estate expense
                  
                  
                  —
                  
                  
                  
                  43,000Miscellaneous
                  
                  
                  2,282,000
                  
                  
                  
                  2,110,000Total
      noninterest expenses
                  
                  
                  17,986,000
                  
                  
                  
                  16,629,000Income
      before income tax expense
                  
                  
                  4,949,000
                  
                  
                  
                  6,685,000Income
      tax expense
                  
                  
                  1,448,000
                  
                  
                  
                  2,078,000Net
      income
                  
                  $
                  3,501,000
                  
                  
                  $
                  4,607,000Basic
      earnings per share
                  
                  $
                  0.63
                  
                  
                  $
                  0.83Diluted
      earnings per share
                  
                  $
                  0.63
                  
                  
                  $
                  0.82Cash
      dividends per share
                  
                  $
                  0.35
                  
                  
                  $
                  0.33Weighted
      average number of common shares outstanding
                  
                  
                  5,574,821
                  
                  
                  
                  5,558,182Weighted
      average number of diluted common shares outstanding
                  
                  
                  5,585,834
                  
                  
                  
                  5,587,553





See
accompanying notes to consolidated financial statements.





37
 Table of Contents





Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Changes in Stockholders’ Equity





Years Ended December 31, 2008 and
      2007Common Stock
                                                
                                                
                                                Retained
                                                
                                                
                                                Treasury Stock
                                                
                                                
                                                Accumulated
                                                  Other
                                                  Comprehensive
                                                  Income (Loss),Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Earnings
                                                
                                                
                                                Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Net
                                                
                                                
                                                TotalBalance
      – December 31, 2006
                                                
                                                
                                                5,017,919
                                                
                                                
                                                $
                                                31,148,000
                                                
                                                
                                                $
                                                6,750,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                (592,000
                                                )
                                                
                                                $
                                                37,306,000Cash
      dividends paid ($0.33 per share)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,813,000
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,813,000
                                                )Payment
      of discount on dividend reinvestment plan
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (43,000
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (43,000
                                                )5%
      Stock dividend
                                                
                                                
                                                244,690
                                                
                                                
                                                
                                                3,491,000
                                                
                                                
                                                
                                                (3,601,000
                                                )
                                                
                                                
                                                7,839
                                                
                                                
                                                
                                                107,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (3,000
                                                )Common
      stock issued under stock plans
                                                
                                                
                                                1,810
                                                
                                                
                                                
                                                22,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,463
                                                
                                                
                                                
                                                20,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                42,000Stock
      option compensation expense
                                                
                                                
                                                —
                                                
                                                
                                                
                                                50,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                50,000Stock
      options exercised
                                                
                                                
                                                42,409
                                                
                                                
                                                
                                                200,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (9,302
                                                )
                                                
                                                
                                                (127,000
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                73,000Tax
      benefit on stock options exercised
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,000Comprehensive
      income:Net
      income
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                4,607,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                4,607,000Change
      in unrealized holding gains on securities available for sale arising
      during the period (net of taxes of $549,000)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                865,000
                                                
                                                
                                                
                                                865,000Reclassification
      adjustment for gains in net income (net of taxes of
$1,000)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,000
                                                
                                                
                                                
                                                3,000Total
      comprehensive income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                5,475,000Balance
      – December 31, 2007
                                                
                                                
                                                5,306,828
                                                
                                                
                                                $
                                                34,871,000
                                                
                                                
                                                $
                                                5,943,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                276,000
                                                
                                                
                                                $
                                                41,090,000Cash
      dividends paid ($0.35 per share)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,965,000
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,965,000
                                                )Payment
      of discount on dividend reinvestment plan
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (45,000
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (45,000
                                                )5%
      Stock dividend
                                                
                                                
                                                255,420
                                                
                                                
                                                
                                                2,995,000
                                                
                                                
                                                
                                                (3,096,000
                                                )
                                                
                                                
                                                9,896
                                                
                                                
                                                
                                                99,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (2,000
                                                )Common
      stock issued under stock plans
                                                
                                                
                                                1,667
                                                
                                                
                                                
                                                21,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,603
                                                
                                                
                                                
                                                20,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                41,000Stock
      option compensation expense
                                                
                                                
                                                —
                                                
                                                
                                                
                                                48,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                48,000Stock
      options exercised
                                                
                                                
                                                11,180
                                                
                                                
                                                
                                                70,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,499
                                                )
                                                
                                                
                                                (21,000
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                49,000Tax
      benefit on stock options exercised
                                                
                                                
                                                —
                                                
                                                
                                                
                                                2,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                2,000Repurchase
      of common stock
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (30,000
                                                )
                                                
                                                
                                                (370,000
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (370,000
                                                )Comprehensive
      income:Net
      income
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,501,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,501,000Change
      in unrealized holding gains on securities available for sale arising
      during the period (net of taxes of $260,000)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                383,000
                                                
                                                
                                                
                                                383,000Reclassification
      adjustment for gains in net income (net of taxes of
    $39,000)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                64,000
                                                
                                                
                                                
                                                64,000Total
      comprehensive income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,948,000Balance
      – December 31, 2008
                                                
                                                
                                                5,575,095
                                                
                                                
                                                $
                                                37,962,000
                                                
                                                
                                                $
                                                4,383,000
                                                
                                                
                                                
                                                (20,000
                                                )
                                                
                                                $
                                                (272,000
                                                )
                                                
                                                $
                                                723,000
                                                
                                                
                                                $
                                                42,796,000




See
accompanying notes to consolidated financial statements.





38
 Table of Contents





Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Cash Flows




Years Ended December 31,2008
                    
                    
                    2007Cash
      flows from operating activities:Net
      income
                    
                    $
                    3,501,000
                    
                    
                    $
                    4,607,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
                    
                    
                    918,000
                    
                    
                    
                    787,000Amortization
      of premiums and accretion of discounts, net
                    
                    
                    125,000
                    
                    
                    
                    126,000Accretion
      of deferred loan fees
                    
                    
                    (283,000
                    )
                    
                    
                    (120,000
                    )Provision
      for loan losses
                    
                    
                    3,585,000
                    
                    
                    
                    530,000Valuation
      reserve on other real estate owned
                    
                    
                    —
                    
                    
                    
                    32,000Originations
      of mortgage loans held for sale
                    
                    
                    (19,665,000
                    )
                    
                    
                    (30,570,000
                    )Proceeds
      from sale of mortgage loans
                    
                    
                    20,748,000
                    
                    
                    
                    31,759,000Gain
      on sale of loans
                    
                    
                    (193,000
                    )
                    
                    
                    (318,000
                    )Gain
      on sales and calls of securities
                    
                    
                    (103,000
                    )
                    
                    
                    (4,000
                    )Loss
      on sale of equipment
                    
                    
                    12,000
                    
                    
                    
                    —Deferred
      income tax benefit
                    
                    
                    (365,000
                    )
                    
                    
                    (161,000
                    )Amortization
      of intangible assets
                    
                    
                    33,000
                    
                    
                    
                    32,000Increase
      in accrued interest receivable
                    
                    
                    (259,000
                    )
                    
                    
                    (200,000
                    )(Decrease)
      increase in accrued interest payable
                    
                    
                    (498,000
                    )
                    
                    
                    359,000Increase
      in bank owned life insurance
                    
                    
                    (326,000
                    )
                    
                    
                    (322,000
                    )Life
      insurance proceeds
                    
                    
                    —
                    
                    
                    
                    (459,000
                    )Nonqualified
      stock option expense
                    
                    
                    48,000
                    
                    
                    
                    50,000(Decrease)
      increase in other assets
                    
                    
                    (197,000
                    )
                    
                    
                    158,000Decrease
      in other liabilities
                    
                    
                    (633,000
                    )
                    
                    
                    (106,000
                    )Net
      cash provided by operating activities
                    
                    
                    6,448,000
                    
                    
                    
                    6,180,000Cash
      flows from investing activities:Purchase
      of securities available for sale
                    
                    
                    (45,353,000
                    )
                    
                    
                    (20,532,000
                    )Proceeds
      from maturities and principal repayments on securities available for
      sale
                    
                    
                    7,095,000
                    
                    
                    
                    10,107,000Proceeds
      from sales and calls on securities available for sale
                    
                    
                    24,945,000
                    
                    
                    
                    8,634,000Purchase
      of securities held to maturity
                    
                    
                    (17,210,000
                    )
                    
                    
                    (12,365,000
                    )Proceeds
      from maturities and principal repayments on securities held to
      maturity
                    
                    
                    4,715,000
                    
                    
                    
                    7,591,000Proceeds
      from calls of securities held to maturity
                    
                    
                    4,770,000
                    
                    
                    
                    2,653,000Purchase
      of FHLB—NY stock
                    
                    
                    (437,000
                    )
                    
                    
                    (84,000
                    )Net
      increase in loans
                    
                    
                    (21,715,000
                    )
                    
                    
                    (50,717,000
                    )Additional
      investment in other real estate owned
                    
                    
                    —
                    
                    
                    
                    (324,000
                    )Sale
      of other real estate owned
                    
                    
                    —
                    
                    
                    
                    353,000Proceeds
      from life insurance payout
                    
                    
                    —
                    
                    
                    
                    1,030,000Additions
      to premises and equipment
                    
                    
                    (454,000
                    )
                    
                    
                    (1,639,000
                    )Sale
      of equipment
                    
                    
                    4,000
                    
                    
                    
                    —Net
      cash used in investing activities
                    
                    
                    (43,640,000
                    )
                    
                    
                    (55,293,000
                    )Cash
      flows from financing activities:Net
      (decrease) increase in noninterest – bearing deposits
                    
                    
                    (2,894,000
                    )
                    
                    
                    9,888,000Net
      increase in interest – bearing deposits
                    
                    
                    37,126,000
                    
                    
                    
                    28,188,000Net
      (decrease) increase in securities sold under agreements to
      repurchase
                    
                    
                    (2,123,000
                    )
                    
                    
                    8,260,000Proceeds
      from long term borrowings
                    
                    
                    65,000,000
                    
                    
                    
                    —Net
      (decrease) increase in short term borrowings
                    
                    
                    (9,900,000
                    )
                    
                    
                    2,400,000Payments
      on long term borrowings
                    
                    
                    (46,845,000
                    )
                    
                    
                    (1,647,000
                    )Cash
      dividends paid on common stock
                    
                    
                    (1,967,000
                    )
                    
                    
                    (1,816,000
                    )Payment
      of discount on dividend reinvestment plan
                    
                    
                    (45,000
                    )
                    
                    
                    (43,000
                    )Purchase
      of treasury stock
                    
                    
                    (370,000
                    )
                    
                    
                    —Exercise
      of stock options
                    
                    
                    49,000
                    
                    
                    
                    73,000Tax
      benefit of stock plans
                    
                    
                    2,000
                    
                    
                    
                    3,000Issuance
      of common stock
                    
                    
                    41,000
                    
                    
                    
                    42,000Net
      cash provided by financing activities
                    
                    
                    38,074,000
                    
                    
                    
                    45,348,000Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    882,000
                    
                    
                    
                    (3,765,000
                    )Cash
      and cash equivalents – beginning
                    
                    
                    11,932,000
                    
                    
                    
                    15,697,000Cash
      and cash equivalents – ending
                    
                    $
                    12,814,000
                    
                    
                    $
                    11,932,000Supplemental
      disclosures of cash flow information:Cash
      paid during the year for interest
                    
                    $
                    13,269,000
                    
                    
                    $
                    13,521,000Cash
      paid during the year for income taxes
                    
                    $
                    2,453,000
                    
                    
                    $
                    2,499,000Noncash
      investing activities – security purchases due brokers
                    
                    
                    —
                    
                    
                    $
                    1,027,000– transfer of loan to OREO
                    
                    
                    —
                    
                    
                    $
                    61,000




See
accompanying notes to consolidated financial statements.





39
 Table of Contents





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,
Stewardship Realty LLC and Atlantic Stewardship Insurance Company, LLC. All
significant intercompany transactions and balances are 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. However,
the customers’ ability to repay their loans is dependent on the real estate and
general economic conditions in the area. 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,
based on available information, 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
flows





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 short
term borrowings and securities sold under agreement to repurchase.





Securities
available for sale and held to maturity





The
Corporation classifies its securities as held to maturity or 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 amortized cost. 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. Premiums and
discounts on securities are amortized on the level-yield method without
anticipating prepayments except for mortgage-backed securities where prepayments
are anticipated. Gains and losses on sales are recorded on the trade date and
determined using 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.





40
 Table of Contents





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.





Mortgage
loans held for sale





Mortgage
loans originated and intended for sale in the secondary market are carried 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.





Interest
income on loans is discontinued at the time the loan is 90 days delinquent
unless the loan is well-secured and in process of collection. Past due status is
based on the contractual terms of the loan. In all cases, loans are placed on
nonaccrual or are charged-off at an earlier date if collection of principal or
interest is considered doubtful.





All
interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. 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 conditions 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.





41
 Table of Contents








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.





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. Property acquired
through or instead of foreclosure is initially recorded at fair value less costs
to sell, establishing a new cost basis. 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, 2008 and 2007, the Corporation had
no OREO.





Intangible
assets





Gross
intangible assets totaled $750,000 with accumulated amortization of $713,000 and
$680,000 at December 31, 2008 and 2007, 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 $37,000 and $70,000 at December 31, 2008 and 2007,
respectively, and are amortized on a straight-line method over a period of
fifteen years.





The core
deposit intangible represented the intangible value of depositor relationships
resulting from deposit liabilities assumed in the same acquisition and was
amortized on an accelerated basis over a period of twelve years. The intangible
was fully amortized at December 31, 2006.





Long-Term
Assets





Premises
and equipment, core deposit and other intangible assets, and other long-term
assets are reviewed for impairment when events indicate their carrying amount
may not be recovered from future undiscounted cash flows. If impaired, the
assets are recorded at fair value.





Bank
owned life insurance





The
Corporation has purchased life insurance policies on certain key officers. Bank
owned life insurance is recorded at the amount that can be realized under the
insurance contract at the balance sheet date, which is the cash surrender value
adjusted for other charges or other amounts due that are probable at
settlement.





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. The
Corporation purchases shares for the dividend reinvestment plan 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, beginning in 2006, the
Corporation has recorded stock-based compensation cost using the fair value
method. Compensation cost is recognized for stock options issued based on the
fair value of these awards at the date of grant. A Black-Scholes model is
utilized to estimate the fair value of stock options. Compensation cost is
recognized over the required service period, generally defined as the vesting
period.





42
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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.





In
accordance with FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48), a tax position is recognized as a benefit only if it is “more
likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test,
no tax benefit is recorded.





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, net of tax, which are also recognized as separate components
of equity.





Earnings
per share





Basic
earnings per share is calculated by dividing net income by the weighted average
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, 2008 and 2007.





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.





Adoption
of New Accounting Standards:





FASB
Statement of Financial Accounting Standard No. 157, “Fair Value
Measurements”





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued the
Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 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. In February
2008, FASB issued Staff Position 157-2, “Effective Date of FASB Statement 157
(“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of SFAS 157, effective January 1, 2008, has not
had a material impact on the Corporation’s consolidated financial position or
results of operation. In October 2008, FASB issued Staff Position (“FSP”) 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active”. This FSP
clarifies the application of SFAS 157 in a market that is not active. The impact
of adoption was not material.





43
 Table of Contents





FASB
Statement of Financial Accounting Standard No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”





In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The Corporation did not
elect the fair value option for any financial assets or financial liabilities as
of January 1, 2008, the effective date of SFAS 159.





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” (“EITF 06-4”). EITF 06-4
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. The adoption of EITF 06-4, effective January 1, 2008, has not had a
material impact on the Corporation’s consolidated financial position or results
of operation.





Effect
of Newly Issued But Not Yet Effective Accounting Standards:





In
December 2007, the FASB issued Statement No. 141 (revised 2007), Business
Combinations (“SFAS 141(R)”), which establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. SFAS 141(R) is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The
adoption SFAS 141(R) will not have a material effect on the Corporation’s
results of operations or financial position.





In
December 2007, the FASB issued Statement No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51”(“SFAS
160”), which will change the accounting and reporting for minority interests,
which will be re-characterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. SFAS No. 160 is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS No.
160 will not have a significant impact on the Corporation’s results of
operations or financial position.





In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133” (“SFAS 161”).
SFAS 161 amends and expands the disclosure requirements of SFAS 133 for
derivative instruments and hedging activities. SFAS 161 requires qualitative
disclosure about objectives and strategies for using derivative and hedging
instruments, quantitative disclosures about fair value amounts of the
instruments and gains and losses on such instruments, as well as disclosures
about credit-risk features in derivative agreements. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The adoption of SFAS
161 will not have a material effect on the Corporation’s results of
operations or financial position.





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. The average amounts of the reserves on deposit for the years
ended December 31, 2008 and 2007 were approximately $300,000.





44
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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, 2008Fair
                            
                            
                            Gross UnrealizedValue
                            
                            
                            Gains
                            
                            
                            LossesU.S.
      government-sponsored agencies:After
      one year through five years
                            
                            $
                            1,513,000
                            
                            
                            $
                            14,000
                            
                            
                            $
                            —After
      five years through ten years
                            
                            
                            21,878,000
                            
                            
                            
                            499,000
                            
                            
                            
                            1,000After
      ten years
                            
                            
                            26,269,000
                            
                            
                            
                            228,000
                            
                            
                            
                            29,00049,660,000
                            
                            
                            
                            741,000
                            
                            
                            
                            30,000Obligations
      of state and political subdivisions:Within
      one year
                            
                            
                            712,000
                            
                            
                            
                            1,000
                            
                            
                            
                            —After
      one year through five years
                            
                            
                            307,000
                            
                            
                            
                            3,000
                            
                            
                            
                            —After
      five years through ten years
                            
                            
                            2,180,000
                            
                            
                            
                            2,000
                            
                            
                            
                            59,000After
      ten years
                            
                            
                            2,621,000
                            
                            
                            
                            —
                            
                            
                            
                            131,0005,820,000
                            
                            
                            
                            6,000
                            
                            
                            
                            190,000Mortgage-backed
      securities:After
      one year through five years
                            
                            
                            4,238,000
                            
                            
                            
                            46,000
                            
                            
                            
                            7,000After
      five years through ten years
                            
                            
                            4,457,000
                            
                            
                            
                            142,000
                            
                            
                            
                            —After
      ten years
                            
                            
                            22,975,000
                            
                            
                            
                            528,000
                            
                            
                            
                            8,00031,670,000
                            
                            
                            
                            716,000
                            
                            
                            
                            15,000Total
      debt securities
                            
                            
                            87,150,000
                            
                            
                            
                            1,463,000
                            
                            
                            
                            235,000Other
      equity investments
                            
                            
                            2,873,000
                            
                            
                            
                            —
                            
                            
                            
                            35,000$
                            90,023,000
                            
                            
                            $
                            1,463,000
                            
                            
                            $
                            270,000
 
 December 31, 2007Fair
                                
                                
                                Gross UnrealizedValue
                                
                                
                                Gains
                                
                                
                                LossesU.S.
      government-sponsored agencies:Within
      one year
                                
                                $
                                497,000
                                
                                
                                $
                                —
                                
                                
                                $
                                3,000After
      one year through five years
                                
                                
                                7,323,000
                                
                                
                                
                                47,000
                                
                                
                                
                                1,000After
      five years through ten years
                                
                                
                                13,923,000
                                
                                
                                
                                265,000
                                
                                
                                
                                —After
      ten years
                                
                                
                                13,950,000
                                
                                
                                
                                183,000
                                
                                
                                
                                —35,693,000
                                
                                
                                
                                495,000
                                
                                
                                
                                4,000Obligations
      of state and political subdivisions:Within
      one year
                                
                                
                                326,000
                                
                                
                                
                                —
                                
                                
                                
                                1,000After
      one year through five years
                                
                                
                                1,016,000
                                
                                
                                
                                —
                                
                                
                                
                                4,000After
      five years through ten years
                                
                                
                                326,000
                                
                                
                                
                                2,000
                                
                                
                                
                                1,000After
      ten years
                                
                                
                                1,235,000
                                
                                
                                
                                —
                                
                                
                                
                                23,0002,903,000
                                
                                
                                
                                2,000
                                
                                
                                
                                29,000Mortgage-backed
      securities:Within
      one year
                                
                                
                                17,000
                                
                                
                                
                                —
                                
                                
                                
                                —After
      one year through five years
                                
                                
                                2,340,000
                                
                                
                                
                                3,000
                                
                                
                                
                                28,000After
      five years through ten years
                                
                                
                                5,047,000
                                
                                
                                
                                32,000
                                
                                
                                
                                21,000After
      ten years
                                
                                
                                29,727,000
                                
                                
                                
                                170,000
                                
                                
                                
                                156,00037,131,000
                                
                                
                                
                                205,000
                                
                                
                                
                                205,000Total
      debt securities
                                
                                
                                75,727,000
                                
                                
                                
                                702,000
                                
                                
                                
                                238,000Other
      equity investments
                                
                                
                                1,230,000
                                
                                
                                
                                —
                                
                                
                                
                                17,000$
                                76,957,000
                                
                                
                                $
                                702,000
                                
                                
                                $
                                255,000


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.





45
 Table of Contents





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
2008 and 2007, 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, 2008 and
2007, and if the unrealized loss position was continuous for the twelve months
prior to December 31, 2008 and 2007.




Less than 12 Months
                  
                  
                  12 Months or Longer
                  
                  
                  Total2008
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesU.S.
      government sponsored agencies
                  
                  $
                  7,464,000
                  
                  
                  $
                  (30,000
                  )
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  7,464,000
                  
                  
                  $
                  (30,000
                  )Obligations
      of state and political subdivisions
                  
                  
                  4,709,000
                  
                  
                  
                  (190,000
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,709,000
                  
                  
                  
                  (190,000
                  )Mortgage-backed
      securities
                  
                  
                  1,651,000
                  
                  
                  
                  (8,000
                  )
                  
                  
                  438,000
                  
                  
                  
                  (7,000
                  )
                  
                  
                  2,089,000
                  
                  
                  
                  (15,000
                  )Other
      equity investments
                  
                  
                  40,000
                  
                  
                  
                  (4,000
                  )
                  
                  
                  2,742,000
                  
                  
                  
                  (31,000
                  )
                  
                  
                  2,782,000
                  
                  
                  
                  (35,000
                  )Total
      temporarily impaired securities
                  
                  $
                  13,864,000
                  
                  
                  $
                  (232,000
                  )
                  
                  $
                  3,180,000
                  
                  
                  $
                  (38,000
                  )
                  
                  $
                  17,044,000
                  
                  
                  $
                  (270,000
                  )
   Less than 12 Months
                  
                  
                  12 Months or Longer
                  
                  
                  Total2007
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesU.S.
      government sponsored agencies
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,995,000
                  
                  
                  $
                  (4,000
                  )
                  
                  $
                  1,995,000
                  
                  
                  $
                  (4,000
                  )Obligations
      of state and political subdivisions
                  
                  
                  1,067,000
                  
                  
                  
                  (20,000
                  )
                  
                  
                  1,278,000
                  
                  
                  
                  (9,000
                  )
                  
                  
                  2,345,000
                  
                  
                  
                  (29,000
                  )Mortgage-backed
      securities
                  
                  
                  3,632,000
                  
                  
                  
                  (8,000
                  )
                  
                  
                  14,413,000
                  
                  
                  
                  (197,000
                  )
                  
                  
                  18,045,000
                  
                  
                  
                  (205,000
                  )Other
      equity investments
                  
                  
                  71,000
                  
                  
                  
                  (4,000
                  )
                  
                  
                  1,159,000
                  
                  
                  
                  (13,000
                  )
                  
                  
                  1,230,000
                  
                  
                  
                  (17,000
                  )Total
      temporarily impaired securities
                  
                  $
                  4,770,000
                  
                  
                  $
                  (32,000
                  )
                  
                  $
                  18,845,000
                  
                  
                  $
                  (223,000
                  )
                  
                  $
                  23,615,000
                  
                  
                  $
                  (255,000
                  )
  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
entire principal.





Cash
proceeds realized from sales and calls of securities available for sale for the
years ended December 31, 2008 and 2007 were $24,945,000 and $8,634,000,
respectively. There were gross gains totaling $79,000 and no gross losses
realized on sales or calls during the year ended December 31, 2008. The tax
provision related to these realized gains was $30,000. There were gross gains
totaling $2,000 and no gross losses realized on sales or calls during the year
ended December 31, 2007. The tax provision related to these realized gains was
negligible.





The fair
value of securities pledged to secure treasury tax and loan deposits for the
year ended December 31, 2008 was $500,000. See also Note 9 to the financial
statements regarding securities pledged as collateral for securities sold under
agreements to repurchase.





46
 Table of Contents





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, 2008Carrying
                        
                        
                        Gross UnrecognizedAmount
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        Fair ValueU.S.
      government sponsored agencies:After
      one year through five years
                        
                        $
                        399,000
                        
                        
                        $
                        32,000
                        
                        
                        $
                        —
                        
                        
                        $
                        431,000After
      five years through ten years
                        
                        
                        3,090,000
                        
                        
                        
                        37,000
                        
                        
                        
                        —
                        
                        
                        
                        3,046,000After
      ten years
                        
                        
                        6,882,000
                        
                        
                        
                        148,000
                        
                        
                        
                        —
                        
                        
                        
                        7,030,00010,290,000
                        
                        
                        
                        217,000
                        
                        
                        
                        —
                        
                        
                        
                        10,507,000Obligations
      of state and political subdivisions:Within
      one year
                        
                        
                        1,149,000
                        
                        
                        
                        4,000
                        
                        
                        
                        —
                        
                        
                        
                        1,153,000After
      one year through five years
                        
                        
                        2,392,000
                        
                        
                        
                        19,000
                        
                        
                        
                        —
                        
                        
                        
                        2,411,000After
      five years through ten years
                        
                        
                        13,981,000
                        
                        
                        
                        87,000
                        
                        
                        
                        131,000
                        
                        
                        
                        13,937,000After
      ten years
                        
                        
                        5,526,000
                        
                        
                        
                        —
                        
                        
                        
                        170,000
                        
                        
                        
                        5,356,00023,048,000
                        
                        
                        
                        110,000
                        
                        
                        
                        301,000
                        
                        
                        
                        22,857,000Mortgage-backed
      securities:Within
      one year
                        
                        
                        60,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        60,000After
      one but within five years
                        
                        
                        801,000
                        
                        
                        
                        11,000
                        
                        
                        
                        —
                        
                        
                        
                        812,000After
      five years through ten years
                        
                        
                        1,575,000
                        
                        
                        
                        55,000
                        
                        
                        
                        —
                        
                        
                        
                        1,630,000After
      ten years
                        
                        
                        13,082,000
                        
                        
                        
                        205,000
                        
                        
                        
                        3,000
                        
                        
                        
                        13,284,00015,518,000
                        
                        
                        
                        271,000
                        
                        
                        
                        3,000
                        
                        
                        
                        15,786,000$
                        48,856,000
                        
                        
                        $
                        598,000
                        
                        
                        $
                        304,000
                        
                        
                        $
                        49,150,000
 
 
 December 31, 2007Carrying
                        
                        
                        Gross UnrecognizedAmount
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        Fair ValueU.S.
      Treasury:After
      one year through five years
                        
                        $
                        501,000
                        
                        
                        $
                        5,000
                        
                        
                        $
                        —
                        
                        
                        $
                        506,000501,000
                        
                        
                        
                        5,000
                        
                        
                        
                        —
                        
                        
                        
                        506,000U.S.
      government sponsored agencies:Within
      one year
                        
                        
                        1,453,000
                        
                        
                        
                        —
                        
                        
                        
                        1,000
                        
                        
                        
                        1,452,000After
      one year through five years
                        
                        
                        2,644,000
                        
                        
                        
                        21,000
                        
                        
                        
                        —
                        
                        
                        
                        2,665,000After
      five years through ten years
                        
                        
                        2,261,000
                        
                        
                        
                        30,000
                        
                        
                        
                        —
                        
                        
                        
                        2,291,000After
      ten years
                        
                        
                        5,973,000
                        
                        
                        
                        84,000
                        
                        
                        
                        —
                        
                        
                        
                        6,057,00012,331,000
                        
                        
                        
                        135,000
                        
                        
                        
                        1,000
                        
                        
                        
                        12,465,000Obligations
      of state and political subdivisions:Within
      one year
                        
                        
                        1,652,000
                        
                        
                        
                        1,000
                        
                        
                        
                        4,000
                        
                        
                        
                        1,649,000After
      one year through five years
                        
                        
                        2,924,000
                        
                        
                        
                        2,000
                        
                        
                        
                        14,000
                        
                        
                        
                        2,912,000After
      five years through ten years
                        
                        
                        10,749,000
                        
                        
                        
                        161,000
                        
                        
                        
                        2,000
                        
                        
                        
                        10,908,000After
      ten years
                        
                        
                        7,244,000
                        
                        
                        
                        40,000
                        
                        
                        
                        20,000
                        
                        
                        
                        7,264,00022,569,000
                        
                        
                        
                        204,000
                        
                        
                        
                        40,000
                        
                        
                        
                        22,733,000Mortgage-backed
      securities:Within
      one year
                        
                        
                        50,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        50,000After
      one but within five years
                        
                        
                        600,000
                        
                        
                        
                        1,000
                        
                        
                        
                        3,000
                        
                        
                        
                        598,000After
      five years through ten years
                        
                        
                        2,464,000
                        
                        
                        
                        18,000
                        
                        
                        
                        13,000
                        
                        
                        
                        2,469,000After
      ten years
                        
                        
                        2,674,000
                        
                        
                        
                        29,000
                        
                        
                        
                        16,000
                        
                        
                        
                        2,687,0005,788,000
                        
                        
                        
                        48,000
                        
                        
                        
                        32,000
                        
                        
                        
                        5,804,000$
                        41,189,000
                        
                        
                        $
                        392,000
                        
                        
                        $
                        73,000
                        
                        
                        $
                        41,508,000




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 GNMAand
government sponsored agencies such as FNMA, FHLB and FHLMC. At year end 2008 and
2007, 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.





47
 Table of Contents





The
following tables summarize the fair value and unrecognized losses of those
investment securities which reported an unrecognized loss at December 31, 2008
and 2007, and if the unrecognized loss position was continuous for the twelve
months prior to December 31, 2008 and 2007.




Less than 12 Months
                  
                  
                  12 Months or Longer
                  
                  
                  Total2008
                  
                  Fair Value
                  
                  
                  Unrecognized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrecognized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrecognized
                    LossesU.S.
      government sponsored agencies
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Obligations
      of state and political subdivisions
                  
                  
                  13,440,000
                  
                  
                  
                  (301,000
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  13,440,000
                  
                  
                  
                  (301,000
                  )Mortgage-backed
      securities
                  
                  
                  2,715,000
                  
                  
                  
                  (3,000
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,715,000
                  
                  
                  
                  (3,000
                  )Total
      temporarily impaired securities
                  
                  $
                  16,155,000
                  
                  
                  $
                  (304,000
                  )
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  16,155,000
                  
                  
                  $
                  (304,000
                  )
 
 
 Less than 12 Months
                  
                  
                  12 Months or Longer
                  
                  
                  Total2007
                  
                  Fair Value
                  
                  
                  Unrecognized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrecognized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrecognized
                    LossesU.S.
      government sponsored agencies
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,452,000
                  
                  
                  $
                  (1,000
                  )
                  
                  $
                  1,452,000
                  
                  
                  $
                  (1,000
                  )Obligations
      of state and political subdivisions
                  
                  
                  614,000
                  
                  
                  
                  (3,000
                  )
                  
                  
                  7,056,000
                  
                  
                  
                  (37,000
                  )
                  
                  
                  7,670,000
                  
                  
                  
                  (40,000
                  )Mortgage-backed
      securities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,128,000
                  
                  
                  
                  (32,000
                  )
                  
                  
                  3,128,000
                  
                  
                  
                  (32,000
                  )Total
      temporarily impaired securities
                  
                  $
                  614,000
                  
                  
                  $
                  (3,000
                  )
                  
                  $
                  11,636,000
                  
                  
                  $
                  (70,000
                  )
                  
                  $
                  12,250,000
                  
                  
                  $
                  (73,000
                  )
  The
unrecogized 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, 2008 and December 31, 2007 were $4,770,00 and $2,653,000,
respectively. Gross gains totaling $24,000 and no losses were realized from
calls for the year ended December 31, 2008. The tax provision related to these
realized gains was $9,000. Gross gains totaling $2,000 and no losses were
realized from calls for the year ended December 31, 2007. The tax provision
related to these realized gains was negligible.





The
carrying value of securities pledged to secure public deposits for the two years
ended December 31, 2008 and 2007 were $700,000 and $501,000, respectively. The
carrying value of securities pledged to secure treasury tax and loan deposits
for the year ended December 31, 2008 was $500,000. See also Note 9 to financial
statements regarding securities pledged as collateral for securities sold under
agreements to repurchase.





48
 Table of Contents





Note
5. LOANS





The loan
portfolio consisted of the following:





December
      31,2008
                        
                        
                        2007Mortgage:Residential
                        
                        $
                        40,337,000
                        
                        
                        $
                        44,719,000Commercial
                        
                        
                        226,183,000
                        
                        
                        
                        209,082,000Commercial
                        
                        
                        100,282,000
                        
                        
                        
                        89,845,000Equity
                        
                        
                        21,208,000
                        
                        
                        
                        19,723,000Installment
                        
                        
                        51,290,000
                        
                        
                        
                        56,796,000Other
                        
                        
                        356,000
                        
                        
                        
                        424,000Total
      gross loans
                        
                        
                        439,656,000
                        
                        
                        
                        420,589,000Less:
      Deferred loan fees, net of costs
                        
                        
                        387,000
                        
                        
                        
                        442,000Allowance for loan losses
                        
                        
                        5,166,000
                        
                        
                        
                        4,457,0005,553,000
                        
                        
                        
                        4,899,000Loans,
      net
                        
                        $
                        434,103,000
                        
                        
                        $
                        415,690,000





At
December 31, 2008 and 2007, loans participated by the Corporation to other
organizations totaled approximately $28,642,000 and $10,397,000,
respectively.





Activity
in the allowance for loan losses is summarized as follows:





December 31,2008
                  
                  
                  2007Balance,
      beginning
                  
                  $
                  4,457,000
                  
                  
                  $
                  4,101,000Provision
      charged to operations
                  
                  
                  3,585,000
                  
                  
                  
                  530,000Recoveries
      of loans charged off
                  
                  
                  26,000
                  
                  
                  
                  11,000Loans
      charged off
                  
                  
                  (2,902,000
                  )
                  
                  
                  (185,000
                  )Balance,
      ending
                  
                  $
                  5,166,000
                  
                  
                  $
                  4,457,000




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, 2008 and 2007, these loans
aggregated approximately $2,683,000 and $2,346,000, respectively. During the
year ended December 31, 2008, new loans totaling $1,113,000 were granted and
repayments totaled approximately $776,000. The loans, at December 31, 2008, were
current as to principal and interest payments.








Note
6. NONPERFORMING LOANS





Nonperforming
loans include the following:




December 31,2008
                  
                  
                  2007Nonaccrual
      loans
                  
                  $
                  4,230,000
                  
                  
                  $
                  455,000Loans
      past due ninety days or more and accruing
                  
                  
                  353,000
                  
                  
                  
                  26,000Restructured
      loans
                  
                  
                  1,855,000
                  
                  
                  
                  —Total
      nonperforming loans
                  
                  $
                  6,438,000
                  
                  
                  $
                  481,000


Nonaccrual
loans and loans past due 90 days or more and accruing included both smaller
balance homogeneous loans that are collectively evaluated for impairment and
individually classified loans. Restructured loans classified as nonaccrual for
the years ended December 31, 2008 and December 31, 2007 were $22,000 and
$72,000, respectively.





49
 Table of Contents





The
following information is presented for loans classified as nonaccrual and
restructured:





Year ended December 31,2008
                  
                  
                  2007Income
      that would have been recorded under contractual terms
                  
                  $
                  400,000
                  
                  
                  $
                  40,000Less
      interest income received
                  
                  
                  222,000
                  
                  
                  
                  10,000Lost
      income on nonperforming loans during the year
                  
                  $
                  178,000
                  
                  
                  $
                  30,000






Impaired
loans consisted of the following:





December 31,2008
                
                
                2007Impaired
      LoansWith
      related allowance for loan loss
                
                $
                2,762,000
                
                
                $
                222,000Without
      related allowance for loan loss
                
                
                1,468,000
                
                
                
                233,000Total
      impaired loans
                
                $
                4,230,000
                
                
                $
                455,000Related
      allowance for possible credit losses
                
                $
                481,000
                
                
                $
                39,000Average
      investment in impaired loans
                
                $
                1,430,000
                
                
                $
                344,000Interest
      recognized on impaired loans
                
                $
                —
                
                
                $
                —






Note
7. PREMISES AND EQUIPMENT, NET





December 31,2008
                
                
                2007Land
                
                $
                2,999,000
                
                
                $
                2,999,000Buildings
      and improvements
                
                
                2,893,000
                
                
                
                2,802,000Leasehold
      improvements
                
                
                2,188,000
                
                
                
                2,159,000Furniture,
      fixtures and equipment
                
                
                4,292,000
                
                
                
                4,581,00012,372,000
                
                
                
                12,541,000Less
      accumulated depreciation and amortization
                
                
                4,902,000
                
                
                
                4,591,000Total
      premises & equipment, net
                
                $
                7,470,000
                
                
                $
                7,950,000





Amounts
charged to net occupancy expense for depreciation and amortization of banking
premises and equipment amounted to $918,000 and $787,000 in 2008 and 2007,
respectively.





50
 Table of Contents





Note
8. DEPOSITS




December 31, 2008
                      
                      
                      December 31, 2007Weighted
                        Average
                        Rate
                      
                      
                      Amount
                      
                      
                      Weighted
                        Average
                        Rate
                      
                      
                      AmountNoninterest-bearing
      demand
                      
                      
                      —
                      %
                      
                      $
                      99,099,000
                      
                      
                      
                      —
                      %
                      
                      $
                      101,993,000NOW
      accounts
                      
                      
                      0.86
                      %
                      
                      
                      73,176,000
                      
                      
                      
                      1.75
                      %
                      
                      
                      67,044,000Money
      market accounts
                      
                      
                      1.95
                      %
                      
                      
                      87,592,000
                      
                      
                      
                      3.17
                      %
                      
                      
                      86,669,000Total
      interest-bearing demand
                      
                      
                      1.45
                      %
                      
                      
                      160,768,000
                      
                      
                      
                      2.55
                      %
                      
                      
                      153,713,000Statement
      savings and clubs
                      
                      
                      0.58
                      %
                      
                      
                      36,447,000
                      
                      
                      
                      0.80
                      %
                      
                      
                      33,524,000Business
      savings
                      
                      
                      0.49
                      %
                      
                      
                      3,180,000
                      
                      
                      
                      0.50
                      %
                      
                      
                      3,486,000Total
      savings
                      
                      
                      0.57
                      %
                      
                      
                      39,627,000
                      
                      
                      
                      0.77
                      %
                      
                      
                      37,010,000IRA
      investment and variable rate savings
                      
                      
                      4.04
                      %
                      
                      
                      30,073,000
                      
                      
                      
                      4.56
                      %
                      
                      
                      26,499,000Brokered
      certificates
                      
                      
                      3.06
                      %
                      
                      
                      30,698,000
                      
                      
                      
                      5.19
                      %
                      
                      
                      15,415,000Money
      market certificates
                      
                      
                      3.39
                      %
                      
                      
                      146,266,000
                      
                      
                      
                      4.47
                      %
                      
                      
                      137,669,000Total
      certificates of deposit
                      
                      
                      3.44
                      %
                      
                      
                      207,037,000
                      
                      
                      
                      4.55
                      %
                      
                      
                      179,583,000Total
      interest-bearing deposits
                      
                      
                      2.38
                      %
                      
                      
                      407,432,000
                      
                      
                      
                      3.34
                      %
                      
                      
                      370,306,000Total
      deposits
                      
                      
                      1.91
                      %
                      
                      $
                      506,531,000
                      
                      
                      
                      2.62
                      %
                      
                      $
                      472,299,000





Certificates
of deposit with balances of $100,000 or more at December 31, 2008 and 2007,
totaled approximately $80,326,000 and
$71,122,000, respectively.





The
scheduled maturities of certificates of deposit were as follows:




December
      31,
                          20082009
                        
                        $
                        132,405,0002010
                        
                        
                        61,509,0002011
                        
                        
                        5,976,0002012
                        
                        
                        6,572,0002013
                        
                        
                        575,000$
                        207,037,000




Note
9. BORROWINGS





Federal
Home Loan Bank of New York Advances





The
following table presents Federal Home Loan Bank of New York (“FHLB-NY”) advances
by maturity date:





December 31, 2008
                      
                      
                      December 31, 2007Advances
      Maturing
                      
                      Amount
                      
                      
                      Weighted
                        Average
                        Rate
                      
                      
                      Amount
                      
                      
                      Weighted
                        Average
                        RateWithin
      one year
                      
                      $
                      6,900,000
                      
                      
                      
                      0.44
                      %
                      
                      $
                      18,645,000
                      
                      
                      
                      3.58
                      %After
      one year, but within two years
                      
                      
                      —
                      
                      
                      
                      0.00
                      %
                      
                      
                      —
                      
                      
                      
                      0.00
                      %After
      two years, but within three years
                      
                      
                      —
                      
                      
                      
                      0.00
                      %
                      
                      
                      —
                      
                      
                      
                      0.00
                      %After
      three years, but within four years
                      
                      
                      —
                      
                      
                      
                      0.00
                      %
                      
                      
                      —
                      
                      
                      
                      0.00
                      %After
      four years, but within five years
                      
                      
                      15,000,000
                      
                      
                      
                      3.30
                      %
                      
                      
                      10,000,000
                      
                      
                      
                      3.82
                      %After
      five years
                      
                      
                      15,000,000
                      
                      
                      
                      1.98
                      %
                      
                      
                      —
                      
                      
                      
                      0.00
                      %$
                      36,900,000
                      
                      
                      
                      2.23
                      %
                      
                      $
                      28,645,000
                      
                      
                      
                      3.66
                      %




51
 Table of Contents





During
the years 2008 and 2007, the maximum amount of FHLB-NY advances outstanding at
any month end was $64.0 million and $32.0 million, respectively. The average
amount of advances outstanding during year ended December 31, 2008 and 2007 was
$44.3 million and $20.4 million, respectively.





Advances
totaling $30.0 million have quarterly call features, of which $20.0 million have
not yet reached their first call date.





Advances
from the FHLB-NY are all fixed rate borrowings and are secured by a blanket
assignment of the Corporation’s unpledged, qualifying mortgage loans,
mortgage-backed securities or by investment securities. Such loans remain under
the control of the Corporation. Securities are maintained in safekeeping with
the FHLB-NY.





At
December 31, 2008, the Corporation had available an overnight line of credit and
a one-month overnight repricing line of credit with the FHLB-NY, each in the
amount of $58.5 million. In addition, the Corporation had available overnight
variable repricing lines of credit with other correspondent banks totaling $22
million on an unsecured basis. There were no borrowings under these lines of
credit at December 31, 2008 and 2007.





Securities
Sold Under Agreement to Repurchase





Securities
sold under agreements to repurchase represent financing
arrangements.





At
December 31, 2008 and 2007, included in the balance of securities sold under
agreements to repurchase is a wholesale repurchase agreement with a broker to
borrow $14 million with a maturity in 2014. The borrowing had a fixed interest
rate of 3.25% for the first year and then converted to a floating rate at 9.00%
minus 3-month LIBOR measured on a quarterly basis with a 5.15% cap and a 0.0%
floor. This repurchase agreement is collateralized by agency securities
maintained in safekeeping with the broker. The remaining balances at December
31, 2008 as well as the balances at December 31, 2007 were securities sold to
Bank customers at fixed rates with maturities varying from 91 days to one year.
These securities were maintained in a separate safekeeping account within the
Corporation’s control.





At
December 31, 2008 and 2007, securities sold under agreements to repurchase were
collateralized by U.S. Treasury and agency securities having a carrying value of
approximately $19,433,000 and $20,208,000, respectively.





Information
concerning securities sold under agreements to repurchase is summarized as
follows:




December 31,2008
                  
                  
                  2007Balance
                  
                  $
                  15,160,000
                  
                  
                  $
                  17,283,000Weighted
      average interest rate at year end
                  
                  
                  5.00
                  %
                  
                  
                  3.56
                  %Weighted
      average length of maturity
                  
                  6.5
      years
                  
                  
                  5.7
      yearsMaximum
      amount outstanding at any month end during the year
                  
                  $
                  16,599,000
                  
                  
                  $
                  17,283,000Average
      amount outstanding during the year
                  
                  $
                  16,259,000
                  
                  
                  $
                  12,192,000Average
      interest rate during the year
                  
                  
                  3.85
                  %
                  
                  
                  4.13
                  %




Note
10. SUBORDINATED DEBENTURES





In 2003,
the Corporation formed Stewardship Statutory Trust I (the “Trust”), a statutory
business trust, which on September 17, 2003 issued $7,000,000 Fixed/Floating
Rate Capital Securities (“Capital Securities”). The Trust used the proceeds to
purchase from the Corporation, $7,217,000 of Fixed/Floating Rate Junior
Subordinated Deferrable Interest Debentures (“Debentures”) maturing 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 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.





Prior to
September 17, 2008, the Capital Securities and the Debentures both had a fixed
interest rate of 6.75%. Beginning September 17, 2008, the rate floats quarterly
at a rate of three month London Interbank Offered Rate (LIBOR) plus 2.95%. As of
December 31, 2008 the rate on both the Capital Securities and the Debentures was
4.82%.





The
subordinated debentures may be included in Tier I capital (with certain
limitations applicable) under current regulatory guidelines and
interpretations.





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”). In accordance with FIN 46R, the trust is not consolidated
with the Company’s financial statements, but rather the subordinated debentures
are shown as a liability.





52
 Table of Contents





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, 2008, 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 2008 and 2007, 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, 2008, 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, 2008 and 2007, compared to the minimum capital adequacy
requirements and the requirements for classification as a well capitalized
institution under the prompt corrective action regulations:




Actual
                          
                          
                          Required for
      CapitalAdequacy
      Purposes
                          
                          
                          To Be Well
      CapitalizedUnder Prompt
      CorrectiveAction
      RegulationsAmount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          RatioDecember
      31, 2008Leverage
      (Tier 1) capitalConsolidated
                          
                          $
                          49,014,000
                          
                          
                          
                          8.01
                          %
                          
                          $
                          24,480,000
                          
                          
                          
                          4.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          44,069,000
                          
                          
                          
                          7.26
                          %
                          
                          
                          24,288,000
                          
                          
                          
                          4.00
                          %
                          
                          $
                          30,360,000
                          
                          
                          
                          5.00
                          %Risk-based
      capital:Tier
      1Consolidated
                          
                          
                          49,014,000
                          
                          
                          
                          10.50
                          %
                          
                          
                          18,680,000
                          
                          
                          
                          4.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          44,069,000
                          
                          
                          
                          9.46
                          %
                          
                          
                          18,630,000
                          
                          
                          
                          4.00
                          %
                          
                          
                          27,945,000
                          
                          
                          
                          6.00
                          %TotalConsolidated
                          
                          
                          54,180,000
                          
                          
                          
                          11.60
                          %
                          
                          
                          37,360,000
                          
                          
                          
                          8.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          49,234,000
                          
                          
                          
                          10.57
                          %
                          
                          
                          37,259,000
                          
                          
                          
                          8.00
                          %
                          
                          
                          46,574,000
                          
                          
                          
                          10.00
                          %December
      31, 2007Leverage
      (Tier 1) capitalConsolidated
                          
                          $
                          47,732,000
                          
                          
                          
                          8.56
                          %
                          
                          $
                          22,295,000
                          
                          
                          
                          4.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          42,313,000
                          
                          
                          
                          7.66
                          %
                          
                          
                          22,104,000
                          
                          
                          
                          4.00
                          %
                          
                          $
                          27,630,000
                          
                          
                          
                          5.00
                          %Risk-based
      capital:Tier
      1Consolidated
                          
                          
                          47,732,000
                          
                          
                          
                          10.76
                          %
                          
                          
                          17,736,000
                          
                          
                          
                          4.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          42,313,000
                          
                          
                          
                          9.57
                          %
                          
                          
                          17,690,000
                          
                          
                          
                          4.00
                          %
                          
                          
                          26,535,000
                          
                          
                          
                          6.00
                          %TotalConsolidated
                          
                          
                          52,189,000
                          
                          
                          
                          11.77
                          %
                          
                          
                          35,473,000
                          
                          
                          
                          8.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          46,769,000
                          
                          
                          
                          10.58
                          %
                          
                          
                          35,380,000
                          
                          
                          
                          8.00
                          %
                          
                          
                          44,224,000
                          
                          
                          
                          10.00
                          %




53
 Table of Contents





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, 2008 and 2007 amounted to approximately $281,000 and $396,000,
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, 2008 and
2007 amounted to approximately $70,000 and $69,000, 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 3,433 and 3,609 shares
during 2008 and 2007, respectively. At December 31, 2008 the Corporation had
211,558 shares reserved for issuance under this plan.





Note
13. STOCK-BASED COMPENSATION





At
December 31, 2008, 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 2008 and 2007 under
this plan. At December 31, 2008 the Corporation had 96,686 shares reserved for
issuance 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. Shares are purchased for Directors in the
open market and resulted in purchases of 6,607 and 5,467 shares for 2008 and
2007, respectively. At December 31, 2008 the Corporation had 530,234 shares
reserved for issuance under this plan.





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The
Employee Stock Option Plan provides for options to purchase shares of Common
Stock to be issued to employees of the Corporation at the discretion of the
Compensation Committee. 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. Any options granted were
issued with an exercise price representing the 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. While there are still option
outstanding under this plan, there were no options granted during 2008 or 2007
and there are no longer any shares reserved for issuance under this plan. The
plan allows for the exercise of options to be paid for in cash or with shares
already owned. During 2008 and 2007, 1,499 and 9,302 shares, respectively, were
used to satisfy the exercise of options. A summary of the status of the
qualified stock options as of December 31, 2008 and changes during the year then
ended is presented as follows:




2008Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  38,238
                  
                  
                  $
                  7.20Exercised
                  
                  
                  (9,425
                  )
                  
                  
                  4.57Forfeited
                  
                  
                  (1,531
                  )
                  
                  
                  11.37Outstanding
      at end of year
                  
                  
                  27,282
                  
                  
                  $
                  7.88Intrinsic
      value at year end
                  
                  $
                  58,000Options
      exercisable at year end
                  
                  
                  27,282Intrinsic
      value of options exercisable
                  
                  $
                  58,000Weighted-average
      remaining contractual term (years)
                  
                  
                  2.03


The
intrinsic value of options exercised was $80,000 and $380,000 for the years
ended December 31, 2008 and 2007, respectively. The Corporation received cash
from the exercise of options in the amount of $22,000 and $32,000 for the years
ended December 31, 2008 and 2007, respectively.





The
following table summarizes information about the qualified employee stock
options outstanding and exercisable at December
31, 2008:





Exercise
                                  Price
                                
                                
                                Number
                                  Outstanding
                                  at 12/31/08
                                
                                
                                Weighted-Average
                                  Remaining
                                  Life$
                                5.53
                                
                                
                                
                                7,330
                                
                                
                                0.15
                                years6.12
                                
                                
                                
                                10,660
                                
                                
                                
                                1.1311.75
                                
                                
                                
                                9,292
                                
                                
                                
                                4.54$
                                7.88
                                
                                
                                
                                27,282
                                
                                
                                2.03
                                years





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 options
were issued with an exercise price which represented market price of the stock
at the date of grant. Options were granted in 2005 to new directors beginning
their terms in 2005. There were no options granted since that date. The plan
allows for the exercise of options to be paid for in cash or with shares already
owned. At December 31, 2008 the Corporation had 38,413 shares reserved for
issuance under this plan.





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. Under this plan 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. At December
31, 2008 the Corporation had 11,576 shares reserved for issuance under this
plan.





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A summary
of the status of the nonqualified stock options issued under the 2001 and 2006
Stock Option Plan for Non-Employee Directors as of December 31, 2008 is
presented below:




2008Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  60,318
                  
                  
                  $
                  11.76Exercised
                  
                  
                  (2,314
                  )
                  
                  
                  11.66Outstanding
      at end of year
                  
                  
                  58,004
                  
                  
                  $
                  11.76Intrinsic
      value at year end
                  
                  $
                  —Options
      exercisable at year end
                  
                  
                  24,432Intrinsic
      value of options exercisable
                  
                  $
                  —Weighted-average
      remaining contractual term (years)
                  
                  
                  3.21


The
Corporation received cash from the exercise of options in the amount of $27,000
and $41,000 for the years ended December 31, 2008 and 2007, respectively. The
Corporation realized a tax benefit from the options exercised in the years ended
December 31, 2008 and 2007 of $2,000 and $3,000, respectively.





The
following table summarizes information about the nonqualified Non-Employee
Director stock options outstanding and exercisable at December 31,
2008:





Exercise
                                    Price
                                  
                                  
                                  Number
                                    Outstanding
                                    at
      12/31/08
                                  
                                  
                                  Weighted-Average
                                    Remaining
                                    Life
                                  
                                  Number
                                    Exercisable
                                    at
      12/31/08$
                                  12.67
                                  
                                  
                                  
                                  5,910
                                  
                                  
                                  1.80
                                  years
                                  
                                  
                                  5,91011.66
                                  
                                  
                                  
                                  52,094
                                  
                                  
                                  
                                  3.37
                                  
                                  
                                  
                                  18,523$
                                  11.76
                                  
                                  
                                  
                                  58,004
                                  
                                  
                                  3.21
                                  years
                                  
                                  
                                  24,432





Unrecognized
compensation expense totaled $114,000 and will be recognized over the next 2.4
years.





56
 Table of Contents





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 2008 and 2007:





2008
                                    
                                    
                                    2007Net
      income
                                    
                                    $
                                    3,501,000
                                    
                                    
                                    $
                                    4,607,000Weighted
      average common shares outstanding - basic
                                    
                                    
                                    5,574,821
                                    
                                    
                                    
                                    5,558,182Effect
      of dilutive securities - stock options
                                    
                                    
                                    11,013
                                    
                                    
                                    
                                    29,371Weighted
      average common shares outstanding - diluted
                                    
                                    
                                    5,585,834
                                    
                                    
                                    
                                    5,587,553Earnings
      per share:Basic
                                    
                                    $
                                    0.63
                                    
                                    
                                    $
                                    0.83Diluted
                                    
                                    $
                                    0.63
                                    
                                    
                                    $
                                    0.82





Stock
options granting 59,341 and 56,740 shares of common stock for the years ended
December 31, 2008 and 2007, respectively were not considered in computing
diluted earnings per share because they were antidilutive.





Note
15. INCOME TAXES





The
components of income taxes (benefit) are summarized as follows:




Year ended December 31,2008
                  
                  
                  2007Current
      tax expense:Federal
                  
                  $
                  1,364,000
                  
                  
                  $
                  1,717,000State
                  
                  
                  449,000
                  
                  
                  
                  522,0001,813,000
                  
                  
                  
                  2,239,000Deferred
      tax benefit:Federal
                  
                  
                  (286,000
                  )
                  
                  
                  (152,000
                  )State
                  
                  
                  (79,000
                  )
                  
                  
                  (9,000
                  )(365,000
                  )
                  
                  
                  (161,000
                  )$
                  1,448,000
                  
                  
                  $
                  2,078,000




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 December 31,2008
                      
                      
                      2007Federal
      income tax
                      
                      $
                      1,683,000
                      
                      
                      $
                      2,273,000Add
      (deduct) effect of:State
      income taxes, net of federal income tax effect
                      
                      
                      245,000
                      
                      
                      
                      338,000Nontaxable
      interest income
                      
                      
                      (375,000
                      )
                      
                      
                      (312,000
                      )Life
      insurance
                      
                      
                      (108,000
                      )
                      
                      
                      (268,000
                      )Nondeductible
      expenses
                      
                      
                      28,000
                      
                      
                      
                      71,000Change
      in valuation reserve - federal
                      
                      
                      (7,000
                      )
                      
                      
                      27,000Other
      items, net
                      
                      
                      (18,000
                      )
                      
                      
                      (51,000
                      )Effective
      federal income taxes
                      
                      $
                      1,448,000
                      
                      
                      $
                      2,078,000




57
 Table of Contents





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 31,2008
                    
                    
                    2007Deferred
      tax assets:Allowance
      for loan losses
                    
                    $
                    2,063,000
                    
                    
                    $
                    1,780,000Accrued
      reserves
                    
                    
                    27,000
                    
                    
                    
                    75,000Core
      deposit intangible amortization
                    
                    
                    —
                    
                    
                    
                    3,000Stock
      compensation
                    
                    
                    60,000
                    
                    
                    
                    41,000Nonaccrual
      loan interest
                    
                    
                    75,000
                    
                    
                    
                    19,000Depreciation
                    
                    
                    167,000
                    
                    
                    
                    212,000Contribution
      carry forward
                    
                    
                    206,000
                    
                    
                    
                    87,000State
      capital loss carry forward
                    
                    
                    96,000
                    
                    
                    
                    111,0002,694,000
                    
                    
                    
                    2,328,000Valuation
      reserve
                    
                    
                    (111,000
                    )
                    
                    
                    (94,000
                    )2,583,000
                    
                    
                    
                    2,234,000Deferred
      tax liabilities:Unrealized
      gains on securities available for sale
                    
                    
                    470,000
                    
                    
                    
                    171,000Other
                    
                    
                    50,000
                    
                    
                    
                    66,000520,000
                    
                    
                    
                    237,000Net
      deferred tax assets
                    
                    $
                    2,063,000
                    
                    
                    $
                    1,997,000


There
were no unrecognized tax benefits during the year or at the year ending December
31, 2008 and 2007. There were no tax interest and penalties recorded in the
income statement for the year ended December 31, 2008 and 2007. There were no
tax interest and penalties accrued for the year ended December 31, 2008 and
2007.





The
Corporation and its subsidiaries are subject to U.S. federal income tax as well
as income tax of the state of New Jersey. The Corporation is no longer subject
to examination by taxing authorities for years before 2005.





Note
16. COMMITMENTS AND CONTINGENCIES





Loan
Commitments





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, 2008, the Corporation had residential mortgage commitments to
extend credit aggregating approximately $1.6 million at fixed rates averaging
6.14%. All these loan commitments will be sold to investors upon closing.
Commercial, construction, and home equity loan commitments of approximately
$11.1 million were extended with variable rates averaging 5.95% and $5.1 million
were extended at fixed rates averaging 6.55%. All commitments were due to expire
within approximately 120 days.





Additionally,
at December 31, 2008, the Corporation was committed for approximately $86.9
million of unused lines of credit, consisting of $22.2 million relating to a
home equity line of credit program and an unsecured line of credit program (cash
reserve), $3.7 million relating to an unsecured overdraft protection program,
and $61.0 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.





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 Table of Contents





Commitments
under standby and commercial letters of credit aggregated approximately $3.5
million at December 31, 2008, of which $3.4 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.





Lease
Commitments





Rental
expense under long-term operating leases for branch offices amounted to
approximately $980,000 and $766,000 during the years ended December 31, 2008 and
2007, respectively. At December 31, 2008, 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
                        Rent2009
                      
                      $
                      863,0002010
                      
                      
                      872,0002011
                      
                      
                      860,0002012
                      
                      
                      844,0002013
                      
                      
                      815,000Thereafter
                      
                      
                      3,200,000$
                      7,454,000


Contingencies





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, 2008, the Bank could have paid
dividends totaling approximately $7.4 million. At December 31, 2008, this
restriction did not result in any effective limitation in the manner in which
the Corporation is currently operating.





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 Table of Contents





Note
18. FAIR VALUE OF FINANCIAL INSTRUMENTS





Statement
of Financial Accounting Standard No. 157, “Fair Value Measurements”, establishes
a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:





Level 1:
Quoted prices (unadjusted) or identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.





Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.





Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
and asset or liability.





The fair
values of securities available for sale are determined by matrix pricing, which
is a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2 inputs).





The
Company measures impairment of collateralized loans based on the estimated fair
value of the collateral less estimated costs to sell, incorporating assumptions
that experienced parties might use in estimating the value of such collateral
(Level 3 inputs).





Assets and Liabilities
Measured on a Recurring Basis





Assets
and liabilities measured at fair value on a recurring basis are summarized
below:




Fair Value Measurements at December 31,
      2008
                    UsingDecember 31,
                    2008
                  
                  
                  Quoted Prices
                    in Active
                    Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)Assets:Available
      for sale securities
                  
                  $
                  90,023,000
                  
                  
                  $
                  —
                  
                  
                  $
                  90,023,000
                  
                  
                  $
                  —


Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $4,230,000, with a
valuation allowance of $481,000, resulting in an additional provision for loan
losses of $371,000 for the year ended December 31, 2008.





Assets and Liabilities
Measured on a Non-Recurring Basis





Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:




Fair Value Measurements at December 31,
      2008
                      UsingDecember 31,
                      2008
                    
                    
                    Quoted Prices
                      in Active
                      Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)Assets:Impaired
      loans
                    
                    $
                    4,230,000
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    4,230,000Mortgage
      loans held for sale
                    
                    $
                    394,000
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    394,000


60
 Table of Contents





Fair
value estimates, methods and assumptions are set financial instruments. forth
below, for items not previously presented, for the Corporation’s financial
instruments.





December 31,2008
                      
                      
                      2007Carrying
                        Amount
                      
                      
                      Estimated
                        Fair Value
                      
                      
                      Carrying
                        Amount
                      
                      
                      Estimated
                        Fair Value(Dollars
      in thousands)Financial
      assets:Cash
      and cash equivalents
                      
                      $
                      12,814
                      
                      
                      $
                      12,814
                      
                      
                      $
                      11,932
                      
                      
                      $
                      11,932Securities
      held to maturity
                      
                      
                      48,856
                      
                      
                      
                      49,150
                      
                      
                      
                      41,189
                      
                      
                      
                      41,508FHLB-NY
      stock
                      
                      
                      2,420
                      
                      
                      
                      N/A
                      
                      
                      
                      1,983
                      
                      
                      
                      N/ANet
      loans
                      
                      
                      434,103
                      
                      
                      
                      436,193
                      
                      
                      
                      415,690
                      
                      
                      
                      415,900Accrued
      interest receivable
                      
                      
                      3,371
                      
                      
                      
                      3,371
                      
                      
                      
                      3,112
                      
                      
                      
                      3,112Financial
      liabilities:Deposits
                      
                      
                      506,531
                      
                      
                      
                      508,325
                      
                      
                      
                      472,299
                      
                      
                      
                      473,981Securities
      sold under agreements to repurchase
                      
                      
                      15,160
                      
                      
                      
                      15,160
                      
                      
                      
                      17,283
                      
                      
                      
                      17,283Other
      borrowings
                      
                      
                      36,900
                      
                      
                      
                      34,973
                      
                      
                      
                      28,645
                      
                      
                      
                      28,585Subordinated
      debenture
                      
                      
                      7,217
                      
                      
                      
                      7,399
                      
                      
                      
                      7,217
                      
                      
                      
                      7,430Accrued
      interest payable
                      
                      
                      1,582
                      
                      
                      
                      1,582
                      
                      
                      
                      2,080
                      
                      
                      
                      2,080




61
 Table of Contents





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
held to maturity





All
securities held to maturity are actively traded and have been valued using
quoted market prices.





FHLB-NY
stock





It is not
practicable to determine the fair value of FHLB-NY stock due to restrictions
placed on the transferability of the stock.





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.




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. 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.





Other
borrowings





The
carrying amount of the borrowings which mature in one day approximates fair
value. For the borrowings with a longer maturity, the fair value is based on the
discounted value of cash flows. The discount rate is estimated using market
discount rates which reflect the interest rate risk inherent in the term
borrowings.





Subordinated
debenture





The fair
value of the subordinated debenture is based on the discounted value of the cash
flows. The discounted rate is estimated using market rates which reflect the
interest rate risk inherent in the debenture.





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,
2008 and 2007 were not material.





Limitations





The
preceding fair value estimates were made at December 31, 2008 and 2007, 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 judgements 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
judgement 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, 2008 and 2007, 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.





62
 Table of Contents





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. Condensed financial
statements are presented below:




Condensed
      Statements of Financial Condition
                  
                  December 31,2008
                  
                  
                  2007AssetsCash
      and due from banks
                  
                  $
                  131,000
                  
                  
                  $
                  652,000Securities
      available for sale
                  
                  
                  2,582,000
                  
                  
                  
                  2,574,000Securities
      held to maturity
                  
                  
                  1,992,000
                  
                  
                  
                  1,991,000Investment
      in subsidiary
                  
                  
                  44,833,000
                  
                  
                  
                  42,658,000Accrued
      interest receivable
                  
                  
                  45,000
                  
                  
                  
                  43,000Other
      assets
                  
                  
                  466,000
                  
                  
                  
                  420,000Total
      assets
                  
                  $
                  50,049,000
                  
                  
                  $
                  48,338,000Liabilities
      and Stockholders’ equitySubordinated
      debentures
                  
                  $
                  7,217,000
                  
                  
                  $
                  7,217,000Other
      liabilities
                  
                  
                  36,000
                  
                  
                  
                  31,000Stockholders’
      equity
                  
                  
                  42,796,000
                  
                  
                  
                  41,090,000Total
      liabilities and Stockholders’ equity
                  
                  $
                  50,049,000
                  
                  
                  $
                  48,338,000
   Condensed
      Statements of Income
                  
                  Years ended December 31,2008
                  
                  
                  2007Interest
      income - securities available for sale
                  
                  $
                  126,000
                  
                  
                  $
                  226,000Interest
      income - securities held to maturity
                  
                  
                  110,000
                  
                  
                  
                  13,000Dividend
      income
                  
                  
                  2,100,000
                  
                  
                  
                  2,450,000Other
      income
                  
                  
                  18,000
                  
                  
                  
                  15,000Total
      income
                  
                  
                  2,354,000
                  
                  
                  
                  2,704,000Interest
      expense
                  
                  
                  466,000
                  
                  
                  
                  487,000Other
      expenses
                  
                  
                  216,000
                  
                  
                  
                  220,000Total
      expenses
                  
                  
                  682,000
                  
                  
                  
                  707,000Income
      before income tax benefit
                  
                  
                  1,672,000
                  
                  
                  
                  1,997,000Tax
      benefit
                  
                  
                  (144,000
                  )
                  
                  
                  (153,000
                  )Income
      before equity in undistributed earnings of subsidiary
                  
                  
                  1,816,000
                  
                  
                  
                  2,150,000Equity
      in undistributed earnings of subsidiary
                  
                  
                  1,685,000
                  
                  
                  
                  2,457,000Net
      income
                  
                  $
                  3,501,000
                  
                  
                  $
                  4,607,000


63
 Table of Contents




Condensed
      Statements of Cash Flows
                        
                        Years ended December 31,2008
                        
                        
                        2007Cash
      flows from operating activities:Net
      income
                        
                        $
                        3,501,000
                        
                        
                        $
                        4,607,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Equity
      in undistributed earnings of subsidiary
                        
                        
                        (1,685,000
                        )
                        
                        
                        (2,457,000
                        )Accretion
      of discounts
                        
                        
                        (1,000
                        )
                        
                        
                        —Increase
      in accrued interest receivable
                        
                        
                        (2,000
                        )
                        
                        
                        (3,000
                        )Decrease
      (increase) in other assets
                        
                        
                        (49,000
                        )
                        
                        
                        7,000Increase
      (decrease) in other liabilities
                        
                        
                        3,000
                        
                        
                        
                        (14,000
                        )Net
      cash provided by operating activities
                        
                        
                        1,767,000
                        
                        
                        
                        2,140,000Cash
      flows from investing activities:Purchase
      of securities held to maturity
                        
                        
                        —
                        
                        
                        
                        (1,991,000
                        )Purchase
      of securities available for sale
                        
                        
                        (998,000
                        )
                        
                        
                        (1,562,000
                        )Proceeds
      from sales and calls on securities available for sale
                        
                        
                        1,000,000
                        
                        
                        
                        3,500,000Net
      cash provided by investing (used in) activities
                        
                        
                        2,000
                        
                        
                        
                        (53,000
                        )Cash
      flows from financing activities:Cash
      dividends paid on common stock
                        
                        
                        (1,967,000
                        )
                        
                        
                        (1,816,000
                        )Payment
      of discount on dividend reinvestment plan
                        
                        
                        (45,000
                        )
                        
                        
                        (43,000
                        )Exercise
      of stock options
                        
                        
                        49,000
                        
                        
                        
                        73,000Tax
      benefit of stock plans
                        
                        
                        2,000
                        
                        
                        
                        3,000Purchase
      of treasury stock
                        
                        
                        (370,000
                        )
                        
                        
                        -Issuance
      of common stock
                        
                        
                        41,000
                        
                        
                        
                        42,000Net
      cash used in investing activities
                        
                        
                        (2,290,000
                        )
                        
                        
                        (1,741,000
                        )Net
      (decrease) increase in cash and cash equivalents
                        
                        
                        (521,000
                        )
                        
                        
                        346,000Cash
      and cash equivalents - beginning
                        
                        
                        652,000
                        
                        
                        
                        306,000Cash
      and cash equivalents - ending
                        
                        $
                        131,000
                        
                        
                        $
                        652,000




64
 Table of Contents





NOTE
20. QUARTERLY FINANCIAL DATA (Unaudited)





The
following table contains quarterly financial data for the years ended December
31, 2008 and 2007 (Dollars in thousands).





First
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Fourth
                        Quarter
                      
                      
                      TotalYear
      ended December 31, 2008:Interest
      income
                      
                      $
                      8,657
                      
                      
                      $
                      8,710
                      
                      
                      $
                      8,910
                      
                      
                      $
                      8,797
                      
                      
                      $
                      35,074Interest
      expense
                      
                      
                      3,495
                      
                      
                      
                      3,154
                      
                      
                      
                      3,100
                      
                      
                      
                      3,022
                      
                      
                      
                      12,771Net
      interest income before provision for loan losses
                      
                      
                      5,162
                      
                      
                      
                      5,556
                      
                      
                      
                      5,810
                      
                      
                      
                      5,775
                      
                      
                      
                      22,303Provision
      for loan losses (a)
                      
                      
                      100
                      
                      
                      
                      260
                      
                      
                      
                      1,175
                      
                      
                      
                      2,050
                      
                      
                      
                      3,585Net
      interest income after provision for loan losses
                      
                      
                      5,062
                      
                      
                      
                      5,296
                      
                      
                      
                      4,635
                      
                      
                      
                      3,725
                      
                      
                      
                      18,718Noninterest
      income (b)
                      
                      
                      976
                      
                      
                      
                      1,017
                      
                      
                      
                      894
                      
                      
                      
                      1,330
                      
                      
                      
                      4,217Noninterest
      expenses
                      
                      
                      4,479
                      
                      
                      
                      4,562
                      
                      
                      
                      4,362
                      
                      
                      
                      4,583
                      
                      
                      
                      17,986Income
      before income tax expense
                      
                      
                      1,559
                      
                      
                      
                      1,751
                      
                      
                      
                      1,167
                      
                      
                      
                      472
                      
                      
                      
                      4,949Income
      tax expense
                      
                      
                      498
                      
                      
                      
                      572
                      
                      
                      
                      329
                      
                      
                      
                      49
                      
                      
                      
                      1,448Net
      income
                      
                      $
                      1,061
                      
                      
                      $
                      1,179
                      
                      
                      $
                      838
                      
                      
                      $
                      423
                      
                      
                      $
                      3,501Basic
      earnings per share
                      
                      $
                      0.19
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.08
                      
                      
                      $
                      0.63Diluted
      earnings per share
                      
                      $
                      0.19
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.08
                      
                      
                      $
                      0.63






First
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Fourth
                        Quarter
                      
                      
                      TotalYear
      ended December 31, 2007:Interest
      income
                      
                      $
                      7,932
                      
                      
                      $
                      8,117
                      
                      
                      $
                      8,526
                      
                      
                      $
                      8,735
                      
                      
                      $
                      33,310Interest
      expense
                      
                      
                      3,259
                      
                      
                      
                      3,315
                      
                      
                      
                      3,614
                      
                      
                      
                      3,692
                      
                      
                      
                      13,880Net
      interest income before provision for loan losses
                      
                      
                      4,673
                      
                      
                      
                      4,802
                      
                      
                      
                      4,912
                      
                      
                      
                      5,043
                      
                      
                      
                      19,430Provision
      for loan losses
                      
                      
                      10
                      
                      
                      
                      180
                      
                      
                      
                      90
                      
                      
                      
                      250
                      
                      
                      
                      530Net
      interest income after provision for loan losses
                      
                      
                      4,663
                      
                      
                      
                      4,622
                      
                      
                      
                      4,822
                      
                      
                      
                      4,793
                      
                      
                      
                      18,900Noninterest
      income (c)
                      
                      
                      996
                      
                      
                      
                      1,506
                      
                      
                      
                      915
                      
                      
                      
                      997
                      
                      
                      
                      4,414Noninterest
      expense
                      
                      
                      3,995
                      
                      
                      
                      4,182
                      
                      
                      
                      3,873
                      
                      
                      
                      4,579
                      
                      
                      
                      16,629Income
      before income tax expense
                      
                      
                      1,664
                      
                      
                      
                      1,946
                      
                      
                      
                      1,864
                      
                      
                      
                      1,211
                      
                      
                      
                      6,685Income
      tax expense
                      
                      
                      578
                      
                      
                      
                      492
                      
                      
                      
                      635
                      
                      
                      
                      373
                      
                      
                      
                      2,078Net
      income
                      
                      $
                      1,086
                      
                      
                      $
                      1,454
                      
                      
                      $
                      1,229
                      
                      
                      $
                      838
                      
                      
                      $
                      4,607Basic
      earnings per share
                      
                      $
                      0.20
                      
                      
                      $
                      0.26
                      
                      
                      $
                      0.22
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.83Diluted
      earnings per share
                      
                      $
                      0.19
                      
                      
                      $
                      0.26
                      
                      
                      $
                      0.22
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.82




(a)
            Third
      Quarter and Fourth Quarter of 2008 includes increased provision for loan
      losses primarily related to a group of loans to one
    borrower.


(b)
            Fourth
      Quarter of 2008 amount includes a gain on sale of the merchant
      portfolio.


(c)
            Second Quarter
      of 2007 amount includes a gain on life insurance
  proceeds.





65
 Table of Contents




NOTE
21. SUBSEQUENT EVENTS





On
January 30, 2009, the Corporation received $10 million as part of the United
States Treasury Department’s Troubled Asset Relief Program — Capital Purchase
Program. In exchange, the Corporation issued 10,000 Senior Preferred Shares and
127,119 warrants to purchase common stock. The senior preferred shares pay a
cumulative dividend of 5% per annum for the first five years and 9% per annum
thereafter. The Corporation may repay the funds provided under Troubled Asset
Relief Program — Capital Purchase
Program without regard to whether the Corporation has replaced such funds from
any other source or to any waiting period. The warrants to purchase 127,119 in
common shares have an exercise price of $11.80 per share. Until the earlier of
the third anniversary of the Treasury’s investment in the Corporation’s Series A
Preferred Stock or when all of the shares of Series A Preferred Stock have been
redeemed by the Corporation or transferred by the Treasury to third parties, the
Corporation may not, without the consent of the Treasury, increase the common
stock cash dividend.





66
 Table of Contents





Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure





None.





Item 9A. Controls and Procedures





(a)
            Evaluation
      of internal controls and procedures





Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-K, our principal executive officer and principal financial officer have
concluded that our internal controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange
Act”)) are effective to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms.





(b)
            Management’s
      Report on Internal Control over Financial
  Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Exchange
Act. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and can only provide
reasonable assurance with respect to financial statement preparation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.





We
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, we used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in Internal Control—Integrated Framework. Based on our assessment using those
criteria, our management (including our Chief Executive Officer and Principal
Accounting Officer) concluded that our internal control over financial reporting
was effective as of December 31, 2008.





This
Annual Report on Form 10-K does not include an attestation report of the
Corporation’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Corporation’s registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Corporation to provide
only management’s report in this Annual Report on Form 10-K.





(c)
            Changes
      in internal controls





There
were no significant changes in our internal control over financial reporting or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses during the quarter ended
December 31, 2008 that have materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





Item 9B. Other Information





None.





Part
III





Item 10. Directors, Executive Officers and Corporate
Governance





Information
concerning directors and executive officers contained under the captions
“Election of Directors” and “Compliance with Section 16(a) Beneficial Ownership
Reporting,” in the Proxy Statement for the Corporation’s 2009 Annual Meeting of
Shareholders is incorporated herein by reference.





67
 Table of Contents





Code
of Ethics





The
Corporation has adopted a Code of Ethical Conduct for Senior Financial Managers
that applies to its principal executive officer, principal financial officer,
principal accounting officer, controller and any other person performing similar
functions. The Corporation’s Code of Ethical Conduct for Senior Financial
Managers is posted on its website, www.asbnow.com. The
Corporation intends to satisfy the disclosure requirement under Item 5.05 of
Form 8-K regarding an amendment to, or waiver from, a provision of its Code of
Ethical Conduct for Senior Financial Managers by filing an 8-K and by posting
such information on its website.





Audit
Committee and Audit Committee Financial Expert





The
members of our audit committee as of December 31, 2008 were Howard Yeaton
(Chairman), Harold Dyer, John L. Steen and Michael Westra. The Audit Committee
determined that Howard Yeaton and Michael Westra were “audit committee financial
experts” as defined by the Securities and Exchange Commission. All members of
our audit committee are “independent” as defined under Rule 6320A of FINRA’s
listing standards.





Item 11. Executive Compensation





Information
concerning executive compensation under the caption “Executive Compensation” in
the Proxy Statement for the Corporation’s 2009 Annual Meeting of Shareholders is
incorporated herein by reference.





Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters





The
following table provides information with respect to the equity securities that
are authorized for issuance under our compensation plans as of December 31,
2008:





Equity
Compensation Plan Information





Number of
                    securities to be
                    issued upon
                    exercise of
                    outstanding
                    options, warrants
                    and rights (a)
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding options,
                    warrants and rights
                    (b)
                  
                  
                  Number of
                    securities
                    remaining
                    available for
                    future issuance
                    under equity
                    compensation
                    plans (excluding
                    securities
                    reflected in
                    column (a))
                    (c)Equity
      compensation plans approved by security holders
                  
                  
                  85,286
                  
                  
                  $
                  10.51
                  
                  
                  
                  261,549Equity
      compensation plans not approved by security holders
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  626,921Total
                  
                  
                  85,286
                  
                  
                  $
                  10.51
                  
                  
                  
                  888,470


The
equity compensation plans not approved by security holders are the Stock Bonus
Plan and the Directors Stock Plan. The 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. The Corporation has not granted shares under this plan
since 1998. The Director Stock Plan permits members of the Board of Directors to
receive any monthly Board of Directors’ fees in shares of the Corporation’s
common stock, rather than in cash. The Corporation purchased 6,607 shares in the
open market during 2008 for the benefit of the Director Stock Plan.





Information
concerning security ownership of certain beneficial owners and management under
the caption “Stock Ownership of Management and Principal Shareholders,” in the
Proxy Statement for the Corporation’s 2009 Annual Meeting of Shareholders is
incorporated herein by reference.





68
 Table of Contents





Item 13. Certain Relationships and Related Transactions, and
Director Independence





Information
concerning certain relationships and related transactions under the captions
“Election of Directors” and “Certain Relationships and Related Transactions,” in
the Proxy Statement for the Corporation’s 2009 Annual Meeting of Shareholders is
incorporated herein by reference.





Item 14. Principal Accountant Fees and Services





Information
concerning principal accountant fees and services under the caption “Fees Billed
by Accountants During Fiscal 2008 and Fiscal 2007,” in the Proxy Statement for
the Corporation’s 2009 Annual Meeting of Shareholders is incorporated herein by
reference.





Part
IV





Item 15. Exhibits and Financial Statement
Schedules





(a)
Exhibits





Exhibit


Number
            Description of
      Exhibits


3(i).1
            Certificate
      of Incorporation of Stewardship Financial Corporation
  (1)


3(i).2
            Certificate
      of Amendment to Certificate of Incorporation of Stewardship Financial
      Corporation (2)


3(i).3
            Certificate
      of Amendment to Certificate of Incorporation of Stewardship Financial
      Corporation(3)


3(i).4
            Certificate
      of Amendment to Certificate of Incorporation of Stewardship Financial
      Corporation(4)


3(i).5
            Certificate
      of Amendment to Certificate of Incorporation of Stewardship Financial
      Corporation(5)


3(i).6
            Certificate
      of Amendment to Certificate of Incorporation of Stewardship Financial
      Corporation containing the terms of the Corporation’s Fixed Rate
      Cumulative Perpetual Preferred Stock, Series A
  (6)


3(ii)
            Bylaws
      of Stewardship Financial Corporation
(7)


4(i)
            Form
      of Certificate for the Series A Preferred Shares
  (8)


4(ii)
            Warrant
      to Purchase up to 127,119 Shares of Common Stock
  (9)


10(i)
            1995
      Incentive Stock Option Plan (10)


10(ii)
            1995
      Stock Option Plan for Non-Employee Directors
  (11)


10(iii)
            1995
      Employee Stock Purchase Plan (12)


10
      (iv)
            Stock
      Bonus Plan (12)


10
      (v)
            Stewardship
      Financial Corporation Dividend Reinvestment Plan
  (13)


10
      (vi)
            Stewardship
      Financial Corporation Director Stock Plan
(14)


10(vii)
            Amended
      and Restated 1995 Stock Option Plan
(15)


10(viii)
            Amended
      and Restated Director Stock Plan
(15)


10(ix)
            Dividend
      Reinvestment Plan (16)


10(x)
            2001
      Stock Option Plan For Non-Employee Directors
  (17)


10(xi)
            Dividend
      Reinvestment Plan (18)


10(xii)
            2006
      Stock Option Plan for Non-Employee Directors
  (19)


10(xiii)
            Letter
      Agreement, dated January 30, 2009, including Securities Purchase Agreement
      – Standard Terms incorporated by reference therein, between Stewardship
      Financial Corporation and the Treasury
(20)


10(xiv)
            Form
      of Waiver, executed by each of Paul Van Ostenbridge, Claire M. Chadwick,
      Julie E. Holland and Robert C. Vliet
(21)


13
            Annual
      Report to Shareholders for the year ended December 31,
  2008





21
            Subsidiaries
      of the Registrant


23
            Consent
      of Crowe Horwath LLP


31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.


31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.


32.1
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.





69
 Table of Contents






(1)
            Incorporated
      by reference from Exhibit 3(i) to the Corporation’s Registration Statement
      on Form 8-B, Registration No. 0-21855, filed December 10,
      1996.


(2)
            Incorporated
      by reference from Exhibit 3(ii) to the Corporation’s Registration
      Statement on Form 8-B, Registration No. 0-21855, filed on December 10,
      1996.


(3)
            Incorporated
      by reference from Exhibit A to the Corporation’s Definitive Proxy
      Statement on Schedule 14A, filed on April 18,
  1997.


(4)
            Incorporated
      by reference from Appendix A to the Corporation’s Definitive Proxy
      Statement on Schedule 14A, filed on April 10,
  2002.


(5)
            Incorporated
      by reference from Exhibit D to the Corporation’s Definitive Proxy
      Statement on Schedule 14A, filed on April 8,
  2004.


(6)
            Incorporated
      by reference from Exhibit 3.1 to the Corporation’s Current Report on Form
      8-K, filed on February 4, 2009.


(7)
            Incorporated
      by reference to the Corporation’s Registration Statement on Form 8-B,
      Registration No. 0-21855, filed on December 10,
  1996.


(8)
            Incorporated
      by reference from Exhibit 4.1 to the Corporation’s Current Report on Form
      8-K, filed February 4, 2009.


(9)
            Incorporated
      by reference from Exhibit 4.2 to the Corporation’s Current Report on Form
      8-K, filed February 4, 2009.


(10)
            Incorporated
      by reference from Exhibit 5(B)(10)(a) to the Corporation’s Registration
      Statement on Form 8-B, Registration No. 0­21855, filed December 10,
      1996.


(11)
            Incorporated
      by reference from Exhibit 5(B)(10)(b) to the Corporation’s Registration
      Statement on Form 8-B, Registration No. 0­21855, filed December 10,
      1996.


(12)
            Incorporated
      by reference from Exhibits 4(c) to 23(d) from the Corporation’s
      Registration Statement on Form S-8, Registration No. 333-20793, filed
      January 31, 1997.


(13)
            Incorporated
      by reference from Exhibit 4(a) from the Corporation’s Registration
      Statement on Form S-3, Registration No. 333-20699, filed January 30,
      1997.


(14)
            Incorporated
      by reference from Exhibit 4(a) from the Corporation’s Registration
      Statement on Form S-8, Registration No. 333-31245, filed July 11,
      1997.


(15)
            Incorporated
      by reference from Exhibits 10(vii) and 10(viii) from the Corporation’s
      Annual Report on Form 10-KSB, filed March 31,
  1999.


(16)
            Incorporated
      by reference from Exhibit 4(a) from the Corporation’s Registration
      Statement on Form S-3, Registration No. 333-54738, filed January 31,
      2001.


(17)
            Incorporated
      by reference from Exhibit 4(b) from the Corporation’s Registration
      Statement on Form S-8, Registration No. 333-87842, filed May 8,
      2002.


(18)
            Incorporated
      by reference from Exhibit 4(a) from the Corporation’s Registration
      Statement on Form S-3, Registration No. 333­133632, filed April 28,
      2006.


(19)
            Incorporated
      by reference from Exhibit 5(a) from the Corporation’s Registration
      Statement on Form S-8, Registration No. 333­135462, filed June 29,
      2006.


(20)
            Incorporated
      by reference from Exhibit 10.1 to the Corporation’s Current Report on Form
      8-K, filed February 4, 2009.


(21)
            Incorporated
      by reference from Exhibit 10.2 to the Corporation’s Current Report on Form
      8-K, filed February 4, 2009.





70
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.














STEWARDSHIP
      FINANCIAL CORPORATIONBy
      :
                /s/ Paul Van OstenbridgePaul
      Van OstenbridgeDated: March 31,
      2009
                
                Chief
      Executive Officer and
Director








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.








Name
                
                Title
                
                Date/s/ Paul Van Ostenbridge
                
                Chief
      Executive Officer
                
                March
      31, 2009Paul
      Van Ostenbridge
                
                and
      Director(Principal
      Executive Officer)/s/ Claire M. Chadwick
                
                Chief
      Financial Officer
                
                March
      31, 2009Claire
      M. Chadwick
                
                (Principal
      Financial Officer andPrincipal
      Accounting Officer)/s/ Harold Dyer
                
                Director
                
                March
      31, 2009Harold
      Dyer/s/
      William Hanse
                
                Chairman
      of the Board
                
                March
      31, 2009William
      Hanse/s/ Margo Lane
                
                Director
                
                March
      31, 2009Margo
      Lane/s/ Arie Leegwater
                
                Director
                
                March
      31, 2009Arie
      Leegwater/s/ John L. Steen
                
                Director
                
                March
      31, 2009John
      L. Steen/s/ Robert Turner
                
                Secretary
      and Director
                
                March
      31, 2009Robert
      Turner/s/ William J. VanderEems
                
                Director
                
                March
      31, 2009William
      J. VanderEems/s/ Abe Van Wingerden
                
                Vice
      Chairman of the Board
                
                March
      31, 2009Abe
      Van Wingerden/s/ Michael Westra
                
                Director
                
                March
      31, 2009Michael
      Westra/s/ Howard Yeaton
                
                Director
                
                March
      31, 2009Howard
      Yeaton