FINANCIAL
      HIGHLIGHTS
 
 2007
                
                
                2006
                
                
                %
      CHANGEFOR
      THE YEAR ENDED DECEMBER 31
                
                (Dollars
      in thousands, except per share amounts)Net
      income
                
                $
                4,607
                
                
                $
                4,753
                
                
                
                -3.1
                %Average
      shares outstanding
                
                
                5,294
                
                
                
                5,272
                
                
                
                0.4
                %Per
      common shareBasic
      net income
                
                
                0.87
                
                
                
                0.90
                
                
                
                -3.3
                %Diluted
      net income
                
                
                0.87
                
                
                
                0.89
                
                
                
                -2.2
                %Cash
      dividends declared
                
                
                0.34
                
                
                
                0.29
                
                
                
                17.2
                %Book
      value at year end
                
                
                7.74
                
                
                
                7.08
                
                
                
                9.3
                %BALANCE
      SHEET DATA AT DECEMBER 31Total
      assets
                
                
                571,905
                
                
                
                519,749
                
                
                
                10.0
                %Total
      gross loans
                
                
                420,147
                
                
                
                369,544
                
                
                
                13.7
                %Allowance
      for loan losses
                
                
                4,457
                
                
                
                4,101
                
                
                
                8.7
                %Total
      deposits
                
                
                472,299
                
                
                
                434,223
                
                
                
                8.8
                %Stockholders’
      equity
                
                
                41,090
                
                
                
                37,306
                
                
                
                10.1
                %CONSOLIDATED
      RATIOSReturn
      on average assets
                
                
                0.86
                %
                
                
                0.96
                %
                
                
                -10.4
                %Return
      on average equity
                
                
                11.76
                %
                
                
                13.41
                %
                
                
                -12.3
                %Tier
      1 capital to average assets (leverage)
                
                
                8.56
                %
                
                
                8.85
                %
                
                
                -3.3
                %Tier
      1 capital to risk-adjusted assets
                
                
                10.76
                %
                
                
                11.25
                %
                
                
                -4.4
                %Total
      capital to risk-adjusted assets
                
                
                11.77
                %
                
                
                12.28
                %
                
                
                -4.2
                %
 
 All
share data has been restated to include the effects of 5% stock dividends issued
November, 2006 and November, 2007.
 
 
 
 
 2 0
      0 7 A N N U A L R E P O R T – N E W H O R I Z O N
  S
 2
 
 BOARD
      OF DIRECTORS
 
 STEWARDSHIP
FINANCIAL CORPORATION AND ATLANTIC STEWARDSHIP BANK
 
 William
      C. Hanse, Esq., Chairman
                John
      L. Steen
                Abe
      Van Wingerden, Vice ChairmanPartner,
      Hanse & Hanse
                President,
      Steen Sales, Inc.
                President,
      Abe Van Wingerden Co., Inc.President,
      Dutch Valley Throwing Co., Inc.
                T/A
      Van Wingerden Farm sHarold
      DyerRetired
                Robert
      J. Turner, Secretary
                Michael
      A. Westra, CPARetired
                General
      Manager, Wayne Tile CompanyMargo
      Lane
                William
      J. Vander Eems
                Howard
      R. Yeaton, CPASales
      and Market Coordinator,
                President,
      William Vander Eems, Inc.
                Managing
      Principal,PBI-Dansensor
      America, Inc.
                
                Financial
      Consulting StrategiesPaul
      Van OstenbridgeArie
      Leegwater
                President
      and Chief Executive Officer,Retired
                Stewardship
      Financial Corporation andAtlantic
      Stewardship Bank
 
 
 
 Standing
left to right: Michael A. Westra, CPA; William J. Vander Eems; John L. Steen;
Howard R. Yeaton, CPA; Abe Van Wingerden; Arie Leegwater; Margo Lane. Seated
left to right: Paul Van Ostenbridge; William C. Hanse, Esq.; Harold Dyer; Robert
J. Turner.
 
 
 S T
      E W A R D S H I P F I N A N C I A L C O R P O R A T I O N A N D S U B S I
      D I A R Y
 3
 
 SFC
      JOINS THE NASDAQ
 STEWARDSHIP FINANCIAL
CORPORATION BEGINS TRADING ON NASDAQ CAPITAL MARKET
 On
      March 28, 2007, Stewardship Financial Corporation embarked upon a new
      horizon of another kind when its common stock began trading on the NASDAQ
      Capital Market under the symbol SSFN. We are delighted to reach this
      milestone in our history and believe that the NASDAQ Capital Market will
      provide more recognition and visibility for Stewardship Financial
      Corporation within the investment community. We look forward to increasing
      liquidity in our stock and thus enhancing value for our
      shareholders.Later
      in the year, on August 20, 2007, Paul Van Ostenbridge, Chief Executive
      Officer of Stewardship Financial Corporation presided over the NASDAQ
      Closing Bell Ceremony. To mark the occasion, the Stewardship Financial
      Corp-oration Board of Directors and members of the Atlantic Steward-ship
      Bank management team as well as several of the Bank’s found-ing fathers
      attended the ceremony which was broadcast live from the NASDAQ Marketsite
      in New York’s Times Square.
                
                Paul
      Van Ostenbridge, CEO, Stewardship Financial Corporation and Atlantic
      Stewardship Bank, (center), rings the NASDAQ Closing Bell.“We
      are deeply touched to receive your generous donation both for the gift
      itself but even more by the spirit behind it. Philanthropy is always more
      than welcome, but this displays a nobility of spirit that is unique. Thank
      you so very much.
                  
                  On
      behalf of ourselves, but even more on behalf of the many who will benefit
      from your generosity, thank you very much indeed.”
                  
                  Ralph
      Spencer,
                  Executive
      Director
                  Community
      Blood Services Foundation, Oradell, NJ
 
 
 NEW
      BUSINESS DEVELOPMENT BOARDS
 
 BERGEN
      BOARD
                James
      D. Vaughan III, Esq.
                PASSAIC
      BOARD
                SPECIALAPPRECIATIONJanyce
      Bandstra
                David
      Visbeen
                Vince
      Brosnan
                We
      extend a heartfelt thank you to our friends and associates who
      successfully completed their terms as members of the Bank’s New Business
      Development Boards: Ruth Knyfd, Edward Nieuwenhuis, Jr., MD, and Benard W.
      Thomas, Jr. We greatly appreciate all of their efforts in promoting the
      Bank within the community and look forward to their continued
      support.Richard
      Barclay
                MORRIS
      BOARD
                Ernest
      P. DeMarco, CPAMark
      Borst Richard J.
                Andreas
      Comodromos,
                Shanti
      JostBrady,
      Esq. Douglas
                CPA
      Antonia Daughtry
                Ruth
      KuderBushoven,
      CPA
                David
      De Vries
                Wayne
      R. KuikenWilliam
      R. Cook
                Robert
      E. Fazekas
                William
      A. Monaghan III, Esq.Paul
      D. Heerema
                Gregory
      A. Golden
                Mark
      D. Reitsma, CFP.Bartel
      Leegwater
                Brian
      W. Hanse, Esq., CPA
                Darryl
      Siss, EsqPaul
      Ruitenberg
                Garrett
      A. Hoogerhyde, CPA
                Clifford
      Vander MayJohn
      Scoccola
                Vernon
      Kuiken
                Steve
      Van Der StadRoger
      Steiginga
                Edward
      Ramirez
                Charles
      VerhoogAllen
      Stiles
                Anita
      Van Wingerden
                Ralph
      Wiegers
 
 
 2 0
      0 7 A N N U A L R E P O R T – N E W H O R I Z O N
  S
 4
 
 MESSAGE
      TO THE SHAREHOLDERS
 
 DEAR
SHAREHOLDERS AND FRIENDS
  As we
reflect upon 2007, it was a year of New Horizons for Stewardship Financial
Corporation and the Atlantic Stewardship Bank. The Corporation embarked upon
many new endeavors, the most notable of which was its entry into the NASDAQ
Capital Market. In early March of 2007, Stewardship Financial Corporation was
approved to list its common stock shares on the NASDAQ Capital Market and on
March 28, 2007 the stock began trading under the symbol SSFN. Listing on NASDAQ
has pro-vided Stewardship Financial Corporation and the Atlantic Stewardship
Bank more recognition and visibility in the investment community. As a result,
Stewardship Financial Corporation was invited to preside over the NASDAQ Closing
Bell Ceremony on August 20, 2007. The ceremony was broadcast live from the
NASDAQ Marketsite in New York’s Times Square.
  New
Horizons were also realized as the Bank’s branch network expanded into three new
locations, each providing a unique opportu-nity. In April, we opened our
eleventh branch at 378 Franklin Avenue in Wyckoff, NJ. The branch, a new
structure, built from the ground up, compliments the local architecture. We were
well received by Wyckoff residents, attracting over $13 million in deposits as
of Decem-ber 31, 2007. In September, the Bank ventured into a totally new
ter-ritory, when we opened our twelfth branch in the town of Westwood. Located
at the busy intersection of Kinderkamack Road and Jefferson Avenue, this branch
gives us the chance to acquaint Westwood and the surrounding communities with
the ASB brand of customer serv-ice. In December, we made our long awaited entry
into North Hale-don, opening our thirteenth branch at 33 Sicomac Road. This
location will bridge the gap between our Midland Park and Wayne locations
allowing us to conveniently serve new, as well as, existing North Hale-don
customers. Each new branch is full service offering drive-up bank-ing, an ATM,
safe deposit boxes, a coin counting machine and a night drop.
  
  Pictured
from left to right: Edward Nieuwenhuis, Jr., MD, Atlantic Stewardship Bank
Business Development Board Member; Raymond Santhouse, Midland Park Branch
Manager; Jayne Press, Eastern Christian Children’s Retreat Executive Director;
Darryl Siss, Esq., Eastern Christian Children’s Retreat Board
Member.
  Investments
for the future will bring the Bank to the next level. We have strengthened our
Business Development Team with seasoned professionals to assist us in
penetrating the commercial market as well as cultivating business in new
territories on the horizon.
  In 2007,
we introduced several new products and services each designed to fill a specific
banking need. Our Genesis Account created especially for churches and 501 (c)
(3) non-profit organizations reinforces our mission to serve as well as to tithe
or give back to the community. When an organization invests its funds in the
Genesis Account, it not only earns a competitive rate of return, it also helps
build the pool of funds available to be tithed.
  On the
lending side, the Bank introduced the Quick Write Line of Credit. Designed
especially for small business owners, the Quick Write Line of Credit features
smaller loan amounts than our traditional Write Line of Credit, an attractive
introductory rate, a three-year term and quick turn around time. For northern
New Jersey homeowners look-ing for a readily available source of funds, we
introduced a Fixed Rate Home Equity Line of Credit loan. The product offers the
security of a fixed rate and the flexibility of a credit line. Features such as
interest only payments for the first five years, no application fee, and
inter-est charged only on the amount borrowed make this loan attractive.
  Our new
core computer system allowed us to reach yet another new horizon, real time
processing. This provides real time access to account information, both online
and through telephone banking. Transac-tions processed at the teller line or an
ATM are posted to customer’s accounts as soon as they are made and reflected
immediately online and through telephone banking.
   S T
      E W A R D S H I P F I N A N C I A L C O R P O R A T I O N A N D S U B S I
      D I A R Y  5
  2007 was
a tumultuous year for the financial services industry as a whole. With the
falling interest rate environment as well as other challenges continuing to
place pressure on interest rate margins many financial institu-tions struggled
to realize a profit. Steward-ship Financial Corporation and its subsidiary
Atlantic Stewardship Bank is pleased to report that despite an initial impact on
earnings we were still able to post a strong return on assets (ROA). The Return
on Average Assets was 0.86% and the Return on Average Equity was 11.76% for the
year ending December 31, 2007. Earnings per diluted share for the year-ended
2007 was $0.87.
  
  Pictured
from left to right: Amanda Bialy, Ridgewood Branch Manager; Monica Roers, YWCA
Director; Diane Ingrassia, Hawthorne Branch Manager.
  Stewardship Financial Corporation’s
total assets reached $571.9 million at December 31, 2007, compared to $519.7
million at December 31, 2006, for growth of 10.0%. Total loans increased $50.6
million, or 13.7% from $369.5 million at December 31, 2006 to $420.1 million at
December 31, 2007. Total deposits were $472.3 million at December 31, 2007,
compared to $434.2 million a year ago, for an increase of 8.8%. Total
stockhold-ers’ equity increased 10.1% to $41.1 million at December 31, 2007,
compared to $37.3 million a year ago
  “Your
      gift to Bethany Christian Services sustains many vital ministries, such as
      our Pregnancy Counseling Services, which:
                    
                    §Provide free
      counseling to men and women experiencing an unplanned
      pregnancy.
                    
                    §Give expectant
      parents information about all of their options, including the pro-life
      option of adoption.
                    
                    §Assist
      birthparents before, during and after the placement of their children into
      loving adoptive homes.
                    
                    On
      behalf of the thousands of individuals and families who have benefited
      from our Pregnancy Counseling Services, we thank you for your commitment
      to unborn children.” Nancy Dykstra-Powers Branch Director Bethany
      Christian Services Fair Lawn, NJ
 We
continue to experience strong growth in our commercial and commercial real
estate lending markets and are pleased to report that the Corporation is not
involved in the sub prime mortgage market. Asset quality remains strong and the
increases in the loan loss reserve directly correlate to the increase in loans.
The management team recognizes that 2008 will also be challenging for community
banks. The 2007 investment in business sales and service associates will enhance
the Corporation’s earnings in the upcoming year and we are confident the new
branches will positively impact earnings in future years.
  In 2007,
the Atlantic Stewardship Bank’s Tithing Program continued to expand its horizons
giving $705,000 to more than 400 deserving organizations. Since the program’s
inception, $5,735,000 in donations have been shared with local food banks as
well as Chris-tian missions, schools, and health care facil-ities. The Bank
recognizes the importance of local civic and non-profit organizations by
supporting them with donations as well.
  In
closing we wish to thank our growing base of customers, for it is your funds on
deposit at the end of the day that contribute to our ability to tithe and enable
us to continue to give back to the community. Our success is made possible by
the hard work and dedica-tion of all Bank associates, at every level of the
organization. We are grateful to our shareholders for their loyal support of the
Bank and its mission. Finally, we are most thankful to our Lord, Jesus Christ,
who continues to guide us.
  /s/ William
      C. Hanse, Esq.
                /s/
      Paul Van OstenbridgeWilliam
      C. Hanse, Esq.
                Paul
      Van OstenbridgeChairman
      of the Board of Directors
                President
      and Chief Executive Officer
 
  2 0
      0 7 A N N U A L R E P O R T – N E W H O R I Z O N
  S
 6
 
 SHAREHOLDER
      INFORMATION
 
 The
Annual Shareholders’ Meeting for the Stewardship Financial Corporation will be
held at the Christian Health Care Center, 301 Sicomac Avenue, Wyckoff, New
Jersey, on Tuesday, May 13, 2008, at 7:00 PM (please use the Mountain Avenue
entrance). The Corporation had 994 Shareholders of Record on December 31,
2007.
  Registrar
and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016, is the
transfer agent for Stewardship Financial Corporation common stock. We invite you
to contact them at 800-368-5948 should you wish to transfer stock or to join the
Dividend Reinvestment Plan.
  DIVIDEND
REINVESTMENT PLAN
  A total
of 756 Shareholders currently par-ticipate in the Corporation’s Shareholder
Div-idend Reinvestment Plan, representing 1,850,000 or 34.8% of all shares
outstanding. Plan participants reinvest cash dividends to purchase new shares of
stock at 95% of the market value, based on the most recent trades. Shareholders
interested in joining the Dividend Reinvestment Plan may request a Plan
Membership Form from the Registrar and Transfer Company.
  ANNUAL
REPORT
  Stewardship
Financial Corporation will pro-vide a copy of the Annual Report on Form 10K,
free of charge to any shareholder upon written request, including the financial
statements and schedules which have been filed with the Securities and Exchange
Commission. Requests should be addressed to Stewardship Financial Corporation,
Attn: Corporate Services, 630 Godwin Avenue, Midland Park, NJ 07432-1405.
  CORPORATE
GOVERNANCE
  The Board
of Directors’ Audit, Nominating and Compensation Committee Charters; as well as
the Code of Ethical Conduct for Senior Financial Managers, are available for
viewing at www.asbnow.com. Visit the “Home” page and refer to “Investor
Relations” section. The above-mentioned information is also avail-able in print
to shareholders requesting the same in writing.
  “It
      is a pleasure to thank you for your recent contribution to our school. We
      appreciate your continued generosity and commitment to
      Calvary Christian Academy. Your interest and support of
      Christian education is to be commended.
                  
                  May
      God bless you with eternal rewards for blessing our school and making a
      difference in the lives of our student body. It is a privilege and an
      honor to do business with a company of such high character and Godly
      principles. Thanks again!”
                  
                  Thomas
      T. McGann, M.Ed.
                  Principal Calvary Christian Academy
                  Wayne,
      NJ
 
 RECENT
HISTORY OF DIVIDENDS PAID
  The Board
of Directors of the Stewardship Financial Corporation is pleased to pay, on
February 1, 2008, a quarterly dividend to Shareholders of Record on January 15,
2008, in the amount of $0.09. Future dividends are expected to be paid on May 1,
August 1, and November 1, subject to Board approval.
  November
      15, 2007
                
                5%
      stock dividendNovember
      1, 2007
                
                $
                0.09August
      1, 2007
                
                $
                0.09May
      1, 2007
                
                $
                0.08February
      1, 2007
                
                $
                0.08November
      15, 2006
                
                5%
      stock dividendNovember
      1, 2006
                
                $
                0.08August
      1, 2006
                
                $
                0.07May
      1, 2006
                
                $
                0.07February
      1, 2006
                
                $
                0.07
 
 
 
 
 S T
      E W A R D S H I P F I N A N C I A L C O R P O R A T I O N A N D S U B S I
      D I A R Y
 7
 
 OUR
      2007 TITHING PROGRAM
 
 EACH ONE
SHOULD USE WHATEVER GIFT HE HAS RECEIVED TO SERVE OTHERS, FAITHFULLY
ADMINISTERING GOD’S GRACE IN ITS VARIOUS FORMS.
  1 PETER
4:10
  
 What
      makes Atlantic Stewardship Bank unique is the fact that every year the
      Bank gives away 10% of its pre-tax earnings. The Bank was founded on the
      Biblical Old Testament tenet of tithing or giving back one tenth to God.
      Each year, Atlantic Stewardship Bank tithes, or shares ten percent of its
      pre-tax earnings with Christian and local non-profit organizations
      selected by the Board of Directors. The original founders of the Bank were
      so deeply committed to this concept, that the Tithing Program defines our
      mission and is part of our corporate-by-laws.
                  
                  In
      2007, the Bank’s tithe was $705,000 enabling it to share with over 400
      recipients. Since the program’s inception, Atlantic Stewardship Bank has
      distributed $5,735,000 in total tithe donations.
                  
                  We
      thank God for His continued blessings which allow us to reach new horizons
      each year, and for our ever-growing loyal customer base.Pictured
      from left to right: Richard Densel, Midland Park Assistant Branch Manager;
      Douglas Prol, Trinity Christian School Principal; Judi Rothwell, Montville
      Branch Manager.“On
      behalf of everyone at the Center for Food Action, we want to express our
      appreciation for your generous donation which will enable the staff and
      volunteers at our pantries in Englewood, Mahwah, Hackensack, Elmwood Park,
      Carlstadt, Palisades Park, Ringwood and Fairview to continue to offer
      a helping hand to those whose lives are in crisis.
                  
                  Residents
      from 65 towns in Bergen County, 21 towns in Passaic County and
      several towns in Morris County turned to CFA, and thanks to the
      generosity of donors like you, we were able to help.
                  
                  Your
      support will help fill many needs; thank you again.”
                  
                  Patricia
      Espy
                  
                  Executive
      Director
                  Center
      for Food Action
                  Englewood,
      NJPictured
      from left to right: Donald Klingen, Hawthorne Christian Academy Principal;
      Margo Lane, Atlantic Stewardship Bank Director; Paul Vernarchik, Student;
      Laura Ibach, Student; John Ubu, Student; Paul Van Ostenbridge, CEO,
      Atlantic Stewardship Bank.
 
 2 0
      0 7 A N N U A L R E P O R T – N E W H O R I Z O N
  S
 8
 
 WE ARE
PLEASED TO HAVE ASSISTED THE FOLLOWING ORGANIZATIONS WITH OUR 2007 TITHE
DISTRIBUTION
  *Africa
      Inland Mission
                  *American Christian School
                  *The
      Back to God Hour
                  *Baptist
      Haiti Mission
                  *Bergen County
      Society
                  *Bessie
      Green Community
                  *Bethany
      Christian Services of New Jersey
                  *Blessed
      Sacrament School
                  *Calvary Christian Academy
                  *Calvin College
                  *Calvin
      Theological Seminary
                  *Care-A-Lot Christian Nursery
      School
                  *Cary Christian Center
                  *Cathedral
      Choir
                  *Catholic
      Charities
                  *Christian Health Care Center
                  *Christian
      Reformed World Relief Committee
                  *Christian Schools
      International
                  *CUMAC
                  *Dawn Treader Christian School
                  *Don Bosco Prep High
      School
                  *Eastern
      Christian Children’s Retreat
                  *Eastern
      Christian School Association
                  *Elim
      Christian Services
                  *Eva’s
      Village
                  *Faith
      Ministries of White Lake, NY
                  *Father’s
      Cupboard
                  *Fellowship
      Homes
                  *Fig
      Orchard
                  *First
      Choice Women’s Resource Centers
                  *Florence Christian Home
                  *Friendship
      Ministries
                  *Gideons
      International Lakeland Camp
                  *Gideons International Passaic Valley
      Camp
                  *Gideons
      International Paterson Camp
                  *Gideons
      International Ramapo Camp
                  *Good
      Shepherd Mission
                  *Goshen Christian School
                  *Grace
      Counseling Ministries
                  *Habitat
      for Humanity of Bergen County
                  *Harvest
      Outreach Ministries
                  *Hawthorne Christian Academy
                  *Hawthorne
      Ecumenical Council – Crop Walk
                  *Hawthorne
      Ecumenical Social Service Fund –
                  Food
      Pantry
                  *Holland Christian Home
                  *Hope
      Haven
                
                *Northside
      Community Christian Reformed Church – Day Camp
                  *Oasis
      Haven for Women and Children
                  *Operation
      Double Harvest – Haiti
                  *Paterson
      Habitat For Humanity
                  *Preakness
      Baptist Church Group Workcamp
                  *Prison
      Fellowship Ministries
                  *Prison
      Fellowship Ministries – Angel Tree Program
                  *Puritan
      Reformed Theological Seminary
                  *Ridgewood
      YMCA
                  *Ringwood Christian School
                  *Ron
      Hutchcraft Ministries
                  *St.
      Anthony’s School
                  *St.
      Augustine Presbyterian Church –
      Multi Service Center
                  *St.
      Elizabeth’s Interparochial School
                  *St.
      Joseph’s Regional Medical Center
                  *St.
      Joseph’s Wayne Hospital
                  *St.
      Luke Community Development Center
                  *St.
      Paul’s Community Development Corp.
                  *St.
      Philip’s Camp Youth Development Program and Coffee Pot Ministry
                  *St.
      Pius X School
                  *The
      Salvation Army – Paterson Branch
                  *Siena Village
      at Wayne
                  *Sonshine Christian Academy
                  *Star
      of Hope Ministries, Inc.
                  *Strategic
      Prayer Command
                  *Sussex Christian School
                  *Teen
      Challenge of NJ
                  *Touch
      The World Ministries
                  *Trinity Christian School
                  *United
      Paterson Development Corporation – After School Literacy and Safe Space
      Programs
                  *Unity
      Christian Reformed Church After School Program
                  *Veritas Christian Academy
                  *Waldwick Seventh Day Adventist School
                  *Wayne
      Interfaith Network
                  *Western
      Theological Seminary
                  *Westminster
      Theological Seminary
                  *World
      For Christ Crusade
                  *Wyckoff Christian Pre-School
                  *Wyckoff
      Family YMCA
                  *Wyckoff
      Reformed Church Food Pantry
                  *YWCA
      of Bergen County
                  *Zion
      Community Development Corporation“Thank
      you for again including us in your Tithing Program. We are truly grateful
      to have such generous and faithful friends as we do in Atlantic
      Stewardship Bank.
                  
                  We
      always look forward to furthering our mission of putting Christian
      principles into practice through programs that build healthy spirit, mind
      and body for all. We are proud to build strong kids, strong families and
      strong communities and are truly blessed with a wonderful staff and
      members. Thank you again for your support.”
                  
                  Richard
      J. Clayton
                  Chief
      Executive Officer
                  Ridgewood
      YMCA
                  Ridgewood,
      NJ*Hope
      House
                  *International
      Networx
                  *King’s
      Kids Pre-school and Daycare
                  *Kuyper College
                  *Lancaster Bible College
                  *Life
      Givers Network
                  *Lighthouse Pregnancy Resource Center
                  *Little
      Sisters of the Poor and St. Joseph’s
                  Home
      for the Elderly
                  *Lord’s
      Day Alliance of NJ
                  *The
      Luke Society
                  *Madison Avenue Baptist Academy
                  *Madison
      Avenue Crossroads
                  Community
      Ministries
                  *Mary
      Help of Christians Academy
                  *Mid
      Atlantic Ministries
                  *Mississippi
      Christian Family Services
                  *Mt. Hope
      Camp
                  *Mustard Seed School
                  *Netherlands
      Reformed Christian School
                  *New
      City Kids
                  *New
      Hope Community Development Center
                  *New
      Hope Community Ministries
                  *New
      Jersey Family Policy Council
                  *Northeast
      Community Transformation
                  *North
      Jersey Home Schoolers Association
  
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      E W A R D S H I P F I N A N C I A L C O R P O R A T I O N A N D S U B S I
      D I A R Y
 9
 
 ADDITIONALLY,
THE BANK HAS PROVIDED SUPPORT THROUGHOUT 2007 TO THE FOLLOWING
ORGANIZATIONS
  
 Allendale/Waldwick
      PBA Local #217
                  American Labor Museum
                  American
      Legion Auxiliary
                  American
      Red Cross Bergen-Hudson Chapter
                  American
      Special Children’s Pilgrimage Group
                  *Armenian
      Presbyterian Church Golf Outing
                  Avon
      Walk for Breast Cancer
                  Bergen County Housing Coalition
                  Bergen County Summer
      Campership Fund
                  Bergen County
      United Way – Warm Homes Program
                  Bergen County
      Wildcats Special Olympics Program
                  Bergen
      Highlands Rotary Club Bergen Philharmonic Orchestra
                  *Bethlehem Lutheran Church
                  Upward
      Christian Basketball League
                  Boonton
      Food Pantry
                  Boys
      & Girls Club of Hawthorne
                  Boys
      & Girls Club of Northwest NJ
                  Boys
      & Girls Club of Paterson
                  Boy
      Scouts of America Northern NJ Council
                  Boy
      Scout Troup #93 of Hawthorne
                  Camp Hope
      of Hackensack
                  Candigas
      Women’s Choir
                  Center
      for Food Action
                  Childhood
      Cancer Society
                  Children’s
      Aid & Family Services
                  Chilton Memorial Hospital
                  *Christian
      Overcomers
                  Cody’s
      Foundation
                  Community
      Blood Services Foundation
                  Community
      Housing in Partnership (CHIP)
                  Community
      Meals
                  *Concerts
      of Prayer – Greater New York
                  Co-Operative Nursery
      School of Ridgewood
                  Creative Living Counseling Center
                  Cystic
      Fibrosis Foundation
                DACKKs
      Group for Supportive Housing
                  Daikona
      Fund of the Greek Orthodox Metropolis of NJ
                  Danny Affilitto Memorial Scholarship
      Fund
                  Deborah Hospital
      Foundation
                  *Dedication
      Evangelism
                  *Department
      for Persons with Disabilities C.A.R.E.
                  *DePaul Catholic High
      School
                  Drug
      Awareness Council (DAC) of Montville
                  *Emergency
      Food Coalition of Passaic County
                  *Emmanuel Baptist Church
      – Women of Emmanuel
                  Emmanuel
      Cancer Foundation
                  *Faith
      Chapel Reformed Church
                  Youth
      Ministry
                  Forum School
                  Foundation
      for Free Enterprise
                  Foundation
      for the Handicapped
                  Friends
      of the Hermitage
                  Friends
      of the Louis Bay
                  2nd
      Library
                  Friends
      of the Midland Park Library
                  Frost
      Valley YMCA
                  Garfield
      UNICO
                  Gift
      of Life – Abbott & Caserta
                  Realtor
      Golf Outing
                  Gift
      of Life – Rotary Clubs in District 7490
                  Girl
      Scout Council of Bergen County
                  Glen
      Rock Central Business District Commission
                  *Goodwill
      Rescue Mission
                  *Grace
      United Methodist ChurchNursery School
                  Hawthorne
      Baseball/Softball Association
                  Hawthorne
      Board of Health –
                  Food
      Pantry
                  Haledon
      Borough – Haledon Centennial
                  Hawthorne
      Caballeros
                  Hawthorne
      Chamber of Commerce
                  Hawthorne
      Community
                  Library
      Foundation
                Hawthorne
      Cubs
                  Football
      Association
                  Hawthorne
      Domestic Violence Response Team
                  Hawthorne
      Education Foundation
                  Hawthorne
      Fall Baseball
                  Hawthorne
      Fire Department
                  *Hawthorne Gospel Church
      – Ecuador Mission Trip
                  Hawthorne High
      School Hawthorne
                  High
      School PTO
                  Hawthorne High
      School – Share
                  Hawthorne
      Knights of Columbus
                  Hawthorne
      Lions Club
                  Hawthorne
      PBA Local #200
                  Hawthorne
      Rotary Club
                  Hawthorne
      Soccer Association
                  Hawthorne
      Special Recreation
                  Hawthorne
      – Thomas Jefferson School PTO
                  Hawthorne
      VFW District #1
                  Hawthorne
      Volunteer Ambulance Corps
                  Hawthorne
      – Washington School PTO
                  Healing
      the Children Midlantic
                  *Hispanic Multi-Purpose Service Center
                  Hoboken
      International Film Festival
                  *Holy Spirit School
                  *Home
      Bound Ministries
                  Hope
      for the Warriors for Corporal Visnu Gonzalez
                  Hudson
      Milestones
                  *Interchurch
      Softball League
                  Jamboree
      Scholarship Fund
                  Jerry
      Speziale Community Outreach Foundation
                  Jewish
      Family & Children’s Service of Wayne
                  Juvenile
      Diabetes Research Foundation
                  Leukemia
      & Lymphoma Society
                  The
      Love Fund of Midland Park
                  The
      Love Fund of Wyckoff
                  Mahwah
      Youth Sports Boosters
                  Marge
      and Debra Shortway Foundation
                  Memorial
      Day Nursery
                Memorial Sloan-Kettering Cancer Center
                  Michael
      Coppola Fundraiser
                  Midland Park
      Ambulance Corps
                  Midland Park Baseball
      Association
                  Midland Park
      Chamber of Commerce
                  Midland Park High
      School
                  Midland
      Park Junior Football andCheerleading Association
                  Midland Park
      Lions Club
                  Midland
      Park PBA
                  Midland Park
      Public Education Foundation
                  Midland Park
      Volunteer Fire Company
                  Mike
      Geltrude Foundation
                  Mohawk
      Athletic Club of Hawthorne
                  Molly
      Foundation for Juvenile Diabetes
                  Montclair State University
                  Montville
      Baseball/Softball Association
                  Montville
      Chamber of Commerce
                  Montville
      Educational Foundation
                  Montville
      Kiwanis Club
                  Montville Township
      First Aid Squad
                  Montville Township
      Fourth of July Committee
                  Montville Township High
      School Ice Hockey
                  Montville Township High School Parent Teacher
      Council
                  Montville Township
      Library Foundation
                  Montville Township Literacy
      Foundation
                  Montville Township
      PBA
                  Montville Township
      Social Services
                  Montville
      Volunteer Ambulance Corps
                  *Mount Bethel Baptist Church
      –
                  MLK,
      Jr. Day
                  New
      Bridge Services
                  New
      Jersey Citizen Action
                  New
      Jersey Citizen Action Education Fund
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 10
 
 New
      Jersey Community Development Corporation
                  New
      Jersey State Fireman’s Association of Paterson
                  New
      Jersey State Organization of Cystic Fibrosis
                  North
      Jersey Chorus
                  *North
      Jersey Home Schoolers
                  Association
      Choral Program
                  North
      Stars Association for Competitive Gymnastics
                  Operation
      Smile
                  Order
      of the Lamp Scholarship Fund
                  *Our
      Lady of Consolation Church Youth Ministry
                  *Our
      Lady of the Valley School
                  Paramus
      Association for Competitive Gymnastics
                  Partners
      in Pride
                  *Partners
      Worldwide
                  Passaic
      County Bar Association
                  Passaic
      County Council on Alcohol and Drug Abuse
                  Passaic County
      Historical Society
                  Passaic Valley
      Fraternal Order of Police Lodge #181
                  *Paterson
      Assembly of God – Walk for Health Awareness
                  *Paterson Gospel Church
      – Girls Way Out Program
                  Paterson
      Rotary
                  *Paterson YMCA
                  Pequannock
      Street Fair
                  Pequannock Township
      First Aid and Rescue Squad
                  Pequannock Township
      Food Pantry
                  Pequannock Township High
      School Marching Band
                  Pequannock Township
      Little League
                  Pequannock Township
      PBA Local #172
                  Pequannock Township Public Library
                  Pequannock Township
      Regional Chamber of Commerce
                  Pequannock
      Township Volunteer Fire Department Engine Co. #1
                  Pequannock
      Township Volunteer Fire Department Engine Co. #2
                Pequannock
      UNICO
                  Project
      Heartbeat
                  Project
      Lovematch
                  *Project
      Timothy
                  Prospect Park
      Volunteer Fire Department
                  Push
      to Walk
                  Ramapo-Bergen
      Animal Refuge, Inc.
                  Ramapo Boosters Association
                  Ramapo High
      School
                  Ridgewood
      Baseball and Softball Association
                  Ridgewood
      Biddy Basketball
                  Ridgewood
      Boys Lacrosse Association
                  Ridgewood
      Downtown for the Holidays
                  Ridgewood
      Education Foundation
                  Ridgewood
      Emergency Services
                  Ridgewood
      Fire Department Association
                  Ridgewood
      Fourth of July Committee
                  Ridgewood High
      School Band Association
                  Ridgewood High
      School Football Scholarship Committee
                  Ridgewood
      PBA Local #20 Ridgewood Rotary Clubs
                  Ridgewood
      Singers
                  Ridgewood
      Softball
                  Ridgewood
      Woman’s Club
                  Robert
      P. Giaimo Memorial Fund
                  Rodland
      Memorial Scholarship Fund
                  Roy
      A Freitag Memorial Post 1049
                  Royal
      Family Kids Camp
                  Ruth
      Estrin Goldberg Memorial
                  *St.
      Joseph Church – One Heart for Haiti
                  *St. Leon
      Armenian Church Youth Programs
                  *St.
      Luke Parish – Operation Chillout
                  *St.
      Nicholas Church Outreach Programs
                  *St.
      Spyridon Church Restoration Program
                  Share
      Housing Association for Ridgewood and Environs (SHARE)
                Shomrei
      Torah – Wayne Congregation
                  Shrine
      Circus
                  Social
      Service Association of Ridgewood and Vicinity
                  Somerville-Hawes
      Dads’ Night
                  Sons
      of the American Legion Post
                  Special
      Projects for Underprivileged and Disabled
                  Suburban
      Woman’s Club of Pompton Plains
                  Summit Speech School
                  Team
      Luke
                  Temple Israel
                  Tomorrow’s
      Children’s Fund
                  Torpedoes
      Soccer Club
                  Towaco
      – Cedar Hill School – Home and School Association
                  Towaco
      Civic Association
                  Tri County
      Chamber of Commerce – Wayne
                  *Turning
      Point UFC Bergen Bike Tour
                  *United
      Methodist Church Mission Programs – Wayne
                  Valley Hospital
                  Veritans
      Camp
                  Waldwick
      Baseball Association
                  Waldwick
      Boy Scout Troop #99
                  Waldwick Community Alliance
                  Waldwick Fire Department
                  Waldwick High
      School
                  Waldwick High
      School Booster Club
                  Waldwick High
      School Music
                  Parents
      Association Waldwick – Julia A. Traphagen School PSO
                  Waldwick
      Lions Club
                  Waldwick
      PBA
                  Waldwick
      Public Library
                  Waldwick
      Recreation Trust Fund
                  Waldwick
      Soccer Association
                  Waldwick
      Volunteer Ambulance Corps
                  Wayne Adult Community
      Center
                  Wayne
      – Albert Payson Terhune School PTO
                  Wayne
      – Community Volunteer Fire Company #1
                Wayne
      Counseling and Family Services
                  Wayne
      Day
                  Wayne
      Elks Lodge #2181
                  Wayne Hills High School
                  Wayne Hills High
      School Band Boosters
                  Wayne
      Hockey Club
                  Wayne
      – James Fallon Elementary School PTO
                  Wayne
      – Lafayette Elementary School PTO
                  Wayne
      Lions Club
                  Wayne
      Little League
                  Wayne
      Little League – NJ District 2
                  Wayne
      Police Athletic League
                  Wayne
      PBA Local 136
                  Wayne
      – Pompton Falls Volunteer Fire Department #3
                  Wayne
      – Preakness Volunteer Fire Company #4
                  Wayne
      Public Library
                  Wayne
      Rotary Club
                  Wayne
      – Schuyler Colfax Middle School PTO
                  Wayne Township
      Memorial First Aid Squad
                  Wayne Township Parks
      and Recreation Department
                  Wayne Valley High
      School PTO
                  West
      Bergen Mental Healthcare
                  Westwood
      Cares
                  Westwood
      Home for the Holidays
                  Westwood Volunteer Ambulance Corps
                  William Paterson University
                  Wyckoff
      – Calvin Coolidge School PTO
                  Wyckoff
      Education Foundation
                  Wyckoff
      Fire Department
                  Wyckoff
      Fire Department Ladies Auxiliary
                  Wyckoff-Midland Park
      Rotary Club
                  Wyckoff
      Volunteer Ambulance Corps
                  YM-YWHA
      of North Jersey
                  Youth
      Consultation Service
                  *Zion Lutheran School
                  Zonta
      Club of Northern Valley
                  
                  *
      Denotes Christian Charity
 
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      D I A R Y
 11
 2007
      TITHING PROGRAM RECIPIENTS
 
 The
Atlantic Stewardship Bank is pleased to feature two outstanding organizations
that serve the Bank’s local communities. It is an honor for us to help support
their work.
  OASIS: A HAVEN FOR WOMEN AND CHILDREN
 PATERSON,
NJ – WWW.OASISNJ.ORG
 
 
  Oasis is
a nonprofit organization dedicated to assisting impoverished families who strive
to achieve economic independence by providing educational programs to equip
mothers and their children with the skills they need to become self-sufficient.
Oasis provides “a hand up, not a hand out” by offering Adult Education classes
for women and Educational Pro-grams in an After School Program for at-risk youth
in the Paterson community, completely free of charge. All pro-grams are designed
to help these families succeed in the work-place and in the public education
system. Support services, including food, clothing, and preschool care, are
provided enabling their adult woman students to focus on their education. It is
Oasis’s goal to eradicate intergenerational poverty by assisting the poorest
most vulnerable members of our community, the women and children.
 
 
  
  Standing:
Tyler Boucher, Blanca Boucher and Pastor Jeffrey Boucher. Seated: Zachary
Boucher and Erin Perna.
  TOUCH
THE WORLD MINISTRIES
 ALLENDALE, NJ –
WWW.TOUCHTHEWORLD.ORG
  Founded
in 1990, Touch the World Ministries, purpose was, and continues to be, to give
young people the opportunity to experience God. In direct response to parents
who were concerned about the static faith of their children, founder, CEO and
pastor, Jeff Boucher set out with a team of teens to the Six Nations Indian
Reserve in Ontario, Canada. Their mission was simple; to build two cabins to
house Native American children suffering from difficult circumstances. The team
achieved their construction goal in 17 days, but also managed to accomplish much
more. The greater goal was to give the team members an experience with God and
the results were farther reaching than initial expectations. Every teen returned
from that trip with a new relationship with God. Immediately following the
team’s return from that first trip, more than 30 adults volunteered their
service after seeing the internal changes in the returned team members. Thus
Touch the World Ministries was born.
  God
continued to bless TTW in the years that followed, with the organization growing
rapidly; hiring on its first full time employee in 1993. From then on, Touch the
World began to take shape and turn into the organization that it is
today.
  Today,
Touch the World has full time staff members in Japan, Uganda, Cuba, Scotland,
and the USA. The heartbeat of TTW is still missions and discipleship, but in
recent years has expanded to include Parent Ministries, a full service café, a
skateboarding park and much more. All Touch the World endeavors seek to bring
people, particularly young people, into a closer relationship with God our
Creator and Savior
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 CUSTOMER
      CORNER
 
 The
Atlantic Stewardship Bank is known throughout northern New Jersey not only for
its unique tithing program, but also for delivering exceptional customer
service. We realize that happy, satisfied cus-tomers allow the Bank to continue
to grow and fulfill its mission. Each year we take this opportunity to feature a
few of our loyal customers.
  
  “We bank
at Atlantic Stewardship Bank because of their faithful support of local
charitable, civic, and religious organizations. During the last 20 years, they
have donated more than $5,000,000 – 10% of their profits – to help over 400
neighborhood organizations continue their community outreach. As owners of the
Vander Plaat Funeral Home of Wyckoff, a family business founded in 1805, we
applaud and appreciate their commitment to the community.”
  Bill and
Linda Brock
 Vander
Plaat Funeral Home
 Wyckoff,
NJ
 
  
  “Our
family has a three-generation history with Atlantic Stewardship Bank. I worked
in the Midland Park branch of ASB for 3-1/2 years before my sons, George
and Sam, were born and I came to know and respect them for their generosity and
fairness. Their customers regard them in the same way as their employees do.
 
 Ever
since the Bank was formed in 1985, my father-in-law, Luis Rojas and my husband
George, have been faithful friends and supporters. Our accounting and mortgage
services company, Prospect Park Financial Services, does all of its business
banking with ASB. The bank is like a family to us, where you can feel at home
and have a relation-ship that benefits all of your personal and business needs.
In an ever-changing world, it is good to know that the stability and strength of
Atlantic Stewardship Bank will be supporting the future goals of the Rojas
family.”
  Anita
Rojas
 North
Haledon, NJ
 
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      D I A R Y
 13
  BRANCH
      NETWORK EXPANDS
 
 During
2007, Atlantic Stewardship Bank opened three new branch offices, each featuring
an ATM, coin counting machine, safe deposit boxes, night drop, and the ASBean
Coffee Counter.
  WYCKOFF
 378
Franklin Avenue, Wyckoff, NJ 07481
  Opened in
April of 2007, the Wyckoff office was built to serve the needs of our existing
Wyckoff customer base as well as to attract new customers. The residents of
Wyckoff are quite impressed with our building and our products and services as
demonstrated by the steady growth of deposits.
  WESTWOOD
 200
Kinderkamack Road, Westwood, NJ 07675
  Opened in
September of 2007, the Westwood office was totally renovated inside and out.
Located at a busy intersection on the main thoroughfare, we have high hopes for
our entry into this new market.
  NORTH
HALEDON
 33
Sicomac Road, North Haledon, NJ 07508
  Opened in
December of 2007, the North Haledon office bridges the gap between our
Midland Park and Wayne offices. This office allows us to more conveniently
serve our existing North Haledon customer base while attracting new customers.
We look forward to our Grand Opening Celebration planned for the Spring of 2008.
  “I
      would like to take this opportunity to thank Atlantic Stewardship Bank for
      their recent donation to the Forum School. This contribution will be
      used to expand the programs we offer to our special children. Such
      thoughtfulness is greatly appreciated.
                  
                  I
      would also like to thank you for your exceptional help with all of our
      banking needs. It is always a pleasure to deal with you and the Waldwick
      office.”
                  
                  Steven
      Krapes, Ed.D.,
                  Director,
                  The
      Forum School, Waldwick, NJ
 
 
 
  Atlantic
Stewardship Bank’s Wyckoff office.
 
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 14
 
 OFFICERS
 
 STEWARDSHIP
      FINANCIAL CORPORATION OFFICERS
                  
                  William
      C. Hanse, Esq.
                  Chairman
      of the Board of Directors
                  
                  Abe
      Van Wingerden
                  Vice
      Chairman of the Board of Directors
                  
                  Paul
      Van Ostenbridge
                  President
      and Chief Executive Officer
                  
                  Robert
      J. Turner
                  Secretary
                  
                  Julie
      E. Holland
                  Senior
      Vice President and Treasurer
                  
                  Timothy
      G. Madden
                  Senior
      Vice President
                  
                  Angela
      P. Turi
                  Vice
      President
                  
                  Mary
      Beth Steiginga
                  Assistant
      Secretary
                ATLANTIC
      STEWARDSHIP BANK OFFICERS
                  
                  Paul
      Van Ostenbridge
                  President
      and Chief Executive Officer
                  
                  Julie
      E. Holland
                  Senior
      Vice President and Treasurer
                  
                  Timothy
      G. Madden
                  Senior
      Vice President
                  
                  Robert
      C. Vliet
                  Senior
      Vice President
                  
                  M.
      Bernard Joustra
                  Vice
      President
                  
                  Rene
      Miranda
                  Vice
      President
                  
                  Douglas
      Olsen
                  Vice
      President
                  
                  Cynthia
      A. Perrotta
                  Vice
      President
                  
                  Richard
      D. Powers
                  Vice
      President
                  
                  Raymond
      J. Santhouse
                  Vice
      President
                Gail
      K. Tilstra
                  Vice
      President
                  
                  Angela
      P. Turi
                  Vice
      President
                  
                  David
      J. Van Lenten
                  Vice
      President
                  
                  Alma
      M. Baxter
                  Assistant
      Vice President
                  
                  Karen
      Bulley
                  Assistant
      Vice President
                  
                  Janet
      Decker
                  Assistant
      Vice President
                  
                  Richard
      Densel
                  Assistant
      Vice President
                  
                  Diane
      Ingrassia
                  Assistant
      Vice President
                  
                  John
      S. Krantz
                  Assistant
      Vice President
                  
                  Nicholas
      Latora
                  Assistant
      Vice President
                  
                  Thomas
      A. Maselli
                  Assistant
      Vice President
                  
                  James
      O’Brien
                  Assistant
      Vice President
                  
                  Louise
      Rohner
                  Assistant
      Vice President
                Amanda
      Bialy
                  Assistant
      Secretary
                  
                  Yanet
      Cordero de Marti
                  Assistant
      Secretary
                  
                  Richard
      P. Cuneo
                  Assistant
      Secretary
                  
                  Ellie
      King
                  Assistant
      Secretary
                  
                  Grace
      Lobbregt
                  Assistant
      Secretary
                  
                  Michael
      Mangine
                  Assistant
      Secretary
                  
                  Kelly
      Nienhouse
                  Assistant
      Secretary
                  
                  Kristine
      Rasile
                  Assistant
      Secretary
                  
                  Judi
      Rothwell
                  Assistant
      Secretary
                  
                  Mary
      Beth Steiginga
                  Assistant
      Secretary
                  
                  Tonni
      von Schaumburg
                  Assistant
      Secretary
                  
                  Barbara
      S. Vincent
                  Assistant
      Secretary
                  
                  Peggy
      Weber
                  Assistant
      Secretary
                  
                  Virginia
      M. Lowe
                  Compliance
      Officer
                  
                  John
      Lindemulder
                  Administrative
      Assistant
                  
                  Larry
      Marra
                  Administrative
      Assistant
                  
                  Amy
      Miller
                  Administrative
      Assistant
                  
                  Jean
      M. Schaver
                  Administrative
      Assistant
                  
                  William
      J. Tussi
                  Administrative
      Assistant
                  
                  Joan
      Van Houten
                  Administrative
      Assistant
                  
                  Kenneth
      C. Wehinger
                  Administrative
      Assistant
 
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      D I A R Y
 15
 
 STEWARDSHIP
      FINANCIAL CORPORATION
  Prior to
the establishment of the Stewardship Financial Corporation holding company, the
stock was originally issued in the name of Atlantic Stewardship Bank. The
initial offering required a minimum purchase of 200 shares at the price of $10
per share.
  The
Corporation declared its first cash dividend in 1990 and cash dividends have
been paid annually. To assist interested shareholders in purchasing additional
shares of stock, The Board of Directors introduced a Dividend Reinvestment Plan
in 1994.
  We are
pleased to report the original investment of $2,000 was worth $31,163 as of
year-end 2007 when the assumption was made that the shareholder took advantage
of the Dividend Reinvestment Plan; stock splits as well as stock dividends. The
twenty-two year return to the original investor is 13.55%.
  
  Pictured
from left to right: William C. Hanse, Esq., Chairman of the Board of Directors;
Jacob and Milvi Vander Eems; and Paul Van Ostenbridge, CEO, Atlantic Stewardship
Bank, attend the Wyckoff Branch evening reception.
   “Thank
      you for your donation to the Emergency Food Coalition of Passaic County.
      For every four dollars that you gave we were able to purchase enough
      grocery meals to feed each needy person who came to us for a week. Most of
      our clients are families and many are working poor barely able to afford
      their rent.
                  Thank
      you for your thoughtfulness and your support. From the staff and members
      of the EFC, I wish you the very best in 2008.”
                  William
      P. Long
                  Coordinator
                  Emergency
      Food Coalition of Passaic County
                  Paterson,
      NJ
 
  CORPORATE
ATTORNEYS
  Stewardship
Financial Corporation
 McCarter
& English, LLP Attorneys at Law 4 Gateway Center Newark,
NJ 07102 973-622-4444
  Atlantic
Stewardship Bank
 Hanse
& Hanse 2035 E. Hamburg Turnpike Wayne, NJ 07040 973-831-8700
  STEWARDSHIP
FINANCIAL CORPORATION
  We are
proud to advise the following brokers make a market in Stewardship Financial
Corporation stock:
  Keefe,
Bruyette & Woods
 787
Seventh Avenue, 4th Floor New York, NY 10019 212-887-7777
  Sandler
O’Neill & Partners, L.P.
 919 Third
Avenue, 6th Floor New York, NY 10022 800-635-6851
  Stifel,
Nicolaus & Company, Inc.
 18
Columbia Turnpike Florham Park, NJ 07932 800-793-7226
  TRANSFER
AGENT REGISTRAR AND DIVIDEND REIMBURSEMENT AGENT
  To report
a change of name or address, or a lost stock certificate or dividend check,
contact:
  Registrar
and Transfer Company
 10
Commerce Drive Cranford, NJ 07016 800-368-5948 www.rtco.com
  Shareholder
Relations Stewardship Financial Corporation Corporate Division 201-444-7100
www.asbnow.com
 
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 16
 BRANCH
      LOCATIONS AND STAFF
 
  HEADQUARTERS
– MIDLAND PARK
  630
Godwin Avenue
  Raymond
J. Santhouse
 Branch
Manager, Vice President & Regional Manager
  Richard
Densel
 Assistant
Branch Manager & Assistant Vice President
  HAWTHORNE
  1111
Goffle Road
  George
Kotevski
 Branch
Operations Manager
  HAWTHORNE
  386
Lafayette Avenue
  Diane
Ingrassia
 Branch
Manager, Assistant Vice President & Regional Manager
  Grace
Lobbregt
 Assistant
Branch Manager & Assistant Secretary
 
  
  Tom
Maselli, Wyckoff Branch Manager, presents prizes to the winners of the Wyckoff
Branch Grand Opening Coloring Contest.
   MONTVILLE
  2
Changebridge Road
  Judi
Rothwell
 Branch
Manager & Assistant Secretary
  NORTH
HALEDON
  33
Sicomac Road
  Thomas A.
Maselli
 Branch
Manager & Assistant Vice President
  Linda
Martin
 Branch
Operations Manager
  PEQUANNOCK
  249
Newark-Pompton Turnpike
  Louise
Rohner
 Branch
Manager & Assistant Vice President
  Kristine
Rasile
 Assistant
Branch Manager & Assistant Secretary
  “On
      behalf of all the staff here at Wyckoff Christian Preschool and
      Kindergarten, we want to thank you for the very generous gift that has
      been given to us from your Tithing Program. Our preschool offers programs
      for children from 2-1/2 to 6 years old. Your very generous gift will be
      used to purchase additional computer equipment for the classrooms.” Rose
      Barrett Administrative Director Wyckoff Christian Preschool &
      Kindergarten Wyckoff, NJ
 
  RIDGEWOOD
  190
Franklin Avenue
  Amanda
Bialy
 Branch
Manager & Assistant Secretary
  Catherine
Bobadilla
 Assistant
Branch Manager
  WALDWICK
  64
Franklin Turnpike
  Kelly
Nienhouse
 Branch
Manager & Assistant Secretary
  Michelle
Albert
 Assistant
Branch Manager
  WAYNE
  400
Hamburg Turnpike
  Douglas
Olsen
 Branch
Manager, Vice President & Regional Manager
  Amy
Miller
 Assistant
Branch Manager & Administrative Assistant
 
  WAYNE HILLS
  87 Berdan
Avenue
  John
Lindemulder
 Branch
Manager & Administrative Assistant
  WAYNE VALLEY
  311
Valley Road
  Richard
P. Cuneo
 Branch
Manager & Assistant Secretary
  WESTWOOD
  200
Kinderkamack Road
  Barbara
S. Vincent
 Branch
Manager & Assistant Secretary
  WYCKOFF
  378
Franklin Avenue
  Thomas A.
Maselli
 Branch
Manager & Assistant Vice President
  Joan Van
Houten
 Assistant
Branch Manager & Administrative Assistant
   S T
      E W A R D S H I P F I N A N C I A L C O R P O R A T I O N A N D S U B S I
      D I A R Y







STEWARDSHIP FINANCIAL CORPORATION
AND SUBSIDIARYSTOCK PERFORMANCE GRAPH





The
following graph compares the cumulative total return on a hypothetical $100
investment made on December 31, 2002 in: (a) Stewardship Financial Corporation’s
common stock; (b) Nasdaq Bank Index; (c) Peer index; and Nasdaq Composite Index.
The Peer index consists of ten banks located in New Jersey and Pennsylvania with
total asset size and operating performance comparable with the Corporation. The
peer group consists of 1st Constitution Bancorp, BCB Bancorp, Inc., Central
Jersey Bancorp, Codorus Valley Bancorp, Inc., Community Bank of Bergen County,
Mid Pen Bancorp, Somerset Hills Bancorp, Sterling Bank, Sussex Bancorp, and
Unity Bancorp, Inc. The information provided is not necessarily indicative of
the Corporation’s future performance.













Period
      EndingIndex
            
            12/31/02
            
            
            12/31/03
            
            
            12/31/04
            
            
            12/31/05
            
            
            12/31/06
            
            
            12/31/07Stewardship
      Financial Corporation
            
            $
            100.00
            
            
            $
            191.19
            
            
            $
            189.99
            
            
            $
            187.07
            
            
            $
            183.62
            
            
            $
            197.78Nasdaq
      Bank Index
            
            
            100.00
            
            
            
            132.59
            
            
            
            150.40
            
            
            
            147.42
            
            
            
            167.54
            
            
            
            134.67Peer
      Index
            
            
            100.00
            
            
            
            153.27
            
            
            
            180.80
            
            
            
            187.37
            
            
            
            192.03
            
            
            
            166.18Nasdaq
      Composite Index
            
            
            100.00
            
            
            
            150.64
            
            
            
            164.35
            
            
            
            167.78
            
            
            
            185.12
            
            
            
            204.80





A-1





STEWARDSHIP
FINANCIAL CORPORATION AND SUBSIDIARYCONSOLIDATED FINANCIAL SUMMARY OF SELECTED
FINANCIAL DATA




The
following table presents selected financial data as of and for the years ended
December 31, 2003, 2004, 2005, 2006 and 2007. The selected financial data is
derived from our audited consolidated financial statements appearing elsewhere
in this report.





December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in thousands, except per share amounts)Earnings
      Summary:Net
      interest income
            
            $
            19,430
            
            
            $
            19,084
            
            
            $
            18,211
            
            
            $
            16,367
            
            
            $
            14,324Provision
      for loan losses
            
            
            (530
            )
            
            
            (264
            )
            
            
            (600
            )
            
            
            (540
            )
            
            
            (425
            )Net
      interest income after provision for loan losses
            
            
            18,900
            
            
            
            18,820
            
            
            
            17,611
            
            
            
            15,827
            
            
            
            13,899Noninterest
      income
            
            
            4,414
            
            
            
            4,189
            
            
            
            3,240
            
            
            
            2,726
            
            
            
            2,894Noninterest
      expense
            
            
            16,629
            
            
            
            15,629
            
            
            
            13,867
            
            
            
            12,501
            
            
            
            11,394Income
      before income tax expense
            
            
            6,685
            
            
            
            7,380
            
            
            
            6,984
            
            
            
            6,052
            
            
            
            5,399Income
      tax expense
            
            
            2,078
            
            
            
            2,627
            
            
            
            2,504
            
            
            
            2,204
            
            
            
            1,908Net
      income
            
            $
            4,607
            
            
            $
            4,753
            
            
            $
            4,480
            
            
            $
            3,848
            
            
            $
            3,491Common
      Share Data: (1)Basic
      net income
            
            $
            0.87
            
            
            $
            0.90
            
            
            $
            0.85
            
            
            $
            0.75
            
            
            $
            0.68Diluted
      net income
            
            
            0.87
            
            
            
            0.89
            
            
            
            0.85
            
            
            
            0.74
            
            
            
            0.68Cash
      dividends declared.
            
            
            0.34
            
            
            
            0.29
            
            
            
            0.24
            
            
            
            0.20
            
            
            
            0.16Book
      value at year end
            
            
            7.74
            
            
            
            7.08
            
            
            
            6.38
            
            
            
            5.86
            
            
            
            5.29Average
      shares outstanding, net of treasury stock
            
            
            5,294
            
            
            
            5,272
            
            
            
            5,240
            
            
            
            5,157
            
            
            
            5,090Shares
      outstanding at year end
            
            
            5,307
            
            
            
            5,269
            
            
            
            5,235
            
            
            
            5,195
            
            
            
            5,130Dividend
      payout ratio
            
            
            39.35
            %
            
            
            32.19
            %
            
            
            27.79
            %
            
            
            26.46
            %
            
            
            23.37
            %Selected
      Consolidated Ratios:Return
      on average assets
            
            
            0.86
            %
            
            
            0.96
            %
            
            
            1.00
            %
            
            
            0.95
            %
            
            
            0.97
            %Return
      on average stockholders’ equity
            
            
            11.76
            %
            
            
            13.41
            %
            
            
            13.86
            %
            
            
            13.48
            %
            
            
            13.68
            %Average
      stockholders’ equity as a percentage of average total
    assets.
            
            
            7.34
            %
            
            
            7.19
            %
            
            
            7.20
            %
            
            
            7.06
            %
            
            
            7.12
            %Tier-I
      capital leverage (2)
            
            
            8.56
            %
            
            
            8.85
            %
            
            
            8.71
            %
            
            
            9.08
            %
            
            
            8.89
            %Tier-I
      risk based capital (3)
            
            
            10.76
            %
            
            
            11.25
            %
            
            
            11.16
            %
            
            
            12.48
            %
            
            
            12.93
            %Total
      risk based capital (3)
            
            
            11.77
            %
            
            
            12.28
            %
            
            
            12.21
            %
            
            
            13.57
            %
            
            
            14.03
            %Allowance
      for loan loss to total loans
            
            
            1.06
            %
            
            
            1.11
            %
            
            
            1.11
            %
            
            
            1.11
            %
            
            
            1.10
            %Nonperforming
      loans to total loans
            
            
            0.11
            %
            
            
            0.41
            %
            
            
            0.15
            %
            
            
            0.48
            %
            
            
            0.42
            %Selected
      Year-end Balances:Total
      assets
            
            $
            571,905
            
            
            $
            519,749
            
            
            $
            482,727
            
            
            $
            424,306
            
            
            $
            401,768Total
      loans, net of allowance for loan loss
            
            
            415,690
            
            
            
            365,443
            
            
            
            341,976
            
            
            
            292,909
            
            
            
            258,776Total
      deposits
            
            
            472,299
            
            
            
            434,223
            
            
            
            403,466
            
            
            
            356,730
            
            
            
            341,335Stockholders’
      equity
            
            
            41,090
            
            
            
            37,306
            
            
            
            33,384
            
            
            
            30,460
            
            
            
            27,149




(1)
              All
      share and per share amounts have been restated to reflect a 5% stock
      dividend paid November 2003, 2004, 2005 2006 and 2007, a 3 for 2 stock
      split that occurred July 2003 and a 4 for 3 stock split that occurred July
      2005.





(2)
              As
      a percentage of average quarterly
assets.





(3)
              As
      a percentage of total risk-weighted
assets.


A-2




Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





This
section provides an analysis of the Stewardship Financial Corporation’s (the
“Corporation”) consolidated financial condition and results of operations for
the years ended December 31, 2007 and 2006. The analysis should be read in
conjunction with the related audited consolidated financial statements and the
accompanying notes presented elsewhere herein.





This
annual report contains certain “forward looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995, and may be identified
by the use of such words as “believe,” “expect,” “anticipate,” “should,” “plan,”
“estimate,” and “potential.” Examples of forward looking statements include, but
are not limited to, estimates with respect to the financial condition, results
of operations and business of the Corporation that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include: changes in general, economic and market
conditions, legislative and regulatory conditions, or the development of an
interest rate environment that adversely affects the Corporation’s interest rate
spread or other income anticipated from operations and investments. As used in
this annual report, “we” and “us” and “our” refer to Stewardship Financial
Corporation and its consolidated subsidiary, Atlantic Stewardship Bank,
depending on the context.





Introduction





The
Corporation, organized in January 1995, as a business corporation under the laws
of the State of New Jersey, was established by the Board of Directors of
Atlantic Stewardship Bank (the “Bank”) to become a holding company for the Bank.
The shareholders of the Bank approved the holding company formation at the
annual meeting in 1996. After obtaining approval and submitting appropriate
applications, the Corporation, on November 22, 1996, acquired all of the shares
of the Bank in exchange for its own shares, on a share per share basis. The
Bank, and its subsidiaries, Stewardship Investment Corporation and Stewardship
Realty Corporation LLC, are wholly-owned subsidiaries of the Corporation. The
Corporation also formed a second subsidiary in 2003, Stewardship Statutory Trust
I (the "Trust”). The Trust was formed to issue Trust Preferred Securities to
enhance the capital position of the Corporation. The Trust is not consolidated
with the Corporation’s financial statements due to the adoption of Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003)
“Consolidation of Variable Interest Entities” (“FIN 46R”).





The
Corporation conducts a general commercial and retail banking business
encompassing a wide range of traditional deposit and lending functions along
with the other customary banking services. Stewardship Investment Corporation is
a wholly-owned nonbank subsidiary of the Bank, whose primary business is to own
and manage a portion of the Bank’s investment portfolio. Stewardship Realty
Corporation, a subsidiary of the Bank was formed in September 2005 to purchase a
property located at 612 Godwin Avenue, Midland Park, Bergen County, New Jersey.
The property, located next to the main office of the Corporation, will be used
for future office space for the administrative area of the bank. The Corporation
earns income and generates cash primarily through the deposit gathering
activities of the branch network. These deposits are then utilized to fund the
Corporation’s lending and investing activities.





The
Corporation is affected by the overall economic conditions in northern New
Jersey, the interest rate and yield curve environment, and overall national
economy. These factors are relevant because they will affect our ability to
attract specific deposit products, our ability to invest in loan and investment
products, and our ability to earn acceptable profits without incurring increased
risks.





When
evaluating the financial condition and operating performance of the
organization, management reviews historical trends, peer comparisons, asset and
deposit concentrations, interest margin analysis, adequacy of loan loss reserve
and loan quality performance, adequacy of capital under current positions as
well as to support future expansion, adequacy of liquidity, and overall quality
of earnings performance.





The
Corporation has developed a strong deposit base with good franchise value.
Challenges facing the organization are to continue to grow the existing branch
levels, provide adequate technology enhancements to achieve efficiencies, offer
a competitive product line, and provide the highest level of customer
service.





During
2007, the Corporation began to develop the infrastructure needed to allow the
entity to continue to build franchise value, expand its customer base, offer
appropriate products and services to its existing and future customer base and
enhance the overall presence of the Corporation to the markets. In March 2007
the Corporation moved its stock from trading on the bulletin board of NASDAQ to
the NASDAQ Capital Market. This should provide improved visibility to the stock,
better pricing to market and overall liquidity in the stock trading. This was an
important milestone for the stockholders of the Corporation.





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 deposits, a two lane drive-up and an ATM drive-up
facility.


A-3




In
September 2007 the Corporation successfully opened its twelfth branch in
Westwood, Bergen County, New Jersey.  This represents 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. Management believes that with appropriate marketing efforts, the
Corporation can provide the products and services to penetrate the existing
banking competition and become a significant player in the community banking
market in that area. In addition, 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 will service existing customers as well as attract a new
customer base.





Management
believes that each of these branching opportunities will help contribute to a
strong branch network. Although new branches such as these and Montville, opened
in 2006, are in their infancy and do not adequately contribute to the
profitability of the organization, management believes that these branches
provide strong opportunities to help contribute to the future success of the
organization. The branch network being established provides for strong 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. In addition to the
branch network, management increased the staffing in the commercial lending and
new business development departments. The investment in these areas should
provide benefits in the future in providing for new deposit and lending
relationships.





The
Corporation achieved all of these milestones while operating in an extremely
challenging market. 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. The declining of short term rates during the latter part of the
year steepened the yield curve but came as a result of the decline in economic
performance. The financial industry has had to face many difficulties
surrounding the subprime mortgage market and a slow down in the real estate
market. Although the area in which the bank operates has been somewhat shielded
by the 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 and should not be negatively impacted in this area.





Considering
these factors, the Corporation continued to perform well when compared with peer
group performance. The Corporation will concentrate its efforts on growing and
maturing its existing branch network and should see the benefits of its
investment in the lending and new business infrastructure during
2008.





During
the second quarter of 2007, the Corporation received a life insurance payout on
the death of an officer of the Corporation and recorded other income totaling
$459,000.





During
the fourth quarter of 2006, Management completed two transactions that
positioned the Corporation to improve future profitability and asset yields. The
Corporation successfully completed a sale of its $3.4 million credit card
portfolio to Elan Financial Services (“Elan”). Elan, a national provider of
credit card services, purchased the portfolio and will continue to service and
offer credit card products in the name of Atlantic Stewardship Bank. The
proceeds from the sale were reinvested in other lending opportunities. The
Corporation will realize, in addition to the premium paid on the portfolio,
future income from Elan based on new card production and customer
activity.





Management
also completed the sale of $17.3 million available for sale securities that were
yielding less than 5%. The proceeds realized from the sale were used to purchase
higher yielding securities and to fund loan growth. Management anticipates that
this transaction helped improve portfolio yields and reduced exposure to future
interest rate risk.





Recent
Accounting Pronouncements





A
discussion of recent pronouncements and their effect on the Corporation’s
financial statements can be found in Note 20 of the financial
statements.





Critical
Accounting Policies And Estimates





“Management’s
Discussion and Analysis of Financial Condition and Results of Operation,” is
based upon the Corporation’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Corporation to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. Note 1 to the Corporation’s
Audited Consolidated Financial Statements for the year ended December 31, 2007
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.


A-4




The
allowance for loan losses is based upon management’s evaluation of the adequacy
of the allowance, including an assessment of known and inherent risks in the
portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate, which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation’s allowance
for loan losses. Such agencies may require the Corporation to make additional
provisions for loan losses based upon information available to them at the time
of their examination. Furthermore, the majority of the Corporation’s loans are
secured by real estate in the State of New Jersey. Accordingly, the
collectibility of a substantial portion of the carrying value of the
Corporation’s loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the northern New Jersey area experience an adverse economic shock. Future
adjustments to the allowance for loan losses may be necessary due to economic,
operating, regulatory and other conditions beyond the Corporation’s
control.





Earnings
Summary





The
Corporation reported net income of $4.6 million, or $0.87 basic earnings per
share, for the year ended December 31, 2007, a decrease of $146,000, or 3.1%,
below the $4.8 million recorded for 2006. Earnings decreased as a result of
increases in noninterest expense and provision for loan losses, partially offset
by increases of net interest income and noninterest income.





The
Corporation has been operating in a volatile interest rate environment for the
last three years. The targeted federal funds rate, a strong indicator of short
term interest rates began 2005 at 2.25%. The rate was increased 25 basis points
each time the Federal Open Market Committee (FOMC) met in 2005 ending the year
at 4.25%. Rate increases continued in 2006, reaching a high of 5.25% in June
2006. The FOMC then held short term rates steady until September 2007 and then
began injecting liquidity into the markets, thereby decreasing interest rates
for the rest of the year. Targeted federal funds rate ended the year at 4.25%.
The impact of the actions of the FOMC along with economic and inflation
indicators had the Corporation operating in an inverted to flat yield curve from
January 2006 through the summer of 2007. The yield curve has steepened during
the last five months of 2007 being impacted by the decline in short term
interest rates.





During
this time period, the competition to attract deposit balances has been intense,
with customers opting out of low or no interest bearing core deposits into
higher yielding certificates of deposits. Financial institutions looking to grow
their balance sheets and fund loan activity have been 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.





The
return on average assets decreased in 2007 to 0.86% from 0.96% in 2006. The
return on average equity decreased to 11.76% in 2007 from 13.41% in
2006.





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.





In 2007,
net interest income, on a tax equivalent basis, increased to $19.8 million from
$19.4 million in 2006, an increase of $449,000, or 2.3%. This was caused by an
increase of $7.5 million, or 7.2%, in net average interest-earning assets
(average interest-earning assets less average interest-bearing
liabilities).





Interest
income, on a tax equivalent basis, increased $3.4 million, or 11.3%, during 2007
to $33.7 million from $30.3 million earned during 2006. The increase was due to
an increase in the average volume of interest-earning assets and an increase in
yields on interest-earning assets. Average interest-earning assets increased
$39.1 million in 2007, or 8.4%, over the 2006 amount with average loans
attributing to $26.1 million of the increase due primarily to the Corporation’s
competitiveness within the marketplace. Yields on interest earning assets
increased 17 basis points from 6.52% in 2006 to 6.69% in 2007.


A-5




Interest
expense increased $3.0 million, or 27.2%, during 2007 to $13.9 million. The
increase was due to an increase in average interest-bearing liabilities of $31.6
million, or 8.8%, to $393.2 million during 2007. Yields on interest-bearing
liabilities increased to 3.5% during 2007 from 3.02% during 2006. Average
noninterest-bearing deposits increased $4.4 million, or 4.8%, to $96.7 million.
The Corporation operated in an extremely challenging interest rate environment
with customers demanding higher yielding deposit products. The Corporation
continued to experience a shift from low cost demand and savings to higher
yielding money market accounts and certificates of deposit. The Corporation
supplemented 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 are helping to lower cost of funds and provide
for better managing of interest rate risk. The Corporation was successful in
opening three new branches to extend and strengthen its branch network. It also
has developed a new Genesis Account which is a tiered interest bearing demand
account targeted toward churches and nonprofit organizations. The Corporation
underwent a core processing conversion during the fourth quarter which sets the
foundation for additional products and services to be offered in the future. The
online banking product for the organization moved from a batch processing to a
real time processing which provides more consistent and current account
information to our customers. Additional new products and services will begin to
be offered in 2008 which will hopefully be successful in attracting new core
deposit business and consumer customers to the organization.





The
following table reflects the components of the Corporation’s net interest income
for the years ended December 31, 2007 and 2006 including, (1) average assets,
liabilities, and stockholders’ equity, (2) interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities, (3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, and (4) net yield on
interest-earning assets. Nontaxable income from investment securities is
presented on a tax-equivalent basis assuming a statutory tax rate of 34% for the
years presented. This was accomplished by adjusting this income upward to make
it equivalent to the level of taxable income required to earn the same amount
after taxes.


A-6




2007
            
            
            2006Average
            
            
            
            
            
            
            
            
            AverageInterest
            
            
            Rates
            
            
            
            
            
            Interest
            
            
            RatesAverage
            
            
            Income/
            
            
            Earned/
            
            
            Average
            
            
            Income/
            
            
            Earned/Balance
            
            
            Expense
            
            
            Paid
            
            
            Balance
            
            
            Expense
            
            
            Paid(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
      (1)
            
            $
            385,954
            
            
            $
            27,517
            
            
            
            7.13
            %
            
            $
            359,806
            
            
            $
            25,619
            
            
            
            7.12
            %Taxable
      investment securities (1)
            
            
            93,732
            
            
            
            4,921
            
            
            
            5.25
            
            
            
            85,322
            
            
            
            3,732
            
            
            
            4.37Tax-exempt
      investment securities (1) (2)
            
            
            23,372
            
            
            
            1,200
            
            
            
            5.13
            
            
            
            18,702
            
            
            
            868
            
            
            
            4.64Other
      interest-earning assets
            
            
            631
            
            
            
            45
            
            
            
            7.13
            
            
            
            741
            
            
            
            51
            
            
            
            6.88Total
      interest-earning assets
            
            
            503,689
            
            
            
            33,683
            
            
            
            6.69
            
            
            
            464,571
            
            
            
            30,270
            
            
            
            6.52Non-interest-earning
      assets:Allowance
      for loan losses
            
            
            (4,184
            )
            
            
            
            
            
            
            
            
            
            
            (4,020
            )Other
      assets.
            
            
            34,084
            
            
            
            
            
            
            
            
            
            
            
            32,862Total
      assets
            
            $
            533,589
            
            
            
            
            
            
            
            
            
            
            $
            493,413Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Interest-bearing
      demand deposits.
            
            $
            134,219
            
            
            $
            3,432
            
            
            
            2.56
            %
            
            $
            116,405
            
            
            $
            2,064
            
            
            
            1.77
            %Savings
      deposits.
            
            
            37,171
            
            
            
            282
            
            
            
            0.76
            
            
            
            41,682
            
            
            
            256
            
            
            
            0.61Time
      deposits.
            
            
            181,973
            
            
            
            8,297
            
            
            
            4.56
            
            
            
            160,816
            
            
            
            6,560
            
            
            
            4.08Repurchase
      agreements.
            
            
            12,192
            
            
            
            505
            
            
            
            4.14
            
            
            
            7,461
            
            
            
            331
            
            
            
            4.44FHLB
      borrowings
            
            
            20,379
            
            
            
            877
            
            
            
            4.30
            
            
            
            27,923
            
            
            
            1,218
            
            
            
            4.36Subordinated
      debenture
            
            
            7,217
            
            
            
            487
            
            
            
            6.75
            
            
            
            7,217
            
            
            
            487
            
            
            
            6.75Total
      interest-bearing liabilities
            
            
            393,151
            
            
            
            13,880
            
            
            
            3.53
            
            
            
            361,504
            
            
            
            10,916
            
            
            
            3.02Noninterest-bearing
      liabilities:Demand
      deposits
            
            
            96,659
            
            
            
            
            
            
            
            
            
            
            
            92,217Other
      liabilities
            
            
            4,624
            
            
            
            
            
            
            
            
            
            
            
            4,234Stockholders'
      equity
            
            
            39,155
            
            
            
            
            
            
            
            
            
            
            
            35,458Total
      liabilities and stockholders' equity
            
            $
            533,589
            
            
            
            
            
            
            
            
            
            
            $
            493,413Net
      interest income (taxable equivalent basis)
            
            
            
            
            
            
            19,803
            
            
            
            
            
            
            
            
            
            
            
            19,354Tax
      equivalent adjustment
            
            
            
            
            
            
            (373
            )
            
            
            
            
            
            
            
            
            
            
            (270
            )Net
      interest income
            
            
            
            
            
            $
            19,430
            
            
            
            
            
            
            
            
            
            
            $
            19,084Net
      interest spread (taxable equivalent basis)
            
            
            
            
            
            
            
            
            
            
            3.16
            %
            
            
            
            
            
            
            
            
            
            
            3.50
            %Net
      yield on interest-earning assets (taxable equivalent basis)
      (3)
            
            
            
            
            
            
            
            
            
            
            3.93
            %
            
            
            
            
            
            
            
            
            
            
            4.17
            %


_______________________


(1)
              For
      purpose of these calculations, nonaccruing loans are included in the
      average balance. Fees are included in loan interest. Loans and total
      interest-earning assets are net of unearned income. Securities are
      included at amortized cost.





(2)
              The
      tax equivalent adjustments are based on a marginal tax rate of
      34%.





(3)
              Net
      interest income (taxable equivalent basis) divided by average
      interest-earning assets.


A-7




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.





2007
      Versus 2006(In
      thousands)Increase
      (Decrease)Due
      to Change inVolume
            
            
            Rate
            
            
            NetInterest
      income:Loans
            
            $
            1,864
            
            
            $
            34
            
            
            $
            1,898Taxable
      investment securities
            
            
            392
            
            
            
            797
            
            
            
            1,189Tax-exempt
      investment securities
            
            
            233
            
            
            
            99
            
            
            
            332Other
      interest-earning assets
            
            
            (8
            )
            
            
            2
            
            
            
            (6
            )Total
      interest-earning assets
            
            
            2,481
            
            
            
            932
            
            
            
            3,413Interest
      expense:Interest-bearing
      demand deposits
            
            $
            352
            
            
            $
            1,016
            
            
            $
            1,368Savings
      deposits
            
            
            (30
            )
            
            
            56
            
            
            
            26Time
      deposits
            
            
            917
            
            
            
            820
            
            
            
            1,737Repurchase
      agreements
            
            
            197
            
            
            
            (23
            )
            
            
            174FHLB
      borrowings
            
            
            (325
            )
            
            
            (16
            )
            
            
            (341
            )Total
      interest-bearing liabilities
            
            
            1,111
            
            
            
            1,853
            
            
            
            2,964Net
      change in net interest income
            
            $
            1,370
            
            
            $
            (921
            )
            
            $
            449





Provision
for Loan Losses




The
Corporation maintains an allowance for loan losses considered by management to
be adequate to cover the inherent risk of loss associated with its loan
portfolio. On an ongoing basis, management analyzes the adequacy of this
allowance by considering the nature and volume of the Corporation’s loan
activity, financial condition of the borrower, fair market value of underlying
collateral, and changes in general market conditions. Additions to the allowance
for loan losses are charged to operations in the appropriate period. Actual loan
losses, net of recoveries, serve to reduce the allowance. The appropriate level
of the allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates.





The loan
loss provision totaled $530,000 for the year ended December 31, 2007, bringing
the allowance for loan loss to $4.5 million, or 1.06% of total loans. This
compared to a loan loss provision of $264,000 for the year ended December 31,
2006 and an allowance for loan loss of $4.1 million, or 1.11% of total
loans.  The loan loss provision for the year ended 2007 was impacted
by several significant factors.  Gross loans increased $50.5 million
in 2007, from $370.0 million at December 31, 2006 to $420.6 million at December
31, 2007. $24.6 million of the growth in 2007 occurred during the fourth
quarter, with a 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.





Although
net chargeoffs increased during the year ended December 31, 2007, the
Corporation has historically experienced very low chargeoffs, and total net
chargeoffs for 2007 represented just 0.05% of total loans.





Total
nonperforming loans totaled $481,000, the lowest level over the past five years,
representing only 0.11% of total loans. One measure which the Corporation uses
to determine the adequacy of the allowance for loan losses is the coverage
ratio, which calculates the allowance for loan losses as a percent of
nonperforming loans. The coverage ratio as of December 31, 2007 was 926.6%
compared to 267.3% as of December 31, 2006.


A-8




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 a 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.





Noninterest
Income





Noninterest
income consists of all income other than interest income and is principally
derived from service charges on deposits, gain on sales of mortgage loans,
income derived from bank owned life insurance, fees on safe deposit boxes,
credit card merchant income and income derived from debit cards and ATM
usage.





Noninterest
income increased $225,000, or 5.4%, to $4.41 million during the year ended
December 31, 2007, when compared with $4.2 million during the comparable 2006
period. Income of $459,000 was recorded as a result of a death benefit insurance
payment received in the quarter ended June 30, 2007. Income derived from the
merchant credit card processing program increased $219,000, or 17.7%, due to an
expanding merchant base. The Corporation has marketed its merchant services to
its existing business customers as well as new prospective customers. Businesses
are analyzed prior to being offered the merchant services to ensure the
Corporation is maintaining the appropriate amount of risk with in the servicing
product. Gain on sales of mortgage loans increased $83,000, or 35.3% due to an
increased volume of loans originated and sold. Fees and service charge income
declined $104,000, or 6.3%, as consumers and small business shifted to free or
low balance maintenance checking products and a decline in the fees received
through the overdraft checking program. Miscellaneous income declined $135,000,
or 31.1% due primarily to the loss of other income from the credit card
portfolio of $146,000 due to its sale. Noninterest income for 2006 contained
earnings from the gain on the sale of the credit card portfolio of $746,000. The
sale of the credit card portfolio was completed during the fourth quarter of
2006, pursuant to which management sold $3.4 million credit card loans to Elan.
Under the agreement, Elan purchased the portfolio for a 19% premium and agreed
to honor the existing award program offered to customers. Under the terms of the
agreement, cards are still offered in the name of Atlantic Stewardship Bank. The
Corporation shares in income as new cards are issued and as cardholders complete
transactions. An investment restructuring, completed during the fourth quarter
of 2006, resulted in the sale of $17.3 million available for sale securities
yielding less than 5% with a loss of $435,000. Proceeds were reinvested in
higher yielding investments and loans that helped improve earning asset yields
and decrease interest rate risk.





Noninterest
Expense





Although
management is committed to containing noninterest expense, the continued growth
of the Corporation has caused noninterest expense to increase by $1.0 million or
6.4%, to $16.6 million for the year ended December 31, 2007, compared to $15.6
million for the same period in 2006. Salaries and employee benefits, the major
component of noninterest expense, increased $561,000 or 8.3%. The increase was
due primarily to staffing increases in lending, new business development, and
the new Wyckoff, Westwood and North Haledon branches and for general merit and
performance increases. Occupancy and equipment expenses increased $292,000
primarily due to the expenses relating to the three new branches. Advertising
expense increased $142,000 due primarily to the need to advertise in our new
markets and promote the new branches being opened and merchant processing
expenses increased $184,000 due to the growth in the merchant
business.





In
accordance with its By-laws to tithe ten percent (10%) of its pre-tax profits to
various charities, the Corporation had charitable contributions totaling
$705,000 for the year ended December 31, 2007, a decrease of $50,000, or 6.6%,
over the same period in 2006.





Income
Taxes





Income
tax expense totaled $2.1 million for the year ended December 31, 2007, for an
effective tax rate of 31.1%, compared to $2.63 million, for an effective tax
rate of 35.6% for the year ended December 31, 2006. The effective tax rate has
decreased in 2007 due to the effect of the nontaxable death benefit proceeds
being recorded. The decrease in the effective tax rate during 2006 can be
attributed primarily to the tax deferred income derived from bank owned life
insurance.





Financial
Condition





Total
assets at December 31, 2007 were $571.9 million, an increase of $52.2 million,
or 10.0%, over the $519.7 million at December 31, 2006. This increase in assets
reflects, among other things, a $50.2 million increase in net loans held for
portfolio.


A-9


Loan
Portfolio





The
Corporation’s loan portfolio at December 31, 2007, net of allowance for loan
losses, totaled $415.7 million, an increase of $50.2 million, or 13.7%, over the
$365.4 million at December 31, 2006. Commercial real estate mortgage loans
consisting of $209.1 million, or 49.7% of the total portfolio, comprised the
largest portion of the loan portfolio. This represented an increase of $31.7
million from $177.4 million, or 47.9% of the total loan portfolio at December
31, 2006. Commercial loans increased $17.2 million to $89.8 million,
representing 21.3% of the total loan portfolio. Consumer installment loans
increased $4.4 million and residential real estate mortgages decreased $2.3
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, 2007, 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
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(In
      thousands)Real
      estate mortgage:Residential
            
            $
            44,719
            
            
            $
            47,020
            
            
            $
            45,604
            
            
            $
            41,569
            
            
            $
            44,835Commercial
            
            
            209,082
            
            
            
            177,411
            
            
            
            163,309
            
            
            
            130,762
            
            
            
            109,708Commercial
      loans
            
            
            89,845
            
            
            
            72,606
            
            
            
            65,011
            
            
            
            55,252
            
            
            
            48,950Consumer
      loans:Installment
      (1)
            
            
            56,796
            
            
            
            52,389
            
            
            
            51,540
            
            
            
            47,218
            
            
            
            41,067Home
      equity
            
            
            19,723
            
            
            
            20,010
            
            
            
            20,271
            
            
            
            21,484
            
            
            
            17,181Other
            
            
            424
            
            
            
            560
            
            
            
            506
            
            
            
            260
            
            
            
            238Total
      gross loans
            
            
            420,589
            
            
            
            369,996
            
            
            
            346,241
            
            
            
            296,545
            
            
            
            261,979Less:
      Allowance for loan losses
            
            
            4,457
            
            
            
            4,101
            
            
            
            3,847
            
            
            
            3,299
            
            
            
            2,888Deferred
      loan fees
            
            
            442
            
            
            
            452
            
            
            
            418
            
            
            
            337
            
            
            
            315Net
      loans
            
            $
            415,690
            
            
            $
            365,443
            
            
            $
            341,976
            
            
            $
            292,909
            
            
            $
            258,776





(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,
2007 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.





After
      1 YearWithin
            
            
            But
      Within
            
            
            After1
      Year
            
            
            5
      Years
            
            
            5
      Years
            
            
            Total(In
      thousands)Real
      estate mortgage
            
            $
            32,877
            
            
            $
            12,445
            
            
            $
            208,479
            
            
            $
            253,801Commercial
            
            
            37,654
            
            
            
            41,710
            
            
            
            10,481
            
            
            
            89,845Consumer
            
            
            2,362
            
            
            
            8,595
            
            
            
            65,986
            
            
            
            76,943Total
      gross loans
            
            $
            72,893
            
            
            $
            62,750
            
            
            $
            284,946
            
            
            $
            420,589


A-10





The
following table sets forth the dollar amount of all gross loans due one year or
more after December 31, 2007, which have predetermined interest rates or
floating or adjustable interest rates:





Floating
      orPredetermined
            
            
            AdjustableRates
            
            
            Rates
            
            
            Total(In
      thousands)Real
      estate mortgage
            
            $
            58,140
            
            
            $
            162,784
            
            
            $
            220,924Commercial
            
            
            31,470
            
            
            
            20,721
            
            
            
            52,191Consumer
            
            
            65,919
            
            
            
            8,662
            
            
            
            74,581$
            155,529
            
            
            $
            192,167
            
            
            $
            347,696





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.
Accordingly, the collectibility of a substantial portion of the carrying value
of the Corporation’s loan portfolio is susceptible to changes in the local
market conditions and may be adversely affected should real estate values
decline or the northern New Jersey area experience an adverse economic shock.
Future adjustments to the allowance may be necessary due to economic, operating,
regulatory, and other conditions beyond the Corporation’s control. The allowance
for loan losses represents 1.06% of total loans, or 9.3 times non-performing
loans at December 31, 2007, compared with 1.11% of total loans or 2.7 times
non-performing loans at December 31, 2006. In management’s opinion, the
allowance for loan losses totaling $4.5 million is adequate to cover losses
inherent in the portfolio at December 31, 2007.





Nonperforming
Assets





Nonperforming
assets include nonaccrual loans, restructured loans, loans past due 90 days or
more and accruing, and other real estate owned. There was no other real estate
owned assets for the periods presented. The Corporation’s loans are generally
placed in a nonaccrual status when they become past due in excess of 90 days as
to payment of principal and interest. Interest previously accrued on these loans
and not yet paid is charged against income during the current period. Interest
earned thereafter is only included in income to the extent that it is received
in cash. Loans past due 90 days or more and accruing represent those loans which
are sufficiently collateralized and management believes all interest and
principal owed will be collected. Restructured loans are loans that have been
renegotiated to permit a borrower, who has incurred adverse financial
circumstances, to continue to perform. Management can reduce the contractual
interest rates to below market rates or make significant concessions to the
terms of the loan in order for the borrower to continue to make
payments.


A-11


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
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in thousands)Nonaccrual
      loans: (1)Commercial
      real estate
            
            $
            73
            
            
            $
            123
            
            
            $
            122
            
            
            $
            56
            
            
            $
            83Commercial
            
            
            307
            
            
            
            167
            
            
            
            258
            
            
            
            159
            
            
            
            163Consumer
            
            
            75
            
            
            
            154
            
            
            
            92
            
            
            
            47
            
            
            
            11Total
      nonaccrual loans
            
            
            455
            
            
            
            444
            
            
            
            472
            
            
            
            262
            
            
            
            257Loans
      past due ninety days or more and accruing: (2)Commercial
      real estate
            
            
            —
            
            
            
            840
            
            
            
            —
            
            
            
            940
            
            
            
            —Commercial
            
            
            25
            
            
            
            241
            
            
            
            —
            
            
            
            —
            
            
            
            314Consumer
            
            
            1
            
            
            
            9
            
            
            
            55
            
            
            
            7
            
            
            
            6Total
      loans past due ninety days or more and accruing
            
            
            26
            
            
            
            1,090
            
            
            
            55
            
            
            
            947
            
            
            
            320Restructured
      loans:Commercial
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            269Consumer
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            215
            
            
            
            244Total
      restructured loans
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            215
            
            
            
            513Total
      nonperforming loans
            
            $
            481
            
            
            $
            1,534
            
            
            $
            527
            
            
            $
            1,424
            
            
            $
            1,090Nonaccrual
      loans to total gross loans
            
            
            0.11
            %
            
            
            0.12
            %
            
            
            0.14
            %
            
            
            0.09
            %
            
            
            0.10
            %Nonperforming
      loans to total gross loans
            
            
            0.11
            %
            
            
            0.41
            %
            
            
            0.15
            %
            
            
            0.48
            %
            
            
            0.42
            %Nonperforming
      loans to total assets
            
            
            0.08
            %
            
            
            0.30
            %
            
            
            0.11
            %
            
            
            0.34
            %
            
            
            0.27
            %Allowance
      for loan losses to nonperforming loans
            
            
            926.61
            %
            
            
            267.34
            %
            
            
            729.98
            %
            
            
            231.67
            %
            
            
            264.95
            %


______________


(1)
              Restructured
      loans classified in the nonaccrual category totaled $73,000 for the year
      ended December 31, 2007. There were no restructured loans classified as
      nonaccrual for the year ended December 31, 2006. Restructured loans
      classified in the nonaccrual category totaled $152,000, $162,000 and
      $174,000 for 2005, 2004 and 2003, respectively.


(2)
              There
      were no restructured loans classified in the past due ninety days or more
      and accruing for the years ended 2007, 2006, 2005 and 2004. In 2003,
      restructured loans totaling $150,000 were classified in the past due
      ninety days or more and accruing
category.





There
were no loans, other than those included in the above table, where the
Corporation was aware of any credit conditions of any borrowers that would
indicate a strong possibility of the borrowers not complying with the present
terms and conditions of repayment and which may result in such loans being
included as nonaccrual, past due or restructured at a future
date.


A-12




The
following table sets forth, for each of the preceding five years, the historical
relationships among the amount of loans outstanding, the allowance for loan
losses, the provision for loan losses, the amount of loans charged off and the
amount of loan recoveries:





2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2007(Dollars
      in thousands)Balance
      at beginning of period
            
            $
            4,101
            
            
            $
            3,847
            
            
            $
            3,299
            
            
            $
            2,888
            
            
            $
            2,689Loans
      charged off:Commercial
            
            
            82
            
            
            
            7
            
            
            
            —
            
            
            
            49
            
            
            
            173Consumer
            
            
            103
            
            
            
            33
            
            
            
            57
            
            
            
            92
            
            
            
            56Total
      loans charged off
            
            
            185
            
            
            
            40
            
            
            
            57
            
            
            
            141
            
            
            
            229Recoveries
      of loans previously charged off:Commercial
            
            
            —
            
            
            
            23
            
            
            
            —
            
            
            
            3
            
            
            
            1Consumer
            
            
            11
            
            
            
            7
            
            
            
            5
            
            
            
            9
            
            
            
            2Total
      recoveries of loans previously charged off
            
            
            11
            
            
            
            30
            
            
            
            5
            
            
            
            12
            
            
            
            3Net
      loans charged off
            
            
            174
            
            
            
            10
            
            
            
            52
            
            
            
            129
            
            
            
            226Provisions
      charged to operations
            
            
            530
            
            
            
            264
            
            
            
            600
            
            
            
            540
            
            
            
            425Balance
      at end of period
            
            $
            4,457
            
            
            $
            4,101
            
            
            $
            3,847
            
            
            $
            3,299
            
            
            $
            2,888Net
      charge offs during the period to average loans outstanding during the
      period
            
            
            1.06
            %
            
            
            1.11
            %
            
            
            1.11
            %
            
            
            1.11
            %
            
            
            1.10
            %Balance
      of allowance for loan losses at the end of year to gross year end
      loans
            
            
            0.05
            %
            
            
            0.00
            %
            
            
            0.02
            %
            
            
            0.05
            %
            
            
            0.10
            %





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:





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Amount
            
            
            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
            
            $
            256
            
            
            
            10.6
            %
            
            $
            298
            
            
            
            12.7
            %
            
            $
            320
            
            
            
            13.2
            %
            
            $
            297
            
            
            
            14.0
            %
            
            $
            306
            
            
            
            17.1
            %Real
      estate - commercial
            
            
            1,900
            
            
            
            49.7
            %
            
            
            1,705
            
            
            
            48.0
            %
            
            
            1,562
            
            
            
            47.1
            %
            
            
            1,272
            
            
            
            44.1
            %
            
            
            1,038
            
            
            
            41.9
            %Commercial
            
            
            1,640
            
            
            
            21.4
            %
            
            
            1,407
            
            
            
            19.6
            %
            
            
            1,192
            
            
            
            18.8
            %
            
            
            979
            
            
            
            18.6
            %
            
            
            910
            
            
            
            18.7
            %Consumer
            
            
            661
            
            
            
            18.3
            %
            
            
            691
            
            
            
            19.7
            %
            
            
            773
            
            
            
            20.9
            %
            
            
            751
            
            
            
            23.3
            %
            
            
            634
            
            
            
            22.3
            %Total
      allowance for loan losses
            
            $
            4,457
            
            
            
            100.0
            %
            
            $
            4,101
            
            
            
            100.0
            %
            
            $
            3,847
            
            
            
            100.0
            %
            
            $
            3,299
            
            
            
            100.0
            %
            
            $
            2,888
            
            
            
            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 unrecognized holding gains
or losses reported in a separate component of stockholders’ equity. Securities
in the available for sale category may be held for indefinite periods of time
and include securities that management intends to use as part of its
Asset/Liability strategy or that may be sold in response to changes in interest
rates, changes in prepayment risks, the need to provide liquidity, the need to
increase regulatory capital or similar factors. Securities available for sale
increased to $77.0 million at December 31, 2007, from $72.7 million at December
31, 2006, an increase of $4.2 million, or 5.8%. Securities held to maturity
increased $2.0 million, or 5.2%, to $41.2 million at December 31, 2007 from
$39.2 million at December 31, 2006.


A-13





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
      31,2007
            
            
            2006
            
            
            2005Carrying
            
            
            
            
            
            Carrying
            
            
            
            
            
            CarryingValue
            
            
            Percent
            
            
            Value
            
            
            Percent
            
            
            Value
            
            
            Percent(Dollars
      in thousands)Securities
      available for sale:U.S.
      Treasury
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            496
            
            
            
            0.8
            %U.S.
      government-sponsored agencies
            
            
            35,693
            
            
            
            46.4
            %
            
            
            32,117
            
            
            
            44.2
            %
            
            
            32,478
            
            
            
            50.6
            %Obligations
      of state and political subdivisions
            
            
            2,903
            
            
            
            3.8
            %
            
            
            1,823
            
            
            
            2.5
            %
            
            
            2,031
            
            
            
            3.2
            %Mortgage-backed
      securities
            
            
            37,131
            
            
            
            48.2
            %
            
            
            37,707
            
            
            
            51.8
            %
            
            
            28,110
            
            
            
            43.8
            %Other
      equity investments
            
            
            1,230
            
            
            
            1.6
            %
            
            
            1,099
            
            
            
            1.5
            %
            
            
            1,051
            
            
            
            1.6
            %Total
            
            $
            76,957
            
            
            
            100.0
            %
            
            $
            72,746
            
            
            
            100.0
            %
            
            $
            64,166Securities
      held to maturity:U.S.
      Treasury
            
            $
            501
            
            
            
            1.2
            %
            
            $
            502
            
            
            
            1.3
            %
            
            $
            1,004
            
            
            
            2.7
            %U.S.
      government-sponsored agencies
            
            
            12,331
            
            
            
            29.9
            %
            
            
            10,776
            
            
            
            27.5
            %
            
            
            12,113
            
            
            
            32.0
            %Obligations
      of state and political subdivisions
            
            
            22,569
            
            
            
            54.8
            %
            
            
            20,516
            
            
            
            52.4
            %
            
            
            15,747
            
            
            
            41.7
            %Mortgage-backed
      securities
            
            
            5,788
            
            
            
            14.1
            %
            
            
            7,369
            
            
            
            18.8
            %
            
            
            8,937
            
            
            
            23.6
            %Total
            
            $
            41,189
            
            
            
            100.0
            %
            
            $
            39,163
            
            
            
            100.0
            %
            
            $
            37,801
            
            
            
            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, 2007. Issuers may have the right to call or prepay obligations with
or without call or prepayment penalties. This might cause actual maturities to
differ from contractual maturities.





After
      1 Year
            
            
            After
      5 YearsWithin
            
            
            Through
            
            
            Through
            
            
            After1
      Year
            
            
            5
      Years
            
            
            10
      Years
            
            
            10
      Years
            
            
            Total(Dollars
      in thousands)U.S.
      government-sponsored agencies:Carrying
      value
            
            $
            497
            
            
            $
            7,323
            
            
            $
            13,923
            
            
            $
            13,950
            
            
            $
            35,693Yield
            
            
            3.21
            %
            
            
            4.61
            %
            
            
            5.78
            %
            
            
            5.97
            %
            
            
            5.58
            %Obligations
      of state and political subdivisions:Carrying
      value
            
            
            326
            
            
            
            1,016
            
            
            
            326
            
            
            
            1,235
            
            
            
            2,903Yield
            
            
            2.20
            %
            
            
            3.36
            %
            
            
            3.64
            %
            
            
            3.97
            %
            
            
            3.52
            %Mortgage-backed
      securities:Carrying
      value
            
            
            17
            
            
            
            2,340
            
            
            
            5,047
            
            
            
            29,727
            
            
            
            37,131Yield
            
            
            5.08
            %
            
            
            3.96
            %
            
            
            4.50
            %
            
            
            5.33
            %
            
            
            5.13
            %Other
      equity investments:Carrying
      value
            
            
            1,230
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,230Yield
            
            
            3.68
            %
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3.68
            %Total
      carrying value
            
            $
            2,070
            
            
            $
            10,679
            
            
            $
            19,296
            
            
            $
            44,912
            
            
            $
            76,957Weighted
      average yield
            
            
            3.35
            %
            
            
            4.35
            %
            
            
            5.41
            %
            
            
            5.49
            %
            
            
            5.25
            %


A-14





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, 2007. Issuers may have the right to call or prepay obligations with
or without call or prepayment penalties. This might cause actual maturities to
differ from contractual maturities.





After
      1 Year
            
            
            After
      5 YearsWithin
            
            
            Through
            
            
            Through
            
            
            After1
      Year
            
            
            5
      Years
            
            
            10
      Years
            
            
            10
      Years
            
            
            Total(Dollars
      in thousands)U.S.
      Treasury :Carrying
      value
            
            $
            501
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            501Yield
            
            
            4.57
            %
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4.57
            %U.S.
      government-sponsored agencies :Carrying
      value
            
            
            1,453
            
            
            
            2,644
            
            
            
            2,261
            
            
            
            5,973
            
            
            
            12,331Yield
            
            
            4.17
            %
            
            
            5.02
            %
            
            
            5.62
            %
            
            
            5.72
            %
            
            
            5.37
            %Obligations
      of state and political subdivisions :Carrying
      value
            
            
            1,652
            
            
            
            2,924
            
            
            
            10,749
            
            
            
            7,244
            
            
            
            22,569Yield
            
            
            2.91
            %
            
            
            3.01
            %
            
            
            3.78
            %
            
            
            3.88
            %
            
            
            3.65
            %Mortgage-backed
      securities :Carrying
      value
            
            
            50
            
            
            
            600
            
            
            
            2,464
            
            
            
            2,674
            
            
            
            5,788Yield
            
            
            5.51
            %
            
            
            4.38
            %
            
            
            4.99
            %
            
            
            5.64
            %
            
            
            5.23
            %Total
      carrying value
            
            $
            3,656
            
            
            $
            6,168
            
            
            $
            15,474
            
            
            $
            15,891
            
            
            $
            41,189Weighted
      average yield
            
            
            3.67
            %
            
            
            4.00
            %
            
            
            4.24
            %
            
            
            4.87
            %
            
            
            4.40
            %





Deposits





Corporation
deposits at December 31, 2007 totaled $472.3 million, an increase of $38.1
million, or 8.8%, over the comparable period of 2006, when deposits totaled
$434.2 million. The Corporation relied on its expanding branch network and
current competitive products and services to provide growth during 2007. The
economic and interest rate environment made it difficult to attract core
deposits. During 2006, the Corporation began utilizing the brokered certificate
of deposit market, with $15.4 million and $19.7 million included in the time
deposit balances as of December 31, 2007 and 2006, 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
      31,2007
            
            
            2006
            
            
            2005Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)Noninterest-bearing
      demand
            
            $
            101,993
            
            
            
            21.6
            %
            
            $
            92,105
            
            
            
            21.2
            %
            
            $
            94,331
            
            
            
            23.4
            %Interest-bearing
      demand
            
            
            153,713
            
            
            
            32.6
            %
            
            
            120,899
            
            
            
            27.8
            %
            
            
            122,867
            
            
            
            30.5
            %Saving
      deposits
            
            
            37,010
            
            
            
            7.8
            %
            
            
            37,324
            
            
            
            8.6
            %
            
            
            45,779
            
            
            
            11.3
            %Certificates
      of deposit
            
            
            179,583
            
            
            
            38.0
            %
            
            
            183,895
            
            
            
            42.4
            %
            
            
            140,489
            
            
            
            34.8
            %Total.
            
            $
            472,299
            
            
            
            100.0
            %
            
            $
            434,223
            
            
            
            100.0
            %
            
            $
            403,466
            
            
            
            100.0
            %





As of
December 31, 2007, 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
            
            $
            18,311Four
      months through six months
            
            
            7,702Seven
      months through twelve months
            
            
            27,230Over
      twelve months
            
            
            17,879Total
            
            $
            71,122


A-15





Interest
Rate Sensitivity





Interest
rate movements and deregulation of interest rates have made managing the
Corporation’s interest rate sensitivity increasingly important. The Corporation
attempts to maintain stable net interest margins by generally matching the
volume of assets and liabilities maturing, or subject to repricing, by adjusting
interest rates to market conditions, and by developing new products. One method
of measuring the Corporation’s exposure to changes in interest rates is the
maturity and repricing gap analysis. The difference between the volume of assets
and liabilities that reprice in a given period is the interest sensitivity gap.
A “positive” gap results when more assets than liabilities mature or are
repricing in a given time frame. Conversely, a “negative” gap results when there
are more liabilities than assets maturing or repricing in a given period of
time. The smaller the gap, the less the effect of the market volatility on net
interest income. During a period of rising interest rates, an institution with a
negative gap position would not be in as favorable a position, as compared to an
institution with a positive gap, to invest in higher yielding assets. This may
result in yields on its assets increasing at a slower rate than the increase in
its costs of interest-bearing liabilities than if it had a positive gap. During
a period of falling interest rates, an institution with a negative gap would
experience a repricing of its assets at a slower rate than its interest-bearing
liabilities, which consequently may result in its net interest income growing at
a faster rate than an institution with a positive gap position.





The
following table sets forth estimated maturity/repricing structure of the
Corporation’s interest-earning assets and interest-bearing liabilities as of
December 31, 2007. 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
            
            $
            37,312
            
            
            $
            32,400
            
            
            $
            184,089
            
            
            $
            —
            
            
            $
            253,801Commercial
            
            
            50,263
            
            
            
            7,774
            
            
            
            31,808
            
            
            
            —
            
            
            
            89,845Consumer
            
            
            20,984
            
            
            
            4,590
            
            
            
            51,369
            
            
            
            —
            
            
            
            76,943Mortgage
      loans held for sale
            
            
            1,284
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,284Investment
      securities (1)
            
            
            16,791
            
            
            
            21,408
            
            
            
            81,930
            
            
            
            —
            
            
            
            120,129Federal
      funds sold
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Other
      assets
            
            
            143
            
            
            
            —
            
            
            
            —
            
            
            
            29,760
            
            
            
            29,903Total
      assets
            
            $
            126,777
            
            
            $
            66,172
            
            
            $
            349,196
            
            
            $
            29,760
            
            
            $
            571,905Source
      of funds:Savings
            
            $
            37,010
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            37,010Interest-bearing
            
            
            153,713
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            153,713Certificates
      of deposit
            
            
            45,881
            
            
            
            86,117
            
            
            
            47,585
            
            
            
            —
            
            
            
            179,583Repurchase
      agreements
            
            
            16,499
            
            
            
            784
            
            
            
            —
            
            
            
            —
            
            
            
            17,283Borrowings
            
            
            16,892
            
            
            
            277
            
            
            
            11,476
            
            
            
            —
            
            
            
            28,645Subordinated
      debenture
            
            
            —
            
            
            
            —
            
            
            
            7,217
            
            
            
            —
            
            
            
            7,217Other
      liabilities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            107,364
            
            
            
            107,364Stockholders’
      equity
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            41,090
            
            
            
            41,090Total
      source of funds
            
            $
            269,995
            
            
            $
            87,178
            
            
            $
            66,278
            
            
            $
            148,454
            
            
            $
            571,905Interest
      rate sensitivity gap
            
            $
            (143,218
            )
            
            $
            (21,006
            )
            
            $
            282,918
            
            
            $
            (118,694
            )Cumulative
      interest rate sensitivity gap
            
            $
            (143,218
            )
            
            $
            (164,224
            )
            
            $
            118,694
            
            
            $
            —Ratio
      of GAP to total assets
            
            
            -25.0
            %
            
            
            -3.7
            %
            
            
            49.5
            %
            
            
            -20.8
            %Ratio
      of cumulative GAP assets to total assets
            
            
            -18.6
            %
            
            
            -28.7
            %
            
            
            20.8
            %
            
            
            —


________________


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


A-16




The
Corporation also uses a simulation model to analyze the sensitivity of net
interest income to movements in interest rates. The simulation model projects
net interest income, net income, net interest margin, and capital to asset
ratios based on various interest rate scenarios over a twelve- month period. The
model is based on the actual maturity and repricing characteristics of all rate
sensitive assets and liabilities. Management incorporates into the model certain
assumptions regarding prepayments of certain assets and liabilities. The model
assumes an immediate rate shock to interest rates without management’s ability
to proactively change the mix of assets or liabilities. According to the reports
generated for year end 2007, an immediate interest rate increase of 200 basis
points resulted in a decrease in net interest income of 11.5%, or $2.7 million,
while an immediate interest rate decrease of 200 basis points resulted in an
increase in net interest income of 3.0% or $712,000. 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. Assumptions have been built into the model for prepayments for assets
and decay rates for nonmaturity deposits such as savings and interest bearing
demand.





Liquidity





The
Corporation’s primary sources of funds are deposits, amortization and
prepayments of loans and mortgage-backed securities, maturities of investment
securities and funds provided by operations. While scheduled loan and
mortgage-backed securities amortization and maturities of investment securities
are a relatively predictable source of funds, deposit flow and prepayments on
loan and mortgage-backed securities are greatly influenced by market interest
rates, economic conditions, and competition.





The
Corporation’s liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. These activities are
summarized below:





Years Ended December 31,2007
            
            
            2006(In
      thousands)Cash
      and cash equivalents - beginning
            
            $
            15,697
            
            
            $
            14,028Operating
      activities:Net
      income
            
            
            4,607
            
            
            
            4,753Adjustments
      to reconcile net income to net cash provided by operating
      activities
            
            
            1,573
            
            
            
            (70
            )Net
      cash provided by operating activities
            
            
            6,180
            
            
            
            4,683Net
      cash used in investing activities
            
            
            (55,293
            )
            
            
            (34,261
            )Net
      cash provided by financing activities
            
            
            45,348
            
            
            
            31,247Net
      (decrease) increase in cash and cash equivalents
            
            
            (3,765
            )
            
            
            1,669Cash
      and cash equivalents - ending
            
            $
            11,932
            
            
            $
            15,697





Cash was
generated by operating activities in each of the above periods. The primary
source of cash from operating activities during each period was net
income.





Liquidity
management is both a daily and long-term function of business management. Excess
liquidity is generally invested in short-term investments, such as federal funds
sold.





The
Corporation enters into commitments to extend credit, such as letters of credit,
which are not reflected in the consolidated financial
statements.


A-17


The
Corporation has various contractual obligations that may require future cash
payments. The following table summarizes the Corporation’s contractual
obligations at December 31, 2007 and the effect of such obligations is expected
to have on our liquidity


and cash
flows in future periods.





Less
      than
            
            
            1-3
            
            
            4-5
            
            
            After
      5Total
            
            
            1
      Year
            
            
            Years
            
            
            Years
            
            
            Years(In
      thousands)Contractual
      obligationsOperating
      lease obligations
            
            $
            7,662
            
            
            $
            829
            
            
            $
            1,533
            
            
            $
            1,467
            
            
            $
            3,833Total
      contracted cost obligations
            
            $
            7,662
            
            
            $
            829
            
            
            $
            1,533
            
            
            $
            1,467
            
            
            $
            3,833Other
      long-term liabilities/long-term debtTime
      deposits
            
            $
            179,583
            
            
            $
            131,998
            
            
            $
            39,816
            
            
            $
            7,769
            
            
            $
            —Federal
      Home Loan Bank advances
            
            
            28,645
            
            
            
            18,645
            
            
            
            —
            
            
            
            —
            
            
            
            10,000Subordinated
      debentures
            
            
            7,217
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,217Total
      other long-term liabilities/long-term debt
            
            $
            215,445
            
            
            $
            150,643
            
            
            $
            39,816
            
            
            $
            7,769
            
            
            $
            17,217Other
      commitments - off balance sheetLetter
      of credit
            
            $
            3,707
            
            
            $
            3,630
            
            
            $
            77
            
            
            $
            —
            
            
            $
            —Other
      commitments - off balance sheet
            
            
            15,636
            
            
            
            15,636
            
            
            
            —
            
            
            
            —
            
            
            
            —Unused
      lines of credit
            
            
            81,682
            
            
            
            81,682
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      off balance sheet arrangements and contractual obligations
            
            $
            101,025
            
            
            $
            100,948
            
            
            $
            77
            
            
            $
            —
            
            
            $
            —


____________


For
further information, see Note 16 of Notes to Consolidated Financial
Statements.




Management
believes that a significant portion of the time deposits will remain with the
Corporation. In addition, management does not believe that all of the unused
lines of credit will be exercised. The Corporation anticipates that it will have
sufficient funds available to meet its current contractual commitments. Should
the Corporation need temporary funding, the Corporation has an overnight line of
credit with the FHLB-NY for a maximum of $51.7 million.





Capital





Banks and
bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations, involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action. Regulations of the
Board of Governors of the Federal Reserve System (“FRB”) require bank holding
companies to maintain minimum levels of regulatory capital. Under the
regulations in effect at December 31, 2007, 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,
2007.





Required
            
            
            Actual
            
            
            ExcessRisk-based
      capital:Tier
      1Corporation
            
            
            4.00
            %
            
            
            10.76
            %
            
            
            6.76
            %Bank
            
            
            4.00
            %
            
            
            9.57
            %
            
            
            5.57
            %TotalCorporation
            
            
            8.00
            %
            
            
            11.77
            %
            
            
            3.77
            %Bank
            
            
            8.00
            %
            
            
            10.58
            %
            
            
            2.58
            %Leverage ratio*Corporation
            
            
            4.00
            %
            
            
            8.56
            %
            
            
            4.56
            %Bank
            
            
            4.00
            %
            
            
            7.66
            %
            
            
            3.66
            %


_______________


*
            The
      minimum leverage ratio set by the FRB and the FDIC is 3.00%. Institutions
      which are not “top-rated” will be expected to maintain a ratio of
      approximately 100 to 200 basis points above this
  ratio.


A-18


CroweTM


Crowe
Chizek and Company LLC


Member
Horwath International








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, 2007 and 2006 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, 2007 and 2006 and the results of its operations and its cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.








/s/
      Crowe Chizek and Company LLCCrowe
      Chizek and Company LLC








Livingston,
New Jersey


March 28,
2008


A-19




Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Financial Condition




December
      31,2007
              
              
              2006AssetsCash
      and due from banks
              
              $
              11,789,000
              
              
              $
              14,861,000Other
      interest-earning assets
              
              
              143,000
              
              
              
              836,000Cash
      and cash equivalents
              
              
              11,932,000
              
              
              
              15,697,000Securities
      available for sale
              
              
              76,957,000
              
              
              
              72,746,000Securities
      held to maturity, estimated fair value of $41,508,000 (2007) and
      $38,881,000 (2006)
              
              
              41,189,000
              
              
              
              39,163,000FHLB-NY
      stock, at cost
              
              
              1,983,000
              
              
              
              1,899,000Loans,
      net of allowance for loan losses of $4,457,000 (2007) and $4,101,000
      (2006)
              
              
              415,690,000
              
              
              
              365,443,000Mortgage
      loans held for sale
              
              
              1,284,000
              
              
              
              2,155,000Premises
      and equipment, net
              
              
              7,950,000
              
              
              
              7,098,000Accrued
      interest receivable
              
              
              3,112,000
              
              
              
              2,912,000Intangible
      assets
              
              
              70,000
              
              
              
              102,000Bank
      owned life insurance
              
              
              8,273,000
              
              
              
              8,522,000Other
      assets
              
              
              3,465,000
              
              
              
              4,012,000Total
      assets
              
              $
              571,905,000
              
              
              $
              519,749,000Liabilities
      and Stockholders’ equityLiabilitiesDeposits:Noninterest-bearing
              
              $
              101,993,000
              
              
              $
              92,105,000Interest-bearing
              
              
              370,306,000
              
              
              
              342,118,000Total
      deposits
              
              
              472,299,000
              
              
              
              434,223,000Other
      borrowings
              
              
              28,645,000
              
              
              
              27,892,000Subordinated
      debentures
              
              
              7,217,000
              
              
              
              7,217,000Securities
      sold under agreements to repurchase
              
              
              17,283,000
              
              
              
              9,023,000Accrued
      interest payable
              
              
              2,080,000
              
              
              
              1,721,000Accrued
      expenses and other liabilities
              
              
              3,291,000
              
              
              
              2,367,000Total
      liabilities
              
              
              530,815,000
              
              
              
              482,443,000Commitments
      and contingencies
              
              
              —
              
              
              
              —Stockholders'
      equityCommon
      stock, no par value, 10,000,000 shares authorized, 5,306,828 and 5,017,919
      shares issued and outstanding at December 31, 2007 and 2006,
      respectively
              
              
              34,871,000
              
              
              
              31,148,000Retained
      earnings
              
              
              5,943,000
              
              
              
              6,750,000Accumulated
      other comprehensive income (loss), net
              
              
              276,000
              
              
              
              (592,000
              )Total
      Stockholders' equity
              
              
              41,090,000
              
              
              
              37,306,000Total
      liabilities and Stockholders' equity
              
              $
              571,905,000
              
              
              $
              519,749,000


See
accompanying notes to consolidated financial statements.


A-20




Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Income





Years Ended December 31,2007
            
            
            2006Interest
      income:Loans
            
            $
            27,517,000
            
            
            $
            25,619,000Securities
      held to maturity:Taxable
            
            
            927,000
            
            
            
            879,000Nontaxable
            
            
            757,000
            
            
            
            562,000Securities
      available for sale:Taxable
            
            
            3,877,000
            
            
            
            2,746,000Nontaxable
            
            
            70,000
            
            
            
            36,000FHLB
      dividends
            
            
            117,000
            
            
            
            107,000Other
      interest-earning assets
            
            
            45,000
            
            
            
            51,000Total
      interest income
            
            
            33,310,000
            
            
            
            30,000,000Interest
      expense:Deposits
      .
            
            
            12,011,000
            
            
            
            8,880,000Borrowed
      money
            
            
            1,869,000
            
            
            
            2,036,000Total
      interest expense
            
            
            13,880,000
            
            
            
            10,916,000Net
      interest income before provision for loan losses
            
            
            19,430,000
            
            
            
            19,084,000Provision
      for loan losses
            
            
            530,000
            
            
            
            264,000Net
      interest income after provision for loan losses
            
            
            18,900,000
            
            
            
            18,820,000Noninterest
      income:Fees
      and service charges
            
            
            1,556,000
            
            
            
            1,660,000Bank
      owned life insurance
            
            
            322,000
            
            
            
            312,000Gain
      on life insurance proceeds
            
            
            459,000
            
            
            
            —Gain
      (loss) on calls and sales of securities, net
            
            
            4,000
            
            
            
            (435,000
            )Gain
      on sales of mortgage loans
            
            
            318,000
            
            
            
            235,000Gain
      on sale of credit card loans
            
            
            —
            
            
            
            746,000Merchant
      processing
            
            
            1,456,000
            
            
            
            1,237,000Miscellaneous
            
            
            299,000
            
            
            
            434,000Total
      noninterest income
            
            
            4,414,000
            
            
            
            4,189,000Noninterest
      expense:Salaries
      and employee benefits
            
            
            7,353,000
            
            
            
            6,792,000Occupancy,
      net
            
            
            1,525,000
            
            
            
            1,312,000Equipment
            
            
            972,000
            
            
            
            893,000Data
      processing
            
            
            1,221,000
            
            
            
            1,272,000Advertising
            
            
            525,000
            
            
            
            383,000FDIC
      insurance premium
            
            
            121,000
            
            
            
            51,000Amortization
      of intangible assets
            
            
            32,000
            
            
            
            38,000Charitable
      contributions
            
            
            705,000
            
            
            
            755,000Stationery
      and supplies
            
            
            368,000
            
            
            
            338,000Merchant
      processing
            
            
            1,306,000
            
            
            
            1,122,000Bank-card
      related services
            
            
            348,000
            
            
            
            483,000Other
      real estate expense
            
            
            43,000
            
            
            
            —Miscellaneous
            
            
            2,110,000
            
            
            
            2,190,000Total
      noninterest expenses
            
            
            16,629,000
            
            
            
            15,629,000Income
      before income tax expense
            
            
            6,685,000
            
            
            
            7,380,000Income
      tax expense
            
            
            2,078,000
            
            
            
            2,627,000Net
      income
            
            $
            4,607,000
            
            
            $
            4,753,000Basic
      earnings per share
            
            $
            0.87
            
            
            $
            0.90Diluted
      earnings per share
            
            $
            0.87
            
            
            $
            0.89Cash
      dividends per share
            
            $
            0.34
            
            
            $
            0.29Weighted
      average number of common shares outstanding
            
            
            5,293,507
            
            
            
            5,271,986Weighted
      average number of diluted common shares outstanding
            
            
            5,321,479
            
            
            
            5,321,130





See
accompanying notes to consolidated financial statements.


A-21




Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Changes in Stockholders’ Equity





Years
      Ended December 31, 2007 and 2006AccumulatedOtherComprehensiveCommon
      Stock
            
            
            Retained
            
            
            Treasury
      Stock
            
            
            Income
      (Loss),Shares
            
            
            Amount
            
            
            Earnings
            
            
            Shares
            
            
            Amount
            
            
            Net
            
            
            TotalBalance
      – January 1, 2006 .
            
            
            4,787,889
            
            
            $
            28,211,000
            
            
            $
            6,647,000
            
            
            
            (39,581
            )
            
            $
            (556,000
            )
            
            $
            (918,000
            )
            
            $
            33,384,000Cash
      dividends paid ($0.29 per share)
            
            
            —
            
            
            
            —
            
            
            
            (1,529,000
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,529,000
            )Common
      stock issued under dividend reinvestment plan
            
            
            —
            
            
            
            (3,000
            )
            
            
            —
            
            
            
            29,773
            
            
            
            415,000
            
            
            
            —
            
            
            
            412,000Payment
      of discount on dividend reinvestment plan
            
            
            —
            
            
            
            (19,000
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (19,000
            )5%
      Stock dividend
            
            
            194,294
            
            
            
            2,501,000
            
            
            
            (3,121,000
            )
            
            
            45,684
            
            
            
            619,000
            
            
            
            —
            
            
            
            (1,000
            )Common
      stock issued under stock plans
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,865
            
            
            
            69,000
            
            
            
            —
            
            
            
            69,000Stock
      option compensation expense
            
            
            —
            
            
            
            51,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            51,000Stock
      options exercised
            
            
            35,736
            
            
            
            233,000
            
            
            
            —
            
            
            
            (9,000
            )
            
            
            (132,000
            )
            
            
            —
            
            
            
            101,000Tax
      benefit on stock options exercised
            
            
            —
            
            
            
            174,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            174,000Repurchase
      common stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (31,741
            )
            
            
            (415,000
            )
            
            
            —
            
            
            
            (415,000
            )Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            4,753,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,753,000Unrealized
      holding gains on securities available for sale arising during the period
      (net of taxes of $351,000)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            605,000
            
            
            
            605,000Reclassification
      adjustment for losses in net income (net of tax benefit of
      $156,000)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (279,000
            )
            
            
            (279,000
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,079,000Balance
      – December 31, 2006
            
            
            5,017,919
            
            
            $
            31,148,000
            
            
            $
            6,750,000
            
            
            
            —
            
            
            $
            —
            
            
            $
            (592,000
            )
            
            $
            37,306,000Cash
      dividends paid ($0.34 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
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,607,000Unrealized
      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
            
            
            $
            41,090,000





See
accompanying notes to consolidated financial statements.


A-22


Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Cash Flows





Years
      Ended December 31,2007
            
            
            2006Cash
      flows from operating activities:Net
      income
            
            $
            4,607,000
            
            
            $
            4,753,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
            
            
            787,000
            
            
            
            712,000Amortization
      of premiums and accretion of discounts, net
            
            
            126,000
            
            
            
            244,000Accretion
      of deferred loan fees
            
            
            (120,000
            )
            
            
            (130,000
            )Provision
      for loan losses
            
            
            530,000
            
            
            
            264,000Valuation
      reserve on other real estate owned
            
            
            32,000
            
            
            
            —Originations
      of mortgage loans held for sale
            
            
            (30,570,000
            )
            
            
            (23,462,000
            )Proceeds
      from sale of mortgage loans
            
            
            31,759,000
            
            
            
            23,583,000Gain
      on sale of loans
            
            
            (318,000
            )
            
            
            (235,000
            )Loss
      on sale of securities available for sale
            
            
            .
      —
            
            
            
            435,000Gain
      on calls of securities
            
            
            (4,000
            )
            
            
            —Gain
      on sale of credit card portfolio
            
            
            .
      —
            
            
            
            (746,000
            )Deferred
      income tax benefit
            
            
            (161,000
            )
            
            
            (115,000
            )Amortization
      of intangible assets
            
            
            32,000
            
            
            
            38,000Increase
      in accrued interest receivable
            
            
            (200,000
            )
            
            
            (480,000
            )Increase
      in accrued interest payable
            
            
            359,000
            
            
            
            576,000Increase
      in bank owned life insurance
            
            
            (322,000
            )
            
            
            (312,000
            )Gain
      on life insurance proceeds
            
            
            (459,000
            )
            
            
            —Nonqualified
      stock option expense
            
            
            50,000
            
            
            
            51,000Decrease
      (increase) in other assets
            
            
            158,000
            
            
            
            (562,000
            )(Decrease)
      increase in other liabilities
            
            
            (106,000
            )
            
            
            69,000Net
      cash provided by operating activities
            
            
            6,180,000
            
            
            
            4,683,000Cash
      flows from investing activities:Purchase
      of securities available for sale
            
            
            (20,532,000
            )
            
            
            (37,817,000
            )Proceeds
      from maturities and principal repaymentson securities available
      for sale
            
            
            10,107,000
            
            
            
            12,373,000Proceeds
      from sales and calls on securitiesavailable for
      sale
            
            
            8,634,000
            
            
            
            16,867,000Purchase
      of securities held to maturity
            
            
            (12,365,000
            )
            
            
            (16,250,000
            )Proceeds
      from maturities and principal repayments on securities held to
      maturity
            
            
            7,591,000
            
            
            
            13,777,000Proceeds
      from calls of securities held to maturity
            
            
            2,653,000
            
            
            
            950,000(Purchase)
      redemption of FHLB—NY stock
            
            
            (84,000
            )
            
            
            40,000Net
      increase in loans
            
            
            (50,717,000
            )
            
            
            (27,051,000
            )Additional
      investment in other real estate owned
            
            
            (324,000
            )
            
            
            —Sale
      of other real estate owned
            
            
            353,000
            
            
            
            —Proceeds
      from sale of credit card portfolio
            
            
            —
            
            
            
            4,196,000Life
      insurance proceeds
            
            
            .
      1,030,000
            
            
            
            —Additions
      to premises and equipment
            
            
            (1,639,000
            )
            
            
            (1,346,000
            )Net
      cash used in investing activities
            
            
            (55,293,000
            )
            
            
            (34,261,000
            )Cash
      flows from financing activities:Net
      increase (decrease) in noninterest – bearing deposits
            
            
            9,888,000
            
            
            
            (2,226,000
            )Net
      increase in interest – bearing deposits
            
            
            28,188,000
            
            
            
            32,983,000Net
      increase in securities sold under agreements to repurchase
            
            
            8,260,000
            
            
            
            4,292,000Net
      increase (decrease) in short term borrowings
            
            
            2,400,000
            
            
            
            (1,000,000
            )Payments
      on long term borrowings
            
            
            (1,647,000
            )
            
            
            (1,594,000
            )Cash
      dividends paid on common stock
            
            
            (1,816,000
            )
            
            
            (1,118,000
            )Payment
      of discount on dividend reinvestment plan
            
            
            (43,000
            )
            
            
            (19,000
            )Purchase
      of treasury stock
            
            
            —
            
            
            
            (415,000
            )Exercise
      of stock options
            
            
            73,000
            
            
            
            101,000Tax
      benefit of stock plans
            
            
            3,000
            
            
            
            174,000Issuance
      of common stock
            
            
            42,000
            
            
            
            69,000Net
      cash provided by financing activities
            
            
            45,348,000
            
            
            
            31,247,000Net
      (decrease) increase in cash and cash equivalents
            
            
            (3,765,000
            )
            
            
            1,669,000Cash
      and cash equivalents – beginning
            
            
            15,697,000
            
            
            
            14,028,000Cash
      and cash equivalents – ending
            
            $
            11,932,000
            
            
            $
            15,697,000Supplemental
      disclosures of cash flow information:Cash
      paid during the year for interest
            
            
            13,521,000
            
            
            
            10,341,000Cash
      paid during the year for income taxes
            
            
            2,499,000
            
            
            
            2,799,000Noncash
      investing activities – security purchases due brokers
            
            
            1,027,000
            
            
            
            —–transfer
      of loan to ORE
            
            
            61,000
            
            
            
            —Noncash
      financing activities – issuance of common stock under dividend
      reinvestment plan
            
            
            —
            
            
            
            412,000





See
accompanying notes to consolidated financial statements.


A-23





Stewardship
Financial Corporation and Subsidiary Notes to Consolidated Financial
Statements





Note
1. SIGNIFICANT ACCOUNTING POLICIES





Nature
of operations and principles of consolidation





The
consolidated financial statements include the accounts of Stewardship Financial
Corporation and its wholly owned subsidiary, Atlantic Stewardship Bank, (‘the
Bank”), together referred to as “the Corporation”. Atlantic Stewardship Bank
includes its wholly owned subsidiaries, Stewardship Investment Corporation and
Stewardship Realty LLC. All significant intercompany 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 federal
funds purchased and repurchase agreements.





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 held to maturity and are carried
at amortized cost. All other securities are classified as 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.


A-24





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.


A-25





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. When a property is
acquired, the excess of the carrying amount over fair value, if any, is charged
to the allowance for loan losses. Subsequent adjustments to the carrying value
are recorded in an allowance for OREO and charged to OREO expense. As of
December 31, 2007 and 2006, the Corporation had no OREO.





Intangible
assets





Gross
intangible assets totaled $750,000 with accumulated amortization of $680,000 and
$648,000 at December 31, 2007 and 2006, 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 $70,000 and $102,000 at December 31, 2007 and
2006, 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. Upon
adoption of EITF Issue No. 06-5, which is discussed further below, 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.
Prior to the adoption of EITF Issue No. 06-5, the Corporation recorded owned
life insurance at its cash surrender value.





In
September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
“Accounting for Purchases of Life Insurance – Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin 85-4 (Accounting for
Purchases of Life Insurance)” (EITF Issue No. 06-5). EITF Issue No. 06-5
requires that a policyholder consider contractual terms of a life insurance
policy in determining the amount that could be realized under the insurance
contract. It also requires that if the contract provides for a greater surrender
value if all individual policies in a group are surrendered at the same time,
that the surrender value be determined based on the assumption that policies
will be surrendered on an individual basis. Lastly, EITF Issue No. 06-5 requires
disclosure when there are contractual restrictions on the Corporation’s ability
to surrender a policy. The adoption of EITF Issue No. 06-5 on January 1, 2007
had no impact on the Corporation’s financial condition or results of
operation.





Treasury
Stock





Repurchases
of common stock are recorded as treasury stock at cost. Treasury stock is
reissued using the first in first out method. Treasury stock may be reissued for
exercise of stock options, dividend reinvestment plans, stock dividends or other
stock issuances. The difference between the cost and the market value at the
time the treasury stock is reissued is shown as an adjustment to common
stock.





Dividend
Reinvestment Plan





The
Corporation offers shareholders the opportunity to participate in a dividend
reinvestment plan. Plan participants may reinvest cash dividends to purchase new
shares of stock at 95% of the market value, based on the most recent trades.
Previously, the Corporation purchased treasury stock or issued authorized but
un-issued shares to fund the dividend reinvestment plan and issued stock to the
plan participants in place of cash dividends. Effective May 16, 2006, the
Corporation changed the policy to purchase shares for the dividend reinvestment
participants on the open market through an approved broker. The Corporation uses
the cash


A-26


dividends
due the plan participants to purchase shares from the broker. The Corporation
reimburses the broker for the 5% discount when the purchase of the Corporation’s
stock is completed.





Stock-based
compensation





Effective
January 1, 2006, the Corporation adopted Statement of Financial Accounting
Standards No. 123(R), “Share Based Payment” (SFAS No. 123(R)), using the
modified prospective transition method. Accordingly, the Corporation has
recorded stock-based compensation cost using the fair value method starting in
2006.





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.





The
Corporation adopted FASB Interpretation 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48), as of January 1, 2007. 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. The adoption had no
affect on the Corporation’s financial statements.





The
Corporation recognizes interest and/or penalties related to income tax matters
in income tax expense.





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 average daily
number of common shares outstanding during the period. Common stock equivalents
are not included in the calculation.





Diluted
earnings per share is computed similar to that of the basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potential dilutive common
shares were issued.





All share
and per share amounts have been restated to reflect a 5% stock dividend paid
November, 2006 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.








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, 2007 and 2006 were approximately $300,000.


A-27





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, 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
            
            
            75,727,000702,000
            
            
            
            238,000Other
      equity investments
            
            
            1,230,000
            
            
            
            —
            
            
            
            17,000$
            76,957,000
            
            
            $
            702,000
            
            
            $
            255,000December
      31, 2006Fair
            
            
            Gross
      UnrealizedValue
            
            
            Gains
            
            
            LossesU.S.
      government-sponsored agenciesWithin
      one year.
            
            $
            4,180,000
            
            
            $
            —
            
            
            $
            20,000After
      one year through five years
            
            
            11,375,000
            
            
            
            1,000
            
            
            
            138,000After
      five years through ten years
            
            
            8,384,000
            
            
            
            27,000
            
            
            
            35,000After
      ten years
            
            
            8,178,000
            
            
            
            —
            
            
            
            154,00032,117,000
            
            
            
            28,000
            
            
            
            347,000Obligations
      of state and political subdivisions:After
      one year through five years
            
            
            1,331,000
            
            
            
            —
            
            
            
            25,000After
      five years through ten years
            
            
            143,000
            
            
            
            —
            
            
            
            —After
      ten years
            
            
            349,000
            
            
            
            —
            
            
            
            5,0001,823,000
            
            
            
            —
            
            
            
            30,000Mortgage-backed
      securities:Within
      one year
            
            
            4,000
            
            
            
            —
            
            
            
            —After
      one year through five years
            
            
            2,190,000
            
            
            
            —
            
            
            
            75,000After
      five years through ten years
            
            
            6,376,000
            
            
            
            5,000
            
            
            
            154,000After
      ten years
            
            
            29,137,000
            
            
            
            35,000
            
            
            
            412,00037,707,000
            
            
            
            40,000
            
            
            
            641,000Total
      debt securities
            
            
            71,647,000
            
            
            
            68,000
            
            
            
            1,018,000Other
      equity investments
            
            
            1,099,000
            
            
            
            —
            
            
            
            21,000$
            72,746,000
            
            
            $
            68,000
            
            
            $
            1,039,000


A-28





Issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties. This might cause actualmaturities to differ from the
contractual maturities summarized above.





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
2007 and 2006, 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, 2007 and
2006, and if the unrealized loss position was continuous for the twelve months
prior to December 31, 2007 and 2006.





Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalUnrealized
            
            
            
            
            
            Unrealized
            
            
            
            
            
            Unrealized2007
            
            Fair
      Value
            
            
            Losses
            
            
            Fair
      Value
            
            
            Losses
            
            
            Fair
      Value
            
            
            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
      eauity 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
            )Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            Total2006
            
            Fair
      Value
            
            
            UnrealizedLosses
            
            
            Fair
      Value
            
            
            UnrealizedLosses
            
            
            Fair
      Value
            
            
            UnrealizedLossesU.S.
      government sponsored agencies
            
            $
            16,551,000
            
            
            $
            (181,000
            )
            
            $
            11,980,000
            
            
            $
            (166,000
            )
            
            $
            28,531,000
            
            
            $
            (347,000
            )Obligations
      of state and political subdivisions
            
            
            492,000
            
            
            
            (5,000
            )
            
            
            1,071,000
            
            
            
            (25,000
            )
            
            
            1,563,000
            
            
            
            (30,000
            )Mortgage-backed
      securities
            
            
            7,433,000
            
            
            
            (59,000
            )
            
            
            20,546,000
            
            
            
            (582,000
            )
            
            
            27,979,000
            
            
            
            (641,000
            )Other
      eauity investments
            
            
            —
            
            
            
            —
            
            
            
            1,099,000
            
            
            
            (21,000
            )
            
            
            1,099,000
            
            
            
            (21,000
            )Total
      temporarily impaired securities
            
            $
            24,476,000
            
            
            $
            (245,000
            )
            
            $
            34,696,000
            
            
            $
            (794,000
            )
            
            $
            59,172,000
            
            
            $
            (1,039,000
            )





The
unrealized losses are primarily due to the changes in interest rates. These
securities have not been considered other than temporarily impaired as scheduled
principal and interest payments have been made and management anticipates
collecting the entire principal balance as scheduled. Management believes the
price variation is temporary in nature and has the ability and intent to hold
these securities to maturity or for a sufficient amount of time to recover the
recorded principal.





Cash
proceeds realized from sales and calls of securities available for sale for the
years ended December 31, 2007 and 2006 were $8,634,000 and $16,867,000,
respectively. 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. There were no gross
gains and gross losses totaling $435,000 were realized on sales or calls during
the year ended December 31, 2006. The tax benefit related to these realized
losses was $156,000.





See Note
9 to financial statements regarding securities pledged as collateral for
securities sold under agreements to repurchase.


A-29





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, 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
            
            
            $
            41,508,000December
      31, 2006Carrying
            
            
            Gross
      UnrecognizedAmount
            
            
            Gains
            
            
            Losses
            
            
            Fair
      ValueU.S.
      Treasury:After
      one year through five years
            
            $
            502,000
            
            
            $
            —
            
            
            $
            2,000
            
            
            $
            500,000502,000
            
            
            
            —
            
            
            
            2,000
            
            
            
            500,000U.S.
      government sponsored agencies:Within
      one year
            
            
            1,455,000
            
            
            
            —
            
            
            
            22,000
            
            
            
            1,433,000After
      one year through five years
            
            
            5,091,000
            
            
            
            3,000
            
            
            
            56,000
            
            
            
            5,038,000After
      five years through ten years
            
            
            2,748,000
            
            
            
            5,000
            
            
            
            5,000
            
            
            
            2,748,000After
      ten years
            
            
            1,482,000
            
            
            
            —
            
            
            
            26,000
            
            
            
            1,456,00010,776,000
            
            
            
            8,000
            
            
            
            109,000
            
            
            
            10,675,000Obligations
      of state and political subdivisions:Within
      one year
            
            
            4,596,000
            
            
            
            2,000
            
            
            
            14,000
            
            
            
            4,584,000After
      one year through five years
            
            
            4,475,000
            
            
            
            1,000
            
            
            
            73,000
            
            
            
            4,403,000After
      five years through ten years
            
            
            6,499,000
            
            
            
            32,000
            
            
            
            25,000
            
            
            
            6,506,000After
      ten years
            
            
            4,946,000
            
            
            
            18,000
            
            
            
            42,000
            
            
            
            4,922,00020,516,000
            
            
            
            53,000
            
            
            
            154,000
            
            
            
            20,415,000Mortgage-backed
      securities:Within
      one year
            
            
            20,000
            
            
            
            —
            
            
            
            —
            
            
            
            20,000After
      one but within five years
            
            
            698,000
            
            
            
            —
            
            
            
            13,000
            
            
            
            685,000After
      five years through ten years
            
            
            1,725,000
            
            
            
            10,000
            
            
            
            17,000
            
            
            
            1,718,000After
      ten years
            
            
            4,926,000
            
            
            
            22,000
            
            
            
            80,000
            
            
            
            4,868,0007,369,000
            
            
            
            32,000
            
            
            
            110,000
            
            
            
            7,291,000$
            39,163,000
            
            
            $
            93,000
            
            
            $
            375,000
            
            
            $
            38,881,000





Issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. This might cause actual maturities to differ from the
contractual maturities summarized above.





Mortgage-backed
securities are comprised primarily of government agencies such as GNMA and
government sponsored agencies such as FNMA, FHLB and FHLMC. At year end 2007 and
2006, there were no holdings of securities of any one issuer other
than


A-30


the U.S.
government and its agencies in an amount greater than 10% of stockholders'
equity.





The
following tables summarize the fair value and unrecognized losses of those
investment securities which reported an unrecognized loss at December 31, 2007
and 2006, and if the unrecognized loss position was continuous for the twelve
months prior to December 31, 2007 and 2006.





Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalUnrecognized
            
            
            
            
            
            Unrecognized
            
            
            
            
            
            Unrecognized2007
            
            Fair
      Value
            
            
            Losses
            
            
            Fair
      Value
            
            
            Losses
            
            
            Fair
      Value
            
            
            LossesU.S.
      Treasury
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —U.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
            )Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalUnrecognized
            
            
            
            
            
            
            Unrecognized
            
            
            
            
            
            
            Unrecognized2006
            
            Fair
      Value
            
            
            Losses
            
            
            Fair
      Value
            
            
            Losses
            
            
            Fair
      Value
            
            
            LossesU.S.
      Treasury
            
            $
            500,000
            
            
            $
            (2,000
            )
            
            $
            —
            
            
            $
            —
            
            
            $
            500,000
            
            
            $
            (2,000
            )U.S.
      government sponsored agencies
            
            
            2,950,000
            
            
            
            (31,000
            )
            
            
            6,069,000
            
            
            
            (78,000
            )
            
            
            9,019,000
            
            
            
            (109,000
            )Obligations
      of state and political subdivisions
            
            
            6,238,000
            
            
            
            (62,000
            )
            
            
            6,083,000
            
            
            
            (92,000
            )
            
            
            12,321,000
            
            
            
            (154,000
            )Mortgage-backed
      securities
            
            
            973,000
            
            
            
            (9,000
            )
            
            
            3,956,000
            
            
            
            (101,000
            )
            
            
            4,929,000
            
            
            
            (110,000
            )Total
      temporarily impaired securities
            
            $
            10,661,000
            
            
            $
            (104,000
            )
            
            $
            16,108,000
            
            
            $
            (271,000
            )
            
            $
            26,769,000
            
            
            $
            (375,000
            )





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, 2007 were $2,653,000. Cash proceeds realized froms calls of
securities held to maturity for the year ended December 31, 2006 were $950,000.
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. There were no gains or losses realized on calls for the year ended
December 31, 2006.





The
carrying value of securities pledged to secure treasury tax and loan deposits
and public deposits for the two years ended December 31, 2007 and 2006 were
$1,001,000 and $1,002,000, respectively. See also Note 9 to financial statements
regarding securities pledged as collateral for securities sold under agreements
to repurchase.


A-31





Note
5. LOANS





The loan
portfolio consisted of the following:





December
      31,2007
            
            
            2006Mortgage:Residential
            
            $
            44,719,000
            
            
            $
            47,020,000Commercial
            
            
            209,082,000
            
            
            
            177,411,000Commercial
            
            
            89,845,000
            
            
            
            72,606,000Equity
            
            
            19,723,000
            
            
            
            20,010,000Installment
            
            
            56,796,000
            
            
            
            52,389,000Other.
            
            
            424,000
            
            
            
            560,000Total
      gross loans
            
            
            420,589,000
            
            
            
            369,996,000Less:
      Deferred loan fees, net of costs
            
            
            442,000
            
            
            
            452,000Allowance
      for loan losses
            
            
            4,457,000
            
            
            
            4,101,0004,899,000
            
            
            
            4,553,000Loans,
      net
            
            $
            415,690,000
            
            
            $
            365,443,000





At
December 31, 2007 and 2006, loans participated by the Corporation to other
organizations totaled approximately $10,397,000 and $13,704,000,
respectively.





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





December
      31,2007
            
            
            2006Balance,
      beginning
            
            $
            4,101,000
            
            
            $
            3,847,000Provision
      charged to operations
            
            
            530,000
            
            
            
            264,000Recoveries
      of loans charged off
            
            
            11,000
            
            
            
            30,000Loans
      charged off
            
            
            (185,000
            )
            
            
            (40,000
            )Balance,
      ending
            
            $
            4,457,000
            
            
            $
            4,101,000





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, 2007 and 2006, these loans
aggregated approximately $2,346,000 and $1,617,000, respectively. During the
year ended December 31, 2007, new loans totaling $1,320,000 were granted and
repayments totaled approximately $591,000. The loans, at December 31, 2007, were
current as to principal and interest payments.





Note
6. NONPERFORMING LOANS





Nonperforming
loans include the following:





December
      31,2007
            
            
            2006Nonaccrual
      loans
            
            $
            455,000
            
            
            $
            444,000Loans
      past due ninety days or more and accruing
            
            
            26,000
            
            
            
            1,090,000Total
      nonperforming loans
            
            $
            481,000
            
            
            $
            1,534,000





Restructured
loans classified as nonaccrual for the year ended December 31, 2007 were
$72,000. There were no restructured loans classified as nonaccrual for the year
ended December 31, 2007.


A-32


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





Year
      ended December 31,2007
            
            
            2006Income
      that would have been recorded under contractual terms
            
            $
            40,000
            
            
            $
            37,000Less
      interest income received
            
            
            10,000
            
            
            
            14,000Lost
      income on nonperforming loans during the year
            
            $
            30,000
            
            
            $
            23,000









Impaired
loans consisted of the following:





December
      31,2007
            
            
            2006Impaired
      LoansWith
      related allowance for loan loss
            
            $
            222,000
            
            
            $
            223,000Without
      related allowance for loan loss
            
            
            233,000
            
            
            
            221,000Total
      impaired loans
            
            $
            455,000
            
            
            $
            444,000Related
      allowance for possible credit losses
            
            $
            39,000
            
            
            $
            110,000Average
      investment in impaired loans
            
            $
            344,000
            
            
            $
            241,000Interest
      recognized on impaired loans
            
            $
            —
            
            
            $
            —








Note
7. PREMISES AND EQUIPMENT, NET





December
      31,2007
            
            
            2006Land
            
            $
            2,999,000
            
            
            $
            2,999,000Buildings
      and improvements
            
            
            2,802,000
            
            
            
            2,758,000Leasehold
      improvements
            
            
            2,159,000
            
            
            
            1,771,000Furniture,
      fixtures and equipment
            
            
            4,581,000
            
            
            
            3,798,00012,541,000
            
            
            
            11,326,000Less
      accumulated depreciation and amortization
            
            
            4,591,000
            
            
            
            4,228,000Total
      premises & equipment, net
            
            $
            7,950,000
            
            
            $
            7,098,000





Amounts
charged to net occupancy expense for depreciation and amortization of banking
premises and equipment amounted to $787,000 and $712,000 in 2007 and 2006,
respectively.


A-33


Note
8. DEPOSITS





December
      31, 2007
            
            
            December
      31, 2006Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            AverageRate
            
            
            Amount
            
            
            Rate
            
            
            AmountNoninterest-bearing
      demand
            
            
            0
            %
            
            $
            101,993,000
            
            
            
            0
            %
            
            $
            92,105,000NOW
      accounts
            
            
            1.75
            %
            
            
            67,044,000
            
            
            
            1.59
            %
            
            
            64,493,000Money
      market accounts
            
            
            3.17
            %
            
            
            86,669,000
            
            
            
            2.67
            %
            
            
            56,406,000Total
      interest-bearing demand
            
            
            2.55
            %
            
            
            153,713,000
            
            
            
            2.09
            %
            
            
            120,899,000000Statement
      savings and clubs
            
            
            0.80
            %
            
            
            33,524,000
            
            
            
            0.77
            %
            
            
            33,546,000Business
      savings
            
            
            0.50
            %
            
            
            3,486,000
            
            
            
            0.51
            %
            
            
            3,778,000Total
      savings
            
            
            0.77
            %
            
            
            37,010,000
            
            
            
            0.74
            %
            
            
            37,324,000IRA
      investment and variable rate savings
            
            
            4.56
            %
            
            
            26,499,000
            
            
            
            4.31
            %
            
            
            23,012,000Brokered
      certificates
            
            
            5.19
            %
            
            
            15,415,000
            
            
            
            5.37
            %
            
            
            19,671,000Money
      market certificates
            
            
            4.47
            %
            
            
            137,669,000
            
            
            
            4.36
            %
            
            
            141,212,000Total
      certificates of deposit
            
            
            4.55
            %
            
            
            179,583,000
            
            
            
            4.46
            %
            
            
            183,895,000Total
      interest-bearing deposits
            
            
            3.34
            %
            
            
            370,306,000
            
            
            
            3.22
            %
            
            
            342,118,000Total
      deposits
            
            
            2.62
            %
            
            $
            472,299,000
            
            
            
            2.54
            %
            
            $
            434,223,000





Certificates
of deposit with balances of $100,000 or more at December 31, 2007 and 2006,
totaled approximately $71,122,000 and $69,902,000, respectively.





The
scheduled maturities of certificates of deposit were as follows:





December
      31,20072008
            
            $
            131,998,0002009
            
            
            26,570,0002010
            
            
            13,246,0002011
            
            
            4,470,0002012
            
            
            3,299,000$
            179,583,000





Note
9. OTHER BORROWINGS





Federal
Home Loan Bank of New York Advances





During
the years 2007 and 2006, the maximum amount of FHLB-NY advances outstanding at
any month end was $32.0 million and $40.4 million, respectively. The average
amount of advances outstanding during the year ended December 31, 2007 and 2006
was $20.4 million and $27.9 million, respectively. As of December 31, 2007, all
FHLB-NY advances had fixed rates.  The advances are scheduled for
repayment as follows:





December
      31, 2007
            
            
            December
      31, 2006Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            AverageAdvances
      Maturing
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate2007
            
            $
            —
            
            
            
            0.00
            %
            
            $
            14,400,000
            
            
            
            5.33
            %2008
            
            
            18,645,000
            
            
            
            3.58
            %
            
            
            3,492,000
            
            
            
            3.26
            %2009
            
            
            —
            
            
            
            0.00
            %
            
            
            —
            
            
            
            0.00
            %Thereafter
            
            
            10,000,000
            
            
            
            3.82
            %
            
            
            10,000,000
            
            
            
            3.82
            %$
            28,645,000
            
            
            
            3.66
            %
            
            $
            27,892,000
            
            
            
            4.53
            %


A-34





Advances
totaling $10.0 million are convertible by the FHLB -NY quarterly into any
FHLB-NY advance at current market rate. This conversion feature is only
available if the three month LIBOR resets at or above 7.50%.





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





The
Corporation had an available overnight line of credit with the FHLB-NY for a
maximum of $51.7 million at December 31, 2007.





Securities
Sold Under Agreement to Repurchase





At
December 31, 2007 and 2006, securities sold under agreements to repurchase were
collateralized by U.S. Treasury and agency securities having a carrying value of
approximately $20,208,000 and $24,531,000, respectively. In September 2007, the
Corporation entered into a wholesale repurchase agreeement with a broker to
borrow $14.0 million with a maturity of 7 years. The borrowing bears a fixed
interest rate of 3.25% for one year and then converts 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 was collateralized by agency securities
maintained in safekeeping by the broker. The remaining balances at December 31,
2007 as well as balances at December 31, 2006 were securities sold to Bank
customers at fixed rates with maturities varying from one day to one year. These
securities were maintained in a separate safekeeping account within the
Corporation's control.





December
      31,2007
            
            
            2006Balance
            
            $
            17,283,000
            
            
            $
            9,023,000Weighted
      average interest rate
            
            
            3.56
            %
            
            
            4.70
            %Weighted
      average length of maturity
            
            5.7
      years
            
            
            42
      daysMaximum
      amount outstanding at any month endduring
      the year
            
            $
            17,283,000
            
            
            $
            9,757,000Average
      amount outstanding during the year
            
            $
            12,192,000
            
            
            $
            7,461,000Average
      interest rate during the year
            
            
            4.13
            %
            
            
            4.43
            %





Note
10. SUBORDINATED DEBENTURES





On
September 17, 2003, Stewardship Statutory Trust I (the “Trust”), a statutory
business trust, and a wholly owned subsidiary of Stewardship Financial
Corporation, issued $7,000,000 Fixed/Floating Rate Capital Securities (“Capital
Securities”), the proceeds from which the Trust used to purchase from the
Corporation, $7,217,000 of Fixed/Floating Rate Junior Subordinated Deferrable
Interest Debentures (“Debentures”) maturing September 17, 2033. The Trust is
obligated to distribute all proceeds of a redemption whether voluntary or upon
maturity, to holders of the Capital Securities. Stewardship Financial
Corporation’s obligation with respect to the Capital Securities, and the
subordinated debentures, when taken together, provide a full and unconditional
guarantee on a subordinated basis by Stewardship Financial Corporation of the
Trust’s obligations to pay amounts when due on the Capital
Securities.





The
Capital Securities and the Debentures both bear a fixed interest rate of 6.75%
until September 17, 2008 and thereafter shall float quarterly at a rate of
3-Month LIBOR plus 2.95%.





FASB
Interpretation No. 46, “Consolidation of Variable Interest Entities” was issued
in January 2003 and was reissued as FASB Interpretation No. 46 (revised December
2003) (“FIN 46R”). FIN 46 and FIN 46R provide guidance on the identification of
entities controlled through means other than voting rights and specify how the
Corporation should evaluate its interest in a variable interest entity for
purposes of determining whether to consolidate that entity. If a variable
interest entity does not effectively disperse risk among the parties involved,
it must be consolidated by its primary beneficiary.





The
Corporation adopted FIN 46R on December 31, 2003, deconsolidating its investment
in Stewardship Statutory Trust I, the subsidiary trust formed in connection with
the issuance of subordinated debentures (trust preferred securities). In July
2003, the Board of Governors of the Federal Reserve System instructed bank
holding companies to continue to include trust preferred securities in their
Tier I capital for regulatory purposes until notice is given to the contrary.
There can be no assurance that the Federal Reserve System will continue to allow
bank holding companies to include trust preferred securities in Tier I capital
for regulatory purposes. As of December 31, 2007, assuming the Corporation was
not allowed to include the $7,000,000 in trust preferred securities issued by
Stewardship Statutory Trust I in Tier I capital, the Corporation would remain
“well capitalized”.


A-35





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, 2007, 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 2007 and 2006, 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, 2007, 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, 2007 and 2006, compared to the minimum capital adequacy
requirements and the requirements for classification as a well capitalized
institution under the prompt corrective action regulations:





To
      Be Well CapitalizedRequired
      for Capital
            
            
            Under
      Prompt CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      RegulationsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioDecember
      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
            %December
      31, 2006Leverage
      (Tier 1) capitalConsolidated
            
            $
            44,783,000
            
            
            
            8.85
            %
            
            $
            20,252,000
            
            
            
            4.00
            %
            
            $
            N/A
            
            
            
            N/ABank
            
            
            39,765,000
            
            
            
            7.91
            %
            
            
            20,096,000
            
            
            
            4.00
            %
            
            
            25,120,000
            
            
            
            5.00
            %Risk-based
      capital:Tier
      1Consolidated
            
            
            44,783,000
            
            
            
            11.25
            %
            
            
            15,930,000
            
            
            
            4.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            
            39,765,000
            
            
            
            10.01
            %
            
            
            15,890,000
            
            
            
            4.00
            %
            
            
            23,836,000
            
            
            
            6.00
            %TotalConsolidated
            
            
            48,884,000
            
            
            
            12.28
            %
            
            
            31,859,000
            
            
            
            8.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            
            43,866,000
            
            
            
            11.04
            %
            
            
            31,781,000
            
            
            
            8.00
            %
            
            
            39,726,000
            
            
            
            10.00
            %


A-36


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, 2007 and 2006 amounted to approximately $396,000 and $394,000,
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, 2007 and
2006 amounted to approximately $69,000 and $67,000, 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 3,437 and 3,231 shares
during 2007 and 2006, respectively.





Note
13. STOCK-BASED COMPENSATION





At
December 31, 2007, 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 2007 and 2006 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. Beginning in June, 2006, shares were
purchased for Directors in the open market and resulted in purchases of 5,207
shares for 2007 and 3,168 shares for 2006. From January 1, 2006 through May 31,
2006, the Corporation provided shares in the amount of 2,131 through reissued
treasury shares or through authorized, un-issued shares.


A-37





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
Stock Option Committee. The committee has the authority to determine the terms
and conditions of the options granted, the exercise price thereof, and whether
the options are incentive or non-statutory options. The Employee Stock Option
Plan has reserved 219,901 shares of common stock for issuance. The options were
issued with an exercise price which represented market price of the stock at the
date of grant. Options are exercisable, subject to a vesting schedule, with the
first vesting starting one year from the date of the grant and expire between
five and ten years from the date of grant. There were no options granted during
2007, or 2006. The plan allows for the exercise of options to be paid for in
cash or with shares already owned. During 2007, 9,302 shares were used to
satisfy the exercise of options. A summary of the status of the qualified stock
options as of December 31, 2007 and changes during the year is presented as
follows:





2007WeightedAverageExerciseShares
            
            
            PriceOutstanding
      at beginning of year
            
            
            79,193
            
            
            $
            5.70Exercised
            
            
            (41,222
            )
            
            
            3.86Forfeited
            
            
            (
      1,554
            )
            
            
            10.63Outstanding
      at end of year
            
            
            36,417
            
            
            $
            7.56Intrinsic
      value at year end
            
            $
            207,000Options
      exercisable at year end
            
            
            36,417Intrinsic
      value of options Exercisable
            
            $
            207,000Weighted-average
      remaining contractual term (years)
            
            
            2.51





The
intrinsic value of options exercised was $380,000 and $12,000 for the years
ended December 31, 2007 and 2006, respectively. The Corporation received cash
from the exercise of options in the amount of $32,000 and $10,000 for the years
ended December 31, 2007 and 2006 respectively.





The
following table summarizes information about the qualified employee stock
options outstanding at December 31, 2007:





Options
      OutstandingNumber
            
            
            Weighted
      Avg.
            
            
            Weighted
            
            
            NumberOutstanding
            
            
            Remaining
            
            
            Average
            
            
            Exercisableat
      12/31/07
            
            
            Contractual
      Life
            
            
            Exercise
      Price
            
            
            12/31/07Range
      of Exercise Prices:$3 -
      5
            
            
            
            7,331
            
            
            
            0.14
            
            
            $
            4.30
            
            
            
            7,331$5 -
      8
            
            
            
            18,705
            
            
            
            1.76
            
            
            
            6.20
            
            
            
            18,705$8
      -11
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —$11
      – 14
            
            
            10,381
            
            
            
            5.54
            
            
            
            12.34
            
            
            
            10,381$3
      -14
            
            
            
            36,417
            
            
            
            2.51
            
            
            $
            7.56
            
            
            
            36,417





The 2001
Stock Option Plan for Non-Employee Directors provided for options to purchase
shares of common stock to be issued to Directors of the Corporation. The plan
reserved 168,852 shares of common stock for issuance. The options to be issued
with an exercise price which represented market price of the stock at the date
of grant. There were no options granted during 2007 or 2006. The plan allows for
the exercise of options to be paid for in cash or with shares already owned.
During 2006, 9,000 shares were used to satisfy the exercise
options.


A-38





On May 9,
2006 the shareholders approved the 2006 Stock Option Plan for Non-Employee
Directors. The Plan provides for options to purchase shares of common stock to
be issued to Non-Employee Directors of the Corporation. The plan reserved 66,150
shares of common stock for issuance, 20% of such options are exercisable each
year for five years. Options expire on the earlier of the sixth anniversary of
the date of the grant or May 15, 2012. Options were granted on June 30, 2006 to
all Non-Employee Directors. A 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, 2007 is
presented below:




2007Weighted-AverageExerciseShares
            
            
            PriceOutstanding
      at beginning of year
            
            
            60,753
            
            
            $
            12.34Granted
            
            
            —
            
            
            
            —Exercised
            
            
            (
      3,307
            )
            
            
            12.24Forfeited
            
            
            —
            
            
            
            —Outstanding
      at end of year
            
            
            57,446
            
            
            $
            12.35Intrinsic
      value at end of year
            
            $
            52,000Options
      exercisable at year end
            
            
            13,346Weighted
      average fair value of options granted during the year
            
            $
            —Intrinsic
      value of options exercisable
            
            $
            8,000Weighted
      average remaining contractual terms (years)
            
            
            4.22





The
Corporation received cash from the exercise of options in the amount of $41,000
and $101,000 for the years ended December 31, 2007 and 2006 respectively. The
Corporation realized a tax benefit from the options exercised in the years ended
December 31, 2007 and 2006 of $3,000 and $174,000, respectively.





The fair
value of the options granted for the 2006 Stock Option Plan for Non-Employee
Directors was estimated on the date of the grant using the Black -Scholes option
pricing model with the following assumptions used:





Dividend
      Yield
            
            
            2.25
            %Expected
      Volatility
            
            
            36.72
            %Risk-Free
      Interest Rate
            
            
            5.21
            %Expected
      Life
            6
      yearsFair
      Value at Grant Date
            
            
            $4.33





The
following table summarizes information about the nonqualified Non-Employee
Director stock options outstanding at December 31, 2007:


Options
      OutstandingNumber
      Outstanding at 12/31/07
            
            
            Weighted
      Avg. Remaining Contractual Life
            
            
            Weighted
      Average Exercise Price
            
            
            Number
      Exercisable 12/31/07Range
      of Exercise Prices:$11
      - 13
            
            
            
            51,818
            
            
            
            4.38
            
            
            $
            12.24
            
            
            
            7,718$13
      – 15
            
            
            
            5,628
            
            
            
            2.80
            
            
            
            13.31
            
            
            
            5,628$11
      - 15
            
            
            
            57,446
            
            
            
            4.22
            
            
            $
            12.35
            
            
            
            13,346





Unrecognized
compensation expense totaled $161,000 and will be recognized over the next 3.4
years.


A-39


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 2007 and 2006:





2007
            
            
            2006Net
      income
            
            $
            4,607,000
            
            
            $
            4,753,000Weighted
      average common shares outstanding - basic
            
            
            5,293,507
            
            
            
            5,271,986Effect
      of dilutive securities - stock options
            
            
            27,972
            
            
            
            49,144Weighted average
      common sharesoutstanding -
      diluted
            
            
            5,321,479
            
            
            
            5,321,130Basic
      earnings per share
            
            $
            0.87
            
            
            $
            0.90Diluted
      earnings per share
            
            $
            0.87
            
            
            $
            0.89





Stock
options granting 54,038 and 33,417 shares of common stock for the years ended
December 31, 2007 and 2006, 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 31,2007
            
            
            2006Current
      tax expense:Federal
            
            $
            1,717,000
            
            
            $
            2,092,000State
            
            
            522,000
            
            
            
            650,0002,239,000
            
            
            
            2,742,000Deferred
      tax benefit:Federal
            
            
            (152,000
            )
            
            
            (80,000
            )State
            
            
            (9,000
            )
            
            
            (35,000
            )(161,000
            )
            
            
            (115,000
            )$
            2,078,000
            
            
            $
            2,627,000





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 31,2007
            
            
            2006Federal
      income tax.Add
      (deduct) effect of:
            
            $
            2,273,000
            
            
            $
            2,509,000State
      income taxes, net of federal income tax effect
            
            
            338,000
            
            
            
            406,000Nontaxable
      interest income
            
            
            (312,000
            )
            
            
            (246,000
            )Life
      insurance
            
            
            (268,000
            )
            
            
            (109,000
            )Nondeductible
      expenses
            
            
            71,000
            
            
            
            73,000Change
      in valuation reserve - federal
            
            
            27,000
            
            
            
            17,000Other
      items, net
            
            
            (51,000
            )
            
            
            (23,000
            )Effective
      federal income taxes
            
            $
            2,078,000
            
            
            $
            2,627,000


A-40




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
      31,2007
            
            
            2006Deferred
      tax assets:Allowance
      for loan losses
            
            $
            1,780,000
            
            
            $
            1,638,000Accrued
      reserves
            
            
            75,000
            
            
            
            122,000Core
      deposit intangible amortization
            
            
            3,000
            
            
            
            10,000Stock
      compensation
            
            
            41,000
            
            
            
            20,000Nonaccrual
      loan interest
            
            
            19,000
            
            
            
            12,000Depreciation
            
            
            212,000
            
            
            
            203,000Contribution
      carry forward
            
            
            87,000
            
            
            
            34,000State
      capital loss carry forward
            
            
            111,000
            
            
            
            7,000Unrealized
      losses on securities available for sale
            
            
            —
      381,000Other
            
            
            —
            
            
            
            1,0002,328,000
            
            
            
            2,428,000Valuation
      reserve
            
            
            (94,000
            )
            
            
            (41,000
            )2,234,000
            
            
            
            2,387,000Deferred
      tax liabilities:Unrealized
      gains on securities available for sale
            
            
            171,000
            
            
            
            —Other
            
            
            66,000
            
            
            
            —237,000
            
            
            
            —Net
      deferred tax assets
            
            $
            1,997,000
            
            
            $
            2,387,000







There
were no unrecognized tax benefits during the year or at the year ending December
31, 2007.





There
were no tax interest and penalties recorded in the income statement for the year
ended December 31, 2007. There were no tax interest and penalties accrued for
the year ended December 31, 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
2004.





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.


A-41





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, 2007, the Corporation had mortgage commitments to extend credit
aggregating approximately $1.9 million at fixed rates averaging 5.86%. All these
loan commitments will be sold to investors upon closing. Commercial,
construction, and home equity loan commitments of approximately $12.7 million
were extended with variable rates currently averaging 7.05% and $1.1 million
were extended at fixed rates averaging 6.13%. All commitments were due to expire
within approximately 120 days.





Additionally,
at December 31, 2007, the Corporation was committed for approximately $81.7
million of unused lines of credit, consisting of $25.3 million relating to a
home equity line of credit program and an unsecured line of credit program (cash
reserve), and $56.4 million relating to commercial and construction lines of
credit. Amounts drawn on the unused lines of credit are predominantly assessed
interest at rates which fluctuate with the base rate.





Commitments
under standby and commercial letters of credit aggregated approximately $3.7
million at December 31, 2007, of which $3.6 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





Rentals
under long-term operating lease for branch offices amounted to approximately
$766,000 and $642,000 during the years ended December 31, 2007 and 2006,
respectively. At December 31, 2007, the minimum rental commitments on the
noncancellable leases with an initial term of one year or more and expiring
thereafter is as follows:





Year
      Ending
            
            MinimumDecember
      31
            
            Rent2008
            
            $
            829,0002009
            
            
            776,0002010
            
            
            757,0002011
            
            
            743,0002012
            
            
            724,000Thereafter
            
            
            3,833,000$
            7,662,000


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.


A-42





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, 2007, this restriction did not result
in any effective limitation in the manner in which the Bank is currently
operating.





Note
18. FAIR VALUE OF FINANCIAL INSTRUMENTS





Fair
value estimates, methods and assumptions are set forth below for the
Corporation's financial instruments.





December
      31,2007
            
            
            2006Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            EstimatedAmount
            
            
            Fair
      Value
            
            
            Amount
            
            
            Fair
      Value(Dollars
      in thousands)Financial
      assets:Cash
      and cash equivalents
            
            $
            11,932
            
            
            $
            11,932
            
            
            $
            15,697
            
            
            $
            15,697Securities
      available for sale
            
            
            76,957
            
            
            
            76,957
            
            
            
            72,746
            
            
            
            72,746Securities
      held to maturity
            
            
            41,189
            
            
            
            41,508
            
            
            
            39,163
            
            
            
            38,881FHLB-NY
      stock
            
            
            1,983
            
            
            
            1,983
            
            
            
            1,899
            
            
            
            1,899Net
      loans
            
            
            415,690
            
            
            
            415,900
            
            
            
            365,443
            
            
            
            362,043Mortgage
      loans held for sale
            
            
            1,284
            
            
            
            1,300
            
            
            
            2,155
            
            
            
            2,183Accrued
      interest receivable
            
            
            3,112
            
            
            
            3,112
            
            
            
            2,912
            
            
            
            2,912Financial
      liabilities:Deposits
            
            
            472,299
            
            
            
            473,981
            
            
            
            434,223
            
            
            
            434,223Securities
      sold under agreements to repurchase
            
            
            17,283
            
            
            
            17,283
            
            
            
            9,023
            
            
            
            9,023Other
      borrowings
            
            
            28,645
            
            
            
            28,585
            
            
            
            27,892
            
            
            
            26,655Subordinated
      debenture
            
            
            7,217
            
            
            
            7,430
            
            
            
            7,217
            
            
            
            7,436Accrued
      interest payable
            
            
            2,080
            
            
            
            2,080
            
            
            
            1,721
            
            
            
            1,721


A-43




The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:





Cash
and cash equivalents





The
carrying amount approximates fair value.





Securities
available for sale





All
securities available for sale are actively traded and have been valued using
quoted market prices.





Securities
held to maturity





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





FHLB-NY
stock





The
carrying amount approximates fair value.





Net
loans





Fair
values are estimated for portfolios of loan with similar financial
characteristics. Loans are segregated by type such as residential and commercial
mortgages, commercial and other installment. The fair value of loans is
estimated by discounting cash flows using estimated market discount rates which
reflect the credit and interest rate risk inherent in the loans.





Mortgage
loans held for sale





Loans in
this category have been committed for sale to investors at the current carrying
amount.





Accrued
interest receivable





The
carrying amount approximates fair value.





Deposits





The fair
value of deposits, with no stated maturity, such as noninterest-bearing demand
deposits, savings, NOW and money market accounts, is equal to the amount payable
on demand as of December 31, 2007 and 2006, respectively. The fair value of the
certificates of deposit is based on the discounted value of cash flows. The
discount rate is estimated using market discount rates which reflect interest
rate risk inherent in the certificates of deposit.





Securities
sold under agreements to repurchase





The
carrying value approximates fair value due to the relatively short time before
maturity.





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 the 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 discount 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,
2007 and 2006 were not material.





Limitations





The
preceding fair value estimates were made at December 31, 2007 and 2006, 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, 2007 and 2006, no attempt was made to
estimate the value of anticipated future business. Furthermore, certain tax
implications related to the realization of unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into the estimates.


A-44





Note
19. PARENT COMPANY ONLY





The
Corporation was formed in January, 1995, to operate its subsidiary, Atlantic
Stewardship Bank. The earnings of the bank are recognized by the Corporation
using the equity method of accounting. Accordingly, the bank dividends paid
reduce the Corporation's investment in the subsidiary. In 2003, the Corporation
formed its second subsidiary, Stewardship Statutory Trust, to offer trust
preferred securities. Condensed financial statements are presented
below:





Condensed
      Statements of Financial Condition
            
            Years
      ended December 31,2007
            
            
            2006AssetsCash
      and due from banks
            
            $
            652,000
            
            
            $
            306,000Securities
      available for sale
            
            
            2,574,000
            
            
            
            4,470,000Securities
      held to maturity
            
            
            1,991,000
            
            
            
            —Investment
      in subsidiary
            
            
            42,658,000
            
            
            
            39,307,000Accrued
      interest receivable
            
            
            43,000
            
            
            
            40,000Other
      assets
            
            
            420,000
            
            
            
            441,000Total
      assets
            
            $
            48,338,000
            
            
            $
            44,564,000Liabilities
      and Stockholders’ equitySubordinated
      debentures
            
            $
            7,217,000
            
            
            $
            7,217,000Other
      liabilities
            
            
            31,000
            
            
            
            41,000Stockholders'
      equity
            
            
            41,090,000
            
            
            
            37,306,000Total
      liabilities and Stockholders' equity
            
            $
            48,338,000
            
            
            $
            44,564,000Condensed
      Statements of Income
            
            Years
      ended December 31,2007
            
            
            2006Interest
      income - securities available for sale
            
            $
            226,000
            
            
            $
            177,000Interest
      income - securities held to maturity
            
            
            13,000
            
            
            
            —Dividend
      income
            
            
            2,450,000
            
            
            
            1,853,000Loss
      on sale of available for sale securities
            
            
            —
            
            
            
            (90,000
            )Other
      income
            
            
            15,000
            
            
            
            15,000Total
      income
            
            
            2,704,000
            
            
            
            1,955,000Interest
      expense
            
            
            487,000
            
            
            
            487,000Other
      expenses
            
            
            220,000
            
            
            
            173,000Total
      expenses
            
            
            707,000
            
            
            
            660,000Income
      before income tax benefit
            
            
            1,997,000
            
            
            
            1,295,000Tax
      benefit
            
            
            (153,000
            )
            
            
            (190,000
            )Income
      before equity in undistributed earnings of subsidiary
            
            
            2,150,000
            
            
            
            1,485,000Equity
      in undistributed earnings of subsidiary
            
            
            2,457,000
            
            
            
            3,268,000Net
      income
            
            $
            4,607,000
            
            
            $
            4,753,000


A-45





Condensed
      Statements of Cash Flows
            
            Years
      ended December 31,2007
            
            
            2006Cash
      flows from operating activitiesNet
      income
            
            $
            4,607,000
            
            
            $
            4,753,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Equity
      in undistributed earnings of subsidiary
            
            
            (2,457,000
            )
            
            
            (3,268,000
            )Loss
      on sale of securities available for sale
            
            
            —
            
            
            
            90,000Accretion
      of discounts
            
            
            —
            
            
            
            (2,000
            )Decrease
      (increase) in accrued interest receivable
            
            
            (3,000
            )
            
            
            5,000Decrease
      (increase) in other assets
            
            
            7,000
            
            
            
            (47,000
            )Decrease
      in other liabilities
            
            
            (11,000
            )
            
            
            (33,000
            )Net
      cash provided by operating activities
            
            
            2,143,000
            
            
            
            1,498,000Cash
      flows from investing activities:Purchase
      of security held to maturity
            
            
            (1,991,000
            )
            
            
            —Purchase
      of securities available for sale
            
            
            (1,562,000
            )
            
            
            (3,500,000
            )Proceeds
      from sales and calls on securities available for sale
            
            
            3,500,000
            
            
            
            3,404,000Net
      cash used in investing activities
            
            
            (53,000
            )
            
            
            (96,000
            )Cash
      flows from financing activities:Cash
      dividends paid on common stock
            
            
            (1,816,000
            )
            
            
            (1,118,000
            )Payment
      of discount on dividend reinvestment plan
            
            
            (43,000
            )
            
            
            (19,000
            )Exercise
      of stock options
            
            
            73,000
            
            
            
            101,000Purchase
      of treasury stock
            
            
            —
            
            
            
            (415,000
            )Issuance
      of common stock
            
            
            42,000
            
            
            
            69,000Net
      cash used in investing activities
            
            
            (1,744,000
            )
            
            
            (1,382,000
            )Net
      increase in cash and cash equivalents
            
            
            346,000
            
            
            
            20,000Cash
      and cash equivalents - beginning
            
            
            306,000
            
            
            
            286,000Cash
      and cash equivalents - ending
            
            $
            652,000
            
            
            $
            306,000Supplemental
      disclosures of cash flow information:Noncash
      financing activities - issuance of common stock under dividend
      reinvestment plan
            
            $
            —
            
            
            $
            412,000


A-46





NOTE
20. RECENT ACCOUNTING PRONOUNCEMENTS





Adoption
of New Accounting Standards:





FASB
Statement of Financial Accounting Standard No. 155, “Accounting for Certain
Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and
140”





In
February 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 155, “Accounting for Certain Hybrid
Financial Instruments-an amendment to FASB Statements No. 133 and 140” (SFAS No.
155). This Statement permits fair value remeasurement for hybrid financial
instruments that contain an embedded derivative that otherwise would require
bifurcation. Additionally, SFAS No. 155 clarifies the accounting for beneficial
interests in securitizations. Under SFAS No. 155, all beneficial interests in a
securitization will require an assessment in accordance with SFAS No. 133 to
determine if an embedded derivative exists within the instrument. In January
2007, the FASB issued Derivatives Implementation Group Isse B40, “Application of
Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets” (DIG
Issue B40). DIG Issue B40 provides an exemption from the embedded derivative
test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise
require bifurcation if the test is solely because of a prepayment feature
included within the securitized interest and prepayment is not controlled by the
security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years
beginning after September 15, 2006. The adoption of SFAS No. 155 and DIG Issue
B40 did not have a material impact on the Corporation’s consolidated financial
position or results of operations.




FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109”
 
 In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which
prescribes a recognition threshold and measurement attribute for a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 was effective for fiscal years
beginning after December 15, 2006.  The adoption of this statement 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:





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





In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
157,” Fair Value Measurements”. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset. The standard is
effective for fiscal years beginning after November 15, 2007. The Corporation
does not expect the impact of this standard to be material.





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.” The standard 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 new standard is effective for the
Corporation on January 1, 2008. The Corporation did not elect the fair value
option for any financial assets or financial liabilities as of January 1,
2008.





FASB
Emerging Issues Task Force Issue No. 06-4, “Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements”





In
September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements”. This issue requires that
a liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants’ employment or retirement. The
required accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death benefit
depending on the contractual terms of the underlying agreement. This issue is
effective for fiscal years beginning after December 15, 2007. The Corporation
has determined that the adoption of EITF 06-4 will not have a material impact on
the financial statements.




A-47


Note
21. QUARTERLY FINANCIAL DATA (Unaudited)




The
following table contains quarterly financial data for the years ended December
31, 2007 and 2006 (dollars in thousands).





Year
      ended December 31, 2007:
            
            First
      Quarter
            
            
            Second
      Quarter
            
            
            Third
      Quarter
            
            
            Fourth
      Quarter
            
            
            TotalInterest
      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
            
            
            996
            
            
            
            1,506
            
            
            
            915
            
            
            
            997
            
            
            
            4,414Noninterest
      expense
            
            
            3,995
            
            
            
            4,182
            
            
            
            3,873
            
            
            
            4,579
            
            
            
            16,629Net
      income before income tax expense
            
            
            1,664
            
            
            
            1,946
            
            
            
            1,864
            
            
            
            1,211
            
            
            
            6,685Federal
      and state income tax expense
            
            
            578
            
            
            
            492
            
            
            
            635
            
            
            
            373
            
            
            
            2,078Net
      income
            
            $
            1,086
            
            
            $
            1,454
            
            
            $
            1,229
            
            
            $
            838
            
            
            $
            4,607Basic
      earnings per share
            
            $
            0.21
            
            
            $
            0.27
            
            
            $
            0.23
            
            
            $
            0.16
            
            
            $
            0.87Diluted
      earnings per share
            
            $
            0.21
            
            
            $
            0.27
            
            
            $
            0.23
            
            
            $
            0.16
            
            
            $
            0.87Year
      ended December 31, 2006:
            
            First
      Quarter
            
            
            Second
      Quarter
            
            
            Third
      Quarter
            
            
            Fourth
      Quarter
            
            
            TotalInterest
      income
            
            $
            6,984
            
            
            $
            7,334
            
            
            $
            7,793
            
            
            $
            7,889
            
            
            $
            30,000Interest
      expense
            
            
            2,307
            
            
            
            2,572
            
            
            
            2,928
            
            
            
            3,109
            
            
            
            10,916Net
      interest income before provision for loan losses
            
            
            4,677
            
            
            
            4,762
            
            
            
            4,865
            
            
            
            4,780
            
            
            
            19,084Provision
      for loan losses
            
            
            50
            
            
            
            110
            
            
            
            90
            
            
            
            14
            
            
            
            264Net
      interest income after provision for loan losses
            
            
            4,627
            
            
            
            4,652
            
            
            
            4,775
            
            
            
            4,766
            
            
            
            18,820Noninterest
      income
            
            
            870
            
            
            
            1,032
            
            
            
            983
            
            
            
            1,304
            
            
            
            4,189Noninterest
      expense
            
            
            3,778
            
            
            
            3,863
            
            
            
            3,868
            
            
            
            4,120
            
            
            
            15,629Net
      income before income tax expense
            
            
            1,719
            
            
            
            1,821
            
            
            
            1,890
            
            
            
            1,950
            
            
            
            7,380Federal
      and state income tax expense
            
            
            610
            
            
            
            654
            
            
            
            665
            
            
            
            698
            
            
            
            2,627Net
      income
            
            $
            1,109
            
            
            $
            1,167
            
            
            $
            1,225
            
            
            $
            1,252
            
            
            $
            4,753Basic
      earnings per share
            
            $
            0.21
            
            
            $
            0.22
            
            
            $
            0.23
            
            
            $
            0.24
            
            
            $
            0.90Diluted
      earnings per share
            
            $
            0.21
            
            
            $
            0.22
            
            
            $
            0.23
            
            
            $
            0.23
            
            
            $
            0.89






A-48