UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                  For the quarterly period ended June 30, 2006

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

       For the transition period from ________________ to ________________

                         Commission file number 0-21855

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

            New Jersey                                  22-3351447
--------------------------------------      ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

630 Godwin Avenue, Midland Park,  NJ                      07432
--------------------------------------------       ------------------
  (Address of principal executive offices)              (Zip Code)

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

--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

         Indicate by check mark whether the  registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer [_]    Accelerated filer [_]   Non-accelerated filer [X]

<PAGE>

         Indicate by check mark whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

         The  number  of  shares  outstanding,  net of  treasury  stock,  of the
registrant's Common Stock, no par value, as of August 3, 2006 was 4,802,310.



<PAGE>


                        Stewardship Financial Corporation

                                      INDEX

                                                                          PAGE
                                                                         NUMBER
                                                                         ------
PART I - CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------

ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS

         Consolidated Statements of Financial Condition
         at June 30, 2006 (Unaudited) and December 31, 2005 ...............1

         Consolidated Statements of Income for the Six
         Months ended June 30, 2006 and 2005 (Unaudited) ..................2

         Consolidated Statements of Income for the Three
         Months ended June 30, 2006 and 2005 (Unaudited) ..................3

         Consolidated Statements of Cash Flows for the Six
         Months ended June 30, 2006 and 2005 (Unaudited) ..................4

         Consolidated Statement of Changes in Stockholders'
         Equity for the Six Months ended  June 30, 2006 and
         2005 (Unaudited) .................................................5

         Notes to Consolidated Financial Statements (Unaudited) .........6 - 15

ITEM 2 -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF
           OPERATIONS ..................................................16 - 26

ITEM 3 -  QUANTITATIVE AND QUALITATIVE DISCLOSURE
           ABOUT MARKET RISK .............................................26

ITEM 4 -  CONTROLS AND PROCEDURES ........................................27

PART II - OTHER INFORMATION
---------------------------

ITEM 1A.  RISK FACTORS ...................................................28

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF
         SECURITY HOLDERS ................................................28

ITEM 6 - EXHIBITS ........................................................28

SIGNATURES ...............................................................29
----------

EXHIBIT INDEX ............................................................30
-------------

<PAGE>
<TABLE>
<CAPTION>

                      Stewardship Financial Corporation and Subsidiary
                       Consolidated Statements of Financial Condition
                                        (Unaudited)


                                                                June 30,       December 31,
                                                                  2006            2005
                                                             ------------------------------
<S>                                                                <C>              <C>
Assets

Cash and due from banks                                      $  13,454,000    $  13,158,000
Other interest-earning assets                                      477,000          870,000
                                                             ------------------------------
       Cash and cash equivalents                                13,931,000       14,028,000


Securities available for sale                                   62,269,000       64,166,000
Securities held to maturity; fair value
    of $38,186,000 (2006) and $37,459,000 (2005)                38,856,000       37,801,000
FHLB-NY stock, at cost                                           1,715,000        1,939,000
Loans, net of allowance for loan losses of
    of $ 4,011,000 (2006) and $3,847,000 (2005)                355,793,000      341,976,000
Mortgage loans held for sale                                     1,338,000        2,041,000
Premises and equipment, net                                      6,538,000        6,464,000
Accrued interest receivable                                      2,579,000        2,432,000
Intangible assets, net of accumulated amortization of
    $629,000 (2006) and $610,000 (2005)                            121,000          140,000
Bank owned life insurance                                        8,365,000        8,210,000
Other assets                                                     3,862,000        3,530,000
                                                             ------------------------------

       Total assets                                          $ 495,367,000    $ 482,727,000
                                                             ==============================

Liabilities and stockholders' equity

Liabilities
Deposits:
    Noninterest-bearing                                      $  90,193,000    $  94,331,000
    Interest-bearing                                           328,763,000      309,135,000
                                                             ------------------------------

        Total deposits                                         418,956,000      403,466,000

Other borrowings                                                23,796,000       30,486,000
Subordinated debentures                                          7,217,000        7,217,000
Securities sold under agreements to repurchase                   7,420,000        4,731,000
Accrued interest payable                                         1,322,000        1,086,000
Accrued expenses and other liabilities                           1,627,000        2,357,000
                                                             ------------------------------

        Total liabilities                                      460,338,000      449,343,000
                                                             ------------------------------


Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
     4,823,625 and 4,787,889 shares issued and outstanding
    at June 30, 2006 and December 31, 2005, respectively        28,642,000       28,211,000
Treasury stock, 22,802 and 39,581 shares outstanding at
    June 30, 2006 and December 31, 2005, respectively             (330,000)        (556,000)
Retained earnings                                                8,163,000        6,647,000
Accumulated other comprehensive loss                            (1,446,000)        (918,000)
                                                             ------------------------------

        Total stockholders' equity                              35,029,000       33,384,000
                                                             ------------------------------

        Total liabilities and stockholders' equity           $ 495,367,000    $ 482,727,000
                                                             ==============================
</TABLE>

See notes to unaudited consolidated financial statements.

                                             1
<PAGE>

                Stewardship Financial Corporation and Subsidiary
                        Consolidated Statements of Income
                                   (Unaudited)


                                                             Six Months Ended
                                                                June 30,
                                                       -------------------------
                                                           2006          2005
                                                       -------------------------
Interest income:
     Loans                                             $12,278,000   $ 9,869,000
     Securities held to maturity
       Taxable                                             440,000       416,000
       Non-taxable                                         237,000       286,000
     Securities available for sale
       Taxable                                           1,285,000       994,000
       Non-taxable                                          13,000        17,000
     FHLB-NY stock                                          47,000        32,000
     Other interest-earning assets                          18,000       101,000
                                                       -------------------------
          Total interest income                         14,318,000    11,715,000
                                                       -------------------------

Interest expense:
     Deposits                                            3,792,000     2,240,000
     Borrowed money                                      1,087,000       594,000
                                                       -------------------------
          Total interest expense                         4,879,000     2,834,000
                                                       -------------------------

Net interest income before provision for loan losses     9,439,000     8,881,000
Provision for loan losses                                  160,000       300,000
                                                       -------------------------
Net interest income after provision for loan losses      9,279,000     8,581,000
                                                       -------------------------

Noninterest income:
     Fees and service charges                              828,000       716,000
     Bank owned life insurance                             154,000        55,000
     Merchant processing                                   562,000       433,000
     Gain on sales of mortgage loans                        95,000       101,000
     Miscellaneous                                         263,000       240,000
                                                       -------------------------
           Total noninterest income                      1,902,000     1,545,000
                                                       -------------------------

Noninterest expenses:
     Salaries and employee benefits                      3,332,000     2,978,000
     Occupancy, net                                        607,000       488,000
     Equipment                                             489,000       379,000
     Data processing                                       571,000       552,000
     Advertising                                           201,000       228,000
     FDIC insurance premium                                 26,000        24,000
     Amortization of intangible assets                      19,000        19,000
     Charitable contributions                              362,000       370,000
     Stationery and supplies                               153,000       137,000
     Merchant processing                                   514,000       384,000
     Bank-card related services                            244,000       213,000
     Miscellaneous                                       1,123,000       994,000
                                                       -------------------------
          Total noninterest expenses                     7,641,000     6,766,000
                                                       -------------------------

Income before income tax expense                         3,540,000     3,360,000
Income tax expense                                       1,264,000     1,217,000
                                                       -------------------------
Net income                                             $ 2,276,000   $ 2,143,000
                                                       =========================

Basic earnings per share                               $      0.48   $      0.45
                                                       =========================
Diluted earnings per share                             $      0.47   $      0.45
                                                       =========================

Weighted average number of common shares outstanding     4,769,751     4,733,215
                                                       =========================
Weighted average number of diluted common
     shares outstanding                                  4,819,994     4,787,570
                                                       =========================

Share data has been  restated  to reflect a 4 for 3 stock  split  issued July 1,
2005 and a 5% stock dividend paid November 15, 2005.

See notes to unaudited consolidated financial statements.


                                       2
<PAGE>

                Stewardship Financial Corporation and Subsidiary
                        Consolidated Statements of Income
                                   (Unaudited)

                                                          Three Months Ended
                                                               June 30,
                                                       -----------------------
                                                          2006         2005
                                                       -----------------------
Interest income:
     Loans                                             $6,304,000   $5,082,000
     Securities held to maturity
       Taxable                                            219,000      205,000
       Non-taxable                                        119,000      142,000
     Securities available for sale
       Taxable                                            648,000      494,000
       Non-taxable                                          6,000        9,000
     FHLB-NY stock                                         27,000       19,000
     Other interest-earning assets                         11,000       75,000
                                                       -----------------------
          Total interest income                         7,334,000    6,026,000
                                                       -----------------------

Interest expense:
     Deposits                                           2,015,000    1,265,000
     Borrowed money                                       557,000      282,000
                                                       -----------------------
          Total interest expense                        2,572,000    1,547,000
                                                       -----------------------

Net interest income before provision for loan losses    4,762,000    4,479,000
Provision for loan losses                                 110,000      150,000
                                                       -----------------------
Net interest income after provision for loan losses     4,652,000    4,329,000
                                                       -----------------------

Noninterest income:
     Fees and service charges                             449,000      365,000
     Bank owned life insurance                             74,000       55,000
     Merchant processing                                  296,000      242,000
     Gain on sales of mortgage loans                       45,000       83,000
     Miscellaneous                                        168,000      151,000
                                                       -----------------------
           Total noninterest income                     1,032,000      896,000
                                                       -----------------------

Noninterest expenses:
     Salaries and employee benefits                     1,711,000    1,540,000
     Occupancy, net                                       293,000      237,000
     Equipment                                            247,000      186,000
     Data processing                                      277,000      281,000
     Advertising                                          114,000       97,000
     FDIC insurance premium                                13,000       12,000
     Amortization of intangible assets                      9,000        9,000
     Charitable contributions                             181,000      205,000
     Stationery and supplies                               77,000       67,000
     Merchant processing                                  272,000      193,000
     Bank-card related services                           123,000      108,000
     Miscellaneous                                        546,000      516,000
                                                       -----------------------
          Total noninterest expenses                    3,863,000    3,451,000
                                                       -----------------------

Income before income tax expense                        1,821,000    1,774,000
Income tax expense                                        654,000      635,000
                                                       -----------------------
Net income                                             $1,167,000   $1,139,000
                                                       =======================

Basic earnings per share                               $     0.25   $     0.24
                                                       =======================
Diluted earnings per share                             $     0.24   $     0.24
                                                       =======================

Weighted average number of common shares outstanding    4,784,483    4,743,870
                                                       =======================
Weighted average number of diluted common
     shares outstanding                                 4,825,252    4,798,734
                                                       =======================


Share data has been  restated  to reflect a 4 for 3 stock  split  issued July 1,
2005 and a 5% stock dividend paid November 15, 2005.

See notes to unaudited consolidated financial statements.


                                       3
<PAGE>
<TABLE>
<CAPTION>

                         Stewardship Financial Corporation and Subsidiary
                              Consolidated Statements of Cash Flows
                                           (Unaudited)

                                                                           Six Months Ended
                                                                              June 30,
                                                                     ----------------------------
                                                                         2006             2005
                                                                     ----------------------------
<S>                                                                       <C>             <C>
Cash flows from operating activities:
Net income                                                           $  2,276,000    $  2,143,000
Adjustments to reconcile net income to
    net cash provided by operating activities:
        Depreciation and amortization of premises and equipment           379,000         304,000
        Amortization of premiums and accretion of discounts, net          146,000         226,000
        Accretion of deferred loan fees                                   (58,000)        (78,000)
        Provision for loan losses                                         160,000         300,000
        Originations of mortgage loans held for sale                   (9,383,000)     (9,725,000)
        Proceeds from sale of mortgage loans                           10,181,000      10,054,000
        Gain on sale of loans                                             (95,000)       (101,000)
        Deferred income tax benefit                                       (49,000)       (117,000)
        Amortization of intangible assets                                  19,000          19,000
        Nonqualified stock option expense                                  24,000              --
        Purchase of bank owned life insurance                                  --      (8,000,000)
        increase in bank owned life insurance                            (155,000)        (55,000)
        Increase in accrued interest receivable                          (147,000)        (89,000)
        Decrease in accrued interest payable                              236,000         193,000
        Decrease (increase) in other assets                                48,000         (27,000)
        (Decrease) increase in other liabilities                         (556,000)        227,000
                                                                     ------------    ------------
                 Net cash provided (used) by operating activities       3,026,000      (4,726,000)
                                                                     ------------    ------------

Cash flows from investing activities:
    Purchase of securities available for sale                          (5,613,000)     (2,321,000)
    Proceeds from maturities and principal repayments
          on securities available for sale                              6,595,000       3,234,000
    Proceeds from sales and calls on securities available for sale             --         500,000
    Purchase of securities held to maturity                            (6,813,000)     (1,288,000)
    Proceeds from maturities and principal repayments on
          securities held to maturity                                   5,668,000       2,644,000
    Purchase (Redemption) of FHLB-NY stock                                224,000          (3,000)
    Net increase in loans                                             (13,919,000)    (18,528,000)
    Additions to premises and equipment                                  (453,000)       (940,000)
                                                                     ------------    ------------
                 Net cash provided by investing activities            (14,311,000)    (16,702,000)
                                                                     ------------    ------------

Cash flows from financing activities:
     Net decrease in noninterest-bearing deposits                      (4,138,000)     (1,248,000)
     Net increase in interest-bearing deposits                         19,628,000      45,077,000
     Net increase (decrease) in securities sold under agreements
         to repurchase                                                  2,689,000      (1,259,000)
     Net decrease in short term borrowings                             (5,900,000)     (7,500,000)
     Payments on long term borrowings                                    (790,000)       (765,000)
     Cash dividends paid on common stock                                 (348,000)       (261,000)
     Purchase of treasury stock                                          (103,000)             --
     Exercise of stock options                                            101,000         143,000
     Issuance of common stock                                              49,000          28,000
                                                                     ------------    ------------
             Net cash used in financing activities                     11,188,000      34,215,000
                                                                     ------------    ------------

     Net (decrease) increase in cash and cash equivalents                 (97,000)     12,787,000
     Cash and cash equivalents - beginning                             14,028,000      24,792,000
                                                                     ------------    ------------
     Cash and cash equivalents - ending                              $ 13,931,000    $ 37,579,000
                                                                     ============    ============

Supplemental disclosures of cash flow information:
     Cash paid during the year for interest                             4,643,000       2,650,000
     Cash paid during the year for income taxes                         1,500,000       1,505,000
     Noncash financing activity - issuance of
       common stock under dividend reinvestment plan                      412,000         346,000

</TABLE>

See notes to unaudited consolidated financial statements.


                                                4
<PAGE>
<TABLE>
<CAPTION>

                                         Stewardship Financial Corporation and Subsidiary
                                     Consolidated Statement of Changes in Stockholders' Equity
                                                            (Unaudited)


                                                               For the Period Ended June 30, 2006
                                     --------------------------------------------------------------------------------------------

                                                                                                       Accumulated
                                                                                                          Other
                                                                                                      Comprehensive
                                          Common Stock             Treasury Stock         Retained        Loss,
                                      Shares       Amount        Shares       Amount      Earnings         Net          Total
                                     --------------------------------------------------------------------------------------------
<S>                                  <C>        <C>              <C>       <C>           <C>           <C>           <C>
Balance -- December 31, 2005         4,787,889  $28,211,000      (39,581)  $  (556,000)  $ 6,647,000   $  (918,000)  $ 33,384,000
Dividends Paid                              --           --           --            --      (760,000)           --       (760,000)
Common stock issued under
  stock plans                                                     33,149       461,000            --            --        461,000
Repurchase common stock                     --           --      (16,370)     (235,000)           --            --       (235,000)
Exercise of stock options               35,736      233,000           --            --            --            --        233,000
Stock options earned                        --       24,000           --            --            --            --         24,000
Tax benefit on stock options
  exercised                                 --      174,000           --            --            --            --        174,000
Comprehensive income:
   Net income for the six months
       ended June 30, 2006                  --           --           --            --     2,276,000            --      2,276,000
   Unrealized holding losses on
    securities available for sale
    arising during the period
    (net tax benefit of $331,000)           --           --           --            --            --      (528,000)      (528,000)
                                                                                                                     ------------
Total comprehensive income,
  net of tax                                                                                                            1,748,000

                                     --------------------------------------------------------------------------------------------
Balance -- June 30, 2006             4,823,625  $28,642,000      (22,802)  $  (330,000)  $ 8,163,000   $(1,446,000)  $ 35,029,000
                                     ============================================================================================
<CAPTION>

                                                                     For the Period Ended June 30, 2005
                                                     -------------------------------------------------------------------

                                                                                              Accumulated
                                                                                                 Other
                                                                                             Comprehensive
                                                         Common Stock           Retained         Loss,
                                                      Shares       Amount       Earnings          Net           Total
                                                     -------------------------------------------------------------------
<S>                                                 <C>        <C>           <C>            <C>            <C>
Balance -- December 31, 2004                         4,487,977  $ 23,893,000  $  6,746,000   $   (179,000)  $ 30,460,000
Dividends Paid                                              --            --      (607,000)            --       (607,000)
Common stock issued under stock plans                   26,150       374,000            --             --        374,000
Exercise of stock options                               20,920       143,000            --             --        143,000
Tax benefit on stock options exercised                      --        70,000            --             --         70,000
Comprehensive income:
   Net income for the three months
       ended June 30, 2005                                  --            --     2,143,000             --      2,143,000
   Unrealized holding losses on securities
    available for sale arising during the period
    (net tax benefit of $80,000)                            --            --            --       (129,000)      (129,000)
                                                                                                            ------------
Total comprehensive income, net of tax                                                                         2,014,000

                                                     -------------------------------------------------------------------
Balance -- June 30, 2005                             4,535,047  $ 24,480,000  $  8,282,000   $   (308,000)  $ 32,454,000
                                                     ===================================================================
</TABLE>

See notes to unaudited consolidated financial statements.


                                                                5
<PAGE>

                Stewardship Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                                  June 30, 2006
                                   (Unaudited)


Note 1.  Summary of Significant Accounting Policies

Certain information and footnote  disclosures normally included in the unaudited
consolidated   financial  statements  prepared  in  accordance  with  accounting
principles  generally  accepted  in the  United  States  of  America  have  been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These unaudited condensed consolidated financial statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  thereto  included  in the Annual  Report on Form 10-K for the fiscal year
ended December 31, 2005.

Principles of consolidation

The  consolidated  financial  statements  include the  accounts  of  Stewardship
Financial  Corporation,  (the  "Corporation")  and its wholly owned  subsidiary,
Atlantic  Stewardship  Bank (the  "Bank").  The Bank  includes  its wholly owned
subsidiary,  Stewardship Investment Corp. All significant  intercompany accounts
and transactions have been eliminated in the consolidated  financial statements.
Certain prior period  amounts have been  reclassified  to conform to the current
presentation. The consolidated financial statements of the Corporation have been
prepared in conformity  with  accounting  principles  generally  accepted in the
United States of America. In preparing the financial  statements,  management is
required to make estimates and assumptions  that affect the reported  amounts of
assets and liabilities as of the dates of the statements of financial  condition
and revenues and expenses  during the reporting  periods.  Actual  results could
differ significantly from those estimates.

Material  estimates that are  particularly  susceptible  to significant  changes
relate  to the  determination  of the  allowance  for  loan  losses.  Management
believes that the allowance for loan losses is adequate.  While  management uses
available  information  to recognize  losses on loans,  future  additions to the
allowance  for loan  losses  may be  necessary  based  on  changes  in  economic
conditions in the market area.

Share-based Payment Cost

On January 1, 2006, the Corporation  adopted  Statement of Financial  Accounting
Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS No. 123(R)") under
the applied  modified  perspective  method.  With limited  exceptions,  SFAS No.
123(R)  requires  public  companies  to measure  the cost of  employee  services
received in exchange for an award of equity  instruments based on the grant date
fair value of the award and to recognize  such cost over the period during which
an employee is required to provide  service in exchange  for the award  (usually
the vesting period).

Prior to the adoption of SFAS No. 123(R),  and in accordance with the provisions
of  Statement  of  Financial   Accounting  Standards  No.  123  "Accounting  for
Stock-Based  Compensation"  ("SFAS No.


                                       6
<PAGE>

123"), the Corporation  accounted for share-based payments under the recognition
and  measurement  principles  of  Accounting  Principle  Board  Opinion  No.  25
"Accounting  for Stock Issued to  Employees"  ("APB Opinion No. 25") and related
interpretations.

At June 30,  2006,  the  Corporation  had five  types  of stock  award  programs
referred to as the  Employee  Stock Bonus Plan,  the  Director  Stock Plan,  the
Employee  Stock  Option  Plan  and the  2001  and  2006  Stock  Option  Plan for
Non-Employee  Directors.  The  Employee  Stock Bonus Plan is intended to provide
incentives  which will retain highly  competent key management by providing them
with a bonus in the form of  shares  of  common  stock of the  Corporation.  The
Corporation  did not grant shares under this plan during the first six months of
2005 or 2006.

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. The Corporation  recorded $34,000 and $10,000
in  directors  expense  for the  six  months  ended  June  30,  2006  and  2005,
respectively, and $17,000 and $5,000 in directors expense for the quarters ended
June 30, 2006 and 2005, respectively, relating to this plan.

The Employee Stock Option Plan provides for options to purchase shares of Common
Stock to be issued to  employees of the  Corporation  at the  discretion  of the
Compensation Committee of the Board of Directors. The following table represents
the stock activity for the six months ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                 2006                          2005
                                      ----------------------------   --------------------------
                                                       Weighted                      Weighted
                                                       Average                       Average
                                         Shares     Exercise Price     Shares     Exercise  Price
<S>                                            <C>          <C>              <C>          <C>
Outstanding at beginning of year            72,370   $       6.33         74,688   $       6.41
Granted                                         --             --             --             --
Exercised                                       --             --          1,546           6.52
Forfeited                                      463          13.61            540          19.05
                                      ------------   ------------   ------------   ------------
Outstanding at end of period                71,907   $       6.29         72,602   $       6.32
                                      ============                  ============
Options exercisable                         71,907                        65,886
                                      ============                  ============
Weighted-average fair value of
options granted during the period               --                            --

</TABLE>

Options  outstanding  as of June  30,  2006  had a  weighted  average  remaining
contractual  life of 2.21  years.  The  intrinsic  value  for stock  options  is
calculated  based on the exercise price of the underlying  awards and the market
price of our common stock as of the reporting  date. The intrinsic  value of the
options at June 30, 2006 was $519,000.

The 2001 Stock Option Plan for  Non-Employee  Directors  provided for options to
purchase  shares of common stock to be issued to  non-employee  Directors of the
Corporation.  In  accordance  with  the  provisions  of  SFAS  No.  123(R),  the
Corporation recorded $24,000 of director's  compensation expense for share-based
payments  for the six  months  ended  June 30,  2006 with a related  income  tax
benefit of $10,000 and expense of $7,000 for the  quarter  ended June 30,  2006,
with related income tax benefit of $3,000. This


                                       7
<PAGE>

expense relates to non-qualified stock options that were outstanding but not yet
vested as of January 1, 2006. Due to the relatively small amount of compensation
expense,   basic  and  diluted  earnings  per  share,   income  from  continuing
operations,  income before taxes, net income, cash flow from operations and cash
flow from financing activities were not significantly impacted.

The 2006 Stock Option Plan for Non-Employee Directors which provides for options
to purchase shares of common stock to be issued to non-employee  Directors,  was
adopted by the  shareholders  at the Annual Meeting in May,  2006.  Options were
granted on June 30, 2006.

The following table represents the stock activity for non-employee Directors for
the six months ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                               2006                          2005
                                    ----------------------------   --------------------------
                                                     Weighted                      Weighted
                                                     Average                       Average
                                       Shares     Exercise Price     Shares     Exercise  Price
<S>                                          <C>          <C>              <C>          <C>

Outstanding at beginning of year          43,398   $       7.47         66,371   $       7.33
Granted                                   50,000          13.50             --             --
Exercised                                 35,736           6.51         20,420           6.51
Expired                                    2,557           6.51          7,658          19.05
                                    ------------   ------------   ------------   ------------
Outstanding at end of period              55,105   $      13.61         38,293   $       6.51
                                    ============                  ============
Options exercisable                        5,105                        17,872
                                    ============                  ============
Weighted-average fair value of
options granted during the period   $       4.78                            --

</TABLE>

Of  the  35,736  options   exercised  under  the  2001  Stock  Option  Plan  for
Non-Employee  Directors,  20,240 shares were exercised by tendering 9,000 shares
of common stock.

Options  outstanding  as of June  30,  2006  had a  weighted  average  remaining
contractual  life of 5.45  years.  The  intrinsic  value  for stock  options  is
calculated  based on the exercise price of the underlying  awards and the market
price of our common stock as of the reporting date. There was no intrinsic value
of the options at June 30, 2006 because the exercise  price  equaled or exceeded
the market value of the stock at June 30, 2006.  As of June 30, 2006,  there was
approximately  $239,000  of total  unrecognized  compensation  costs  related to
nonvested stock options. These costs are expected to be recognized over the next
five years.

                                       8
<PAGE>

The  following  table sets forth the pro forma net income and earnings per share
for the three  months and six months of 2005 as if the fair value  based  method
set forth in SFAS No. 123(R) had been applied to all share-based arrangements.

<TABLE>
<CAPTION>
                                                           Three Months Ended   Six Months Ended
                                                              June 30, 2005      June 30, 2005
                                                              -------------      -------------
<S>                                                                 <C>                <C>
Net Income:
         Net income as reported                               $   1,139,000      $   2,143,000
         Stock-based compensation expense included in net
              Income, net of related tax effects                      3,000              6,000
         Total stock-based compensation expense determined
              Under fair value based method for all awards,
              Net of related tax effects                            (18,000)           (36,000)
                                                              -------------      -------------
         Pro forma net income                                 $   1,124,000      $   2,113,000
                                                              =============      =============

Earnings per share:
         As reported basic earnings per share                 $        0.24      $        0.45
         As reported diluted earnings per share                        0.24               0.45
         Pro forma basic earnings per share                            0.24               0.45
         Pro form diluted earnings per share                           0.23               0.44

</TABLE>

Share data has been  restated to reflect a 4 for 3 stock  dividend  issued July,
2005 and a 5% stock dividend paid November 15, 2005.

There  were  stock  options  awarded  under  the  2006  Stock  Option  Plan  for
Non-Employee  Directors on June 30, 2006. The fair value of options  granted for
Directors is estimated on the date of the grant using the  Black-Scholes  option
pricing model with the following assumptions used:

                             Director        Director         Director
                           Stock Options   Stock Options   Stock Options
                               2001            2005             2006
                               ----            ----             ----

Dividend yield                  1.62%           1.79%           2.25%
Expected volatility            39.76%          33.19%          36.72%
Risk-free interest rate         6.65%           4.34%           5.21%
Expected life                7 years         5 years         6 years
Fair value at grant date       $2.94           $4.50           $4.78


                                       9
<PAGE>

Note 2.   Basis of presentation


The interim unaudited  consolidated  financial  statements  included herein have
been prepared in accordance  with  instructions  for Form 10-Q and the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore, do
not include  information or footnotes  necessary for a complete  presentation of
consolidated  financial  condition,  results  of  operations,  and cash flows in
conformity with accounting principles generally accepted in the United States of
America.   However,  all  adjustments,   consisting  only  of  normal  recurring
adjustments,  which  in the  opinion  of  management  are  necessary  for a fair
presentation of the consolidated  financial statements,  have been included. The
results of  operations  for the three  months and six months ended June 30, 2006
are not  necessarily  indicative  of the results  which may be expected  for the
entire year. All share and per share amounts have been restated for stock splits
and stock dividends.


                                       10
<PAGE>
                Stewardship Financial Corporation and Subsidiary
              Notes to Consolidated Financial Statements Continued
                                   (Unaudited)

Note 3.   Securities Available for Sale

The  following  table  sets  forth  the  amortized  cost and  fair  value of the
Corporation's securities available for sale as of June 30, 2006 and December 31,
2005. In accordance  with Statement of Financial  Accounting  Standards No. 115,
"Accounting for Certain Investments in Debt and Equity  Securities",  securities
available for sale are carried at fair value.

<TABLE>
<CAPTION>
                                                          June 30, 2006
                                     --------------------------------------------------------
                                                      Gross           Gross
                                      Amortized    Unrealized       Unrealized       Fair
                                         Cost     Holding Gains   Holding Losses     Value
                                     --------------------------------------------------------
<S>                                   <C>                <C>          <C>          <C>
U.S. government-sponsored agencies    33,987,000            --          931,000    33,056,000
Obligations of state and political
     subdivisions                      1,362,000            --           39,000     1,323,000
Mortgage-backed securities            28,176,000         3,000        1,333,000    26,846,000
Community Reinvestment Act Fund        1,095,000            --           51,000     1,044,000
                                     --------------------------------------------------------
                                     $64,620,000   $     3,000      $ 2,354,000   $62,269,000
                                     ========================================================
<CAPTION>
                                                       December 31, 2005
                                     --------------------------------------------------------
                                                      Gross           Gross
                                      Amortized    Unrealized       Unrealized       Fair
                                         Cost     Holding Gains   Holding Losses     Value
                                     --------------------------------------------------------
<S>                                   <C>                <C>          <C>          <C>
U.S. Treasury securities             $   501,000   $        --      $     5,000   $   496,000
U.S. government-sponsored agencies    33,140,000            --          662,000    32,478,000
Obligations of state and political
     subdivisions                      2,068,000            --           37,000     2,031,000
Mortgage-backed securities            28,879,000         8,000          777,000    28,110,000
Community Reinvestment Act Fund        1,071,000            --           20,000     1,051,000
                                     --------------------------------------------------------
                                     $65,659,000   $     8,000      $ 1,501,000   $64,166,000
                                     ========================================================
</TABLE>

On a quarterly basis, the Corporation  makes an assessment to determine  whether
there have been any events or economic circumstances to indicate that a security
is impaired on an  other-than-temporary  basis.  The Corporation  considers many
factors  including  the length of time the  security has had a market value less
than the cost  basis;  the intent and  ability  of the  Corporation  to hold the
security  for a period of time  sufficient  for a recovery in value;  and recent
events specific to the issuer or industry.  Management  considers the decline in
market value of these securities to be temporary.

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") and the Federal Home Loan Mortgage Corporation ("FHLMC").

Note 4.   Securities Held to Maturity

The  following  table  sets  forth  the  amortized  cost and  fair  value of the
Corporation's  securities  held to maturity as of June 30, 2006 and December 31,
2005.  Securities held to maturity are stated at cost, adjusted for amortization
of premiums and accretion of discounts.

<TABLE>
<CAPTION>
                                                            June 30, 2006
                                     ----------------------------------------------------------
                                                        Gross           Gross
                                       Carrying     Unrecognized     Unrecognized     Fair
                                         Value      Holding Gains   Holding Losses    Value
                                     ----------------------------------------------------------
<S>                                  <C>            <C>             <C>            <C>
U.S. Treasury securities             $    502,000   $         --    $      7,000   $    495,000
U.S. government-sponsored agencies     12,546,000             --         229,000     12,317,000
Obligations of state and political
     subdivisions                      17,962,000          6,000         214,000     17,754,000
Mortgage-backed securities              7,846,000         10,000         236,000      7,620,000
                                     ----------------------------------------------------------
                                     $ 38,856,000   $     16,000    $    686,000   $ 38,186,000
                                     ==========================================================
<CAPTION>
                                                          December 31, 2005
                                     ----------------------------------------------------------
                                                        Gross           Gross
                                       Carrying     Unrecognized     Unrecognized     Fair
                                         Value      Holding Gains   Holding Losses    Value
                                     ----------------------------------------------------------
<S>                                  <C>            <C>             <C>            <C>
U.S. Treasury securities             $  1,004,000   $      2,000    $      1,000   $  1,005,000
U.S. government-sponsored agencies     12,113,000          1,000         180,000     11,934,000
Obligations of state and political
     subdivisions                      15,747,000         27,000         128,000     15,646,000
Mortgage-backed securities              8,937,000         60,000         123,000      8,874,000
                                     ----------------------------------------------------------
                                     $ 37,801,000   $     90,000    $    432,000   $ 37,459,000
                                     ==========================================================
</TABLE>

On a quarterly basis, the Corporation  makes an assessment to determine  whether
there have been any events or economic circumstances to indicate that a security
is impaired on an  other-than-temporary  basis.  The Corporation  considers many
factors  including  the length of time the  security has had a market value less
than the cost  basis;  the intent and  ability  of the  Corporation  to hold the
security  for a period of time  sufficient  for a recovery in value;  and recent
events specific to the issuer or industry.  Management  considers the decline in
market value of these securities to be temporary.

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") and the Federal Home Loan Mortgage Corporation ("FHLMC").

                                       11
<PAGE>

                Stewardship Financial Corporation and Subsidiary
              Notes to Consolidated Financial Statements Continued
                                   (Unaudited)

Note 5.  Loans

         The  Corporation's  primary  market  area for  lending is the small and
medium sized business and  professional  community,  as well as the  individuals
residing,  working and  shopping in Bergen,  Passaic  and Morris  counties,  New
Jersey.  The  following  table  sets  forth the  composition  of loans as of the
periods indicated.

                                                    June 30,        December 31,
                                                      2006              2005
                                                  ------------------------------
Mortgage
     Residential                                  $ 45,037,000      $ 45,604,000
     Commercial                                    167,882,000       163,309,000
Commercial                                          73,149,000        65,011,000
Equity                                              20,006,000        20,271,000
Installment                                         53,832,000        51,540,000
Other                                                  334,000           506,000
                                                  ------------------------------
        Total loans                                360,240,000       346,241,000
                                                  ------------------------------

Less:  Deferred loan fees                              436,000           418,000
          Allowance for loan losses                  4,011,000         3,847,000
                                                  ------------------------------
                                                     4,447,000         4,265,000
                                                  ------------------------------

        Loans, net                                $355,793,000      $341,976,000
                                                  ==============================

Note 6.   Allowance for loan losses

                                                    Six Months Ended June 30,
                                                     2006               2005
                                                 ------------------------------

Balance, beginning of period                     $ 3,847,000        $ 3,299,000
Provision charged to operations                      160,000            300,000
Recoveries of loans charged off                       24,000              3,000
Loans charged off                                    (20,000)           (32,000)
                                                 ------------------------------

Balance, end of period                           $ 4,011,000        $ 3,570,000
                                                 ==============================

                                       12
<PAGE>

                Stewardship Financial Corporation and Subsidiary
              Notes to Consolidated Financial Statements Continued
                                   (Unaudited)


Note 7.  Loan Impairment

The  Corporation  has defined the  population  of impaired  loans to include all
nonaccrual  loans.  The  following  table sets forth  information  regarding the
impaired loans as of the periods indicated.


                                                      June 30,     December 31,
                                                        2006           2005
                                                    ------------   ------------

Impaired loans
    With related allowance for loan losses          $     80,000   $    152,000
    Without related allowance for loan losses            177,000        320,000
                                                    ------------   ------------
Total impaired loans                                $    257,000   $    472,000
                                                    ============   ============

Related allowance for loan losses                   $      7,000   $     29,000
                                                    ============   ============



                                       13
<PAGE>

                Stewardship Financial Corporation and Subsidiary
              Notes to Consolidated Financial Statements Continued
                                   (Unaudited)


Note 8.  Recent Accounting Pronouncements

SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments"

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial Instruments" (SFAS No. 155), an amendment to SFAS No. 133, "Accounting
for Derivative  Instruments and Hedging  Activities"  (SFAS No. 133) and SFAS No
140,   "Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities"  (SFAS No.  140).  SFAS No. 155  provides  the
framework for fair value  remeasurement of any hybrid financial  instrument that
contains an embedded derivative that otherwise would require bifurcation as well
as  establishes a requirement  to evaluate  interests in  securitized  financial
assets to  identify  interests.  SFAS No.  155  further  amends  SFAS No. 140 to
eliminate the prohibition on a qualifying  special-purpose entity from holding a
derivative  financial  instrument  that pertains to a beneficial  interest other
than another  derivative  financial  instrument.  The SFAS No. 155 guidance also
clarifies which interest-only  strips and principal-only  strips are not subject
to the  requirement of SFAS No. 133 and which  concentrations  of credit risk in
the form of  subordination  are not  embedded  derivatives.  This  statement  is
effective for all financial  instruments  acquired or issued after the beginning
of an entity's first fiscal year that begins after  September 15, 2006. SFAS No.
155 is not  expected to have a material  impact on the  Corporation's  financial
statements.

SFAS No. 156, "Accounting for Servicing of Financial Assets"

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets - an amendment of FASB Statement No. 140." (SFAS No. 156). SFAS
No. 156 requires the  recognition of servicing  assets or servicing  liabilities
each time an entity  undertakes  an  obligation  to service a  financial  asset;
requires all separately recognized servicing assets and servicing liabilities to
be initially  measured at fair value, if practicable;  and, permits an entity to
choose  either to (1)  amortize  servicing  assets or servicing  liabilities  in
proportion  to and over the  period of  estimated  net  servicing  income or net
servicing  loss  and  assess  servicing  assets  or  servicing  liabilities  for
impairment or increased  obligation  based on fair value at each reporting date;
or, (2) measure servicing assets or servicing  liabilities at fair value at each
reporting  date and report  changes in fair value in  earnings  in the period in
which the  changes  occur.  At its  initial  adoption,  SFAS No.  156  permits a
one-time reclassification of available for sale securities to trading securities
provided that the available for sale securities are identified in some manner as
offsetting  exposure to changes in fair value of  servicing  assets or servicing
liabilities  subsequently  being  measured at fair value.  SFAS No. 156 requires
separate  financial  statement  presentation  of servicing  assets and servicing
liabilities   subsequently  measured  at  fair  value  and  requires  additional
disclosures  for  all  separately  recognized  servicing  assets  and  servicing
liabilities.  SFAS No. 156 is effective for the  Corporation on January 1, 2007.
The  Corporation  does not expect  adoption to have a significant  impact on the
consolidated  financial  statements,  results of  operation  or liquidity of the
Corporation.


                                       14
<PAGE>

FIN 48, "Accounting for Uncertainty in Income Taxes"

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an Interpretation of FASB Statement No. 109." (FIN 48). FIN 48
prescribes a recognition  threshold and measurement  attribute for the financial
statement  recognition and measurement of a tax position taken or expected to be
taken in a tax return.  It requires the recognition and measurement of uncertain
tax positions using a  "more-likely-than-not"  approach. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Management has not completed its
evaluation of the impact of the adoption of FIN48.

Note 9.   Earnings Per Share

Basic  earnings  per share is  calculated  by dividing net income by the average
daily  number of common  shares  outstanding  during the  period.  Common  stock
equivalents are not included in the  calculation.  Diluted earnings per share is
computed similar to that of basic earnings per share except that the denominator
is increased to include the number of  additional  common shares that would have
been outstanding if all potential dilutive common shares were issued.

The  following  is a  reconciliation  of the  calculation  of basic and  diluted
earnings per share.

                                                 Three Months       Six Months
                                                Ended June 30,    Ended June 30,
                                                2006     2005     2006     2005
                                               ------   ------   ------   ------

Net income                                     $1,167   $1,139   $2,276   $2,143

Weighted average shares                         4,784    4,744    4,770    4,733
Effect of dilutive stock options                   50       55       50       55
                                               ------   ------   ------   ------
Total weighted average dilutive shares          4,834    4,799    4,820    4,788

Basic earnings per share                       $ 0.25   $ 0.24   $ 0.48   $ 0.45
Diluted earnings per share                     $ 0.24   $ 0.24   $ 0.47   $ 0.45

All share and per share  amounts  have been  restated to reflect a 4 for 3 stock
split issued July 2005 and a 5% stock dividend paid November 15, 2005.

Note 10.  Comprehensive Income

Total comprehensive  income includes net income and other  comprehensive  income
which is  comprised  of  unrealized  holding  gains  and  losses  on  securities
available for sale, net of taxes. The Corporation's total  comprehensive  income
for the six  months  ended  June 30,  2006 and  2005 was $1.7  million  and $2.0
million, respectively, and for the three months ended June 30, 2006 and 2005 was
$764,000  and  $1.5   million,   respectively.   The   difference   between  the
Corporation's  net  income  and total  comprehensive  income  for these  periods
relates  to the  change  in the net  unrealized  holding  gains  and  losses  on
securities available for sale during the applicable period of time.


                                       15
<PAGE>

                        Stewardship Financial Corporation
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

This Form 10-Q contains certain "forward looking  statements" within the meaning
of the Private  Securities  Litigation Reform Act of 1995, and may be identified
by the  use of  such  words  as  "believe,"  "expect,"  "anticipate,"  "should,"
"planned,"  "estimated," and "potential." Examples of forward looking statements
include,  but are not  limited  to,  estimates  with  respect  to the  financial
condition,  results of  operations  and  business  of the  Corporation  that are
subject to various factors which could cause actual results to differ materially
from these estimates.  These factors include: changes in general,  economic, and
market conditions,  legislative and regulatory conditions, or the development of
an interest rate environment that adversely affects the  Corporation's  interest
rate spread or other income anticipated from operations and investments. As used
in this  Form  10-Q,  "we" and "us" and  "our"  refer to  Stewardship  Financial
Corporation  and  its  consolidated   subsidiary,   Atlantic  Stewardship  Bank,
depending on the context.


Critical Accounting Policies and Estimates
------------------------------------------

"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," as well as disclosures found elsewhere in this Form 10-Q, are based
upon the  Corporation's  consolidated  financial  statements,  which  have  been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America. The preparation of these financial statements requires
management 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, 2005 included
in our  Annual  Report on Form 10-K for the year ended  December  31,  2005,  as
supplemented by this report, contains a summary of the Corporation's significant
accounting  policies.  Management  also believes the  Corporation's  policy with
respect to the  methodology  for the  determination  of the  allowance  for loan
losses  involves a higher degree of complexity  and requires  management to make
difficult and subjective  judgments which often require assumptions or estimates
about highly  uncertain  matters.  Changes in these  judgments,  assumptions  or
estimates could materially impact results of operations. The Audit Committee and
the  Board  of  Directors  periodically  review  this  critical  policy  and its
application.

The  allowance  for loan  losses is based upon  management's  evaluation  of the
adequacy of the  allowance,  including an assessment of known and inherent risks
in the portfolio,  giving  consideration to the size and composition of the loan
portfolio,  actual  loan  loss  experience,  level  of  delinquencies,  detailed
analysis of individual loans for which full  collectibility  may not be assured,
the existence and estimated net realizable  value of any  underlying  collateral
and guarantees  securing the loans, and current economic and market  conditions.
Although  management  uses  the best  information  available,  the  level of the
allowance  for loan losses  remains an estimate  that is subject to  significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination  process,  periodically review the

                                       16
<PAGE>

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.

Financial Condition
-------------------

Total  assets  increased  by $12.6  million,  or 2.6%,  from  $482.7  million at
December  31, 2005 to $495.4  million at June 30, 2006.  Net loans  increased by
$13.8 million, or 4.0%, despite the Corporation participating approximately $7.1
million of commercial  mortgages  during the first  quarter of 2006.  Securities
available for sale  decreased $1.9 million,  partially  offset by an increase in
securities  held to  maturity  of $1.1  million.  The  composition  of the  loan
portfolio  is  basically  unchanged  at June 30,  2006  when  compared  with the
portfolio at December 31, 2005.

Deposits  totaled $419.0 million at June 30, 2006, an increase of $15.5 million,
or 3.8%,  from $403.5  million at December 31, 2005.  Interest-bearing  deposits
increased by $19.6  million,  or 6.3%, to $328.8  million,  partially  offset by
noninterest-bearing  deposits  decreasing  by $4.1  million,  or 4.4%,  to $90.2
million at June 30, 2006. The Corporation is experiencing  strong competition in
attracting  deposits  due to the  current  interest  environment  and flat yield
curve. The Corporation opened its tenth branch in Montville,  Morris County, New
Jersey in  February  2006 and this new market has helped to obtain a strong core
deposit base. In addition,  the Corporation entered the brokered  certificate of
deposit  market which  provided  $15.6 million in  certificates  of deposit with
average remaining maturities of 4.5 months and average yields of 4.94%.

The Corporation has received  approvals to begin the building of our new Wyckoff
branch,  anticipated to open in the second  quarter of 2007. The  Corporation is
also looking at several new deposit products for  introduction  during this year
to help provide attractive services to existing and new customers that will fund
the loan growth anticipated for the remainder of the year. The challenges of the
rising interest rate environment and the strong  competitive market for deposits
is expected  to  continue  for the  remainder  of the year and will  require the
Corporation  to  continue  to  look  at a  blend  of new  deposit  products  and
borrowings in order to fund the balance sheet.


                                       17
<PAGE>

Results of Operations
---------------------
Six Months Ended June 30, 2006 and 2005
---------------------------------------

General
-------

The Corporation  reported net income of $2.28 million, or $0.47 diluted earnings
per share for the six months ended June 30, 2006,  compared to $2.14 million, or
$0.45  diluted  earnings  per share for the same  period in 2005.  The  $133,000
increase was primarily due to increases in net interest  income and  noninterest
income and a decrease in the  provision  for loan loss,  partially  offset by an
increase in noninterest expense.

Net interest income
-------------------

Net interest  income  increased by $558,000,  or 6.3%,  for the six months ended
June 30, 2006 as compared with the  corresponding  period in 2005.  The increase
was  primarily  due to an  increase  in  average  net  interest-earning  assets,
partially offset by a decrease in the net interest margin.

The following  table reflects the components of the  Corporation's  net interest
income for the six months  ended June 30, 2006 and 2005  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 and loans
is presented on a  tax-equivalent  basis  assuming a statutory  tax rate of 34%.
This  was  accomplished  by  adjusting  non-taxable  income  upward  to  make it
equivalent to the level of taxable income required to earn the same amount after
taxes.

<TABLE>
<CAPTION>
                                                                Analysis of Net Interest Income (Unaudited)

                                                                     For the Six Months Ended June 30,

                                                                 2006                                  2005
                                                 -----------------------------------    -----------------------------------
                                                                            Average                                  Average
                                                               Interest     Rates                     Interest       Rates
                                                  Average      Income/      Earned/      Average      Income/        Earned/
                                                  Balance      Expense       Paid        Balance      Expense         Paid
                                                  -------      -------       ----        -------      -------         ----
<S>                                                 <C>           <C>           <C>        <C>           <C>            <C>
                                                                           (Dollars in thousands)

Assets

Interest-earning assets:
Loans (1)                                        $ 352,037    $  12,278         7.03%   $ 303,839    $   9,870          6.55%
Taxable investment securities (1)                   85,874        1,772         4.16       76,912        1,442          3.78
Tax-exempt investment securities (1) (2)            16,614          364         4.38       19,526          447          4.58
Other interest-earning assets                          432           18         8.40        7,318          101          2.78
                                                 ---------    ---------                 ---------    ---------
Total interest-earning assets                      454,957       14,432         6.40      407,595       11,860          5.87
                                                              ---------                              ---------

Non-interest-earning assets:
Allowance for loan losses                           (3,959)                                (3,459)
Other assets                                        31,517                                 26,620
                                                 ---------                              ---------
Total assets                                     $ 482,515                              $ 430,756
                                                 =========                              =========


Liabilities and Stockholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits                 $ 116,764    $     887         1.53%   $ 134,656    $     716          1.07%
Savings deposits                                    43,858          127         0.58       49,667          147          0.60
Time deposits                                      147,764        2,778         3.79       97,853        1,377          2.84
Repurchase agreements                                6,068          125         4.15        2,929           33          2.27
FHLB Borrowing                                      33,286          719         4.36       18,091          318          3.54
Subordinated debenture                               7,217          243         6.79        7,217          244          6.82
                                                 ---------    ---------                 ---------    ---------
Total interest-bearing liabilities                 354,957        4,879         2.77      310,413        2,835          1.84
                                                              ---------                              ---------
Non-interest-bearing liabilities:
Demand deposits                                     89,375                                 86,390
Other liabilities                                    3,828                                  2,527
Stockholders' equity                                34,355                                 31,426
                                                 ---------                              ---------
Total liabilities and stockholders' equity       $ 482,515                              $ 430,756
                                                 =========                              =========

Net interest income (taxable equivalent basis)                $   9,553                              $   9,025
Tax equivalent adjustment                                          (114)                                  (144)
                                                              ---------                              ---------
Net interest income                                               9,439                                  8,881

Net interest spread (taxable equivalent basis)                                  3.63%                                   4.03%
                                                                           =========                               =========

Net yield on interest-earning
  assets (taxable equivalent basis) (3)                                         4.23%                                   4.47%
                                                                           =========                               =========
</TABLE>
--------------------------

     (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.

                                       18
<PAGE>

Total interest income on a tax equivalent  basis  increased by $2.6 million,  or
21.7%,  primarily  due to an  increase  in the  average  earning  assets  and an
increase in yields on interest-earning  assets. An increase in the yields in the
loan and  investment  portfolio  and a shift of assets  into loans  provided  an
increase in tax equivalent  yields on interest earning assets of 53 basis points
from 5.87% for the six months  ended June 30,  2005 to 6.40% for the same period
in 2006.  The average  balance of  interest-earning  assets  increased  by $47.4
million, or 11.6%, from $407.6 million for the six months ended June 30, 2005 to
$455.0 million for the same period in 2006,  primarily due to strong loan demand
and an increase in taxable investment  securities.  The Corporation continued to
experience  an increase in loan demand which caused loans on average to increase
by $48.2  million to an average of $352.0  million for the six months ended June
30, 2006,  from an average of $303.8 million for the comparable  period in 2005.
Taxable investment  securities  increased by $9.0 million to an average of $85.9
million as the Corporation deployed short-term assets into securities.

Interest  paid on deposits and borrowed  money  increased  by $2.0  million,  or
72.1%, due to an increase in deposits and an increase in rates paid on deposits.
The  average  balance of total  interest-bearing  deposits  and  borrowed  money
increased  to $355.0  million for the six months ended June 30, 2006 from $310.4
million  for  the  comparable  2005  period,   primarily  as  a  result  of  the
Corporation's  expanding  customer base,  issuance of brokered  certificates  of
deposit  and new  product  offerings.  Yields on  deposits  and  borrowed  money
increased  from 1.84% for the six month  period ended June 30, 2005 to 2.77% for
the comparable period in 2006. Rising short-term interest rates and an extremely
competitive  market has caused the  Corporation  to raise  yields on deposits in
order to fund the asset base.

Provision for loan losses
-------------------------

The Corporation  maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent losses  associated with its loan
portfolio,  after giving  consideration to changes in general market conditions,
current charge-off  experience,  level of nonperforming  loans and in the nature
and volume of the Corporation's loan activity.  The allowance for loan losses is
based on estimates,  and provisions are charged to operations  during the period
in which such additions are deemed necessary.

The provision charged to operations totaled $160,000 and $300,000 during the six
months ended June 30, 2006 and 2005, respectively. The decrease in the provision
was  primarily  due to lower loan  growth in 2006 than  observed  in 2005 and an
improvement  in  nonperforming  loans since  December 31,  2005.  See the "Asset
Quality"  section for a summary of allowance  for loan losses and  nonperforming
assets.  The Corporation  monitors its loan portfolio and intends to continue to
provide for loan loss reserves based on its ongoing  periodic review of the loan
portfolio and general market conditions.


                                       19
<PAGE>

Noninterest income
------------------

Noninterest  income increased by $357,000,  or 23.1%, from $1.55 million for the
six month period ended June 30, 2005 to $1.90 million for the comparable  period
in 2006.  Income  derived  from the  merchant  credit  card  processing  program
increased by $129,000 due to an expanding merchant base and deposit related fees
increased by $112,000  for the six month period ended June 30, 2006  compared to
the same period for 2005  primarily  due to the  implementation  of an overdraft
protection program which was offered to customers  beginning March 1, 2006. This
program  allows  eligible  customers  with an overdraft line available for check
writing and ATM, ACH, and Debit card transactions. The Bank purchased bank owned
life insurance in April, 2005 which contributed  $154,000 to noninterest  income
during the six month period ended June 30, 2006,  compared  with $55,000 for the
comparable period in 2005.

Noninterest expense
-------------------

Noninterest  expense  increased by  approximately  $875,000,  or 12.9%, to $7.64
million for the six months  ended June 30, 2006,  compared to $6.77  million for
the same period in 2005. Salaries and employee benefits,  the major component of
noninterest  expense,  increased  by $354,000,  or 11.9%,  during the six months
ended June 30, 2006.  This  increase was due to general  increases for merit and
performance and increases in staffing to support the new Montville  branch,  the
lending  department  and the executive  administration.  Occupancy and equipment
expense increased by $229,000, or 26.4%,  primarily to support the new Montville
branch and the newly relocated Waldwick branch which opened in the fall of 2005.
The increase in the merchant card processing business caused merchant processing
expense to increase by $130,000 in the six months ended June 30, 2006.

Income taxes
------------

Income tax expense  totaled  $1.26  million for the three  months ended June 30,
2006,  for an effective  tax rate of 35.7%.  For the three months ended June 30,
2005,  income tax expense  totaled $1.22  million,  for an effective tax rate of
36.2%.  The  effective  tax  rate has  decreased  due to the  effect  of the tax
deferred status of the bank owned life insurance income.

Results of Operations
---------------------
Three Months Ended June 30, 2006 and 2005
-----------------------------------------

General
-------

The Corporation  reported net income of $1.17 million, or $0.24 diluted earnings
per share for the three months ended June 30, 2006,  compared to $1.14  million,
or $0.24  diluted  earnings  per share for the same period in 2005.  The $28,000
increase was primarily due to increases in net interest  income and  noninterest
income and a decrease in the  provision  for loan loss,  partially  offset by an
increase in noninterest expense.

                                       20
<PAGE>

Net interest income
-------------------

Net interest income  increased by $283,000,  or 6.3%, for the three months ended
June 30, 2006 as compared with the  corresponding  period in 2005.  The increase
was  primarily due to an increase in average net  interest-earning  assets and a
decrease in the net interest margin.

The following  table reflects the components of the  Corporation's  net interest
income for the  quarters  ended June 30,  2006 and 2005  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 and loans
is presented on a  tax-equivalent  basis  assuming a statutory  tax rate of 34%.
This  was  accomplished  by  adjusting  non-taxable  income  upward  to  make it
equivalent to the level of taxable income required to earn the same amount after
taxes.

<TABLE>
<CAPTION>
                                                                    Analysis of Net Interest Income (Unaudited)

                                                                        For the Three Months Ended June 30,

                                                                  2006                                    2005
                                                 -------------------------------------   -------------------------------------
                                                                              Average                                  Average
                                                                Interest      Rates                     Interest       Rates
                                                   Average      Income/       Earned/      Average      Income/        Earned/
                                                   Balance      Expense        Paid        Balance      Expense         Paid
                                                   -------      -------        ----        -------      -------         ----
<S>                                                  <C>           <C>            <C>        <C>           <C>            <C>
                                                                             (Dollars in thousands)

Assets

Interest-earning assets:
Loans (1)                                        $  355,341    $    6,304         7.12%  $  310,836    $    5,082         6.56%
Taxable investment securities (1)                    85,118           894         4.21       75,807           718         3.80
Tax-exempt investment securities (1) (2)             16,413           182         4.44       19,581           223         4.56
Other interest-earning assets                           597            11         7.39       10,542            76         2.89
                                                 ----------    ----------                 ----------   ----------
Total interest-earning assets                       457,469         7,391         6.48      416,766         6,099         5.87
                                                               ----------                              ----------

Non-interest-earning assets:
Allowance for loan losses                            (3,986)                                 (3,526)
Other assets                                         32,761                                  26,589
                                                 ----------                              ----------
Total assets                                     $  486,244                              $  439,829
                                                 ==========                              ==========


Liabilities and Stockholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits                 $  114,840    $      481         1.68%   $  137,536    $      396        1.15%
Savings deposits                                     43,084            63         0.59       49,247            73         0.59
Time deposits                                       151,860         1,471         3.89      105,701           796         3.02
Repurchase agreements                                 6,515            70         4.31        2,466            15         2.44
FHLB Borrowing                                       32,842           365         4.46       16,040           146         3.65
Subordinated debenture                                7,217           122         6.78        7,217           122         6.78
                                                 ----------    ----------                 ----------   ----------
Total interest-bearing liabilities                  356,358         2,572         2.89      318,207         1,548         1.95
                                                               ----------                              ----------
Non-interest-bearing liabilities:
Demand deposits                                      91,370                                  87,111
Other liabilities                                     3,851                                   2,755
Stockholders' equity                                 34,665                                  31,756
                                                 ----------                              ----------
Total liabilities and stockholders' equity       $  486,244                              $  439,829
                                                 ==========                              ==========

Net interest income (taxable equivalent basis)                 $    4,819                              $    4,551
Tax equivalent adjustment                                             (57)                                    (72)
                                                               ----------                              ----------
Net interest income                                                 4,762                                   4,479
                                                               ==========                              ==========

Net interest spread (taxable equivalent basis)                                    3.59%                                    3.92%
                                                                            ==========                               ==========

Net yield on interest-earning
  assets (taxable equivalent basis) (3)                                           4.23%                                    4.38%
                                                                            ==========                               ==========
</TABLE>

----------------------------

     (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.

                                       21
<PAGE>

Total interest income on a tax equivalent  basis  increased by $1.3 million,  or
21.2%,  primarily  due to an  increase  in the  average  earning  assets  and an
increase  in  yields  on   interest-earning   assets.  The  average  balance  of
interest-earning assets increased by $40.7 million, or 9.8%, from $416.8 million
for the three months  ended June 30, 2005 to $457.5  million for the same period
in 2006,  primarily  caused by strong  loan  demand and an  increase  in taxable
investment  securities.  The Corporation  continued to experience an increase in
loan demand  which  caused  loans on average to increase by $44.5  million to an
average of $355.3  million for the three  months  ended June 30,  2006,  from an
average of $310.8 million for the comparable period in 2005.  Taxable investment
securities increased by $9.3 million to an average of $85.1 million.

Interest  paid on deposits and borrowed  money  increased  by $1.0  million,  or
66.2%, due to an increase in deposits and an increase in rates paid on deposits.
The  average  balance of total  interest-bearing  deposits  and  borrowed  money
increased to $356.4 million for the three months ended June 30, 2006 from $318.2
million  for the  comparable  period  in  2005,  primarily  as a  result  of the
Corporation's  expanding  customer base,  issuance of brokered  certificates  of
deposit  and new  product  offerings.  Yields on  deposits  and  borrowed  money
increased from 1.95% for the three month period ended June 30, 2005 to 2.89% for
the comparable period in 2006. Rising short-term interest rates and an extremely
competitive  market has caused the  Corporation  to raise  yields on deposits in
order to fund the asset base.


                                       22
<PAGE>

Provision for loan losses
-------------------------

The Corporation  maintains an allowance for loan losses at a level considered by
management to be adequate to cover the inherent losses  associated with its loan
portfolio,  after giving  consideration to changes in general market conditions,
current charge-off  experience,  level of nonperforming  loans and in the nature
and volume of the Corporation's loan activity.  The allowance for loan losses is
based on estimates,  and provisions are charged to operations  during the period
in which such additions are deemed necessary.

The provision  charged to operations  totaled  $110,000 and $150,000  during the
three months ended June 30, 2006 and 2005, respectively. See the "Asset Quality"
section for a summary of allowance for loan losses and nonperforming assets. The
Corporation  monitors its loan  portfolio and intends to continue to provide for
loan loss reserves  based on its ongoing  periodic  review of the loan portfolio
and general market conditions.


Noninterest income
------------------

Noninterest income increased by $136,000,  or 15.2%, from $896,000 for the three
month period ended June 30, 2005 to $1.0  million for the  comparable  period in
2006. Income derived from the merchant credit card processing  program increased
by $54,000 due to an expanding  merchant base and deposit related fees increased
by $84,000 for the three month period  ended June 30, 2006  compared to the same
period for 2005 due to the  implementation of an overdraft  protection  program.
Offsetting  these increases was a decrease in gain on mortgages sold of $38,000,
caused by lower  volume of loans  originated  for sale during the quarter  ended
June 30, 2006 when compared with the quarter ended June 30, 2005.

Noninterest expense
-------------------

Noninterest  expense  increased by  approximately  $412,000,  or 11.9%,  to $3.9
million for the three months  ended June 30, 2006,  compared to $3.5 million for
the same period in 2005. Salaries and employee benefits,  the major component of
noninterest  expense,  increased by $171,000,  or 11.1%, during the three months
ended June 30, 2006.  This  increase was due to general  increases for merit and
performance and increases in staffing to support the new Montville  branch,  the
lending  department  and the executive  administration.  Occupancy and equipment
expense increased by $117,000, or 27.7%,  primarily to support the new Montville
branch and the newly relocated Waldwick branch which opened in the fall of 2005.
The increase in the merchant card processing business caused merchant processing
expense to increase by $79,000 for the quarter ended June 30, 2006.

Income taxes
------------

Income tax expense  totaled  $654,000  for the three months ended June 30, 2006,
for an  effective  tax rate of 35.9%.  For the three months ended June 30, 2005,
income tax expense totaled $635,000, for an effective tax rate of 35.8%.

                                       23
<PAGE>

Asset Quality
-------------

The  Corporation's  principal  earning  assets are its loans to  businesses  and
individuals located in northern New Jersey.  Inherent in the lending function is
the risk of deterioration  in the borrowers'  ability to repay their loans under
their existing loan agreements. Risk elements include nonaccrual loans, past due
and restructured  loans,  potential problem loans, loan concentrations and other
real estate owned.  The following table shows the  composition of  nonperforming
assets at the end of the last four quarters:

<TABLE>
<CAPTION>
                                            06/30/06     03/31/06     12/31/05     09/30/05
                                            --------     --------     --------     --------
<S>                                        <C>          <C>          <C>          <C>
                                                        (Dollars in Thousands)
Nonaccrual loans: (1)                      $     258    $     184    $     472    $     316
Loans past due 90 days or more: (2)               11            5           55           26
Restructured loans:                               --           --           --           --
                                           ---------    ---------    ---------    ---------
     Total nonperforming loans             $     269    $     189    $     527    $     342
                                           =========    =========    =========    =========

Allowance for loan losses                  $   4,011    $   3,920    $   3,299    $   3,714
                                           =========    =========    =========    =========

Nonaccrual loans to total loans                 0.07%        0.05%        0.14%        0.09%
Nonperforming loans to total loans              0.08%        0.06%        0.15%        0.10%
Nonperforming loans to total assets             0.05%        0.04%        0.11%        0.07%
Allowance for loan losses to total loans        1.11%        1.13%        1.11%        1.14%

</TABLE>

(1)  Generally  represents  loans to which the payments of interest or principal
are in arrears for a period of more than 90 days. Interest previously accrued on
these loans and not yet paid is reversed and charged  against  income during the
current  period.  Interest  earned  thereafter is only included in income to the
extent that it is received in cash.

(2)   Represents   loans  to  which   payments  of  interest  or  principal  are
contractually  past due 90 days or more but which are currently  accruing income
at the contractually  stated rates. A determination is made to continue accruing
income  on  those  loans  which  are  sufficiently  collateralized  and on which
management believes all interest and principal owed will be collected.

There were no loans at June 30,  2006 other  than  those  included  in the above
table, where the Corporation was aware of any credit conditions of any borrowers
that would indicate a strong possibility of the borrowers not complying with the
present  terms and  conditions  of repayment  and which may result in such loans
being included as non-accrual, past due or restructured at a future date.

The Corporation's  lending  activities are concentrated in loans secured by real
estate  located in northern New Jersey.  Accordingly,  the  collectibility  of a
substantial  portion of the  Corporation's  loan  portfolio  is  susceptible  to
changes in real estate market conditions in northern New Jersey.


Market Risk
-----------

The Corporation's  primary exposure to market risk arises from changes in market
interest  rates  ("interest  rate risk").  The  Corporation's  profitability  is
largely  dependent upon its ability to manage interest rate risk.  Interest rate
risk can be defined as the exposure of the  Corporation's

                                       24
<PAGE>

net  interest  income to adverse  movements  in  interest  rates.  Although  the
Corporation  manages  other risks,  such as credit and  liquidity  risk,  in the
normal course of its business, management considers interest rate risk to be its
most significant  market risk and it could potentially have the largest material
effect on the Corporation's  financial  condition.  The Corporation  manages its
interest  rate risk by  utilizing  an  asset/liability  simulation  model and by
measuring and managing its interest sensitivity gap. Interest sensitivity gap is
determined by analyzing the  difference  between the amount of  interest-earning
assets  maturing or  repricing  within a specific  time period and the amount of
interest-bearing  liabilities  maturing or  repricing  within the same period of
time. The Asset Liability  Committee reviews and discusses these measurements on
a monthly basis.

The Corporation does not have any material exposure to foreign currency exchange
rate risk or commodity price risk. The Corporation did not enter into any market
sensitive  instruments  for  trading  purposes  nor did it engage in any hedging
transactions  utilizing derivative  financial  instruments during the six months
ended June 30, 2006.

The Corporation is, however,  a party to financial  instruments with off-balance
sheet risk in the normal course of business to meet the  financing  needs of its
customers.  These  instruments,  which include  commitments to extend credit and
standby letters of credit,  involve, to varying degrees,  elements of credit and
interest  rate risk in  excess  of the  amount  recognized  in the  consolidated
statement of condition. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any  condition  established  in the
contract.  Commitments  generally  have fixed  expiration  dates and may require
collateral  from the borrower if deemed  necessary by the  Corporation.  Standby
letters of credit  are  conditional  commitments  issued by the  Corporation  to
guarantee  the  performance  of a customer to a third  party up to a  stipulated
amount and with specified terms and conditions. Commitments to extend credit and
standby  letters of credit are not  recorded on the  Corporation's  consolidated
balance sheet until the instrument is exercised.

Capital Adequacy
----------------

The  Corporation is subject to capital  adequacy  guidelines  promulgated by the
Board of Governors of the Federal Reserve System ("FRB"). The Bank is subject to
similar capital adequacy  requirements  imposed by the Federal Deposit Insurance
Corporation.  The FRB has issued  regulations  to define the adequacy of capital
based upon the  sensitivity of assets and  off-balance  sheet  exposures to risk
factors.  Four  categories  of risk  weights  (0%,  20%,  50%,  and  100%)  were
established  to be  applied  to  different  types of  balance  sheet  assets and
off-balance  sheet  exposures.   The  aggregate  of  the   risk-weighted   items
(risk-based assets) is the denominator of the ratio, the numerator is risk-based
capital. Under the regulations,  risk-based capital has been classified into two
categories.  Tier 1 capital includes common and qualifying  perpetual  preferred
stockholders'   equity  less  goodwill.   Tier  2  capital  includes   mandatory
convertible debt, allowance for loan losses, subject to certain limitations, and
certain subordinated and term debt securities. Total qualifying capital consists
of Tier 1 capital and Tier 2 capital,  however, the amount of Tier 2 capital may
not  exceed  the  amount  of Tier 1  capital.  At June  30,  2006,  the


                                       25
<PAGE>

minimum risk-based capital requirements to be considered adequately  capitalized
were 4% for Tier 1 capital and 8% for total capital.

Federal banking  regulators  have also adopted  leverage  capital  guidelines to
supplement the risk-based measures. The leverage ratio is determined by dividing
Tier 1 capital as  defined  under the  risk-based  guidelines  by average  total
assets  (non  risk-adjusted)  for the  preceding  quarter.  At June 30, 2006 the
minimum leverage ratio requirement to be considered well capitalized was 4%. The
following table reflects the Corporation's capital ratios at June 30, 2006.


                                   Required         Actual         Excess
                                   --------         ------         ------
Risk-based Capital
         Tier 1                      4.00%          11.27%          7.27%
         Total                       8.00%          12.31%          4.31%
         Leverage Ratio              4.00%           8.97%          4.97%


Liquidity and Capital Resources
-------------------------------

The Corporation's primary sources of funds are deposits, repayments of loans and
mortgage-backed  securities,  maturities  of  investment  securities  and  funds
provided from operations.  While scheduled loan and  mortgage-backed  securities
amortization   and   maturities  of  investment   securities  are  a  relatively
predictable  source  of  funds,  deposit  flow  and  prepayments  on  loans  and
mortgage-backed  securities  are greatly  influenced by market  interest  rates,
economic conditions and competition. The Corporation's liquidity, represented by
cash  and  cash  equivalents,  is a  product  of its  operating,  investing  and
financing activities.

The primary  source of cash from operating  activities is net income.  Liquidity
management is both a daily and long-term function of business management. Excess
liquidity is generally invested in short-term investments, such as federal funds
sold. The Corporation  anticipates  that it will have sufficient funds available
to meet its current loan  commitments.  At June 30, 2006,  the  Corporation  has
outstanding  loan  commitments  of $30.1 million and unused lines and letters of
credit totaling $96.6 million.  Certificates  of deposit  scheduled to mature in
one year or less, at June 30, 2006, totaled $76.3 million.  Management  believes
that a significant  portion of such  deposits will remain with the  Corporation.
Cash and cash equivalents decreased $97,000 during the first six months of 2006.
Net operating and financing  activities provided $3.0 million and $11.2 million,
respectively, and investing activities used $14.3 million.


ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Disclosure  about  quantitative  and  qualitative  market risk is located in the
Market  Risk  section of  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations.

                                       26
<PAGE>

ITEM 4.  Controls and Procedures

The Corporation's management,  with the participation of the Corporation's chief
executive  officer  and  principal   accounting   officer,   has  evaluated  the
effectiveness of the Corporation's disclosure controls and procedures as of June
30, 2006. Based on this evaluation,  the  Corporation's  chief executive officer
and principal  accounting  officer  concluded  that the  Corporation  disclosure
controls and procedures are effective for recording, processing, summarizing and
reporting the information the Corporation is required to disclose in the reports
it files under the  Securities  Exchange  Act of 1934,  within the time  periods
specified  in the SEC's rules and forms.  Such  evaluation  did not identify any
change in the  Corporation's  internal  control over  financial  reporting  that
occurred during the period ended June 30, 2006 that has materially affected,  or
is reasonably likely to materially  affect,  the Corporation's  internal control
over financial reporting.




                                       27
<PAGE>

                        Stewardship Financial Corporation
                          Part II -- Other Information


Item 1A.    Risk Factors
            ------------

                  There have been no material changes in risk factors  described
in the Corporation's  Annual Report on Form 10-K for the year ended December 31,
2005.

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

The  Corporation  held an Annual Meeting of Shareholders on May 9, 2006. At that
meeting, the Corporation's shareholders elected three directors for a three year
term that will expire in May 2009,  or until their  successors  are duly elected
and qualified. The voting results were as follows:

                                               Votes for      Votes Withheld
                                               ---------      --------------

Election of Director
         Robert J. Turner                      3,529,228          17,992
         William J. Vander Eems                3,539,680           7,539
         Paul Van Ostenbridge                  3,540,771           6,449

There  were no broker  non-votes  on any of the  above  matters.  The  following
individuals whose terms expire in either 2007 or 2008, or until their successors
are duly  elected  and  qualified,  continue to serve as  directors:  William C.
Hanse,  Margo  Lane,  Arie  Leegwater,  John  L.  Steen,  Harold  Dyer,  Abe Van
Wingerden, Michael Westra and Howard Yeaton.

The  shareholders  reviewed and voted on the 2006 Director Stock Option Plan for
Nonemployee  Directors with 2,660,804  shares voting for,  357,351 shares voting
against, 56,858 shares abstaining, and 463,206 broker non-votes.

The shareholders ratified the appointment of Crowe Chizek and Company LLC as the
Corporation's  independent auditors for the fiscal year ending December 31, 2006
with 3,530,062  shares voting for, 755 shares voting against,  and 16,401 shares
abstaining.

Item 6.     Exhibits
            --------

     (a)       Exhibits

                     See Exhibit Index following this report.


                                       28
<PAGE>

                                   SIGNATURES
                                   ----------


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.





                        Stewardship Financial Corporation





Date:  August 14, 2006             By: /s/ Paul Van Ostenbridge
       ---------------                 ---------------------------------------
                                           Paul Van Ostenbridge
                                           President and Chief Executive
                                               Officer
                                           (authorized officer on behalf
                                             of registrant)



Date:  August 14, 2006             By: /s/ Julie E. Holland
       ---------------                 ---------------------------------------
                                           Julie E. Holland
                                           Senior Vice President and Treasurer
                                           (principal accounting officer)


                                       29
<PAGE>


                                  EXHIBIT INDEX


EXHIBIT
NUMBER                             DESCRIPTION

31.1        Certification of Paul Van Ostenbridge  required by Rule 13a-14(a) or
            Rule 15d-14(a)

31.2        Certification  of Julie Holland  required by Rule  13a-14(a) or Rule
            15d-14(a)

32.1        Certification  of Paul Van Ostenbridge and Julie Holland required by
            Rule   13a-14(b)   or  Rule   15d-14(b)   and  Section  906  of  the
            Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350


                                       30