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, 2010





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





For the
transition period from _________ to _________





Commission
file number 0-21855





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





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





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





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





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





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    Yes o     No
o





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




Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o   (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x





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





The
number of shares outstanding, net of treasury stock, of the Issuer’s Common
Stock, no par value, as of August 12, 2010 was 5,845,592.










Stewardship Financial Corporation





INDEX





PAGENUMBERPART I  -
            CONSOLIDATED FINANCIAL
      INFORMATIONITEM 1  -
            CONSOLIDATED FINANCIAL STATEMENTSConsolidated Statements of Financial
      Conditionat June 30, 2010 and December 31, 2009
      (Unaudited)
            1Consolidated Statements of Income for the Three
      andSix Months ended June 30, 2010 and 2009
      (Unaudited)
            2Consolidated Statement of Changes in Stockholders’ Equity
      forthe Six Months ended June 30, 2010 and 2009
      (Unaudited)
            3Consolidated Statements of Comprehensive Income for the
      Threeand Six Months ended June 30, 2010 and 2009
      (Unaudited)
            4Consolidated Statements of Cash Flows for the
      SixMonths ended June 30, 2010 and 2009
      (Unaudited)
            5 -
      6Notes to Consolidated Financial Statements
      (Unaudited)
            7 -
      18ITEM 2  -
            MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OFOPERATIONS
            19
      - 27ITEM 3  -
            QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
            28ITEM 4T  -
            CONTROLS AND PROCEDURES
            28PART II  -
            OTHER INFORMATIONITEM 6  -
            EXHIBITS
            29SIGNATURES
            30EXHIBIT
    INDEX
            31


Index


Stewardship Financial Corporation and Subsidiary


Consolidated
Statements of Financial Condition


(Unaudited)




June 30,
            
            
            December 31,2010
            
            
            2009AssetsCash
      and due from banks
            
            $
            16,396,000
            
            
            $
            8,840,000Other
      interest-earning assets
            
            
            56,000
            
            
            
            31,000Federal
      funds sold
            
            
            3,000,000
            
            
            
            -Cash
      and cash equivalents
            
            
            19,452,000
            
            
            
            8,871,000Securities
      available for sale
            
            
            116,009,000
            
            
            
            103,026,000Securities
      held to maturity; estimated fair value of $59,182,000 (2010) and$68,765,000
      (2009)
            
            
            56,836,000
            
            
            
            67,717,000FHLB-NY
      stock, at cost
            
            
            2,497,000
            
            
            
            3,227,000Loans,
      net of allowance for loan losses of $8,745,000 (2010) and $6,920,000
      (2009)
            
            
            449,007,000
            
            
            
            453,119,000Mortgage
      loans held for sale
            
            
            3,059,000
            
            
            
            660,000Premises
      and equipment, net
            
            
            6,639,000
            
            
            
            6,861,000Accrued
      interest receivable
            
            
            2,852,000
            
            
            
            3,167,000Bank
      owned life insurance
            
            
            9,655,000
            
            
            
            9,488,000Other
      assets
            
            
            8,904,000
            
            
            
            7,708,000Total
      assets
            
            $
            674,910,000
            
            
            $
            663,844,000Liabilities
      and stockholders' equityLiabilitiesDeposits:Noninterest-bearing
            
            $
            101,045,000
            
            
            $
            88,427,000Interest-bearing
            
            
            460,138,000
            
            
            
            441,503,000Total
      deposits
            
            
            561,183,000
            
            
            
            529,930,000Federal
      Home Loan Bank of New York Advances
            
            
            36,000,000
            
            
            
            54,600,000Subordinated
      debentures
            
            
            7,217,000
            
            
            
            7,217,000Securities
      sold under agreements to repurchase
            
            
            15,400,000
            
            
            
            15,396,000Accrued
      interest payable
            
            
            935,000
            
            
            
            1,193,000Accrued
      expenses and other liabilities
            
            
            1,477,000
            
            
            
            1,997,000Total
      liabilities
            
            
            622,212,000
            
            
            
            610,333,000Commitments
      and contingencies
            
            
            -
            
            
            
            -Stockholders'
      equityPreferred
      stock, no par value; 2,500,000 shares authorized; 10,000
      sharesissued
      and outstanding at June 30, 2010 and December 31, 2009.Liquidation
      preference of $10,000,000
            
            
            9,766,000
            
            
            
            9,736,000Common
      stock, no par value; 10,000,000 shares authorized;5,846,928
      and 5,834,515 shares issued: 5,842,367 and 5,834,515
sharesoutstanding
      at June 30, 2010 and December 31, 2009, respectively
            
            
            40,501,000
            
            
            
            40,415,000Treasury
      stock, 4,561 shares outstanding at June 30, 2010
            
            
            (43,000
            )
            
            
            -Retained
      earnings
            
            
            1,397,000
            
            
            
            2,922,000Accumulated
      other comprehensive income, net
            
            
            1,077,000
            
            
            
            438,000Total
      stockholders' equity
            
            
            52,698,000
            
            
            
            53,511,000Total
      liabilities and stockholders' equity
            
            $
            674,910,000
            
            
            $
            663,844,000








See notes
to unaudited consolidated financial statements.


1
 Index


Stewardship Financial Corporation and Subsidiary


Consolidated
Statements of Income


(Unaudited)





Three
      Months Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Interest
      income:Loans
            
            $
            6,693,000
            
            
            $
            6,658,000
            
            
            $
            13,567,000
            
            
            $
            13,266,000Securities
      held to maturityTaxable
            
            
            376,000
            
            
            
            519,000
            
            
            
            798,000
            
            
            
            960,000Non-taxable
            
            
            233,000
            
            
            
            219,000
            
            
            
            464,000
            
            
            
            432,000Securities
      available for saleTaxable
            
            
            825,000
            
            
            
            1,066,000
            
            
            
            1,705,000
            
            
            
            2,203,000Non-taxable
            
            
            38,000
            
            
            
            52,000
            
            
            
            87,000
            
            
            
            104,000FHLB
      dividends
            
            
            32,000
            
            
            
            26,000
            
            
            
            69,000
            
            
            
            45,000Other
      interest-earning assets
            
            
            4,000
            
            
            
            2,000
            
            
            
            6,000
            
            
            
            5,000Total
      interest income
            
            
            8,201,000
            
            
            
            8,542,000
            
            
            
            16,696,000
            
            
            
            17,015,000Interest
      expense:Deposits
            
            
            1,729,000
            
            
            
            2,203,000
            
            
            
            3,549,000
            
            
            
            4,575,000Borrowed
      money
            
            
            549,000
            
            
            
            519,000
            
            
            
            1,045,000
            
            
            
            1,022,000Total
      interest expense
            
            
            2,278,000
            
            
            
            2,722,000
            
            
            
            4,594,000
            
            
            
            5,597,000Net
      interest income before provision for loan losses
            
            
            5,923,000
            
            
            
            5,820,000
            
            
            
            12,102,000
            
            
            
            11,418,000Provision
      for loan losses
            
            
            4,705,000
            
            
            
            1,025,000
            
            
            
            6,255,000
            
            
            
            1,175,000Net
      interest income after provision for loan losses
            
            
            1,218,000
            
            
            
            4,795,000
            
            
            
            5,847,000
            
            
            
            10,243,000Noninterest
      income:Fees
      and service charges
            
            
            503,000
            
            
            
            474,000
            
            
            
            972,000
            
            
            
            870,000Bank
      owned life insurance
            
            
            81,000
            
            
            
            76,000
            
            
            
            167,000
            
            
            
            159,000Gain
      on sales of mortgage loans
            
            
            66,000
            
            
            
            73,000
            
            
            
            121,000
            
            
            
            84,000Gain
      on calls and sales of securities
            
            
            474,000
            
            
            
            214,000
            
            
            
            802,000
            
            
            
            253,000Merchant
      processing
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            118,000Other
            
            
            123,000
            
            
            
            112,000
            
            
            
            196,000
            
            
            
            172,000Total
      noninterest income
            
            
            1,247,000
            
            
            
            949,000
            
            
            
            2,258,000
            
            
            
            1,656,000Noninterest
      expenses:Salaries
      and employee benefits
            
            
            1,948,000
            
            
            
            2,077,000
            
            
            
            4,074,000
            
            
            
            4,136,000Occupancy,
      net
            
            
            481,000
            
            
            
            473,000
            
            
            
            970,000
            
            
            
            945,000Equipment
            
            
            277,000
            
            
            
            253,000
            
            
            
            586,000
            
            
            
            518,000Data
      processing
            
            
            327,000
            
            
            
            277,000
            
            
            
            652,000
            
            
            
            582,000FDIC
      insurance premium
            
            
            237,000
            
            
            
            519,000
            
            
            
            461,000
            
            
            
            689,000Merchant
      processing
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            108,000Other
            
            
            901,000
            
            
            
            1,085,000
            
            
            
            1,852,000
            
            
            
            2,114,000Total
      noninterest expenses
            
            
            4,171,000
            
            
            
            4,684,000
            
            
            
            8,595,000
            
            
            
            9,092,000(Loss)
      income before income tax (benefit) expense
            
            
            (1,706,000
            )
            
            
            1,060,000
            
            
            
            (490,000
            )
            
            
            2,807,000Income
      tax (benefit) expense
            
            
            (641,000
            )
            
            
            280,000
            
            
            
            (296,000
            )
            
            
            840,000Net
      (loss) income
            
            
            (1,065,000
            )
            
            
            780,000
            
            
            
            (194,000
            )
            
            
            1,967,000Dividends
      on preferred stock and accretion
            
            
            138,000
            
            
            
            137,000
            
            
            
            275,000
            
            
            
            229,000Net
      (loss) income available to common stockholders
            
            $
            (1,203,000
            )
            
            $
            643,000
            
            
            $
            (469,000
            )
            
            $
            1,738,000Basic
      (loss) earnings per common share
            
            $
            (0.21
            )
            
            $
            0.11
            
            
            $
            (0.08
            )
            
            $
            0.30Diluted
      (loss) earnings per common share
            
            $
            (0.21
            )
            
            $
            0.11
            
            
            $
            (0.08
            )
            
            $
            0.30








Share
data has been restated to reflect a 5% stock dividend paid November 16,
2009.





See notes
to unaudited consolidated financial statements.


2
 Index


Stewardship Financial Corporation and Subsidiary


Consolidated
Statement of Changes in Stockholders' Equity


(Unaudited)





Six
      Months Ended June 30, 2010AccumulatedOtherComprehensivePreferred
            
            
            Common
      Stock
            
            
            Treasury
            
            
            Retained
            
            
            Gain
      (Loss),Stock
            
            
            Shares
            
            
            Amount
            
            
            Stock
            
            
            Earnings
            
            
            Net
            
            
            TotalBalance
      -- December 31, 2009
            
            $
            9,736,000
            
            
            
            5,834,515
            
            
            $
            40,415,000
            
            
            $
            -
            
            
            $
            2,922,000
            
            
            $
            438,000
            
            
            $
            53,511,000Cash
      dividends paid on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,051,000
            )
            
            
            -
            
            
            
            (1,051,000
            )Payment
      of discount on dividendreinvestment
      plan
            
            
            -
            
            
            
            -
            
            
            
            (19,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (19,000
            )Cash
      dividends accrued on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (250,000
            )
            
            
            -
            
            
            
            (250,000
            )Common
      stock issued under stock plans
            
            
            -
            
            
            
            3,037
            
            
            
            24,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            24,000Stock
      option compensation expense
            
            
            -
            
            
            
            -
            
            
            
            26,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            26,000Stock
      options exercised
            
            
            -
            
            
            
            9,376
            
            
            
            55,000
            
            
            
            (43,000
            )
            
            
            -
            
            
            
            -
            
            
            
            12,000Accretion
      of discount on preferred stock
            
            
            25,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (25,000
            )
            
            
            
            
            
            
            -Amortization
      of issuance costs
            
            
            5,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,000
            )
            
            
            
            
            
            
            -Comprehensive
      income:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (194,000
            )
            
            
            -
            
            
            
            (194,000
            )Change
      in unrealized holding gains onsecurities
      available for sale arising duringthe
      period (net tax expense of $317,000)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            486,000
            
            
            
            486,000Reclassification
      adjustment for gains innet
      income (net of taxes of $271,000)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            433,000
            
            
            
            433,000Change
      in fair value of interest rateswap
      (net of tax benefit of $186,000)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (280,000
            )
            
            
            (280,000
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            445,000Balance
      -- June 30, 2010
            
            $
            9,766,000
            
            
            
            5,846,928
            
            
            $
            40,501,000
            
            
            $
            (43,000
            )
            
            $
            1,397,000
            
            
            $
            1,077,000
            
            
            $
            52,698,000Six
      Months Ended June 30, 2009AccumulatedOtherComprehensivePreferred
            
            
            Common
      Stock
            
            
            Treasury
            
            
            Retained
            
            
            Gain
      (Loss),Stock
            
            
            Shares
            
            
            Amount
            
            
            Stock
            
            
            Earnings
            
            
            Net
            
            
            TotalBalance
      -- December 31, 2008
            
            $
            -
            
            
            
            5,575,095
            
            
            $
            37,962,000
            
            
            $
            (272,000
            )
            
            $
            4,383,000
            
            
            $
            723,000
            
            
            $
            42,796,000Proceeds
      from issuance of preferredstock
      and a warrant
            
            
            9,731,000
            
            
            
            
            
            
            
            269,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,000,000Preferred
      stock issuance costs
            
            
            (48,000
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (48,000
            )Cash
      dividends paid on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,055,000
            )
            
            
            -
            
            
            
            (1,055,000
            )Payment
      of discount on dividendreinvestment
      plan
            
            
            -
            
            
            
            -
            
            
            
            (23,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (23,000
            )Cash
      dividends accrued on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (209,000
            )
            
            
            -
            
            
            
            (209,000
            )Common
      stock issued under stock plans
            
            
            -
            
            
            
            2,288
            
            
            
            22,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            22,000Stock
      option compensation expense
            
            
            -
            
            
            
            -
            
            
            
            24,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            24,000Stock
      options exercised
            
            
            -
            
            
            
            7,330
            
            
            
            40,000
            
            
            
            (32,000
            )
            
            
            -
            
            
            
            -
            
            
            
            8,000Repurchase
      of common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (75,000
            )
            
            
            -
            
            
            
            -
            
            
            
            (75,000
            )Accretion
      of discount on preferred stock
            
            
            20,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (20,000
            )
            
            
            
            
            
            
            -Amortization
      of issuance costs
            
            
            4,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,000
            )
            
            
            
            
            
            
            -Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,967,000
            
            
            
            -
            
            
            
            1,967,000Change
      in unrealized holding gains onsecurities
      available for sale arising duringthe
      period (net tax expense of $177,000)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (297,000
            )
            
            
            (297,000
            )Reclassification
      adjustment for gains innet
      income (net of taxes of $15,000)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            153,000
            
            
            
            153,000Change
      in fair value of interest rateswap
      (net of tax benefit of $39,000)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (59,000
            )
            
            
            (59,000
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,764,000Balance
      -- June 30, 2009
            
            $
            9,707,000
            
            
            
            5,584,713
            
            
            $
            38,294,000
            
            
            $
            (379,000
            )
            
            $
            5,062,000
            
            
            $
            520,000
            
            
            $
            53,204,000








See notes
to unaudited consolidated financial statements.


3
 Index


Stewardship Financial Corporation and Subsidiary


Consolidated
Statements of Comprehensive Income


(Unaudited)





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      (loss) income
            
            $
            (1,065,000
            )
            
            $
            780,000
            
            
            $
            (194,000
            )
            
            $
            1,967,000Other
      comprehensive income (loss):Change
      in unrealized holding gains on securitiesavailable
      for sale arising during the period
            
            
            1,437,000
            
            
            
            (509,000
            )
            
            
            2,309,000
            
            
            
            21,000Reclassification
      adjustment for gains in net income
            
            
            474,000
            
            
            
            214,000
            
            
            
            802,000
            
            
            
            253,000Net
      unrealized gains
            
            
            963,000
            
            
            
            (723,000
            )
            
            
            1,507,000
            
            
            
            (232,000
            )Tax
      effect
            
            
            381,000
            
            
            
            (280,000
            )
            
            
            588,000
            
            
            
            (88,000
            )Net
      unrealized gains, net of tax amount
            
            
            582,000
            
            
            
            (443,000
            )
            
            
            919,000
            
            
            
            (144,000
            )Change
      in fair value of interest rate swap
            
            
            (291,000
            )
            
            
            (99,000
            )
            
            
            (466,000
            )
            
            
            (99,000
            )Tax
      effect
            
            
            (116,000
            )
            
            
            (40,000
            )
            
            
            (186,000
            )
            
            
            (40,000
            )Change
      in fair value of interest rate swap,net
      of tax amount
            
            
            (175,000
            )
            
            
            (59,000
            )
            
            
            (280,000
            )
            
            
            (59,000
            )Total
      other comprehensive income (loss)
            
            
            407,000
            
            
            
            (502,000
            )
            
            
            639,000
            
            
            
            (203,000
            )Total
      comprehensive (loss) income
            
            $
            (658,000
            )
            
            $
            278,000
            
            
            $
            445,000
            
            
            $
            1,764,000








The
following is a summary of the accumulated other comprehensive income balances,
net of tax.








6/30/2010
            
            
            12/31/2009Unrealized
      gain on securities available for sale
            
            $
            1,512,000
            
            
            $
            593,000Unrealized
      loss on fair value of interest rate swap
            
            
            (435,000
            )
            
            
            (155,000
            )


4
 Index


Stewardship Financial Corporation and Subsidiary


Consolidated
Statements of Cash Flows


(Unaudited)





Six
      Months EndedJune 30,2010
            
            
            2009Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (194,000
            )
            
            $
            1,967,000Adjustments
      to reconcile net (loss) income tonet
      cash provided by operating activities:Depreciation
      and amortization of premises and equipment
            
            
            416,000
            
            
            
            423,000Amortization
      of premiums and accretion of discounts, net
            
            
            370,000
            
            
            
            305,000Accretion
      of deferred loan fees
            
            
            (55,000
            )
            
            
            (109,000
            )Provision
      for loan losses
            
            
            6,255,000
            
            
            
            1,175,000Originations
      of mortgage loans held for sale
            
            
            (14,952,000
            )
            
            
            (15,548,000
            )Proceeds
      from sale of mortgage loans
            
            
            12,674,000
            
            
            
            9,647,000Gain
      on sales of mortgage loans
            
            
            (121,000
            )
            
            
            (84,000
            )Gain
      on calls and sales of securities
            
            
            (802,000
            )
            
            
            (253,000
            )Deferred
      income tax benefit
            
            
            (791,000
            )
            
            
            (510,000
            )Nonqualified
      stock option expense
            
            
            26,000
            
            
            
            24,000Increase
      in bank owned life insurance
            
            
            (167,000
            )
            
            
            (159,000
            )Decrease
      in accrued interest receivable
            
            
            315,000
            
            
            
            173,000(Increase)
      decrease in other assets
            
            
            (993,000
            )
            
            
            602,000(Decrease)
      increase in accrued interest payable
            
            
            (258,000
            )
            
            
            20,000(Decrease)
      increase in other liabilities
            
            
            (800,000
            )
            
            
            244,000Net
      cash provided by (used in) operating activities
            
            
            923,000
            
            
            
            (2,083,000
            )Cash
      flows from investing activities:Purchase
      of securities available for sale
            
            
            (58,544,000
            )
            
            
            (35,324,000
            )Proceeds
      from maturities and principal repayments on securities available for
      sale
            
            
            7,708,000
            
            
            
            7,753,000Proceeds
      from calls and sales on securities available for sale
            
            
            39,951,000
            
            
            
            31,854,000Purchase
      of securities held to maturity
            
            
            (5,566,000
            )
            
            
            (37,268,000
            )Proceeds
      from maturities and principal repayments on securities held to
      maturity
            
            
            2,553,000
            
            
            
            2,961,000Proceeds
      from calls on securities held to maturity
            
            
            13,735,000
            
            
            
            8,465,000Sale
      (purchase) of FHLB-NY stock
            
            
            730,000
            
            
            
            (118,000
            )Net
      increase in loans
            
            
            (2,088,000
            )
            
            
            (630,000
            )Additions
      to premises and equipment
            
            
            (194,000
            )
            
            
            (109,000
            )Net
      cash used in investing activities
            
            
            (1,715,000
            )
            
            
            (22,416,000
            )Cash
      flows from financing activities:Net
      increase in noninterest-bearing deposits
            
            
            12,618,000
            
            
            
            634,000Net
      increase in interest-bearing deposits
            
            
            18,635,000
            
            
            
            11,335,000Net
      increase in securities sold under agreements to repurchase
            
            
            4,000
            
            
            
            3,000Proceeds
      from term borrowings
            
            
            -
            
            
            
            6,000,000Net
      decrease in short term borrowings
            
            
            (18,600,000
            )
            
            
            (3,600,000
            )Proceeds
      from issuance of preferred stock and warrants
            
            
            -
            
            
            
            9,951,000Cash
      dividends paid on common stock
            
            
            (1,051,000
            )
            
            
            (1,055,000
            )Cash
      dividends paid on preferred stock
            
            
            (250,000
            )
            
            
            (146,000
            )Payment
      of discount on dividend reinvestment plan
            
            
            (19,000
            )
            
            
            (23,000
            )Purchase
      of treasury stock
            
            
            -
            
            
            
            (75,000
            )Options
      exercised
            
            
            12,000
            
            
            
            8,000Issuance
      of common stock
            
            
            24,000
            
            
            
            22,000Net
      cash provided by financing activities
            
            
            11,373,000
            
            
            
            23,054,000Net
      increase (decrease) in cash and cash equivalents
            
            
            10,581,000
            
            
            
            (1,445,000
            )Cash
      and cash equivalents - beginning
            
            
            8,871,000
            
            
            
            12,814,000Cash
      and cash equivalents - ending
            
            $
            19,452,000
            
            
            $
            11,369,000


5
 Index


Stewardship
Financial Corporation and Subsidiary


Consolidated
Statements of Cash Flows (continued)


(Unaudited)





Six
      Months EndedJune 30,2010
            
            
            2009Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
            
            $
            4,852,000
            
            
            $
            5,577,000Cash
      paid during the period for income taxes
            
            $
            1,930,000
            
            
            $
            538,000Noncash
      investing activities - security purchases due brokers
            
            $
            -
            
            
            $
            2,328,000








See notes
to unaudited consolidated financial statements.


6
 Index


Stewardship Financial Corporation and Subsidiary


Notes
to Consolidated Financial Statements


June
30, 2010


(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 (“SEC”).  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, 2009.





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
subsidiaries, Stewardship Investment Corp., Stewardship Realty, LLC and Atlantic
Stewardship Insurance Company, LLC.  All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.  Certain prior period amounts have been reclassified to
conform to the current presentation.  The 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





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





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 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 six months ended June 30, 2010 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.





Derivatives





Derivative
financial instruments are recognized as assets or liabilities at fair
value.  The Corporation’s derivative consists of an interest rate swap
agreement, which is used as part of its asset liability management strategy to
help manage interest rate risk related to its subordinated debentures issued in
2003 to Stewardship Statutory Trust I (the “Trust”), a statutory business trust
(see Note 8 to the Notes to the Audited Consolidated Financial Statements of the
Corporation contained in its Annual Report on Form 10-K for the year ended
December 31, 2009).  The Corporation does not use derivatives for
trading purposes.





The
Corporation designated the hedge as a cash flow hedge, which is a hedge of a
forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability.  For a cash flow hedge,
the gain or loss on the derivative is reported in other comprehensive income and
is reclassified into earnings in the same periods during which the hedged
transaction affects earnings.  Net cash settlements on derivatives
that qualify for hedge accounting are recorded in interest income or interest
expense, based on the item being hedged.


7
 Index


The
Corporation formally documented the risk-management objective and the strategy
for undertaking hedge transactions at the inception of the hedging
relationship.  This documentation includes linking the fair value of
cash flow hedge to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions.  The Corporation
formally assessed, both at the hedge’s inception and on an ongoing basis,
whether the derivative instrument used is highly effective in offsetting changes
in fair values or cash flows of the hedged items.





When a
cash flow hedge is discontinued but the hedged cash flows or forecasted
transactions are still expected to occur, gains or losses that would be
accumulated in other comprehensive income are amortized into earnings over the
same periods which the hedged transactions will affect earnings.





Recent
Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement No.
166, “Accounting for Transfers of Financial Assets—an amendment of FASB
Statement No. 140”, which was codified into Accounting Standards Codification
(“ASC”) 810 (“ASC 810”).  The objective of this guidance is to improve
the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement in transferred financial assets.  The adoption of this
guidance, in the first quarter of 2010, did not have a material effect on the
Corporation’s results of operations or financial position.





In June
2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No.
46(R)”, which was codified into ASC 810.  The objective of this
guidance is to improve financial reporting by corporations involved with
variable interest entities.  The adoption of this guidance, in the
first quarter of 2010, did not have a material effect on the Corporation’s
results of operations or financial position.





In
January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value
Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair
Value Measurements” (“ASU 10-06”).  ASU 10-06 requires increased fair
value disclosures.  Separate presentation of significant transfers
into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the
reasons for such transfers are now required.  ASU 10-06 also requires
the presentation of purchases, sales, issuances and settlements within Level 3
on a gross basis as opposed to a single net figure.  These new
disclosure requirements were adopted by the Corporation in the first quarter of
2010, with the exception of the requirement concerning gross presentation of
Level 3 activity, which is effective for fiscal years beginning after December
15, 2010.  With respect to the portions of ASU 10-06 that were
adopted, the adoption of this standard did not have a material effect on the
Corporation’s results of operations or financial position.  Management
does not expect that the adoption of the remaining portion of ASU 10-06 will
have a material effect on the Corporation’s results of operations or financial
position.





In July
2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses” (“ASU
10-20”).  ASU 10-20 expands current disclosures about credit quality
of financing receivables and the allowance for loan losses.  The
increased disclosures include disaggregated information related to how the
allowance for loan losses is developed and how credit exposures are
managed.  The required disclosures include, among other things, a roll
forward of the allowance for credit losses on a disaggregated basis as well as
information about modified, impaired, non-accrual and past due
loans.  Additional disclosure is also required about the credit
quality indicators of loans by class at the end of the reporting period, the
aging of past due loans and information about troubled debt
restructurings.  ASU 10-20 will be effective for the Corporation’s
financial statements as of December 31, 2010, as it relates to disclosures
required as of the end of a reporting period.  Disclosures that relate
to activity during a reporting period will be required for the Corporation’s
financial statements that include periods beginning on or after January 1,
2011.  Management does not expect the adoption of ASU 10-20 will have
a material effect on the Corporation’s results of operations or financial
position.


8
 Index


Note 2.   Securities –
Available for Sale and Held to Maturity





The fair
value of the available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income were as
follows:





June 30,
      2010Amortized
            
            
            Gross
      Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueU.S.
      Treasury
            
            $
            8,640,000
            
            
            $
            107,000
            
            
            $
            1,000
            
            
            $
            8,746,000U.S.
      government-sponsored agencies
            
            
            25,580,000
            
            
            
            301,000
            
            
            
            -
            
            
            
            25,881,000Obligations
      of state and politicalsubdivisions
            
            
            3,705,000
            
            
            
            108,000
            
            
            
            -
            
            
            
            3,813,000Mortgage-backed
      securities - residential
            
            
            72,461,000
            
            
            
            1,940,000
            
            
            
            57,000
            
            
            
            74,344,000Other
      equity investments
            
            
            3,134,000
            
            
            
            113,000
            
            
            
            22,000
            
            
            
            3,225,000$
            113,520,000
            
            
            $
            2,569,000
            
            
            $
            80,000
            
            
            $
            116,009,000December 31,
      2009Amortized
            
            
            Gross
      Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueU.S.
      Treasury
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -U.S.
      government-sponsored agencies
            
            
            32,642,000
            
            
            
            92,000
            
            
            
            448,000
            
            
            
            32,286,000Obligations
      of state and politicalsubdivisions
            
            
            5,284,000
            
            
            
            122,000
            
            
            
            9,000
            
            
            
            5,397,000Mortgage-backed
      securities - residential
            
            
            61,060,000
            
            
            
            1,423,000
            
            
            
            255,000
            
            
            
            62,228,000Other
      equity investments
            
            
            3,058,000
            
            
            
            66,000
            
            
            
            9,000
            
            
            
            3,115,000$
            102,044,000
            
            
            $
            1,703,000
            
            
            $
            721,000
            
            
            $
            103,026,000





The
following is a summary of the held to maturity securities and related
unrecognized gains and losses:








June 30,
      2010Amortized
            
            
            Gross
      Unrecognized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueU.S.
      government-sponsored agencies
            
            $
            11,336,000
            
            
            $
            201,000
            
            
            $
            -
            
            
            $
            11,537,000Obligations
      of state and politicalsubdivisions
            
            
            27,274,000
            
            
            
            1,154,000
            
            
            
            27,000
            
            
            
            28,401,000Mortgage-backed
      securities - residential
            
            
            18,226,000
            
            
            
            1,018,000
            
            
            
            -
            
            
            
            19,244,000$
            56,836,000
            
            
            $
            2,373,000
            
            
            $
            27,000
            
            
            $
            59,182,000December 31,
      2009Amortized
            
            
            Gross
      Unrecognized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueU.S.
      government-sponsored agencies
            
            $
            19,921,000
            
            
            $
            90,000
            
            
            $
            351,000
            
            
            $
            19,660,000Obligations
      of state and politicalsubdivisions
            
            
            27,038,000
            
            
            
            871,000
            
            
            
            84,000
            
            
            
            27,825,000Mortgage-backed
      securities - residential
            
            
            20,758,000
            
            
            
            547,000
            
            
            
            25,000
            
            
            
            21,280,000$
            67,717,000
            
            
            $
            1,508,000
            
            
            $
            460,000
            
            
            $
            68,765,000


9
 Index


The
following table presents the amortized cost and fair value of the investment
securities portfolio by contractual maturity. As issuers may have the right to
call or prepay obligations with or without call or prepayment penalties, the
actual maturities may differ from contractual maturities.  Securities
not due at a single maturity date, such as mortgage-backed securities, are shown
separately.





June 30,
      2010Amortized
            
            
            FairCost
            
            
            ValueMaturityAvailable
      for saleWithin
      one year
            
            $
            302,000
            
            
            $
            307,000After
      one year, but within five years
            
            
            28,346,000
            
            
            
            28,672,000After
      five years, but within ten years
            
            
            5,218,000
            
            
            
            5,307,000After
      ten years
            
            
            4,059,000
            
            
            
            4,154,000Mortgage-backed
      securities - residential
            
            
            72,461,000
            
            
            
            74,344,000Total
            
            $
            110,386,000
            
            
            $
            112,784,000Held
      to maturityWithin
      one year
            
            $
            1,552,000
            
            
            $
            1,573,000After
      one year, but within five years
            
            
            13,790,000
            
            
            
            14,222,000After
      five years, but within ten years
            
            
            14,289,000
            
            
            
            14,907,000After
      ten years
            
            
            8,979,000
            
            
            
            9,236,000Mortgage-backed
      securities - residential
            
            
            18,226,000
            
            
            
            19,244,000Total
            
            $
            56,836,000
            
            
            $
            59,182,000





The
following tables summarize the fair value and unrealized losses of those
investment securities which reported an unrealized loss at June 30, 2010 and
December 31, 2009, and if the unrealized loss was continuous for the twelve
months prior to June 30, 2010 and December 31, 2009.


10
 Index


Available
for Sale


June
      30, 2010
            
            Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Treasury
            
            $
            1,013,000
            
            
            $
            (1,000
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            1,013,000
            
            
            $
            (1,000
            )U.S.
      government-sponsored
      agencies
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Obligations
      of state andpolitical
      subdivisions
            
            
            -
            
            
            
            -
            
            
            
            450,000
            
            
            
            -
            
            
            
            450,000
            
            
            
            -Mortgage-backedsecurities
      - residential
            
            
            10,170,000
            
            
            
            (57,000
            )
            
            
            -
            
            
            
            -
            
            
            
            10,170,000
            
            
            
            (57,000
            )Other
      equity investments
            
            
            -
            
            
            
            -
            
            
            
            54,000
            
            
            
            (22,000
            )
            
            
            54,000
            
            
            
            (22,000
            )Total
      temporarilyimpaired
      securities
            
            $
            11,183,000
            
            
            $
            (58,000
            )
            
            $
            504,000
            
            
            $
            (22,000
            )
            
            $
            11,687,000
            
            
            $
            (80,000
            )December
      31, 2009
            
            Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Treasury
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -U.S.
      government-sponsored
      agencies
            
            
            23,282,000
            
            
            
            (361,000
            )
            
            
            2,913,000
            
            
            
            (87,000
            )
            
            
            26,195,000
            
            
            
            (448,000
            )Obligations
      of state andpolitical
      subdivisions
            
            
            373,000
            
            
            
            (2,000
            )
            
            
            443,000
            
            
            
            (7,000
            )
            
            
            816,000
            
            
            
            (9,000
            )Mortgage-backedsecurities
      - residential
            
            
            15,156,000
            
            
            
            (255,000
            )
            
            
            -
            
            
            
            -
            
            
            
            15,156,000
            
            
            
            (255,000
            )Other
      equity investments
            
            
            -
            
            
            
            -
            
            
            
            33,000
            
            
            
            (9,000
            )
            
            
            33,000
            
            
            
            (9,000
            )Total
      temporarilyimpaired
      securities
            
            $
            38,811,000
            
            
            $
            (618,000
            )
            
            $
            3,389,000
            
            
            $
            (103,000
            )
            
            $
            42,200,000
            
            
            $
            (721,000
            )Held
      to MaturityJune
      30, 2010
            
            Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalFair
            
            
            Unrecognized
            
            
            Fair
            
            
            Unrecognized
            
            
            Fair
            
            
            UnrecognizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      government-sponsored
      agencies
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Obligations
      of state andpolitical
      subdivisions
            
            
            534,000
            
            
            
            (2,000
            )
            
            
            1,400,000
            
            
            
            (25,000
            )
            
            
            1,934,000
            
            
            
            (27,000
            )Mortgage-backedsecurities
      - residential
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      temporarilyimpaired
      securities
            
            $
            534,000
            
            
            $
            (2,000
            )
            
            $
            1,400,000
            
            
            $
            (25,000
            )
            
            $
            1,934,000
            
            
            $
            (27,000
            )December
      31, 2009
            
            Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalFair
            
            
            Unrecognized
            
            
            Fair
            
            
            Unrecognized
            
            
            Fair
            
            
            UnrecognizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      government-sponsored
      agencies
            
            $
            12,529,000
            
            
            $
            (351,000
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            12,529,000
            
            
            $
            (351,000
            )Obligations
      of state andpolitical
      subdivisions
            
            
            4,504,000
            
            
            
            (69,000
            )
            
            
            401,000
            
            
            
            (15,000
            )
            
            
            4,905,000
            
            
            
            (84,000
            )Mortgage-backedsecurities
      - residential
            
            
            1,949,000
            
            
            
            (25,000
            )
            
            
            -
            
            
            
            -
            
            
            
            1,949,000
            
            
            
            (25,000
            )Total
      temporarilyimpaired
      securities
            
            $
            18,982,000
            
            
            $
            (445,000
            )
            
            $
            401,000
            
            
            $
            (15,000
            )
            
            $
            19,383,000
            
            
            $
            (460,000
            )


11
 Index


Other-Than-Temporary-Impairment


Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.  The investment securities portfolio is evaluated
for OTTI by applying the appropriate OTTI model.  Investment
securities classified as available for sale or held-to-maturity are generally
evaluated for OTTI under generally accepted accounting principles
(“GAAP”).





In
determining OTTI under GAAP, management considers many factors, including: (1)
the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, (3)
whether the market decline was affected by macroeconomic conditions, and (4)
whether the entity has the intent to sell the debt security or more likely than
not will be required to sell the debt security before its anticipated
recovery.  The assessment of whether an other-than-temporary decline
exists involves a high degree of subjectivity and judgment and is based on the
information available to management at a point in time.





When OTTI
occurs, the amount of the OTTI recognized in earnings depends on whether an
entity intends to sell the security or it is more likely than not it will be
required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss.  If an entity intends to sell or it is
more likely than not it will be required to sell the security before recovery of
its amortized cost basis, less any current-period credit loss, the OTTI shall be
recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date.  If
an entity does not intend to sell the security and it is not more likely than
not that the entity will be required to sell the security before recovery of its
amortized cost basis less any current-period loss, the OTTI shall be separated
into the amount representing the credit loss and the amount related to all other
factors.  The amount of the total OTTI related to the credit loss is
determined based on the present value of cash flows expected to be collected and
is recognized in earnings.  The amount of the total OTTI related to
other factors is recognized in other comprehensive income, net of applicable
taxes. The previous amortized cost basis less the OTTI recognized in earnings
becomes the new amortized cost basis of the investment.





At June
30, 2010, there were five fixed rate municipal obligation securities and certain
equity investments in a continuous loss position for 12 months or longer. The
market value, and therefore the loss position, for each type of security
responds differently to market conditions. In management’s opinion, those market
conditions are temporary in nature and provide the basis for the Corporation’s
belief that the declines are temporary.  Because the decline in fair
value is attributable to changes in market conditions, and not credit quality,
and because the Corporation does not have the intent to sell these securities
and it is likely that it will not be required to sell the securities before
their anticipated recovery, the Corporation does not consider these securities
to be other-than-temporarily impaired at June 30, 2010.





Note 3.   Loans and
Nonperforming Loans





The
following table sets forth the composition of loans:





June 30,
            
            
            December 31,2010
            
            
            2009MortgageResidential
            
            $
            32,690,000
            
            
            $
            36,246,000Commercial
            
            
            252,851,000
            
            
            
            246,212,000Commercial
            
            
            113,597,000
            
            
            
            114,893,000Home
      Equity
            
            
            21,412,000
            
            
            
            21,779,000Installment
            
            
            37,204,000
            
            
            
            41,006,000Other
            
            
            348,000
            
            
            
            340,000Total
      loans
            
            
            458,102,000
            
            
            
            460,476,000Less:  
      Deferred loan fees
            
            
            350,000
            
            
            
            437,000Allowance
      for loan losses
            
            
            8,745,000
            
            
            
            6,920,0009,095,000
            
            
            
            7,357,000Loans,
      net
            
            $
            449,007,000
            
            
            $
            453,119,000


12
 Index


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





Six
      Months Ended June 30,2010
            
            
            2009Balance,
      beginning of period
            
            $
            6,920,000
            
            
            $
            5,166,000Provision
      charged to operations
            
            
            6,255,000
            
            
            
            1,175,000Recoveries
      of loans charged off
            
            
            84,000
            
            
            
            92,000Loans
      charged off
            
            
            (4,514,000
            )
            
            
            (91,000
            )Balance,
      end of period
            
            $
            8,745,000
            
            
            $
            6,342,000





Nonperforming
loans include the following:


June 30,
            
            
            December 31,2010
            
            
            2009Nonaccrual
      loans
            
            $
            25,712,000
            
            
            $
            19,656,000Loans
      past due 90 days or more and accruing
            
            
            -
            
            
            
            415,000Restructured
      loans
            
            
            1,210,000
            
            
            
            2,846,000Total
      nonperfoming loans
            
            $
            26,922,000
            
            
            $
            22,917,000





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





June 30,
            
            
            December 31,2010
            
            
            2009Impaired
      loansWith
      related allowance for loan losses
            
            $
            15,743,000
            
            
            $
            8,668,000Without
      related allowance for loan losses
            
            
            11,179,000
            
            
            
            13,834,000Total
      impaired loans
            
            $
            26,922,000
            
            
            $
            22,502,000Related
      allowance for loan losses
            
            $
            1,913,000
            
            
            $
            1,903,000





Note
4.   Interest Rate Swap





The
Corporation utilizes interest rate swap agreements as part of its asset
liability management strategy to help manage its interest rate risk
position.  The notional amount of the interest rate swaps does not
represent amounts exchanged by the parties.  The amount exchanged is
determined by reference to the notional amount and the other terms of the
individual interest rate swap agreements.





Interest Rate Swap
Designated as Cash Flow Hedge:  During the second quarter of
2009, the Corporation entered into a swap with an effective date of March 17,
2010.  An interest rate swap with a notional amount of $7 million was
designated as a cash flow hedge of the subordinated debentures and was
determined to be fully effective during the three and six months ended June 30,
2010.  As such, no amount of ineffectiveness has been included in net
income.  Therefore, the aggregate fair value of the swap is recorded
in other assets (liabilities) with changes in fair value recorded in other
comprehensive income (loss).  The amount included in accumulated other
comprehensive income (loss) would be reclassified to current earnings should the
hedge no longer be considered effective.  The Corporation expects the
hedge to remain fully effective during the remaining term of the
swap.  As of June 30, 2010, the interest rate swap is secured by
investment securities with a fair value of $1,002,000.


13
 Index


Summary
information about the interest rate swap designated as a cash flow hedge as of
June 30, 2010 is as follows:





Notional
      amount
            $
      7,000,000Pay
      rate
            7.00%Receive
      rate
            3
      month LIBOR plus 2.95%Maturity
            March
      17, 2016Unrealized
      loss
            $724,000





The net
expense recorded on the swap transaction totaled $66,000 and $78,000 for the
three and six months ended June 30, 2010, respectively, and is reported as a
component of interest expense – borrowed money.  There was no net
expense recorded for the three and six months ended June 30, 2009.





The fair
value of the interest rate swap of $724,000 was included in accrued expenses and
other liabilities on the Consolidated Statements of Financial
Condition.





The
      Effect of Derivative Instruments on the Consolidated Income
      StatementAmount
      of Loss, Net of Taxes,Recognized
      in OCI on DerivativeCash
      Flow Hedging Relationship
                    (Effective
      Portion)For
      the six months ended June 30,2010
                    
                    2009Cash
      flow hedge
                    $
                    280,000
                    
                    $
                    59,000





Note
5.   Fair Value of Financial Instruments





Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in an orderly transaction between market
participants on the measurement date.  There are three levels of
inputs that may be used to measure fair value:





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





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





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





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





The
interest rate swaps are reported at fair values obtained from brokers who
utilize internal models with observable market data inputs to estimate the
values of these instruments (Level 2 inputs).





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


14
 Index


Assets and Liabilities
Measured on a Recurring Basis





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





Fair
      Value Measurements Using:Quoted
      Prices in
            
            
            SignificantActive
      Markets
            
            
            Other
            
            
            Significantfor
      Identical
            
            
            Observable
            
            
            UnobservableCarrying
            
            
            Assets
            
            
            Inputs
            
            
            InputsValue
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)At
      June 30, 2010Assets:Available
      for sale securitiesU.S.
      Treasuries
            
            $
            8,746,000
            
            
            $
            -
            
            
            $
            8,746,000
            
            
            $
            -U.S.
      government -sponsered
      agencies
            
            
            25,881,000
            
            
            
            -
            
            
            
            25,881,000
            
            
            
            -Obligations
      of state andpolitical
      subdivisions
            
            
            3,813,000
            
            
            
            -
            
            
            
            3,813,000
            
            
            
            -Mortgage-backedsecurities
      - residential
            
            
            74,344,000
            
            
            
            -
            
            
            
            74,344,000
            
            
            
            -Other
      equity investments
            
            
            3,225,000
            
            
            
            -
            
            
            
            3,225,000
            
            
            
            -Total
      available forsale
      securities
            
            $
            116,009,000
            
            
            $
            -
            
            
            $
            116,009,000
            
            
            $
            -Liabilities:Interest
      rate swap
            
            $
            724,000
            
            
            $
            -
            
            
            $
            724,000
            
            
            $
            -At
      December 31, 2009Assets:Available
      for sale securitiesU.S.
      Treasuries
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -U.S.
      government -sponsered
      agencies
            
            
            32,286,000
            
            
            
            -
            
            
            
            32,286,000
            
            
            
            -Obligations
      of state andpolitical
      subdivisions
            
            
            5,397,000
            
            
            
            -
            
            
            
            5,397,000
            
            
            
            -Mortgage-backedsecurities
      - residential
            
            
            62,228,000
            
            
            
            -
            
            
            
            62,228,000
            
            
            
            -Other
      equity investments
            
            
            3,115,000
            
            
            
            -
            
            
            
            3,115,000
            
            
            
            -Total
      available forsale
      securities
            
            $
            103,026,000
            
            
            $
            -
            
            
            $
            103,026,000
            
            
            $
            -Liabilities:Interest
      rate swap
            
            $
            258,000
            
            
            $
            -
            
            
            $
            258,000
            
            
            $
            -


15
 Index


Assets and Liabilities
Measured on a Non-Recurring Basis





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





Fair
      Value Measurements Using:Quoted
      Prices
            
            
            Significantin
      Active
            
            
            Other
            
            
            SignificantMarkets
      for
            
            
            Observable
            
            
            UnobservableCarrying
            
            
            Identical
      Assets
            
            
            Inputs
            
            
            InputsValue
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)At
      June 30, 2010Assets:Impaired
      loans
            
            $
            13,830,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            13,830,000At
      December 31, 2009Assets:Impaired
      loans
            
            $
            6,765,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            6,765,000








Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $15,743,000 at June 30,
2010, with a valuation allowance of $1,913,000, resulting in an additional
provision for loan losses of $1,751,000 for the six months ended June 30,
2010.





Impaired
loans had a carrying amount of $8,668,000 with a valuation allowance of
$1,903,000, resulting in an additional provision for loan losses of $1,422,000
for year ended December 31, 2009.





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





June 30,
      2010
            
            
            December 31,
      2009Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            EstimatedAmount
            
            
            Fair
      Value
            
            
            Amount
            
            
            Fair
      Value(Dollars
      in thousands)Financial
      assets:Cash
      and cash equivalents
            
            $
            19,452,000
            
            
            $
            19,452,000
            
            
            $
            8,871,000
            
            
            $
            8,871,000Securities
      available for sale
            
            
            116,009,000
            
            
            
            116,009,000
            
            
            
            103,026,000
            
            
            
            103,026,000Securities
      held to maturity
            
            
            56,836,000
            
            
            
            59,182,000
            
            
            
            67,717,000
            
            
            
            68,765,000FHLB-NY
      stock
            
            
            2,497,000
            
            
            
            N/A
            
            
            
            3,227,000
            
            
            
            N/ANet
      loans, including impaired loans
            
            
            449,007,000
            
            
            
            451,070,000
            
            
            
            453,119,000
            
            
            
            453,813,000Accrued
      interest receivable
            
            
            2,852,000
            
            
            
            2,852,000
            
            
            
            3,167,000
            
            
            
            3,167,000Financial
      liabilities:Deposits
            
            
            561,183,000
            
            
            
            562,138,000
            
            
            
            529,930,000
            
            
            
            531,230,000FHLB-NY
      Advances
            
            
            36,000,000
            
            
            
            34,852,000
            
            
            
            54,600,000
            
            
            
            51,949,000Securities
      sold under agreementsto
      repurchase
            
            
            15,400,000
            
            
            
            15,400,000
            
            
            
            15,396,000
            
            
            
            15,396,000Subordinated
      debenture
            
            
            7,217,000
            
            
            
            6,582,000
            
            
            
            7,217,000
            
            
            
            5,943,000Accrued
      interest payable
            
            
            935,000
            
            
            
            935,000
            
            
            
            1,193,000
            
            
            
            1,193,000





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





Cash and cash equivalents–
The carrying amount approximates fair value.


Securities available for sale and
held to maturity– The methods for determining fair values were described
previously.


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


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


Accrued interest receivable–
The carrying amount approximates fair value.


16
 Index


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


Securities sold under agreements to
repurchase– The carrying value approximates fair value due to the
relatively short time before maturity.


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


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


Accrued interest payable– The
carrying amount approximates fair value.


Commitments to extend credit–
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties, and at June
30, 2010 and December 31, 2009 the fair value of such commitments were not
material.





Limitations – The preceding
fair value estimates were made at June 30, 2010 and December 31, 2009, based on
pertinent market data and relevant information on the financial
instruments.  These estimates do not include any premium or discounts
that could result from an offer to sell at one time the Corporation’s entire
holdings of a particular financial instrument or category
thereof.  Since no market exists for a substantial portion of the
Corporation’s financial instruments, fair value estimates were necessarily based
on judgments with respect to future expected loss experience, current economic
conditions, risk assessments of various financial instruments, and other
factors.  Given the subjective nature of these estimates, the
uncertainties surrounding them and the matters of significant judgment that must
be applied, these fair value estimates cannot be calculated with
precision.  Modifications in such assumptions could meaningfully alter
these estimates.





Since
these fair value approximates were made solely for on and off balance sheet
financial instruments at June 30, 2010 and December 31, 2009, no attempt was
made to estimate the value of anticipated future
business.  Furthermore, certain tax implications related to the
realization of unrealized gains and losses could have a substantial impact on
these fair value estimates and have not been incorporated into the
estimates.





Note
6.   Stock-Based Compensation





On
February 16, 2010, the Board of Directors adopted the Stewardship Financial
Corporation 2010 Stock Incentive Plan (the “2010 Plan”).  The 2010
Plan became effective upon approval by the shareholders at the Annual Meeting on
May 17, 2010.





The
purpose of the 2010 Plan is to promote the long-term growth and profitability of
the Corporation by (i) providing key people with incentives to improve
shareholder value and to contribute to the growth and financial success of the
Corporation, and (ii) enabling the Corporation to attract, retain and reward the
best available persons.  As of June 30, 2010 there were no awards
granted.


17
 Index


Note
7.   Earnings Per Share





Basic
earnings per share is calculated by dividing net income available to common
stockholders 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 Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009(in
      thousands, except per share data)Net
      income (loss)
            
            $
            (1,065
            )
            
            $
            780
            
            
            $
            (194
            )
            
            $
            1,967Dividends
      on preferred stock and accretion
            
            
            138
            
            
            
            137
            
            
            
            275
            
            
            
            229Net
      income (loss) available to common stockholders
            
            $
            (1,203
            )
            
            $
            643
            
            
            $
            (469
            )
            
            $
            1,738Weighted
      average shares
            
            
            5,842
            
            
            
            5,831
            
            
            
            5,841
            
            
            
            5,830Effect
      of dilutive stock options
            
            
            N/A
            
            
            
            5
            
            
            
            N/A
            
            
            
            5Total
      weighted average dilutive shares
            
            
            5,842
            
            
            
            5,836
            
            
            
            5,841
            
            
            
            5,835Basic
      earnings (loss) per common share
            
            $
            (0.21
            )
            
            $
            0.11
            
            
            $
            (0.08
            )
            
            $
            0.30Diluted
      earnings (loss) per common share
            
            $
            (0.21
            )
            
            $
            0.11
            
            
            $
            (0.08
            )
            
            $
            0.30





For
periods in which a loss is reported, the impact of dilutive stock options and
common stock warrants is not considered as the result would be
antidilutive.  Stock options to purchase 70,427 average shares of
common stock were not considered in computing diluted earnings per share for the
six months ended June 30, 2009 because they were antidilutive.  A
common stock warrant to purchase 111,353 average shares of common stock was not
considered in computing diluted earnings per share for the six months ended June
30, 2009 because it was antidilutive.





All share
and per share amounts have been restated to reflect a 5% stock dividend paid on
November 16, 2009.


18
 Index


Stewardship Financial Corporation


Management’s
Discussion and Analysis of


Financial
Condition and Results of Operations








Cautionary
Note Regarding Forward-Looking Statements





This
Quarterly Report on Form 10-Q contains certain “forward looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995, and
may be identified by the use of such words as “believe,” “expect,” “anticipate,”
“should,” “plan,” “estimate,” and “potential.”  Examples of forward
looking statements include, but are not limited to, estimates with respect to
the financial condition, results of operations and business of the Corporation
that are subject to various factors which could cause actual results to differ
materially from these estimates.  These factors include: changes in
general, economic and market conditions, legislative and regulatory conditions,
or the development of an interest rate environment that adversely affects the
Corporation’s interest rate spread or other income anticipated from operations
and investments.  As used in this 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 Quarterly Report on Form 10-Q, are
based upon the Corporation’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these financial
statements requires the Corporation to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and
expenses.  Note 1 to the Corporation’s Audited Consolidated Financial
Statements for the year ended December 31, 2009 included in our Annual Report on
Form 10-K for the year ended December 31, 2009, as supplemented by this report,
contains a summary of the Corporation’s significant accounting
policies.  Management believes the Corporation’s policy with respect
to the methodology for the determination of the allowance for loan losses
involves a higher degree of complexity and requires management to make difficult
and subjective judgments, which often require assumptions or estimates about
highly uncertain matters.  Changes in these judgments, assumptions or
estimates could materially impact results of operations.  This
critical policy and its application are periodically reviewed with the Audit
Committee and the Board of Directors.





The
allowance for loan losses is based upon management’s evaluation of the adequacy
of the allowance, including an assessment of known and inherent risks in the
portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectability may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market
conditions.  Although management uses the best information available,
the level of the allowance for loan losses remains an estimate, which is subject
to significant judgment and short-term change.  Various regulatory
agencies, as an integral part of their examination process, periodically review
the Corporation’s allowance for loan losses.  Such agencies may
require the Corporation to make additional provisions for loan losses based upon
information available to them at the time of their
examination.  Furthermore, the majority of the Corporation’s loans are
secured by real estate in the State of New Jersey.  Accordingly, the
collectability 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 $11.1 million, or 1.7%, to $674.9 million at June 30, 2010 from
$663.8 million at December 31, 2009.  Cash and cash equivalents
increased $10.6 million, reflecting planned additional
liquidity.  Securities available for sale increased $13.0 million
while securities held to maturity decreased $10.9 million.  The
changes in the securities portfolio included the effect of calls and
replacements of securities in the current interest rate environment as well as
proactive sales of securities by the Corporation to minimize the anticipated
impact of rising market rates.  The balance in the net loan portfolio
declined slightly from $453.1 million at December 31, 2009 to $449.0 million at
June 30, 2010.  Increases due to new loans originated were offset by a
$1.825 million net increase in the allowance for loan losses and regular
principal payments and payoffs.





Deposits
totaled $561.2 million at June 30, 2010, an increase of $31.3 million, or 5.9%,
from $529.9 million at December 31, 2009.  The growth in deposits
consisted of increases in both interest-bearing and non-interest bearing
accounts,


19
 Index


demonstrating
appropriate product offerings.  Our products and services, including
those introduced throughout 2009, will allow us to continue to attract new
personal and business core deposits.





FHLB of
NY advances were $36.0 million at June 30, 2010 compared with $54.6 million at
December 31, 2009.  The decrease in these borrowings was the result of
an increase in deposits which were used to paydown overnight
advances.





Results of
Operations





General





The
Corporation reported a net loss of $1.1 million, or a $0.21 loss per diluted
common share for the three months ended June 30, 2010, compared to net income of
$780,000, or $0.11 diluted earnings per common share for the comparable prior
year period.  For the six months ended June 30, 2010, the net loss was
$194,000, or $0.08 per diluted common share.  These results compare to
net income of $2.0 million, or $0.30 diluted earnings per common share for the
six months ended June 30, 2009.  Results for the current three and six
month periods include a significantly increased provision for loan losses of
$4.7 million and $6.3 million, respectively.





Net Interest
Income





Net
interest income for the three and six months ended June 30, 2010 was $5.9
million and $12.1 million, respectively, compared to $5.8 million and $11.4
million recorded in the prior year periods.  The increases in the
current year periods are primarily due to a decline in the cost of interest
bearing liabilities.  The net interest rate spread and net yield on
interest earning assets for the three months ended June 30, 2010 were 3.48% and
3.84%, respectively, compared to 3.45% and 3.89% for the three months ended June
30, 2009.  For the six months ended June 30, 2010, the net interest
rate spread and net yield on interest earning assets were 3.61% and 3.96%,
respectively, compared to 3.44% and 3.88% for the six months ended June 30,
2009.  The net yield on interest earning assets during the current
year periods reflects a decline in loan interest rates and yields on securities
offset by a decline in the interest rates on deposits and
borrowings.





The
following tables reflect the components of the Corporation’s net interest income
for the three and six months ended June 30, 2010 and 2009 including, (1) average
assets, liabilities and stockholders’ equity based on average daily balances,
(2) interest income earned on interest-earning assets and interest expense paid
on interest-bearing liabilities, (3) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, and (4) net yield
on interest-earning assets.  Nontaxable income from investment
securities and loans is presented on a tax-equivalent basis assuming a statutory
tax rate of 34% for the periods presented.  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.


20
 Index


Analysis
of Net Interest Income (Unaudited)


For the
Three Months Ended June 30,





2010
              
              
              2009Average
              
              
              
              
              
              
              
              
              AverageInterest
              
              
              Rates
              
              
              
              
              
              Interest
              
              
              RatesAverage
              
              
              Income/
              
              
              Earned/
              
              
              Average
              
              
              Income/
              
              
              Earned/Balance
              
              
              Expense
              
              
              Paid
              
              
              Balance
              
              
              Expense
              
              
              Paid(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
      (1) (2)
              
              $
              461,879
              
              
              $
              6,703
              
              
              
              5.82
              %
              
              $
              438,675
              
              
              $
              6,670
              
              
              
              6.10
              %Taxable
      investment securities (1)
              
              
              138,948
              
              
              
              1,234
              
              
              
              3.56
              
              
              
              146,204
              
              
              
              1,612
              
              
              
              4.42Tax-exempt
      investment securities (1) (2)
              
              
              31,376
              
              
              
              397
              
              
              
              5.08
              
              
              
              29,520
              
              
              
              397
              
              
              
              5.39Other
      interest-earning assets
              
              
              1,233
              
              
              
              4
              
              
              
              1.30
              
              
              
              96
              
              
              
              2
              
              
              
              8.36Total
      interest-earning assets
              
              
              633,436
              
              
              
              8,338
              
              
              
              5.28
              
              
              
              614,495
              
              
              
              8,681
              
              
              
              5.67Non-interest-earning
      assets:Allowance
      for loan losses
              
              
              (7,543
              )
              
              
              
              
              
              
              
              
              
              
              (5,385
              )Other
      assets
              
              
              42,156
              
              
              
              
              
              
              
              
              
              
              
              33,943Total
      assets
              
              $
              668,049
              
              
              
              
              
              
              
              
              
              
              $
              643,053Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
              
              $
              236,358
              
              
              $
              825
              
              
              
              1.40
              %
              
              $
              182,967
              
              
              $
              580
              
              
              
              1.27
              %Savings
      deposits
              
              
              48,404
              
              
              
              51
              
              
              
              0.42
              
              
              
              42,510
              
              
              
              56
              
              
              
              0.53Time
      deposits
              
              
              165,097
              
              
              
              853
              
              
              
              2.07
              
              
              
              194,692
              
              
              
              1,567
              
              
              
              3.23Repurchase
      agreements
              
              
              15,400
              
              
              
              184
              
              
              
              4.79
              
              
              
              15,163
              
              
              
              190
              
              
              
              5.03FHLB
      borrowing
              
              
              36,263
              
              
              
              239
              
              
              
              2.64
              
              
              
              49,487
              
              
              
              253
              
              
              
              2.05Subordinated
      debenture
              
              
              7,217
              
              
              
              126
              
              
              
              7.00
              
              
              
              7,217
              
              
              
              76
              
              
              
              4.22Total
      interest-bearing liabilities
              
              
              508,739
              
              
              
              2,278
              
              
              
              1.80
              
              
              
              492,036
              
              
              
              2,722
              
              
              
              2.22Non-interest-bearing
      liabilities:Demand
      deposits
              
              
              99,926
              
              
              
              
              
              
              
              
              
              
              
              92,789Other
      liabilities
              
              
              4,968
              
              
              
              
              
              
              
              
              
              
              
              4,270Stockholders'
      equity
              
              
              54,416
              
              
              
              
              
              
              
              
              
              
              
              53,958Total
      liabilities and stockholders' equity
              
              $
              668,049
              
              
              
              
              
              
              
              
              
              
              $
              643,053Net
      interest income (taxable equivalent basis)
              
              
              
              
              
              
              6,060
              
              
              
              
              
              
              
              
              
              
              
              5,959Tax
      Equivalent adjustment
              
              
              
              
              
              
              (137
              )
              
              
              
              
              
              
              
              
              
              
              (139
              )Net
      interest income
              
              
              
              
              
              $
              5,923
              
              
              
              
              
              
              
              
              
              
              $
              5,820Net
      interest spread (taxable equivalent basis)
              
              
              
              
              
              
              
              
              
              
              3.48
              %
              
              
              
              
              
              
              
              
              
              
              3.45
              %Net
      yield on interest-earningassets
      (taxable equivalent basis) (3)
              
              
              
              
              
              
              
              
              
              
              3.84
              %
              
              
              
              
              
              
              
              
              
              
              3.89
              %





______________________





(1)
            For
      purposes of these calculations, nonaccruing loans are included in the
      average balance.  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
 Index


Analysis
of Net Interest Income (Unaudited)


For the
Six Months Ended June 30,





2010
              
              
              2009Average
              
              
              
              
              
              
              
              
              AverageInterest
              
              
              Rates
              
              
              
              
              
              Interest
              
              
              RatesAverage
              
              
              Income/
              
              
              Earned/
              
              
              Average
              
              
              Income/
              
              
              Earned/Balance
              
              
              Expense
              
              
              Paid
              
              
              Balance
              
              
              Expense
              
              
              Paid(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
      (1) (2)
              
              $
              461,950
              
              
              $
              13,589
              
              
              
              5.93
              %
              
              $
              437,806
              
              
              $
              13,290
              
              
              
              6.12
              %Taxable
      investment securities (1)
              
              
              136,149
              
              
              
              2,573
              
              
              
              3.81
              
              
              
              140,508
              
              
              
              3,208
              
              
              
              4.60Tax-exempt
      investment securities (1) (2)
              
              
              31,839
              
              
              
              811
              
              
              
              5.14
              
              
              
              29,230
              
              
              
              787
              
              
              
              5.43Other
      interest-earning assets
              
              
              679
              
              
              
              6
              
              
              
              1.78
              
              
              
              90
              
              
              
              5
              
              
              
              11.20Total
      interest-earning assets
              
              
              630,617
              
              
              
              16,979
              
              
              
              5.43
              
              
              
              607,634
              
              
              
              17,290
              
              
              
              5.74Non-interest-earning
      assets:Allowance
      for loan losses
              
              
              (7,427
              )
              
              
              
              
              
              
              
              
              
              
              (5,300
              )Other
      assets
              
              
              39,845
              
              
              
              
              
              
              
              
              
              
              
              34,514Total
      assets
              
              $
              663,035
              
              
              
              
              
              
              
              
              
              
              $
              636,848Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
              
              $
              229,562
              
              
              $
              1,595
              
              
              
              1.40
              %
              
              $
              175,167
              
              
              $
              1,097
              
              
              
              1.26
              %Savings
      deposits
              
              
              47,855
              
              
              
              100
              
              
              
              0.42
              
              
              
              41,449
              
              
              
              114
              
              
              
              0.55Time
      deposits
              
              
              168,198
              
              
              
              1,854
              
              
              
              2.22
              
              
              
              203,244
              
              
              
              3,364
              
              
              
              3.34Repurchase
      agreements
              
              
              15,399
              
              
              
              365
              
              
              
              4.78
              
              
              
              15,162
              
              
              
              378
              
              
              
              5.03FHLB
      borrowing
              
              
              41,013
              
              
              
              486
              
              
              
              2.39
              
              
              
              47,822
              
              
              
              484
              
              
              
              2.04Subordinated
      debenture
              
              
              7,217
              
              
              
              194
              
              
              
              5.42
              
              
              
              7,217
              
              
              
              160
              
              
              
              4.47Total
      interest-bearing liabilities
              
              
              509,244
              
              
              
              4,594
              
              
              
              1.82
              
              
              
              490,061
              
              
              
              5,597
              
              
              
              2.30Non-interest-bearing
      liabilities:Demand
      deposits
              
              
              94,987
              
              
              
              
              
              
              
              
              
              
              
              90,802Other
      liabilities
              
              
              4,434
              
              
              
              
              
              
              
              
              
              
              
              4,255Stockholders'
      equity
              
              
              54,370
              
              
              
              
              
              
              
              
              
              
              
              51,730Total
      liabilities and stockholders' equity
              
              $
              663,035
              
              
              
              
              
              
              
              
              
              
              $
              636,848Net
      interest income (taxable equivalent basis)
              
              
              
              
              
              
              12,385
              
              
              
              
              
              
              
              
              
              
              
              11,693Tax
      Equivalent adjustment
              
              
              
              
              
              
              (283
              )
              
              
              
              
              
              
              
              
              
              
              (275
              )Net
      interest income
              
              
              
              
              
              $
              12,102
              
              
              
              
              
              
              
              
              
              
              $
              11,418Net
      interest spread (taxable equivalent basis)
              
              
              
              
              
              
              
              
              
              
              3.61
              %
              
              
              
              
              
              
              
              
              
              
              3.44
              %Net
      yield on interest-earningassets
      (taxable equivalent basis) (3)
              
              
              
              
              
              
              
              
              
              
              3.96
              %
              
              
              
              
              
              
              
              
              
              
              3.88
              %





____________________





(1)
            For
      purposes of these calculations, nonaccruing loans are included in the
      average balance.  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.


22
 Index


For the
three months ended June 30, 2010, total interest income on a tax equivalent
basis decreased $343,000, or 4.0%,  when compared to the three months
ended June 30, 2009 primarily due to a decrease in the total yield on
interest-earning assets, partially offset by an increase in the average
interest-earning assets.  Total interest income on a tax equivalent
basis decreased $312,000 for the six months ended June 30, 2010, or 1.8%,
compared to the same period for 2009.  Consistent with the three month
period, the decrease in the current six month period is due to a decrease in the
overall yield on interest-earning assets, partially offset by an increase in the
average interest-earning assets.  The average rate earned on
interest-earning assets was 5.28% and 5.43% for the three and six months ended
June 30, 2010, respectively, compared to an average rate of 5.67% and 5.74% for
the same prior year periods.  The decline in the asset yields reflect
the effect of a prolonged low interest rate environment as well as the impact of
nonaccrual loans, including those transferred to nonaccrual during the current
year periods.  Average interest-earning assets increased $18.9 million
and $23.0 million for the three and six months ended June 30, 2010,
respectively, when compared to the prior year periods.  Loans of
$461.9 million and $462.0 million for the three and six months ended June 30,
2010, respectively, represent increases of $23.2 million and $24.1 million when
compared to the same prior year periods.





Interest
paid on deposits and borrowed money decreased $444,000, or 16.3%, and $1.0
million, or 17.9%, for the three and six months ended June 30, 2010 compared to
the same periods for 2009.  The declines are due to general decreases
in rates paid on deposits and borrowings, partially offset by increases in
average interest-bearing liabilities.  The average balance of total
interest-bearing deposits and borrowings increased $16.7 million and $19.2
million for the three and six months ended June 30, 2010, respectively, from the
comparable 2009 periods.  For the three months ended June 30, 2010,
the total cost for interest-bearing liabilities declined to 1.80% representing a
42 basis point decline when compared to the same prior year
period.  Yields on deposits and borrowed money decreased 48 basis
points from 2.30% for the six month period ended June 30, 2009 to 1.82% for the
comparable period in 2010.





Provision for Loan
Losses





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





The loan
loss provision totaled $4.7 million and $6.3 million for the three and six
months ended June 30, 2010, respectively.  For the three and six
months ended June 30, 2009 the provision for loan losses was $1.025 million and
$1.175 million, respectively.  Nonperforming loans of $26.9 million at
June 30, 2010 reflected an increase when compared to $22.9 million of
nonperforming loans at December 31, 2009.





During
the first six months of 2010, the Corporation charged off loans totaling $4.5
million and recovered $84,000 in previously charged off loans compared to
$91,000 and $92,000, respectively, during the same period in
2009.  Approximately $2.1 million of the increase in the charge offs
was related to a loan to one borrower.  In addition, the Corporation
records partial chargeoffs on collateral dependent loans.  After net
chargeoffs of $4.4 million for the six months ended June 30, 2010, the allowance
for loan losses related to the impaired loans was $1.9 million at both June 30,
2010 and December 31, 2009.





The
current period loan loss provision and the increase in nonperforming loans is
indicative of continuing economic conditions that have contributed to an
increase in loan delinquencies and the softness in the real estate
market.  The Corporation monitors its loan portfolio and will continue
to provide for loan loss reserves, as appropriate, based on its ongoing periodic
review of the loan portfolio and general market conditions.





See
“Asset Quality” section for a summary of the allowance for loan losses and
nonperforming assets.





Noninterest
Income





For the
three and six months ended June 30, 2010, noninterest income was $1.2 million
and $2.3 million, respectively, compared to $949,000 and $1.7 million for the
prior year periods.  The security sales discussed above under “Financial Condition” and under
“Results of Operations - General”resulted in gain on calls and
sales of securities of $474,000 and $802,000 for the three and six months ended
June 30, 2010, respectively, compared to $214,000 and $253,000 for the three and
six months ended June 30, 2009.


23
 Index


When
compared to the prior periods, fees and service charges increased $29,000 and
$102,000 for the three and six months ended June 30, 2010,
respectively.  The increase primarily reflects revisions to policies
for the assessment of fees as well as the changes in and additions to the
current fee structure.





As
previously reported, on December 31, 2008, the Corporation sold its merchant
servicing portfolio and, as a result, a decline of $118,000 in the related
noninterest income line as well as a $108,000 decline in the related noninterest
expense line is reflected for the six months ended June 30, 2010.





Noninterest
Expense





Noninterest
expenses for the three and six months ended June 30, 2010 were $4.2 million and
$8.6 million, respectively.  For the comparable prior year periods,
noninterest expenses were $4.7 million and $9.1 million,
respectively.   A reduced level of expense associated with
charitable contributions reflects the lower level of net income for the current
year periods.  For the three and six months ended June 30, 2009, FDIC
insurance premiums reflected the recording of an industry-wide special
assessment which amounted to $300,000 for the Corporation.





As
previously reported, on December 31, 2008, the Corporation sold its merchant
servicing portfolio and, as a result, a $108,000 decline in the related
noninterest expense line as well as a decline of $118,000 in the related
noninterest income line is reflected for the six months ended June 30,
2010.





Income Tax
Expense





For the
three and six months ended June 30, 2010, the Corporation recorded an income tax
benefit of $641,000 and $296,000, respectively compared to an income tax expense
of $280,000 and $840,000 for the three and six months ended June 30, 2009,
respectively.  The tax benefit for the current year periods reflect
the utilization of a capital loss carryforward to offset the taxability of a
portion of the gain on calls and sales of securities.  In addition,
the tax benefit reflects a decrease in our overall projected effective tax rate
as a result of our tax exempt income representing a larger percentage of pretax
income due to lower projected earnings.





Asset
Quality





The
Corporation’s principal earning asset is its loan portfolio.  Inherent
in the lending function is the risk of deterioration in the borrowers’ ability
to repay loans under existing loan agreements.  Management realizes
that because of this risk, reserves are maintained to absorb probable incurred
loan losses.  In determining the adequacy of the allowance for loan
losses, management of the Corporation considers the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activities, along
with general economic and real estate market conditions.  Although
management attempts to establish a reserve sufficient to offset probable
incurred losses in the portfolio, changes in economic conditions, regulatory
policies and borrower’s performance could require future changes to the
allowance.





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:


24
 Index





June
      30,
            
            
            March
      31,
            
            
            December
      31,
            
            
            September
      30,2010
            
            
            2010
            
            
            2009
            
            
            2009Nonaccrual
      loans (1)
            
            $
            25,712
            
            
            $
            19,525
            
            
            $
            19,656
            
            
            $
            14,536Loans
      past due 90 days or more and accruing (2)
            
            
            -
            
            
            
            -
            
            
            
            415
            
            
            
            728Total
      nonperforming loans
            
            
            25,712
            
            
            
            19,525
            
            
            
            20,071
            
            
            
            15,264Restructured
      loans
            
            
            1,210
            
            
            
            2,775
            
            
            
            2,846
            
            
            
            2,417Total
      nonperforming loans
            
            $
            26,922
            
            
            $
            22,300
            
            
            $
            22,917
            
            
            $
            17,681Allowance
      for loan losses
            
            $
            8,745
            
            
            $
            8,174
            
            
            $
            6,920
            
            
            $
            7,249Nonperforming
      loans to total gross loans
            
            
            5.88
            %
            
            
            4.83
            %
            
            
            4.98
            %
            
            
            3.92
            %Nonperforming
      loans to total assets
            
            
            3.99
            %
            
            
            3.37
            %
            
            
            3.45
            %
            
            
            2.72
            %Allowance
      for loan losses to total gross loans
            
            
            1.91
            %
            
            
            1.77
            %
            
            
            1.50
            %
            
            
            1.61
            %Allowance
      for loan losses tononperforming
      loans
            
            
            32.48
            %
            
            
            36.65
            %
            
            
            30.20
            %
            
            
            41.00
            %





(1)  Generally
represents loans to which the payments of principal or interest are in arrears
for a period of more than 90 days.





(2)  Represents
loans to which payments of principal or interest 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.





The
nonaccrual loans are comprised of 76 loans, primarily commercial mortgage,
residential mortgage and commercial loans.  While the Corporation
maintains strong underwriting requirements, an increase in the number and amount
of nonaccrual loans is reflective of the prolonged weakened economic conditions
and the corresponding effects it has had on our commercial borrowers and the
current real estate environment.  Certain loans, including
restructured loans, are current, but due to accounting guidance or prudent
review, management has continued to keep these loans on nonaccrual. The ratio of
allowance for loan losses to nonperforming loans declined to 32.48% from 36.65%
at the end of the prior quarter.





A loan is
generally placed on nonaccrual when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement.  The identification of nonaccrual loans reflects
careful monitoring of the loan portfolio.  The Corporation has been
diligent and proactive in identifying and dealing with problem credits and is
focused on resolving the nonperforming loans and mitigating future losses in the
portfolio.  Certain nonaccrual loans are expected to be worked out
during the coming months.  All delinquent loans continue to be
reviewed by management on a biweekly basis.  In an effort to identify
any potential problem loan, management has undertaken a review over the past
quarter of the majority of loan files to identify early warning signs that might
indicate future problems.  As of June 30, 2010, the Corporation saw a
reduction in the level of loans past due 30-89 days to $4.0 million – a
significant decline from $9.7 million as of March 31, 2010.  While we
recognize the decline is largely a result of the migration of delinquent loans
to nonaccrual, the fact that these delinquencies did not replenish may be an
indicator that new problem loans have slowed.  We will continue to
monitor delinquencies for early identification of new problem
loans.  While not a significantly large portfolio, a large number of
problem loans are commercial construction loans which have been affected by the
struggling construction industry.  As such, the entire commercial
construction portfolio is being actively monitored.





The
Corporation maintains an allowance for loan losses at a level considered by
management to be adequate to cover the probable incurred losses associated with
its loan portfolio.  The Corporation’s policy with respect to the
methodology for the determination of the allowance for loan losses involves a
high degree of complexity and requires management to make difficult and
subjective judgments,  The adequacy of the allowance for loan losses
is based upon management’s evaluation of the known and inherent risks in the
portfolio, consideration to the size and composition of the loan portfolio,
actual loan loss experience, the level of delinquencies, detailed analysis of
individual loans for which full collectability 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.





In
establishing the allowance for loan losses, the Corporation utilizes a two tier
approach by (1) identifying problem loans and allocating specific loss
allowances on such loans and (2) establishing a general valuation allowance on
the remainder of its loan portfolio.  The Corporation maintains a loan
review system that allows for a periodic review of its loan portfolio and the
early identification of potential problem loans.  Such a system takes
into consideration, among other things, delinquency status, size of loans, type
of collateral and financial condition of the borrowers.


25
 Index


Allocations
of specific loan loss allowances are established for identified loans based on a
review of various information including appraisals of underlying
collateral.  Appraisals are performed by independent licensed
appraisers to determine the value of impaired, collateral-dependent
loans.  Appraisals are periodically updated to ascertain any further
decline in value.  General loan loss allowances are based upon a
combination of factors including, but not limited to, actual loss experience,
composition of loan portfolio, current economic conditions and management’s
judgment.





Primarily
as a result of the increase in nonperforming loans, the Corporation recorded an
increase in the provision for loan losses.  For the three months ended
June 30, 2010, the provision for loan losses was $4.705 million, bringing the
year to date provision for loan losses to $6.255 million compared to $1.025
million and $1.175 million for the three and six months ended June 30, 2009,
respectively.  The total allowance for loan losses increased to 1.91%
of total loans from a comparable ratio of 1.77% at March 31, 2010 and 1.50% at
December 31, 2009.





When it
is probable that some portion or all of a loan balance will not be collected,
that amount is charged off as loss against the allowance for loan
losses.  After net chargeoffs of $4.1 million and $4.4 million for the
three and six months ended June 30, 2010, respectively, the allowance for loan
losses totaled $8.7 million as of June 30, 2010 compared to $8.2 million and
$6.9 million as of March 31, 2010 and December 31, 2009,
respectively.  In general, the chargeoffs reflect partial writedowns
on nonaccrual loans due to the initial evaluation of market values of the
underlying real estate collateral in accordance with ASC
310-40.  Approximately $2.1 million of the current period charge-offs
related to a single loan.  While we have taken the conservative
position of a full chargeoff on this loan, we continue to aggressively pursue
collection, including legal action.





Our
allowance for loan losses to nonperforming loans declined to 32.48% at June 30,
2010, compared with 36.65% at March 31, 2010, but reflects an increase over the
30.20% at December 31, 2009.  The change in this metric between
periods is partially attributable to the fluctuation in nonaccrual
loans.  We have assessed these loans for collectability and
considered, among other things, the borrower’s ability to repay, the value of
the underlying collateral, and other market conditions to ensure the allowance
for loan losses is adequate to absorb probable incurred losses.  The
majority of our nonperforming loans are secured by real estate
collateral.  While our nonperforming loans have trended upward since
March 31, 2010, the underlying collateral coverage for nonperforming loans
supports the significant collection of our principal, and therefore, we do not
estimate a proportionate upward trending in losses.  In addition, the
decline in the ratio of allowance for loan losses to nonperforming loans is
partially a result of the net chargeoffs taken during the second quarter. The decline
in this ratio is also reflective of our intense efforts to identify all problem
loans and place them on nonaccrual status.  This effort has included
the updating of appraisals and specific evaluation of such loans to determine
estimated cash flows from business and/or collateral.  This ratio is
reflective of this detailed analysis and the probable incurred losses we have
identified with these nonperforming loans.





As of
June 30, 2010, there were $22.8 million of other loans not included in the above
table compared to $20.2 million and $14.0 million at March 31, 2010 and December
31, 2009, respectively, where credit conditions of borrowers caused management
to have concerns about the possibility of the borrowers not complying with the
present terms and conditions of repayment and which may result in disclosure of
such loans at a future date.  These loans have been considered by
management in conjunction with the analysis of the adequacy of the allowance for
loan losses.





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




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,
2010, the minimum risk-based capital requirements to be considered adequately
capitalized were 4% for Tier 1 capital and 8% for total
capital.


26
 Index


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,
2010 the minimum leverage ratio requirement to be considered well capitalized
was 4%.  The following table reflects the Corporation’s capital ratios
at June 30, 2010.





Required
            
            
            Actual
            
            
            ExcessLeverage
      Ratio
            
            
            4.00
            %
            
            
            8.77
            %
            
            
            4.77
            %Risk-based
      CapitalTier
      1
            
            
            4.00
            %
            
            
            11.81
            %
            
            
            7.81
            %Total
            
            
            8.00
            %
            
            
            13.07
            %
            
            
            5.07
            %





Liquidity and Capital
Resources





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





The
primary source of cash from operating activities is net
income.  Liquidity management is both a daily and long-term function
of business management.  Excess liquidity is generally invested in
short-term investments, such as federal funds sold.





Cash and
cash equivalents increased $10.6 million during the first six months of
2010.  Net operating and financing activities provided $0.9 million
and $11.4 million, respectively, and investing activities used $1.7
million.





The
Corporation anticipates that it will have sufficient funds available to meet its
current contractual commitments.  Should the Corporation need
temporary funding, the Corporation has an overnight line of credit and a
one-month overnight repricing line of credit with the FHLB-NY, each in the
amount of $64.3 million.  In addition, the Corporation had available
overnight variable repricing lines of credit with other correspondent banks
totaling $23 million on an unsecured basis.





With
respect to the payment of dividends on common stock, management recognizes that
future dividends could be impacted by losses or reduced
earnings.


27
 Index


ITEM 3.  Quantitative and Qualitative Disclosures about Market
Risk





Not
applicable to smaller reporting companies.





ITEM 4T.  Controls and Procedures





(a)
            Evaluation
      of internal controls and procedures





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





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





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





(c)
            Changes
      in Internal Controls over Financial
Reporting





There
were no significant changes in our internal control over financial reporting or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses during the quarter ended June
30, 2010 that have materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


28
 Index


Stewardship
Financial Corporation


Part
II -- Other Information








Item 6.
            Exhibits





See
Exhibit Index following this report.


29
 Index


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 CorporationDate:    August
      16, 2010
            
            By:
            /s/ Paul Van
    OstenbridgePaul
      Van OstenbridgePresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:    August
      16, 2010
            
            By:
            /s/ Claire M.
    ChadwickClaire
      M. ChadwickSenior
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting Officer)


30
 Index


EXHIBIT INDEX








Exhibit
              Number
            
            Description
      of Exhibits31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002





31