UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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




For the
quarterly period ended March 31, 2009





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 ý     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 fies). 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 definition 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  ý





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





The number of shares outstanding, net
of treasury stock, of the Issuer’s Common Stock, no par value, as of May 8, 2009
was 5,536,645.











Stewardship
Financial Corporation





INDEX








PAGENUMBERPART
      I  -  CONSOLIDATED FINANCIAL
      INFORMATIONITEM 1  -   CONSOLIDATED FINANCIAL
      STATEMENTSConsolidated Statements of Financial Condition at March 31,
      2009 and December 31, 2008 (Unaudited)
            1Consolidated Statements of Income for the Three Months ended
      March 31, 2009 and 2008 (Unaudited)
            2Consolidated Statement of Changes in Stockholders’ Equity for
      the Three Months ended March 31, 2009 and 2008
    (Unaudited)
            3Consolidated Statements of Cash Flows for the Three Months
      ended March 31, 2009 and 2008 (Unaudited)
            4 -
      5Notes to Consolidated Financial Statements
      (Unaudited)
            6 -
      12ITEM 2  -   MANAGEMENT’S DISCUSSION
      AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            13
      - 19ITEM 3 -   QUANTITATIVE AND QUALITATIVE
      DISCLOSURE ABOUT MARKET RISK
            20ITEM 4T-    CONTROLS AND
      PROCEDURES
            20PART
      II  -  OTHER INFORMATION
            21SIGNATURES
            22EXHIBIT
      INDEX
            23








Index





Stewardship Financial Corporation and SubsidiaryConsolidated Statements of Financial Condition(Unaudited)March
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008AssetsCash
      and due from banks
                          
                          $
                          11,669,000
                          
                          
                          $
                          12,719,000Other
      interest-earning assets
                          
                          
                          151,000
                          
                          
                          
                          95,000Cash
      and cash equivalents
                          
                          
                          11,820,000
                          
                          
                          
                          12,814,000Securities
      available for sale
                          
                          
                          106,577,000
                          
                          
                          
                          90,023,000Securities
      held to maturity; estimated fair value of $71,784,000 (2009)
      and$49,150,000
      (2008)
                          
                          
                          70,842,000
                          
                          
                          
                          48,856,000FHLB-NY
      stock, at cost
                          
                          
                          3,032,000
                          
                          
                          
                          2,420,000Loans,
      net of allowance for loan losses of $5,324,000 (2009) and $5,166,000
      (2008)
                          
                          
                          431,467,000
                          
                          
                          
                          434,103,000Mortgage
      loans held for sale
                          
                          
                          1,968,000
                          
                          
                          
                          394,000Premises
      and equipment, net
                          
                          
                          7,331,000
                          
                          
                          
                          7,470,000Accrued
      interest receivable
                          
                          
                          3,334,000
                          
                          
                          
                          3,371,000Bank
      owned life insurance
                          
                          
                          8,682,000
                          
                          
                          
                          8,599,000Other
      assets
                          
                          
                          3,963,000
                          
                          
                          
                          3,766,000Total
      assets
                          
                          $
                          649,016,000
                          
                          
                          $
                          611,816,000Liabilities
      and stockholders' equityLiabilitiesDeposits:Noninterest-bearing
                          
                          $
                          87,376,000
                          
                          
                          $
                          99,099,000Interest-bearing
                          
                          
                          428,094,000
                          
                          
                          
                          407,432,000Total
      deposits
                          
                          
                          515,470,000
                          
                          
                          
                          506,531,000Other
      borrowings
                          
                          
                          50,500,000
                          
                          
                          
                          36,900,000Subordinated
      debentures
                          
                          
                          7,217,000
                          
                          
                          
                          7,217,000Securities
      sold under agreements to repurchase
                          
                          
                          15,162,000
                          
                          
                          
                          15,160,000Accrued
      interest payable
                          
                          
                          1,747,000
                          
                          
                          
                          1,582,000Accrued
      expenses and other liabilities
                          
                          
                          5,340,000
                          
                          
                          
                          1,630,000Total
      liabilities
                          
                          
                          595,436,000
                          
                          
                          
                          569,020,000Commitments
      and contingencies
                          
                          
                          -
                          
                          
                          
                          -Stockholders'
      equityPreferred
      stock, no par value; 2,500,000 shares authorized; 10,000
      sharesissued
      and outstanding at March 31, 2009.  Liquidation preference of
      $10,000,000.
                          
                          
                          9,692,000
                          
                          
                          
                          -Common
      stock, no par value; 10,000,000 shares authorized;5,584,713
      and 5,575,095 shares issued: 5,553,645 and 5,555,095
sharesoutstanding
      at March 31, 2009 and December 31, 2008, respectively
                          
                          
                          38,294,000
                          
                          
                          
                          37,962,000Treasury
      stock, 31,068 and 20,000 shares outstanding at March 31, 2009
      andDecember
      31, 2008, respectively
                          
                          
                          (379,000
                          )
                          
                          
                          (272,000
                          )Retained
      earnings
                          
                          
                          4,951,000
                          
                          
                          
                          4,383,000Accumulated
      other comprehensive income
                          
                          
                          1,022,000
                          
                          
                          
                          723,000Total
      stockholders' equity
                          
                          
                          53,580,000
                          
                          
                          
                          42,796,000Total
      liabilities and stockholders' equity
                          
                          $
                          649,016,000
                          
                          
                          $
                          611,816,000See
      notes to unaudited consolidated financial statements.


1
 Index


Stewardship
      Financial Corporation and SubsidiaryConsolidated
      Statements of Income(Unaudited)Three
      Months EndedMarch
      31,2009
                                            
                                            
                                            2008Interest
      income:Loans
                                            
                                            $
                                            6,608,000
                                            
                                            
                                            $
                                            7,185,000Securities
      held to maturityTaxable
                                            
                                            
                                            441,000
                                            
                                            
                                            
                                            204,000Non-taxable
                                            
                                            
                                            213,000
                                            
                                            
                                            
                                            207,000Securities
      available for saleTaxable
                                            
                                            
                                            1,137,000
                                            
                                            
                                            
                                            994,000Non-taxable
                                            
                                            
                                            52,000
                                            
                                            
                                            
                                            27,000FHLB
      dividends
                                            
                                            
                                            19,000
                                            
                                            
                                            
                                            34,000Other
      interest-earning assets
                                            
                                            
                                            3,000
                                            
                                            
                                            
                                            6,000Total
      interest income
                                            
                                            
                                            8,473,000
                                            
                                            
                                            
                                            8,657,000Interest
      expense:Deposits
                                            
                                            
                                            2,372,000
                                            
                                            
                                            
                                            2,910,000Borrowed
      money
                                            
                                            
                                            503,000
                                            
                                            
                                            
                                            585,000Total
      interest expense
                                            
                                            
                                            2,875,000
                                            
                                            
                                            
                                            3,495,000Net
      interest income before provision for loan losses
                                            
                                            
                                            5,598,000
                                            
                                            
                                            
                                            5,162,000Provision
      for loan losses
                                            
                                            
                                            150,000
                                            
                                            
                                            
                                            100,000Net
      interest income after provision for loan losses
                                            
                                            
                                            5,448,000
                                            
                                            
                                            
                                            5,062,000Noninterest
      income:Fees
      and service charges
                                            
                                            
                                            396,000
                                            
                                            
                                            
                                            295,000Bank
      owned life insurance
                                            
                                            
                                            83,000
                                            
                                            
                                            
                                            81,000Gain
      on sales of mortgage loans
                                            
                                            
                                            11,000
                                            
                                            
                                            
                                            55,000Gain
      on calls and sales of securities
                                            
                                            
                                            39,000
                                            
                                            
                                            
                                            41,000Merchant
      processing
                                            
                                            
                                            118,000
                                            
                                            
                                            
                                            369,000Other
                                            
                                            
                                            60,000
                                            
                                            
                                            
                                            135,000Total
      noninterest income
                                            
                                            
                                            707,000
                                            
                                            
                                            
                                            976,000Noninterest
      expenses:Salaries
      and employee benefits
                                            
                                            
                                            2,059,000
                                            
                                            
                                            
                                            2,016,000Occupancy,
      net
                                            
                                            
                                            472,000
                                            
                                            
                                            
                                            449,000Equipment
                                            
                                            
                                            265,000
                                            
                                            
                                            
                                            273,000Data
      processing
                                            
                                            
                                            305,000
                                            
                                            
                                            
                                            308,000FDIC
      insurance premium
                                            
                                            
                                            170,000
                                            
                                            
                                            
                                            73,000Charitable
      contributions
                                            
                                            
                                            171,000
                                            
                                            
                                            
                                            162,000Stationery
      and supplies
                                            
                                            
                                            59,000
                                            
                                            
                                            
                                            111,000Merchant
      processing
                                            
                                            
                                            108,000
                                            
                                            
                                            
                                            325,000Other
                                            
                                            
                                            799,000
                                            
                                            
                                            
                                            762,000Total
      noninterest expenses
                                            
                                            
                                            4,408,000
                                            
                                            
                                            
                                            4,479,000Income
      before income tax expense
                                            
                                            
                                            1,747,000
                                            
                                            
                                            
                                            1,559,000Income
      tax expense
                                            
                                            
                                            560,000
                                            
                                            
                                            
                                            498,000Net
      income
                                            
                                            
                                            1,187,000
                                            
                                            
                                            
                                            1,061,000Dividends
      on preferred stock and accretion
                                            
                                            
                                            92,000
                                            
                                            
                                            
                                            -Net
      income available to common stockholders
                                            
                                            $
                                            1,095,000
                                            
                                            
                                            $
                                            1,061,000Basic
      earnings per common share
                                            
                                            $
                                            0.20
                                            
                                            
                                            $
                                            0.19Diluted
      earnings per common share
                                            
                                            $
                                            0.20
                                            
                                            
                                            $
                                            0.19Weighted
      average number of common shares outstanding
                                            
                                            
                                            5,551,734
                                            
                                            
                                            
                                            5,576,090Weighted
      average number of diluted commonshares
      outstanding
                                            
                                            
                                            5,557,098
                                            
                                            
                                            
                                            5,591,517Share
      data has been restated to reflect a 5% stock dividend paid November 17,
      2008.See
      notes to unaudited consolidated financial statements.


2
 Index





Stewardship
      Financial Corporation and SubsidiaryConsolidated
      Statement of Changes in Stockholders'
Equity(Unaudited)Three
      Months Ended March 31, 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
                                        
                                        
                                        (49,000
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (49,000
                                        )Cash
      dividends paid on common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (527,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (527,000
                                        )Payment
      of discount on dividendreinvestment
      plan
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (11,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (11,000
                                        )Cash
      dividends accrued on preferredstock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (84,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (84,000
                                        )Common
      stock issued under stock plans
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,288
                                        
                                        
                                        
                                        22,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        22,000Stock
      option compensation expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,000Stock
      options exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,330
                                        
                                        
                                        
                                        40,000
                                        
                                        
                                        
                                        (32,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        8,000Repurchase
      of common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (75,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (75,000
                                        )Accretion
      of discount on preferredstock
                                        
                                        
                                        8,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (8,000
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        -Amortization
      of issuance costs
                                        
                                        
                                        2,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,000Comprehensive
      income:Net
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,187,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,187,000Change
      in unrealized holding gains onsecurities
      available for sale arising duringthe
      period (net tax expense of $177,000)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        275,000
                                        
                                        
                                        
                                        275,000Reclassification
      adjustment for gains innet
      income (net of taxes of $15,000)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        24,000
                                        
                                        
                                        
                                        24,000Total
      comprehensive income
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        1,486,000Balance
      -- March 31, 2009
                                        
                                        $
                                        9,692,000
                                        
                                        
                                        
                                        5,584,713
                                        
                                        
                                        $
                                        38,294,000
                                        
                                        
                                        $
                                        (379,000
                                        )
                                        
                                        $
                                        4,951,000
                                        
                                        
                                        $
                                        1,022,000
                                        
                                        
                                        $
                                        53,580,000Three
      Months Ended March 31, 2008AccumulatedOtherComprehensiveCommon
      Stock
                                        
                                        
                                        Treasury
                                        
                                        
                                        Retained
                                        
                                        
                                        Gain
      (Loss),Amount
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Stock
                                        
                                        
                                        Earnings
                                        
                                        
                                        Net
                                        
                                        
                                        TotalBalance
      -- December 31, 2007
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        5,306,828
                                        
                                        
                                        $
                                        34,871,000
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        5,943,000
                                        
                                        
                                        $
                                        276,000
                                        
                                        
                                        $
                                        41,090,000Cash
      dividends paid on common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (478,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (478,000
                                        )Payment
      of discount on dividendreinvestment
      plan
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (11,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (11,000
                                        )Common
      stock issued under stock plans
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,667
                                        
                                        
                                        
                                        21,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        21,000Stock
      option compensation expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,000Stock
      options exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        8,976
                                        
                                        
                                        
                                        43,000
                                        
                                        
                                        
                                        (21,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        22,000Comprehensive
      income:Net
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,061,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,061,000Change
      in unrealized holding gains onsecurities
      available for sale arising duringthe
      period (net tax benefit of $249,000)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        397,000
                                        
                                        
                                        
                                        397,000Reclassification
      adjustment for gainsin
      net income (net taxes of $17,000)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        24,000
                                        
                                        
                                        
                                        24,000Total
      comprehensive income
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        1,482,000Balance
      -- March 31, 2008
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        5,317,471
                                        
                                        
                                        $
                                        34,936,000
                                        
                                        
                                        $
                                        (21,000
                                        )
                                        
                                        $
                                        6,526,000
                                        
                                        
                                        $
                                        697,000
                                        
                                        
                                        $
                                        42,138,000See
      notes to unaudited consolidated financial statements.


3
 Index





Stewardship
      Financial Corporation and SubsidiaryConsolidated
      Statements ofCash Flows(Unaudited)Three
      Months EndedMarch
      31,2009
                                    
                                    2008Cash
      flows from operating activities:Net
      income
                                    
                                    $
                                    1,187,000
                                    
                                    
                                    $
                                    1,061,000Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Depreciation
      and amortization of premises and equipment
                                    
                                    
                                    210,000
                                    
                                    
                                    
                                    240,000Amortization
      of premiums and accretion of discounts, net
                                    
                                    
                                    123,000
                                    
                                    
                                    
                                    30,000Accretion
      of deferred loan fees
                                    
                                    
                                    (56,000
                                    )
                                    
                                    
                                    (59,000
                                    )Provision
      for loan losses
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    100,000Originations
      of mortgage loans held for sale
                                    
                                    
                                    (2,948,000
                                    )
                                    
                                    
                                    (5,642,000
                                    )Proceeds
      from sale of mortgage loans
                                    
                                    
                                    1,385,000
                                    
                                    
                                    
                                    4,736,000Gain
      on sale of loans
                                    
                                    
                                    (11,000
                                    )
                                    
                                    
                                    (55,000
                                    )Gain
      on calls and sales of securities
                                    
                                    
                                    (39,000
                                    )
                                    
                                    
                                    (41,000
                                    )Loss
      on sale of equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    12,000Deferred
      income tax benefit
                                    
                                    
                                    (69,000
                                    )
                                    
                                    
                                    (50,000
                                    )Amortization
      of intangible assets
                                    
                                    
                                    8,000
                                    
                                    
                                    
                                    8,000Nonqualified
      stock option expense
                                    
                                    
                                    12,000
                                    
                                    
                                    
                                    12,000Amortization
      of stock issuance costs
                                    
                                    
                                    2,000
                                    
                                    
                                    
                                    -Increase
      in bank owned life insurance
                                    
                                    
                                    (83,000
                                    )
                                    
                                    
                                    (81,000
                                    )Decrease
      in accrued interest receivable
                                    
                                    
                                    37,000
                                    
                                    
                                    
                                    99,000(Increase)
      decrease in other assets
                                    
                                    
                                    (328,000
                                    )
                                    
                                    
                                    86,000Increase
      (decrease) in accrued interest payable
                                    
                                    
                                    165,000
                                    
                                    
                                    
                                    (235,000
                                    )Increase
      in other liabilities
                                    
                                    
                                    615,000
                                    
                                    
                                    
                                    33,000Net
      cash provided by operating activities
                                    
                                    
                                    360,000
                                    
                                    
                                    
                                    254,000Cash
      flows from investing activities:Purchase
      of securities available for sale
                                    
                                    
                                    (30,248,000
                                    )
                                    
                                    
                                    (18,442,000
                                    )Proceeds
      from maturities and principal repayments on securities available for
      sale
                                    
                                    
                                    2,730,000
                                    
                                    
                                    
                                    1,746,000Proceeds
      from calls and sales on securities available for sale
                                    
                                    
                                    11,417,000
                                    
                                    
                                    
                                    7,316,000Purchase
      of securities held to maturity
                                    
                                    
                                    (24,289,000
                                    )
                                    
                                    
                                    (404,000
                                    )Proceeds
      from maturities and principal repayments on securities held to
      maturity
                                    
                                    
                                    1,018,000
                                    
                                    
                                    
                                    412,000Proceeds
      from calls on securities held to maturity
                                    
                                    
                                    4,250,000
                                    
                                    
                                    
                                    3,770,000Purchase
      of FHLB-NY stock
                                    
                                    
                                    (612,000
                                    )
                                    
                                    
                                    (575,000
                                    )Net
      decrease (increase) in loans
                                    
                                    
                                    2,542,000
                                    
                                    
                                    
                                    (5,137,000
                                    )Additions
      to premises and equipment
                                    
                                    
                                    (71,000
                                    )
                                    
                                    
                                    (170,000
                                    )Sale
      of equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,000Net
      cash used in investing activities
                                    
                                    
                                    (33,263,000
                                    )
                                    
                                    
                                    (11,480,000
                                    )Cash
      flows from financing activities:Net
      decrease in noninterest-bearing deposits
                                    
                                    
                                    (11,723,000
                                    )
                                    
                                    
                                    (6,496,000
                                    )Net
      increase in interest-bearing deposits
                                    
                                    
                                    20,662,000
                                    
                                    
                                    
                                    10,764,000Net
      increase (decrease) in securities sold under agreements to
      repurchase
                                    
                                    
                                    2,000
                                    
                                    
                                    
                                    (775,000
                                    )Proceeds
      from term borrowings
                                    
                                    
                                    6,000,000
                                    
                                    
                                    
                                    30,000,000Net
      increase (decrease) in short term borrowings
                                    
                                    
                                    7,600,000
                                    
                                    
                                    
                                    (16,800,000
                                    )Payments
      on long term borrowings
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (420,000
                                    )Proceeds
      from issuance of preferred stock and warrants
                                    
                                    
                                    9,951,000
                                    
                                    
                                    
                                    -Cash
      dividends paid on common stock
                                    
                                    
                                    (527,000
                                    )
                                    
                                    
                                    (478,000
                                    )Payment
      of discount on dividend reinvestment plan
                                    
                                    
                                    (11,000
                                    )
                                    
                                    
                                    (11,000
                                    )Purchase
      of treasury stock
                                    
                                    
                                    (75,000
                                    )
                                    
                                    
                                    -Options
      exercised
                                    
                                    
                                    8,000
                                    
                                    
                                    
                                    22,000Issuance
      of common stock
                                    
                                    
                                    22,000
                                    
                                    
                                    
                                    21,000Net
      cash provided by financing activities
                                    
                                    
                                    31,909,000
                                    
                                    
                                    
                                    15,827,000Net
      (decrease) increase in cash and cash equivalents
                                    
                                    
                                    (994,000
                                    )
                                    
                                    
                                    4,601,000Cash
      and cash equivalents - beginning
                                    
                                    
                                    12,814,000
                                    
                                    
                                    
                                    11,932,000Cash
      and cash equivalents - ending
                                    
                                    $
                                    11,820,000
                                    
                                    
                                    $
                                    16,533,000


4
 Index





Stewardship
      Financial Corporation and SubsidiaryConsolidated
      Statements of Cash Flows (continued)(Unaudited)Three
      Months EndedMarch
      31,2009
                                                
                                                2008Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
                                                
                                                $
                                                2,710,000
                                                
                                                
                                                $
                                                3,729,000Cash
      paid during the period for income taxes
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                -Noncash
      investing activities - security purchases due brokers
                                                
                                                $
                                                3,010,000
                                                
                                                
                                                $
                                                1,209,000See
      notes to unaudited consolidated financial statements.


5
 Index


Stewardship
Financial Corporation and Subsidiary


Notes
to Consolidated Financial Statements


March
31, 2009


(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, 2008.





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 recognize
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 three months ended March 31, 2009 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.





Adoption
of New Accounting Standards





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





In
December 2007, the FASB issued Statement No. 160, “Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB
No. 51”  (“SFAS 160”), which changes the accounting and
reporting for minority interests, which are now re-characterized as
noncontrolling interests and classified as a component of equity within the
consolidated balance sheet.  The adoption of SFAS No. 160 did not have a
significant impact on the Corporation’s results of operations or financial
position.





In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133” (“SFAS
161”).   SFAS 161 amends and expands the disclosure requirements
of SFAS 133 for derivative instruments and hedging activities.  SFAS
161 requires qualitative disclosure about objectives and
strategies


6
 Index


for using
derivative and hedging instruments, quantitative disclosures about fair value
amounts of the instruments and gains and losses on such instruments, as well as
disclosures about credit-risk features in derivative agreements.  The
adoption of SFAS 161 did not have a material effect on the Corporation’s results
of operations or financial position.





Recently
Issued But Not Yet Effective Accounting Standards





In April
2009, the FASB issued Staff Position No. 107-1 and APB 28-1 (“FSP 107-1”), Interim Disclosures about Fair Value
of Financial Instruments. FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
that were previously only required in annual financial statements. FSP 107-1 is
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.  The
Corporation plans to adopt this FSP in the second quarter.  The
adoption of FSP 107-1 is not expected to have a material effect on the
Corporation’s results of operations or financial position.





In April
2009, the FASB issued Staff Position No. 115-2 and FAS 124-2(“FSP 115-2 /
124-2”), Recognition and
presentation of Other-Than-Temporary Impairments, which amends existing
guidance for determining whether impairment is other-than-temporary for debt
securities.  FSP 115-2 / 124-2 requires an entity to access whether it
intends to sell, or it is more likely than not that it will be required to sell
a security in an unrealized loss position before recovery of its amortized cost
basis.  If either of these criteria is met, the entire difference
between amortized cost and fair value is recognized in earnings.  For
securities that do not meet the aforementioned criteria, the amount of
impairment recognized in earnings is limited to the amount related to credit
losses, while impairment related to other factors is recognized in other
comprehensive income.    Additionally, this FSP expands and
increases the frequency of existing disclosures about other-than-temporary
impairments for debt and equity securities.  FSP 115-2 / 124-2 is
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15,
2009.  The Corporation plans to adopt this FSP in the second
quarter.  The adoption of FSP 115-2 / 124-2 is not expected to have a
material effect on the Corporation’s results of operations or financial
position.





In April
2009, the FASB issued Staff Position 157-4 (“FSP 157-4”), Determining Fair Value When the
Volume and Level of Activity for the Asset and Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly.  FSP 157-4 emphasizes that even if there has been a
significant decrease in the volume and level of activity, the objective of a
fair value measurement remains the same.  Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants.  The FSP provides a number of factors to consider
when evaluating whether there has been a significant decrease in the volume and
level of activity for an asset or liability in relation to normal market
activity.   In addition, when transactions or quoted prices are
not considered orderly, adjustments to those prices based on the weight of
available information may be needed to determine the appropriate fair
value.  The FSP also requires increased disclosures.  FSP
157-4 is effective for interim and annual reporting periods ending after June
15, 2009 and shall be applied prospectively. Early adoption is permitted for
periods ending after March 15, 2009.  The Corporation plans to adopt
this FSP in the second quarter.  The adoption of FSP 157-4 is not
expected to have a material effect on the Corporation’s results of operations or
financial position.





7
 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:





March
      31, 2009Gross
                      
                      
                      GrossFair
                      
                      
                      Unrealized
                      
                      
                      UnrealizedValue
                      
                      
                      Holding
      Gains
                      
                      
                      Holding
      LossesU.S.
      government-sponsored agencies
                      
                      $
                      42,884,000
                      
                      
                      $
                      498,000
                      
                      
                      $
                      133,000Obligations
      of state and politicalsubdivisions
                      
                      
                      5,722,000
                      
                      
                      
                      47,000
                      
                      
                      
                      76,000Mortgage-backed
      securities
                      
                      
                      55,004,000
                      
                      
                      
                      1,329,000
                      
                      
                      
                      2,000Other
      securities
                      
                      
                      2,967,000
                      
                      
                      
                      25,000
                      
                      
                      
                      4,000$
                      106,577,000
                      
                      
                      $
                      1,899,000
                      
                      
                      $
                      215,000December
      31, 2008Gross
                      
                      
                      GrossFair
                      
                      
                      Unrealized
                      
                      
                      UnrealizedValue
                      
                      
                      Holding
      Gains
                      
                      
                      Holding
      LossesU.S.
      government-sponsored agencies
                      
                      $
                      49,660,000
                      
                      
                      $
                      741,000
                      
                      
                      $
                      30,000Obligations
      of state and politicalsubdivisions
                      
                      
                      5,820,000
                      
                      
                      
                      6,000
                      
                      
                      
                      190,000Mortgage-backed
      securities
                      
                      
                      31,670,000
                      
                      
                      
                      716,000
                      
                      
                      
                      15,000Other
      securities
                      
                      
                      2,873,000
                      
                      
                      
                      -
                      
                      
                      
                      35,000$
                      90,023,000
                      
                      
                      $
                      1,463,000
                      
                      
                      $
                      270,000





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





March
      31, 2009Gross
                          
                          
                          GrossCarrying
                          
                          
                          Unrecognized
                          
                          
                          Unrecognized
                          
                          
                          FairValue
                          
                          
                          Holding
      Gains
                          
                          
                          Holding
      Losses
                          
                          
                          ValueU.S.
      government-sponsored agencies
                          
                          $
                          28,753,000
                          
                          
                          $
                          157,000
                          
                          
                          $
                          163,000
                          
                          
                          $
                          28,747,000Obligations
      of state and politicalsubdivisions
                          
                          
                          23,617,000
                          
                          
                          
                          545,000
                          
                          
                          
                          131,000
                          
                          
                          
                          24,031,000Mortgage-backed
      securities
                          
                          
                          18,472,000
                          
                          
                          
                          535,000
                          
                          
                          $
                          1,000
                          
                          
                          
                          19,006,000$
                          70,842,000
                          
                          
                          $
                          1,237,000
                          
                          
                          $
                          295,000
                          
                          
                          $
                          71,784,000December
      31, 2008Gross
                          
                          
                          GrossCarrying
                          
                          
                          Unrecognized
                          
                          
                          Unrecognized
                          
                          
                          FairValue
                          
                          
                          Holding
      Gains
                          
                          
                          Holding
      Losses
                          
                          
                          ValueU.S.
      government-sponsored agencies
                          
                          $
                          10,290,000
                          
                          
                          $
                          217,000
                          
                          
                          $
                          -
                          
                          
                          $
                          10,507,000Obligations
      of state and politicalsubdivisions
                          
                          
                          23,048,000
                          
                          
                          
                          110,000
                          
                          
                          
                          301,000
                          
                          
                          
                          22,857,000Mortgage-backed
      securities
                          
                          
                          15,518,000
                          
                          
                          
                          271,000
                          
                          
                          
                          3,000
                          
                          
                          
                          15,786,000$
                          48,856,000
                          
                          
                          $
                          598,000
                          
                          
                          $
                          304,000
                          
                          
                          $
                          49,150,000





On a
quarterly basis, the Corporation makes an assessment to determine whether there
have been any events or economic circumstances to indicate that a security is
impaired on an other-than-temporary basis.  The Corporation considers
many factors including the length of time the security has had a market value
less than the cost basis; the intent


8
 Index


and
ability of the Corporation to hold the security for a period of time sufficient
for a recovery in value; and recent events specific to the issuer or
industry.  Management considers the decline in market value of these
securities to be temporary.





Mortgage-backed
securities are comprised primarily of government agencies such as the Government
National Mortgage Association ("GNMA") and government-sponsored agencies such as
the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Banks
("FHLB") and the Federal Home Loan Mortgage Corporation (“FHLMC”).





Note
3.   Loans





The
following table sets forth the composition of loans:








March
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008MortgageResidential
                                      
                                      $
                                      39,690,000
                                      
                                      
                                      $
                                      40,337,000Commercial
                                      
                                      
                                      229,333,000
                                      
                                      
                                      
                                      226,183,000Commercial
                                      
                                      
                                      96,587,000
                                      
                                      
                                      
                                      100,282,000Equity
                                      
                                      
                                      22,803,000
                                      
                                      
                                      
                                      21,208,000Installment
                                      
                                      
                                      48,398,000
                                      
                                      
                                      
                                      51,290,000Other
                                      
                                      
                                      385,000
                                      
                                      
                                      
                                      356,000Total
      loans
                                      
                                      
                                      437,196,000
                                      
                                      
                                      
                                      439,656,000Less:  
       Deferred
      loan fees
                                      
                                      
                                      405,000
                                      
                                      
                                      
                                      387,000Allowance
      for loan losses
                                      
                                      
                                      5,324,000
                                      
                                      
                                      
                                      5,166,0005,729,000
                                      
                                      
                                      
                                      5,553,000Loans,
      net
                                      
                                      $
                                      431,467,000
                                      
                                      
                                      $
                                      434,103,000





Note
4.   Allowance for Loan Losses





Three
      Months Ended March 31,2009
                
                
                2008Balance,
      beginning of period
                
                $
                5,166,000
                
                
                $
                4,457,000Provision
      charged to operations
                
                
                150,000
                
                
                
                100,000Recoveries
      of loans charged off
                
                
                87,000
                
                
                
                18,000Loans
      charged off
                
                
                (79,000
                )
                
                
                (4,000
                )Balance,
      end of period
                
                $
                5,324,000
                
                
                $
                4,571,000





Note
5.   Loan Impairment





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





March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Impaired
      loansWith
      related allowance for loan losses
                      
                      $
                      2,981,000
                      
                      
                      $
                      2,762,000Without
      related allowance for loan losses
                      
                      
                      3,611,000
                      
                      
                      
                      1,468,000Total
      impaired loans
                      
                      $
                      6,592,000
                      
                      
                      $
                      4,230,000Related
      allowance for loan losses
                      
                      $
                      655,000
                      
                      
                      $
                      481,000





9
 Index


Note
6.   Fair Value





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





Level 1:
Quoted prices (unadjusted) 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 securities available for sale are determined by matrix pricing, which
is a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2 inputs).





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





Assets and Liabilities
Measured on a Recurring Basis





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





Fair
      Value Measurements at Using:Carrying
                            Value
                          
                          
                          Quoted
      Prices in
                            Active
      Markets for
                            Identical
      Assets
                            (Level
      1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs
      (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level
      3)At
      March 31, 2009Assets:Available
      for sale securities
                          
                          $
                          106,577,000
                          
                          
                          $
                          -
                          
                          
                          $
                          106,577,000
                          
                          
                          $
                          -At
      December 31, 2008Assets:Available
      for sale securities
                          
                          $
                          90,023,000
                          
                          
                          $
                          -
                          
                          
                          $
                          90,023,000
                          
                          
                          $
                          -





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:Carrying
                        Value
                      
                      
                      Quoted
      Prices in
                        Active
      Markets for
                        Identical
      Assets
                        (Level
      1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level
      2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level
      3)At
      March 31, 2009Assets:Impaired
      loans
                      
                      $
                      2,326,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,326,000At
      December 31, 2008Assets:Impaired
      loans
                      
                      $
                      2,281,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,281,000





10
 Index


Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $2,981,000 at March 31,
2009, with a valuation allowance of $655,000, resulting in an additional
provision for loan losses of $174,000 for the three months ended March 31,
2009.





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 EndedMarch
      31,2009
                
                
                2008(in
      thousands, except per share data)Net
      income
                
                $
                1,187
                
                
                $
                1,061Dividends
      on preferred stock and accretion
                
                
                92
                
                
                
                -Net
      income available to common stockholders
                
                $
                1,095
                
                
                $
                1,061Weighted
      average shares
                
                
                5,552
                
                
                
                5,576Effect
      of dilutive stock options
                
                
                5
                
                
                
                16Total
      weighted average dilutive shares
                
                
                5,557
                
                
                
                5,592Basic
      earnings per common share
                
                $
                0.20
                
                
                $
                0.19Diluted
      earnings per common share
                
                $
                0.20
                
                
                $
                0.19





Stock
options to purchase 67,295 and 54,408 average shares of common stock were not
considered in computing diluted earnings per share for the three months ended
March 31, 2009 and 2008, respectively, because they were
antidilutive.   A common stock warrant to purchase 84,746 average
shares of common stock was not considered in computing diluted earnings per
share for the three months ended March 31, 2009 because it was
antidilutive.





All share
and per share amounts have been restated to reflect a 5% stock dividend declared
on September 16, 2008 and payable November 17, 2008.





Note
8.   Preferred Stock





On
January 30, 2009, in exchange for issuing 10,000 shares of Series A Preferred
Stock (the “Senior Preferred Shares”) and a warrant to purchase 127,119 shares
of common stock, the Corporation received $10.0 million as part of the United
States Treasury Department’s Capital Purchase Program
(“CPP”).





The
Senior Preferred Shares pay a cumulative dividend of 5% per annum for the first
five years and 9% per annum thereafter.  Dividends are payable
quarterly in arrears and the Corporation accrues the preferred dividends as
earned over the period the Senior Preferred Shares are outstanding.





The
warrant to purchase 127,119 of common shares has an exercise price of $11.80 per
share.  The exercise price for the warrant was calculated based on the
average of the closing prices of the Corporation’s common stock on the 20
trading days ending on the last trading day prior to the date of the Treasury’s
approval of the Corporation’s application under the program.





Of the
$10 million of proceeds, $9.7 million was allocated to the Senior Preferred
Shares and $269,000 was allocated to the warrant based on their estimated
relative fair values as of January 30, 2009.  The resulting discount
on the Senior Preferred Shares of $269,000 is being accreted through a charge to
retained earnings over an estimated five year life using an effective yield
method.  The Senior Preferred Shares and warrant issued under the CPP
are includable in Tier I capital for regulatory capital.


11
 Index





The
Corporation may repay the funds provided under the CPP without regard to whether
the Corporation has replaced such funds from any other source or to any waiting
period, subject to regulatory approval.  Until the earlier of the
third anniversary of the Treasury’s investment in the Senior Preferred Shares or
when all of the Senior Preferred Shares have been redeemed by the Corporation or
transferred by the Treasury to third parties, the Corporation may not, without
the consent of the Treasury, increase the common stock cash
dividend.











12
 Index


Stewardship
Financial Corporation


Management’s
Discussion and Analysis of


Financial
Condition and Results of Operations








Cautionary
Note Regarding Forward-Looking Statements





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





Critical
Accounting Policies and Estimates





“Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” as
well as disclosures found elsewhere in this Form 10-Q, are based upon the
Corporation’s consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires the
Corporation to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses.  Note 1 to the
Corporation’s Audited Consolidated Financial Statements for the year ended
December 31, 2008 included in our Annual Report on Form 10-K for the year ended
December 31, 2008, 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 by $37.2 million, or 6.1%, from $611.8 million at December 31,
2008 to $649.0 million at March 31, 2009.  Securities available for
sale and securities held to maturity increased $16.6 million and $22.0 million,
respectively.  The overall increase in securities was primarily
attributable to the initial investing and leveraging of the $10.0 million of
funds received under the Capital Purchase Program principally in mortgage-backed
securities.  The cash flows from the amortization of the
mortgage-backed securities will be utilized to continue to fund loan
growth.  Net loans decreased $2.6 million due, in part, to the sale of
$2.0 million of loan participations.





Deposits
totaled $515.5 million at March 31, 2009, an increase of $8.9 million, or 1.8%,
from $506.5 million at December 31, 2008.  The Corporation introduced
its Power Rate Checking to customers during the first quarter of
2009.  This free checking account rewards customers with a high rate
of interest for meeting three simple qualifications that assist the Bank in
reducing our account related expenses.  A new online business product
is being rolled out in the second quarter of 2009.


13
 Index


These
products and services will allow us to continue to attract new personal and
business core deposits.  A $13.6 million increase in other borrowings
reflects funds utilized to accomplish the leveraging of the $10 million of CPP
funds.





Results of Operations for
the Three Months Ended March 31, 2009 and 2008





General





The
Corporation reported net income of $1.2 million, or $0.20 diluted earnings per
common share for the three months ended March 31, 2009, compared to $1.1
million, or $0.19 diluted earnings per common share for the comparable prior
year period.





Net Interest
Income





Net
interest income for the three months ended March 31, 2009 was $5.6 million
compared to $5.2 million recorded in the prior year period.  The
increase in the current year period is primarily attributable 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 March
31, 2009 were 3.42% and 3.87%, respectively, compared to 3.23% and 3.94% for the
three months ended March 31, 2008.  The  net yield on
interest earning assets during the current year period reflects both a decline
in loan interest rates and yields on securities as well as a decline in the
interest rates on deposits and borrowings.





The
following table reflects the components of the Corporation’s net interest income
for the three months ended March 31, 2009 and 2008 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.


14
 Index








Analysis
      of Net Interest Income (Unaudited)For
      the Three Months Ended March 31,2009
                                      
                                      
                                      2008Average
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      AverageInterest
                                      
                                      
                                      Rates
                                      
                                      
                                      
                                      
                                      
                                      Interest
                                      
                                      
                                      RatesAverage
                                      
                                      
                                      Income/
                                      
                                      
                                      Earned/
                                      
                                      
                                      Average
                                      
                                      
                                      Income/
                                      
                                      
                                      Earned/Balance
                                      
                                      
                                      Expense
                                      
                                      
                                      Paid
                                      
                                      
                                      Balance
                                      
                                      
                                      Expense
                                      
                                      
                                      Paid(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
      (1) (2)
                                      
                                      $
                                      436,926
                                      
                                      
                                      $
                                      6,619
                                      
                                      
                                      
                                      6.14
                                      %
                                      
                                      $
                                      424,449
                                      
                                      
                                      $
                                      7,196
                                      
                                      
                                      
                                      6.88
                                      %Taxable
      investment securities (1)
                                      
                                      
                                      134,749
                                      
                                      
                                      
                                      1,597
                                      
                                      
                                      
                                      4.81
                                      
                                      
                                      
                                      95,002
                                      
                                      
                                      
                                      1,232
                                      
                                      
                                      
                                      5.26Tax-exempt
      investment securities (1) (2)
                                      
                                      
                                      28,938
                                      
                                      
                                      
                                      390
                                      
                                      
                                      
                                      5.47
                                      
                                      
                                      
                                      25,698
                                      
                                      
                                      
                                      341
                                      
                                      
                                      
                                      5.38Other
      interest-earning assets
                                      
                                      
                                      84
                                      
                                      
                                      
                                      3
                                      
                                      
                                      
                                      9.66
                                      
                                      
                                      
                                      222
                                      
                                      
                                      
                                      6
                                      
                                      
                                      
                                      10.96Total
      interest-earning assets
                                      
                                      
                                      600,697
                                      
                                      
                                      
                                      8,609
                                      
                                      
                                      
                                      5.81
                                      
                                      
                                      
                                      545,371
                                      
                                      
                                      
                                      8,775
                                      
                                      
                                      
                                      6.52Non-interest-earning
      assets:Allowance
      for loan losses
                                      
                                      
                                      (5,214
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (4,488
                                      )Other
      assets
                                      
                                      
                                      35,413
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      33,062Total
      assets
                                      
                                      $
                                      630,896
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      573,945Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
                                      
                                      $
                                      167,280
                                      
                                      
                                      $
                                      517
                                      
                                      
                                      
                                      1.25
                                      %
                                      
                                      $
                                      155,341
                                      
                                      
                                      $
                                      870
                                      
                                      
                                      
                                      2.27
                                      %Savings
      deposits
                                      
                                      
                                      40,377
                                      
                                      
                                      
                                      58
                                      
                                      
                                      
                                      0.58
                                      
                                      
                                      
                                      36,398
                                      
                                      
                                      
                                      69
                                      
                                      
                                      
                                      0.77Time
      deposits
                                      
                                      
                                      211,891
                                      
                                      
                                      
                                      1,797
                                      
                                      
                                      
                                      3.44
                                      
                                      
                                      
                                      175,882
                                      
                                      
                                      
                                      1,971
                                      
                                      
                                      
                                      4.54Repurchase
      agreements
                                      
                                      
                                      15,162
                                      
                                      
                                      
                                      189
                                      
                                      
                                      
                                      5.06
                                      
                                      
                                      
                                      16,683
                                      
                                      
                                      
                                      143
                                      
                                      
                                      
                                      3.48FHLB
      borrowing
                                      
                                      
                                      46,139
                                      
                                      
                                      
                                      230
                                      
                                      
                                      
                                      2.02
                                      
                                      
                                      
                                      38,958
                                      
                                      
                                      
                                      318
                                      
                                      
                                      
                                      3.31Subordinated
      debenture
                                      
                                      
                                      7,217
                                      
                                      
                                      
                                      84
                                      
                                      
                                      
                                      4.72
                                      
                                      
                                      
                                      7,217
                                      
                                      
                                      
                                      124
                                      
                                      
                                      
                                      6.97Total
      interest-bearing liabilities
                                      
                                      
                                      488,066
                                      
                                      
                                      
                                      2,875
                                      
                                      
                                      
                                      2.39
                                      
                                      
                                      
                                      430,479
                                      
                                      
                                      
                                      3,495
                                      
                                      
                                      
                                      3.29Non-interest-bearing
      liabilities:Demand
      deposits
                                      
                                      
                                      88,792
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      97,183Other
      liabilities
                                      
                                      
                                      4,562
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,838Stockholders'
      equity
                                      
                                      
                                      49,476
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      41,445Total
      liabilities and stockholders' equity
                                      
                                      $
                                      630,896
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      573,945Net
      interest income (taxable equivalent basis)
                                      
                                      
                                      
                                      5,734
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      5,280Tax
      Equivalent adjustment
                                      
                                      
                                      
                                      
                                      
                                      
                                      (136
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (118
                                      )Net
      interest income
                                      
                                      
                                      
                                      
                                      
                                      $
                                      5,598
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      5,162Net
      interest spread (taxable equivalent basis)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3.42
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3.23
                                      %Net
      yield on interest-earningassets
      (taxable equivalent basis) (3)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3.87
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3.94
                                      %_______________________(1)   
      For purpose 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.





15
 Index


For the
three months ended March 31, 2009, total interest income on a tax equivalent
basis decreased $166,000, or 1.9%, when compared to the three months ended March
31, 2008 primarily due to a decrease in the total yield on interest-earning
assets, partially offset by an increase in the average earning
assets.  The average rate earned on interest-earning assets was 5.81%
for the three months ended March 31, 2009 compared to an average rate of 6.52%
for the same prior year period.  The average yield on the loan
portfolio decreased 74 basis points when comparing the three months ended March
31, 2009 to the three months ended March 31, 2008.  The decline in
short-term interest rates during 2008 resulted in a Prime rate of 3.25% at March
31, 2009 compared to a Prime rate of 5.25% a year earlier.  The
decline in short-term rates resulted in loans resetting during the past year at
lower interest rates, thereby contributing to the decline in yields on earning
assets.  Average interest-earning assets increased $55.3 million for
the three months ended March 31, 2009 when compared to the prior year
period.  The increase is primarily attributable to an increase in
loans due to demand and an increase in taxable investment securities as a result
of the previously mentioned leverage strategy.  Average loans
increased $12.5 million to an average of $436.9 million for the three months
ended March 31, 2009, from an average of $424.4 million for the comparable
period in 2008.  Taxable investment securities of $134.7 million for
the three months ended March 31, 2009 represent an increase of $39.7 million
when compared to the same prior year period.





Interest
paid on deposits and borrowed money decreased $620,000, or 17.7% for the three
months ended March 31, 2009 compared to the same period for 2008.  The
decline is due to a decrease in rates paid on deposits and borrowings, partially
offset by an increase in average interest-bearing liabilities.  The
average balance of total interest-bearing deposits and borrowings increased
$57.6 million for the three months ended March 31, 2009 from the comparable 2008
period.  In addition to the Corporation’s expanding customer base, the
increase in average interest-bearing liabilities was a result of increased
borrowings to complete the leveraging of the $10 million of CPP
funds.  For the three months ended March 31, 2009, the total cost for
interest-bearing liabilities declined to 2.39% representing a 90 basis point
decline when compared to the same prior year period.





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 the current estimates.





The loan
loss provision totaled $150,000 for the three months ended March 31,
2009.  For the three months ended March 31, 2008 the provision for
loan losses was $100,000.  Nonaccrual loans increased from $4.2
million at December 31, 2008 to $6.6 million at March 31, 2009.  The
allowance for loan losses related to the impaired loans increased from $481,000
at December 31, 2008 to $655,000 million at March 31, 2009.  The
current period loan loss provision primarily reflects the increase in impaired
loans.  The Corporation monitors its loan portfolio and intends to
continue to provide for loan loss reserves based on its ongoing periodic review
of the loan portfolio and general market conditions.





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





Noninterest
Income





For the
three ended March 31, 2009, noninterest income was $707,000 compared to $976,000
for the prior year period.  As previously reported, on December 31,
2008, the Corporation sold its merchant servicing portfolio and, as a result, a
decline of $251,000 in noninterest income as well as a $217,000 decline in
noninterest expense is reflected for the three months ended March 31,
2009. Gains on sales of mortgage loans were $11,000 for the three months
ended March 31, 2009, a decrease when compared to $55,000 for the three months
ended March 31, 2008.  When compared to the prior year, the three
months ended March 31, 2009 reflects a decrease in mortgage activity due to the
challenging real estate market.  This decrease in activity resulted in
a decline in the volume of loans sold and ultimately, a decline in gains on
mortgages sold.  Mortgage loan application activity increased during
the first quarter of 2009 and such activity should ultimately translate into
additional gain on sales of mortgage loans.





Noninterest
Expense





Noninterest
expenses for the three months ended March 31, 2009 was $4.4 million and $4.5
million for the comparable prior year period.  As previously reported,
on December 31, 2008, the Corporation sold its merchant servicing portfolio and,
as a result, a $217,000 decline in noninterest expense as well as a decline of
$251,000 in noninterest income is reflected for the three months ended March 31,
2009. FDIC insurance premiums increased $97,000 for the three
months


16
 Index


ended
March 31, 2009 when compared to the three months ended March 31, 2008,
reflecting a general increase in the assessment of insurance as well as in
increase in deposits.





Income Tax
Expense





Income
tax expense totaled $560,000 for the three months ended March 31, 2009 compared
to an income tax expense of $498,000 for the three months ended March 31,
2008.  The effective tax rate for the three months ended March 31,
2009 was 32.1% compared to 31.9% for the three months ended March 31,
2008.





Asset
Quality





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








March
      31,
                
                
                December
      31,
                
                
                September
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2008
                
                
                2008Nonaccrual
      loans (1)
                
                $
                6,592
                
                
                $
                4,230
                
                
                $
                6,884
                
                
                $
                451Loans
      past due 90 days or more and accruing (2)
                
                
                414
                
                
                
                353
                
                
                
                268
                
                
                
                840Total
      nonperforming loans
                
                
                7,006
                
                
                
                4,583
                
                
                
                7,152
                
                
                
                1,291Restructured
      loans
                
                
                2,375
                
                
                
                1,855
                
                
                
                -
                
                
                
                -Total
      nonperforming loans
                
                $
                9,381
                
                
                $
                6,438
                
                
                $
                7,152
                
                
                $
                1,291Allowance
      for loan losses
                
                $
                5,324
                
                
                $
                5,166
                
                
                $
                5,930
                
                
                $
                4,768Nonperforming
      loans to total loans
                
                
                2.15
                %
                
                
                1.46
                %
                
                
                1.61
                %
                
                
                0.29
                %Nonperforming
      loans to total assets
                
                
                1.45
                %
                
                
                1.05
                %
                
                
                1.17
                %
                
                
                0.21
                %Allowance
      for loan losses to total loans
                
                
                1.22
                %
                
                
                1.18
                %
                
                
                1.34
                %
                
                
                1.09
                %Allowance
      for loan losses tononperforming
      loans
                
                
                56.75
                %
                
                
                80.24
                %
                
                
                82.91
                %
                
                
                369.33
                %








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





(2)  Represents
loans to which payments of 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 24 loans, primarily commercial mortgage,
residential mortgage and commercial loans.  While the Corporation
maintains strong underwriting requirements, the increase is reflective of the
current economic and real estate environment.





As of
March 31, 2009, there were $17.8 million of other loans not included in the
above table, where credit conditions of borrowers caused management to have
concerns about the possibility of the borrowers not complying with the present
terms and conditions of repayment and which may result in disclosure of such
loans at a future date.  These loans have been considered by
management in conjunction with the analysis of the adequacy of the allowance for
loan losses.





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.


17
 Index


Interest Rate
Sensitivity




The
Corporation’s primary exposure to market risk arises from changes in market
interest rates (“interest rate risk”).  The Corporation’s
profitability is largely dependent upon its ability to manage interest rate
risk.  Interest rate risk can be defined as the exposure of the
Corporation’s net interest income to adverse movements in interest
rates.





The
Corporation manages its interest rate risk by utilizing an asset/liability
simulation model and by measuring and managing its interest sensitivity
gap.  The simulation model analyzes the sensitivity of net interest
income to movements in interest rates.  The simulation model projects
net interest income, net income, net margin, and capital to asset ratios based
on various interest rate scenarios over a twelve-month period.  The
model is based on the actual maturity and repricing characteristics of all rate
sensitive assets and liabilities.  Management incorporates into the
model certain assumptions regarding prepayments of certain assets and
liabilities.  Assumptions have been built into the model for
prepayments for assets and decay rates for nonmaturity deposits such as savings
and interest bearing demand.  The model assumes an immediate rate
shock to interest rates without management’s ability to proactively change the
mix of assets or liabilities.  According to reports generated for the
quarter ended March 31, 2009, an immediate interest rate increase of 200 basis
points would have resulted in a decrease in net interest income of 8.5%, or $2.1
million, while an immediate decrease of 200 basis points would have resulted in
a decrease in net interest income of 2.5%, or $626,000.  Management
has a goal to maintain a percentage change of no more than 17.5% given a 200
basis point change in interest rates.  Management cannot provide any
assurance about the actual effect of changes in interest rates on the
Corporation’s net interest income.





The
Corporation does not have any material exposure to foreign currency exchange
rate risk or commodity price risk.  The Corporation did not enter into
any market sensitive instruments for trading purposes nor did it engage in any
hedging transactions utilizing derivative financial instruments during the three
months ended March 31, 2009.





The
Corporation is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers.  These instruments include commitments to extend credit and
standby letters of credit.  Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statement of condition.  Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The Corporation evaluates each customer’s
creditworthiness on a case-by-case basis.  The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of credit, is
based on management’s credit evaluation of the counter-party.  Standby
letters of credit are conditional commitments issued by the Corporation to
guarantee payment or performance of a customer to a third party up to a
stipulated amount and with specified terms and
conditions.  Commitments to extend credit and standby letters of
credit are not recorded on the Corporation’s consolidated balance sheet until
the instrument is exercised.




Capital
Adequacy




The
Corporation is subject to capital adequacy guidelines promulgated by the Board
of Governors of the Federal Reserve System (“FRB”).  The Bank is
subject to similar capital adequacy requirements imposed by the Federal Deposit
Insurance Corporation.  The FRB has issued regulations to define the
adequacy of capital based upon the sensitivity of assets and off-balance sheet
exposures to risk factors.   Four categories of risk weights (0%,
20%, 50%, and 100%) were established to be applied to different types of balance
sheet assets and off-balance sheet exposures.  The aggregate of the
risk-weighted items (risk-based assets) is the denominator of the ratio, the
numerator is risk-based capital.  Under the regulations, risk-based
capital has been classified into two categories.  Tier 1 capital
includes common and qualifying perpetual preferred stockholders’ equity less
goodwill.  Tier 2 capital includes mandatory convertible debt,
allowance for loan losses, subject to certain limitations, and certain
subordinated and term debt securities.  Total qualifying capital
consists of Tier 1 capital and Tier 2 capital; however; the amount of Tier 2
capital may not exceed the amount of Tier 1 capital.  At March 31,
2009, the minimum risk-based capital requirements to be considered adequately
capitalized were 4% for Tier 1 capital and 8% for total capital.





18
 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 March 31,
2009 the minimum leverage ratio requirement to be considered well capitalized
was 4%.  The following table reflects the Corporation’s capital ratios
at March 31, 2009.





Required
                Actual
                ExcessLeverage
      Ratio
                4.00%
                9.44%
                5.44%Risk-based
      CapitalTier
      1
                4.00%
                12.52%
                8.52%Total
                8.00%
                13.64%
                5.64%





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 decreased $1.0 million during the first three months of
2009.  Net operating and financing activities provided $361,000 and
$31.9 million, respectively, and investing activities used $33.3
million.


19
 Index


ITEM
3.  Quantitative andQualitative 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.





We
assessed the effectiveness of our internal control over financial reporting as
of March 31, 2009.  In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control—Integrated Framework. Based on our
assessment using those criteria, our management (including our Chief Executive
Officer and Chief Financial Officer) concluded that our internal control over
financial reporting was effective as of March 31, 2009.





(c)
            Changes
      in internal controls.


There
were no significant changes in our internal controls 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 March
31, 2009 that have materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.








20
 Index


Stewardship
Financial Corporation


PartII -- Other Information








Item
      1.
            
            Legal
      ProceedingsNone.Item
      1A.
            
            Risk
      FactorsNot
      applicable to smaller reporting companies.Item
      2.
            
            Unregistered
      Sales of Equity Securities and Use of ProceedsNone.Item
      3.
            
            Defaults
      Upon Senior SecuritiesNone.Item
      4.
            
            Submission
      of Matters to a Vote of Security HoldersNone.Item
      5.
            
            Other
      InformationNone.Item
      6.
            
            ExhibitsSee
      Exhibit Index following this report.


21
 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:   May
      15, 2009
                By:
                /s/ Paul Van OstenbridgePaul
      Van OstenbridgePresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:   May
      15, 2009
                By:
                /s/ Claire M. ChadwickClaire
      M. ChadwickSenior
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting
Officer)








22
 Index





EXHIBIT INDEX








Exhibit
              Number
            
            Description
      of Exhibits3(i).1
            
            Restated
      Certificate of Incorporation of Stewardship Financial
      Corporation31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Chief Financial 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
















23