Stewardship Financial (SSFN) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

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

For the transition period from _________ to _________

Commission file number 0-21855

Stewardship Financial Corporation

(Exact name of registrant as specified in its charter)

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

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

(201)  444-7100

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

Stewardship Financial Corporation

INDEX

		PAGE
		NUMBER
PART I  -	CONSOLIDATED FINANCIAL INFORMATION
ITEM 1  -	CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
at June 30, 2010 and December 31, 2009 (Unaudited)		1
Consolidated Statements of Income for the Three and
Six Months ended June 30, 2010 and 2009 (Unaudited)		2
Consolidated Statement of Changes in Stockholders’ Equity for
the Six Months ended June 30, 2010 and 2009 (Unaudited)		3
Consolidated Statements of Comprehensive Income for the Three
and Six Months ended June 30, 2010 and 2009 (Unaudited)		4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2010 and 2009 (Unaudited)		5 - 6
Notes to Consolidated Financial Statements (Unaudited)		7 - 18
ITEM 2  -	MANAGEMENT’S DISCUSSION AND ANALYSIS OF
	FINANCIAL CONDITION AND RESULTS OF
	OPERATIONS	19 - 27
ITEM 3  -	QUANTITATIVE AND QUALITATIVE DISCLOSURES
	ABOUT MARKET RISK	28
ITEM 4T  -	CONTROLS AND PROCEDURES	28
PART II  -	OTHER INFORMATION
ITEM 6  -	EXHIBITS	29
SIGNATURES		30
EXHIBIT INDEX		31

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition

(Unaudited)

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

See notes to unaudited consolidated financial statements.

1

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income

(Unaudited)

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

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

See notes to unaudited consolidated financial statements.

2

Stewardship Financial Corporation and Subsidiary

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)

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

See notes to unaudited consolidated financial statements.

3

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

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

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

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

4

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

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

5

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited)

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

See notes to unaudited consolidated financial statements.

6

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2010

(Unaudited)

Note 1.  Summary of Significant Accounting Policies

Certain information and footnote disclosures normally included in the unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Principles of consolidation

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

Material estimates

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

Basis of presentation

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.  However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results which may be expected for the entire year.  All share and per share amounts have been restated for stock splits and stock dividends.

Derivatives

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

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

7

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

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

Recent Accounting Pronouncements

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

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

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

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

8

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

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

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

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

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

9

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

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

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

10

Available for Sale

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

11

Other-Than-Temporary-Impairment

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

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

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

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

Note 3.   Loans and Nonperforming Loans

The following table sets forth the composition of loans:

	June 30,		December 31,
	2010		2009
Mortgage
Residential	$	32,690,000	$	36,246,000
Commercial		252,851,000		246,212,000
Commercial		113,597,000		114,893,000
Home Equity		21,412,000		21,779,000
Installment		37,204,000		41,006,000
Other		348,000		340,000
Total loans		458,102,000		460,476,000
Less:   Deferred loan fees		350,000		437,000
Allowance for loan losses		8,745,000		6,920,000
		9,095,000		7,357,000
Loans, net	$	449,007,000	$	453,119,000

12

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

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

Nonperforming loans include the following:

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

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

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

Note 4.   Interest Rate Swap

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

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

13

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

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

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

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

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

Note 5.   Fair Value of Financial Instruments

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

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

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

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

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

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

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

14

Assets and Liabilities Measured on a Recurring Basis

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

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

15

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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

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

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

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

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

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

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

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

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

Accrued interest receivable – The carrying amount approximates fair value.

16

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

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

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

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

Accrued interest payable – The carrying amount approximates fair value.

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

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

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

Note 6.   Stock-Based Compensation

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

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

17

Note 7.   Earnings Per Share

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

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

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

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

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

18

Stewardship Financial Corporation

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

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

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures found elsewhere in this Quarterly Report on Form 10-Q, are based upon the Corporation’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  Note 1 to the Corporation’s Audited Consolidated Financial Statements for the year ended December 31, 2009 included in our Annual Report on Form 10-K for the year ended December 31, 2009, as supplemented by this report, contains a summary of the Corporation’s significant accounting policies.  Management believes the Corporation’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters.  Changes in these judgments, assumptions or estimates could materially impact results of operations.  This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

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

Financial Condition

Total assets increased $11.1 million, or 1.7%, to $674.9 million at June 30, 2010 from $663.8 million at December 31, 2009.  Cash and cash equivalents increased $10.6 million, reflecting planned additional liquidity.  Securities available for sale increased $13.0 million while securities held to maturity decreased $10.9 million.  The changes in the securities portfolio included the effect of calls and replacements of securities in the current interest rate environment as well as proactive sales of securities by the Corporation to minimize the anticipated impact of rising market rates.  The balance in the net loan portfolio declined slightly from $453.1 million at December 31, 2009 to $449.0 million at June 30, 2010.  Increases due to new loans originated were offset by a $1.825 million net increase in the allowance for loan losses and regular principal payments and payoffs.

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

19

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

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

Results of Operations

General

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

Net Interest Income

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

The following tables reflect the components of the Corporation’s net interest income for the three and six months ended June 30, 2010 and 2009 including, (1) average assets, liabilities and stockholders’ equity based on average daily balances, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, and (4) net yield on interest-earning assets.  Nontaxable income from investment securities and loans is presented on a tax-equivalent basis assuming a statutory tax rate of 34% for the periods presented.  This was accomplished by adjusting non-taxable income upward to make it equivalent to the level of taxable income required to earn the same amount after taxes.

20

Analysis of Net Interest Income (Unaudited)

For the Three Months Ended June 30,

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

______________________

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

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

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

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Analysis of Net Interest Income (Unaudited)

For the Six Months Ended June 30,

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

____________________

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

total interest-earning assets are net of unearned income.  Securities are included at amortized cost.

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

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

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

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

Provision for Loan Losses

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

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

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

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

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

Noninterest Income

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

23

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

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

Noninterest Expense

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

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

Income Tax Expense

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

Asset Quality

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

Risk elements include nonaccrual loans, past due and restructured loans, potential problem loans, loan concentrations and other real estate owned.  The following table shows the composition of nonperforming assets at the end of the last four quarters:

24

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

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

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

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

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

The Corporation maintains an allowance for loan losses at a level considered by management to be adequate to cover the probable incurred losses associated with its loan portfolio.  The Corporation’s policy with respect to the methodology for the determination of the allowance for loan losses involves a high degree of complexity and requires management to make difficult and subjective judgments,  The adequacy of the allowance for loan losses is based upon management’s evaluation of the known and inherent risks in the portfolio, consideration to the size and composition of the loan portfolio, actual loan loss experience, the level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions.

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

25

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

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

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

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

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

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

Capital Adequacy

The Corporation is subject to capital adequacy guidelines promulgated by the Board of Governors of the Federal Reserve System (“FRB”).  The Bank is subject to similar capital adequacy requirements imposed by the Federal Deposit Insurance Corporation.  The FRB has issued regulations to define the adequacy of capital based upon the sensitivity of assets and off-balance sheet exposures to risk factors.   Four categories of risk weights (0%, 20%, 50%, and 100%) were established to be applied to different types of balance sheet assets and off-balance sheet exposures.  The aggregate of the risk-weighted items (risk-based assets) is the denominator of the ratio, the numerator is risk-based capital.  Under the regulations, risk-based capital has been classified into two categories.  Tier 1 capital includes common and qualifying perpetual preferred stockholders’ equity less goodwill.  Tier 2 capital includes mandatory convertible debt, allowance for loan losses, subject to certain limitations, and certain subordinated and term debt securities.  Total qualifying capital consists of Tier 1 capital and Tier 2 capital; however; the amount of Tier 2 capital may not exceed the amount of Tier 1 capital.  At June 30, 2010, the minimum risk-based capital requirements to be considered adequately capitalized were 4% for Tier 1 capital and 8% for total capital.

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Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures.  The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (non risk-adjusted) for the preceding quarter.  At June 30, 2010 the minimum leverage ratio requirement to be considered well capitalized was 4%.  The following table reflects the Corporation’s capital ratios at June 30, 2010.

	Required			Actual			Excess
Leverage Ratio		4.00	%		8.77	%		4.77	%
Risk-based Capital
Tier 1		4.00	%		11.81	%		7.81	%
Total		8.00	%		13.07	%		5.07	%

Liquidity and Capital Resources

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

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

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

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

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

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ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

ITEM 4T.  Controls and Procedures

(a) Evaluation of internal controls and procedures

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

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

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

(c) Changes in Internal Controls over Financial Reporting

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

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Stewardship Financial Corporation

Part II -- Other Information

Item 6. Exhibits

See Exhibit Index following this report.

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SIGNATURES

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

	Stewardship Financial Corporation
Date:    August 16, 2010		By:	/s/ Paul Van Ostenbridge
		Paul Van Ostenbridge
		President and Chief Executive Officer
		(Principal Executive Officer)
Date:    August 16, 2010		By:	/s/ Claire M. Chadwick
		Claire M. Chadwick
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Exhibits
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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