This Quarterly Report on Form 10-Q contains certain "forward looking statements" with respect to Stewardship Financial Corporation (the "Corporation") within the meaning of the Private Securities Litigation Reform Act of 1995, which forward looking statements 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", "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 conformity with U.S. generally accepted accounting principles ("GAAP"). 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, 2011 included in the 2011 Annual 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 adverse economic changes. 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 $3.2 million to $712.0 million at March 31, 2012 from $708.8 million at December 31, 2011. Cash and cash equivalents increased $10.5 million to $24.2 million at March 31, 2012 from $13.7 million at December 31, 2011, reflecting deposit growth. Securities available for sale increased $4.2 million to $175.1 million while securities held to maturity decreased $2.0 million to $36.4 million. Net loans decreased $4.2 million from $444.8 million at December 31, 2011 to $440.6 million at March 31, 2012. Increases due to new loans originated were more than offset by regular principal payments and payoffs in the first quarter loan as well as a $1.5 million net increase in the allowance for loan losses. Loans held for sale totaled $4.7 million at March 31, 2012, a decrease from $1.4 million at December 31, 2011. Other real estate owned (OREO) declined $1.4 million primarily reflecting sales of properties partially offset by the foreclosure on another property.

Deposits totaled $602.1 million at March 31, 2012, an increase of $8.5 million from $593.6 million at December 31, 2011. The growth in deposits consisted of a $2.8 million increase in noninterest-bearing accounts and a $5.7 million increase in interest-bearing accounts.

FHLB - NY advances were $28.0 million at March 31, 2012 compared to $32.7 million at December 31, 2011. The decrease in these borrowings was the result of an increase in deposits which was used to pay down maturing advances.

Results of Operations

General

The Corporation reported net income of $776,000, or $0.12 diluted earnings per common share for the three months ended March 31, 2012, compared to $483,000, or $0.06 diluted earnings per common share for the comparable prior year period.

Net Interest Income

Net interest income for the three months ended March 31, 2012 was $6.1 million compared to $5.9 million recorded in the prior year period. The increase in the current year is primarily due to an increase in average interest earning assets and a decline in the cost of interest bearing liabilities partially offset by a decline in the yield on interest-earning assets. The net interest rate spread and net yield on interest earning assets for the three months ended March 31, 2012 were 3.48% and 3.71%, respectively, compared to 3.59% and 3.84% for the three months ended March 31, 2012. The net interest rate spread and net yield on interest earning assets for the current year period reflects a decline in loan interest rates and yields on securities as well as a decline in the interest rates on deposits. The Corporation continues in its efforts to proactively manage deposit costs in an effort to mitigate the lower asset yields earned. The reduced yields on assets reflect both the elevated level of nonperforming loans as well as the historically low market rates in the current environment.

The following table reflects the components of the Corporation's net interest income for the three months ended March 31, 2012 and 2011 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.

Analysis of Net Interest Income (Unaudited)
   For the Three Months Ended March 31,




                                                                  2012                                       2011
                                                                               Average                                    Average
                                                                Interest        Rates                      Interest        Rates
                                                  Average       Income/        Earned/       Average       Income/        Earned/
                                                  Balance       Expense         Paid         Balance       Expense         Paid
                                                         (Dollars in thousands)                     (Dollars in thousands)

Assets

Interest-earning assets:
Loans (1) (2)                                    $ 460,066     $    6,270          5.47 %   $ 456,285     $    6,451          5.73 %
Taxable investment securities (1)                  174,996            979          2.24       155,127          1,060          2.77
Tax-exempt investment securities (1) (2)            33,190            402          4.86        31,030            396          5.18
Other interest-earning assets                        1,513              7          1.86           592              8          7.89
Total interest-earning assets                      669,765          7,658          4.59       643,034          7,915          4.99

Non-interest-earning assets:
Allowance for loan losses                          (12,109 )                                   (8,777 )
Other assets                                        52,461                                     51,857
Total assets                                     $ 710,117                                  $ 686,114


Liabilities and Stockholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits                 $ 253,978     $      314          0.50 %   $ 249,366     $      476          0.77 %
Savings deposits                                    58,499             29          0.21        48,369             31          0.26
Time deposits                                      166,971            640          1.54       175,300            782          1.81
Repurchase agreements                               14,342            183          5.09        14,643            181          5.01
FHLB-NY borrowing                                   30,142            173          2.30        35,268            232          2.67
Subordinated debenture                               7,217            126          7.00         7,217            124          6.97
Total interest-bearing liabilities                 531,149          1,465          1.11       530,163          1,826          1.40
Non-interest-bearing liabilities:
Demand deposits                                    117,704                                    100,315
Other liabilities                                    2,830                                      3,125
Stockholders' equity                                58,434                                     52,511
Total liabilities and stockholders' equity       $ 710,117                                  $ 686,114

Net interest income (taxable equivalent basis)                      6,193                                      6,089
Tax Equivalent adjustment                                            (142 )                                     (140 )
Net interest income                                            $    6,051                                 $    5,949

Net interest spread (taxable equivalent basis)                                     3.48 %                                     3.59 %

Net yield on interest-earning
  assets (taxable equivalent basis) (3)                                            3.71 %                                     3.84 %

(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.

For the three months ended March 31, 2012, total interest income, on a tax equivalent basis, decreased $257,000 to $7.658 million, or 3.3%, when compared to the same prior year period. The decrease was due to a decrease in yields on interest-earning assets partially offset by an increase in the average balance of interest-earning assets. The average rate earned on interest-earning assets decreased 40 basis points from 4.99% for the three months ended March 31, 2011 to 4.59% in the current year period. The decline in the asset yield reflects the effect of a prolonged low interest rate environment as well as the impact of nonaccrual loans. Average interest-earning assets increased $26.7 million for the three months ended March 31, 2012, or 4.2%, when compared to the prior year period with average investment securities increasing $22.0 million. Average loans increased $3.8 million to an average of $460.1 million for the three months ended March 31, 2012 from an average of $456.3 million for the comparable period in 2011.

Interest paid on deposits and borrowed money decreased $361,000 to $1.465 million, or 19.8%, for the three months ended March 31, 2012 compared to the same period for 2011. The decline is due to general decreases in rates paid on deposits and borrowings, partially offset by increases in average interest-bearing liabilities. For the three months ended March 31, 2012, the total cost for interest-bearing liabilities declined to 1.11% representing a 29 basis point decline when compared to the same prior year period. The average balance of total interest-bearing deposits and borrowings increased only $986,000 for the three months ended March 31, 2012 from the comparable 2011 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 current estimates.

The loan loss provision totaled $1.765 million for the three months ended March 31, 2012 compared to $1.675 million for the three months ended March 31, 2011. Nonaccrual loans of $26.8 million at March 31, 2012 reflected a slight decrease from $27.7 million of nonaccrual loans at December 31, 2011. The allowance for loan losses related to the impaired loans increased from $3.1 million at December 31, 2011 to $4.2 million at March 31, 2012. During the three months ended March 31, 2012, the Corporation charged off $294,000 of loan balances and recovered $22,000 in previously charged off loans compared to $303,000 and $12,000, respectively, during the same period in 2011.

The current period loan loss provision primarily 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 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 below for a summary of the allowance for loan losses and nonperforming assets.

Noninterest Income

Noninterest income was $1.6 million for the three months ended March 31, 2012 compared to $1.1 million for the prior year period. The increase is primarily due to $433,000 from gains on calls and sales of securities for the three months ended March 31, 2012. There were no such gains in the prior year period.

Noninterest Expense

Noninterest expenses for the three months ended March 31, 2012 increased slightly to $4.8 million compared to $4.7 million in the comparable prior year period. The increase in noninterest expenses reflects higher salary and employee benefits expense, partially associated with the management of nonperforming assets. Partially offsetting these expense increases is a decrease in the FDIC insurance premiums reflecting the second quarter 2011 change in the quarterly assessment base.

Income Tax Expense

Income tax expense totaled $306,000 for the three months ended March 31, 2012 compared to an income tax expense of $191,000 for the three months ended March 31, 2011. The effective tax rate was 28.3% for both the three months ended March 31, 2012 and 2011.

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 borrowers' 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:

                                                   March 31,       December 31,       September 30,      June 30,
                                                     2012              2011               2011             2011

Nonaccrual loans (1)                              $    26,823     $       27,736     $        24,422     $  23,834
Loans past due 90 days or more and accruing (2)             -                  -               2,589         2,342
Total nonperforming loans                              26,823             27,736              27,011        26,176

Other real estate owned                                 3,840              5,288                 434           275
Total nonperforming assets                        $    30,663     $       33,024     $        27,445     $  26,451

Performing restructured loans (3)                 $     5,847     $        5,979     $         7,339     $   3,527

Allowance for loan losses                         $    13,097     $       11,604     $        12,389     $  11,230

Nonperforming loans to total gross loans                 5.91 %             6.08 %              5.87 %        5.59 %
Nonperforming assets to total assets                     4.31 %             4.66 %              3.89 %        3.78 %
Allowance for loan losses to total gross loans           2.89 %             2.54 %              2.69 %        2.40 %
Allowance for loan losses to
nonperforming loans                                     48.83 %            41.84 %             45.87 %       42.90 %

(1) Generally represents loans as to which the payment of principal or interest is 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 as to which payment of principal or interest is 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.

(3) Any restructured loans that are on nonaccrual status are only reported in nonaccrual loans and not also in restructured loans.

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. All delinquent loans continue to be reviewed by management.

At March 31, 2012, the nonaccrual loans were comprised of 94 loans, primarily commercial real estate loans, commercial loans and construction loans. While the Corporation maintains strong underwriting requirements, the 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 in accordance with applicable guidance and cautious review, management has continued to keep these loans on nonaccrual.

Since December 31, 2011, nonaccrual loans have decreased $913,000 to $26.8 million at the end of the most recent quarter. The decrease primarily represents payments being received on nonaccrual loans. The ratio of allowance for loan losses to nonperforming loans increased to 48.83% at March 31, 2012 from 41.84% at December 31, 2011. The ratio of allowance for loan losses to nonperforming loans is reflective of detailed analysis and the probable incurred losses we have identified with these nonperforming loans. This metric reflects both the effect of an increase in the allowance for loan losses and the decrease in nonaccrual loans.

Evaluation of all nonperforming loans includes the updating of appraisals and specific evaluation of such loans to determine estimated cash flows from business and/or collateral. 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 remained elevated, we have recorded appropriate chargeoffs and the underlying collateral coverage for a considerable portion of the nonperforming loans currently supports the significant collection of our remaining principal.

For loans not included in nonperforming loans, at March 31, 2012, the level of loans past due 30-89 days was $8.3 million compared to $1.0 million at December 31, 2011. While many of the loans that were past due 30-89 days at March 31, 2012 have made their payment, 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.

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 the loan portfolio, current economic conditions and management's judgment.

Primarily as a result of the continuing higher level of nonperforming loans, the Corporation recorded an elevated provision for loan losses. For the three months ended March 31, 2012, the provision for loan losses was $1.765 million compared to $1.675 million for the three months ended March 31 2011. The total allowance for loan losses increased to 2.89% of total loans from a comparable ratio of 2.54% at December 31, 2011.

At March 31, 2012 and December 31, 2011, the Corporation had $15.0 million and $15.1 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $5.8 million and $6.0 million were performing in accordance with their new terms at March 31, 2012 and December 31, 2011, respectively. The remaining troubled debt restructures are reported as nonaccrual loans. Specific reserves of $1.6 million and $1.2 million were allocated for the troubled debt restructurings at March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012, the Corporation has committed $296,000 of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring. As of December 31, 2011, the Corporation had committed to $416,000 of additional funds committed on outstanding loans that were classified as troubled debt restructurings.

Included in performing restructured loans at both March 31, 2012 and December 31, 2011 is a loan for $2.3 million for which the estate of our borrower was provided with a forbearance to allow time to market for sale the underlying commercial real estate collateral. There is a signed contract for the sale of the property and upon closing of the sale transaction, the Corporation should collect all outstanding principal and accrued interest owed under the loan.

The balance in performing restructured loans also includes two loans to a related borrower for $1.1 million at both March 31, 2012 and December 31, 2011. While these loans are current under their restructured terms, because of the below market rate of interest, these loans will continue to be reflected as restructured loans in accordance with accounting practices.

When it is confirmed that some portion or all of a loan balance will not be collected, that amount is charged off as a loss against the allowance for loan losses. For the three months ended March 31, 2012, net chargeoffs were $272,000. while many of the nonaccrual loans continue to make normal monthly payments, chargeoffs result from the borrowers' inability to provide adequate . . .