10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2012

OR

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

For the transition period from __________ to ___________

Commission file number 1-33377

Stewardship Financial Corporation

(Exact name of registrant as specified in its charter)

New Jersey	22-3351447
(State of other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)
630 Godwin Avenue, Midland Park, NJ	07432
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: Common Stock, no par value

Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o          No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o          No ý

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

Yes ý          No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý          No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the 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	Smaller reporting company	ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2012 was $21,378,000. As of March 22, 2013, 5,933,028 shares of the registrant’s common stock, net of treasury stock, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the registrant's definitive proxy statement for the registrant's 2013 Annual Meeting of Shareholders.

FORM 10-K

STEWARDSHIP FINANCIAL CORPORATION

For the Year Ended December 31, 2012

Table of Contents

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	9
Item 2.	Properties	10
Item 3.	Legal Proceedings	11
Item 4.	Mine Safety Disclosures	11
PART II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6.	Selected Financial Data	13
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 8.	Financial Statements and Supplementary Data	35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Item 9B.	Other Information	80
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	81
Item 11.	Executive Compensation	81
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	81
Item 13.	Certain Relationships and Related Transactions, and Director Independence	82
Item 14.	Principal Accounting Fees and Services	82
PART IV
Item 15.	Exhibits and Financial Statement Schedules	82
	Signatures

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K may contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Stewardship Financial Corporation (the “Corporation”). Such statements are not historical facts and may involve risks and uncertainties. Such statements include expressions about the Corporation’s confidence, strategies and expectations about earnings, new and existing programs and products, relationships, opportunities, technology and market conditions and are based on current beliefs and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. These statements may be identified by forward-looking terminology such as “expect,” “believe,” or “anticipate,” or expressions of confidence like “strong,” or “on-going,” or similar statements or variations of such terms. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities:

§ impairment charges with respect to securities,

§ unanticipated costs in connection with new branch openings,

§ further deterioration of the economy,

§ acts of war, acts of terrorism and natural disasters,

§ decline in commercial and residential real estate values,

§ unexpected changes in interest rates,

§ inability to manage growth in commercial loans,

§ unexpected loan prepayment volume,

§ unanticipated exposure to credit risks,

§ insufficient allowance for loan losses,

§ competition from other financial institutions,

§ adverse effects of government regulation or different than anticipated effects from existing regulations,

§ passage by Congress of a law which unilaterally amends the terms of the Treasury’s investment in us in a way that adversely affects us,

§ a decline in the levels of loan quality and origination volume,

§ a decline in deposits, and

§ other unexpected events.

The Corporation undertakes no obligation to update or revise any forward-looking statements in the future.

Part I

Item 1. Business

General

Stewardship Financial Corporation (the “Corporation” or the “Registrant”) is a one-bank holding company, which was incorporated under the laws of the State of New Jersey in January 1995 to serve as a holding company for Atlantic Stewardship Bank (the “Bank”). The Corporation was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock of the Bank (the “Acquisition”). Pursuant to the New Jersey Banking Act of 1948, as amended (the “New Jersey Banking Act”), and pursuant to approval of the shareholders of the Bank, the Corporation acquired the Bank and became its holding company on November 22, 1996. As part of the Acquisition, shareholders of the Bank received one share of common stock, no par value of the Corporation (“Common Stock”), for each outstanding share of the common stock of the Bank held. The only significant activity of the Corporation is ownership and supervision of the Bank.

The Bank is a commercial bank formed under the laws of the State of New Jersey on April 26, 1984. Throughout 2012 the Bank operated from its main office at 630 Godwin Avenue, Midland Park, New Jersey, and its twelve branches located in the State of New Jersey.

The Corporation is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”). The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable limits. The operations of the Corporation and the Bank are subject to the supervision and regulation of the FRB, the FDIC and the New Jersey Department of Banking and Insurance (the “Department”).

Stewardship Investment Corp. is a wholly-owned, non-bank subsidiary of the Bank, whose primary business is to own and manage an investment portfolio. Stewardship Realty, LLC is a wholly-owned, non-bank subsidiary of the Bank, whose primary business is to own and manage property at 612 Godwin Avenue, Midland Park, New Jersey. Atlantic Stewardship Insurance Company, LLC is a wholly-owned, non-bank subsidiary of the Bank, whose primary business is insurance. The Bank also has several other wholly-owned, non-bank subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. In addition to the Bank, in 2003, the Corporation formed, Stewardship Statutory Trust I, a wholly-owned, non-bank subsidiary for the purpose of issuing trust preferred securities.

The principal executive offices of the Corporation are located at 630 Godwin Avenue, Midland Park, New Jersey 07432. Our telephone number is (201) 444-7100 and our website address is http://www.asbnow.com.

Business of the Corporation

The Corporation’s primary business is the ownership and supervision of the Bank. The Corporation, through the Bank, conducts a traditional commercial banking business, and offers services including personal and business checking accounts and time deposits, money market accounts and regular savings accounts. The Corporation structures the Bank’s specific products and services in a manner designed to attract the business of the small and medium-sized business and professional community as well as that of individuals residing, working and shopping in Bergen, Morris and Passaic counties, New Jersey. The Corporation engages in a wide range of lending activities and offers commercial, consumer, residential real estate, home equity and personal loans.

In addition, in forming the Bank, the members of the Board of Directors envisioned a community-based institution which would serve the local communities surrounding its branches, while also providing a return to its shareholders. This vision has been reflected in the Bank’s tithing policy, under which the Bank tithes 10% of its pre-tax profits to worthy Christian and civic organizations in the communities where the Bank maintains branches.

Service Area

The Bank’s service area primarily consists of Bergen, Morris and Passaic counties in New Jersey, although the Corporation makes loans throughout New Jersey. Throughout 2012, the Bank operated from its main office in Midland Park, New Jersey and twelve existing branch offices in Hawthorne (2), Ridgewood, Montville, North Haledon, Pequannock, Waldwick, Wayne (3), Westwood and Wyckoff, New Jersey.

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Recent Developments

On October 3, 2008, in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Department of the Treasury (the “Treasury”) was given the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the Treasury announced that it would purchase equity stakes, in the form of preferred stock, in a wide variety of banks and thrifts under a program, known as the Capital Purchase Program (the “CPP”) under the Troubled Assets Relief Program (“TARP”), from the $700 billion authorized by the EESA. Although we believed that our capital position was sound, we concluded that the CPP would allow us to raise additional capital on favorable terms in comparison with other available alternatives. Accordingly, on January 30, 2009, the Treasury purchased 10,000 shares of cumulative perpetual preferred stock of the Corporation with a liquidation value of $1,000 per share (the “Series A Preferred Shares”) and a ten-year warrant to purchase up to 127,119 shares of our Common Stock at an exercise price of $11.80 per share (the “Warrant”) under the TARP CPP for an aggregate purchase price of $10 million in cash. The Warrant was subsequently adjusted to apply to 133,475 shares of our Common Stock with an exercise price of $11.24 per share to reflect the 5% stock dividend paid in November 2009. The terms of the Series A Preferred Shares issued to the Treasury provided for a dividend of 5% for the first five years and 9% thereafter.

Subsequently, the Corporation elected to repurchase the Series A Preferred Shares through participation in the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. Accordingly, on September 1, 2011, the Treasury purchased 15,000 shares of the Corporation’s Senior Non-Cumulative Perpetual Preferred Stock, Series B stock (the “Series B Preferred Shares”), having a liquidation preference of $1,000 per share for an aggregate purchase price of $15 million in cash.

The terms of the newly-established Series B Preferred Shares impose restrictions on the Corporation’s ability to declare or pay dividends or purchase, redeem or otherwise acquire for consideration, shares of our Common Stock and any class or series of stock of the Corporation the terms of which do not expressly provide that such class or series will rank senior or junior to the Series B Preferred Shares as to dividend rights and/or rights on liquidation, dissolution or winding up of the Corporation. Specifically, the terms provide for the payment of a non-cumulative quarterly dividend, payable in arrears, which the Corporation accrues as earned over the period that the Series B Preferred Shares are outstanding. The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement) from 1% to 5% per annum and, thereafter, for the eleventh through the first half of the nineteenth dividend periods, from 1% to 7%. In general, the dividend rate decreases as the level of the Bank’s QSBL increases. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%. During 2012, the dividend rate ranged between 1% and 3.39%. Such dividends are not cumulative but the Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level.

In addition, the Series B Preferred Shares are non-voting except in limited circumstances and, in the event that the Company has not timely declared and paid dividends on the Series B Preferred Shares for six dividend periods or more, whether or not consecutive, and shares of Series B Preferred Stock with an aggregate liquidation preference of at least $25 million are still outstanding, the Treasury may designate two additional directors to be elected to the Company’s Board of Directors. Subject to the approval of the Bank’s federal banking regulator, the Federal Reserve, the Corporation may redeem the Series B Preferred Shares at any time at the Corporation’s option, at a redemption price equal to the liquidation preference per share plus the per share amount of any unpaid dividends for the then-current period through the date of the redemption. The Series B Preferred Shares are includable in Tier I capital for regulatory capital.

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Using the proceeds of the issuance of the Series B Preferred Shares, the Corporation simultaneously repurchased all 10,000 shares of the Series A Preferred Shares previously issued under the TARP CPP for an aggregate purchase price of $10,022,222, in cash, including accrued but unpaid dividends through the date of repurchase. Thereafter, on October 26, 2011, the Corporation completed the repurchase of the Warrant held by the Treasury for an aggregate purchase price of $107,398, in cash.

Competition

The Bank competes for deposits and loans with commercial banks, thrifts and other financial institutions, many of which have greater financial resources than the Bank. Many large financial institutions in New York City and other parts of New Jersey compete for the business of New Jersey residents and companies located in the Bank’s service area. Certain of these institutions have significantly higher lending limits than the Bank and provide services to their customers that the Bank does not offer.

Management believes the Bank is able to compete on a substantially equal basis with its competitors because it provides responsive, personalized services through management’s knowledge and awareness of the Bank’s service area, customers and business.

Employees

At December 31, 2012, the Corporation employed 122 full-time employees and 37 part-time employees. None of these employees is covered by a collective bargaining agreement and the Corporation believes that its employee relations are good.

Supervision and Regulation

General

Bank holding companies and banks are extensively regulated under both federal and state law. These laws and regulations are intended to protect depositors, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions and is not intended to be an exhaustive description of the statutes or regulations applicable to the Corporation’s business. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Corporation and the Bank.

Dodd-Frank Act

On July 21, 2010, financial regulatory reform legislation entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act imposes extensive changes across the financial regulatory landscape, including provisions that, among other things, have:

· centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws;

· applied to most bank holding companies, the same leverage and risk-based capital requirements applicable to insured depository institutions. The Corporation’s existing trust preferred securities will continue to be treated as Tier 1 capital;

· changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible equity, eliminated the ceiling on the size of the Deposit Insurance Fund (“DIF”) and increased the floor on the size of the DIF, which generally requires an increase in the level of assessments for institutions with assets in excess of $10 billion;

· implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions;

· made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of the Securities Investor Protection Corporation protection from $100,000 to $250,000 and provided unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions;

· repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts; and

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· restricted the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater.

Additional aspects of the Dodd-Frank Act are subject to implementation through rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Corporation, the Bank and its customers or the financial industry in general. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues that those deposits may generate.

Regulation of the Corporation

BANK HOLDING COMPANY ACT. As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), the Corporation is subject to the regulation and supervision of the FRB. The Corporation is required to file with the FRB annual reports and other information showing that its business operations and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the FRB determines to be so closely related to banking or managing or controlling banks as to be properly incident thereto.

The BHCA requires, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire all or substantially all of the assets of any other bank, (ii) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank (unless it owns a majority of such bank’s voting shares), or (iii) merge or consolidate with any other bank holding company. The FRB will not approve any merger, acquisition, or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served.

Additionally, the BHCA prohibits, with certain limited exceptions, a bank holding company from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries; unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefits to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.

The BHCA prohibits depository institutions whose deposits are insured by the FDIC and bank holding companies, among others, from transferring and sponsoring and investing in private equity funds and hedge funds.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default. Under a policy of the FRB with respect to bank holding company operations, a bank holding company is required to commit resources to support such institutions in circumstances where it might not do so absent such a policy. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The FRB has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

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The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $500 million or more. The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be “Tier I” capital, consisting of common shareholders’ equity and certain preferred stock, less certain goodwill items and other intangible assets. The remainder, “Tier II Capital,” may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt. Total capital is the sum of Tier I and Tier II capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FRB (determined on a case-by-case basis or as a matter of policy after formal rule-making).

Bank holding company assets are given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property which carry a 50% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing nonfinancial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% risk-weighting. Short-term commercial letters of credit have a 20% risk-weighting and certain short-term unconditionally cancelable commitments have a 0% risk-weighting.

In addition to the risk-based capital guidelines, the FRB has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum.

Regulation of the Bank

As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the Department. As an FDIC-insured institution, the Bank is also subject to regulation, supervision and control by the FDIC, an agency of the federal government. The regulations of the FDIC and the Department impact virtually all activities of the Bank, including the minimum level of capital the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions, and various other matters.

INSURANCE OF DEPOSITS. Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The Dodd-Frank Act permanently raised the standard maximum deposit insurance amount to $250,000. On November 9, 2010, the FDIC Board of Directors issued a final rule to implement the Dodd-Frank Act that provides temporary unlimited deposit insurance coverage for non-interest bearing accounts from December 31, 2010, through December 31, 2012. This temporary unlimited coverage was in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC's general deposit insurance rules.

The FDIC redefined its deposit insurance premium assessment base to be an institution’s average consolidated total assets minus average tangible equity as required by the Dodd-Frank Act and revised deposit insurance assessment rate schedules in light of the changes to the assessment base. The rate schedule and other revisions to the assessment rules, which were adopted by the FDIC Board of Directors on February 7, 2011, become effective April 1, 2011 and were first used to calculate the June 30, 2011 assessment. As of December 31, 2012, the Bank’s assessment rate averaged $0.09 per $100 in assessable assets minus average tangible equity.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation (“FICO”) issued in connection with the failure of certain savings and loan associations. This payment is established quarterly and averaged 0.66% and 0.84% for the years ended December 31, 2012 and 2011, respectively. The Corporation paid $42,000 and $50,000 under this assessment for the years ended December 31, 2012 and 2011, respectively. These assessments will continue until the FICO bonds mature in 2017.

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The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. Since 2008, there have been higher levels of bank failures which has dramatically increased resolution costs of the FDIC and depleted the DIF. In order to maintain a strong funding position and restore reserve ratios of the DIF, the FDIC has increased assessment rates of insured institutions and may continue to do so in the future. On November 12, 2009, the FDIC adopted a requirement for institutions to prepay their estimated quarterly insurance premium for the fourth quarter of 2009 and all of 2010, 2011 and 2012. The Bank prepaid $3.2 million of such premium on December 30, 2009. At December 31, 2012 and 2011 the prepaid premium was $1.0 million and $1.6 million, respectively.

Capital Adequacy Guidelines FOR BANKS. Similar to the FRB, the FDIC has promulgated risk-based capital guidelines for banks that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. These guidelines are substantially the same as those put in place by the FRB for bank holding companies.

DIVIDEND RIGHTS. Under the New Jersey Banking Act, a bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank’s surplus.

USA PATRIOT ACT OF 2001 (the “Patriot Act”). On October 26, 2001, the Patriot Act was signed into law. Enacted in response to the terrorist attacks in New York, Pennsylvania, and Washington, D.C. on September 11, 2001, the Patriot Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including, but not limited to: (a) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (b) standards for verifying customer identification at account opening; (c) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (d) reports of nonfinancial trades and business filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (e) filing of suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

Regulations promulgated under the Patriot Act impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. Failure of a financial institution to comply with the Patriot Act’s requirements could have serious legal consequences for the institution and adversely affect its reputation.

Item 1A. Risk Factors

Investments in the Common Stock of Stewardship Financial Corporation involve risk. The following discussion highlights the risks management believes are material for our Corporation, but does not necessarily include all risks that we may face.

Our operations are subject to interest rate risk and changes in interest rates may negatively affect financial performance.

Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed money. To be profitable we must earn more interest from our interest-earning assets than we pay on our interest-bearing liabilities. Changes in the general level of interest rates may have an adverse effect on our business, financial condition and results of operations. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of governmental and regulatory agencies such as the Federal Reserve Bank. Changes in monetary policy and interest rates can also adversely affect our ability to originate loans and deposits, the fair value of financial assets and liabilities and the average duration of our assets and liabilities.

Our allowance for loan losses may be insufficient.

There are inherent risks associated with our lending activities. There are risks inherent in making any loan, including dealing with individual borrowers, nonpayment, uncertainties as to the future value of collateral and changes in economic and industry conditions. We attempt to mitigate and manage credit risk through prudent loan underwriting and approval procedures, monitoring of loan concentrations and periodic independent review of outstanding loans. We cannot be assured that these procedures will reduce credit risk inherent in the business.

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We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and assets serving as collateral for loan repayments. In determining the size of our allowance for loan loss, we rely on our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover probable incurred loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our portfolio. Significant additions to our allowance for loan losses would materially decrease our net income.

A continuing economic recession and struggling financial markets have adversely affected our industry and, because of our geographic concentration in northern New Jersey, we could be impacted by adverse changes in local economic conditions.

Our success depends on the general economic conditions of the nation, the State of New Jersey, and the northern New Jersey area. The nation’s current economic environment and the related struggling financial markets have severely adversely affected the banking industry and may adversely affect our business, financial condition, results of operations and stock price. We believe recovery will continue to be slow and do not believe these difficult economic conditions are likely to improve dramatically in the near term. Unlike larger banks that are more geographically diversified, we provide financial services to customers primarily in the market areas in which we operate. The local economic conditions of these areas have a significant impact on our commercial, real estate and construction loans, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. While we did not and do not have a sub-prime lending program, any further significant decline in the real estate market in our primary market area would hurt our business and mean that collateral for our loans would have less value. As a consequence, our ability to recover on defaulted loans by selling the real estate securing the loan would be diminished and we would be more likely to suffer losses on defaulted loans. Any of the foregoing events and conditions could have a material adverse effect on our business, results of operations and financial condition.

Competition within the financial services industry could adversely affect our profitability.

We face strong competition from banks, other financial institutions, money market mutual funds and brokerage firms within the New York metropolitan area. A number of these entities have substantially greater resources and lending limits, larger branch systems and a wider array of banking services. Competition among depository institutions for customer deposits has increased significantly in the current continuing difficult economic situation. If we are unsuccessful in competing effectively, we will lose market share and may suffer a reduction in our margins and suffer adverse consequences to our business, results of operations and financial condition.

Federal and State regulations could restrict our business and increase our costs and non-compliance would result in penalties, litigation and damage to our reputation.

We operate in a highly regulated environment and are subject to extensive regulation, supervision, and examination by the FDIC, the FRB and the State of New Jersey. The significant federal and state banking regulations that we are subject to are described herein under “Item 1. Business.” Such regulation and supervision of the activities in which bank and bank holding companies may engage is primarily intended for the protection of the depositors and the federal deposit insurance funds. These regulations affect our lending practices, capital structure, investment practices, dividend policy and overall operations. These statutes, regulations, regulatory policies, and interpretations of policies and regulations are constantly evolving and may change significantly over time. Any such changes could subject the Corporation to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Due to our nation’s current economic situation and a low level of confidence in the financial markets, new federal and/or state laws and regulations of lending and funding practices and liquidity standards continue to be implemented. Bank regulatory agencies are being very aggressive in responding to concerns and trends identified in bank examinations with respect to bank capital requirements. Any increased government oversight, including the full implementation of the Dodd-Frank Act, may increase our costs and limit our business opportunities. Our failure to comply with laws, regulations or policies applicable to our business could result in sanctions against us by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurances that such violations will not occur.

7

A breach of our information systems through a security breach, computer virus or disruption of service or a compliance breach by one of our vendors could negatively affect our reputation and business.

We rely heavily upon a variety of computing platforms and networks over the Internet for the purpose of data processing, communication and information exchange and to conduct our business and provide our customers with the ability to bank online. Despite the safeguards instituted by management, our systems are susceptible to a breach of security through unauthorized access, phishing schemes, computer viruses and other security problems. In addition, we rely on the service of a variety of third-party vendors to meet our processing needs. If confidential information is compromised, we could be exposed to claims, litigation, financial losses, costs and damages. Such damages could materially affect our earnings. In addition, any failure, interruption or breach in security could also result in failures or disruptions in our general ledger, deposit, loan and other systems and could subject us to additional regulatory scrutiny. In addition, the negative affect on our reputation could affect our ability to deliver products and services successfully to new and existing customers.

The trading volume of our stock remains low which could impact stock prices.

The trading history of our Common Stock has been characterized by relatively low trading volume. The value of a shareholder’s investment may be subject to decreases due to the volatility of the price of our Common Stock which trades on the Nasdaq Capital Market.

The market price of our Common Stock may be volatile and subject to fluctuations in response to numerous factors, including, but not limited to, the factors discussed in the other risk factors and the following:

· actual or anticipated fluctuation in operating results;

· press releases, publicity, or announcements;

· changes in expectation of our future financial performance;

· future sales of our Common Stock; and

· other developments affecting us or our competitors.

These factors may adversely affect the trading price of our Common Stock, regardless of our actual operating performance, and could prevent a shareholder from selling Common Stock at or above the current market price.

Because of our participation in the Treasury’s Small Business Lending Fund, the Corporation is subject to certain restrictions including limitations on the payment of dividends.

The Series B Preferred Shares issued in connection with our participation in the SBLF pay a non-cumulative quarterly dividend in arrears. Such dividends are not cumulative but the Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level. This restriction on declaring or paying dividends could negatively affect the value of our Common Stock.

Moreover, our ability to pay dividends is always subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Corporation’s earnings, capital requirements, financial condition and other factors considered relevant by the Corporation’s Board of Directors. Although we have historically paid cash dividends on our Common Stock, we are not required to do so and our Board of Directors could further reduce or eliminate our Common Stock dividend in the future.

If we are unable to redeem the Series B Preferred Shares issued to the Treasury in connection with our participation in the Treasury’s Small Business Lending Fund and Series B Preferred Shares remain outstanding for more than four and one half years, the cost of the capital received will increase.

The Series B Preferred Shares pay a non-cumulative quarterly dividend in arrears. As discussed elsewhere in this Form 10-K, the dividend rate can fluctuate from 1% to 5% per annum on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding. In addition, for the eleventh through the first half of the nineteenth dividend periods such dividend rate may vary from 1% to 7%. In the event that we are unable to redeem the Series B Preferred Shares and such shares remain outstanding for more than four and one-half years, the dividend rate will be fixed at 9%. This increase in the annual dividend rate on the Series B Preferred Shares could have a material adverse effect on our liquidity.

8

The Series B Preferred Shares issued to the Treasury in connection with our participation in the Treasury’s Small Business Lending Fund reduces our net income available to common shareholders and earnings per share of Common Stock.

As discussed elsewhere in the Form 10-K, the Series B Preferred Shares pay non-cumulative dividends at the rate of 1% to 5% per annum during the first ten quarters, based upon changes in the level of our QSBL over the base line level. Such dividend rate may vary from 1% to 5% per annum for the second through tenth dividend periods and from 1% to 7% for the eleventh through the first half of the nineteenth dividend periods, to reflect the amount of change in the Bank’s level of QBSL. The dividend rate for the initial dividend period was 1% and, during 2012, the dividend rate ranged between 1% and 3.39%. In the event that the Series B Preferred Shares remain outstanding for more than four and one-half years, the dividend rate will be fixed at 9%. Such dividends are not cumulative but the Corporation may only declare and pay dividends on our Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and will be subject to other restrictions on its ability to repurchase or redeem other securities. These dividends will reduce our net income and earnings per common share. The Series B Preferred Shares ranks senior to the Common Stock and, as such, will receive preferential treatment in the event of liquidation, dissolution or winding up of the Corporation.

External factors, many of which we cannot control, may result in liquidity concerns for us.

Liquidity risk is the potential that the Corporation will be unable to: meet its obligations as they come due; capitalize on growth opportunities as they arise; or pay regular dividends, because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is required to fund various obligations, including credit commitments to borrowers, loan originations, withdrawals by depositors, repayment of borrowings, operating expenses, capital expenditures and dividends to shareholders.

Liquidity is derived primarily from deposit growth and retention; principal and interest payments on loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a prolonged economic downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.

Item 1B. Unresolved Staff Comments

None.

9

Item 2. Properties

The Corporation conducts its business through its main office located at 630 Godwin Avenue, Midland Park, New Jersey and its twelve branch offices. The property located at 612 Godwin Avenue is intended to be used for future administrative offices. The property located at 121 Franklin Avenue is a remote drive-up location. The following table sets forth certain information regarding the Corporation’s properties as of December 31, 2012.

	Leased	Date of Lease
Location	or Owned	Expiration
612 Godwin Avenue	Owned	—
Midland Park, NJ
630 Godwin Avenue	Owned	—
Midland Park, NJ
386 Lafayette Avenue	Owned	—
Hawthorne, NJ
87 Berdan Avenue	Leased	06/30/14
Wayne, NJ
64 Franklin Turnpike	Owned	—
Waldwick, NJ
190 Franklin Avenue	Leased	09/30/17
Ridgewood, NJ
121 Franklin Avenue	Leased	01/31/15
Ridgewood, NJ
311 Valley Road	Leased	11/30/13
Wayne, NJ
249 Newark Pompton Turnpike	Owned	—
Pequannock, NJ
1111 Goffle Road	Leased	05/31/13
Hawthorne, NJ
400 Hamburg Turnpike	Leased	04/30/14
Wayne, NJ
2 Changebridge Road	Leased	06/30/15
Montville, NJ
378 Franklin Avenue	Leased	05/31/26
Wyckoff, NJ
200 Kinderkamack Road	Leased	05/30/26
Westwood, NJ
33 Sicomac Avenue	Leased	10/31/14
North Haledon, NJ

We believe that our properties are in good condition, well maintained and adequate for the present and anticipated needs of our business.

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Item 3. Legal Proceedings

The Corporation and the Bank are parties to or otherwise involved in legal proceedings arising in the normal course of business from time to time, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. Management does not believe that there is any pending or threatened proceeding against the Corporation or the Bank which, if determined adversely, would have a material effect on the business or financial position of the Corporation or the Bank.

Item 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Corporation’s Common Stock trades on the Nasdaq Capital Market under the symbol “SSFN”. As of March 22, 2013, there were approximately 1,000 shareholders of record of the Common Stock.

The following table sets forth the quarterly high and low sale prices of the Common Stock as reported on the Nasdaq Capital Market for the quarterly periods presented and cash dividends declared and paid in the quarterly periods presented. The prices below reflect inter-dealer prices, without retail markup, markdown or commissions, and may not represent actual transactions.

	Sales Price				Cash
	High		Low		Dividend
Year Ended December 31, 2012
Fourth quarter	$	4.84	$	3.40	$	0.02
Third quarter		5.25		4.07		0.04
Second quarter		5.35		4.22		0.04
First quarter		6.30		4.75		0.05

Year Ended December 31, 2011
Fourth quarter	$	6.50	$	4.70	$	0.05
Third quarter		7.00		4.51		0.05
Second quarter		7.40		4.71		0.05
First quarter		7.90		5.73		0.05

The Corporation may pay dividends as declared from time to time by the Corporation’s Board of Directors out of funds legally available therefore, subject to certain restrictions. Since dividends from the Bank are a major source of income for the Corporation, any restriction on the Bank’s ability to pay dividends will act as a restriction on the Corporation’s ability to pay dividends. Under the New Jersey Banking Act, the Bank may not pay a cash dividend unless, following the payment of such dividend, the capital stock of the Bank will be unimpaired and (i) the Bank will have a surplus of no less than 50% of its capital stock or (ii) the payment of such dividend will not reduce the surplus of the Bank. In addition, the Bank cannot pay dividends if doing so would reduce its capital below the regulatory imposed minimums.

Also, our ability to pay future cash dividends is subject to the terms of our Series B Preferred Stock issued in connection with the Corporation’s participation in the SBLF program which provide that we may only declare and pay dividends on our Common Stock if we have declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares.

During fiscal 2012, the Corporation paid quarterly cash dividends totaling $0.15 per share compared to quarterly cash dividends totaling $0.20 per share during fiscal 2011.

We did not repurchase any shares of our Common Stock during the fourth quarter of 2012.

11

STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total return on a hypothetical $100 investment made on December 31, 2007 in: (a) Stewardship Financial Corporation’s common stock; (b) NASDAQ Composite; (c) NASDAQ Bank; and (d) Peer Group 2012. The Peer Group 2012 index consists of New Jersey-based commercial banks with total asset size and operating performance comparable with the Corporation. The Peer Group 2012 index consists of the following companies: 1st Colonial Bancorp, Inc., 1st Constitution Bancorp, Bancorp of New Jersey, Inc., BCB Bancorp, Inc., Center Bancorp, Inc., Community Partners Bancorp, Parke Bancorp, Inc., Somerset Hills Bancorp, Sussex Bancorp, and Unity Bancorp, Inc. The information provided is not necessarily indicative of the Corporation’s future performance.

STEWARDSHIP FINANCIAL CORPORATION

	Period Ending
Index		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11		12/31/12
Stewardship Financial Corporation		$	100.00	$	81.47	$	75.06	$	53.16	$	50.71	$	39.33
NASDAQ Composite		$	100.00	$	60.02	$	87.24	$	103.08	$	102.26	$	120.42
NASDAQ Bank		$	100.00	$	78.46	$	65.67	$	74.97	$	67.10	$	79.64
Peer Group 2012		$	100.00	$	56.08	$	55.12	$	65.75	$	64.95	$	76.49

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Item 6. Selected Financial Data

The following selected consolidated financial data of the Corporation is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, including notes, thereto, included elsewhere in this document.

STEWARDSHIP FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED

FINANCIAL SUMMARY OF SELECTED FINANCIAL DATA

	December 31,
	2012			2011			2010			2009			2008
	(Dollars in thousands, except per share amounts)
Earnings Summary:
Net interest income	$	23,532		$	24,610		$	24,206		$	23,345		$	22,303
Provision for loan losses		9,995			10,845			9,575			3,575			3,585
Net interest income after provision for loan losses		13,537			13,765			14,631			19,770			18,718
Noninterest income		6,389			5,170			4,387			3,133			4,217
Noninterest expense		19,653			18,666			17,950			17,790			17,986
Income before income tax expense (benefit)		273			269			1,068			5,113			4,949
Income tax expense (benefit)		(247	)		(415	)		(165	)		1,479			1,448
Net income		520			684			1,233			3,634			3,501
Dividends on preferred stock and accretion		352			558			550			504			—
Net income available to common shareholders	$	168		$	126		$	683		$	3,130		$	3,501
Common Share Data: (1)
Basic net income	$	0.03		$	0.02		$	0.12		$	0.54		$	0.60
Diluted net income		0.03			0.02			0.12			0.54			0.60
Cash dividends declared		0.15			0.20			0.28			0.36			0.34
Book value at year end		6.98			7.28			7.24			7.50			7.31
Average shares outstanding net of treasury stock		5,909			5,861			5,843			5,832			5,854
Shares outstanding at year end		5,925			5,883			5,846			5,835			5,854
Selected Consolidated Ratios:
Return on average assets		0.07	%		0.10	%		0.18	%		0.57	%		0.58	%
Return on average common shareholders' equity		0.39	%		0.29	%		1.55	%		7.25	%		8.34	%
Average shareholders' equity as a percentage of    average total assets		8.33	%		7.92	%		7.99	%		8.23	%		6.98	%
Leverage (Tier-I) capital (2)		9.09	%		8.86	%		8.58	%		9.22	%		8.01	%
Tier-I risk based capital (3)		13.63	%		12.65	%		12.20	%		11.99	%		10.50	%
Total risk based capital (3)		14.89	%		13.91	%		13.45	%		13.24	%		11.60	%
Allowance for loan loss to total loans		2.42	%		2.54	%		1.88	%		1.50	%		1.18	%
Nonperforming loans to total loans		4.14	%		6.08	%		4.98	%		4.36	%		1.04	%
Selected Year-end Balances:
Total assets	$	688,388		$	708,818		$	688,118		$	663,844		$	611,816
Total loans, net of allowance for loan loss		429,832			444,803			443,245			453,119			434,103
Total deposits		590,254			593,552			575,603			529,930			506,531
Shareholders' equity		56,346			57,792			52,132			53,511			42,796

(1) All share and per share amounts have been restated to reflect 5% stock dividends paid November 2008 and 2009.

(2) As a percentage of average quarterly assets.

(3) As a percentage of total risk-weighted assets.

13

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section provides an analysis of the Corporation’s consolidated financial condition and results of operations for the years ended December 31, 2012 and 2011. The analysis should be read in conjunction with the related audited consolidated financial statements and the accompanying notes presented elsewhere herein.

Cautionary Note Regarding Forward-Looking Statements

This annual report contains certain “forward looking statements” 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 annual report, “we”, “us” and “our” refer to Stewardship Financial Corporation and its consolidated subsidiary, Atlantic Stewardship Bank, depending on the context.

Introduction

The Corporation’s primary business is the ownership and supervision of the Bank and, through the Bank, the Corporation has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. The Corporation currently has 13 full service branches offices located in Bergen, Passaic and Morris counties in New Jersey. The Corporation conducts a general commercial and retail banking business encompassing a wide range of traditional deposit and lending functions along with the other customary banking services. The Corporation earns income and generates cash primarily through the deposit gathering activities of the branch network. These deposits gathered from the general public are then utilized to fund the Corporation’s lending and investing activities.

The Corporation has developed a strong deposit base with good franchise value. A mix of a variety of different deposit products and electronic services, along with a strong focus on customer service, is used to attract customers and build depositor relationships. Challenges facing the Corporation include our ability to continue to grow the branch deposit levels, provide adequate technology enhancements to achieve efficiencies, offer a competitive product line, and provide the highest level of customer service.

The Corporation is affected by the overall economic conditions in northern New Jersey, the interest rate and yield curve environment, and the overall national economy. These factors are relevant because they will affect our ability to attract specific deposit products, our ability to invest in loan and investment products, and our ability to earn acceptable profits without incurring increased risks.

When evaluating the financial condition and operating performance of the Corporation, management reviews historical trends, peer comparisons, asset and deposit concentrations, interest margin analysis, adequacy of loan loss reserve and loan quality performance, adequacy of capital under current positions as well as to support future expansion, adequacy of liquidity, and overall quality of earnings performance.

The branch network coupled with our online services provides for solid coverage in both existing and new markets in key towns in the three counties in which we operate. The Corporation continually evaluates the need to further develop the infrastructure, including electronic products and services, to enable it to continue to build franchise value and expand its existing and future customer base.

In 2011 and 2012, the Corporation, like all financial institutions, continued to experience a difficult and complicated economic and operating environment. The Corporation’s results have been affected by the economic downturn through higher loan loss provisions and managing credit risk remains a significant challenge for the Bank. In addition, competition in the northern New Jersey market remained intense and the challenges of operating throughout these years in a flat interest rate market continued to make it somewhat difficult to attract deposits at appropriate interest rate levels. While the Bank has seen growth in deposits, management continues to find strong competition for low cost, core deposits. Furthermore, while the current economic conditions and softness in the real estate market have contributed to an increase in loan delinquencies, new lending opportunities are being appropriately evaluated. The Corporation has not been involved in the subprime lending area.

14

In an effort to address the strong competition in attracting deposit balances, the Corporation continues to evaluate product and services offerings. Improvements and upgrades of our electronic / online banking products and services continue to be a priority. Within the last several years we introduced an online banking / cash management product as well as remote deposit capture services for businesses. In early 2012 we enhanced our security for online banking customers by upgrading to multi-factor authentication sign-on. In April, 2012, after a significant amount of preparation and testing, we introduced both our application for smartphones and our application for the iPad providing additional means for our customers to access their accounts conveniently. By December, 2012, our mobile banking application had been upgraded to include mobile deposit allowing customers to deposit checks remotely by taking pictures of checks and transmitting them. Plans for the offering of business mobile banking are in place.

Beginning in mid-2010 the Corporation began to experience an increase in mortgage loan refinance activity due to the Corporation’s promotion of a ‘no cost closing’ program and the lower rate environment. This activity has allowed the Corporation to sell a larger volume into the secondary market resulting in increased gains from the sale of mortgage loans. In addition to concentrating on increasing noninterest income, expense control continues to be a focus. However, the increase in noninterest expense for 2012 is reflective of increasing regulatory compliance requirements and the staffing necessary to oversee all compliance-related issues. In addition, an increase in salary and employee benefits expense is the result of an increased focus on commercial lending opportunities as well as costs associated with enhancements to the credit review function. Finally, noninterest expense reflects increased costs associated with the workout of problem loans, primarily legal costs, as well as costs related to holding other real estate owned that is acquired through foreclosure or deed in lieu of foreclosure.

In September 2011, the Corporation received $15 million in connection with its participation in the Treasury’s Small Business Lending Fund (“SBLF”) program. In exchange, the Corporation issued to the Treasury 15,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B. The Corporation used the proceeds to simultaneously repurchase the Corporation’s shares of cumulative perpetual preferred stock, Series A previously issued under the Treasury’s Troubled Assets Relief Program (“TARP”) Capital Purchase Program (the “CPP”). In addition, the Corporation completed the repurchase of a warrant held by the Treasury that had been issued as part of the Corporation's participation in the TARP CPP. The additional capital provided by the SBLF further solidified our already well capitalized position, thereby enhancing our ability to continue to grow assets and increasing our ability to make new loans. Accordingly, we can better serve the lending needs of consumers and businesses in our market.

The Corporation will continue to concentrate its efforts on improving asset quality, developing its existing branch network, introducing new products and services, capitalizing on technology and focusing on improved efficiencies during 2012.

Recent Storm Related Events

On October 29, 2012, Super Storm Sandy struck the Northeastern United States and significantly impacted the region including the primary operating areas of the Corporation. While we experienced no substantial damage to any of our facilities, we were affected by power outages and certain limitations on operational capabilities and many of our customers have been negatively impacted. We have completed an assessment of the impact of Super Storm Sandy on our business and based upon our assessment, we do not believe there has been significant adverse effect on the collateral of our borrowers and/or their ability to repay their obligations to the Bank. Furthermore, we do not believe that the prolonged power outages caused by the storm, that temporarily interrupted our ability to open some of our branches, has had a significant or lasting impact on our business. Nevertheless, these impacts were not favorable to our business and our assessment is preliminary and, as such, there could be an adverse effect from the storm on our future earnings.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements and their effect on the Corporation’s Audited Consolidated Financial Statements can be found in Note 1 of the Corporation’s Audited Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.

15

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as well as disclosures found elsewhere in this Annual Report on Form 10-K, are based upon the Corporation’s audited consolidated financial statements, which have been prepared in conformity of 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, 2012 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.

Earnings Summary

The Corporation reported net income of $520,000 for the year ended December 31, 2012, compared to $684,000 for 2011. Earnings in both 2012 and 2011 reflected a large provision for loan loss. After dividends on preferred stock and accretion, net income available to common shareholders was $168,000 for 2012, or $0.03 per diluted common share, compared to $126,000, or $0.02 per diluted common share for the year ended December 31, 2011.

The return on average assets was 0.07% in 2012 compared to 0.10% in 2011. The return on average common equity was 0.39% for 2012 as compared to 0.29% in 2011.

Results of Operations

Net Interest Income

The Corporation’s principal source of revenue is the net interest income derived from the Bank, which represents the difference between the interest earned on assets and interest paid on funds acquired to support those assets. Net interest income is affected by the balances and mix of interest-earning assets and interest-bearing liabilities, changes in their corresponding yields and costs, and by the volume of interest-earning assets funded by noninterest-bearing deposits. The Corporation’s principal interest-earning assets are loans made to businesses and individuals and investment securities.

For the year ended December 31, 2012, net interest income, on a tax equivalent basis, decreased to $24.1 million from $25.2 million for the year ended December 31, 2011, reflecting a decrease of $1.1 million, or 4.3%. The net interest rate spread and net yield on interest earning assets for the year ended December 31, 2012 were 3.44% and 3.66%, respectively, compared to 3.58% and 3.83% for the year ended December 31, 2011. The net interest rate spread and net yield on interest earning assets for the current year reflect 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 an elevated level of nonperforming loans as well as historically low market rates in the current environment.

16

For the year ended December 31, 2012, total interest income, on a tax equivalent basis, decreased $2.9 million, or 8.9%, when compared to the prior year. The decrease was due to a decrease in yields on interest-earning assets partially offset by a small increase in the average balance of interest-earning assets. The average rate earned on interest-earning assets decreased 45 basis points from 4.89% for the year ended December 31, 2011 to 4.44% in the current year. 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 $2.4 million in 2012 over the 2011 amount with average investment securities increasing $14.7 million partially offset by a decrease of $12.4 million in average loans.

Interest expense decreased $1.8 million, or 25.7%, during the year ended December 31, 2012 to $5.2 million. The decline is due to general decreases in rates paid on deposits and borrowings coupled with decreases in average interest-bearing liabilities. The cost of interest-bearing liabilities decreased to 1.00% for the year ended December 31, 2012 compared to 1.31% during 2011, reflecting a general decline in rates paid on deposits. Average interest-bearing liabilities were $518.2 million for the year ended December 31, 2012, reflecting a decrease of $11.6 million, or 2.2%, when compared to $529.8 million for the year ended December 31, 2011. While the Corporation experienced an increase in core deposits, the decrease in average interest-bearing liabilities reflects a decline in time deposits and a reduced reliance on borrowings. The Corporation continues to supplement its branch deposit network with a mix of wholesale repurchase agreements and Federal Home Loan Bank borrowings. The Federal Home Loan Bank borrowings in particular provide an alternative funding source that help to lower cost of funds and provide for better management of interest rate risk. There were no brokered certificates of deposit utilized during 2012.

17

The following table reflects the components of the Corporation’s net interest income for the years ended December 31, 2012, 2011 and 2010 including: (1) average assets, liabilities and shareholders’ 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 years 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.

	2012									2011									2010
							Average									Average									Average
				Interest			Rates						Interest			Rates						Interest			Rates
	Average			Income/			Earned/			Average			Income/			Earned/			Average			Income/			Earned/
	Balance			Expense			Paid			Balance			Expense			Paid			Balance			Expense			Paid
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1)	$	449,362		$	24,099			5.36	%	$	461,808		$	26,357			5.71	%	$	460,721		$	27,336			5.93	%
Taxable investment securities		174,044			3,518			2.02			162,035			4,125			2.55			142,146			4,593			3.23
Tax-exempt investment securities (2)		34,856			1,624			4.66			32,162			1,625			5.05			31,107			1,587			5.10
Other interest-earning assets		940			41			4.36			796			42			5.28			2,055			26			1.27
Total interest-earning assets		659,202			29,282			4.44			656,801			32,149			4.89			636,029			33,542			5.27
Non-interest-earning assets:
Allowance for loan losses		(12,518	)								(10,921	)								(8,399	)
Other assets		55,501									55,690									45,886
Total assets	$	702,185								$	701,570								$	673,516
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	246,731		$	1,050			0.43	%	$	248,887		$	1,740			0.70	%	$	237,616		$	2,904			1.22	%
Savings deposits		62,767			102			0.16			52,370			136			0.26			47,251			169			0.36
Time deposits		162,129			2,250			1.39			172,791			2,984			1.73			171,745			3,551			2.07
Repurchase agreements		12,468			636			5.10			15,246			735			4.82			15,221			736			4.84
FHLB-NY  borrowings		26,867			631			2.35			33,339			865			2.59			38,486			970			2.52
Subordinated debentures		7,217			506			7.01			7,217			504			6.98			7,217			448			6.21
Total interest-bearing liabilities		518,179			5,175			1.00			529,850			6,964			1.31			517,536			8,778			1.70
Noninterest-bearing liabilities:
Demand deposits		122,548									112,646									98,507
Other liabilities		2,991									3,503									3,649
Shareholders' equity		58,467									55,571									53,824
Total liabilities and Shareholders’ equity	$	702,185								$	701,750								$	673,516
Net interest income (taxable equivalent basis)					24,107									25,185									24,764
Tax equivalent adjustment					(575	)								(575	)								(558	)
Net interest income				$	23,532								$	24,610								$	24,206
Net interest spread (taxable equivalent basis)								3.44	%								3.58	%								3.57	%
Net yield on interest-earning assets (taxable equivalent basis) (3)								3.66	%								3.83	%								3.89	%

(1) For purpose of these calculations, nonaccruing loans are included in the average balance. Fees are included in loan interest.

(2) The tax equivalent adjustments are based on a marginal tax rate of 34%. Loans and total interest-earning assets are net of unearned income. Securities are included at amortized cost.

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

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The following table compares net interest income for the year ended December 31, 2012 over the year ended December 31, 2011 in terms of changes from the prior year in the volume of interest-earning assets and interest-bearing liabilities and changes in yields earned and rates paid on such assets and liabilities on a tax-equivalent basis. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

	2012 Versus 2011									2011 Versus 2010
	(In thousands)
	Increase (Decrease)									Increase (Decrease)
	Due to Change in									Due to Change in
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans	$	(697	)	$	(1,561	)	$	(2,258	)	$	64		$	(1,043	)	$	(979	)
Taxable investment securities		289			(896	)		(607	)		589			(1,057	)		(468	)
Tax-exempt investment securities		131			(132	)		(1	)		53			(15	)		38
Other interest-earning assets		7			(8	)		(1	)		(24	)		40			16
Total interest-earning assets		(270	)		(2,597	)		(2,867	)		682			(2,075	)		(1,393	)
Interest expense:
Interest-bearing demand deposits		(15	)		(675	)		(690	)		132			(1296	)		(1,164	)
Savings deposits		24			(58	)		(34	)		17			(50	)		(33	)
Time deposits		(176	)		(558	)		(734	)		22			(589	)		(567	)
Repurchase agreements		(140	)		41			(99	)		1			(2	)		(1	)
FHLB borrowings		(157	)		(77	)		(234	)		(133	)		28			(105	)
Subordinated debentures		—			2			2			—			56			56
Total interest-bearing liabilities		(464	)		(1,325	)		(1,789	)		39			(1,853	)		(1,814	)
Net change in net interest income	$	194		$	(1,272	)	$	(1,078	)	$	643		$	(222	)	$	421

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 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 of $10.0 million for the year ended December 31, 2012 compares to a $10.8 million loan loss provision recorded for the year ended December 31, 2011. The allowance for loan loss was $10.6 million, or 2.42% of total loans as of December 31, 2012 compared to $11.6 million, or 2.54% of total loans a year earlier.

The loan loss provision takes into account any growth or contraction in the loan portfolio and any changes in nonperforming loans as well as the impact of charge-offs. In determining the level of the allowance for loan loss, the Corporation also considered the types of loans as well as the overall seasoning of new loans to determine the risk that was inherent in the portfolio.

Nonperforming loans decreased from $27.7 million, or 6.08% of total loans at December 31, 2011 to $18.2 million, or 4.14% of total loans at December 31, 2012. During the year ended December 31, 2012, the Corporation charged-off $11.2 million of loan balances and recovered $252,000 in previously charged-off loans compared to $7.8 million and $38,000, respectively, in the prior year. The allowance for loan losses related to the impaired loans decreased from $3.1 million at December 31, 2011 to $266,000 at December 31, 2012 primarily due to charge-offs down to the net realizable value of collateral for some of the impaired loans.

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In addition to these factors, the Corporation evaluated the economic conditions and overall real estate climate in the primary business markets in which it operates when considering the overall risk of the lending portfolio. The asset quality issues, caused by the national economic downturn which began in 2008, and the current year charge-offs and provision for loan losses are reflective of current economic conditions that 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 further information concerning the allowance for loan losses and nonperforming assets.

Noninterest Income

Noninterest income consists of all income other than interest income and is principally derived from service charges on deposits, income derived from bank-owned life insurance, gains from calls and sales of securities, gains on sales of mortgage loans and income derived from debit cards and ATM usage. In addition, gains on sales of other real estate owned (“OREO”) are reflected as noninterest income.

Noninterest income increased $1.2 million to $6.4 million for the year ended December 31, 2012 as compared to $5.2 million for the prior year. For the year ended December 31, 2012, noninterest income included $2.3 million from gains on calls and sales of securities compared to $1.2 million in 2011. Gains on sales of mortgage loans totaled $887,000 for 2012, a decrease from $1.2 million for the year ended December 31, 2011 reflective of retaining a higher amount of mortgage loans for portfolio. Gains on sales of other real estate owned represent a net amount resulting from increased OREO activity.

Noninterest Expense

Noninterest expense for the years ended December 31, 2012 and 2011 were $19.7 million and $18.7 million, respectively. Noninterest expense for 2012 reflects higher salary and employee benefits expense, reflective of increasing regulatory compliance and the attendant staffing necessary to oversee all compliance-related issues. In addition, the increase in salary and employee benefits expense is the result of an increased focus on commercial lending opportunities as well as costs associated with an enhanced credit review function. An increase in expense related to other real estate owned is reflective of increased activity. Included in miscellaneous expense for the current year period is $691,000 related to a prepayment premium resulting from the repayment of $7 million of a wholesale repurchase agreement.

Income Taxes

For the year ended December 31, 2012, income taxes represented a benefit of $247,000 compared to a benefit of $415,000 for the year ended December 31, 2011. The tax benefit for both years 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 earnings. In addition, the tax benefit for the year ended December 31, 2012 includes the write-off of certain deferred tax assets which will not be realized related to contribution carryovers and expired stock options.

Financial Condition

Total assets at December 31, 2012 were $688.4 million, a decrease of $20.4 million, or 2.9%, over the $708.8 million at December 31, 2011. Cash and cash equivalents increased $7.3 million to $21.0 million at December 31, 2012 from $13.7 million at December 31, 2011. Securities available-for-sale increased $3.8 million to $174.7 million while securities held to maturity decreased $8.6 million to $29.7 million. Net loans decreased $15.0 million from $444.8 million at December 31, 2011 to $429.8 million at December 31, 2012. Increases due to new loans originated were more than offset by regular principal payments and payoffs in 2012. In addition, $2.8 million of loans were transferred to other real estate owned. Loans held for sale totaled $784,000 at December 31, 2012, a decrease from $4.7 million at December 31, 2011. OREO reflected a net decline of $4.2 million primarily reflecting sales of properties partially offset by the foreclosure on additional properties.

20

Loan Portfolio

The Corporation’s loan portfolio at December 31, 2012, net of allowance for loan losses, totaled $429.8 million, a decrease of $15.0 million, or a 3.4% decrease over the $444.8 million at December 31, 2011. Residential real estate mortgages increased $12.3 million. Although the Corporation continued its policy of selling the majority of its residential real estate loans in the secondary market, certain residential real estate loans were placed into portfolio to partially compensate for payoffs and normal amortization. Of the loans sold, all have been sold with servicing of the loan transferring to the purchaser. Commercial real estate mortgage loans consisting of $252.1 million, or 57.2% of the total portfolio, represent the largest portion of the loan portfolio. These loans reflected a decrease of $7.4 million from $259.5 million, or 56.8% of the total loan portfolio at December 31, 2011. Commercial loans decreased $13.1 million to $89.4 million, representing 20.3% of the total loan portfolio. Consumer installment loans and home equity loans decreased $4.8 million and $3.0 million, respectively, partially attributable to borrowers continuing to consolidate secondary liens on their homes as they refinance in the lower interest rate environment.

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. The Corporation has not made loans to borrowers outside the United States.

At December 31, 2012, aside from the real estate concentration described above, there were no concentrations of loans exceeding 10% of total loans outstanding. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other related conditions.

The following table sets forth the classification of the Corporation’s loans by major category at the end of each of the last five years:

	December 31,
	2012			2011		2010		2009		2008
	(In thousands)
Real estate mortgage:
Residential (1)	$	67,200		$	54,946	$	43,020	$	36,246	$	40,337
Commercial (1)		252,087			259,462		248,527		246,212		226,183
Commercial loans		89,414			102,500		109,527		114,893		100,282
Consumer loans:
Installment (2)		16,544			21,310		29,522		41,006		51,290
Home equity		14,912			17,889		20,965		21,779		21,208
Other		266			306		305		340		356
Total gross loans		440,423			456,413		451,866		460,476		439,656
Less: Allowance for loan losses		10,641			11,604		8,490		6,920		5,166
Deferred loan (fees) costs		(50	)		6		131		437		387
Net loans	$	429,832		$	444,803	$	443,245	$	453,119	$	434,103

(1) Includes construction loans.

(2) Includes automobile, home improvement, second mortgages and unsecured loans.

21

The following table sets forth certain categories of gross loans as of December 31, 2012 by contractual maturity. Borrowers may have the right to prepay obligations with or without prepayment penalties. This might cause actual maturities to differ from the contractual maturities summarized below.

	Within 1 Year		After 1 Year But Within 5 Years		After 5 Years		Total
	(In thousands)
Real estate mortgage	$	8,754	$	12,872	$	297,661	$	319,287
Commercial		37,265		28,833		23,316		89,414
Consumer		262		3,420		28,040		31,722
Total gross loans	$	46,281	$	45,125	$	349,017	$	440,423

The following table sets forth the dollar amount of all gross loans due one year or more after December 31, 2012, which have predetermined interest rates or floating or adjustable interest rates:

	Predetermined Rates		Floating or Adjustable Rates		Total
	(In thousands)
Real estate mortgage	$	75,294	$	235,239	$	310,533
Commercial		29,214		22,935		52,149
Consumer		16,946		14,514		31,460
	$	121,454	$	272,688	$	394,142

Asset Quality

The Corporation’s principal earning asset is its loan portfolio. Inherent in the lending function is the risk of deterioration in a borrower’s ability to repay loans under existing loan agreements. To address 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.

In establishing the allowance for loan losses, the Corporation utilizes a two-tiered approach by (1) identifying problem loans and allocating specific loss allowances to 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.

The Corporation’s accounting policies are set forth in Note 1 to the Corporation’s Audited Consolidated Financial Statements. The application of some of these policies requires significant management judgment and the utilization of estimates. Actual results could differ from these judgments and estimates resulting in a significant impact on the financial statements. A critical accounting policy for the Corporation is the policy utilized in determining the adequacy of the allowance for loan losses. 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 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. Future adjustments to the allowance may be necessary due to economic, operating, regulatory, and other conditions beyond the Corporation’s control. In management’s opinion, the allowance for loan losses totaling $10.6 million is adequate to cover probable incurred losses inherent in the portfolio at December 31, 2012.

22

Nonperforming Assets

Risk elements include nonaccrual loans, past due and restructured loans, potential problem loans, loan concentrations and other real estate owned (i.e., property acquired through foreclosure or deed in lieu of foreclosure). The Corporation’s loans are generally placed in a nonaccrual status when they become past due in excess of 90 days as to payment of principal and interest or earlier if collection of principal or interest is considered doubtful. Interest previously accrued on these loans and not yet paid is charged against income during the current period. Interest earned thereafter is only included in income to the extent that it is received in cash. Loans past due 90 days or more and accruing represent those loans which are in the process of collection, adequately collateralized and management believes all interest and principal owed will be collected. Restructured loans are loans that have been renegotiated to permit a borrower, who has incurred adverse financial circumstances, to continue to perform. Management can make concessions to the terms of the loan or reduce the contractual interest rates to below market rates in order for the borrower to continue to make payments.

23

The following table sets forth certain information regarding the Corporation’s nonperforming assets as of December 31 of each of the preceding five years:

	December 31,
	2012			2011			2010			2009			2008
	(Dollars in thousands)
Nonaccrual loans: (1)
Construction	$	3,080		$	8,092		$	2,303		$	8,581		$	2,575
Residential real estate		413			779			1,106			1,131			—
Commercial real estate		10,083			9,302			10,540			5,109			291
Commercial		3,735			8,672			7,722			3,638			825
Consumer		800			891			829			1,197			539
Total nonaccrual loans		18,011			27,736			22,500			19,656			4,230
Loans past due 90 days or more and accruing: (2)
Construction		—			—			—			415			—
Commercial real estate		—			—			—			—			—
Commercial		237			—			—			—			353
Consumer		—			—			—			—			—
Total loans past due ninety days or more and Accruing		237			—			—			415			353
Total nonperforming loans		18,248			27,736			22,500			20,071			4,583
Other real estate owed		1,058			5,288			615			—			—
Total nonperforming assets	$	19,306		$	33,024		$	23,115		$	20,071		$	4,583
Restructured loans: (3)
Construction	$	3,244		$	561		$	—		$	—		$	—
Commercial real estate		2,425			3,386			—			665			1,483
Commercial		4,704			2,032			130			2,181			372
Total restructured loans	$	10,373		$	5,979		$	130		$	2,846		$	1,855
Allowance for loan losses	$	10,641		$	11,604		$	8,490		$	6,920		$	5,166
Nonaccrual loans to total gross loans		4.09	%		6.08	%		4.98	%		4.27	%		0.96	%
Nonperforming loans to total gross loans		4.14	%		6.08	%		4.98	%		4.36	%		1.04	%
Nonperforming assets to total assets		2.80	%		4.66	%		3.36	%		3.02	%		0.75	%
Allowance for loan losses to nonperforming loans		58.31	%		41.84	%		37.73	%		34.48	%		112.72	%

(1) Restructured loans classified in the nonaccrual category totaled $1.3 million, $9.1 million, $4.0 million, $23,000 and $22,000 for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively.

(2) There were no restructured loans classified in the past due 90 days or more and accruing for any years presented.

(3) Any restructured loans that are on nonaccrual status are only reported in nonaccrual loans and not reflected 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 is focused on resolving the nonperforming loans and mitigating future losses in the portfolio. All delinquent loans continue to be reviewed by management.

At December 31, 2012, the nonaccrual loans were comprised of 55 loans, primarily commercial real estate loans, commercial loans and construction loans. While the Corporation maintains strong underwriting requirements, the number and amount of nonaccrual loans is a reflection 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.

24

Since December 31, 2011, nonperforming loans have decreased $9.5 million to $18.2 million at December 31, 2012. The ratio of allowance for loan losses to nonperforming loans increased to 58.31% at December 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 the effect of the decrease in nonaccrual loans partially offset by a decrease in the allowance for loan losses.

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 charge-offs and the underlying collateral coverage for a considerable portion of the nonperforming loans currently supports the collection of our remaining principal.

For loans not included in nonperforming loans, at December 31, 2012, the level of loans past due 30-89 days was $3.1 million, an increase from $1.0 million at December 31, 2011. We will continue to monitor delinquencies for early identification of new problem loans. While not comprising a significantly large portion of the loan portfolio, a 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 of 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.

Primarily as a result of the continuing higher level of nonperforming loans, the Corporation continues to record an elevated provision for loan losses. For the years ended December 31, 2012 and 2011, the provision for loan losses was $9.995 million and $10.845 million, respectively. The total allowance for loan losses represented 2.42% of total loans at December 31, 2012 compared to a ratio of 2.54% at December 31, 2011.

At December 31, 2012 and 2011, the Corporation had $11.7 million and $15.1 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $10.4 million and $6.0 million were performing in accordance with their new terms at December 31, 2012 and 2011, respectively. The remaining troubled debt restructures are reported as nonaccrual loans. Specific reserves of $246,000 and $1.2 million have been allocated for the troubled debt restructurings at December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, the Corporation had committed $241,000 and $416,000, respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

Included in performing restructured loans as of 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. The property was sold in 2012 and the Corporation collected 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 December 31, 2012 and 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.

For the year ended December 31, 2012, gross interest income which would have been recorded had the restructured and non-accruing loans been current in accordance with their original terms amounted to $815,000 million, of which $394,000 was included in interest income for the year ended December 31, 2012.

25

When it is believed 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. For the year ended December 31, 2012, net charge-offs were $11.0 million compared to $7.7 million for the year ended December 31, 2011. Included in charge-offs for the current year is one loan for $3.0 million. During the second quarter of 2012, management placed the loan on nonaccrual status based on developments relating to the borrower which have impacted the borrower’s repayment ability. During the fourth quarter of 2012, management made the decision to charge-off this loan in its entirety as collectability was believed to be remote.

While regular monthly payments continue to be made on many of the nonaccrual loans, certain charge-offs result, nevertheless, from the borrowers’ inability to provide adequate documentation evidencing their ability to continue to service their debt. Therefore, consideration has been given to any underlying collateral and appropriate charge-offs recorded based, in general, on the deficiency of such collateral. In general, the charge-offs reflect partial writedowns and full charge-offs on nonaccrual loans due to the initial evaluation of market values of the underlying real estate collateral in accordance with Accounting Standards Codification (“ASC”) 310-40. In addition, the current year reflects an increased level of charge-offs of previously established reserves that were based on analysis of the discounted cash flows for non-real estate collateral dependent loans. Management believes the charge-off of these reserves provides a clearer indication of the value of nonaccrual loans. The charge-off of reserves increases the average historical charge-off experience, thereby resulting in an increase in Corporation’s level of general reserves on performing loans. In addition to our actions of recording partial and full charge-offs on loans, we continue to aggressively pursue collection, including legal action.

As of December 31, 2012, there were $44.2 million of other loans not included in the preceding risk elements table, compared to $36.1 million at December 31, 2011, where credit conditions of borrowers, including real estate tax delinquencies, 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 as nonperforming 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.

26

The following table sets forth, for each of the preceding five years, the historical relationships among the amount of loans outstanding, the allowance for loan losses, the provision for loan losses, the amount of loans charged-off and the amount of loan recoveries:

	December 31,
	2012			2011			2010			2009			2008
	(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period	$	11,604		$	8,490		$	6,920		$	5,166		$	4,457
Loans charged-off:
Construction		394			839			1,231			1,003			—
Residential real estate		21			112			25			85			—
Commercial real estate		3,577			1,911			1,241			—			—
Commercial		7,144			4,603			5,082			623			2,841
Consumer		74			304			519			215			61
Total loans charged-off		11,210			7,769			8,098			1,926			2,902
Recoveries of loans previously charged-off:
Construction		6			3			72			—			—
Commercial		240			29			10			93			—
Consumer		6			6			11			12			26
Total recoveries of loans previously charged-off		252			38			93			105			26
Net loans charged-off		10,958			7,731			8,005			1,821			2,876
Provisions charged to operations		9,995			10,845			9,575			3,575			3,585
Balance at end of period	$	10,641		$	11,604		$	8,490		$	6,920		$	5,166
Net charge-offs during the period to average loans    outstanding during the period		2.44	%		1.67	%		1.74	%		0.41	%		0.66	%
Balance of allowance for loan losses at the end of    year to gross year end loans		2.42	%		2.54	%		1.88	%		1.50	%		1.18	%

The following table sets forth the allocation of the allowance for loan losses, for each of the preceding five years, as indicated by loan categories:

	2012					2011					2010					2009					2008
	Amount		Percent to Total (1)			Amount		Percent to Total (1)			Amount		Percent to Total (1)			Amount		Percent to Total (1)			Amount		Percen to Total (1)
	(Dollars in thousands)
Real estate – Residential	$	308		15.3	%	$	303		12.0	%	$	188		9.5	%	$	155		7.9	%	$	245		9.2	%
Real estate – commercial		5,105		57.2	%		5,423		56.8	%		4,038		55.0	%		2,677		53.5	%		2,164		51.4	%
Commercial		4,832		20.3	%		5,368		22.5	%		3,745		24.2	%		3,148		24.9	%		2,086		22.8	%
Consumer		355		7.2	%		500		8.7	%		512		11.3	%		940		13.7	%		671		16.6	%
Unallocated		41		—	%		10		—	%		7		—	%		—		—	%		—		—	%
Total allowance for loan losses	$	10,641		100.0	%	$	11,604		100.0	%	$	8,490		100.0	%	$	6,920		100.0	%	$	5,166		100.0	%

(1) Represents percentage of loan balance in category to total gross loans.

Investment Portfolio

The Corporation maintains an investment portfolio to enhance its yields and to provide a secondary source of liquidity. The portfolio is comprised of U.S. Treasury securities, U.S. government and agency obligations, state and political subdivision obligations, mortgage-backed securities, asset-backed securities, corporate debt securities and other equity investments, and has been classified as held to maturity or available-for-sale. Investments in debt securities that the Corporation has the intention and the ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. All other securities are classified as available-for-sale securities and reported at fair value, with unrealized holding gains or losses reported in a separate component of shareholders’ equity. Securities in the available-for-sale category may be held for indefinite periods of time and include securities that management intends to use as part of its Asset/Liability strategy or that may be sold in response to changes in interest rates, changes in prepayment risks, the need to provide liquidity, the need to increase regulatory capital or similar factors. Securities available-for-sale increased to $174.7 million at December 31, 2012, from $170.9 million at December 31, 2011, an increase of $3.8 million, or 2.2%. The increase in securities available-for-sale reflects the Corporation’s focus on liquidity in the current economic environment. Securities held to maturity decreased $8.6 million, or 22.5%, to $29.7 million at December 31, 2012 from $38.4 million at December 31, 2011.

27

The following table sets forth the classification of the Corporation’s investment securities by major category at the end of the last three years:

	December 31,
	2012					2011					2010
	Carrying Value		Percent			Carrying Value		Percent			Carrying Value		Percent
	(Dollars in thousands)
Securities available-for-sale:
U.S. Treasury	$	4,006		2.3	%	$	4,050		2.4	%	$	9,249		6.7	%
U.S. government-sponsored agencies		37,255		21.3			20,744		12.1			13,586		9.8
Obligations of state and
political subdivisions		14,170		8.1			9,318		5.4			4,279		3.1
Mortgage-backed securities-residential		105,428		60.3			133,467		78.1			108,327		78.1
Asset-backed securities (a)		9,884		5.7			—		—			—		—
Corporate debt		495		0.3			—		—			—		—
Other equity investments		3,462		2.0			3,346		2.0			3,187		2.3
Total	$	174,700		100.0	%	$	170,925		100.0	%	$	138,628		100.0	%
Securities held to maturity:
U.S. government-sponsored agencies	$	260		0.9	%	$	2,770		7.2	%	$	4,208		9.3	%
Obligations of state and
political subdivisions		22,787		76.7			24,575		64.1			26,148		57.6
Mortgage-backed securities-residential		6,671		22.4			11,009		28.7			15,038		33.1
Total	$	29,718		100.0	%	$	38,354		100.0	%	$	45,394		100.0	%

(a) Collateralized by student loans

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The following table sets forth the maturity distribution and weighted average yields (calculated on the basis of stated yields to maturity, considering applicable premium or discount) of the Corporation’s debt securities available-for-sale as of December 31, 2012. Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This might cause actual maturities to differ from contractual maturities.

		Within 1 Year			After 1 Year Through 5 Years			After 5 Years Through 10 Years			After 10 Years			Total
	(Dollars in thousands)
U.S. Treasury:
Carrying value		$	4,006		$	—		$	—		$	—		$	4,006
Yield			0.70	%		—	%		—	%		—	%		0.70	%
U.S. government-sponsored agencies:
Carrying value			—			2,505			10,999			23,751			37,255
Yield			—	%		0.96	%		1.55	%		1.66	%		1.58	%
Obligations of state and political subdivisions:
Carrying value			—			1,993			10,741			1,436			14,170
Yield			—	%		1.69	%		2.11	%		4.00	%		2.25	%
Corporate debt:
Carrying value			—			495			—			—			495
Yield			—	%		1.05	%		—	%		—	%		1.05	%
Total carrying value		$	4,006		$	4,993		$	21,740		$	25,187		$	55,926
Weighted average yield			0.70	%		1.26	%		1.83	%		1.79	%		1.68	%

The following table sets forth the maturity distribution and weighted average yields (calculated on the basis of stated yields to maturity, considering applicable premium or discount) of the Corporation’s debt securities held to maturity as of December 31, 2012. Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This might cause actual maturities to differ from contractual maturities.

	Within 1 Year			After 1 Year Through 5 Years			After 5 Years Through 10 Years			After 10 Years			Total
	(Dollars in thousands)
U.S. government-sponsored agencies:
Carrying value	$	—		$	255		$	5		$	—		$	260
Yield		—	%		4.59	%		1.75	%		—	%		4.54	%
Obligations of state and  political subdivisions:
Carrying value		906			14,735			6,968			178			22,787
Yield		3.25	%		3.30	%		3.87	%		3.75	%		3.48	%
Total carrying value	$	906		$	14,990		$	6,973		$	178		$	23,047
Weighted average yield		3.25	%		3.32	%		3.87	%		3.75	%		3.49	%

Deposits

The Corporation had deposits at December 31, 2012 totaling $590.3 million, a decrease of $3.3 million, or 0.6%, over the comparable period of 2011, when deposits totaled $593.6 million. The Corporation relied on its branch network and current competitive products and services to maintain deposits during 2012. There were no brokered certificates of deposit at December 31, 2012 or 2011.

29

The following table sets forth the classification of the Corporation’s deposits by major category as of December 31 of each of the three preceding years:

	December 31,
	2012					2011					2010
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Noninterest-bearing demand	$	124,286		21.1	%	$	115,776		19.5	%	$	99,723		17.3	%
Interest-bearing demand		241,471		40.8	%		249,058		41.9	%		248,240		43.1	%
Saving deposits		68,338		11.6	%		57,967		9.8	%		47,692		8.3	%
Certificates of deposit		156,159		26.5	%		170,751		28.8	%		179,948		31.3	%
Total	$	590,254		100.0	%	$	593,552		100.0	%	$	575,603		100.0	%

As of December 31, 2012, the aggregate amount of outstanding time deposits issued in amounts of $100,000 or more, broken down by time remaining to maturity, was as follows (in thousands):

Three months or less	$	20,247
Four months through six months		15,646
Seven months through twelve months		19,731
Over twelve months		39,259
Total	$	94,883

Borrowings

Although deposits with the Bank are the Corporation’s primary source of funds, the Corporation’s policy has been to utilize borrowings to the extent that they are a less costly source of funds, when the Corporation desires additional capacity to fund loan demand, or to extend the life of its liabilities as a means of managing exposure to interest rate risk. The Corporation’s borrowings are a combination of advances from the Federal Home Loan Bank of New York (“FHLB-NY”), including overnight repricing lines of credit, and, to a lesser extent, securities sold under agreements to repurchase.

Interest Rate Sensitivity

Interest rate movements have made managing the Corporation’s interest rate sensitivity increasingly important. The Corporation attempts to maintain stable net interest margins by generally matching the volume of interest-earning assets and interest-bearing liabilities maturing, or subject to repricing, by adjusting interest rates to market conditions, and by developing new products. One method of measuring the Corporation’s exposure to changes in interest rates is the maturity and repricing gap analysis. The difference or mismatch between the amount of assets and liabilities that mature or reprice in a given period is defined as the interest rate sensitivity gap. A “negative” gap results when the amount of interest-bearing liabilities maturing or repricing within a specified time period exceeds the amount of interest-earning assets maturing or repricing within the same period of time. Conversely, a “positive” gap results when the amount of interest-earning assets maturing or repricing exceed the amount of interest-bearing liabilities maturing or repricing in the same given time frame. The smaller the gap, the less the effect of the market volatility on net interest income. During a period of rising interest rates, an institution with a negative gap position would not be in as favorable a position, as compared to an institution with a positive gap, to invest in higher yielding assets. This may result in yields on its assets increasing at a slower rate than the increase in its costs of interest-bearing liabilities than if it had a positive gap. During a period of falling interest rates, an institution with a negative gap would experience a repricing of its assets at a slower rate than its interest-bearing liabilities, which consequently may result in its net interest income growing at a faster rate than an institution with a positive gap position.

The following table sets forth estimated maturity/repricing structure of the Corporation’s interest-earning assets and interest-bearing liabilities as of December 31, 2012. The amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability and adjusted for prepayment assumptions where applicable. The table does not necessarily indicate the impact of general interest rate movements on the Corporation’s net interest income because the repricing of certain categories of assets and liabilities, for example, prepayments of loans and withdrawal of deposits, is beyond the Corporation’s control. As a result, certain assets and liabilities indicated as repricing within a period may in fact reprice at different times and at different rate levels.

30

	Three Months or Less			More than Three Months Through One Year			After One Year			Noninterest Sensitive			Total
	(Dollars in thousands)
Assets:
Loans:
Real estate mortgage	$	28,686		$	43,541		$	247,060		$	—		$	319,287
Commercial		40,004			7,352			42,058			—			89,414
Consumer		14,707			2,053			14,962			—			31,722
Mortgage loans held for sale		784			—			—			—			784
Investment securities (1)		37,520			38,959			130,152			—			206,631
Other assets		1,054			—			—			39,496			40,550
Total assets	$	122,755		$	91,905		$	434,232		$	39,496		$	688,388
Source of funds:
Interest-bearing demand	$	241,471		$	—		$	—		$	—		$	241,471
Savings		68,338			—			—			—			68,338
Certificate of deposit		31,522			57,893			66,744			—			156,159
FHLB of NY advances		—			—			25,000			—			25,000
Repurchase agreements		7,343			—			—			—			7,343
Subordinated debenture		—			—			7,217			—			7,217
Other liabilities		—			—			—			126,514			126,514
Shareholders' equity		—			—			—			56,346			56,346
Total source of funds	$	348,674		$	57,893		$	98,961		$	182,860		$	688,388
Interest rate sensitivity gap	$	(225,919	)	$	34,012		$	335,271		$	(143,364	)
Cumulative interest rate sensitivity gap	$	(225,919	)	$	(191,907	)	$	143,364		$	—
Ratio of GAP to total assets		-32.8	%		4.9	%		48.7	%		-20.8	%
Ratio of cumulative GAP assets to total assets		-32.8	%		-27.9	%		20.8	%		-—	%

(1) Includes securities held to maturity, securities available-for-sale and FHLB-NY stock.

The Corporation also uses a simulation model to analyze the sensitivity of net interest income to movements in interest rates. The simulation model projects net interest income, net income, net interest margin, and capital to asset ratios based on various interest rate scenarios over a twelve-month period. The model is based on the actual maturity and repricing characteristics of all rate sensitive assets and liabilities. Management incorporates into the model certain assumptions regarding prepayments of certain assets and liabilities. Assumptions have been built into the model for prepayments for assets and decay rates for nonmaturity deposits such as savings and interest bearing demand. The model assumes an immediate rate shock to interest rates without management’s ability to proactively change the mix of assets or liabilities. Based on the reports generated for December 31, 2012, an immediate interest rate increase of 200 basis points would have resulted in a decrease in net interest income of 4.1%, or $966,000, and an immediate interest rate decrease of 200 basis points would have resulted in a decrease in net interest income of 5.4% or $1.3 million. Management cannot provide any assurance about the actual effect of changes in interest rates on the Corporation’s net interest income.

Liquidity

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 by 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.

31

The Corporation’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. These activities are summarized below:

	Years Ended December 31,
	2012			2011
	(In thousands)
Cash and cash equivalents – beginning	$	13,698		$	19,983
Operating activities:
Net income		520			684
Adjustments to reconcile net income to net cash provided by operating activities		12,263			15,385
Net cash provided by operating activities		12,783			16,069
Net cash provided by (used in) investing activities		13,584			(40,160	)
Net cash provided by (used in) financing activities		(19,049	)		17,806
Net increase (decrease) in cash and cash equivalents		7,318			(6,285	)
Cash and cash equivalents – ending	$	21,016		$	13,698

Cash was generated by operating activities in each of the above periods. The primary source of cash from operating activities during each period was operating income.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds sold.

The Corporation enters into commitments to extend credit, such as letters of credit, which are not reflected in the Corporation’s Audited Consolidated Financial Statements.

The Corporation has various contractual obligations that may require future cash payments. The following table summarizes the Corporation’s contractual obligations at December 31, 2012 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

			Payment Due By Period
	Total		Less than 1 Year		1 – 3 Years		4 – 5 Years		After 5 Years
	(In thousands)
Contractual obligations
Operating lease obligations	$	4,745	$	1,006	$	1,121	$	606	$	2,012
Total contracted cost obligations	$	4,745	$	1,006	$	1,121	$	606	$	2,012
Other long-term liabilities/long-term debt
Time deposits	$	156,159	$	89,470	$	54,784	$	11,905	$	—
Federal Home Loan Bank advances		25,000		—		—		15,000		10,000
Securities sold under agreements to repurchase		7,343		343		7,000		—		—
Subordinated debentures		7,217		—		—		7,217		—
Total other long-term liabilities/long-term debt	$	195,719	$	89,813	$	61,784	$	34,122	$	10,000
Other commitments - off balance sheet
Letters of credit	$	1,396	$	1,344	$	52	$	—	$	—
Commitments to extend credit		11,610		11,610		—		—		—
Unused lines of credit		59,959		59,959		—		—		—
Total off balance sheet arrangements and contractual obligations	$	72,965	$	72,913	$	52	$	—	$	—

Management believes that a significant portion of the time deposits will remain with the Corporation. In addition, management does not believe that all of the unused lines of credit will be exercised. We anticipate that the Corporation will have sufficient funds available to meet its current contractual commitments. Should we need temporary funding, the Corporation has the ability to borrow overnight with the FHLB-NY. The overall borrowing capacity is contingent on available collateral to secure borrowings and the ability to purchase additional activity-based capital stock of the FHLB-NY. The Corporation may also borrow from the Discount Window of the Federal Reserve Bank of New York based on the market value of collateral pledged. At December 31, 2012 and 2011, the borrowing capacity at the Discount Window was $5.1 million. In addition, the Corporation had available overnight variable repricing lines of credit with other correspondent banks totaling $11 million on an unsecured basis. There were no borrowings under these lines of credit at December 31, 2012 and 2011.

32

The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Of the $1.4 million commitments under standby and commercial letters of credit, $1.3 million expire within one year. Should any letter of credit be drawn on, the interest rate charged on the resulting note would fluctuate with the Corporation's base rate. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby and commercial letters of credit are conditional commitments issued by the Corporation to guarantee payment or performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation obtains collateral supporting those commitments for which collateral is deemed necessary.

At December 31, 2012, the Corporation had residential mortgage commitments to extend credit aggregating approximately $417,000 at variable rates averaging 3.13% and $1.8 million at fixed rates averaging 3.87%. Approximately $1.8 million of these loan commitments will be sold to investors upon closing. Commercial, construction, and home equity loan commitments of approximately $9.3 million were extended with variable rates averaging 3.88% and $140,000 were extended at fixed rates averaging 4.88%. Generally, commitments were due to expire within approximately 60 days.

The unused lines of credit consist of $13.5 million relating to a home equity line of credit program and an unsecured line of credit program (cash reserve), $4.8 million relating to an unsecured overdraft protection program, and $41.7 million relating to commercial and construction lines of credit. Amounts drawn on the unused lines of credit are predominantly assessed interest at rates which fluctuate with the base rate.

Capital

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Regulations of the Board of Governors of the FRB require bank holding companies to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2012, the Corporation was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. The Bank must comply with substantially similar capital regulations promulgated by the FDIC.

33

The following table summarizes the capital ratios for the Corporation and the Bank at December 31, 2012.

	Actual			Required for Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action
Leverage ratio *
Consolidated		9.09	%		4.00	%		N/A
Bank		8.91	%		4.00	%		5.00	%
Risk-based capital
Tier I
Consolidated		13.63	%		4.00	%		N/A
Bank		13.35	%		4.00	%		6.00	%
Total
Consolidated		14.89	%		8.00	%		N/A
Bank		14.62	%		8.00	%		10.00	%

* The minimum leverage ratio set by the FRB and the FDIC is 3.00%. Institutions, which are not “top-rated”, will be expected to maintain a ratio of approximately 100 to 200 basis points above this ratio.

On September 1, 2011, in exchange for issuing 15,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Shares”), having a liquidation preference of $1,000 per share, the Corporation received $15.0 million as part of the Treasury’s SBLF program. The SBLF is a $30 billion fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion.

Using proceeds of the issuance of the Series B Preferred Shares, the Corporation simultaneously repurchased all 10,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share (the “Series A Preferred Shares”) previously issued under the TARP CPP, for a purchase price of $10,022,222, including accrued but unpaid dividends through the date of repurchase.

The Series B Preferred Shares pay a non-cumulative quarterly dividend in arrears. The Corporation accrues the preferred dividends as earned over the period the Series B Preferred Shares are outstanding. The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement). In general, the dividend rate decreases as the level of the Bank’s QSBL increases. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%. During 2012, the dividend rate ranged between 1% and 3.39%.The dividend rate for future dividend periods will be set based upon changes in the level of QSBL as compared to the baseline level. Such dividend rate may vary from 1% to 5% per annum for the second through tenth dividend periods and from 1% to 7% for the eleventh through the first half of the nineteenth dividend periods, to reflect the amount of change in the Bank’s level of QSBL. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Such dividends are not cumulative but the Corporation may only declare and pay dividends on its common stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and will be subject to other restrictions on its ability to repurchase or redeem other securities.

Subject to regulatory approval, the Corporation may redeem the Series B Preferred Shares at any time. The Series B Preferred Shares are includable in Tier I capital for regulatory capital.

On October 26, 2011, the Corporation completed the repurchase of the 10-year warrant held by the Treasury which was issued as part of the Corporation's participation in the TARP CPP, and entitled the Treasury to purchase 133,475 shares of the Corporation’s Common Stock at an exercise price of $11.24 per share. The Corporation paid a total of $107,398 to the Treasury to repurchase the warrant.

34

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 8. Financial Statements and Supplementary Data

35

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Stewardship Financial Corporation and Subsidiary

Midland Park, New Jersey

We have audited the accompanying consolidated statements of financial condition of Stewardship Financial Corporation and Subsidiary as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stewardship Financial Corporation and Subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Horwath LLP

Livingston, New Jersey

March 28, 2013

36

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition

	December 31,
	2012		2011
Assets
Cash and due from banks	$	19,962,000	$	13,289,000
Other interest-earning assets		1,054,000		409,000
Cash and cash equivalents		21,016,000		13,698,000
Securities available-for-sale		174,700,000		170,925,000
Securities held to maturity; estimated fair value
of $31,768,000 (2012) and $40,984,000 (2011)		29,718,000		38,354,000
Federal Home Loan Bank of New York stock, at cost		2,213,000		2,478,000
Mortgage loans held for sale		784,000		4,711,000
Loans, net of allowance for loan losses of $10,641,000 (2012)
and $11,604,000 (2011)		429,832,000		444,803,000
Premises and equipment, net		5,645,000		6,101,000
Accrued interest receivable		2,372,000		2,618,000
Other real estate owned, net		1,058,000		5,288,000
Bank owned life insurance		10,470,000		10,145,000
Other assets		10,580,000		9,697,000
Total assets	$	688,388,000	$	708,818,000
Liabilities and Shareholders' equity
Liabilities
Deposits:
Noninterest-bearing	$	124,286,000	$	115,776,000
Interest-bearing		465,968,000		477,776,000
Total deposits		590,254,000		593,552,000
Federal Home Loan Bank of New York advances		25,000,000		32,700,000
Securities sold under agreements to repurchase		7,343,000		14,342,000
Subordinated debentures		7,217,000		7,217,000
Accrued interest payable		560,000		775,000
Accrued expenses and other liabilities		1,668,000		2,440,000
Total liabilities		632,042,000		651,026,000
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value; 2,500,000 shares authorized;
15,000 and 15,000 shares issued and outstanding at
December 31, 2012 and 2011, respectively.  Liquidation
preference of $15,000,000 and $15,000,000, respectively		14,964,000		14,955,000
Common stock, no par value; 10,000,000 shares authorized;
5,924,865 and 5,882,504 shares issued and outstanding
at December 31, 2012 and 2011, respectively		40,606,000		40,420,000
Retained earnings		316,000		1,043,000
Accumulated other comprehensive income, net		460,000		1,374,000
Total Shareholders' equity		56,346,000		57,792,000
Total liabilities and Shareholders' equity	$	688,388,000	$	708,818,000

See accompanying notes to consolidated financial statements.

37

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income

	Years Ended December 31,
	2012			2011
Interest income:
Loans	$	24,056,000		$	26,312,000
Securities held to maturity:
Taxable		487,000			687,000
Nontaxable		817,000			878,000
Securities available-for-sale:
Taxable		2,923,000			3,316,000
Nontaxable		275,000			217,000
FHLB dividends		108,000			122,000
Other interest-earning assets		41,000			42,000
Total interest income		28,707,000			31,574,000
Interest expense:
Deposits		3,402,000			4,860,000
Borrowed money		1,773,000			2,104,000
Total interest expense		5,175,000			6,964,000
Net interest income before provision for loan losses		23,532,000			24,610,000
Provision for loan losses		9,995,000			10,845,000
Net interest income after provision for loan losses		13,537,000			13,765,000
Noninterest income:
Fees and service charges		1,998,000			2,074,000
Bank owned life insurance		325,000			325,000
Gain on calls and sales of securities, net		2,340,000			1,161,000
Gain on sales of mortgage loans		887,000			1,209,000
Gain on sales of other real estate owned		429,000			10,000
Miscellaneous		410,000			391,000
Total noninterest income		6,389,000			5,170,000
Noninterest expense:
Salaries and employee benefits		9,470,000			8,983,000
Occupancy, net		1,967,000			2,023,000
Equipment		971,000			970,000
Data processing		1,291,000			1,351,000
Advertising		537,000			446,000
FDIC insurance premium		612,000			714,000
Charitable contributions		86,000			398,000
Stationery and supplies		208,000			196,000
Legal		485,000			502,000
Bank-card related services		546,000			496,000
Other real estate owned		603,000			95,000
Miscellaneous		2,877,000			2,492,000
Total noninterest expenses		19,653,000			18,666,000
Income before income tax benefit		273,000			269,000
Income tax benefit		(247,000	)		(415,000	)
Net income		520,000			684,000
Dividends on preferred stock and accretion		352,000			558,000
Net income available to common shareholders	$	168,000		$	126,000
Basic earnings per common share	$	0.03		$	0.02
Diluted earnings per common share	$	0.03		$	0.02
Weighted average number of common shares outstanding		5,908,503			5,861,465
Weighted average number of diluted common shares outstanding		5,908,503			5,861,465

See accompanying notes to consolidated financial statements.

38

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

	Years Ended December 31,
	2012			2011
Net income	$	520,000		$	684,000
Other comprehensive income (loss):
Change in unrealized holding gains on securities   Available-for-sale arising during the period		763,000			3,837,000
Reclassification adjustment for gains in net income		(2,340,000	)		(1,161,000	)
Net unrealized gain (losses)		(1,577,000	)		2,676,000
Tax effect		614,000			(1,038,000	)
Net unrealized gain (losses), net of tax amount		(963,000	)		1,638,000
Change in fair value of interest rate swap		81,000			(230,000	)
Tax effect		(32,000	)		92,000
Change in fair value of interest rate swap, net of tax amount		49,000			(138,000	)
Total other comprehensive income (loss)		(914,000	)		1,500,000
Total comprehensive income (loss)	$	(394,000	)	$	2,184,000

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

	Balance at December 31, 2012			Current Year Change			Balance at December 31, 2011
Unrealized gain on securities available-for-sale	$	947,000		$	(963,000	)	$	1,910,000
Unrealized loss on fair value of interest rate swap		(487,000	)		49,000			(536,000	)
Accumulated other comprehensive income, net	$	460,000		$	(914,000	)	$	1,374,000

See accompanying notes to consolidated financial statements.

39

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

	Years Ended December 31, 2012 and 2011
																		Accumulated
																		Other
																		Compre- hensive
	Preferred			Common Stock					Retained			Treasury Stock						Income
	Stock			Shares		Amount			Earnings			Shares			Amount			(Loss), Net			Total
Balance – January 1, 2011	$	9,796,000			5,846,927	$	40,516,000		$	1,959,000			(917	)	$	(13,000	)	$	(126,000	)	$	52,132,000
Proceeds from issuance of preferred   stock		15,000,000			—		—			—			—			—			—			15,000,000
Preferred stock issuance costs		(48,000	)		—		—			—			—			—			—			(48,000	)
Repurchase of preferred stock		(10,000,000	)		—		—			—			—			—			—			(10,000,000	)
Redemption of common stock   warrants		—			—		(269,000	)		161,000			—			—			—			(108,000	)
Cash dividends declared ($0.20 per   share)		—			—		—			(1,171,000	)		—			—			—			(1,171,000	)
Payment of discount on dividend   reinvestment plan		—			—		(15,000	)		—			—			—			—			(15,000	)
Cash dividends declared on preferred   stock		—			—		—			(383,000	)		—			—			—			(383,000	)
Common stock issued under dividend   reinvestment plan		—			19,298		94,000			—			—			—			—			94,000
Common stock issued under stock   plans		—			16,279		75,000			—			917			13,000			—			88,000
Stock option compensation expense		—			—		19,000			—			—			—			—			19,000
Accretion of discount on preferred   stock		174,000			—		—			(174,000	)		—			—			—			—
Amortization of issuance costs		33,000			—		—			(33,000	)		—			—			—			—
Comprehensive income										684,000									1,500,000			2,184,000
Balance -- December 31, 2011		14,955,000			5,882,504		40,420,000			1,043,000			—			—			1,374,000			57,792,000
Cash dividends declared ($0.15 per   share)		—			—		—			(886,000	)		—			—			—			(886,000	)
Payment of discount on dividend   reinvestment plan		—			—		(8,000	)		—			—			—			—			(8,000	)
Cash dividends declared on preferred   stock		—			—		—			(352,000	)		—			—			—			(352,000	)
Common stock issued under dividend   reinvestment plan		—			32,574		148,000			—			—			—			—			148,000
Common stock issued under stock   plans		—			9,787		46,000			—			—			—			—			46,000
Amortization of issuance costs		9,000			—		—			(9,000	)		—			—			—			—
Comprehensive income (loss)										520,000									(914,000	)		(394,000	)
Balance -- December 31, 2012	$	14,964,000			5,924,865	$	40,606,000		$	316,000			—		$	—		$	460,000		$	56,346,000

See accompanying notes to consolidated financial statements.

40

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	520,000		$	684,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		532,000			594,000
Amortization of premiums and accretion of discounts, net		1,628,000			1,372,000
Accretion (amortization) of deferred loan fees		49,000			(16,000	)
Provision for loan losses		9,995,000			10,845,000
Originations of mortgage loans held for sale		(61,431,000	)		(85,615,000	)
Proceeds from sale of mortgage loans		66,245,000			91,931,000
Gain on sale of mortgage loans		(887,000	)		(1,209,000	)
Gains on sales and calls of securities		(2,340,000	)		(1,161,000	)
Gain on sale of OREO		(429,000	)		(10,000	)
Deferred income tax benefit		115,000			(1,850,000	)
Decrease in accrued interest receivable		246,000			188,000
Decrease in accrued interest payable		(215,000	)		(202,000	)
Earnings on bank owned life insurance		(325,000	)		(325,000	)
Stock option expense		—			19,000
(Increase) decrease in other assets		950,000			(442,000	)
Increase (decrease) in other liabilities		(1,870,000	)		1,266,000
Net cash provided by operating activities		12,783,000			16,069,000
Cash flows from investing activities:
Purchase of securities available-for-sale		(134,832,000	)		(97,018,000	)
Proceeds from maturities and principal repayments on securities available-for-sale		27,964,000			21,148,000
Proceeds from sales and calls on securities available-for-sale		102,300,000			46,245,000
Proceeds from maturities and principal repayments on securities held to maturity		4,147,000			4,938,000
Proceeds from sales and calls of securities held to maturity		4,418,000			1,895,000
Sale of FHLB-NY stock		265,000			19,000
Net (increase) decrease in loans		2,106,000			(17,453,000	)
Proceeds from sale of other real estate owned		7,292,000			366,000
Additions to premises and equipment		(76,000	)		(300,000	)
Net cash provided by (used in) investing activities		13,584,000			(40,160,000	)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		8,510,000			16,053,000
Net increase (decrease) in interest-bearing deposits		(11,808,000	)		1,896,000
Net decrease in securities sold under agreements to repurchase		(6,999,000	)		(300,000	)
Net increase (decrease) in borrowings		(7,700,000	)		4,700,000
Repayment of long term borrowings		—			(18,000,000	)
Proceeds from long term borrowings		—			10,000,000
Proceeds from issuance of preferred stock, net of issuance costs		—			14,952,000
Repurchase of preferred stock and warrant		—			(10,108,000	)
Cash dividends paid on common stock		(886,000	)		(1,171,000	)
Cash dividends paid on preferred stock		(352,000	)		(383,000	)
Payment of discount on dividend reinvestment plan		(8,000	)		(15,000	)
Issuance of common stock		194,000			182,000
Net cash provided by (used in) financing activities		(19,049,000	)		17,806,000
Net increase (decrease) in cash and cash equivalents		7,318,000			(6,285,000	)
Cash and cash equivalents - beginning		13,698,000			19,983,000
Cash and cash equivalents - ending	$	21,016,000		$	13,698,000
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$	5,390,000		$	7,165,000
Cash paid during the year for income taxes	$	1,316,000		$	1,880,000
Transfers from loans to other real estate owned	$	2,821,000		$	5,067,000

See accompanying notes to consolidated financial statements.

41

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

Note 1. SIGNIFICANT ACCOUNTING POLICIES

Nature of operations and principles of consolidation

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly owned subsidiary, Atlantic Stewardship Bank (“the Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation (whose primary business is to own and manage an investment portfolio), Stewardship Realty LLC (whose primary business is to own and manage property at 612 Godwin Avenue, Midland Park, New Jersey), Atlantic Stewardship Insurance Company, LLC (whose primary business is insurance) and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the daily operations. All intercompany accounts and transactions are eliminated in the consolidated financial statements.

The Corporation provides financial services through the Bank’s offices in Bergen, Passaic, and Morris Counties, New Jersey. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial, residential mortgage and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow generated from the operations of businesses. There are no significant concentrations of loans to any one industry or customer. The Corporation’s lending activities are concentrated in loans secured by real estate located in northern New Jersey and, therefore, collectability of the loan portfolio is susceptible to changes in real estate market conditions in the northern New Jersey market. The Corporation has not made loans to borrowers outside the United States.

Basis of consolidated financial statements presentation

The consolidated financial statements of the Corporation have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ significantly from those estimates. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Cash flows

Cash and cash equivalents include cash and deposits with other financial institutions under 90 days and interest-bearing deposits in other banks with original maturities under 90 days. Net cash flows are reported for customer loan and deposit transactions, and short term borrowings and securities sold under agreement to repurchase.

Securities available-for-sale and held to maturity

The Corporation classifies its securities as held to maturity or available-for-sale. Investments in debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at amortized cost. All other securities are classified as securities available-for-sale. Securities available-for-sale may be sold prior to maturity in response to changes in interest rates or prepayment risk, for asset/liability management purposes, or other similar factors. These securities are carried at fair value with unrealized holding gains or losses reported in a separate component of shareholders’ equity, net of the related tax effects.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

42

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Federal Home Loan Bank (“FHLB”) Stock

The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as income.

Mortgage loans held for sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value on an aggregate basis. Mortgage loans held for sale are carried net of deferred fees, which are recognized as income at the time the loans are sold to permanent investors. Gains or losses on the sale of mortgage loans held for sale are recognized at the settlement date and are determined by the difference between the net proceeds and the amortized cost. All loans are sold with loan servicing rights released to the buyer.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans represents the outstanding principal balance after charge-offs and does not include accrued interest receivable as the inclusion is not significant to the reported amounts.

Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is adequately secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or are charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to an accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for loan losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

43

A loan is considered impaired 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. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructuring and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance is based on historical loss experience adjusted for current factors. The historical loss experience is determined for each portfolio segment and class, and is based on the actual loss history experienced by the Company over the most recent 3 years. For each portfolio segment the Bank prepares a migration analysis which analyzes the historical loss experience. The migration analysis is updated quarterly for the purpose of determining the assigned allocation factors which are essential components of the allowance for loan losses calculation. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment or class. These qualitative factors include consideration of the following: levels of and trends in charge-offs; levels of and trends in delinquencies and impaired loans; levels and trends in loan size; levels of real estate concentrations; national and local economic trends and conditions; the depth and experience of lending management and staff; and other changes in lending policies, procedures, and practices.

For purposes of determining the allowance for loan losses, loans in the portfolio are segregated by product type into the following segments: commercial, commercial real estate, construction, residential real estate, consumer and other. The Corporation also sub-divides these segments into classes based on the associated risks within those segments. Commercial loans are divided into the following two classes: secured by real estate and other. Construction loans are divided into the following two classes: commercial and residential. Consumer loans are divided into two classes: secured by real estate and other. The models and assumptions used to determine the allowance require management’s judgment. Assumptions, data and computations are appropriately reviewed and properly documented.

The risk characteristics of each of the identified portfolio segments are as follows:

Commercial – Commercial loans are generally of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Furthermore, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Commercial Real Estate – Commercial real estate loans are secured by multi-family and nonresidential real estate and generally have larger balances and involve a greater degree of risk than residential real estate loans. Commercial real estate loans depend on the global cash flow analysis of the borrower and the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the cash flow from the property. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. Commercial Real Estate is also subject to adverse market conditions that cause a decrease in market value or lease rates, obsolescence in location or function and market conditions associated with over supply of units in a specific region.

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Construction – Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, additional funds may be required to be advanced in excess of the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, the value of the building may be insufficient to assure full repayment if liquidation is required. If foreclosure is required on a building before or at completion due to a default, there can be no assurance that all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs will be recovered.

Residential Real Estate – Residential real estate loans are generally made on the basis of the borrower’s ability to make repayment from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable. Repayment of residential real estate loans is subject to adverse employment conditions in the local economy leading to increased default rate and decreased market values from oversupply in a geographic area. In general, residential real estate loans depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Consumer loans – Consumer loans secured by real estate may entail greater risk than do residential mortgage loans due to a lower lien position. In addition, other consumer loans, particularly loans secured by assets that depreciate rapidly, such as motor vehicles, are subject to greater risk. In all cases, collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Generally, when it is probable that some portion or all of a loan balance will not be collected, regardless of portfolio segment, that amount is charged-off as a loss against the allowance for loan losses. On loans secured by real estate, the charge-offs reflect partial writedowns due to the initial valuation of market values of the underlying real estate collateral in accordance with Accounting Standards Codification 310-40. Consumer loans are generally charged-off in full when they reach 90 – 120 days past due.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and equipment

Land is stated at cost. Buildings and improvements and furniture, fixtures and equipment are stated at cost, less accumulated depreciation computed on the straight-line method over the estimated lives of each type of asset. Estimated useful lives are three to forty years for buildings and improvements and three to twenty-five years for furniture, fixtures and equipment. Leasehold improvements are stated at cost less accumulated amortization computed on the straight-line method over the shorter of the term of the lease or useful life.

Long-Term Assets

Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recovered from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

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Other Real Estate Owned

Other real estate owned (OREO) consists of property acquired through foreclosure or deed in lieu of foreclosure and property that is in-substance foreclosed. OREO is initially recorded at fair value less estimated selling costs. When a property is acquired, the excess of the carrying amount over fair value, if any, is charged to the allowance for loan losses. Subsequent adjustments to the carrying value are recorded in an allowance for OREO and charged to OREO expense.

Bank owned life insurance

The Corporation has purchased life insurance policies on certain key officers. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Treasury Stock

Repurchases of common stock are recorded as treasury stock at cost. Treasury stock is reissued using the first in first out method. Treasury stock may be reissued for exercise of stock options, dividend reinvestment plans, stock dividends or other stock issuances. The difference between the cost and the market value at the time the treasury stock is reissued is shown as an adjustment to common stock.

Dividend Reinvestment Plan

The Corporation offers shareholders the opportunity to participate in a dividend reinvestment plan. Plan participants may reinvest cash dividends to purchase new shares of stock at 95% of the market value, based on the most recent trades. Cash dividends due to the plan participants are utilized to acquire shares from either, or a combination of, the issuance of authorized shares or purchases of shares in the open market through an approved broker. The Corporation reimburses the broker for the 5% discount when the purchase of the Corporation’s stock is completed. The plan is considered to be non-compensatory

Stock-based compensation

Stock-based compensation cost is recognized using the fair value method. Compensation cost is recognized for stock options issued based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period.

Income taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Comprehensive income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, and unrealized gains or losses on cash flow hedges, net of tax, which are also recognized as separate components of equity.

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Earnings per common share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average 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 the 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 and common stock warrants were issued.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Loss contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.

Dividend restriction

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Corporation or by the Corporation to its shareholders. The Corporation's ability to pay cash dividends is based, among other things, on its ability to receive cash from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's profits, combined with the retained net profits of the preceding two years. At December 31, 2012 the Bank could have paid dividends totaling approximately $1.4 million. At December 31, 2012, this restriction did not result in any effective limitation in the manner in which the Corporation is currently operating. Also, please see Note 11 with respect to restrictions on the Corporation’s ability to declare and pay dividends resulting from the terms of the Corporation’s Series B Preferred Shares.

Derivatives

Derivative financial instruments are recognized as assets or liabilities at fair value. The Corporation’s only 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. The Corporation does not use derivatives for trading purposes.

The Corporation designated the interest rate swap 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 change in the fair value 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 this interest rate swap that qualify for hedge accounting are recorded in interest expense. Changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings.

The Corporation formally documented the risk-management objective and the strategy for undertaking the hedge transaction at the inception of the hedging relationship. This documentation includes linking the fair value of the cash flow hedge to the subordinated debt on the balance sheet. 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 cash flows of the subordinated debt.

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.

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Fair value of financial instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Adoption of New Accounting Standards

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (together, “the Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments of this ASU are to be applied prospectively. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. This ASU provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

Note 2. RESTRICTIONS ON CASH AND DUE FROM BANKS

Prior to July 26, 2012, cash reserves were required to be maintained on deposit with the Federal Reserve Bank based on the Bank’s deposits. The average amounts of the reserves on deposit for 2012 through this date as well as for the year ended December 31, 2011 were approximately $25,000. After July 26, 2012 no required reserves were held at the Federal Reserve Bank.

Note 3. 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:

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,003,000	$	3,000	$	—	$	4,006,000
U.S. government-sponsored agencies		37,287,000		35,000		67,000		37,255,000
Obligations of state and political subdivisions		13,724,000		468,000		22,000		14,170,000
Mortgage-backed securities-residential		104,341,000		1,176,000		89,000		105,428,000
Asset-backed securities (a)		9,874,000		22,000		12,000		9,884,000
Corporate debt		492,000		3,000		—		495,000
Total debt securities		169,721,000		1,707,000		190,000		171,238,000
Other equity investments		3,425,000		37,000		—		3,462,000
	$	173,146,000	$	1,744,000	$	190,000	$	174,700,000

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	December 31, 2011
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,027,000	$	23,000	$	—	$	4,050,000
U.S. government-sponsored agencies:		20,702,000		46,000		4,000		20,744,000
Obligations of state and political subdivisions		8,866,000		461,000		9,000		9,318,000
Mortgage-backed securities-residential		130,912,000		2,583,000		28,000		133,467,000
Total debt securities		164,507,000		3,113,000		41,000		167,579,000
Other equity investments		3,287,000		59,000		—		3,346,000
	$	167,794,000	$	3,172,000	$	41,000	$	170,925,000

(a) Collateralized by student loans

Cash proceeds realized from sales and calls of securities available-for-sale for the years ended December 31, 2012 and 2011 were $102,300,000 and $46,245,000, respectively. There were gross gains totaling $2,290,000 and gross losses totaling $8,000 realized on sales or calls during the year ended December 31, 2012. The tax provision related to these realized gains was $892,000. There were gross gains totaling $1,157,000 and gross losses totaling $1,000 realized on sales or calls during the year ended December 31, 2011. The tax provision related to these realized gains was $455,000.

The fair value of available-for-sale securities pledged to secure public deposits for the year ending December 31, 2012 and 2011 was $1,246,000 and $1,440,000, respectively. See also Note 8 to the consolidated financial statements regarding securities pledged as collateral for Federal Home Loan Bank of New York advances and securities sold under agreements to repurchase.

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

	December 31, 2012
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	260,000	$	46,000	$	—	$	306,000
Obligations of state and political subdivisions		22,787,000		1,407,000		—		24,194,000
Mortgage-backed securities-residential		6,671,000		597,000		—		7,268,000
	$	29,718,000	$	2,050,000	$	—	$	31,768,000

	December 31, 2011
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	2,770,000	$	80,000	$	—	$	2,850,000
Obligations of state and political subdivisions		24,575,000		1,705,000		—		26,280,000
Mortgage-backed securities-residential		11,009,000		845,000		—		11,854,000
	$	38,354,000	$	2,630,000	$	—	$	40,984,000

Cash proceeds realized from sales and calls of securities held to maturity for the years ended December 31, 2012 and 2011 were $4,418,000 and $1,895,000, respectively. There were gross gains totaling $58,000 and no gross losses realized from sales and calls for the year ended December 31, 2012. The tax provision related to these realized gains was $22,000. There were gross gains totaling $5,000 and no gross losses realized from calls for the year ended December 31, 2011. The tax provision related to these realized gains was $2,000.

See also Note 8 to the consolidated financial statements regarding securities pledged as collateral for Federal Home Loan Bank of New York advances and securities sold under agreements to repurchase.

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Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This might cause actual maturities to differ from the contractual maturities.

Mortgage-backed securities are comprised primarily of government agencies such as the Government National Mortgage Association and government sponsored agencies such as the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Banks and the Federal Home Loan Mortgage Corporation. At year end 2012 and 2011, there were no holdings of securities of any one issuer other than the U.S. government and its agencies in an amount greater than 10% of shareholders' equity.

The following tables summarize the fair value and unrealized losses in the available-for-sale securities portfolio of those investment securities which reported an unrealized loss at December 31, 2012 and 2011, and if the unrealized loss position was continuous for the twelve months prior to December 31, 2012 and 2011. There were no investment securities in the held to maturity portfolio which reported an unrealized loss at December 31, 2012 or 2011.

Available-for-Sale

2012	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		20,716,000		(67,000	)		—		—		20,716,000		(67,000	)
Obligations of state and political
subdivisions		3,257,000		(22,000	)		—		—		3,257,000		(22,000	)
Mortgage-backed securities-residential		23,715,000		(89,000	)		—		—		23,715,000		(89,000	)
Asset-backed securities		3,047,000		(12,000	)		—		—		3,047,000		(12,000	)
Corporate debt		—		—			—		—		—		—
Other equity investments		—		—			—		—		—		—
Total temporarily impaired securities	$	50,735,000	$	(190,000	)	$	—	$	—	$	50,735,000	$	(190,000	)

2011	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		1,993,000		(4,000	)		—		—		1,993,000		(4,000	)
Obligations of state and political
subdivisions		1,335,000		(9,000	)		—		—		1,335,000		(9,000	)
Mortgage-backed securities-residential		10,637,000		(28,000	)		—		—		10,637,000		(28,000	)
Other equity investments		—		—			—		—		—		—
Total temporarily impaired securities	$	13,965,000	$	(41,000	)	$	—	$	—	$	13,965,000	$	(41,000	)

Other-Than-Temporary-Impairment

At December 31, 2012, there were no securities in a continuous loss position for 12 months or longer. The Corporation’s unrealized losses are primarily due to market conditions. These securities have not been considered other than temporarily impaired as scheduled principal and interest payments have been made and management anticipates collecting the entire principal balance as scheduled. 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 December 31, 2012.

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Note 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

At December 31, 2012 and 2011, respectively, the loan portfolio consisted of the following:

	December 31,
	2012			2011
Commercial:
Secured by real estate	$	58,160,000		$	60,650,000
Other		31,254,000			41,850,000
Commercial real estate		242,763,000			246,549,000
Construction:
Commercial		9,324,000			12,913,000
Residential		—			252,000
Residential real estate		67,200,000			54,694,000
Consumer:
Secured by real estate		30,982,000			38,278,000
Other		624,000			1,086,000
Other		116,000			141,000
Total gross loans		440,423,000			456,413,000
Less:  Deferred loan (fees) costs, net		(50,000	)		6,000
Allowance for loan losses		10,641,000			11,604,000
		10,591,000			11,610,000
Loans, net	$	429,832,000		$	444,803,000

At December 31, 2012 and 2011, loans participated by the Corporation to other organizations totaled approximately $20,559,000 and $31,060,000, respectively. These amounts are not included in the totals presented above.

The Corporation has entered into lending transactions with directors, executive officers and principal shareholders of the Corporation and their affiliates. At December 31, 2012 and 2011, these loans aggregated approximately $2,927,000 and $2,905,000, respectively. During the year ended December 31, 2012, new loans totaling $1,228,000 were granted and repayments totaled approximately $1,206,000. The loans, at December 31, 2012, were current as to principal and interest payments.

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

	For the year ended December 31, 2012
	Balance beginning of period		Provision charged to operations			Loans charged-off			Recoveries of loans charged-off		Balance end of period
Commercial	$	5,368,000	$	6,368,000		$	(7,144,000	)	$	240,000	$	4,832,000
Commercial real estate		4,943,000		3,570,000			(3,577,000	)		—		4,936,000
Construction		480,000		78,000			(394,000	)		5,000		169,000
Residential real estate		303,000		25,000			(21,000	)		1,000		308,000
Consumer		498,000		(79,000	)		(69,000	)		2,000		352,000
Other		2,000		2,000			(5,000	)		4,000		3,000
Unallocated		10,000		31,000			—			—		41,000
Balance, ending	$	11,604,000	$	9,995,000		$	(11,210,000	)	$	252,000	$	10,641,000

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	For the year ended December 31, 2011
	Balance beginning of period		Provision charged to operations		Loans charged-off			Recoveries of loans charged-off		Balance end of period
Commercial	$	3,745,000	$	6,197,000	$	(4,603,000	)	$	29,000	$	5,368,000
Commercial real estate		3,112,000		3,742,000		(1,911,000	)		—		4,943,000
Construction		930,000		386,000		(839,000	)		3,000		480,000
Residential real estate		184,000		231,000		(112,000	)		—		303,000
Consumer		510,000		281,000		(296,000	)		3,000		498,000
Other		2,000		5,000		(8,000	)		3,000		2,000
Unallocated		7,000		3,000		—			—		10,000
Balance, ending	$	8,490,000	$	10,845,000	$	(7,769,000	)	$	38,000	$	11,604,000

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2012 and 2011:

	December 31, 2012
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer		Other		Unallocated		Total
Allowance for loan losses:
Ending Allowance balance attributable to loans
Individually evaluated for impairment	$	251,000	$	15,000	$	—	$	—	$	—	$	—	$	—	$	266,000
Collectively evaluated for impairment		4,581,000		4,921,000		169,000		308,000		352,000		3,000		41,000		10,375,000
Total ending allowance balance	$	4,832,000	$	4,936,000	$	169,000	$	308,000	$	352,000	$	3,000	$	41,000	$	10,641,000
Loans:
Loans individually evaluated for impairment	$	8,641,000	$	12,803,000	$	6,029,000	$	413,000	$	800,000	$	—	$	—	$	28,686,000
Loans collectively evaluated for impairment		80,773,000		229,960,000		3,295,000		66,787,000		30,806,000		116,000		—		411,737,000
Total ending Loan balance	$	89,414,000	$	242,763,000	$	9,324,000	$	67,200,000	$	31,606,000	$	116,000	$	—	$	440,423,000

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	December 31, 2011
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer		Other Loans		Unallocated		Total
Allowance for loan losses:
Ending Allowance balance attributable to loans
Individually evaluated for impairment	$	1,908,000	$	947,000	$	266,000	$	—	$	—	$	—	$	—	$	3,121,000
Collectively evaluated for impairment		3,460,000		3,996,000		214,000		303,000		498,000		2,000		10,000		8,483,000
Total ending allowance balance	$	5,368,000	$	4,943,000	$	480,000	$	303,000	$	498,000	$	2,000	$	10,000	$	11,604,000
Loans:
Loans individually evaluated for impairment	$	10,265,000	$	13,128,000	$	8,653,000	$	779,000	$	891,000	$	—	$	—	$	33,716,000
Loans collectively evaluated for impairment		92,235,000		233,421,000		4,512,000		53,915,000		38,473,000		141,000		—		422,697,000
Total ending Loan balance	$	102,500,000	$	246,549,000	$	13,165,000	$	54,694,000	$	39,364,000	$	141,000	$	—	$	456,413,000

The following table presents the recorded investment in nonaccrual loans at the dates indicated:

	December 31,
	2012		2011
Commercial:
Secured by real estate	$	3,374,000	$	6,178,000
Other		261,000		2,494,000
Commercial real estate		10,083,000		9,302,000
Construction:
Commercial		3,080,000		7,840,000
Residential		—		252,000
Residential real estate		413,000		779,000
Consumer:
Secured by real estate		800,000		891,000
Other		—		—
Other		—		—
Total nonaccrual loans	$	18,011,000	$	27,736,000

At December 31, 2012 there was one Commercial – Secured by real estate loan for $237,000 that was past due 90 days and still accruing. This loan is in the process of collection and adequately collateralized. Management believes all interest and principal owed will be collected. There were no loans past due 90 days and still accruing at December 31, 2011.

53

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

	At and for the year ended December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	9,689,000	$	6,557,000			$	4,221,000	$	92,000
Other		424,000		146,000				109,000		5,000
Commercial real estate		17,211,000		12,149,000				10,054,000		158,000
Construction:
Commercial		7,300,000		6,029,000				6,041,000		53,000
Residential		—		—				—		—
Residential real estate		451,000		413,000				393,000		—
Consumer:
Secured by real estate		834,000		800,000				922,000		—
Other		—		—				—		—
Other		—		—				—		—
With an allowance recorded:
Commercial:
Secured by real estate		965,000		781,000	$	176,000		2,589,000		25,000
Other		1,163,000		1,157,000		75,000		2,195,000		43,000
Commercial real estate		923,000		654,000		15,000		2,940,000		18,000
Construction:
Commercial		—		—		—		1,224,000		—
Residential		—		—		—		596,000		—
Residential real estate		—		—		—		239,000		—
Consumer:
Secured by real estate		—		—		—		—		—
Other		—		—		—		—		—
Other		—		—		—		—		—
Total nonperforming loans	$	38,960,000	$	28,686,000	$	266,000	$	31,523,000	$	394,000

During the year ended December 31, 2012, no interest income was recognized on a cash basis.

54

	At and for the year ended December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	3,306,000	$	2,831,000			$	2,260,000	$	22,000
Other		—		—				396,000		23,000
Commercial real estate		10,691,000		8,523,000				7,110,000		52,000
Construction:
Commercial		8,453,000		7,609,000				2,888,000		26,000
Residential		—		—				219,000		—
Residential real estate		866,000		779,000				404,000		—
Consumer:
Secured by real estate		911,000		891,000				811,000		—
Other		—		—				—		—
Other		—		—				—		—
With an allowance recorded:
Commercial:
Secured by real estate		7,287,000		4,590,000	$	468,000		4,788,000		34,000
Other		2,876,000		2,844,000		1,440,000		1,822,000		5,000
Commercial real estate		4,747,000		4,605,000		947,000		5,962,000		63,000
Construction:
Commercial		1,085,000		792,000		264,000		643,000		12,000
Residential		273,000		252,000		2,000		50,000		—
Residential real estate		—		—		—		537,000		—
Consumer:
Secured by real estate		—		—		—		31,000		—
Other		—		—		—		—		—
Other		—		—		—		—		—
Total nonperforming loans	$	40,495,000	$	33,716,000	$	3,121,000	$	27,921,000	$	237,000

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The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2012 and 2011. Nonaccrual loans are included in the disclosure by payment status:

	December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial:
Secured by real estate	$	101,000	$	179,000	$	2,674,000	$	2,954,000	$	55,206,000	$	58,160,000
Other		25,000		98,000		52,000		175,000		31,079,000		31,254,000
Commercial real estate		2,582,000		—		9,023,000		11,605,000		231,158,000		242,763,000
Construction:
Commercial		—		460,000		815,000		1,275,000		8,049,000		9,324,000
Residential		—		—		—		—		—		—
Residential real estate		161,000		—		413,000		574,000		66,626,000		67,200,000
Consumer:
Secured by real estate		67,000		—		647,000		714,000		30,268,000		30,982,000
Other		—		—		—		—		624,000		624,000
Other		—		—		—		—		116,000		116,000
Total	$	2,936,000	$	737,000	$	13,624,000	$	17,297,000	$	423,126,000	$	440,423,000

	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial:
Secured by real estate	$	875,000	$	546,000	$	3,977,000	$	5,398,000	$	55,252,000	$	60,650,000
Other		53,000		260,000		1,752,000		2,065,000		39,785,000		41,850,000
Commercial real estate		—		736,000		5,352,000		6,088,000		240,461,000		246,549,000
Construction:
Commercial		—		561,000		2,640,000		3,201,000		9,712,000		12,913,000
Residential		—		—		252,000		252,000		—		252,000
Residential real estate		—		—		779,000		779,000		53,915,000		54,694,000
Consumer:
Secured by real estate		581,000		—		719,000		1,300,000		36,978,000		38,278,000
Other		4,000		—		—		4,000		1,082,000		1,086,000
Other		—		—		—		—		141,000		141,000
Total	$	1,513,000	$	2,103,000	$	15,471,000	$	19,087,000	$	437,326,000	$	456,413,000

Troubled Debt Restructurings

At December 31, 2012 and 2011, the Corporation had $11.7 million and $15.1 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $10.4 million and $6.0 million were performing in accordance with their new terms at December 31, 2012 and 2011, respectively. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of $246,000 and $1.2 million have been allocated for the troubled debt restructurings at December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, the Corporation had committed $241,000 and $416,000, respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

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During the years ended December 31, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans primarily represents an extension of the maturity date at terms more favorable than the current market terms for new debt with similar risk, including a lower interest rate. Many of the modifications represent the term out of previous lines of credit that were not renewed. Modifications involving an extension of the maturity date were for periods ranging from 3 months to 15 years.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2012 and 2011:

	December 31, 2012								December 31, 2011
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial:
Secured by real estate		9	$	1,875,000	$	1,875,000		15	$	3,002,000	$	3,002,000
Other		7		3,735,000		3,735,000		11		678,000		678,000
Commercial real estate		1		755,000		755,000		3		2,864,000		2,864,000
Construction:
Commercial		1		300,000		300,000		7		5,961,000		5,961,000
Residential		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		—
Consumer:
Secured by real estate		—		—		—		—		—		—
Other		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total		18	$	6,655,000	$	6,655,000		36	$	12,505,000	$	12,505,000

For the year ended December 31, 2012, the troubled debt restructurings described above increased the allowance for loan losses by $2.4 million. There were $3.3 million of charge-offs in 2012 related to these troubled debt restructurings. For the year ended December 31, 2011, the troubled debt restructurings described above increased the allowance for loan losses by $1.6 million. There were $1.1 million of charge-offs in 2011 related to these troubled debt restructurings.

A loan is considered to be in payment default once it is contractually 90 days past due under the modified terms. There are no troubled debt restructurings for which there was a payment default within twelve months following the modification.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

Credit Quality Indicators

The Corporation categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate and commercial construction loans. This analysis is performed at the time the loan is originated and annually thereafter. The Corporation uses the following definitions for risk ratings.

57

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard – Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – A Doubtful loan with all weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable or improbable. The likelihood of loss is extremely high, but because of certain important and reasonably specific factors, an estimated loss is deferred until a more exact status can be determined.

Loss – A loan classified Loss is considered uncollectible and of such little value that its continuance as an asset is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be affected in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of December 31, 2012 and 2011, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:

	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	47,524,000	$	7,368,000	$	3,268,000	$	—	$	—	$	58,160,000
Other		29,484,000		1,508,000		185,000		77,000		—		31,254,000
Commercial real estate		215,158,000		16,003,000		9,007,000		2,595,000		—		242,763,000
Construction:
Commercial		3,294,000		2,950,000		3,080,000		—		—		9,324,000
Residential		—		—		—		—		—		—
Total	$	295,460,000	$	27,829,000	$	15,540,000	$	2,672,000	$	—	$	341,501,000

	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	52,004,000	$	3,234,000	$	5,248,000	$	164,000	$	—	$	60,650,000
Other		38,790,000		566,000		617,000		1,877,000		—		41,850,000
Commercial real estate		233,295,000		3,512,000		7,333,000		2,409,000		—		246,549,000
Construction:
Commercial		4,512,000		1,656,000		6,745,000		—		—		12,913,000
Residential		—		—		252,000		—		—		252,000
Total	$	328,601,000	$	8,968,000	$	20,195,000	$	4,450,000	$	—	$	362,214,000

58

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate and consumer loan segments, the Corporation evaluates credit quality based on payment activity. The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of December 31, 2012 and 2011.

	December 31, 2012
	Current		Past Due and Nonaccrual		Total
Residential real estate	$	66,626,000	$	574,000	$	67,200,000
Consumer:
Secured by real estate		30,268,000		714,000		30,982,000
Other		624,000		—		624,000
Total	$	97,518,000	$	1,288,000	$	98,806,000

	December 31, 2011
	Current		Past Due and Nonaccrual		Total
Residential real estate	$	53,915,000	$	779,000	$	54,694,000
Consumer:
Secured by real estate		36,978,000		1,300,000		38,278,000
Other		1,082,000		4,000		1,086,000
Total	$	91,975,000	$	2,083,000	$	94,058,000

Note 5. PREMISES AND EQUIPMENT, NET

The balance of premises and equipment consists of the following at December 31, 2012 and 2011:

	December 31,
	2012		2011
Land	$	2,999,000	$	2,999,000
Buildings and improvements		2,883,000		2,936,000
Leasehold improvements		2,244,000		2,244,000
Furniture, fixtures and equipment		3,034,000		3,219,000
		11,160,000		11,398,000
Less: accumulated depreciation and amortization		5,515,000		5,297,000
Total premises & equipment, net	$	5,645,000	$	6,101,000

Amounts charged to net occupancy expense for depreciation and amortization of banking premises and equipment amounted to $532,000 and $594,000 in 2012 and 2011, respectively.

Note 6. OTHER REAL ESTATE OWNED

The balance of other real estate owned consists of the following at December 31, 2012 and 2011:

	December 31,
	2012		2011
Acquired by foreclosure or deed in lieu of foreclosure	$	1,058,000	$	3,873,000
In-substance foreclosure		—		1,453,000
Allowance for losses on other real estate owned		—		(38,000	)
Other real estate owned, net	$	1,058,000	$	5,288,000

59

Activity in the allowance for losses on other real estate owned was as follows:

	For the year ended December 31,
	2012			2011
Beginning of year	$	38,000		$	—
Additions charged to expense		188,000			38,000
Reductions from sales of other real estate owned		(226,000	)		—
End of year	$	—		$	38,000

Net gain on sale of other real estate owned totaled $429,000 and $10,000 for the year ended December 31, 2012 and 2011, respectively.

Expenses related to other real estate owned include:

	For the year ended December 31,
	2012		2011
Provision for unrealized losses	$	188,000	$	38,000
Operating expenses, net of rental income		415,000		57,000
	$	603,000	$	95,000

Note 7. DEPOSITS

	December 31,
	2012		2011
Noninterest-bearing demand	$	124,286,000	$	115,776,000
Interest-bearing checking accounts		177,516,000		175,514,000
Money market accounts		63,955,000		73,544,000
Total interest-bearing demand		241,471,000		249,058,000
Statement savings and clubs		60,478,000		51,769,000
Business savings		7,860,000		6,198,000
Total savings		68,338,000		57,967,000
IRA investment and variable rate savings		35,058,000		38,257,000
Money market certificates		121,101,000		132,494,000
Total certificates of deposit		156,159,000		170,751,000
Total interest-bearing deposits		465,968,000		477,776,000
Total deposits	$	590,254,000	$	593,552,000

Certificates of deposit with balances of $100,000 or more at December 31, 2012 and 2011, totaled $94,883,000 and $102,348,000, respectively.

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The scheduled maturities of certificates of deposit were as follows:

	December 31,
2013	$	89,470,000
2014		45,159,000
2015		9,625,000
2016		8,858,000
2017		3,047,000
	$	156,159,000

Note 8. BORROWINGS

Federal Home Loan Bank of New York Advances

The following table presents Federal Home Loan Bank of New York ("FHLB-NY") advances by maturity date:

	December 31, 2012					December 31, 2011
			Weighted Average					Weighted Average
Advances maturing	Amount		Rate			Amount		Rate
Within one year	$	—		—	%	$	7,700,000		1.30	%
After one year, but within two years		—		—	%		—		—	%
After two years, but within three years		—		—	%		5,000,000		1.72	%
After three years, but within four years		10,000,000		1.64	%		—		—	%
After four years, but within five years		5,000,000		1.16	%		10,000,000		1.64	%
After five years		10,000,000		1.85	%		10,000,000		1.85	%
	$	25,000,000		1.63	%	$	32,700,000		1.64	%

During the fiscal years 2012 and 2011, the maximum amount of FHLB-NY advances outstanding at any month end was $36.8 million and $36.0 million, respectively. The average amount of advances outstanding during the year ended December 31, 2012 and 2011 was $26.9 million and $33.3 million, respectively.

On September 21, 2012 the Corporation refinanced borrowings with the FHLB in the amount of $5 million. The FHLB amount that was repaid had a rate of 1.72% and a remaining average life of 1.9 years. The new borrowing has a stated rate of 1.16% and an average life of 5.0 years. In connection with the repayment, the Corporation incurred a prepayment premium of $135,000 which is being amortized into earnings over the life of the new borrowings resulting in an effective interest rate for the borrowings of 1.70%.

On August 19, 2011 the Corporation refinanced borrowings with the FHLB in the amount of $15.0 million. The FHLB advances repaid had a blended rate of 3.30% and an average life of 1.8 years. The new borrowings have a blended stated rate of 1.67% and an average life of 4.0 years. In connection with the repayment, the Corporation incurred a prepayment penalty of $814,000. The prepayment penalty is being amortized into earnings over the life of the new borrowings resulting in an effective interest rate for the borrowings of 2.75%. In addition, on December 14, 2011 the Corporation prepaid a borrowing with the FHLB in the amount of $5 million. This advance had a rate of 1.85% and a remaining life of 3.2 years. This transaction resulted in a prepayment penalty of $268,000 which was fully expensed in 2011 and is included in miscellaneous expense on the Consolidated Statement of Income.

At December 31, 2012, FHLB advances totaling $10.0 million had a quarterly call feature which has reached its first call date.

Advances from the FHLB-NY are all fixed rate borrowings and are secured by a blanket assignment of the Corporation's unpledged, qualifying mortgage loans and by mortgage-backed securities or investment securities. The loans remain under the control of the Corporation. Securities are maintained in safekeeping with the FHLB-NY. As of December 31, 2012 and 2011, the advances were collateralized by $55.2 million and $37.7 million, respectively, of first mortgage loans under the blanket lien arrangement. Additionally, the advances were collateralized by $5.3 million and $14.3 million of investment securities as of December 31, 2012 and 2011, respectively. Based on the collateral the Corporation was eligible to borrow up to a total of $60.5 million at December 31, 2012 and $52.0 million at December 31, 2011.

61

The Corporation has the ability to borrow overnight with the FHLB-NY. There were no overnight borrowings with the FHLB-NY at December 31, 2012. At December 31, 2011 there was $4.7 million in overnight borrowings with the FHLB-NY. The overall borrowing capacity is contingent on available collateral to secure borrowings and the ability to purchase additional activity-based capital stock of the FHLB-NY.

The Corporation may also borrow from the Discount Window of the Federal Reserve Bank of New York based on the market value of collateral pledged. At December 31, 2012 and 2011, the borrowing capacity at the Discount Window was $5.1 million. In addition, the Corporation had available overnight variable repricing lines of credit with other correspondent banks totaling $11 million on an unsecured basis. There were no borrowings under these lines of credit at December 31, 2012 and 2011.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase represent financing arrangements.

Included in the balance of securities sold under agreements to repurchase is a wholesale repurchase agreement with a broker with a maturity in 2014. The borrowing has a fixed interest rate of 3.25% for the first year and then converted to a floating rate at 9.00% minus 3-month LIBOR measured on a quarterly basis with a 5.15% cap and a 0.0% floor. This repurchase agreement is collateralized by agency securities maintained in safekeeping with the broker. On September 25, 2012 the Corporation repaid $7 million of the original $14 million wholesale repurchase agreement. In connection with the repayment, the Corporation incurred a prepayment premium of $691,000 which is included in noninterest expenses.

The remaining balances at December 31, 2012 as well as the balances at December 31, 2011 were securities sold to Bank customers at fixed rates with maturities varying from 6 months to one year. These securities were maintained in a separate safekeeping account within the Corporation's control.

At December 31, 2012 and 2011, securities sold under agreements to repurchase were collateralized by U.S. Treasury and U.S. government-sponsored agency securities having a carrying value of approximately $11,002,000 and $19,269,000, respectively.

Information concerning securities sold under agreements to repurchase is summarized as follows:

	December 31,
	2012			2011
Balance	$	7,343,000		$	14,342,000
Weighted average interest rate at year end		4.92	%		5.04	%
Maximum amount outstanding at any month end
during the year	$	14,342,000		$	16,993,000
Average amount outstanding during the year	$	12,468,000		$	15,246,000
Average interest rate during the year		5.10	%		4.82	%

Note 9. SUBORDINATED DEBENTURES

In 2003, the Corporation formed Stewardship Statutory Trust I (the “Trust”), a statutory business trust, which on September 17, 2003 issued $7.0 million Fixed/Floating Rate Capital Securities (“Capital Securities”). The Trust used the proceeds to purchase from the Corporation, $7,217,000 of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (“Debentures”) maturing September 17, 2033. The Trust is obligated to distribute all proceeds of a redemption whether voluntary or upon maturity, to holders of the Capital Securities. The Corporation’s obligation with respect to the Capital Securities, and the Debentures, when taken together, provide a full and unconditional guarantee on a subordinated basis by the Corporation of the Trust’s obligations to pay amounts when due on the Capital Securities. The Corporation is not considered the primary beneficiary of this Trust (variable interest entity); therefore the trust is not consolidated in the Corporation’s consolidated financial statements, but rather the subordinated debentures are shown as a liability.

62

Prior to September 17, 2008, the Capital Securities and the Debentures both had a fixed interest rate of 6.75%. Beginning September 17, 2008, the rate floats quarterly at a rate of three month London Interbank Offered Rate (LIBOR) plus 2.95%. At December 31, 2012 and 2011, the rate on both the Capital Securities and the Debentures was 3.26% and 3.51%, respectively. The Corporation has the right to defer payments of interest on the subordinated debentures by extending the interest payment period for up to 20 consecutive quarterly periods.

The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

Note 10. REGULATORY CAPITAL REQUIREMENTS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Regulations of the Board of Governors of the Federal Reserve System require bank holding companies to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2012, the Corporation was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. The Bank must comply with substantially similar capital regulations promulgated by the FDIC.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

At year end 2012 and 2011, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events that have occurred since that notification that management believes would change the Bank's category.

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Management believes that, as of December 31, 2012, the Bank and the Corporation have met all capital adequacy requirements to which they are subject. The following is a summary of the Corporation's and the Bank's actual capital amounts and ratios as of December 31, 2012 and 2011 compared to the minimum capital adequacy requirements and the requirements for classification as a well-capitalized institution under the prompt corrective action regulations:

	Actual					Required for Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Leverage (Tier 1) capital
Consolidated	$	62,887,000		9.09	%	$	27,682,000		4.00	%		N/A		N/A
Bank		61,558,000		8.91	%		27,625,000		4.00	%	$	34,531,000		5.00	%
Risk-based capital:
Tier 1
Consolidated		62,887,000		13.63	%		18,459,000		4.00	%		N/A		N/A
Bank		61,558,000		13.35	%		18,440,000		4.00	%		27,660,000		6.00	%
Total
Consolidated		68,715,000		14.89	%		36,917,000		8.00	%		N/A		N/A
Bank		67,380,000		14.62	%		36,880,000		8.00	%		46,100,000		10.00	%
December 31, 2011
Leverage (Tier 1) capital
Consolidated	$	63,418,000		8.86	%	$	28,634,000		4.00	%		N/A		N/A
Bank		61,193,000		8.57	%		28,546,000		4.00	%	$	35,683,000		5.00	%
Risk-based capital:
Tier 1
Consolidated		63,418,000		12.65	%		20,051,000		4.00	%		N/A		N/A
Bank		61,193,000		12.22	%		20,023,000		4.00	%		30,034,000		6.00	%
Total
Consolidated		69,750,000		13.91	%		40,103,000		8.00	%		N/A		N/A
Bank		67,516,000		13.49	%		40,046,000		8.00	%		50,057,000		10.00	%

In February, 2013 the Bank agreed with its regulators to maintain a minimum Leverage (Tier 1) capital ratio of at least 8% and a minimum Total Risk-based capital ratio of at least 10%. As presented above, at December 31, 2012, the Bank’s regulatory capital ratios exceeded the established minimum capital requirements.

Note 11. PREFERRED STOCK

In connection with the Corporation’s participation in the U.S. Department of the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion, on September 1, 2011, the Corporation issued 15,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Shares”) to the Treasury for an aggregate purchase price of $15 million, in cash.

Using the proceeds of the issuance of the Series B Preferred Shares, the Corporation simultaneously repurchased all 10,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Shares”) previously issued under the Treasury’s Troubled Assets Relief Program (“TARP”) Capital Purchase Program (the “CPP”) for an aggregate purchase price of $10,022,222, in cash, including accrued but unpaid dividends through the date of repurchase.

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The terms of the newly-established Series B Preferred Shares provide for a liquidation preference of $1,000 per share and impose restrictions on the Corporation’s ability to declare or pay dividends or purchase, redeem or otherwise acquire for consideration, shares of the Corporation’s Common Stock and any class or series of stock of the Corporation the terms of which do not expressly provide that such class or series will rank senior or junior to the Series B Preferred Shares as to dividend rights and/or rights on liquidation, dissolution or winding up of the Corporation. Specifically, the terms provide for the payment of a non-cumulative quarterly dividend, payable in arrears, which the Corporation accrues as earned over the period that the Series B Preferred Shares are outstanding. The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement) from 1% to 5% per annum and, thereafter, for the eleventh through the first half of the nineteenth dividend periods, from 1% to 7%. In general, the dividend rate decreases as the level of the Bank’s QSBL increases. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%. During 2012, the dividend rate ranged between 1% and 3.39%. Such dividends are not cumulative but the Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level.

In addition, the Series B Preferred Shares are non-voting except in limited circumstances. In the event that the Corporation has not timely declared and paid dividends on the Series B Preferred Shares for six dividend periods or more, whether or not consecutive, and shares of Series B Preferred Stock with an aggregate liquidation preference of at least $25,000,000 are still outstanding, the Treasury may designate two additional directors to be elected to the Corporation’s Board of Directors. Subject to the approval of the Bank’s federal banking regulator, the Federal Reserve, the Corporation may redeem the Series B Preferred Shares at any time at the Corporation’s option, at a redemption price equal to the liquidation preference per share plus the per share amount of any unpaid dividends for the then-current period through the date of the redemption. The Series B Preferred Shares are includable in Tier I capital for regulatory capital.

On October 26, 2011, the Corporation completed the repurchase of a warrant held by the United States Treasury Department. The 10-year warrant was issued on January 29, 2009 as part of the Corporation's participation in the TARP CPP, and entitled the Treasury to purchase 133,475 shares of Stewardship Financial Corporation stock at an exercise price of $11.24 per share. The Corporation paid a total of $107,398 to the Treasury to repurchase the warrant.

Note 12. BENEFIT PLANS

The Corporation has a noncontributory profit sharing plan covering all eligible employees. Contributions are determined by the Corporation’s Board of Directors on an annual basis. There was no profit sharing plan expense for the year ended December 31, 2012 or 2011.

The Corporation also has a 401(k) plan which covers all eligible employees. Participants may elect to contribute up to 100% of their salaries, not to exceed the applicable limitations as per the Internal Revenue Code. The Corporation, on an annual basis, may elect to match 50% of the participant’s first 5% contribution. Total 401(k) expense for the years ended December 31, 2012 and 2011 amounted to approximately $145,000 and $136,000, respectively.

During 1996, the Corporation adopted an Employee Stock Purchase Plan which allows all eligible employees to authorize a specific payroll deduction from his or her base compensation for the purchase of the Corporation’s Common Stock. Total stock purchases amounted to 7,589 and 8,824 shares during 2012 and 2011, respectively. At December 31, 2012, the Corporation had 194,519 shares reserved for issuance under this plan.

Note 13. STOCK-BASED COMPENSATION

At December 31, 2012, the Corporation had various types of stock award programs.

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Director Stock Plan

The Director Stock Plan permits members of the Board of Directors of the Bank to receive any monthly Board of Directors’ fees in shares of the Corporation’s common stock, rather than in cash. Shares are purchased for directors in the open market and resulted in purchases of 5,591 and 3,715 shares for 2012 and 2011, respectively. At December 31, 2012, the Corporation had 540,316 shares authorized but unissued for this plan.

Employee Stock Option Plan

The Employee Stock Option Plan provided for options to purchase shares of common stock to be issued to employees of the Corporation at the discretion of the Compensation Committee. There were no options granted during 2012 or 2011. While there are still options outstanding under this plan, the plan does not allow for additional grants after May 2006. Under the plan, the exercise price of options may be paid in cash or with shares already owned. There were no options exercised during 2012 or 2011. A summary of the status of the qualified stock options as of December 31, 2012 and changes during the year then ended is presented as follows:

	2012
			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at beginning of year		7,598	$	11.19
Exercised		—		—
Forfeited		844		11.19
Outstanding at end of year		6,754	$	11.19
Intrinsic value at year end	$	—
Options exercisable at year end		6,754
Intrinsic value of options exercisable	$	—
Weighted-average remaining contractual term (years)		0.54

Non-Employee Directors Stock Option Plan

The 2006 Stock Option Plan for Non-Employee Directors provided for options to purchase shares of common stock to be granted to non-employee directors of the Corporation. The options granted under the plan had exercise prices which represented market price of the stock at the date of grant. No options have been granted since 2009. Under this plan, options vested in equal installments over a period of five years on an annual basis. Options expired on the earlier of the sixth anniversary of the date of the grant or May 15, 2012. Therefore, at December 31, 2012 all options had expired.

Total compensation cost that has been charged against income for this plan was $19,000 for the year ended December 31, 2011. There was no compensation expense for the year ended December 31, 2012.

A summary of the status of the nonqualified stock options issued under the 2006 Stock Option Plan for Non-Employee Directors as of December 31, 2012 is presented below:

	2012
				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at beginning of year		57,130		$	11.02
Expired		(57,130	)		11.02
Outstanding at end of year		—		$	—

No options were exercised under the 2006 Stock Option Plan for Non-Employee Directors during the years ended December 31, 2012 and 2011.

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Stock Incentive Plan

The 2010 Stock Incentive Plan covers both employees and directors. The purpose of the 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. During 2011 each non-employee director received an award of 250 shares under the 2010 Stock Incentive Plan for a total of 2,500 shares. In addition, during 2011 5,145 shares were awarded to employees. Total cost that has been charged against income for this plan was $26,000 for the year ended December 31, 2011. No awards were granted during the year ended December 31, 2012. At December 31, 2012 the Corporation had 192,355 shares authorized but unissued for this plan.

Note 14. EARNINGS PER COMMON SHARE

The following reconciles the income available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for 2012 and 2011:

	2012		2011
Net income	$	520,000	$	684,000
Dividends on preferred stock and accretion		352,000		558,000
Net income available to common shareholders	$	168,000	$	126,000
Weighted average common shares outstanding - basic		5,908,503		5,861,465
Effect of dilutive securities - stock options		—		—
Weighted average common shares outstanding - diluted		5,908,503		5,861,465
Earnings per common share:
Basic	$	0.03	$	0.02
Diluted	$	0.03	$	0.02

For the years ended December 31, 2012 and 2011, stock options to purchase 31,683 and 64,728 average shares of common stock, respectively, were not considered in computing diluted earnings per share of common stock because they were antidilutive. The U.S. Treasury’s warrant to purchase 108,974 average shares of common stock was not considered in computing diluted earnings per common share for the year ended December 31, 2011 because it was antidilutive.

Note 15. INCOME TAXES

The components of income tax benefit are summarized as follows:

	Years ended December 31,
	2012			2011
Current tax expense (benefit):
Federal	$	(440,000	)	$	1,050,000
State		78,000			385,000
		(362,000	)		1,435,000
Deferred tax expense (benefit):
Federal		158,000			(1,432,000	)
State		(93,000	)		(432,000	)
Valuation allowance		50,000			14,000
		115,000			(1,850,000	)
	$	(247,000	)	$	(415,000	)

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The following table presents a reconciliation between the reported income taxes and the income taxes which would be computed by applying the normal federal income tax rate (34%) to income before income taxes:

	Years Ended December 31,
	2012			2011
Federal income tax	$	93,000		$	92,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect		(2,000	)		(17,000	)
Nontaxable interest income		(399,000	)		(401,000	)
Life insurance		(113,000	)		(113,000	)
Nondeductible expenses		17,000			17,000
Write-off of Federal deferred tax asset		133,000			—
Change in valuation reserve		42,000			—
Other items, net		(18,000	)		7,000
Effective federal income taxes	$	(247,000	)	$	(415,000	)

The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

	December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	4,250,000		$	4,635,000
Stock compensation		—			107,000
Nonaccrual loan interest		1,112,000			1,136,000
Depreciation		425,000			406,000
Contribution carry forward		253,000			276,000
State capital loss carry forward		165,000			17,000
Unrealized loss on fair value of interest rate swap		295,000			325,000
Alternate minimum tax		307,000			—
		6,807,000			6,902,000
Valuation reserve		(179,000	)		(129,000	)
		6,628,000			6,773,000
Deferred tax liabilities:
Unrealized gains on securities available-for-sale		607,000			1,221,000
Other		4,000			4,000
		611,000			1,225,000
Net deferred tax assets	$	6,017,000		$	5,548,000

The Corporation has provided a full valuation allowance relating to all of the state tax benefits of both net operating loss carryforwards and contribution carryforwards. Management has determined that it is more likely than not that it will not be able to realize the deferred tax benefits described above. For the year ended December 31, 2012 the Corporation wrote-off deferred tax assets related to expired stock options and those associated with the expiration of certain contribution carryovers.

The Corporation has approximately $856,000 of taxes paid in the carryback period that could be utilized against the deferred tax asset. The remaining $5.2 million of net deferred tax assets more likely than not will be utilized through future earnings.

The Corporation has alternate minimum tax (AMT) credit carryforwards of approximately $307,000 to reduce regular Federal income taxes in future years to the extent that that regular tax exceeds AMT. The AMT credit carryforwards have no expiration date.

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There were no unrecognized tax benefits during the years or at the years ended December 31, 2012 and 2011 and management does not expect a significant change in unrecognized benefits in the next twelve months. There were no tax interest and penalties recorded in the income statement for the years ended December 31, 2012 and 2011. There were no tax interest and penalties accrued for the years ended December 31, 2012 and 2011.

The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the State of New Jersey.

The Corporation is no longer subject to examination by taxing authorities for years before 2009.

Note 16. COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At December 31, 2012, the Corporation had residential mortgage commitments to extend credit aggregating approximately $417,000 at variable rates averaging 3.13% and $1.8 million at fixed rates averaging 3.87%. Approximately $1.8 million of these loan commitments will be sold to investors upon closing. Commercial, construction, and home equity loan commitments of approximately $9.3 million were extended with variable rates averaging 3.88% and $140,000 were extended at fixed rates averaging 4.88%. Generally, commitments were due to expire within approximately 60 days.

Additionally, at December 31, 2012, the Corporation was committed for approximately $60.0 million of unused lines of credit, consisting of $13.5 million relating to a home equity line of credit program and an unsecured line of credit program (cash reserve), $4.8 million relating to an unsecured overdraft protection program, and $41.7 million relating to commercial and construction lines of credit. Amounts drawn on the unused lines of credit are predominantly assessed interest at rates which fluctuate with the base rate.

Commitments under standby letters of credit were approximately $1.4 million at December 31, 2012, of which $1.3 million expires within one year. Should any letter of credit be drawn on, the interest rate charged on the resulting note would fluctuate with the Corporation's base rate. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee payment or performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation obtains collateral supporting those commitments for which collateral is deemed necessary.

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Lease Commitments

Rental expense under long-term operating leases for branch offices amounted to approximately $1,153,000 and $1,132,000 during the years ended December 31, 2012 and 2011, respectively. At December 31, 2012, the minimum rental commitments on the noncancellable leases with an initial term of one year and expiring thereafter are as follows:

Year Ending December 31	Minimum Rent
2013	$	1,006,000
2014		740,000
2015		381,000
2016		313,000
2017		293,000
Thereafter		2,012,000
	$	4,745,000

Contingencies

The Corporation is also subject to litigation which arises primarily in the ordinary course of business. In the opinion of management the ultimate disposition of such litigation should not have a material adverse effect on the financial position of the Corporation.

Note 17. 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 swap does not represent an amount 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: The Corporation entered into a swap with a notional amount of $7 million. It was designated as a cash flow hedge of the subordinated debentures and was determined to be fully effective during the years ended December 31, 2012 and 2011. 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 December 31, 2012, the interest rate swap is secured by investment securities with a fair value of $1,004,000.

Summary information as of December 31, 2012 about the interest rate swap designated as a cash flow hedge 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	($812,000)

The net expense recorded on the swap transaction totaled $255,000 and $265,000 for the years ended December 31, 2012 and 2011, respectively, and is reported as a component of interest expense – borrowed money.

The fair value of the interest rate swap of ($812,000) and ($893,000) at December 31, 2012 and 2011, respectively, was included in accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

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The following table presents the after tax net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the periods indicated.

	For the year ended December 31, 2012
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of gain (loss) reclassified from OCI to interest income		Amount of gain (loss) recognized in other noninterest income (Ineffective Portion)
Interest rate contract	$	49,000	$	—	$	—

	For the year ended December 31, 2011
	Amount of gain (loss) recognized in OCI (Effective Portion)			Amount of gain (loss) reclassified from OCI to interest income		Amount of gain (loss) recognized in other noninterest income (Ineffective Portion)
Interest rate contract	$	(138,000	)	$	—	$	—

Note 18. 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) or 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 quoted market prices, if available (Level 1). For securities where quoted prices are not available, 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 the collateral, incorporating assumptions that experienced parties might use in estimating the value of such collateral (Level 3 inputs). At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Generally, impaired loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, the net book value recorded for the collateral on the borrower’s financial statements, or aging reports. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the borrower and borrower’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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Appraisals are generally obtained to support the fair value of collateral. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by licensed appraisers whose qualifications and licenses have been reviewed and verified by the Corporation. The Corporation utilizes a third party to order appraisals and, once received, review the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. In addition, appraisers may make adjustments to the sales price of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 12% discount to real estate appraised values to cover disposition / selling costs and to reflect the potential price reductions in the market necessary to complete an expedient transaction and to factor in impact of the perception that a transaction being completed by a bank may result in further price reduction pressure.

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
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2012
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,006,000	$	4,006,000	$	—	$	—
U.S. government -
sponsored agencies		37,255,000		—		37,255,000		—
Obligations of state and
political subdivisions		14,170,000		—		14,170,000		—
Mortgage-backed securities-
residential		105,428,000		—		105,428,000		—
Asset-backed securities		9,884,000		—		9,884,000		—
Corporate bonds		495,000		—		495,000		—
Other equity investments		3,462,000		3,402,000		60,000		—
Total available-for-
sale securities	$	174,700,000	$	7,408,000	$	167,292,000	$	—
Liabilities:
Interest rate swap	$	812,000	$	—	$	812,000	$	—

	December 31, 2011
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,050,000	$	4,050,000	$	—	$	—
U.S. government -
sponsored agencies		20,744,000		—		20,744,000		—
Obligations of state and
political subdivisions		9,318,000		—		9,318,000		—
Mortgage-backed securities-
residential		133,467,000		—		133,467,000		—
Other equity investments		3,346,000		3,286,000		60,000		—
Total available-for-
sale securities	$	170,925,000	$	7,336,000	$	163,589,000	$	—
Liabilities:
Interest rate swap	$	893,000	$	—	$	893,000	$	—

There were no transfers between Level 1 and Level 2 during 2012 and 2011.

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Assets and Liabilities Measured on a Non-Recurring Basis

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

			Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2012
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,490,000	$	—	$	—	$	6,490,000
Other		—		—		—		—
Commercial real estate		10,445,,000		—		—		10,445,000
Construction:
Commercial		4,373,000		—		—		4,373,000
Residential		—		—		—		—
Residential real estate		413,000		—		—		413-
Consumer:
Secured by real estate		800,000		—		—		800,000
Other real estate owned		1,058,000		—		—		1,058,000
	$	25,579,000	$	—	$	—	$	25,579,000

	December 31, 2011
Assets:
Impaired loans
Commercial:
Secured by real estate	$	5.106,000	$	—	$	—	$	5,106,000
Other		—		—		—		—
Commercial real estate		9,702,000		—		—		9,702,000
Construction:
Commercial		8,138,000		—		—		8,138,000
Residential		250,000		—		—		250,000
Residential real estate		779,000		—		—		779,000
Consumer:
Secured by real estate		891,000		—		—		891,000
Other real estate owned		5,288,000		—		—		5,288,000
	$	30,154,000	$	—	$	—	$	30,154,000

Collateral dependent impaired loans measured for impairment using the fair value of the collateral had a recorded investment of $22,699,000, with a valuation allowance of $178,000, resulting in an additional provision for loan losses of $4,501,000 for the year ended December 31, 2012.

Collateral dependent impaired loans had a recorded investment of $25,478,000, with a valuation allowance of $612,000, resulting in an additional provision for loan losses of $4,915,000 for the year ended December 31, 2011.

OREO had a recorded investment of $1,058,000 with no valuation allowances at December 31, 2012. OREO had a recorded investment of $5,326,000 with a valuation allowance of $38,000 at December 31, 2011. Additional valuation allowances of $188,000 and $38,000 were recorded for the years ended December 31, 2012 and 2011, respectively.

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For the Level 3 assets measured at fair value on a non-recurring basis at December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

Assets	Fair Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans	$	22,521,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.	5% - 10%
				Estimated selling costs.	7%
Other real estate owned	$	1,058,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.	5% - 10%
				Estimated selling costs.	7%

Fair value estimates for the Corporation’s financial instruments are summarized below:

			Fair  Value  Measurements Using
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	At December 31, 2012
Financial assets:
Cash and cash equivalents	$	21,016,000		$	21,016,000	$	—	$	—
Securities available-for-sale		174,700,000			7,408,000		167,292,000		—
Securities held to maturity		29,718,000			—		31,768,000		—
FHLB-NY stock		2,213,000			N/A		N/A		N/A
Mortgage loans held for sale		784,000			—		784,000		—
Loans, net		429,832,000			—		—		449,041,000
Accrued interest receivable		2,372,000			2,000		908,000		1,462,000
Financial liabilities
Deposits		590,254,000			434,569,000		157,219,000		—
FHLB-NY advances		25,000,000			—		25,825,000		—
Securities sold under
agreements to repurchase		7,343,000			—		7,883,000		—
Subordinated debenture		7,217,000			—		—		7,112,000
Accrued interest payable		560,000			1,000		540,000		19,000
Interest rate swap		812,000			—		812,000		—

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	At December 31, 2011
	Carrying		Estimated
	Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	13,698,000	$	13,698,000
Securities available-for-sale		170,925,000		170,925,000
Securities held to maturity		38,354,000		40,984,000
FHLB-NY stock		2,478,000		N/A
Net loans, including impaired loans		444,803,000		453,604,000
Accrued interest receivable		2,618,000		2,618,000
Financial liabilities:
Deposits		593,552,000		595,939,000
FHLB-NY Advances		32,700,000		33,482,000
Securities sold under agreements to repurchase		14,342,000		14,786,000
Subordinated debenture		7,217,000		6,297,000
Accrued interest payable		775,000		775,000
Interest rate swap		893,000		893,000

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 and is classified as Level 1.

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.

Mortgage loans held for sale – Loans in this category have been committed for sale to third party investors at the current carrying amount resulting in a Level 2 classification.

Loans, net – 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 loans. The fair value of loans is estimated by discounting cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans resulting in a Level 3 classification.

Accrued interest receivable – The carrying amount approximates fair value.

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 resulting in a Level 1 classification. The fair value of certificates of deposit is based on the discounted value of cash flows resulting in a Level 2 classification. The discount rate is estimated using market discount rates which reflect interest rate risk inherent in the certificates of deposit.

FHLB-NY advances – With respect to FHLB-NY borrowings, 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 and credit risk inherent in the term borrowings resulting in a Level 2 classification.

Securities sold under agreements to repurchase – The carrying value approximates fair value due to the relatively short time before maturity resulting in a Level 2 classification.

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Subordinated debenture – The fair value of the subordinated debenture is based on the discounted value of the cash flows. The discount rate is estimated using market rates which reflect the interest rate risk inherent in the debenture resulting in a Level 3 classification.

Accrued interest payable – The carrying amount approximates fair value.

Interest rate swap – The methods for determining fair values were described previously.

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 December 31, 2012 and 2011 the fair value of such commitments were not material.

Limitations

The preceding fair value estimates were made at December 31, 2012 and 2011 based on pertinent market data and relevant information on the financial instruments. These estimates do not include any premiums 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 approximations were made solely for on and off balance sheet financial instruments at December 31, 2012 and 2011, 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 19. PARENT COMPANY ONLY

The Corporation was formed in January 1995 as a bank holding company to operate its wholly-owned subsidiary, Atlantic Stewardship Bank. The earnings of the Bank are recognized by the Corporation using the equity method of accounting. Accordingly, the Bank dividends paid reduce the Corporation's investment in the subsidiary. Condensed financial statements are presented below:

Condensed Statements of Financial Condition

	December 31,
	2012		2011
Assets
Cash and due from banks	$	263,000	$	861,000
Securities available-for-sale		1,004,000		—
Securities held to maturity		—		993,000
Investment in subsidiary		62,502,000		63,103,000
Accrued interest receivable		5,000		12,000
Other assets		452,000		646,000
Total assets	$	64,226,000	$	65,615,000
Liabilities and Shareholders’ Equity
Subordinated debentures	$	7,217,000	$	7,217,000
Other liabilities		663,000		606,000
Shareholders' equity		56,346,000		57,792,000
Total liabilities and Shareholders' equity	$	64,226,000	$	65,615,000

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Condensed Statements of Income

	Years ended December 31,
	2012			2011
Interest income - securities available-for-sale	$	9,000		$	23,000
Interest income - securities held to maturity		15,000			54,000
Dividend income		675,000			—
Other income		15,000			27,000
Total income		714,000			104,000
Interest expense		506,000			504,000
Other expenses		319,000			306,000
Total expenses		825,000			810,000
Loss before income tax benefit		(111,000	)		(706,000	)
Tax benefit		(266,000	)		(239,000	)
Income (loss) before equity in undistributed earnings of subsidiary		155,000			(467,000	)
Equity in undistributed earnings of subsidiary		365,000			1,151,000
Net income		520,000			684,000
Dividends on preferred stock and accretion		352,000			558,000
Net income available to common shareholders	$	168,000		$	126,000

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Condensed Statements of Cash Flows

	Years ended December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	520,000		$	684,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary		(365,000	)		(1,151,000	)
Amortization of premiums and accretion of discounts, net		—			4,000
Gains on sales and calls of securities		(7,000	)		(19,000	)
Decrease in accrued interest receivable		7,000			4,000
(Increase) decrease in other assets		193,000			(102,000	)
Increase (decrease) in other liabilities		105,000			(29,000	)
Net cash provided by (used in) operating activities		453,000			(609,000	)
Cash flows from investing activities:
Purchase of securities available-for-sale		(1,499,000	)		—
Proceeds from principal repayments on securities available-for-sale		—			149,000
Proceeds from calls on securities available-for-sale		500,000			1,071,000
Proceeds from calls on securities held to maturity		1,000,000			—
Investment in subsidiary bank		—			(5,000,000	)
Net cash provided by (used in) investing activities		1,000			(3,780,000	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock		—			14,952,000
Repurchase of preferred stock and warrant		—			(10,108,000	)
Cash dividends paid on common stock		(886,000	)		(1,171,000	)
Cash dividends paid on preferred stock and accretion		(352,000	)		(383,000	)
Payment of discount on dividend reinvestment plan		(8,000	)		(15,000	)
Issuance of common stock		194,000			182,000
Net cash provided by (used in) financing activities		(1,052,000	)		3,457,000
Net decrease in cash and cash equivalents		(598,000	)		(932,000	)
Cash and cash equivalents - beginning		861,000			1,793,000
Cash and cash equivalents - ending	$	263,000		$	861,000

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Note 20. QUARTERLY FINANCIAL DATA (Unaudited)

The following table contains quarterly financial data for the years ended December 31, 2012 and 2011 (dollars in thousands).

	First Quarter		Second Quarter			Third Quarter		Fourth Quarter			Total
Year ended December 31, 2012:
Interest income	$	7,516	$	7,317		$	7,120	$	6,754		$	28,707
Interest expense		1,465		1,357			1,259		1,094			5,175
Net interest income before provision for loan losses		6,051		5,960			5,861		5,660			23,532
Provision for loan losses		1,765		2,900			2,000		3,330			9,995
Net interest income after provision for loan losses		4,286		3,060			3,861		2,330			13,537
Noninterest income		1,550		911			1,719		2,209			6,389
Noninterest expenses		4,754		4,454			5,206		5,239			19,653
Income (loss) before income tax expense (benefit)		1,082		(483	)		374		(700	)		273
Income tax expense (benefit)		306		(159	)		46		(440	)		(247	)
Net income (loss)		776		(324	)		328		(260	)		520
Dividends on preferred stock		75		38			112		127			352
Net income (loss) available to common shareholders	$	701	$	(362	)	$	216	$	(387	)	$	168
Basic earnings (loss) per share	$	0.12	$	(0.06	)	$	0.04	$	(0.07	)	$	0.03
Diluted earnings (loss) per share	$	0.12	$	(0.06	)	$	0.04	$	(0.07	)	$	0.03

Year ended December 31, 2011:
Interest income	$	7,775	$	8,033	$	8,018	$	7,748		$	31,574
Interest expense		1,826		1,812		1,732		1,594			6,964
Net interest income before provision for loan losses		5,949		6,221		6,286		6,154			24,610
Provision for loan losses		1,675		1,915		2,330		4,925			10,845
Net interest income after provision for loan losses		4,274		4,306		3,956		1,229			13,765
Noninterest income		1,094		943		1,350		1,783			5,170
Noninterest expenses		4,694		4,536		4,615		4,821			18,666
Income (loss) before income tax expense (benefit)		674		713		691		(1,809	)		269
Income tax expense (benefit)		191		128		113		(847	)		(415	)
Net income (loss)		483		585		578		(962	)		684
Dividends on preferred stock and accretion		138		138		244		38			558
Net income (loss) available to common shareholders	$	345	$	447	$	334	$	(1,000	)	$	126
Basic earnings (loss) per share	$	0.06	$	0.08	$	0.05	$	(0.17	)	$	0.02
Diluted earnings (loss) per share	$	0.06	$	0.08	$	0.05	$	(0.17	)	$	0.02

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A . Controls and Procedures

(a) Evaluation of internal controls and procedures

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

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

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

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on our assessment using those criteria, our management (including our Principal Executive Officer and Principal Accounting Officer) concluded that our internal control over financial reporting was effective as of December 31, 2012.

This Annual Report on Form 10-K does not include an attestation report of the Corporation’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Corporation to provide only management’s report in this Annual Report on Form 10-K.

(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 December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

On March 27, 2013, the Board of Directors of the Corporation approved the amendment and restatement of the Corporation’s bylaws (as so amended, the “Amended and Restated Bylaws”), effective immediately. The purpose of the amendment and restatement was, among other things, to make certain technical and conforming amendments to the bylaws for consistency between them and the Corporation’s various committee charters, policies and guidelines as well as to clarify certain provisions. The principal amendments and clarifications contained in the Amended and Restated Bylaws include the following:

· clarification of advance notice and related provisions, consistent with their purpose of establishing an orderly process for shareholders seeking to propose business at shareholders’ meetings or to nominate directors;

· clarification of the process for adjournment of shareholders’ meetings; and

· clarification of the process of voting at shareholders’ meetings and the conduct of meetings generally.

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The preceding summary is qualified in its entirety by reference to the Amended and Restated Bylaws which are attached as Exhibit 3(ii) to this Annual Report on Form 10-K and are incorporated by reference herein.

Part III

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning directors and executive officers contained under the captions “Election of Directors”: “Senior Executive Officers” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934,” in the Proxy Statement for the Corporation’s 2013 Annual Meeting of Shareholders is incorporated herein by reference.

Code of Ethics

The Corporation has adopted a Code of Ethical Conduct for Senior Financial Managers that applies to its principal executive officer, principal financial officer, principal accounting officer, controller and any other person performing similar functions. The Corporation’s Code of Ethical Conduct for Senior Financial Managers is posted on our website, www.asbnow.com. The Corporation intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of its Code of Ethical Conduct for Senior Financial Managers by filing an 8-K and by posting such information on its website.

Audit Committee and Audit Committee Financial Expert

The members of our Audit Committee as of December 31, 2012 were Howard Yeaton (Chairman), Harold Dyer, John L. Steen and Michael Westra. The Audit Committee determined that Howard Yeaton and Michael Westra were “audit committee financial experts” as defined in Item 407(d)(5) of Regulation S-K as promulgated by the Securities and Exchange Commission. All members of our Audit Committee are “independent” as defined under Nasdaq listing rule 5605(a)(2).

Item 11. Executive Compensation

Information concerning executive compensation under the caption “Executive Compensation” and director compensation under the heading “Director Compensation” in the Proxy Statement for the Corporation’s 2013 Annual Meeting of Shareholders is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table provides information with respect to the equity securities that are authorized for issuance under our compensation plans as of December 31, 2012:

Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		6,754	$	11.19		386,874
Equity compensation plans not approved by security holders		—		—		540,316
Total		6,754	$	11.19		927,190

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The only equity compensation plan not approved by security holders is the Director Stock Plan. The Director Stock Plan permits members of the Board of Directors to receive any monthly Board of Directors’ fees in shares of the Corporation’s Common Stock, rather than in cash. The Corporation purchased 5,591 shares of the Corporation’s Common Stock in the open market during 2012 for the benefit of the Director Stock Plan.

Information concerning security ownership of certain beneficial owners and management under the caption “Stock Ownership of Management and Principal Shareholders” in the Proxy Statement for the Corporation’s 2013 Annual Meeting of Shareholders is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information concerning certain relationships and related transactions under the captions “Election of Directors” and “Certain Relationships and Related Transactions,” in the Proxy Statement for the Corporation’s 2013 Annual Meeting of Shareholders is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

Information concerning principal accountant fees and services under the caption “Fees Billed by our Independent Registered Public Accounting Firm During Fiscal 2012 and Fiscal 2011,” in the Proxy Statement for the Corporation’s 2013 Annual Meeting of Shareholders is incorporated herein by reference.

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a) (1) Financial Statements

The Consolidated Financial Statements of Stewardship Financial Corporation and Subsidiary included in Item 8:

Report of Independent Registered Public Accounting Firm	36
Consolidated Statements of Financial Condition as of December 31, 2012 and 2011	37
Consolidated Statements of Income for the years ended December 31, 2012 and 2011	38
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012 and 2011	39
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012 and 2011	40
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	41
Notes to Consolidated Financial Statements	42

(2) Financial Statement Schedules

None.

(3) Exhibits ¹

Exhibit
Number	Description of Exhibits
3(i)	Restated Certificate of Incorporation of Stewardship Financial Corporation (1)

82

3(i).2	Certificate of Amendment to the Certificate of Incorporation of Stewardship Financial Corporation (2)
3(ii)	Amended and Restated By-Laws of Stewardship Financial Corporation
4.1	Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (3)
4.2	Warrant to Purchase up to 127,119 Shares of Common Stock (4)
4.3	Form of Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series B (5)
10.1	1995 Incentive Stock Option Plan (6)
10.2	1995 Employee Stock Purchase Plan (7)
10.3	Stewardship Financial Corporation Dividend Reinvestment Plan (8)
10.4	Stewardship Financial Corporation Director Stock Plan (9)
10.5	Amended and Restated 1995 Stock Option Plan (9)
10.6	Amended and Restated Director Stock Plan (10)
10.7	Dividend Reinvestment Plan (11)
10.8	2001 Stock Option Plan For Non-Employee Directors (12)
10.9	Dividend Reinvestment Plan (13)
10.10	2006 Stock Option Plan for Non-Employee Directors (14)
10.11	Letter Agreement, dated January 30, 2009, including Securities Purchase Agreement – Standard Terms incorporated by reference therein, between Stewardship Financial Corporation and the Treasury (15)
10.12	Waivers, executed January 30, 2009 by each of Paul Van Ostenbridge, Claire M. Chadwick, Julie E. Holland and Robert C. Vliet (16)
10.13	Dividend Reinvestment Plan, as amended and restated effective May 18, 2010 (17)
10.14	2010 Stock Incentive Plan (18)
10.15	Small Business Lending Fund - Securities Purchase Agreement effective September 1, 2011 between the Corporation and the Secretary of the Treasury, and Repurchase Letter dated September 1, 2011 between the Corporation and the U.S. Department of the Treasury (19)
13	Annual Report to Shareholders for the year ended December 31, 2012
16	Letter dated February 1, 2013 from Crowe Horwath LLP to the Securities and Exchange Commission (20)
21	Subsidiaries of the Registrant
23	Consent of Crowe Horwath LLP
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
99.1	Press Release dated March 27, 2013
101	The following materials from Stewardship Financial Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statement of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Comprehensive Income, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements (21)

(1)	Incorporated by reference from Exhibit 3(i).1 to the Corporation’s Quarterly Report on Form 10-Q, filed May 15, 2009.
(2)	Incorporated by reference from Exhibit 3.1 to the Corporation’s Current Report on Form 8-K, filed September 7, 2011.
(3)	Incorporated by reference from Exhibit 4.1 to the Corporation’s Current Report on Form 8-K, filed February 4, 2009.
(4)	Incorporated by reference from Exhibit 4.2 to the Corporation’s Current Report on Form 8-K, filed February 4, 2009.

83

(5)	Incorporated by reference from Exhibit 4.1 to the Corporation’s Current Report on Form 8-K, filed September 7, 2011.
(6)	Incorporated by reference from Exhibit 5(B)(10)(a) to the Corporation’s Registration Statement on Form 8-B, Registration No. 0-21855, filed December 10, 1996.
(7)	Incorporated by reference from Exhibits 4(c) to 23(d) from the Corporation’s Registration Statement on Form S-8, Registration No. 333-20793, filed January 31, 1997.
(8)	Incorporated by reference from Exhibit 4(a) from the Corporation’s Registration Statement on Form S-3, Registration No. 333-20699, filed January 30, 1997.
(9)	Incorporated by reference from Exhibit 4(a) from the Corporation’s Registration Statement on Form S-8, Registration No. 333-31245, filed July 11, 1997.
(10)	Incorporated by reference from Exhibits 10(vii) and 10(viii) from the Corporation’s Annual Report on Form 10-KSB, filed March 31, 1999.
(11)	Incorporated by reference from Exhibit 4(a) from the Corporation’s Registration Statement on Form S-3, Registration No. 333-54738, filed January 31, 2001.
(12)	Incorporated by reference from Exhibit 4(b) from the Corporation’s Registration Statement on Form S-8, Registration No. 333-87842, filed May 8, 2002.
(13)	Incorporated by reference from Exhibit 4(a) from the Corporation’s Registration Statement on Form S-3, Registration No. 333-133632, filed April 28, 2006.
(14)	Incorporated by reference from Exhibit 5(a) from the Corporation’s Registration Statement on Form S-8, Registration No. 333-135462, filed June 29, 2006.
(15)	Incorporated by reference from Exhibit 10.1 to the Corporation’s Current Report on Form 8-K, filed February 4, 2009.
(16)	Incorporated by reference from Exhibit 10.2 to the Corporation’s Current Report on Form 8-K, filed February 4, 2009.
(17)	Incorporated by reference from Exhibit 4.2 to the Corporation’s Registration Statement on Form S-3, Registration No. 333-167374, filed June 8, 2010.
(18)	Incorporated by reference from Exhibit 10.1 to the Corporation’s Current Report on Form 8-K, filed May 19, 2010.
(19)	Incorporated by reference from Exhibits 10.1 and 10.2 to the Corporation’s Current Report on Form 8-K, filed September 7, 2011.
(20)	Incorporated by reference from Exhibit 16.1 to the Corporation’s Current Report on Form 8-K, filed February 1, 2013.
(21)	This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Corporation specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
By :	/s/  Paul Van Ostenbridge
	Paul Van Ostenbridge
	Chief Executive Officer and Director

Dated: March 28, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/  Paul Van Ostenbridge	Chief Executive Officer	March 28, 2013
Paul Van Ostenbridge	and Director
	(Principal Executive Officer)
/s/  Claire M. Chadwick	Chief Financial Officer	March 28, 2013
Claire M. Chadwick	(Principal Financial Officer and
	Principal Accounting Officer)
/s/  Richard W. Culp	Director	March 28, 2013
Richard W. Culp
/s/  Harold Dyer	Director	March 28, 2013
Harold Dyer
/s/  William Hanse	Chairman of the Board	March 28, 2013
William Hanse
/s/  Margo Lane	Director	March 28, 2013
Margo Lane
/s/  Arie Leegwater	Director	March 28, 2013
Arie Leegwater
/s/  John L. Steen	Director	March 28, 2013
John L. Steen
/s/  Robert Turner	Secretary and Director	March 28, 2013
Robert Turner
/s/  William J. Vander Eems	Director	March 28, 2013
William J. Vander Eems
/s/  Michael Westra	Vice Chairman of the Board	March 28, 2013
Michael Westra
/s/  Howard Yeaton	Director	March 28, 2013
Howard Yeaton

85

EX-3.II

STEWARDSHIP FINANCIAL CORPORATION

AMENDED AND RESTATED BY-LAWS

(Adopted by Resolution of the Board of Directors as of March 27, 2012)

ARTICLE I

LAW, CERTIFICATE OF INCORPORATION AND BY-LAWS

SECTION 1.1 These By-Laws of Stewardship Financial Corporation (the “Corporation”) are subject to the certificate of incorporation of the Corporation. In these By-Laws, references to “law,” the “Certificate of Incorporation” and the “By-Laws” shall mean the laws of the State of New Jersey and any other applicable laws governing the operations of the Corporation as from time to time in effect, the provisions of the Certificate of Incorporation of the Corporation, as amended and restated from time to time (the “Certificate of Incorporation”), and the provisions of these By-Laws as from time to time in effect.

ARTICLE II

SHAREHOLDERS

SECTION 2.1. ANNUAL MEETING: Except as may otherwise be provided for specifically by law, an annual meeting of the shareholders of the Corporation, for the purpose of electing directors of the Corporation to serve during the ensuing year and until their respective successors are elected and qualified and to act upon such other business properly before the meeting, shall be held in each year, on the date and at the time and place, as shall be fixed from time to time by the Corporation’s board of directors (the “Board”).

SECTION 2.2. SPECIAL MEETINGS:

(a)          General. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President or the Chief Executive Officer. Subject to Subsection (b) of this Section 2.2, a special meeting of the shareholders shall also be called by the Secretary of the Corporation to act on any matter that may properly be considered at a meeting of shareholders upon the written request of the holders of not less than a majority of all the votes entitled to be cast on the action proposed to be taken at such meeting. Subject to Subsection (b) of this Section 2.2, any special meeting shall be held at such place, date and time as may be designated by the Board, the Chairman of the Board, the President or the Chief Executive Officer, whoever shall have called the meeting. In fixing a date for any special meeting, the Board, the Chairman of the Board, the President or the Chief Executive Officer may consider such factors as he, she or it deems relevant, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for the meeting and any plan of the Board to call an annual meeting or a special meeting. Business transacted at all special meetings shall be confined to the purpose or purposes set forth in the notice thereof. Business transacted at a special meeting requested by shareholders shall be limited to the matters described in the Record Date Request Notice (as defined below); provided, however, that nothing herein shall prohibit the Board from submitting matters to the shareholders at any special meeting requested by shareholders.

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(b)          Shareholder-Requested Special Meetings. (1) Any shareholder of record seeking to have shareholders request a special meeting shall, by sending written notice to the Secretary (the “Record Date Request Notice”), request that the Board fix a record date to determine the shareholders entitled to request a special meeting (the “Request Record Date”). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more shareholders of record as of the date of signature (or their agents duly authorized in a writing accompanying the Record Date Request Notice), shall bear the date of signature of each such shareholder (or such agent) and shall set forth all information relating to each such shareholder and each matter proposed to be acted on at the meeting that would be required to be disclosed in connection with the solicitation of proxies for election of directors in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such a solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder. Upon receiving the Record Date Request Notice, the Board may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten (10) days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board. If the Board, within ten (10) days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date, the Request Record Date shall be the close of business on the tenth (10^th) day after the first date on which the Record Date Request Notice is received by the Secretary.

(2)          In order for any shareholder to request a special meeting to act on any matter that may properly be considered at a meeting of shareholders, one or more written requests for a special meeting (collectively, the “Special Meeting Request”) signed by shareholders of record (or their agents duly authorized in a writing accompanying the request) as of the Request Record Date entitled to cast not less than a majority of all of the votes entitled to be cast on such matter at such meeting (the “Special Meeting Percentage”) shall be delivered to the Secretary. In addition, the Special Meeting Request shall (i) set forth the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to those lawful matters set forth in the Record Date Request Notice received by the Secretary), (ii) bear the date of signature of each such shareholder (or such agent) signing the Special Meeting Request, (iii) set forth (A) the name and address, as they appear in the Corporation’s books, of each shareholder signing such request (or on whose behalf the Special Meeting Request is signed), (B) the class, series and number of all shares of stock of the Corporation which are owned (beneficially or of record) by each such shareholder and (C) the nominee holder for, and number of, shares of stock of the Corporation owned beneficially but not of record by such shareholder and (iv) be received by the Secretary within sixty (60) days after the Request Record Date. Any requesting shareholder (or agent duly authorized in a writing accompanying the revocation of the Special Meeting Request) may revoke his, her or its request for a special meeting at any time by written revocation delivered to the Secretary.

(3)          The Secretary shall inform the requesting shareholders of the reasonably estimated cost of preparing and mailing or delivering the notice of the meeting (including the Corporation’s proxy materials). The Secretary shall not be required to call a special meeting upon shareholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (2) of this Subsection 2.2(b), the Secretary receives payment of such reasonably estimated cost prior to the preparation and mailing or delivery of such notice of the meeting.

(4)          In the case of any special meeting called by the Secretary upon the request of shareholders (a “Shareholder-Requested Meeting”), such meeting shall be held at such place, date and time as may be designated by the Board; provided, however, that the date of any Shareholder-Requested Meeting shall be not more than ninety (90) days after the record date for such meeting (the “Meeting Record Date”); and provided further that if the Board fails to designate, within ten (10) days after the date that a valid Special Meeting Request is actually received by the Secretary (the “Delivery Date”), a date and time for a Shareholder-Requested Meeting, then such meeting shall be held at 2:00 p.m. local time on the ninetieth (90^th) day after the Meeting Record Date or, if such ninetieth (90^th) day is not a Business Day (as defined below), on the first preceding Business Day; and provided further that in the event that the Board fails to designate a place for a Shareholder-Requested Meeting within ten (10) days after the Delivery Date, then such meeting shall be held at the principal executive office of the Corporation. In the case of any Shareholder-Requested Meeting, if the Board fails to fix a Meeting Record Date that is a date within thirty (30) days after the Delivery Date, then the close of business on the thirtieth (30^th) day after the Delivery Date shall be the Meeting Record Date. The Board may revoke the notice for any Shareholder-Requested Meeting in the event that the requesting shareholders fail to comply with the provisions of paragraph (3) of this Subsection 2.2(b).

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(5)          If written revocations of the Special Meeting Request have been delivered to the Secretary and the result is that shareholders of record (or their agents duly authorized in writing), as of the Request Record Date, entitled to cast less than the Special Meeting Percentage have delivered, and not revoked, requests for a special meeting to the Secretary: (i) if the notice of meeting has not already been given, the Secretary shall refrain from giving the notice of the meeting and send to all requesting shareholders who have not revoked such requests written notice of any revocation of a request for a special meeting on the matter, or (ii) if the notice of meeting has been given and if the Secretary first sends to all requesting shareholders who have not revoked requests for a special meeting on the matter written notice of any revocation of a request for the special meeting and written notice of the Corporation’s intention to revoke the notice of the meeting or for the chairman of the meeting to adjourn the meeting without action on the matter, (A) the Secretary may revoke the notice of the meeting at any time before ten (10) days before the commencement of the meeting or (B) the chairman of the meeting may call the meeting to order and adjourn the meeting without acting on the matter. Any request for a special meeting received after a revocation by the Secretary of a notice of a meeting shall be considered a request for a new special meeting.

(6)          For purposes of these By-Laws, “Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New Jersey are authorized or obligated by law or executive order to close.

SECTION 2.3. NOTICE OF MEETINGS: Except as otherwise provided by law, written notice of the date, time, place and purpose or purposes of every meeting of shareholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by regular mail, to each shareholder entitled to vote at the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage prepaid, addressed to the shareholder at the shareholder’s address as it appears on the stock records of the Corporation, or at the shareholder’s last known address. As to any adjourned session of any meeting of shareholders, notice of the adjourned meeting need not be given if the date, time and place thereof are announced at the meeting at which the adjournment was taken except that if after the adjournment a new record date is set for the adjourned session, notice of any such adjourned session of the meeting shall be given in the manner heretofore described. Notice of any meeting of shareholders shall be deemed waived by a shareholder who attends the meeting without protesting prior to the conclusion of the meeting the lack of notice thereof. Notice need not be given to any shareholder who submits, either before or after the meeting, a signed waiver of notice. Neither the business to be transacted at, nor the purpose of, any meeting of shareholders or any adjourned session thereof need be specified in any written waiver of notice.

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SECTION 2.4. ADVANCE NOTICE OF SHAREHOLDER NOMINEES FOR DIRECTOR AND OTHER SHAREHOLDER PROPOSALS: In addition to any other requirements under the By-Laws, the Certificate of Incorporation or applicable law, only matters properly brought before any annual or special meeting of shareholders of the Corporation in compliance with the procedures set forth in this Section shall be considered at such meeting. For any matter to be properly brought before any meeting of shareholders, the matter must be specified in the notice of meeting given by or at the direction of the Board (or any duly authorized committee thereof), otherwise properly brought before the meeting by or at the direction of the Board (or any duly authorized committee thereof) or otherwise properly brought before the meeting by a shareholder of the Corporation in compliance with the procedures set forth in this Section.

(a)          A shareholder desiring to bring a proposal before an annual meeting of shareholders (other than to nominate a director of the Corporation) shall deliver timely to the Secretary of the Corporation the following: (i) a request for inclusion of the proposal in the notice of meeting, (ii) the text of the proposal the shareholder intends to present at the meeting and a brief explanation of why the shareholder favors the proposal, (iii) the name and address of the shareholder and all persons or entities acting in concert with the shareholder, (iv) the class, series and number of all shares of stock of the Corporation which are owned (beneficially and of record) by such shareholder, together with evidence reasonably satisfactory to the Secretary of such ownership, (v) any material interest of the shareholder (other than as a shareholder) in the proposal and (vi) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. To be timely, a shareholder’s notice to the Secretary pursuant to this Subsection (a) must be delivered or mailed and received at the principal executive officers of the Corporation, not less than one hundred twenty (120) days nor more than one hundred fifty (150) days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received by the later of the close of business on (i) the one hundred twentieth (120^th) day prior to the annual meeting date or (ii) the tenth (10^th) day following the date that the annual meeting date is first publicly disclosed, whichever first occurs.

(b)          Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations for the election of directors may be made by the Board, by a committee appointed by the Board or by any shareholder who is a shareholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of shareholders entitled to vote at such meeting. Any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a shareholders’ meeting only if written notice of such shareholder’s intent to make such nomination or nominations has been given timely to the Secretary of the Corporation.

(c)          To be timely, a shareholder’s written notice to the Secretary pursuant to Subsection (b) of this Section 2.4 must be delivered or mailed and received at the principal executive officers of the Corporation, (i) with respect to an election of directors to be held at an annual meeting of shareholders, not less than one hundred twenty (120) days nor more than one hundred fifty (150) days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received by the later of the close of business on (A) the one hundred twentieth (120^th) day prior to the annual meeting date or (B) the tenth (10^th) day following the date that the annual meeting date is first publicly disclosed, whichever first occurs and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, no later than the close of business on the tenth (10^th) day following the date on which notice of such meeting is first publicly disclosed.

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(d)          To be in proper written form, a shareholder’s notice to the Secretary pursuant to Subsection (b) of this Section 2.4 must set forth (i) as to each person the shareholder proposes to nominate for election as a director, (A) the name, age, business address and residence address of the person, (B) the business experience during the past five years of such person, including his or her principal occupation or employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience, (C) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (D) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A (or any successor provision) under the Exchange Act, and the rules and regulations promulgated thereunder; and (ii) as to the shareholder giving the notice, (A) the name and address of such shareholder and of all persons or entities acting in concert with the shareholder, (B) the name and address of such shareholder as they appear on the Corporation’s books (if they so appear), (C) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such shareholder, together with evidence reasonably satisfactory to the Secretary of such beneficial ownership, (D) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (E) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (F) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

(e)          A shareholder who does not comply with the foregoing procedures may be precluded from nominating a candidate for election as a director at a meeting of shareholders. If the chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the chairman of the meeting shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.

SECTION 2.5. PROXIES: Every shareholder may authorize another person or persons to act for him by proxy in all matters in which a shareholder is entitled to participate, whether by waiving notice of any meeting, objecting to or voting or participating at a meeting, or expressing consent or dissent without a meeting. Shareholders may vote at any meeting by proxy. Every proxy shall be in writing, dated and signed by the shareholder or by his attorney-in-fact. No proxy shall be voted or acted upon after eleven months from its date unless such proxy provides for a longer period. granting the same. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. The authorization of a proxy may, but need not be limited to, specified action; provided, however, that if a proxy limits its authorization to a meeting or meetings of shareholders unless otherwise specifically provided such proxy shall entitle the holder thereof to vote at any adjourned session but shall not be valid after the final adjournment thereof.

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SECTION 2.6. QUORUM: Except where a larger quorum is required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of the holders of at least a majority of the total number of shares entitled to vote shall constitute a quorum at such meeting. No business shall be transacted in the absence of a quorum; less than a quorum may adjourn any meeting from time to time, and the meeting so adjourned may be held without further notice.

SECTION 2.7. VOTING: Except as may otherwise be required by law or by the Certificate of Incorporation, each shareholder of record of any class or series of capital stock of the Corporation shall be entitled at each meeting of shareholders to one vote for every share of capital stock standing in such shareholder’s name as of the record date (as determined in accordance with Section 2.8) and entitling the shareholder to so vote. Except as otherwise provided by law or by the Certificate of Incorporation, any corporate action to be taken by a vote of the shareholders, other than the election of directors, shall be authorized by not less than a majority of the votes cast at a meeting by the shareholders entitled to vote thereon who are present in person or represented by proxy, and where a separate vote by class is required, a majority of the votes cast by the shareholders of such class who are present in person or represented by proxy shall be the act of such class. A candidate shall be elected upon receiving the vote of a plurality of votes cast at the meeting. Unless required by applicable law or determined by the chairman of the meeting to be advisable, the vote on any matter, including the election of directors, need not be by written ballot. In the case of a vote by written ballot, each ballot shall be signed by the shareholder voting, or by such shareholder’s proxy.

SECTION 2.8. VOTING RIGHTS: The persons entitled to receive notice of and to vote at any shareholders' meeting shall be determined from the records of the Corporation on the date of mailing of the notice or on such other date not more than sixty (60) nor less than ten (10) days before such meeting as shall be fixed in advance by the Board as the record date.

SECTION 2.9. CONDUCT OF MEETINGS: At each meeting of the shareholders, the Chairman of the Board, if any, or, in his absence, the President, shall act as chairman of the meeting. The Secretary or, in his absence, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and shall keep the minutes thereof. The order of business at all meetings of the shareholders shall be as determined by the chairman of the meeting.

ARTICLE III

DIRECTORS

SECTION 3.1. NUMBER AND QUALIFICATIONS OF DIRECTORS: The Board shall consist of not less than five nor more than fifteen directors, each of whom shall hold office until his or her successor shall have been duly elected and shall have qualified, or until he or she sooner dies, resigns or is removed from the Board. The number of directors shall be determined by a resolution adopted by a majority of the directors then in office. A majority of the members of the Board shall be “independent directors” within the meaning of the rules of The Nasdaq Stock Market, Inc. A director of the Corporation shall at all times meet all statutory and regulatory qualifications for a director of a publicly held bank holding company.

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SECTION 3.2. POWERS OF BOARD: Subject only to the limitations or requirements of law, any action duly and validly taken by the shareholders, and these By-Laws, the Board shall have full power to manage and administer the business and affairs of the Corporation.

SECTION 3.3. MEETINGS OF THE BOARD:

(a)          Meetings of the Board, regular or special, may be held at any place within or without the State of New Jersey as the Board from time to time may fix or as shall be specified in the respective notice or waivers of notice thereof.

(b)          The annual meeting of the Board shall be held either (i) without notice immediately after the annual meeting of shareholders and in the same place or (ii) as promptly as may be practicable after the annual meeting of shareholders, but in no event more than thirty (30) days after the annual meeting of shareholders, for the purpose of organizing the Board and electing and appointing officers for the ensuing year.

(c)          Regular meetings of the Board shall be held without notice at such time and place as the Board may, from time to time, set by resolution.

(d)          Special meetings of the Board may be called at any time by either the Chairman of the Board, if any, the President, or any three (3) directors. Notice of each special meeting of the Board, stating the day, time, place and purpose or purposes thereof, shall be given to each director not less than two (2) days by mail or one (1) day by facsimile, telephone (including voice mail) or electronic mail, prior to the date specified for the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior to the conclusion of the meeting, the lack of notice to him. Neither the business to be transacted at, nor the purpose of, any meeting of the Board need be specified in the notice or waiver of notice of such meeting. Notice of an adjourned meeting need not be given if the time and place are fixed at the meeting adjourning and if the period of adjournment does not exceed ten (10) days in any one adjournment.

SECTION 3.4. QUORUM: Except as may be otherwise provided by law, by the Certificate of Incorporation or by these By-Laws, at all meetings of the Board a majority of the entire Board shall constitute a quorum for the transaction of business. No business may be transacted in the absence of a quorum; provided, however, less than a quorum may adjourn any meeting from time to time, and such adjourned meeting may be held without further notice being given.

SECTION 3.5. ACTION BY VOTE: Except as may be otherwise provided by law, by the Certificate of Incorporation or by these By-Laws, when a quorum is present at any Board meeting, the vote of a majority of the directors present shall be the act of the Board.

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SECTION 3.6. VACANCIES: Any vacancy in the Board arising from an increase in the number of directors or otherwise may be filled by the vote of a majority of the directors then in office, though less than a quorum, or by a sole remaining director. Each director so elected shall hold office for the balance of the unexpired term of his predecessor and until his successor is elected and qualified for office. Directors appointed to fill vacancies on the Board shall be placed in a class in a manner designed to keep equality between the classes, to the extent possible. The shareholders may at any validly called meeting elect a director to fill any vacancy not filled by the Board. If the Board accepts the resignation of a director which is tendered to take effect at a future time, a successor director may be elected to take office when the resigning director’s resignation becomes effective.

SECTION 3.7. TERM OF OFFICE: Directors will be elected to serve for a term of three (3) years and until their successors are duly elected and qualified. The Board shall be divided, as nearly as reasonably possible, into three (3) classes, and each director shall be elected to serve terms of three (3) years. The Board shall not be classified into more than three (3) separate and distinct classes of directors, and each director's particular term of office may not exceed three years. In full accordance with these By-Laws, a director may be re-nominated and/or re-elected to the Board.

SECTION 3.8. COMPENSATION: Directors may receive from the Corporation reasonable compensation for their services, including a fixed fee for, and reimbursement of expenses incurred in respect to, attendance at meetings of the Board or meetings of committees of the Board and/or a fixed annual fee or other type or manner of compensation, as shall be determined from time to time by the Board. A director serving as Chairman of the Board or of any committee of the Board may receive additional compensation for service in such capacity, as shall be determined from time to time by the Board.

SECTION 3.9. ACTION OF DIRECTORS WITHOUT A MEETING. Any action required or permitted to be taken pursuant to authorization voted at a meeting of the Board or any committee of the Board may be taken without a meeting if, prior or subsequent to the action, all directors or members of the committee, as the case may be, consent thereto in writing and the written consents are filed with the minutes of the proceedings of the Board or committee.

SECTION 3.10. TELEPHONE CONFERENCE MEETINGS OF THE BOARD. Any or all directors may participate in a meeting of the Board or a committee thereof by means of a conference telephone or any other means of communication by which all persons participating in the meeting are able to hear each other.

SECTION 3.11. DIRECTOR INELIGIBILITY: A person is not eligible to serve as a director of the Corporation if he or she: (a) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year; (b) is a person against whom a federal or state bank regulatory agency has issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal; (c) has been found either by any federal or state regulatory agency, whose decision is final and not subject to appeal, or by a court to have: (1) breached a fiduciary duty involving personal profit or (2) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any cease and desist order issued by a banking, securities, commodities or insurance regulatory agency; or (d) has been nominated by a person who would be ineligible to serve as a director of the Corporation by reason of clauses (a), (b) or (c) of this section; or (e) is a party (either directly or through an affiliate) to litigation or an administrative proceeding adverse to the Corporation or the Bank, except: (1) derivative litigation brought in the name of the Corporation or the Bank by the director in his capacity as a shareholder of the Corporation or (2) litigation arising out of a proxy fight concerning the election of directors of the Corporation or the Bank or otherwise involving control of the Corporation or the Bank. Each director of the Corporation is obligated to inform the Corporation immediately of any occurrence which comes within this section. In the case of any director who becomes ineligible to serve as a director under clause (e) of this section, the director may be considered for re-election to the Board after the conclusion of the litigation or administrative proceeding. The Corporation shall confirm in writing to any director who becomes ineligible to serve as a director of the Corporation as set forth in this section that the director has become ineligible and shall immediately cease to serve as a director of the Corporation. In addition, notice of the director’s ineligibility and cessation of service shall be given to the Board as well as the Regional Office of the Board of Governors of the Federal Reserve System and, as appropriate, to the Commissioner of Banking and Insurance of the State of New Jersey.

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SECTION 3.12. INTERESTED DIRECTORS AND OFFICERS:

(a)          No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of the Corporation’s directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if any one of the following is true:

(1)          the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee thereof, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

(2)          the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

(3)         the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof, or the shareholders.

(b)           The interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.

SECTION 3.13. EXECUTIVE SESSIONS: The independent directors shall meet as often as necessary to fulfill their responsibilities, including in executive sessions without the attendance of non-independent directors and management, at least four times per year.

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ARTICLE IV

COMMITTEES

SECTION 4.1. ESTABLISHMENT OF COMMITTEES: The Board, by resolution adopted by a majority of the entire Board, may appoint from among its members, an executive committee and one or more other committees, each of which shall have one or more members. All committee members shall be appointed for the term of one year but shall hold office until their successors are elected and have qualified.  The Board, by resolution adopted by a majority of the entire Board, may (a) fill any vacancy in any such committee for the unexpired term; (b) appoint one or more directors to serve as alternate members of any such committee, to act in the absence or disability of members of any such committee with all the powers of such absent or disabled members; (c) abolish any such committee at its pleasure; and (d) remove any director from membership on such committee at any time, with or without cause. The Board may determine whether any committee shall be composed in part or entirely of directors who are independent of the Corporation.  The Board shall make all determinations of whether a director is independent.

SECTION 4.2. COMMITTEE REPORTS: Actions taken at a meeting of any such committee shall be kept in a record of its proceedings, which shall be reported to the Board at its next meeting following such committee meeting; except that, when the meeting of the Board is held within two (2) days after the committee meeting, such report shall, if not made at the first meeting, be made to the Board at its second meeting following such committee meeting.

SECTION 4.3. POWERS OF COMMITTEES: Subject to the limitations and regulations prescribed by law, the By-Laws or by the Board, the committees established by the Board shall have and may exercise all the authority of the Board, subject to their respective charters, except that no committee may make, alter or repeal any by-laws, elect any director, remove any director or officer, submit to shareholders any action that requires shareholder approval, or amend or repeal any resolution of the Board establishing such committee or any other resolution of the Board which by its terms may be amended or repealed only by the Board.

SECTION 4.4. NOTICES AND MEETINGS OF COMMITTEE: The members of a committee of the Board may by resolution schedule regular committee meetings. Special meetings of a committee may be called as the committee may determine. Meetings of any committee of the Board, regular or special, may be held at any place within or without the State of New Jersey as such committee from time to time may fix. No notice of regular meetings need be given. Notice of each special meeting of a committee, stating the day, time, place and purpose or purposes thereof, shall be given to each member of the committee not less than two (2) days by mail or one (1) day by facsimile, telephone (including voice mail) or electronic mail, prior to the date specified for the meeting.

SECTION 4.5. QUORUM: At any committee meeting, a majority of the committee members shall constitute a quorum and, except where otherwise provided by law or the By-laws, a majority of committee members at a committee meeting at which a quorum is present shall decide any question that may come before the committee meeting.  A majority of the committee members present at any regular or special committee meeting, although less than a quorum, may adjourn the committee meeting from time to time, without notice other than as announced at the meeting, until a quorum is present.  At such adjourned committee meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original committee meeting.

Page 10 of 14

SECTION 4.6. COMMITTEE CHARTERS: Each committee may and, if directed by the Board, shall establish a charter reflecting its function, charge, and responsibilities.  The charter shall be prepared by the committee and shall be subject to approval by the Board.

ARTICLE V

OFFICERS

SECTION 5.1. OFFICERS ENUMERATED: The officers of the Corporation shall be a President, a Secretary, a Treasurer. The Board also may elect or appoint a Chairman of the Board, one or more Vice Chairmen, one or more Vice Presidents (any of whom may be designated as Executive Vice Presidents, Senior vice Presidents or otherwise) and one or more Assistant Secretaries. One person may hold more than one office. The Board may designate the officers who shall be the chief executive officer, chief operating officer, chief financial officer and chief legal officer of the Corporation.

SECTION 5.2. DUTIES:

(a)          Chairman of the Board. The Chairman shall preside at all meetings of the Board and of the shareholders.

(b)          Vice-Chairman of the Board. In the absence of the Chairman, the Vice-Chairman shall preside at all meetings of the Board and of the shareholders.

(c)          President. The President shall be subject to the control of the Board, and shall have the general supervision of the business affairs of the Corporation and shall, unless the Board shall designate another to the office, be the Chief Executive Officer of the Corporation, with the duties and responsibilities customarily pertaining to that office. The President shall, at each annual meeting of the shareholders, make an annual report on the business and fiscal affairs of the Corporation, and make such recommendations as he or she deems proper. The President shall preside at meetings in the absence of the Chairman and Vice-Chairman, if any.

(d)          Vice Presidents. The Vice President or, if there shall be more than one, the Vice Presidents, if any, in such order determined by the Board, shall perform, in the absence or disability of the President, the duties and exercise the powers of the President and shall have such other powers and duties as the Board or the President assigns to him, her or them.

(e)          Secretary. The Board shall appoint a Secretary of the Corporation who shall serve as Secretary of the Board and who shall oversee the keeping and preservation of accurate minutes and records of all meetings. The Secretary shall oversee the giving of all notices required by these By-Laws to be given; shall be the custodian of the corporate seal, records, documents and papers of the Corporation. The Secretary shall have and exercise any and all powers and duties pertaining, by law, regulation, or practice, to the office of Secretary or those imposed by these By-Laws and shall perform such other duties as may be assigned by the Board.

(f)          Treasurer. The Treasurer shall have the care and custody of all the monies and securities of the Corporation. The Treasurer shall cause to be entered in the books of the Corporation, full and accurate accounts of all monies received and paid, shall sign instruments requiring the signature of the Treasurer, and shall perform other duties usually pertaining to the office and as the Board shall direct.

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(g)          Assistant Secretaries and Assistant Treasurers. The duties of any Assistant Secretary or Assistant Treasurer shall be those usually pertaining to their respective offices and as may be properly required of them by the Board or by the officers to whom they report.

SECTION 5.3. EXECUTIVE OFFICERS: The President, the Treasurer and the Secretary, and such other officers as shall be designated by the Board, shall be deemed the executive officers (each an “Executive Officer”) of the Corporation.

SECTION 5.5. ELECTION: The officers may be elected by the Board at the first meeting of the Board following the annual meeting of the shareholders or at any other time. At any time or from time to time, the Board may delegate to any officer its power to elect or appoint any other officer or any agents of the Corporation.

SECTION 5.6. TENURE; VACANCIES: Each officer shall hold office until the first meeting of the Board following the next annual meeting of the shareholders and until his or her successor is chosen and qualified, unless a shorter or longer period shall have been specified by the terms of his or her election or appointment or, in each case, until he or she sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain its authority at the pleasure of the Board or the officer by whom he was appointed or by the officer who then holds agent appointive power. If an office becomes vacant for any reason, the Board may fill the vacancy and each officer so elected shall serve for the remainder of his or her predecessor’s term.

SECTION 5.7. REMOVAL: Any officer may be removed from office at any time, with or without cause, by the Board, but such removal shall be without prejudice to the contractual rights, if any, of the officer so removed. The Board may at any time terminate or modify the authority of any agent.

SECTION 5.8. RESIGNATION: Any officer may resign at any time by giving written notice to the Chairman of the Board, if any, the President, or the Vice President/Human Resources officer. Any such resignation shall take effect upon receipt of such notice or at any later time specified therein and without in either case the necessity of its being accepted unless the resignation shall so state.

SECTION 5.9. COMPENSATION: The compensation of all of the officers of the Corporation shall be fixed by the Board.

ARTICLE VI

CERTIFICATES AND TRANSFER OF SHARES

SECTION 6.1. CERTIFICATES; UNCERTIFICATED SHARES: The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares that may be evidenced by a book entry system maintained by the registrar of such shares, or a combination of both, in each case as shall be approved by the Board. Certificates for the Corporation’s capital stock shall be in such form as required by law and as approved by the Board. Each certificate shall be signed in the name of the Corporation by the Chairman, if any, or the President or any Vice President and by the Secretary, the Treasurer or any Assistant Secretary or any Assistant Treasurer and shall bear the seal of the Corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent or registered by a registrar, other than the Corporation or its employees, the signature of any officer of the Corporation may be a facsimile signature. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature was placed on any certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued nevertheless by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue.

Page 12 of 14

SECTION 6.2. TRANSFER OF SHARES: Transfers of shares shall be made upon the books of the Corporation: (a) upon surrender of a certificate or certificates for the shares by the registered holder in person or by duly authorized attorney, or upon presentation of proper statutory evidence of succession, assignment or authority to transfer the shares, and upon surrender of the appropriate certificate or certificates or (b) in the case of uncertificated shares, upon receipt of proper transfer instructions from the registered owner of such uncertificated shares, or from a duly authorized attorney or from an individual presenting proper evidence of succession, assignment or authority to transfer the shares. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the books of the Corporation as the owner of the share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions and to vote as the owner, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in such share or shares on the part of any other person.

SECTION 6.3. LOST, STOLEN OR DESTROYED CERTIFICATES: In the event a stock certificate is represented by a shareholder to be lost, stolen or destroyed, a new certificate shall be issued in place thereof upon such proof of the loss, theft or destruction and upon the giving of such bond or other security as may be required by the Board.

SECTION 6.4. TRANSFER AGENTS AND REGISTRARS: The Board may from time to time appoint one or more transfer agents and one or more registrars for the transfer and/or registration of shares who shall have such powers and duties as the Board shall specify.

ARTICLE VII

MISCELLANEOUS PROVISIONS

SECTION 7.1. CORPORATE SEAL: Any Executive Officer shall have authority to affix the corporate seal to any document requiring such seal, and to attest to the same. Such seal shall be in such form as shall be approved from time to time by the Board.

SECTION 7.2. AMENDMENTS: Except as may otherwise be required by law or by the Certificate of Incorporation, the By-Laws may be amended, altered or repealed, in whole or in part, by the affirmative vote of a majority of the directors then in office.

SECTION 7.3. FISCAL YEAR: The fiscal year of the Corporation shall be the calendar year.

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SECTION 7.4. EXECUTION OF INSTRUMENTS:

(a) All agreements, indentures, deeds of trust, mortgages, deeds, titles, conveyances, assignments, transfers, security agreements, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, checks, drafts, letters of credit, bills of exchange, stock certificates, certified checks, certificates of deposits, affidavits, bonds, undertakings, signature guarantees, proxies, charges to deposit accounts, bank ledger entries, and other instrument or documents may be made, signed, executed, acknowledged, verified, delivered or accepted on behalf of the Corporation by any Executive Officer. Any such instruments may also be executed, acknowledged, verified, delivered, or accepted on behalf of the Corporation by such other officers or employees of the Corporation as the Board may from time to time by resolution authorize.

(b) Except as otherwise limited by the Board, every Executive Officer shall have the power and authority severally and without the signature of any other officer or agent, to vote any and all bonds or stocks, execute consent to reorganizations, modification agreements and compromises, with respect to any bonds or stock owned or held by the Corporation either in its own right or in trust, as an agent for another, or with respect to any agreements securing the same. Every Executive Officer shall have the power and authority to transfer, convert, endorse, sell, assign, set over and deliver any and all shares of stock, bonds, debentures or other securities now or hereafter standing in the name of the Corporation, and to execute and deliver any and all written instruments of assignment and transfer necessary or proper to effectuate such authority. Any officer or employee of the Corporation other than an Executive Officer shall have like duties and powers only when he shall receive express authority from the Board to act.

SECTION 7.5. PURPOSE: The object and purpose for which the Corporation is organized is to own and operate the Bank as a viable business through which members of the Bank community bear witness to Jesus Christ in recognition of a shared belief that Jesus Christ is Lord, that God raised Him from the dead and that He will enable us in unity and oneness of spirit to carry out this purpose.

SECTION 7.6. TITHING POLICY: The Corporation shall be a tithing corporation which means that ten percent (10%) of the pre-tax net profits of the Bank, after regulatory, organizational and operating expenses and necessary capital requirements are met and computing taxable income without regard to: (a) the deduction for contributions, (b) the deduction for dividends received, (c) net operating loss carry-back, and (d) any capital loss carry-forward, shall be donated by the Bank to U.S. Internal Revenue Service approved, not-for-profit, religious, educational, charitable, and/or evangelical religious recipients (other than particular churches or particular church denominations) as determined by the Board and the guidance of the Corporation’s shareholders. This tithing is done in gratitude to God for so great a salvation, recognizing that all that we have belongs to Him, in the ultimate sense.

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EX-13

2012 ANNUAL REPORT

  

…Stand firm. Let nothing move you. Always give yourselves fully to the work of the Lord, because you know that your labor in the Lord is not in vain.

- 1 C O R I N T H I A N S 1 5 : 5 8

Atlantic Stewardship Bank and Stewardship Financial Corporation continue to stand firm, letting nothing move us from our corporate mission and our purpose of serving the financial needs of the northern New Jersey community. We give ourselves fully to the work of the Lord remaining as committed today as the original founders were to the concept of tithing, or giving back ten percent of our earnings, to Christian and local non-profit organizations.

STANDING FIRM

O U R  M I S S I O N

The Atlantic Stewardship Bank was established to serve the northern New Jersey community’s financial needs and to give back, or tithe, one-tenth of our earnings to the community.

We are a confident and progressive institution that meets business and individual banking deposit and borrowing needs. We understand the value of each and every customer and make it a priority to treat each customer fairly and with respect. By investing prudently we safeguard assets, provide ample capital growth and recognize our shareholders with a proper return. As a responsible and accountable employer, we cultivate a caring professional environment where our associates can be productive and are encouraged to grow.

We are an independent commercial bank that stands on solid Christian principles and the American banking regulations established by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the State of New Jersey. We hold these fundamentals paramount in every decision we make; for the good of our customers, our shareholders, and our associates.

N E W  I N  2 0 1 2     Atlantic Stewardship Bank introduced several new products and services to make managing finances more convenient for our customers.   You’d need the strength of Atlas to carry your brick-and-mortar bank around, but thanks to mobile technology, you don’t have to – not literally, anyway. Your smart phone or tablet enabled for ASB Mobile Banking now offers anywhere, anytime access to your checking and savings accounts. The ASB App for the iPhone, iPad and Android provides customers access to their ASB accounts from wherever life takes them. The application is free and available for download from the App Store, Google Play or the ASB website. With simply the touch of a button, customers can transfer funds between their ASB accounts, view balances and transaction history, pay bills, locate branches and ATMs, view check images and access Purchase Rewards. And, with ASB Mobile Deposit, customers can use the ASB App to deposit a check to their ASB account from their iPhone or Android. Simply take a picture of both sides of your endorsed check and hit Deposit to submit it to your account.   ASB also increased the functionality of Online Banking with the addition of email and text message alerts. Online Banking customers may now receive alerts notifying them of account activity and balance changes. Payment Partner, our online bill pay service also received an upgrade in 2012 which included new, user-friendly features such as easier navigation, EBills, overnight payments, and more information at a glance.   In 2012, we also increased the security of our Online Banking platform with the imple- mentation of Multi-Factor Authentication. When a user logs on to a computer that is not recognized, they are prompted to verify their identity. This prevents unauthorized access using stolen credentials on a non-enrolled computer. Users may enroll each computer on which they plan to conduct online banking as well as un-enroll PC’s that they no longer wish to use for online banking.   Opening a checking account became easier in 2012 with the addition of online account opening. Consumers were given the option to open select Atlantic Stewardship Bank checking accounts via the ASB website without the need to visit a branch. This new technology also allows Atlantic Stewardship Bank associates to visit potential customers and open new checking accounts on the spot. In 2013, we will increase the number of checking accounts that may be opened online.   For our commercial customers, Business Online Banking was upgraded to a new and improved version. The system was updated with a new look and feel and the style of the screens was improved to enhance the customer experience. Business customers may perform functions such as pay bills and make transfers, sign up for e-statements and receive balance alerts.   Through a partnership with LPL Financial, Investment Services at Atlantic Stewardship Bank was introduced to offer our customers access to a complete array of financial instruments and services including stocks, bonds, mutual funds, annuities, insurance, state-of-the-art technology and unbiased investment research. Financial Consultants are available at our branches to provide customers with professional guidance and excellent service.   B U S I N E S S D E V E L O P M E N T B O A R D S     BERGEN   Richard Barclay John Belanus J.T. Bolger Mark Borst Richard J. Brady, Esq. Linda A. Brock William R. Cook Peter V. Demarest Robert Galorenzo, MD William F. Gilsenan, Jr. Bartel Leegwater Donald W. Reeder, Esq. Jeffrey Van Inwegen, MD James D. Vaughan III, Esq.     MORRIS   David S. Bickel Antonia Daughtry Robert E. Fazekas Gregory A. Golden Brian W. Hanse, Esq., CPA Jeffrey T. Massaro Joseph Pellegrino Peter B. Ruprecht Kenneth Vander May Abe Van Wingerden Michael Wolansky, CPA     PASSAIC   Vince Brosnan Ben Della Cerra Mary Forshay Paul D. Heerema Donald G. Matthews, Esq. William A. Monaghan III, Esq. Mark D. Reitsma, CFP George Schaaf Susan Vander Ploeg Ralph Wiegers  

M E S S A G E  T O  T H E  S H A R E H O L D E R S

Dear Shareholders and Friends:

Standing Firm. Stewardship Financial Corporation remains a solid financial institution in this continued uncertain economic environment. The best example of the Corporation’s firm standing is our capital levels that exceed the regulatory capital requirements. This well capitalized position assisted the Corporation over the last several years in managing through a very difficult and demanding economic period and continues to provide us with the ability to safely move forward.

At December 31, 2012, the Bank’s capital levels of a Tier 1 leverage ratio of 8.91% and a total risk based capital ratio of 14.62% far exceeded the regulatory requirements of 5% and 10%, respectively, for a well capitalized institution.

The Northern New Jersey economic climate continues to be challenging. Although there are reports of stabi- lization in a few U.S. geographical markets, our lending market has yet to experience a turnaround. The com- mercial real estate valuations are in a state of flux and many of our commercial customers are still struggling.

This environment requires the corporation to closely monitor each commercial borrower showing signs of weakness. We recognize the need to provide appropri- ate reserves, which for the year ended December 31, 2012, had a $10.0 million negative impact on earnings. Net income for the year ended December 31, 2012 was

$520,000.

Acknowledging the need to improve earnings, Management remains dedicated to reducing Non-Performing Assets. This is an ongoing commitment as the Bank works through the legal process. In the State of New Jersey, a residential foreclosure takes approximately three years before the Bank can take ownership of residential properties securing delinquent loans. The State provides an expedited process for certain commercial properties and the Bank takes advantage of this process when- ever possible. As evidence of progress made, the Bank reduced its Non-Performing Assets to $19.3 million as of December 31, 2012 which is 2.80% of total assets. This compares favorably to December 31, 2011 Non-Performing Assets of $33.0 million or 4.66% of total assets. Management continues to work diligently to reduce the Non-Performing Assets.

The Board of Directors and the Management Team are committed to improving earnings and have implemented several changes which we anticipate will have a positive impact over the next few years. The main focus has been on strengthening the Commercial Loan Division. This past year, the Bank hired a new Commercial Loan Division Manager who has strong knowledge of our market and extensive experience in all aspects of commercial lending. The Division was also enhanced by adding a Credit Officer, a new position which provides an independent opinion during the underwriting and risk assessment process. New experienced Commercial Lenders will assist existing lenders in what appears to be early signs of increasing loan demand. Finally, a Credit Department Manager and new Credit Analysts compliment the Commercial Lending Team.

In addition to addressing the Commercial Loan Division’s origination and customer service areas, the Bank strength- ened its Classified Assets Work-out Division. This team continues to resolve commercial credit issues while facilitating timely and cost effective sales of former collateral properties acquired by the Bank as Other Real Estate Owned (OREO).

Our Mortgage Division continues to contribute to earnings as a result of the Corporation’s ongoing promotion of “The Best Deal in Town” residential mortgage refinance program. In 2012, the program was revised to offer a $400 rebate of the mortgage application fee at closing to increase the number of closed applications. In addition to the steady stream of refinance applications, the Corporation has seen a slight increase in purchase applications. To strengthen this Division, the Bank brought on a new Mortgage Manager with strong experience in all aspects of consumer mortgage loan originations, sales, and support systems.

C O N T I N U E D

The Bank continued its firm commitment to offering products and services to meet our current and future customer needs. In 2012, we introduced additional products and services focused on serving our customers when and where they need it. We recognize that today’s customer may not always be available when the bank is open; therefore we have enhanced our products and services to fit into their busy lifestyles. With that in mind, we extended the hours of our Customer Service Center.

The introduction of the ASB App for the iPhone, iPad and Android allows our customers to access their ASB accounts virtually, anytime, anywhere. This application allows users to transfer funds between ASB accounts, view balances and transaction history, pay bills, and locate branches and ATMs. And, with the addition of ASB Mobile Deposit, customers may now deposit checks into their ASB account simply by taking a picture of the check with their smart phone.

Opening a checking account also became more convenient in 2012 as we allowed customers to open select ASB checking accounts online. With our online application, consumers are able to open a new checking account from the convenience of their home, office or anywhere they have access to a computer with an internet con- nection. This technology has also allowed ASB associates to visit local businesses and open new checking accounts on the spot, without having to go to a branch.

For our business customers, the Bank upgraded its Business Online Banking product to a new and improved version.

In 2013, Atlantic Stewardship Bank will launch a new and improved website at www.asbnow.com. The new website will feature improved navigation and a mobile version for viewing on smart phones and tablets. In addition, the Bank will be enhancing its checking account offerings for both consumers and businesses with new choices that meet the changing needs of our customers.

To manage the increased regulatory burden imposed on the banking industry overall, Management has taken steps to strengthen the Bank’s Compliance Department with the addition of an experienced Compliance Officer as well as increasing depth in knowledge and understanding by adding more members to the Compliance Team.

In 2012, through its partnership with LPL Financial, the Corporation became a full-service provider of financial products with the introduction of Investment Services at Atlantic Stewardship Bank. Through this business line, the Bank is able to offer our customers access to a wide array of financial instruments and services including stocks, bonds, mutual funds, annuities, insurance, state-of-the-art technology and unbiased investment research. The Bank has LPL Financial Consultants covering the branches and providing our customers with professional guidance and excellent service. The Corporation looks for- ward to a future income stream from this new endeavor.

The Atlantic Stewardship Bank Tithing Program continues to be a blessing to local Christian and non-profit organ- izations as the regional economy slowly recovers. In 2012, the Bank gave to many deserving organizations such as local food pantries, Christian missions, schools and healthcare facilities as well as local civic and non-profit organizations. Since the Program’s inception in 1987, $7,786,000.00 has been shared with those in need. Atlantic Stewardship Bank is proud to be able to share a portion of our profits with so many worthy organizations.

Finally, we thank you, our shareholders, associates and most of all our loyal customers for your support and con- fidence in Stewardship Financial Corporation and Atlantic Stewardship Bank. With you, we Stand Firm and continue the work of the Lord as we fulfill our mission to serve the ever-changing financial needs of our community.

 

William C. Hanse, Esq.

Chairman of the Board of Directors

 

Paul VanOstenbridge

President and Chief Executive Officer

B O A R D  O F  D I R E C T O R S   STEWARDSHIP FINANCIAL CORPORATION
AND ATLANTIC STEWARDSHIP BANK   William C. Hanse, Esq., Chairman Of Counsel Hanse Anderson LLP   Richard W. Culp Executive Vice President, Sales Pearson Education Company   Harold Dyer (Director Stewardship Financial Corporation Only) Retired   Margo Lane Sales and Marketing Manager Collagen Matrix, Inc.   Arie Leegwater Retired   John L. Steen President, Steen Sales, Inc.   Robert J. Turner, Secretary Retired   William J. Vander Eems President, William Vander Eems, Inc.   Paul Van Ostenbridge President and Chief Executive Officer Stewardship Financial Corporation and Atlantic Stewardship Bank   Michael A. Westra, CPA, Vice Chairman President and General Manager, Wayne Tile Company   Howard R. Yeaton, CPA Managing Principal, Financial Consulting Strategies LLC  

SPECIAL  APPRECIATION

H A R O L D  D Y E R B O A R D  M E M B E R  1 9 8 5 - 2 0 1 3     We extend a heartfelt thank you to Harold Dyer who is retiring from the Board of Directors after many years of service to the Corporation and the Bank. Mr. Dyer has been a Director of the Atlantic Stewardship Bank since its inception in 1985. In addition, Mr. Dyer has served as a Director of Stewardship Financial Corporation since 1997. During his tenure, Mr. Dyer served on various Committees including the Loan Committee and Audit Committee of which he served as Chairman for several years.   From 1957 to 1981, Mr. Dyer was president of White Laundry, Inc., a laundry service company. Having operated a commercial laundry business prior to his retirement, Mr. Dyer was able to provide insight into the challenges faced by and needs of small business owners. Mr. Dyer’s service on the Board of Directors since its inception allowed him to provide a long history of business and banking knowledge and unique insight into the history of the Bank. Mr. Dyer’s knowledge of the Atlantic Stewardship Bank market together with his dedication to our unique Christian Tithing Mission made him a valuable member of the Board for the past 28 years.   We greatly appreciate Mr. Dyer’s dedication and service to the Bank and look forward to his continued support.

2012 ANNUAL REPORT

BR ANCH  LOCATIONS  AND  STAFF

HEADQUARTERS - MIDLAND PARK 630 Godwin Avenue   Raymond J. Santhouse Branch Manager, Vice President & Regional Manager   Kristine Rasile Assistant Branch Manager & Assistant Secretary     HAWTHORNE 386 Lafayette Avenue & 1111 Goffle Road   Diane Ingrassia Branch Manager, Vice President & Regional Manager   Paula Scott Assistant Branch Manager & Assistant Secretary     MONTVILLE 2 Changebridge Road   Judi Rothwell Branch Manager & Assistant Secretary     NORTH HALEDON 33 Sicomac Road   Grace Lobbregt Branch Manager & Assistant Vice President   Linda Martin Branch Operations Manager   PEQUANNOCK 249 Newark-Pompton Turnpike   Louise Rohner Branch Manager & Assistant Vice President   Joan Van Houten Assistant Branch Manager & Assistant Secretary     RIDGEWOOD 190 Franklin Avenue   Paul J. Pellegrine Branch Manager & Assistant Vice President   Catherine Bobadilla Assistant Branch Manager & Assistant Secretary     WALDWICK 64 Franklin Turnpike   Richard Densel Branch Manager & Assistant Vice President   Michelle Albert Assistant Branch Manager     WAYNE 400 Hamburg Turnpike   Douglas Olsen Branch Manager, Vice President & Regional Manager   Janet Garippa Assistant Branch Manager & Assistant Secretary   WAYNE HILLS 87 Berdan Avenue   John Lindemulder Branch Manager & Assistant Vice President   George Kotevski Assistant Branch Manager & Assistant Secretary     WAYNE VALLEY 311 Valley Road   Alejandro Urquico Branch Manager & Assistant Secretary     WESTWOOD 200 Kinderkamack Road   Barbara Vincent Branch Manager & Assistant Secretary     WYCKOFF 378 Franklin Avenue   Karen Mullane Branch Manager & Assistant Vice President  

630GodwinAvenue,MidlandPark,NJ07432

201-444-7100  |  877-844-BANK  |  www.asbnow.com

S T E WA R D S H I P  F I NA N C I A L  C O R P O R AT I O N

CORPORATE ATTORNEYS   Stewardship Financial Corporation   McCarter & English, LLP Attorneys at Law 4 Gateway Center Newark, NJ 07102 973@622@4444   Atlantic Stewardship Bank   Hanse Anderson, LLP 2035 Hamburg Turnpike Suite E Wayne, NJ 07470 973@831@8700     STEWARDSHIP FINANCIAL CORPORATION MARKET MAKER   Stifel, Nicolaus & Company, Inc. 18 Columbia Turnpike Florham Park, NJ 07932 800@793@7226   TRANSFER AGENT REGISTRAR AND DIVIDEND REIMBURSEMENT AGENT   To report a change of name or address, or a lost stock certificate or dividend check, contact:   Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 800@368@5948 www.rtco.com   Shareholder Relations Stewardship Financial Corporation Corporate Division 201@444@7100 www.asbnow.com  

EX-21

Exhibit 21

Stewardship Financial Corporation

SUBSIDIARIES OF THE REGISTRANT

		Percentage	State
		of	of Incorporation
Parent	Subsidiary	Ownership	or Organization
Stewardship Financial Corporation	Atlantic Stewardship Bank	100%	New Jersey
Stewardship Financial Corporation	Stewardship Statutory Trust I	100%	Delaware
Atlantic Stewardship Bank	Stewardship Investment Corporation	100%	New Jersey
Atlantic Stewardship Bank	Stewardship Realty, LLC	100%	New Jersey
Atlantic Stewardship Bank	Atlantic Stewardship Insurance Co., LLC	100%	New Jersey
Atlantic Stewardship Bank	First Presidential Properties LLC	100%	New Jersey
Atlantic Stewardship Bank	Valley View Properties I LLC	100%	New Jersey
Atlantic Stewardship Bank	Triangle Corners LLC	100%	New Jersey
Atlantic Stewardship Bank	Blue Meadow LLC	100%	New Jersey
Atlantic Stewardship Bank	Haledon Park LLC	100%	New Jersey
Atlantic Stewardship Bank	Sparrow Holdings LLC	100%	New Jersey
Atlantic Stewardship Bank	Elsie Properties LLC	100%	New Jersey
Atlantic Stewardship Bank	Foundation Realty LLC	100%	New Jersey

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements on Form S-8 (File Nos. 333-20793, 333-31245, 333-87842, 333-135462, and 333-167373), the Registration Statements on Form S-3 (File Nos. 333-20699, 333-54738, 333-133632, 333-157630, 333-158714, and 333-167374) of Stewardship Financial Corporation of our report dated March 28, 2013 relating to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Crowe Horwath LLP

Livingston, New Jersey

March 28, 2013

EX-31.1

Exhibit 31.1

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,

as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Paul Van Ostenbridge, certify that:

1. I have reviewed this Annual Report on Form 10-K of Stewardship Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 28, 2013

/s/ Paul Van Ostenbridge                               

Paul Van Ostenbridge
President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,

as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Claire M. Chadwick, certify that:

1. I have reviewed this Annual Report on Form 10-K of Stewardship Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5 The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 28, 2013

/s/ Claire M. Chadwick                                         

Claire M. Chadwick
Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. § 1350 as adopted pursuant

to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Stewardship Financial Corporation (the “Corporation”), certifies that:

(1) the Annual Report on Form 10-K of the Corporation for the year ended December 31, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Dated: March 28, 2013	/s/ Paul Van Ostenbridge
	Paul Van Ostenbridge
	President and Chief Executive Officer
Dated: March 28, 2013	/s/ Claire M. Chadwick
	Claire M. Chadwick
	Senior Vice President and
	Chief Financial Officer

This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

EX-99.1

Exhibit 99.1

For Immediate Release
Contact:	Claire M. Chadwick
	SVP and Chief Financial Officer
	630 Godwin Avenue
	Midland Park, NJ 07432
	201- 444-7100

PRESS RELEASE

Stewardship Financial Corporation Announces

Earnings for the Year Ended December 31, 2012

Midland Park, NJ – March 27, 2013 – Stewardship Financial Corporation (NASDAQ:SSFN), parent of Atlantic Stewardship Bank, announced net income for the year ended December 31, 2012 of $520,000 compared to $684,000 for the year ended December 31, 2011. For the three months ended December 31, 2012, the Corporation reported a net loss of $260,000 compared to a net loss of $962,000 for the corresponding three month period in 2011. The 2012 fourth quarter results were negatively impacted by a larger loan loss provision. After dividends on preferred stock and accretion, net income available to common shareholders for the year ended December 31, 2012 was $168,000, or $0.03 per diluted common share, compared to $126,000, or $0.02 per diluted common share, for the prior year. For the three months ended December 31, 2012, after dividends on preferred stock and accretion, the Corporation reported a net loss available to common shareholders of $387,000, or a loss of $0.07 per diluted common share, compared to a net loss of $1,000,000, or a loss of $0.17 per diluted common share, for the three months ended December 31, 2011.

For the three months ended December 31, 2012 the Corporation recorded a $3.3 million provision for loan losses, or $10.0 million on a year to date basis. The prior year provision for loan losses was $4.9 million and $10.8 million for the three months and year ended December

Press Release - Midland Park NJ
Stewardship Financial Corporation continued	March 28, 2013

31, 2011, respectively. Paul Van Ostenbridge, Stewardship Financial Corporation’s President and Chief Executive Officer commented, “While our provision remained elevated during 2012, we did achieve a decline in nonperforming assets.”

At December 31, 2012, nonperforming assets totaled $19.3 million, or 2.80% of total assets, representing a $13.7 million decline from $33.0 million, or 4.66% of total assets, at December 31, 2011. Over the last several years, the Bank has been challenged by, among other things, a very slow and difficult foreclosure process in the State of New Jersey. The decrease in nonperforming assets reflects payments and payoffs received as well as a recent increase in foreclosures and the transfer of these loans to Other Real Estate Owned (OREO). Van Ostenbridge noted, “We continue to have success in disposing of the OREO properties quickly and only a few properties were held at year end with the majority of these properties under contract for sale.”

The Corporation continuously monitors and evaluates the loan portfolio and individual loan problems and, based on the ongoing reviews and general market conditions, establishes an appropriate level of loan loss reserves. As a measurement of improvement in allowance coverage, at December 31, 2012 the ratio of allowance for loans losses to nonperforming loans was 58.31%, representing an increase compared to an allowance coverage level of 41.84% as of December 31, 2011.

The Corporation reported net interest income of $5.7 million and $23.5 million for the three months and year ended December 31, 2012, respectively, compared to $6.2 million and $24.6 million for the equivalent prior year periods. The net interest margin for the current three months and year ended December 31, 2012 of 3.57% and 3.66%, respectively, compared to 3.75% and 3.83% for the three months and year ended December 31, 2011, respectively.

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Press Release - Midland Park NJ
Stewardship Financial Corporation continued	March 28, 2013

Asset yields continue to be impacted by the prolonged, low interest rate environment as well as the impact of nonaccrual loans. The Corporation continues to attempt to offset a portion of the decline in yields on assets through the managing of funding costs. For example, in addition to reducing rates offered on deposit products, during the current year the Corporation prepaid $7.0 million of a higher costing $14.0 million wholesale repurchase agreement.

For the year ended December 31, 2012 noninterest income of $6.4 million represents an increase of $1.2 million compared to $5.2 million for the prior year. Noninterest income for the current year included $2.3 million from gains on calls and sales of securities compared to $1.2 million in 2011. Gains on sales of mortgage loans totaled $887,000 for 2012, a decrease from $1.2 million for the year ended December 31, 2011, reflective of retaining a higher amount of mortgage loans for portfolio. Gains on sales of other real estate owned of $429,000 for 2012 represent a net amount resulting from increased OREO activity over the $10,000 realized in 2011.

Noninterest expenses for the year ended December 31, 2012 increased over the 2011 level. The current year includes higher salary and employee benefits expense, partially reflective of an increased focus on commercial lending opportunities as well as costs associated with an enhanced credit review function. In addition, the increase in salary and employee benefits expenses is the result of increasing regulatory compliance and the attendant staffing necessary to oversee all compliance-related issues. Also included in other expense for the current year period is $691,000 related to a prepayment premium resulting from the repayment of $7 million of a wholesale repurchase agreement.

Total assets of $688.4 million at December 31, 2012 showed a decline when compared to $708.8 million of assets at December 31, 2011. As well as the above noted deleveraging of the balance sheet, since December 31, 2011, gross loans receivable have decreased $16.0

3

Press Release - Midland Park NJ
Stewardship Financial Corporation continued	March 28, 2013

million, reflecting modest demand for loans and our ongoing attention to quality credit underwriting. The Corporation, nevertheless, continues to actively lend and pursue opportunities to increase lending to those in the communities we serve.

Deposit balances were relatively unchanged at $590.3 million at December 31, 2012 compared to $593.6 million a year earlier. Core deposit balances (checking, money market and savings accounts) now comprise 73.5% of total deposits at December 31, 2012 compared to 71.2% just a year earlier. In addition, noninterest-bearing deposits continued to grow reaching $124.3 million, or 21.1% of deposits, at December 31, 2012 compared to $115.8 million, or 19.5%, at December 31, 2011.

The Corporation has been able to manage through the past few difficult years due, in part, to solid capital levels. Tier 1 leverage ratio of 9.09% and total risk based capital ratio of 14.89%, showed improvement from the prior year end and far exceed the regulatory requirements of 4% and 8%, respectively, for a “well capitalized” institution.

To summarize, Van Ostenbridge stated, “The loan loss provisioning levels of recent years have been higher than we were previously accustomed to and have negatively impacted our performance. Nevertheless, we believe our level of reserves is appropriate and we are optimistic and encouraged by the recent improvement in our level of nonperforming assets. We understand that there is still more we need to accomplish and remain committed to further reductions in our level of problem assets. We firmly believe our level of loan loss reserves, coupled with strong liquidity and a sound capital base, enable us to continue to address workout strategies aimed at reducing the overall level of nonperforming assets.”

Stewardship Financial Corporation’s subsidiary, the Atlantic Stewardship Bank, has 13 banking offices in Midland Park, Hawthorne (2), Montville, North Haledon, Pequannock, Ridgewood, Waldwick, Wayne (3), Westwood and Wyckoff, New Jersey. The bank is known for

4

Press Release - Midland Park NJ
Stewardship Financial Corporation continued	March 28, 2013

tithing 10% of its pre-tax profits to Christian and local charities. To date, the Bank’s tithe donations total $7.7 million.

We invite you to visit our website at www.asbnow.com for additional information.

The information disclosed in this document 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.

5

Stewardship Financial Corporation

Selected Consolidated Financial Information

(dollars in thousands, except per share amounts)

(unaudited)

	December 31,			September 30,			December 31,
	2012			2012			2011
Selected Financial Condition Data:
Cash and cash equivalents	$	21,016		$	17,387		$	13,698
Securities available for sale		174,700			173,999			170,925
Securities held to maturity		29,718			31,890			38,354
FHLB Stock		2,213			2,213			2,478
Loans receivable:
Loans receivable, gross		440,423			437,999			456,413
Allowance for loan losses		(10,641	)		(12,598	)		(11,604	)
Other, net		50			93			(6	)
Loans receivable, net		429,832			425,494			444,803
Loans held for sale		784			938			4,711
Other assets		30,125			31,891			33,849
Total assets	$	688,388		$	683,812		$	708,818
Noninterest-bearing deposits	$	124,286		$	125,060		$	115,776
Interest-bearing deposits		465,968			458,366			477,776
Total deposits		590,254			583,426			593,552
Other borrowings		25,000			25,000			32,700
Securities sold under agreements to repurchase		7,343			7,342			14,342
Subordinated debentures		7,217			7,217			7,217
Other liabilities		2,228			2,953			3,215
Stockholders' equity		56,346			57,874			57,792
Total liabilities and stockholders' equity	$	688,388		$	683,812		$	708,818
Book value per common share	$	6.98		$	7.25		$	7.28
Equity to assets		8.19	%		8.46	%		8.15	%
Asset Quality Data:
Nonaccrual loans	$	18,011		$	24,960		$	27,736
Loans past due 90 days or more and accruing		237			75			—
Total nonperforming loans		18,248			25,035			27,736
Other real estate owned		1,058			2,985			5,288
Total nonperforming assets	$	19,306		$	28,020		$	33,024
Nonperforming loans to total loans		4.14	%		5.72	%		6.08	%
Nonperforming assets to total assets		2.80	%		4.10	%		4.66	%
Allowance for loan losses to nonperforming loans		58.31	%		50.32	%		41.84	%
Allowance for loan losses to total gross loans		2.42	%		2.88	%		2.54	%

6

Stewardship Financial Corporation

Selected Consolidated Financial Information

(dollars in thousands, except per share amounts)

(unaudited)

	For the three months ended						For the year ended
	December 31,						December 31,
	2012			2011			2012			2011
Selected Operating Data:
Interest income	$	6,754		$	7,748		$	28,707		$	31,574
Interest expense		1,094			1,594			5,175			6,964
Net interest and dividend income		5,660			6,154			23,532			24,610
Provision for loan losses		3,330			4,925			9,995			10,845
Net interest and dividend income
after provision for loan losses		2,330			1,229			13,537			13,765
Noninterest income:
Fees and service charges		456			524			1,998			2,074
Bank owned life insurance		81			81			325			325
Gain on calls and sales of securities		1,004			686			2,340			1,161
Gain on sales of mortgage loans		160			374			887			1,209
Gain (loss) on sales of other real estate owned		(3	)		—			429			10
Other		79			118			410			391
Total noninterest income		1,777			1,783			6,389			5,170
Noninterest expenses:
Salaries and employee benefits		2,433			2,106			9,470			8,983
Occupancy, net		515			487			1,967			2,023
Equipment		240			239			971			970
Data processing		317			341			1,291			1,351
FDIC insurance premium		155			161			612			714
Other		1,147			1,487			5,342			4,625
Total noninterest expenses		4,807			4,821			19,653			18,666
Income (loss) before income tax expense (benefit)		(700	)		(1,809	)		273			269
Income tax expense (benefit)		(440	)		(847	)		(247	)		(415	)
Net income (loss)		(260	)		(962	)		520			684
Dividends on preferred stock and accretion		127			38			352			558
Net income (loss) available to common stockholders	$	(387	)	$	(1,000	)	$	168		$	126
Weighted avg. no. of diluted common shares		5,923,113			5,866,575			5,908,503			5,861,465
Diluted (loss) earnings per common share	$	(0.07	)	$	(0.17	)	$	0.03		$	0.02
Return on average common equity		-3.56	%		-8.82	%		0.39	%		0.29	%
Return on average assets		-0.15	%		-0.53	%		0.07	%		0.10	%
Yield on average interest-earning assets		4.24	%		4.70	%		4.44	%		4.89	%
Cost of average interest-bearing liabilities		0.86	%		1.20	%		1.00	%		1.31	%
Net interest rate spread		3.38	%		3.50	%		3.44	%		3.58	%
Net interest margin		3.57	%		3.75	%		3.66	%		3.83	%

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2012

Income Taxes Tables

Schedule of income tax (benefit) expense attributable to income from operations

The components of income tax benefit are summarized as follows:

	Years ended December 31,
	2012			2011
Current tax expense (benefit):
Federal	$	(440,000	)	$	1,050,000
State		78,000			385,000
		(362,000	)		1,435,000
Deferred tax expense (benefit):
Federal		158,000			(1,432,000	)
State		(93,000	)		(432,000	)
Valuation allowance		50,000			14,000
		115,000			(1,850,000	)
	$	(247,000	)	$	(415,000	)

Schedule of effective income tax rate reconciliation

The following table presents a reconciliation between the reported income taxes and the income taxes which would be computed by applying the normal federal income tax rate (34%) to income before income taxes:

	Years Ended December 31,
	2012			2011
Federal income tax	$	93,000		$	92,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect		(2,000	)		(17,000	)
Nontaxable interest income		(399,000	)		(401,000	)
Life insurance		(113,000	)		(113,000	)
Nondeductible expenses		17,000			17,000
Write-off of Federal deferred tax asset		133,000			—
Change in valuation reserve		42,000			—
Other items, net		(18,000	)		7,000
Effective federal income taxes	$	(247,000	)	$	(415,000	)

Schedule of deferred tax assets and liabilities

The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

	December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	4,250,000		$	4,635,000
Stock compensation		—			107,000
Nonaccrual loan interest		1,112,000			1,136,000
Depreciation		425,000			406,000
Contribution carry forward		253,000			276,000
State capital loss carry forward		165,000			17,000
Unrealized loss on fair value of interest rate swap		295,000			325,000
Alternate minimum tax		307,000			—
		6,807,000			6,902,000
Valuation reserve		(179,000	)		(129,000	)
		6,628,000			6,773,000
Deferred tax liabilities:
Unrealized gains on securities available-for-sale		607,000			1,221,000
Other		4,000			4,000
		611,000			1,225,000
Net deferred tax assets	$	6,017,000		$	5,548,000

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 2) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Allowance for loan losses Ending balance, Individually evaluated for impairment	$ 266,000	$ 3,121,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	10,375,000	8,483,000
Total Ending allowance balance	10,641,000	11,604,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	28,686,000	33,716,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	411,737,000	422,697,000
Total Loans	440,423,000	456,413,000
Commercial
Allowance for loan losses Ending balance, Individually evaluated for impairment	251,000	1,908,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	4,581,000	3,460,000
Total Ending allowance balance	4,832,000	5,368,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	8,641,000	10,265,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	80,773,000	92,235,000
Total Loans	89,414,000	102,500,000
Commercial real estate
Allowance for loan losses Ending balance, Individually evaluated for impairment	15,000	947,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	4,921,000	3,996,000
Total Ending allowance balance	4,936,000	4,943,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	12,803,000	13,128,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	229,960,000	233,421,000
Total Loans	242,763,000	246,549,000
Construction
Allowance for loan losses Ending balance, Individually evaluated for impairment		266,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	169,000	214,000
Total Ending allowance balance	169,000	480,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	6,029,000	8,653,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	3,295,000	4,512,000
Total Loans	9,324,000	13,165,000
Residential real estate
Allowance for loan losses Ending balance, Individually evaluated for impairment
Allowance for loan losses Ending balance, Collectively evaluated for impairment	308,000	303,000
Total Ending allowance balance	308,000	303,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	413,000	779,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	66,787,000	53,915,000
Total Loans	67,200,000	54,694,000
Consumer
Allowance for loan losses Ending balance, Individually evaluated for impairment
Allowance for loan losses Ending balance, Collectively evaluated for impairment	352,000	498,000
Total Ending allowance balance	352,000	498,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	800,000	891,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	30,806,000	38,473,000
Total Loans	31,606,000	39,364,000
Other
Allowance for loan losses Ending balance, Individually evaluated for impairment
Allowance for loan losses Ending balance, Collectively evaluated for impairment	3,000	2,000
Total Ending allowance balance	3,000	2,000
Loans Recorded investment Ending balance, Individually evaluated for impairment
Loans Recorded investment Ending balance, Collectively evaluated for impairment	116,000	141,000
Total Loans	116,000	141,000
Unallocated
Allowance for loan losses Ending balance, Individually evaluated for impairment
Allowance for loan losses Ending balance, Collectively evaluated for impairment	41,000	10,000
Total Ending allowance balance	41,000	10,000
Loans Recorded investment Ending balance, Individually evaluated for impairment
Loans Recorded investment Ending balance, Collectively evaluated for impairment
Total Loans

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SECURITIES - AVAILABLE-FOR-SALE AND HELD TO MATURITY (Details) (USD $)	Dec. 31, 2012		Dec. 31, 2011
Available for sale securities
Amortized Cost	$ 173,146,000		$ 167,794,000
Gross Unrealized Gains	1,744,000		3,172,000
Gross Unrealized Losses	190,000		41,000
Fair Value	174,700,000		170,925,000
U.S. Treasury
Available for sale securities
Amortized Cost	4,003,000		4,027,000
Gross Unrealized Gains	3,000		23,000
Gross Unrealized Losses
Fair Value	4,006,000		4,050,000
U.S. government-sponsored agencies
Available for sale securities
Amortized Cost	37,287,000		20,702,000
Gross Unrealized Gains	35,000		46,000
Gross Unrealized Losses	67,000		4,000
Fair Value	37,255,000		20,744,000
Obligations of state and political and subdivisions
Available for sale securities
Amortized Cost	13,724,000		8,866,000
Gross Unrealized Gains	468,000		461,000
Gross Unrealized Losses	22,000		9,000
Fair Value	14,170,000		9,318,000
Mortgage-backed securities - residential
Available for sale securities
Amortized Cost	104,341,000		130,912,000
Gross Unrealized Gains	1,176,000		2,583,000
Gross Unrealized Losses	89,000		28,000
Fair Value	105,428,000		133,467,000
Asset-backed Securities
Available for sale securities
Amortized Cost	9,874,000	[1]
Gross Unrealized Gains	22,000	[1]
Gross Unrealized Losses	12,000	[1]
Fair Value	9,884,000	[1]
Corporate Debt Securities
Available for sale securities
Amortized Cost	492,000
Gross Unrealized Gains	3,000
Gross Unrealized Losses
Fair Value	495,000
Total debt securities
Available for sale securities
Amortized Cost	169,721,000		164,507,000
Gross Unrealized Gains	1,707,000		3,113,000
Gross Unrealized Losses	190,000		41,000
Fair Value	171,238,000		167,579,000
Other equity investments
Available for sale securities
Amortized Cost	3,425,000		3,287,000
Gross Unrealized Gains	37,000		59,000
Gross Unrealized Losses
Fair Value	$ 3,462,000		$ 3,346,000

[1] (a) Collateralized by student loans

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BORROWINGS (Details Narrative) (USD $)	0 Months Ended	12 Months Ended
	Dec. 13, 2011	Dec. 31, 2012	Dec. 31, 2011	Sep. 25, 2012	Dec. 31, 2012 First Mortgage Loans	Dec. 31, 2011 First Mortgage Loans	Dec. 31, 2012 Investment Securities	Dec. 31, 2011 Investment Securities	Sep. 21, 2012 Federal Home Loan Bank Advances - refinanced	Aug. 19, 2011 Federal Home Loan Bank Advances - refinanced	Sep. 21, 2012 Federal Home Loan Bank Advances - new borrowings	Aug. 19, 2011 Federal Home Loan Bank Advances - new borrowings
Maximum FHLB advances outstanding at any month end		$ 36,800,000	$ 36,000,000
Average Balance of FHLB advances outstanding		26,900,000	33,300,000
Refinanced borrowings with FHLB									5,000,000	15,000,000
FHLB borrowings, rate									1.72%	3.30%	1.16%	1.67%
Borrowings with FHLB, average remaining life	3 years 2 months 12 days								1 year 10 months 12 days	1 year 9 months 18 days	5 years	4 years
Prepayment premium	368,000			691,000					135,000
Borrowings with FHLB, effective interest rate	1.85%								1.70%	2.75%
Payments of Federal Home Loan Bank Advances	5,000,000
FHLB advances which have reached their first call date		10,000,000
Assets pledged as security for FHLB advances					55,200,000	37,700,000	5,300,000	14,300,000
Additional borrowing capacity from FHLB		60,500,000	52,000,000
Overnight FHLB advances			4,700,000
Borrowing capacity at the Federal Reserve Bank discount window		5,100,000	5,100,000
Overnight variable pricing lines with other correspondent banks		11,000,000	11,000,000
Wholesale repurchase agreement, amount repaid				7,000,000
Wholesale repurchase agreement, total				14,000,000
Wholesale repurchase agreement, description				The borrowing had a current floating rate at 9.00% minus 3-month LIBOR measured on a quarterly basis with a 5.15% cap and a 0.00% floor.
Assets pledged as collateral for securities sold under agreements to repurchase		$ 11,002,000	$ 19,269,000

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 3) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Total nonperfoming loans	$ 18,011,000	$ 27,736,000
Commercial loan secured by real estate
Total nonperfoming loans	3,374,000	6,178,000
Commercial loan - Other
Total nonperfoming loans	261,000	2,494,000
Commercial real estate
Total nonperfoming loans	10,083,000	9,302,000
Construction - Commercial
Total nonperfoming loans	3,080,000	7,840,000
Construction - Residential
Total nonperfoming loans		252,000
Residential real estate
Total nonperfoming loans	413,000	779,000
Consumer loan secured by real estate
Total nonperfoming loans	800,000	891,000
Consumer loan - Other
Total nonperfoming loans
Other
Total nonperfoming loans

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STOCK-BASED COMPENSATION (Details) (USD $)	12 Months Ended
	Dec. 31, 2012
Employee Stock Options
Number of options:
Number of Options outstanding, beginning	7,598
Number of Options exercised
Number of Options forfeited	844
Number of Options outstanding, ending	6,754
Number of Options exercisable	6,754
Weighted Average Exercise Price of Options outstanding, beginning	$ 11.19
Weighted Average Exercise Price of Options exercised
Weighted Average Exercise Price of Options forfeited	$ 11.19
Weighted Average Exercise Price of Options outstanding, ending	$ 11.19
Weighted Average Remaining Contractual Term:
Weighted Average Remaining Contractual Term of Options outstanding	0 years 6 months 14 days
Aggregate Intrinsic Value:
Aggregate Intrinsic Value of Options outstanding
Aggregate Intrinsic Value of Options exercisable
Director Stock Options
Number of options:
Number of Options outstanding, beginning	57,130
Number of Options forfeited	(57,130)
Number of Options outstanding, ending
Weighted Average Exercise Price of Options outstanding, beginning	$ 11.02
Weighted Average Exercise Price of Options forfeited	$ 11.02
Weighted Average Exercise Price of Options outstanding, ending

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RESTRICTIONS ON CASH AND DUE FROM BANKS (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Restrictions On Cash And Due From Banks Details
Average amount of reserves on deposit with the Federal Reserve Bank	$ 25,000	$ 25,000

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OTHER REAL ESTATE OWNED (Tables)

12 Months Ended

Dec. 31, 2012

Other Real Estate Owned Tables

Schedule of Other Real Estate Owned

The balance of other real estate owned consists of the following at December 31, 2012 and 2011:

	December 31,
	2012		2011
Acquired by foreclosure or deed in lieu of foreclosure	$	1,058,000	$	3,873,000
In-substance foreclosure		—		1,453,000
Allowance for losses on other real estate owned		—		(38,000	)
Other real estate owned, net	$	1,058,000	$	5,288,000

Schedule of Activity in Allowance for Losses on Other Real Estate Owned

Activity in the allowance for losses on other real estate owned was as follows:

	For the year ended December 31,
	2012			2011
Beginning of year	$	38,000		$	—
Additions charged to expense		188,000			38,000
Reductions from sales of other real estate owned		(226,000	)		—
End of year	$	—		$	38,000

Schedule of Expenses realted to other real estate owned

Expenses related to other real estate owned include:

	For the year ended December 31,
	2012		2011
Provision for unrealized losses	$	188,000	$	38,000
Operating expenses, net of rental income		415,000		57,000
	$	603,000	$	95,000

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EARNINGS PER COMMON SHARE (Details Narrative)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Stock options
Antidilutive securities excluded from computation of diluted EPS (in shares)	31,683	64,728
U.S. Treasury's warrant
Antidilutive securities excluded from computation of diluted EPS (in shares)		108,974

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SUBORDINATED DEBENTURES (Details Narrative) (USD $)	0 Months Ended
	Mar. 17, 2003	Dec. 31, 2012	Sep. 17, 2008
Subordinated Debentures Details Narrative
Securities issued by the trust	$ 7,000,000
Sale of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures from the company to the trust	$ 7,217,000
Interest rate of Securities and Debentures			6.75%
Interest Rate of Debentures		3.51%
Interest rate of securities		3.26%

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INTEREST RATE SWAP (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Interest Rate Swap Details 1
Amount of gain (loss) recognized in OCI (Effective Portion)	$ 49,000	$ (138,000)
Amount of gain (loss) reclassified from OCI to interest income
Amount of gain (loss) recognized in other noninterest income (Ineffective Portion)

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 5) (USD $)	Dec. 31, 2012	Dec. 31, 2011
30 to 59 Days	$ 2,936,000	$ 1,513,000
60 to 89 Days	737,000	2,103,000
Greater Than 90 Days	13,624,000	15,471,000
Total	17,297,000	19,087,000
Not past due	423,126,000	437,326,000
Total Loans	440,423,000	456,413,000
Commercial loan secured by real estate
30 to 59 Days	101,000	875,000
60 to 89 Days	179,000	546,000
Greater Than 90 Days	2,674,000	3,977,000
Total	2,954,000	5,398,000
Not past due	55,206,000	55,252,000
Total Loans	58,160,000	60,650,000
Commercial loan - Other
30 to 59 Days	25,000	53,000
60 to 89 Days	98,000	260,000
Greater Than 90 Days	52,000	1,752,000
Total	175,000	2,065,000
Not past due	31,079,000	39,785,000
Total Loans	31,254,000	41,850,000
Commercial real estate
30 to 59 Days	2,582,000
60 to 89 Days		736,000
Greater Than 90 Days	9,023,000	5,352,000
Total	11,605,000	6,088,000
Not past due	231,158,000	240,461,000
Total Loans	242,763,000	246,549,000
Construction - Commercial
30 to 59 Days
60 to 89 Days	460,000	561,000
Greater Than 90 Days	815,000	2,640,000
Total	1,275,000	3,201,000
Not past due	8,049,000	9,712,000
Total Loans	9,324,000	12,913,000
Construction - Residential
30 to 59 Days
60 to 89 Days
Greater Than 90 Days		252,000
Total		252,000
Not past due
Total Loans		252,000
Residential real estate
30 to 59 Days	161,000
60 to 89 Days
Greater Than 90 Days	413,000	779,000
Total	574,000	779,000
Not past due	66,626,000	53,915,000
Total Loans	67,200,000	54,694,000
Consumer loan secured by real estate
30 to 59 Days	67,000	581,000
60 to 89 Days
Greater Than 90 Days	647,000	719,000
Total	714,000	1,300,000
Not past due	30,268,000	36,978,000
Total Loans	30,982,000	38,278,000
Consumer loan - Other
30 to 59 Days		4,000
60 to 89 Days
Greater Than 90 Days
Total		4,000
Not past due	624,000	1,082,000
Total Loans	624,000	1,086,000
Other
30 to 59 Days
60 to 89 Days
Greater Than 90 Days
Total
Not past due	116,000	141,000
Total Loans	$ 116,000	$ 141,000

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BENEFIT PLANS (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Benefit Plans Details
401(k) plan employer contributions	$ 145,000	$ 136,000
Shares purchased under the employee stock purchase plan	7,589	8,824
Shares reserved for issuance under the Employee Stock Purchase Plan	194,519

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COMMITMENTS AND CONTINGENCIES (Details) (USD $)	Dec. 31, 2012
Minimum annual lease payments operating lease agreements
2013	$ 1,006,000
2014	740,000
2015	381,000
2016	313,000
2017	293,000
Thereafter	2,012,000
Total	$ 4,745,000

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INCOME TAXES (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Income Taxes Details Narrative
Statutory federal income tax rate	34.00%
Carryback taxes paid that could be utilized against the deferred tax asset	$ 856,000
Deferred Tax Assets Operating Loss carryforwards	5,200,000
AMT credit carryforwards	$ 307,000

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INTEREST RATE SWAP (Details Narrative) (USD $)	Dec. 31, 2012
Interest Rate Swap Details Narrative
Interest rate swap, designated as cash flow hedge notional amount	$ 7,000,000
Investment securities securing interest rate swap	$ 1,004,000

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STOCK-BASED COMPENSATION (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Stock-based compensation expense		$ 19,000
Director Stock Plan
Shares purchased for plan	5,591	3,715
Awards authorized but unissued	540,316
Non-Employee Directors Stock Option Plan
Stock-based compensation expense		19,000
2010 Stock Incentive Plan
Awards authorized but unissued	192,355
Stock-based compensation expense		$ 26,000
2010 Stock Incentive Plan | Employees
Awards granted		5,145
2010 Stock Incentive Plan | Directors
Awards granted		2,500

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BORROWINGS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Maturities of Federal Home Loan Bank Advances
Within one year		$ 7,700,000
After one year, but within two years
After two years, but within three years		5,000,000
After three years, but within four years	10,000,000
After four years, but within five years	5,000,000	10,000,000
After five years	10,000,000	10,000,000
[FederalHomeLoanBankAdvancesMaturitiesSummary]	$ 25,000,000	$ 32,700,000
Average Interest Rate
Within one year	0.00%	1.30%
After one year, but within two years	0.00%	0.00%
After two years, but within three years	0.00%	1.72%
After three years, but within four years	1.64%	0.00%
After four years, but within five years	1.16%	1.64%
After five years	1.85%	1.85%
[FederalHomeLoanBankAdvancesMaturitiesSummaryAverageInterestRate]	1.63%	1.64%

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INTEREST RATE SWAP

12 Months Ended

Dec. 31, 2012

Interest Rate Swap

INTEREST RATE SWAP

Note 17. 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 swap does not represent an amount 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: The Corporation entered into a swap with a notional amount of $7 million. It was designated as a cash flow hedge of the subordinated debentures and was determined to be fully effective during the years ended December 31, 2012 and 2011. 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 December 31, 2012, the interest rate swap is secured by investment securities with a fair value of $1,004,000.

Summary information as of December 31, 2012 about the interest rate swap designated as a cash flow hedge 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	($812,000)

The net expense recorded on the swap transaction totaled $255,000 and $265,000 for the years ended December 31, 2012 and 2011, respectively, and is reported as a component of interest expense – borrowed money.

The fair value of the interest rate swap of ($812,000) and ($893,000) at December 31, 2012 and 2011, respectively, was included in accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

The following table presents the after tax net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the periods indicated.

	For the year ended December 31, 2012
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of gain (loss) reclassified from OCI to interest income		Amount of gain (loss) recognized in other noninterest income (Ineffective Portion)
Interest rate contract	$	49,000	$	—	$	—

	For the year ended December 31, 2011
	Amount of gain (loss) recognized in OCI (Effective Portion)			Amount of gain (loss) reclassified from OCI to interest income		Amount of gain (loss) recognized in other noninterest income (Ineffective Portion)
Interest rate contract	$	(138,000	)	$	—	$	—

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SECURITIES - AVAILABLE-FOR-SALE AND HELD TO MATURITY (Details 2) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	$ 50,735,000	$ 13,965,000
Less than 12 Months, Unrealized Losses	(190,000)	(41,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	50,735,000	13,965,000
Unrealized Losses	(190,000)	(41,000)
U.S. Treasury
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value
Less than 12 Months, Unrealized Losses
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value
Unrealized Losses
U.S. government-sponsored agencies
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	20,716,000	1,993,000
Less than 12 Months, Unrealized Losses	(67,000)	(4,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	20,716,000	1,993,000
Unrealized Losses	(67,000)	(4,000)
Obligations of state and political and subdivisions
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	3,257,000	1,335,000
Less than 12 Months, Unrealized Losses	(22,000)	(9,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	3,257,000	1,335,000
Unrealized Losses	(22,000)	(9,000)
Mortgage-backed securities - residential
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	23,715,000	10,637,000
Less than 12 Months, Unrealized Losses	(89,000)	(28,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	23,715,000	10,637,000
Unrealized Losses	(89,000)	(28,000)
Asset-backed Securities
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	3,047,000
Less than 12 Months, Unrealized Losses	(12,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	3,047,000
Unrealized Losses	(12,000)
Corporate Debt Securities
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value
Less than 12 Months, Unrealized Losses
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value
Unrealized Losses
Other equity investments
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value
Less than 12 Months, Unrealized Losses
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value
Unrealized Losses

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value Of Financial Instruments Tables

Schedule of assets and liabilities measured at fair value on a recurring basis

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

			Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2012
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,006,000	$	4,006,000	$	—	$	—
U.S. government -
sponsored agencies		37,255,000		—		37,255,000		—
Obligations of state and
political subdivisions		14,170,000		—		14,170,000		—
Mortgage-backed securities-
residential		105,428,000		—		105,428,000		—
Asset-backed securities		9,884,000		—		9,884,000		—
Corporate bonds		495,000		—		495,000		—
Other equity investments		3,462,000		3,402,000		60,000		—
Total available-for-
sale securities	$	174,700,000	$	7,408,000	$	167,292,000	$	—
Liabilities:
Interest rate swap	$	812,000	$	—	$	812,000	$	—

	December 31, 2011
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,050,000	$	4,050,000	$	—	$	—
U.S. government -
sponsored agencies		20,744,000		—		20,744,000		—
Obligations of state and
political subdivisions		9,318,000		—		9,318,000		—
Mortgage-backed securities-
residential		133,467,000		—		133,467,000		—
Other equity investments		3,346,000		3,286,000		60,000		—
Total available-for-
sale securities	$	170,925,000	$	7,336,000	$	163,589,000	$	—
Liabilities:
Interest rate swap	$	893,000	$	—	$	893,000	$	—

Schedule of assets and liabilities measured at fair value on a non-recurring basis

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

			Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2012
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,006,000	$	4,006,000	$	—	$	—
U.S. government -
sponsored agencies		37,255,000		—		37,255,000		—
Obligations of state and
political subdivisions		14,170,000		—		14,170,000		—
Mortgage-backed securities-
residential		105,428,000		—		105,428,000		—
Asset-backed securities		9,884,000		—		9,884,000		—
Corporate bonds		495,000		—		495,000		—
Other equity investments		3,462,000		3,402,000		60,000		—
Total available-for-
sale securities	$	174,700,000	$	7,408,000	$	167,292,000	$	—
Liabilities:
Interest rate swap	$	812,000	$	—	$	812,000	$	—

	December 31, 2011
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,050,000	$	4,050,000	$	—	$	—
U.S. government -
sponsored agencies		20,744,000		—		20,744,000		—
Obligations of state and
political subdivisions		9,318,000		—		9,318,000		—
Mortgage-backed securities-
residential		133,467,000		—		133,467,000		—
Other equity investments		3,346,000		3,286,000		60,000		—
Total available-for-
sale securities	$	170,925,000	$	7,336,000	$	163,589,000	$	—
Liabilities:
Interest rate swap	$	893,000	$	—	$	893,000	$	—

Schedule of fair value assumptions for Level 3 asset measurements

For the Level 3 assets measured at fair value on a non-recurring basis at December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

Assets	Fair Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans	$	22,521,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.	5% - 10%
				Estimated selling costs.	7%
Other real estate owned	$	1,058,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.	5% - 10%
				Estimated selling costs.	7%

Schedule of fair value estimates for the financial instruments

Fair value estimates for the Corporation’s financial instruments are summarized below: 

			Fair  Value  Measurements Using
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	At December 31, 2012
Financial assets:
Cash and cash equivalents	$	21,016,000		$	21,016,000	$	—	$	—
Securities available-for-sale		174,700,000			7,408,000		167,292,000		—
Securities held to maturity		29,718,000			—		31,768,000		—
FHLB-NY stock		2,213,000			N/A		N/A		N/A
Mortgage loans held for sale		784,000			—		784,000		—
Loans, net		429,832,000			—		—		449,041,000
Accrued interest receivable		2,372,000			2,000		908,000		1,462,000
Financial liabilities
Deposits		590,254,000			434,569,000		157,219,000		—
FHLB-NY advances		25,000,000			—		25,825,000		—
Securities sold under
agreements to repurchase		7,343,000			—		7,883,000		—
Subordinated debenture		7,217,000			—		—		7,112,000
Accrued interest payable		560,000			1,000		540,000		19,000
Interest rate swap		812,000			—		812,000		—

	At December 31, 2011
	Carrying		Estimated
	Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	13,698,000	$	13,698,000
Securities available-for-sale		170,925,000		170,925,000
Securities held to maturity		38,354,000		40,984,000
FHLB-NY stock		2,478,000		N/A
Net loans, including impaired loans		444,803,000		453,604,000
Accrued interest receivable		2,618,000		2,618,000
Financial liabilities:
Deposits		593,552,000		595,939,000
FHLB-NY Advances		32,700,000		33,482,000
Securities sold under agreements to repurchase		14,342,000		14,786,000
Subordinated debenture		7,217,000		6,297,000
Accrued interest payable		775,000		775,000
Interest rate swap		893,000		893,000

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PREFERRED STOCK (Details Narrative) (USD $)	12 Months Ended		0 Months Ended			12 Months Ended	0 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Jan. 26, 2011 U.S. Treasury's warrant	Jan. 29, 2009 U.S. Treasury's warrant	Sep. 01, 2011 Senior Non-Cumulative Perpetual Preferred Stock, Series B	Dec. 31, 2012 Senior Non-Cumulative Perpetual Preferred Stock, Series B N	Sep. 01, 2011 Series A Preferred Shares
Amount of fund established to encourage lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion	$ 30,000,000,000
Stock issued during period (in shares)					15,000
Stock issued during period, value					15,000,000
Stock issued during period, Value	15,000,000	15,000,000
Stock repurchased during period (in shares)							10,000
Liquidation preference (in dollars per share)					$ 1,000		$ 1,000
Payment for repurchase of preferred stock including accrued but unpaid dividends		10,108,000					10,022,222
Preferred stock dividend rate, Terms						The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement) from 1% to 5% per annum and, thereafter, for the eleventh through the first half of the nineteenth dividend periods, from 1% to 7%. In general, the dividend rate decreases as the level of the Bank’s QSBL increases. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%
Dividend payment restrictions, Description						Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level
Number of dividend defaults required for having voting rights on preferred stock						6
Aggregate liquidation preference						25,000,000
Number of additional directors which may be elected in BOD						2
Redemption of common stock warrants		$ (108,000)	$ 107,398
Warrant Term				10 years
Number of shares able to be purchased by the warrant				133,475
Treasury Warrant exercise price per share				$ 11.24

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PARENT COMPANY ONLY (Details 2) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Cash flows from operating activities:
Net income	$ (260,000)	$ 328,000	$ (324,000)	$ 776,000	$ (962,000)	$ 578,000	$ 585,000	$ 483,000	$ 520,000	$ 684,000
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts, net									1,628,000	1,372,000
Gain on sales and calls of securities									(2,340,000)	(1,161,000)
Decrease in accrued interest receivable									246,000	188,000
(Increase) decrease in other assets									950,000	(442,000)
Increase (decrease) in other liabilities									(1,870,000)	1,266,000
Net cash provided by operating activities									12,783,000	16,069,000
Cash flows from investing activities:
Purchase of securities available for sale									(134,832,000)	(97,018,000)
Proceeds from maturities and principal repayments on securities available for sale									27,964,000	21,148,000
Proceeds from sales and calls on securities available for sale									102,300,000	46,245,000
Proceeds from maturities and principal repayments on securities held to maturity									4,147,000	4,938,000
Net cash provided by (used in) investing activities									13,584,000	(40,160,000)
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs										14,952,000
Repurchase of preferred stock and warrant										(10,108,000)
Cash dividends paid on common stock									(886,000)	(1,171,000)
Cash dividends paid on preferred stock and accretion									(352,000)	(383,000)
Payment of discount on dividend reinvestment plan									(8,000)	(15,000)
Issuance of common stock									194,000	182,000
Net cash provided by (used in) financing activities									(19,049,000)	17,806,000
Net increase (decrease) in cash and cash equivalents									7,318,000	(6,285,000)
Cash and cash equivalents - beginning				13,698,000				19,983,000	13,698,000	19,983,000
Cash and cash equivalents - ending	21,016,000				13,698,000				21,016,000	13,698,000
Parent Company
Cash flows from operating activities:
Net income									520,000	684,000
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiary									(365,000)	(1,151,000)
Amortization of premiums and accretion of discounts, net										4,000
Gain on sales and calls of securities									(7,000)	(19,000)
Decrease in accrued interest receivable									7,000	4,000
(Increase) decrease in other assets									193,000	(102,000)
Increase (decrease) in other liabilities									105,000	(29,000)
Net cash provided by operating activities									453,000	(609,000)
Cash flows from investing activities:
Purchase of securities available for sale									(1,499,000)
Proceeds from maturities and principal repayments on securities available for sale										149,000
Proceeds from sales and calls on securities available for sale									500,000	1,071,000
Proceeds from maturities and principal repayments on securities held to maturity									1,000,000
Investment in subsidiary bank										(5,000,000)
Net cash provided by (used in) investing activities									1,000	(3,780,000)
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs										14,952,000
Repurchase of preferred stock and warrant										(10,108,000)
Cash dividends paid on common stock									(886,000)	(1,171,000)
Cash dividends paid on preferred stock and accretion									(352,000)	(383,000)
Payment of discount on dividend reinvestment plan									(8,000)	(15,000)
Issuance of common stock									194,000	182,000
Net cash provided by (used in) financing activities									(1,052,000)	3,457,000
Net increase (decrease) in cash and cash equivalents									(598,000)	(932,000)
Cash and cash equivalents - beginning				861,000				1,793,000	861,000	1,793,000
Cash and cash equivalents - ending	$ 263,000				$ 861,000				$ 263,000	$ 861,000

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STOCK-BASED COMPENSATION (Tables)

12 Months Ended

Dec. 31, 2012

Stock-Based Compensation Tables

Schedule of activity related to stock options under all plans

A summary of the status of the qualified stock options as of December 31, 2012 and changes during the year then ended is presented as follows:

	2012
			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at beginning of year		7,598	$	11.19
Exercised		—		—
Forfeited		844		11.19
Outstanding at end of year		6,754	$	11.19
Intrinsic value at year end	$	—
Options exercisable at year end		6,754
Intrinsic value of options exercisable	$	—
Weighted-average remaining contractual term (years)		0.54

A summary of the status of the nonqualified stock options issued under the 2006 Stock Option Plan for Non-Employee Directors as of December 31, 2012 is presented below:

	2012
				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at beginning of year		57,130		$	11.02
Expired		(57,130	)		11.02
Outstanding at end of year		—		$	—

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Gross loans	$ 440,423,000	$ 456,413,000
Deferred loan fees, net of costs	(50,000)	6,000
Allowance for loan losses	10,641,000	11,604,000
Allowance net of deferred loan fees	10,591,000	11,610,000
Loans, net	429,832,000	444,803,000
Commercial loan secured by real estate
Gross loans	58,160,000	60,650,000
Commercial loan - Other
Gross loans	31,254,000	41,850,000
Commercial real estate
Gross loans	242,763,000	246,549,000
Allowance for loan losses	4,936,000	4,943,000
Construction - Commercial
Gross loans	9,324,000	12,913,000
Construction - Residential
Gross loans		252,000
Residential real estate
Gross loans	67,200,000	54,694,000
Allowance for loan losses	308,000	303,000
Consumer loan secured by real estate
Gross loans	30,982,000	38,278,000
Consumer loan - Other
Gross loans	624,000	1,086,000
Other
Gross loans	116,000	141,000
Allowance for loan losses	$ 3,000	$ 2,000

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DEPOSITS (Details Narrative) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Deposits Details Narrative
Certificates of deposit with balances of $100,000 or more	$ 94,883,000	$ 102,348,000

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PREMISES AND EQUIPMENT, NET (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Premises And Equipment Net Details Narrative
Depreciation and amortization expense	$ 532,000	$ 594,000

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SECURITIES - AVAILABLE-FOR-SALE AND HELD TO MATURITY (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Securities - Available-For-Sale And Held To Maturity Details Narrative
Cash proceeds realized from sales and calls of securities available for sale	$ 102,300,000	$ 46,245,000
Gross Realized gain from sales and calls of securities available for sale	2,290,000	1,157,000
Gross Realized losses from sales and calls of securities available for sale	8,000	1,000
Tax Impact on realized gain from sales and calls of securities available for sale	892,000	455,000
Available for sale securities pledged to secure public deposits	1,246,000	1,440,000
Proceeds from calls on securities held to maturity	4,418,000	1,895,000
Realized gain from sales and calls of securities held to maturity	58,000	5,000
Tax Impact on realized gain from sales and calls of securities held to maturity	$ 22,000	$ 2,000

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SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

SIGNIFICANT ACCOUNTING POLICIES

Note 1. SIGNIFICANT ACCOUNTING POLICIES

Nature of operations and principles of consolidation

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly owned subsidiary, Atlantic Stewardship Bank (“the Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation (whose primary business is to own and manage an investment portfolio), Stewardship Realty LLC (whose primary business is to own and manage property at 612 Godwin Avenue, Midland Park, New Jersey), Atlantic Stewardship Insurance Company, LLC (whose primary business is insurance) and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the daily operations. All intercompany accounts and transactions are eliminated in the consolidated financial statements.

The Corporation provides financial services through the Bank’s offices in Bergen, Passaic, and Morris Counties, New Jersey. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial, residential mortgage and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow generated from the operations of businesses. There are no significant concentrations of loans to any one industry or customer. The Corporation’s lending activities are concentrated in loans secured by real estate located in northern New Jersey and, therefore, collectability of the loan portfolio is susceptible to changes in real estate market conditions in the northern New Jersey market. The Corporation has not made loans to borrowers outside the United States.

Basis of consolidated financial statements presentation

The consolidated financial statements of the Corporation have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ significantly from those estimates. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Cash flows

Cash and cash equivalents include cash and deposits with other financial institutions under 90 days and interest-bearing deposits in other banks with original maturities under 90 days. Net cash flows are reported for customer loan and deposit transactions, and short term borrowings and securities sold under agreement to repurchase.

Securities available-for-sale and held to maturity

The Corporation classifies its securities as held to maturity or available-for-sale. Investments in debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at amortized cost. All other securities are classified as securities available-for-sale. Securities available-for-sale may be sold prior to maturity in response to changes in interest rates or prepayment risk, for asset/liability management purposes, or other similar factors. These securities are carried at fair value with unrealized holding gains or losses reported in a separate component of shareholders’ equity, net of the related tax effects.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Federal Home Loan Bank (“FHLB”) Stock

The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as income.

Mortgage loans held for sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value on an aggregate basis. Mortgage loans held for sale are carried net of deferred fees, which are recognized as income at the time the loans are sold to permanent investors. Gains or losses on the sale of mortgage loans held for sale are recognized at the settlement date and are determined by the difference between the net proceeds and the amortized cost. All loans are sold with loan servicing rights released to the buyer.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans represents the outstanding principal balance after charge-offs and does not include accrued interest receivable as the inclusion is not significant to the reported amounts.

Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is adequately secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or are charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to an accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for loan losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is considered impaired 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. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructuring and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance is based on historical loss experience adjusted for current factors. The historical loss experience is determined for each portfolio segment and class, and is based on the actual loss history experienced by the Company over the most recent 3 years. For each portfolio segment the Bank prepares a migration analysis which analyzes the historical loss experience. The migration analysis is updated quarterly for the purpose of determining the assigned allocation factors which are essential components of the allowance for loan losses calculation. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment or class. These qualitative factors include consideration of the following: levels of and trends in charge-offs; levels of and trends in delinquencies and impaired loans; levels and trends in loan size; levels of real estate concentrations; national and local economic trends and conditions; the depth and experience of lending management and staff; and other changes in lending policies, procedures, and practices.

For purposes of determining the allowance for loan losses, loans in the portfolio are segregated by product type into the following segments: commercial, commercial real estate, construction, residential real estate, consumer and other. The Corporation also sub-divides these segments into classes based on the associated risks within those segments. Commercial loans are divided into the following two classes: secured by real estate and other. Construction loans are divided into the following two classes: commercial and residential. Consumer loans are divided into two classes: secured by real estate and other. The models and assumptions used to determine the allowance require management’s judgment. Assumptions, data and computations are appropriately reviewed and properly documented.

The risk characteristics of each of the identified portfolio segments are as follows:

Commercial – Commercial loans are generally of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Furthermore, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Commercial Real Estate – Commercial real estate loans are secured by multi-family and nonresidential real estate and generally have larger balances and involve a greater degree of risk than residential real estate loans. Commercial real estate loans depend on the global cash flow analysis of the borrower and the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the cash flow from the property. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. Commercial Real Estate is also subject to adverse market conditions that cause a decrease in market value or lease rates, obsolescence in location or function and market conditions associated with over supply of units in a specific region.

Construction – Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, additional funds may be required to be advanced in excess of the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, the value of the building may be insufficient to assure full repayment if liquidation is required. If foreclosure is required on a building before or at completion due to a default, there can be no assurance that all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs will be recovered.

Residential Real Estate – Residential real estate loans are generally made on the basis of the borrower’s ability to make repayment from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable. Repayment of residential real estate loans is subject to adverse employment conditions in the local economy leading to increased default rate and decreased market values from oversupply in a geographic area. In general, residential real estate loans depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Consumer loans – Consumer loans secured by real estate may entail greater risk than do residential mortgage loans due to a lower lien position. In addition, other consumer loans, particularly loans secured by assets that depreciate rapidly, such as motor vehicles, are subject to greater risk. In all cases, collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Generally, when it is probable that some portion or all of a loan balance will not be collected, regardless of portfolio segment, that amount is charged-off as a loss against the allowance for loan losses. On loans secured by real estate, the charge-offs reflect partial writedowns due to the initial valuation of market values of the underlying real estate collateral in accordance with Accounting Standards Codification 310-40. Consumer loans are generally charged-off in full when they reach 90 – 120 days past due.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and equipment

Land is stated at cost. Buildings and improvements and furniture, fixtures and equipment are stated at cost, less accumulated depreciation computed on the straight-line method over the estimated lives of each type of asset. Estimated useful lives are three to forty years for buildings and improvements and three to twenty-five years for furniture, fixtures and equipment. Leasehold improvements are stated at cost less accumulated amortization computed on the straight-line method over the shorter of the term of the lease or useful life.

Long-Term Assets

Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recovered from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Other Real Estate Owned

Other real estate owned (OREO) consists of property acquired through foreclosure or deed in lieu of foreclosure and property that is in-substance foreclosed. OREO is initially recorded at fair value less estimated selling costs. When a property is acquired, the excess of the carrying amount over fair value, if any, is charged to the allowance for loan losses. Subsequent adjustments to the carrying value are recorded in an allowance for OREO and charged to OREO expense.

Bank owned life insurance

The Corporation has purchased life insurance policies on certain key officers. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Treasury Stock

Repurchases of common stock are recorded as treasury stock at cost. Treasury stock is reissued using the first in first out method. Treasury stock may be reissued for exercise of stock options, dividend reinvestment plans, stock dividends or other stock issuances. The difference between the cost and the market value at the time the treasury stock is reissued is shown as an adjustment to common stock.

Dividend Reinvestment Plan

The Corporation offers shareholders the opportunity to participate in a dividend reinvestment plan. Plan participants may reinvest cash dividends to purchase new shares of stock at 95% of the market value, based on the most recent trades. Cash dividends due to the plan participants are utilized to acquire shares from either, or a combination of, the issuance of authorized shares or purchases of shares in the open market through an approved broker. The Corporation reimburses the broker for the 5% discount when the purchase of the Corporation’s stock is completed. The plan is considered to be non-compensatory.

Stock-based compensation

Stock-based compensation cost is recognized using the fair value method. Compensation cost is recognized for stock options issued based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period.

Income taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Comprehensive income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, and unrealized gains or losses on cash flow hedges, net of tax, which are also recognized as separate components of equity.

Earnings per common share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average 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 the 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 and common stock warrants were issued.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Loss contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.

Dividend restriction

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Corporation or by the Corporation to its shareholders. The Corporation's ability to pay cash dividends is based, among other things, on its ability to receive cash from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's profits, combined with the retained net profits of the preceding two years. At December 31, 2012 the Bank could have paid dividends totaling approximately $1.4 million. At December 31, 2012, this restriction did not result in any effective limitation in the manner in which the Corporation is currently operating. Also, please see Note 11 with respect to restrictions on the Corporation’s ability to declare and pay dividends resulting from the terms of the Corporation’s Series B Preferred Shares.

Derivatives

Derivative financial instruments are recognized as assets or liabilities at fair value. The Corporation’s only 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. The Corporation does not use derivatives for trading purposes.

The Corporation designated the interest rate swap 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 change in the fair value 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 this interest rate swap that qualify for hedge accounting are recorded in interest expense. Changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings.

The Corporation formally documented the risk-management objective and the strategy for undertaking the hedge transaction at the inception of the hedging relationship. This documentation includes linking the fair value of the cash flow hedge to the subordinated debt on the balance sheet. 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 cash flows of the subordinated debt.

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.

Fair value of financial instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Adoption of New Accounting Standards

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (together, “the Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments of this ASU are to be applied prospectively. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. This ASU provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

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PREMISES AND EQUIPMENT, NET (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Premise and equipment, Gross	$ 11,160,000	$ 11,398,000
Accumulated depreciations and amortization	5,515,000	5,297,000
Premises and equipment, net	5,645,000	6,101,000
Land
Premise and equipment, Gross	999,000	2,999,000
Buildings and improvements
Premise and equipment, Gross	2,883,000	2,936,000
Leasehold improvements
Premise and equipment, Gross	2,244,000	2,244,000
Furniture, fixtures and equipment
Premise and equipment, Gross	$ 3,034,000	$ 3,219,000

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PARENT COMPANY ONLY (Tables)

12 Months Ended

Dec. 31, 2012

Parent Company Only Tables

Condensed Statements of Condition

Condensed Statements of Financial Condition

	December 31,
	2012		2011
Assets
Cash and due from banks	$	263,000	$	861,000
Securities available-for-sale		1,004,000		—
Securities held to maturity		—		993,000
Investment in subsidiary		62,502,000		63,103,000
Accrued interest receivable		5,000		12,000
Other assets		452,000		646,000
Total assets	$	64,226,000	$	65,615,000
Liabilities and Shareholders’ Equity
Subordinated debentures	$	7,217,000	$	7,217,000
Other liabilities		663,000		606,000
Shareholders' equity		56,346,000		57,792,000
Total liabilities and Shareholders' equity	$	64,226,000	$	65,615,000

Condensed Statements of Income

Condensed Statements of Income

	Years ended December 31,
	2012			2011
Interest income - securities available-for-sale	$	9,000		$	23,000
Interest income - securities held to maturity		15,000			54,000
Dividend income		675,000			—
Other income		15,000			27,000
Total income		714,000			104,000
Interest expense		506,000			504,000
Other expenses		319,000			306,000
Total expenses		825,000			810,000
Loss before income tax benefit		(111,000	)		(706,000	)
Tax benefit		(266,000	)		(239,000	)
Income (loss) before equity in undistributed earnings of subsidiary		155,000			(467,000	)
Equity in undistributed earnings of subsidiary		365,000			1,151,000
Net income		520,000			684,000
Dividends on preferred stock and accretion		352,000			558,000
Net income available to common shareholders	$	168,000		$	126,000

Condensed Statements of Cash Flows

Condensed Statements of Cash Flows

	Years ended December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	520,000		$	684,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary		(365,000	)		(1,151,000	)
Amortization of premiums and accretion of discounts, net		—			4,000
Gains on sales and calls of securities		(7,000	)		(19,000	)
Decrease in accrued interest receivable		7,000			4,000
(Increase) decrease in other assets		193,000			(102,000	)
Increase (decrease) in other liabilities		105,000			(29,000	)
Net cash provided by (used in) operating activities		453,000			(609,000	)
Cash flows from investing activities:
Purchase of securities available-for-sale		(1,499,000	)		—
Proceeds from principal repayments on securities available-for-sale		—			149,000
Proceeds from calls on securities available-for-sale		500,000			1,071,000
Proceeds from calls on securities held to maturity		1,000,000			—
Investment in subsidiary bank		—			(5,000,000	)
Net cash provided by (used in) investing activities		1,000			(3,780,000	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock		—			14,952,000
Repurchase of preferred stock and warrant		—			(10,108,000	)
Cash dividends paid on common stock		(886,000	)		(1,171,000	)
Cash dividends paid on preferred stock and accretion		(352,000	)		(383,000	)
Payment of discount on dividend reinvestment plan		(8,000	)		(15,000	)
Issuance of common stock		194,000			182,000
Net cash provided by (used in) financing activities		(1,052,000	)		3,457,000
Net decrease in cash and cash equivalents		(598,000	)		(932,000	)
Cash and cash equivalents - beginning		861,000			1,793,000
Cash and cash equivalents - ending	$	263,000		$	861,000

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Nature of operations and principles of consolidation

Nature of operations and principles of consolidation

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly owned subsidiary, Atlantic Stewardship Bank (“the Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation (whose primary business is to own and manage an investment portfolio), Stewardship Realty LLC (whose primary business is to own and manage property at 612 Godwin Avenue, Midland Park, New Jersey), Atlantic Stewardship Insurance Company, LLC (whose primary business is insurance) and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the daily operations. All intercompany accounts and transactions are eliminated in the consolidated financial statements.

The Corporation provides financial services through the Bank’s offices in Bergen, Passaic, and Morris Counties, New Jersey. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial, residential mortgage and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow generated from the operations of businesses. There are no significant concentrations of loans to any one industry or customer. The Corporation’s lending activities are concentrated in loans secured by real estate located in northern New Jersey and, therefore, collectability of the loan portfolio is susceptible to changes in real estate market conditions in the northern New Jersey market. The Corporation has not made loans to borrowers outside the United States.

Basis of consolidated financial statements presentation

Basis of consolidated financial statements presentation

The consolidated financial statements of the Corporation have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ significantly from those estimates. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Cash flows

Cash flows

Cash and cash equivalents include cash and deposits with other financial institutions under 90 days and interest-bearing deposits in other banks with original maturities under 90 days. Net cash flows are reported for customer loan and deposit transactions, and short term borrowings and securities sold under agreement to repurchase.

Securities available-forsale and held to maturity

Securities available-for-sale and held to maturity

The Corporation classifies its securities as held to maturity or available-for-sale. Investments in debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at amortized cost. All other securities are classified as securities available-for-sale. Securities available-for-sale may be sold prior to maturity in response to changes in interest rates or prepayment risk, for asset/liability management purposes, or other similar factors. These securities are carried at fair value with unrealized holding gains or losses reported in a separate component of shareholders’ equity, net of the related tax effects.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Federal Home Loan Bank ("FHLB") Stock

Federal Home Loan Bank (“FHLB”) Stock

The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as income.

Mortgage loans held for sale

Mortgage loans held for sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value on an aggregate basis. Mortgage loans held for sale are carried net of deferred fees, which are recognized as income at the time the loans are sold to permanent investors. Gains or losses on the sale of mortgage loans held for sale are recognized at the settlement date and are determined by the difference between the net proceeds and the amortized cost. All loans are sold with loan servicing rights released to the buyer.

Loans

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans represents the outstanding principal balance after charge-offs and does not include accrued interest receivable as the inclusion is not significant to the reported amounts.

Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is adequately secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or are charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to an accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for loan losses

Allowance for loan losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is considered impaired 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. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructuring and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance is based on historical loss experience adjusted for current factors. The historical loss experience is determined for each portfolio segment and class, and is based on the actual loss history experienced by the Company over the most recent 3 years. For each portfolio segment the Bank prepares a migration analysis which analyzes the historical loss experience. The migration analysis is updated quarterly for the purpose of determining the assigned allocation factors which are essential components of the allowance for loan losses calculation. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment or class. These qualitative factors include consideration of the following: levels of and trends in charge-offs; levels of and trends in delinquencies and impaired loans; levels and trends in loan size; levels of real estate concentrations; national and local economic trends and conditions; the depth and experience of lending management and staff; and other changes in lending policies, procedures, and practices.

For purposes of determining the allowance for loan losses, loans in the portfolio are segregated by product type into the following segments: commercial, commercial real estate, construction, residential real estate, consumer and other. The Corporation also sub-divides these segments into classes based on the associated risks within those segments. Commercial loans are divided into the following two classes: secured by real estate and other. Construction loans are divided into the following two classes: commercial and residential. Consumer loans are divided into two classes: secured by real estate and other. The models and assumptions used to determine the allowance require management’s judgment. Assumptions, data and computations are appropriately reviewed and properly documented.

The risk characteristics of each of the identified portfolio segments are as follows:

Commercial – Commercial loans are generally of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Furthermore, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Commercial Real Estate – Commercial real estate loans are secured by multi-family and nonresidential real estate and generally have larger balances and involve a greater degree of risk than residential real estate loans. Commercial real estate loans depend on the global cash flow analysis of the borrower and the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the cash flow from the property. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. Commercial Real Estate is also subject to adverse market conditions that cause a decrease in market value or lease rates, obsolescence in location or function and market conditions associated with over supply of units in a specific region.

Construction – Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, additional funds may be required to be advanced in excess of the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, the value of the building may be insufficient to assure full repayment if liquidation is required. If foreclosure is required on a building before or at completion due to a default, there can be no assurance that all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs will be recovered.

Residential Real Estate – Residential real estate loans are generally made on the basis of the borrower’s ability to make repayment from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable. Repayment of residential real estate loans is subject to adverse employment conditions in the local economy leading to increased default rate and decreased market values from oversupply in a geographic area. In general, residential real estate loans depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Consumer loans – Consumer loans secured by real estate may entail greater risk than do residential mortgage loans due to a lower lien position. In addition, other consumer loans, particularly loans secured by assets that depreciate rapidly, such as motor vehicles, are subject to greater risk. In all cases, collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Generally, when it is probable that some portion or all of a loan balance will not be collected, regardless of portfolio segment, that amount is charged-off as a loss against the allowance for loan losses. On loans secured by real estate, the charge-offs reflect partial writedowns due to the initial valuation of market values of the underlying real estate collateral in accordance with Accounting Standards Codification 310-40. Consumer loans are generally charged-off in full when they reach 90 – 120 days past due.

Transfers of Financial Assets

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment

Premises and equipment

Land is stated at cost. Buildings and improvements and furniture, fixtures and equipment are stated at cost, less accumulated depreciation computed on the straight-line method over the estimated lives of each type of asset. Estimated useful lives are three to forty years for buildings and improvements and three to twenty-five years for furniture, fixtures and equipment. Leasehold improvements are stated at cost less accumulated amortization computed on the straight-line method over the shorter of the term of the lease or useful life.

Long-Term Assets

Long-Term Assets

Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recovered from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Other Real Estate Owned

Other Real Estate Owned

Other real estate owned (OREO) consists of property acquired through foreclosure or deed in lieu of foreclosure and property that is in-substance foreclosed. OREO is initially recorded at fair value less estimated selling costs. When a property is acquired, the excess of the carrying amount over fair value, if any, is charged to the allowance for loan losses. Subsequent adjustments to the carrying value are recorded in an allowance for OREO and charged to OREO expense.

Bank owned life insurance

Bank owned life insurance

The Corporation has purchased life insurance policies on certain key officers. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Treasury Stock

Treasury Stock

Repurchases of common stock are recorded as treasury stock at cost. Treasury stock is reissued using the first in first out method. Treasury stock may be reissued for exercise of stock options, dividend reinvestment plans, stock dividends or other stock issuances. The difference between the cost and the market value at the time the treasury stock is reissued is shown as an adjustment to common stock.

Dividend Reinvestment Plan

Dividend Reinvestment Plan

The Corporation offers shareholders the opportunity to participate in a dividend reinvestment plan. Plan participants may reinvest cash dividends to purchase new shares of stock at 95% of the market value, based on the most recent trades. Cash dividends due to the plan participants are utilized to acquire shares from either, or a combination of, the issuance of authorized shares or purchases of shares in the open market through an approved broker. The Corporation reimburses the broker for the 5% discount when the purchase of the Corporation’s stock is completed. The plan is considered to be non-compensatory.

Stock-based compensation

Stock-based compensation

Stock-based compensation cost is recognized using the fair value method. Compensation cost is recognized for stock options issued based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period.

Income taxes

Income taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

Comprehensive income

Comprehensive income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, and unrealized gains or losses on cash flow hedges, net of tax, which are also recognized as separate components of equity.

Earnings per common share

Earnings per common share

Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average 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 the 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 and common stock warrants were issued.

Loan Commitments and Related Financial Instruments

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Loss Contingencies

Loss contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.

Dividend restriction

Dividend restriction

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Corporation or by the Corporation to its shareholders. The Corporation's ability to pay cash dividends is based, among other things, on its ability to receive cash from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's profits, combined with the retained net profits of the preceding two years. At December 31, 2012 the Bank could have paid dividends totaling approximately $1.4 million. At December 31, 2012, this restriction did not result in any effective limitation in the manner in which the Corporation is currently operating. Also, please see Note 11 with respect to restrictions on the Corporation’s ability to declare and pay dividends resulting from the terms of the Corporation’s Series B Preferred Shares.

Derivatives

Derivatives

Derivative financial instruments are recognized as assets or liabilities at fair value. The Corporation’s only 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. The Corporation does not use derivatives for trading purposes.

The Corporation designated the interest rate swap 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 change in the fair value 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 this interest rate swap that qualify for hedge accounting are recorded in interest expense. Changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings.

The Corporation formally documented the risk-management objective and the strategy for undertaking the hedge transaction at the inception of the hedging relationship. This documentation includes linking the fair value of the cash flow hedge to the subordinated debt on the balance sheet. 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 cash flows of the subordinated debt.

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.

Fair Values of Financial Instruments

Fair value of financial instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Adoption of New Accounting Standards

Adoption of New Accounting Standards

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (together, “the Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments of this ASU are to be applied prospectively. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. This ASU provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

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QUARTERLY FINANCIAL DATA (Unaudited)

12 Months Ended

Dec. 31, 2012

Quarterly Financial Data

QUARTERLY FINANCIAL DATA (Unaudited)

Note 20. QUARTERLY FINANCIAL DATA (Unaudited)

The following table contains quarterly financial data for the years ended December 31, 2012 and 2011 (dollars in thousands).

	First Quarter		Second Quarter			Third Quarter		Fourth Quarter			Total
Year ended December 31, 2012:
Interest income	$	7,516	$	7,317		$	7,120	$	6,754		$	28,707
Interest expense		1,465		1,357			1,259		1,094			5,175
Net interest income before provision for loan losses		6,051		5,960			5,861		5,660			23,532
Provision for loan losses		1,765		2,900			2,000		3,330			9,995
Net interest income after provision for loan losses		4,286		3,060			3,861		2,330			13,537
Noninterest income		1,550		911			1,719		2,209			6,389
Noninterest expenses		4,754		4,454			5,206		5,239			19,653
Income (loss) before income tax expense (benefit)		1,082		(483	)		374		(700	)		273
Income tax expense (benefit)		306		(159	)		46		(440	)		(247	)
Net income (loss)		776		(324	)		328		(260	)		520
Dividends on preferred stock		75		38			112		127			352
Net income (loss) available to common shareholders	$	701	$	(362	)	$	216	$	(387	)	$	168
Basic earnings (loss) per share	$	0.12	$	(0.06	)	$	0.04	$	(0.07	)	$	0.03
Diluted earnings (loss) per share	$	0.12	$	(0.06	)	$	0.04	$	(0.07	)	$	0.03

Year ended December 31, 2011:
Interest income	$	7,775	$	8,033	$	8,018	$	7,748		$	31,574
Interest expense		1,826		1,812		1,732		1,594			6,964
Net interest income before provision for loan losses		5,949		6,221		6,286		6,154			24,610
Provision for loan losses		1,675		1,915		2,330		4,925			10,845
Net interest income after provision for loan losses		4,274		4,306		3,956		1,229			13,765
Noninterest income		1,094		943		1,350		1,783			5,170
Noninterest expenses		4,694		4,536		4,615		4,821			18,666
Income (loss) before income tax expense (benefit)		674		713		691		(1,809	)		269
Income tax expense (benefit)		191		128		113		(847	)		(415	)
Net income (loss)		483		585		578		(962	)		684
Dividends on preferred stock and accretion		138		138		244		38			558
Net income (loss) available to common shareholders	$	345	$	447	$	334	$	(1,000	)	$	126
Basic earnings (loss) per share	$	0.06	$	0.08	$	0.05	$	(0.17	)	$	0.02
Diluted earnings (loss) per share	$	0.06	$	0.08	$	0.05	$	(0.17	)	$	0.02

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 4) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Related Allowance	$ 266,000	$ 3,121,000
Unpaid Principal Balance	38,960,000	40,495,000
Recorded Investment	28,686,000	33,716,000
Average Recorded Investment	31,523,000	27,921,000
Interest Income Recognized	394,000	237,000
Commercial loan secured by real estate
Unpaid Principal Balance With no related allowance recorded	9,689,000	3,306,000
Recorded Investment With no related allowance recorded	6,557,000	2,831,000
Average Recorded Investment	4,221,000	2,260,000
Interest income recognized for the year	92,000	22,000
Unpaid Principal Balance With an allowance recorded	965,000	7,287,000
Recorded Investment With an allowance recorded	781,000	4,590,000
Related Allowance	176,000	468,000
Average Recorded Investment	2,589,000	4,788,000
Commercial loan - Other
Unpaid Principal Balance With no related allowance recorded	424,000
Recorded Investment With no related allowance recorded	146,000
Average Recorded Investment	109,000	396,000
Interest income recognized for the year	5,000	23,000
Unpaid Principal Balance With an allowance recorded	1,163,000	2,876,000
Recorded Investment With an allowance recorded	1,157,000	2,844,000
Related Allowance	75,000	1,440,000
Average Recorded Investment	2,195,000	1,822,000
Commercial real estate
Unpaid Principal Balance With no related allowance recorded	17,211,000	10,691,000
Recorded Investment With no related allowance recorded	12,149,000	8,523,000
Average Recorded Investment	10,054,000	7,110,000
Interest income recognized for the year	158,000	52,000
Unpaid Principal Balance With an allowance recorded	923,000	4,747,000
Recorded Investment With an allowance recorded	654,000	4,605,000
Related Allowance	15,000	947,000
Average Recorded Investment	2,940,000	5,962,000
Construction - Commercial
Unpaid Principal Balance With no related allowance recorded	7,300,000	8,453,000
Recorded Investment With no related allowance recorded	6,029,000	7,609,000
Average Recorded Investment	6,041,000	2,888,000
Interest income recognized for the year	53,000	26,000
Unpaid Principal Balance With an allowance recorded		1,085,000
Recorded Investment With an allowance recorded		792,000
Related Allowance		264,000
Average Recorded Investment	1,224,000	643,000
Construction - Residential
Unpaid Principal Balance With no related allowance recorded
Recorded Investment With no related allowance recorded
Average Recorded Investment		219,000
Interest income recognized for the year
Unpaid Principal Balance With an allowance recorded		273,000
Recorded Investment With an allowance recorded		252,000
Related Allowance		2,000
Average Recorded Investment	596,000	50,000
Residential real estate
Unpaid Principal Balance With no related allowance recorded	451,000	866,000
Recorded Investment With no related allowance recorded	413,000	779,000
Average Recorded Investment	393,000	404,000
Interest income recognized for the year
Unpaid Principal Balance With an allowance recorded
Recorded Investment With an allowance recorded
Related Allowance
Average Recorded Investment	239,000	537,000
Consumer loan secured by real estate
Unpaid Principal Balance With no related allowance recorded	834,000	911,000
Recorded Investment With no related allowance recorded	800,000	891,000
Average Recorded Investment	922,000	811,000
Interest income recognized for the year
Unpaid Principal Balance With an allowance recorded
Recorded Investment With an allowance recorded
Related Allowance
Average Recorded Investment		31,000
Consumer loan - Other
Unpaid Principal Balance With no related allowance recorded
Recorded Investment With no related allowance recorded
Average Recorded Investment
Interest income recognized for the year
Unpaid Principal Balance With an allowance recorded
Recorded Investment With an allowance recorded
Related Allowance
Average Recorded Investment
Other
Unpaid Principal Balance With no related allowance recorded
Recorded Investment With no related allowance recorded
Average Recorded Investment
Interest income recognized for the year
Unpaid Principal Balance With an allowance recorded
Recorded Investment With an allowance recorded
Related Allowance
Average Recorded Investment

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QUARTERLY FINANCIAL DATA (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2012

Quarterly Financial Data Tables

Schedule of Quarterly Financial Data

The following table contains quarterly financial data for the years ended December 31, 2012 and 2011 (dollars in thousands).

	First Quarter		Second Quarter			Third Quarter		Fourth Quarter			Total
Year ended December 31, 2012:
Interest income	$	7,516	$	7,317		$	7,120	$	6,754		$	28,707
Interest expense		1,465		1,357			1,259		1,094			5,175
Net interest income before provision for loan losses		6,051		5,960			5,861		5,660			23,532
Provision for loan losses		1,765		2,900			2,000		3,330			9,995
Net interest income after provision for loan losses		4,286		3,060			3,861		2,330			13,537
Noninterest income		1,550		911			1,719		2,209			6,389
Noninterest expenses		4,754		4,454			5,206		5,239			19,653
Income (loss) before income tax expense (benefit)		1,082		(483	)		374		(700	)		273
Income tax expense (benefit)		306		(159	)		46		(440	)		(247	)
Net income (loss)		776		(324	)		328		(260	)		520
Dividends on preferred stock		75		38			112		127			352
Net income (loss) available to common shareholders	$	701	$	(362	)	$	216	$	(387	)	$	168
Basic earnings (loss) per share	$	0.12	$	(0.06	)	$	0.04	$	(0.07	)	$	0.03
Diluted earnings (loss) per share	$	0.12	$	(0.06	)	$	0.04	$	(0.07	)	$	0.03

Year ended December 31, 2011:
Interest income	$	7,775	$	8,033	$	8,018	$	7,748		$	31,574
Interest expense		1,826		1,812		1,732		1,594			6,964
Net interest income before provision for loan losses		5,949		6,221		6,286		6,154			24,610
Provision for loan losses		1,675		1,915		2,330		4,925			10,845
Net interest income after provision for loan losses		4,274		4,306		3,956		1,229			13,765
Noninterest income		1,094		943		1,350		1,783			5,170
Noninterest expenses		4,694		4,536		4,615		4,821			18,666
Income (loss) before income tax expense (benefit)		674		713		691		(1,809	)		269
Income tax expense (benefit)		191		128		113		(847	)		(415	)
Net income (loss)		483		585		578		(962	)		684
Dividends on preferred stock and accretion		138		138		244		38			558
Net income (loss) available to common shareholders	$	345	$	447	$	334	$	(1,000	)	$	126
Basic earnings (loss) per share	$	0.06	$	0.08	$	0.05	$	(0.17	)	$	0.02
Diluted earnings (loss) per share	$	0.06	$	0.08	$	0.05	$	(0.17	)	$	0.02

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SECURITIES - AVAILABLE-FOR-SALE AND HELD TO MATURITY (TABLES)

12 Months Ended

Dec. 31, 2012

Securities - Available-For-Sale And Held To Maturity Tables

Schedule of fair value of securities available for sale and related gross unrealized gains and losses

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:

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,003,000	$	3,000	$	—	$	4,006,000
U.S. government-sponsored agencies		37,287,000		35,000		67,000		37,255,000
Obligations of state and political subdivisions		13,724,000		468,000		22,000		14,170,000
Mortgage-backed securities-residential		104,341,000		1,176,000		89,000		105,428,000
Asset-backed securities (a)		9,874,000		22,000		12,000		9,884,000
Corporate debt		492,000		3,000		—		495,000
Total debt securities		169,721,000		1,707,000		190,000		171,238,000
Other equity investments		3,425,000		37,000		—		3,462,000
	$	173,146,000	$	1,744,000	$	190,000	$	174,700,000

	December 31, 2011
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,027,000	$	23,000	$	—	$	4,050,000
U.S. government-sponsored agencies:		20,702,000		46,000		4,000		20,744,000
Obligations of state and political subdivisions		8,866,000		461,000		9,000		9,318,000
Mortgage-backed securities-residential		130,912,000		2,583,000		28,000		133,467,000
Total debt securities		164,507,000		3,113,000		41,000		167,579,000
Other equity investments		3,287,000		59,000		—		3,346,000
	$	167,794,000	$	3,172,000	$	41,000	$	170,925,000

(a) Collateralized by student loans

Schedule of held to maturity securities and related unrecognized gains and losses

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

	December 31, 2012
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	260,000	$	46,000	$	—	$	306,000
Obligations of state and political subdivisions		22,787,000		1,407,000		—		24,194,000
Mortgage-backed securities-residential		6,671,000		597,000		—		7,268,000
	$	29,718,000	$	2,050,000	$	—	$	31,768,000

	December 31, 2011
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	2,770,000	$	80,000	$	—	$	2,850,000
Obligations of state and political subdivisions		24,575,000		1,705,000		—		26,280,000
Mortgage-backed securities-residential		11,009,000		845,000		—		11,854,000
	$	38,354,000	$	2,630,000	$	—	$	40,984,000

Schedule of Continuous unrealized loss position for investment securities available for sale

Available-for-Sale

2012	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		20,716,000		(67,000	)		—		—		20,716,000		(67,000	)
Obligations of state and political
subdivisions		3,257,000		(22,000	)		—		—		3,257,000		(22,000	)
Mortgage-backed securities-residential		23,715,000		(89,000	)		—		—		23,715,000		(89,000	)
Asset-backed securities		3,047,000		(12,000	)		—		—		3,047,000		(12,000	)
Corporate debt		—		—			—		—		—		—
Other equity investments		—		—			—		—		—		—
Total temporarily impaired securities	$	50,735,000	$	(190,000	)	$	—	$	—	$	50,735,000	$	(190,000	)

2011	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		1,993,000		(4,000	)		—		—		1,993,000		(4,000	)
Obligations of state and political
subdivisions		1,335,000		(9,000	)		—		—		1,335,000		(9,000	)
Mortgage-backed securities-residential		10,637,000		(28,000	)		—		—		10,637,000		(28,000	)
Other equity investments		—		—			—		—		—		—
Total temporarily impaired securities	$	13,965,000	$	(41,000	)	$	—	$	—	$	13,965,000	$	(41,000	)

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

12 Months Ended

Dec. 31, 2012

Loans And Allowance For Loan Losses Tables

Loan Portfolio Schedule

At December 31, 2012 and 2011, respectively, the loan portfolio consisted of the following:

	December 31,
	2012			2011
Commercial:
Secured by real estate	$	58,160,000		$	60,650,000
Other		31,254,000			41,850,000
Commercial real estate		242,763,000			246,549,000
Construction:
Commercial		9,324,000			12,913,000
Residential		—			252,000
Residential real estate		67,200,000			54,694,000
Consumer:
Secured by real estate		30,982,000			38,278,000
Other		624,000			1,086,000
Other		116,000			141,000
Total gross loans		440,423,000			456,413,000
Less:  Deferred loan (fees) costs, net		(50,000	)		6,000
Allowance for loan losses		10,641,000			11,604,000
		10,591,000			11,610,000
Loans, net	$	429,832,000		$	444,803,000

Schedule of Allowance for Loan Losses

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

	For the year ended December 31, 2012
	Balance beginning of period		Provision charged to operations			Loans charged-off			Recoveries of loans charged-off		Balance end of period
Commercial	$	5,368,000	$	6,368,000		$	(7,144,000	)	$	240,000	$	4,832,000
Commercial real estate		4,943,000		3,570,000			(3,577,000	)		—		4,936,000
Construction		480,000		78,000			(394,000	)		5,000		169,000
Residential real estate		303,000		25,000			(21,000	)		1,000		308,000
Consumer		498,000		(79,000	)		(69,000	)		2,000		352,000
Other		2,000		2,000			(5,000	)		4,000		3,000
Unallocated		10,000		31,000			—			—		41,000
Balance, ending	$	11,604,000	$	9,995,000		$	(11,210,000	)	$	252,000	$	10,641,000

	For the year ended December 31, 2011
	Balance beginning of period		Provision charged to operations		Loans charged-off			Recoveries of loans charged-off		Balance end of period
Commercial	$	3,745,000	$	6,197,000	$	(4,603,000	)	$	29,000	$	5,368,000
Commercial real estate		3,112,000		3,742,000		(1,911,000	)		—		4,943,000
Construction		930,000		386,000		(839,000	)		3,000		480,000
Residential real estate		184,000		231,000		(112,000	)		—		303,000
Consumer		510,000		281,000		(296,000	)		3,000		498,000
Other		2,000		5,000		(8,000	)		3,000		2,000
Unallocated		7,000		3,000		—			—		10,000
Balance, ending	$	8,490,000	$	10,845,000	$	(7,769,000	)	$	38,000	$	11,604,000

Schedule of allocation of the allowance for loan and lease losses based on the impairment method

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2012 and 2011:

	December 31, 2012
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer		Other		Unallocated		Total
Allowance for loan losses:
Ending Allowance balance attributable to loans
Individually evaluated for impairment	$	251,000	$	15,000	$	—	$	—	$	—	$	—	$	—	$	266,000
Collectively evaluated for impairment		4,581,000		4,921,000		169,000		308,000		352,000		3,000		41,000		10,375,000
Total ending allowance balance	$	4,832,000	$	4,936,000	$	169,000	$	308,000	$	352,000	$	3,000	$	41,000	$	10,641,000
Loans:
Loans individually evaluated for impairment	$	8,641,000	$	12,803,000	$	6,029,000	$	413,000	$	800,000	$	—	$	—	$	28,686,000
Loans collectively evaluated for impairment		80,773,000		229,960,000		3,295,000		66,787,000		30,806,000		116,000		—		411,737,000
Total ending Loan balance	$	89,414,000	$	242,763,000	$	9,324,000	$	67,200,000	$	31,606,000	$	116,000	$	—	$	440,423,000

	December 31, 2011
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer		Other Loans		Unallocated		Total
Allowance for loan losses:
Ending Allowance balance attributable to loans
Individually evaluated for impairment	$	1,908,000	$	947,000	$	266,000	$	—	$	—	$	—	$	—	$	3,121,000
Collectively evaluated for impairment		3,460,000		3,996,000		214,000		303,000		498,000		2,000		10,000		8,483,000
Total ending allowance balance	$	5,368,000	$	4,943,000	$	480,000	$	303,000	$	498,000	$	2,000	$	10,000	$	11,604,000
Loans:
Loans individually evaluated for impairment	$	10,265,000	$	13,128,000	$	8,653,000	$	779,000	$	891,000	$	—	$	—	$	33,716,000
Loans collectively evaluated for impairment		92,235,000		233,421,000		4,512,000		53,915,000		38,473,000		141,000		—		422,697,000
Total ending Loan balance	$	102,500,000	$	246,549,000	$	13,165,000	$	54,694,000	$	39,364,000	$	141,000	$	—	$	456,413,000

Schedule of recorded investment in nonaccrual loans

The following table presents the recorded investment in nonaccrual loans at the dates indicated:

	December 31,
	2012		2011
Commercial:
Secured by real estate	$	3,374,000	$	6,178,000
Other		261,000		2,494,000
Commercial real estate		10,083,000		9,302,000
Construction:
Commercial		3,080,000		7,840,000
Residential		—		252,000
Residential real estate		413,000		779,000
Consumer:
Secured by real estate		800,000		891,000
Other		—		—
Other		—		—
Total nonaccrual loans	$	18,011,000	$	27,736,000

Schedule of recorded investments in impaired loans

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

	At and for the year ended December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	9,689,000	$	6,557,000			$	4,221,000	$	92,000
Other		424,000		146,000				109,000		5,000
Commercial real estate		17,211,000		12,149,000				10,054,000		158,000
Construction:
Commercial		7,300,000		6,029,000				6,041,000		53,000
Residential		—		—				—		—
Residential real estate		451,000		413,000				393,000		—
Consumer:
Secured by real estate		834,000		800,000				922,000		—
Other		—		—				—		—
Other		—		—				—		—
With an allowance recorded:
Commercial:
Secured by real estate		965,000		781,000	$	176,000		2,589,000		25,000
Other		1,163,000		1,157,000		75,000		2,195,000		43,000
Commercial real estate		923,000		654,000		15,000		2,940,000		18,000
Construction:
Commercial		—		—		—		1,224,000		—
Residential		—		—		—		596,000		—
Residential real estate		—		—		—		239,000		—
Consumer:
Secured by real estate		—		—		—		—		—
Other		—		—		—		—		—
Other		—		—		—		—		—
Total nonperforming loans	$	38,960,000	$	28,686,000	$	266,000	$	31,523,000	$	394,000

During the year ended December 31, 2012, no interest income was recognized on a cash basis.

	At and for the year ended December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	3,306,000	$	2,831,000			$	2,260,000	$	22,000
Other		—		—				396,000		23,000
Commercial real estate		10,691,000		8,523,000				7,110,000		52,000
Construction:
Commercial		8,453,000		7,609,000				2,888,000		26,000
Residential		—		—				219,000		—
Residential real estate		866,000		779,000				404,000		—
Consumer:
Secured by real estate		911,000		891,000				811,000		—
Other		—		—				—		—
Other		—		—				—		—
With an allowance recorded:
Commercial:
Secured by real estate		7,287,000		4,590,000	$	468,000		4,788,000		34,000
Other		2,876,000		2,844,000		1,440,000		1,822,000		5,000
Commercial real estate		4,747,000		4,605,000		947,000		5,962,000		63,000
Construction:
Commercial		1,085,000		792,000		264,000		643,000		12,000
Residential		273,000		252,000		2,000		50,000		—
Residential real estate		—		—		—		537,000		—
Consumer:
Secured by real estate		—		—		—		31,000		—
Other		—		—		—		—		—
Other		—		—		—		—		—
Total nonperforming loans	$	40,495,000	$	33,716,000	$	3,121,000	$	27,921,000	$	237,000

Schedule of aging of the recorded investment in past due loans by class of loans

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2012 and 2011. Nonaccrual loans are included in the disclosure by payment status:

	December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial:
Secured by real estate	$	101,000	$	179,000	$	2,674,000	$	2,954,000	$	55,206,000	$	58,160,000
Other		25,000		98,000		52,000		175,000		31,079,000		31,254,000
Commercial real estate		2,582,000		—		9,023,000		11,605,000		231,158,000		242,763,000
Construction:
Commercial		—		460,000		815,000		1,275,000		8,049,000		9,324,000
Residential		—		—		—		—		—		—
Residential real estate		161,000		—		413,000		574,000		66,626,000		67,200,000
Consumer:
Secured by real estate		67,000		—		647,000		714,000		30,268,000		30,982,000
Other		—		—		—		—		624,000		624,000
Other		—		—		—		—		116,000		116,000
Total	$	2,936,000	$	737,000	$	13,624,000	$	17,297,000	$	423,126,000	$	440,423,000

	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial:
Secured by real estate	$	875,000	$	546,000	$	3,977,000	$	5,398,000	$	55,252,000	$	60,650,000
Other		53,000		260,000		1,752,000		2,065,000		39,785,000		41,850,000
Commercial real estate		—		736,000		5,352,000		6,088,000		240,461,000		246,549,000
Construction:
Commercial		—		561,000		2,640,000		3,201,000		9,712,000		12,913,000
Residential		—		—		252,000		252,000		—		252,000
Residential real estate		—		—		779,000		779,000		53,915,000		54,694,000
Consumer:
Secured by real estate		581,000		—		719,000		1,300,000		36,978,000		38,278,000
Other		4,000		—		—		4,000		1,082,000		1,086,000
Other		—		—		—		—		141,000		141,000
Total	$	1,513,000	$	2,103,000	$	15,471,000	$	19,087,000	$	437,326,000	$	456,413,000

Schedule of Troubled Debt Restructurings

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2012 and 2011:

	December 31, 2012								December 31, 2011
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial:
Secured by real estate		9	$	1,875,000	$	1,875,000		15	$	3,002,000	$	3,002,000
Other		7		3,735,000		3,735,000		11		678,000		678,000
Commercial real estate		1		755,000		755,000		3		2,864,000		2,864,000
Construction:
Commercial		1		300,000		300,000		7		5,961,000		5,961,000
Residential		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		—
Consumer:
Secured by real estate		—		—		—		—		—		—
Other		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total		18	$	6,655,000	$	6,655,000		36	$	12,505,000	$	12,505,000

Schedule of loans by credit quality indicators

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of December 31, 2012 and 2011, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:

	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	47,524,000	$	7,368,000	$	3,268,000	$	—	$	—	$	58,160,000
Other		29,484,000		1,508,000		185,000		77,000		—		31,254,000
Commercial real estate		215,158,000		16,003,000		9,007,000		2,595,000		—		242,763,000
Construction:
Commercial		3,294,000		2,950,000		3,080,000		—		—		9,324,000
Residential		—		—		—		—		—		—
Total	$	295,460,000	$	27,829,000	$	15,540,000	$	2,672,000	$	—	$	341,501,000

	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	52,004,000	$	3,234,000	$	5,248,000	$	164,000	$	—	$	60,650,000
Other		38,790,000		566,000		617,000		1,877,000		—		41,850,000
Commercial real estate		233,295,000		3,512,000		7,333,000		2,409,000		—		246,549,000
Construction:
Commercial		4,512,000		1,656,000		6,745,000		—		—		12,913,000
Residential		—		—		252,000		—		—		252,000
Total	$	328,601,000	$	8,968,000	$	20,195,000	$	4,450,000	$	—	$	362,214,000

Schedule of recorded investment in residential real estate and consumer loans based on payment activity

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate and consumer loan segments, the Corporation evaluates credit quality based on payment activity. The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of December 31, 2012 and 2011.

	December 31, 2012
	Current		Past Due and Nonaccrual		Total
Residential real estate	$	66,626,000	$	574,000	$	67,200,000
Consumer:
Secured by real estate		30,268,000		714,000		30,982,000
Other		624,000		—		624,000
Total	$	97,518,000	$	1,288,000	$	98,806,000

	December 31, 2011
	Current		Past Due and Nonaccrual		Total
Residential real estate	$	53,915,000	$	779,000	$	54,694,000
Consumer:
Secured by real estate		36,978,000		1,300,000		38,278,000
Other		1,082,000		4,000		1,086,000
Total	$	91,975,000	$	2,083,000	$	94,058,000

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Consolidated Statements of Cash Flows (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Cash flows from operating activities:
Net income	$ 520,000	$ 684,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment	532,000	594,000
Amortization of premiums and accretion of discounts, net	1,628,000	1,372,000
Accretion (amortization) of deferred loan fees	49,000	(16,000)
Provision for loan losses	9,995,000	10,845,000
Originations of mortgage loans held for sale	(61,431,000)	(85,615,000)
Proceeds from sale of mortgage loans	66,245,000	91,931,000
Gain on sales of mortgage loans	(887,000)	(1,209,000)
Gain on sales and calls of securities	(2,340,000)	(1,161,000)
Gain on sale of other real estate owned	(429,000)	(10,000)
Deferred income tax benefit	115,000	(1,850,000)
Decrease in accrued interest receivable	246,000	188,000
Decrease in accrued interest payable	(215,000)	(202,000)
Earnings on bank owned life insurance	(325,000)	(325,000)
Stock option expense		19,000
(Increase) decrease in other assets	950,000	(442,000)
Increase (decrease) in other liabilities	(1,870,000)	1,266,000
Net cash provided by operating activities	12,783,000	16,069,000
Cash flows from investing activities:
Purchase of securities available for sale	(134,832,000)	(97,018,000)
Proceeds from maturities and principal repayments on securities available for sale	27,964,000	21,148,000
Proceeds from sales and calls on securities available for sale	102,300,000	46,245,000
Proceeds from maturities and principal repayments on securities held to maturity	4,147,000	4,938,000
Proceeds from calls on securities held to maturity	4,418,000	1,895,000
Sale of FHLB-NY stock	265,000	19,000
Net (increase) decrease in loans	2,106,000	(17,453,000)
Proceeds from sale of other real estate owned	7,292,000	366,000
Additions to premises and equipment	(76,000)	(300,000)
Net cash provided by (used in) investing activities	13,584,000	(40,160,000)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	8,510,000	16,053,000
Net increase (decrease) in interest-bearing deposits	(11,808,000)	1,896,000
Net decrease in securities sold under agreements to repurchase	(6,999,000)	(300,000)
Net increase (decrease) in short term borrowings	(7,700,000)	4,700,000
Repayment of long term borrowings		(18,000,000)
Proceeds from long term borrowings		10,000,000
Proceeds from issuance of preferred stock, net of issuance costs		14,952,000
Repurchase of preferred stock		(10,108,000)
Cash dividends paid on common stock	(886,000)	(1,171,000)
Cash dividends paid on preferred stock	(352,000)	(383,000)
Payment of discount on dividend reinvestment plan	(8,000)	(15,000)
Issuance of common stock	194,000	182,000
Net cash provided by (used in) financing activities	(19,049,000)	17,806,000
Net increase (decrease) in cash and cash equivalents	7,318,000	(6,285,000)
Cash and cash equivalents - beginning	13,698,000	19,983,000
Cash and cash equivalents - ending	21,016,000	13,698,000
Supplemental disclosures of cash flow information:
Cash paid during the year for interest	5,390,000	7,165,000
Cash paid during the year for income taxes	1,316,000	1,880,000
Transfers from loans to other real estate owned	$ 2,821,000	$ 5,067,000

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PREMISES AND EQUIPMENT, NET (Tables)

12 Months Ended

Dec. 31, 2012

Premises And Equipment Net Tables

Schedule of Premises and Equipment

The balance of premises and equipment consists of the following at December 31, 2012 and 2011:

	December 31,
	2012		2011
Land	$	2,999,000	$	2,999,000
Buildings and improvements		2,883,000		2,936,000
Leasehold improvements		2,244,000		2,244,000
Furniture, fixtures and equipment		3,034,000		3,219,000
		11,160,000		11,398,000
Less: accumulated depreciation and amortization		5,515,000		5,297,000
Total premises & equipment, net	$	5,645,000	$	6,101,000

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INCOME TAXES (Details 1) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Income Taxes Details 1
Federal income tax									$ 93,000	$ 92,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect									(2,000)	(17,000)
Nontaxable interest income									(399,000)	(401,000)
Life insurance									(113,000)	(113,000)
Nondeductible expenses									17,000	17,000
Write-off of Federal deferred tax assets									133,000
Change in valuation reserve									42,000
Other items, net									(18,000)	7,000
Income Tax Expense	$ (440,000)	$ 46,000	$ (159,000)	$ 306,000	$ (847,000)	$ 113,000	$ 128,000	$ 191,000	$ (247,000)	$ (415,000)

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COMMITMENTS AND CONTINGENCIES (Tables)

12 Months Ended

Dec. 31, 2012

Commitments And Contingencies Tables

Schedule of Future Minimum Payments on Operating Leases

At December 31, 2012, the minimum rental commitments on the noncancellable leases with an initial term of one year and expiring thereafter are as follows:

Year Ending December 31	Minimum Rent
2013	$	1,006,000
2014		740,000
2015		381,000
2016		313,000
2017		293,000
Thereafter		2,012,000
	$	4,745,000

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 1) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Balance at the beginning of period				$ 11,604,000				$ 8,490,000	$ 11,604,000	$ 8,490,000
Provision	3,330,000	2,000,000	2,900,000	1,765,000	4,925,000	2,330,000	1,915,000	1,675,000	9,995,000	10,845,000
Charge Offs									(11,210,000)	(7,769,000)
Recoveries									252,000	38,000
Balance at the end of period	10,641,000				11,604,000				10,641,000	11,604,000
Commercial
Balance at the beginning of period				5,368,000				3,745,000	5,368,000	3,745,000
Provision									6,368,000	6,197,000
Charge Offs									(7,144,000)	(4,603,000)
Recoveries									240,000	29,000
Balance at the end of period	4,832,000				5,368,000				4,832,000	5,368,000
Commercial real estate
Balance at the beginning of period				4,943,000				3,112,000	4,943,000	3,112,000
Provision									3,570,000	3,742,000
Charge Offs									(3,577,000)	(1,911,000)
Recoveries
Balance at the end of period	4,936,000				4,943,000				4,936,000	4,943,000
Construction
Balance at the beginning of period				480,000				930,000	480,000	930,000
Provision									78,000	386,000
Charge Offs									(394,000)	(839,000)
Recoveries									5,000	3,000
Balance at the end of period	169,000				480,000				169,000	480,000
Residential real estate
Balance at the beginning of period				303,000				184,000	303,000	184,000
Provision									25,000	231,000
Charge Offs									(21,000)	(112,000)
Recoveries									1,000
Balance at the end of period	308,000				303,000				308,000	303,000
Consumer Loan [Member]
Balance at the beginning of period				498,000				510,000	498,000	510,000
Provision									(79,000)	281,000
Charge Offs									(69,000)	(296,000)
Recoveries									2,000	3,000
Balance at the end of period	352,000				498,000				352,000	498,000
Other
Balance at the beginning of period				2,000				2,000	2,000	2,000
Provision									2,000	5,000
Charge Offs									(5,000)	(8,000)
Recoveries									4,000	3,000
Balance at the end of period	3,000				2,000				3,000	2,000
Unallocated
Balance at the beginning of period				10,000				7,000	10,000	7,000
Provision									31,000	3,000
Charge Offs
Recoveries
Balance at the end of period	$ 41,000				$ 10,000				$ 41,000	$ 10,000

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BORROWINGS (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Borrowings Details 1
Securities sold under agreement to repurchase	$ 7,343,000	$ 14,342,000
Weighted average rate at year end	4.92%	5.04%
Maximum amount outstanding at any month end during the year	14,342,000	16,993,000
Average amount outstanding during the year	$ 12,468,000	$ 15,246,000
Average interest rate during the year	5.10%	4.82%

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Consolidated Statements of Financial Condition (USD $)	Dec. 31, 2012	Dec. 31, 2011
Statement of Financial Position [Abstract]
Cash and due from banks	$ 19,962,000	$ 13,289,000
Other interest-earning assets	1,054,000	409,000
Cash and cash equivalents	21,016,000	13,698,000
Securities available for sale	174,700,000	170,925,000
Securities held to maturity; estimated fair value of $31,768,000 (2012) and $40,984,000 (2011)	29,718,000	38,354,000
FHLB-NY stock, at cost	2,213,000	2,478,000
Mortgage loans held for sale	784,000	4,711,000
Loans, net of allowance for loan losses of $10,641,000 (2012) and $11,604,000 (2011)	429,832,000	444,803,000
Premises and equipment, net	5,645,000	6,101,000
Accrued interest receivable	2,372,000	2,618,000
Other real estate owned, net	1,058,000	5,288,000
Bank owned life insurance	10,470,000	10,145,000
Other assets	10,580,000	9,697,000
Total assets	688,388,000	708,818,000
Deposits:
Noninterest-bearing	124,286,000	115,776,000
Interest-bearing	465,968,000	477,776,000
Total deposits	590,254,000	593,552,000
Federal Home Loan Bank of New York advances	25,000,000	32,700,000
Securities sold under agreements to repurchase	7,343,000	14,342,000
Subordinated debentures	7,217,000	7,217,000
Accrued interest payable	560,000	775,000
Accrued expenses and other liabilities	1,668,000	2,440,000
Total liabilities	632,042,000	651,026,000
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value; 2,500,000 shares authorized; 15,000 shares issued and outstanding at December 31, 2012 and December 31, 2011. Liquidation preference of $15,000,000 and $15,000,000, respectively	14,964,000	14,955,000
Common stock, no par value; 10,000,000 shares authorized; 5,924,865 and 5,882,504 shares issued and outstanding at December 31, 2012 and 2011, respectively	40,606,000	40,420,000
Retained earnings	316,000	1,043,000
Accumulated other comprehensive income, net	460,000	1,374,000
Total stockholders' equity	56,346,000	57,792,000
Total liabilities and stockholders' equity	$ 688,388,000	$ 708,818,000

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SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	Dec. 31, 2012
Significant Accounting Policies Details
Maximum dividends that may be paid	$ 1,400,000

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PARENT COMPANY ONLY (Details 1) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Total interest expense	$ 1,094,000	$ 1,259,000	$ 1,357,000	$ 1,465,000	$ 1,594,000	$ 1,732,000	$ 1,812,000	$ 1,826,000	$ 5,175,000	$ 6,964,000
Income before income tax benefit and equity in undistributed earnings of subsidiary	(700,000)	374,000	(483,000)	1,082,000	(1,809,000)	691,000	713,000	674,000	273,000	269,000
Tax Benefit	440,000	(46,000)	159,000	(306,000)	847,000	(113,000)	(128,000)	(191,000)	247,000	415,000
Net income	(260,000)	328,000	(324,000)	776,000	(962,000)	578,000	585,000	483,000	520,000	684,000
Dividends on preferred stock and accretion	127,000	112,000	38,000	75,000	38,000	244,000	138,000	138,000	352,000	558,000
Net income available to common stockholders	(387,000)	216,000	(362,000)	701,000	(1,000,000)	334,000	447,000	345,000	168,000	126,000
Parent Company
Interest income - securities available-for-sale									9,000	23,000
Interest income - securities held to maturity									15,000	54,000
Dividend income									675,000
Other Income									15,000	27,000
Total Income									714,000	104,000
Total interest expense									506,000	504,000
Other expenses									319,000	306,000
Total expenses									825,000	810,000
Income before income tax benefit and equity in undistributed earnings of subsidiary									(111,000)	(706,000)
Tax Benefit									(266,000)	(239,000)
Income (loss) before equity in undistributed earnings of subsidiary									155,000	(467,000)
Equity in undistributed earnings of subsidiary									365,000	1,151,000
Net income									520,000	684,000
Dividends on preferred stock and accretion									352,000	558,000
Net income available to common stockholders									$ 168,000	$ 126,000

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Consolidated Statements of Changes in Shareholders' Equity (USD $)	Preferred Stock	Common Stock	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income (Loss), Net	Total
Balance beginning at Dec. 31, 2010	$ 9,796,000	$ 40,516,000	$ 1,959,000	$ (13,000)	$ (126,000)	$ 52,132,000
Balance beginning, shares at Dec. 31, 2010		5,846,927		(917)
Proceeds from issuance of preferred stock	15,000,000					15,000,000
Preferred stock issuance costs	(48,000)					(48,000)
Repurchase of preferred stock	(10,000,000)					(10,000,000)
Redemption of common stock warrants		(269,000)	161,000			(108,000)
Cash dividends declared on common stock			(1,171,000)			(1,171,000)
Payment of discount on dividend reinvestment plan		(15,000)				(15,000)
Cash dividends declared on preferred stock			(383,000)			(383,000)
Common stock issued under dividend reinvestment plan		94,000				94,000
Common stock issued under dividend reinvestment plan, shares		19,298
Common stock issued under stock plans		75,000		13,000		88,000
Common stock issued under stock plans, shares		16,279		917
Stock option compensation expense		19,000				19,000
Accretion of discount on preferred stock	174,000		(174,000)
Amortization of issuance costs	33,000		(33,000)
Comprehensive Income (Loss)			684,000		1,500,000	2,184,000
Balance ending at Dec. 31, 2011	14,955,000	40,420,000	1,043,000		1,374,000	57,792,000
Balance ending, shares at Dec. 31, 2011		5,882,504
Cash dividends declared on common stock			(886,000)			(886,000)
Payment of discount on dividend reinvestment plan		(8,000)				(8,000)
Cash dividends declared on preferred stock			(352,000)			(352,000)
Common stock issued under dividend reinvestment plan		148,000				148,000
Common stock issued under dividend reinvestment plan, shares		32,574
Common stock issued under stock plans		46,000				46,000
Common stock issued under stock plans, shares		9,787
Amortization of issuance costs	9,000		(9,000)
Comprehensive Income (Loss)			520,000		(914,000)	(394,000)
Balance ending at Dec. 31, 2012	$ 14,964,000	$ 40,606,000	$ 316,000		$ 460,000	$ 56,346,000
Balance ending, shares at Dec. 31, 2012		5,924,865

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 3) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Financial assets:
Securities available for sale	$ 174,700,000	$ 170,925,000
Financial liabilities:
Subordinated debenture	7,217,000	7,217,000
Carrying Value
Financial assets:
Cash and cash equivalents	21,016,000	13,698,000
Securities available for sale	174,700,000	170,925,000
Securities held to maturity	29,718,000	38,354,000
FHLB-NY stock	2,213,000	2,478,000
Mortgage loans held for sale	784,000	4,711,000
Loans, net	429,832,000	444,803,000
Accrued interest receivable	2,372,000	2,618,000
Financial liabilities:
Deposits	590,254,000	593,552,000
FHLB-NY Advances	25,000,000	32,700,000
Securities sold under agreements to repurchase	7,343,000	14,342,000
Subordinated debenture	7,217,000	7,217,000
Accrued interest payable	560,000	775,000
Interest rate swap	812,000	893,000
Quoted Prices in Active Markets for Identical Assets (Level 1)
Financial assets:
Cash and cash equivalents	21,016,000
Securities available for sale	7,408,000
Securities held to maturity
FHLB-NY stock
Mortgage loans held for sale
Loans, net
Accrued interest receivable	2,000
Financial liabilities:
Deposits	434,569,000
FHLB-NY Advances
Securities sold under agreements to repurchase
Subordinated debenture
Accrued interest payable	1,000
Interest rate swap
Significant Other Observable Inputs (Level 2)
Financial assets:
Cash and cash equivalents
Securities available for sale	167,292,000
Securities held to maturity	31,768,000
FHLB-NY stock
Mortgage loans held for sale	784,000
Loans, net
Accrued interest receivable	908,000
Financial liabilities:
Deposits	157,219,000
FHLB-NY Advances	25,825,000
Securities sold under agreements to repurchase	7,883,000
Subordinated debenture
Accrued interest payable	540,000
Interest rate swap	812,000
Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
FHLB-NY stock
Mortgage loans held for sale
Loans, net	449,041,000
Accrued interest receivable	1,462,000
Financial liabilities:
Deposits
FHLB-NY Advances
Securities sold under agreements to repurchase
Subordinated debenture	7,112,000
Accrued interest payable	19,000
Interest rate swap
Fair value
Financial assets:
Cash and cash equivalents		13,698,000
Securities available for sale		170,925,000
Securities held to maturity		40,984,000
Mortgage loans held for sale		4,711,000
Loans, net		453,604,000
Accrued interest receivable		2,618,000
Financial liabilities:
Deposits		595,939,000
FHLB-NY Advances		33,482,000
Securities sold under agreements to repurchase		14,786,000
Subordinated debenture		6,297,000
Accrued interest payable		775,000
Interest rate swap		$ 893,000

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 7) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Credit risks rated loans	$ 440,423,000	$ 456,413,000
Pass
Credit risks rated loans	295,460,000	328,601,000
Special Mention
Credit risks rated loans	27,829,000	8,968,000
Substandard
Credit risks rated loans	15,540,000	20,195,000
Doubtful
Credit risks rated loans	2,672,000	4,450,000
Loss
Credit risks rated loans
Commercial loan secured by real estate
Credit risks rated loans	58,160,000	60,650,000
Commercial loan secured by real estate | Pass
Credit risks rated loans	47,524,000	52,004,000
Commercial loan secured by real estate | Special Mention
Credit risks rated loans	7,368,000	3,234,000
Commercial loan secured by real estate | Substandard
Credit risks rated loans	3,268,000	5,248,000
Commercial loan secured by real estate | Doubtful
Credit risks rated loans		164,000
Commercial loan secured by real estate | Loss
Credit risks rated loans
Commercial loan - Other
Credit risks rated loans	31,254,000	41,850,000
Commercial loan - Other | Pass
Credit risks rated loans	29,484,000	38,790,000
Commercial loan - Other | Special Mention
Credit risks rated loans	1,508,000	566,000
Commercial loan - Other | Substandard
Credit risks rated loans	185,000	617,000
Commercial loan - Other | Doubtful
Credit risks rated loans	77,000	1,877,000
Commercial loan - Other | Loss
Credit risks rated loans
Commercial real estate
Credit risks rated loans	242,763,000	246,549,000
Commercial real estate | Pass
Credit risks rated loans	215,158,000	233,295,000
Commercial real estate | Special Mention
Credit risks rated loans	16,003,000	3,512,000
Commercial real estate | Substandard
Credit risks rated loans	9,007,000	7,333,000
Commercial real estate | Doubtful
Credit risks rated loans	2,595,000	2,409,000
Commercial real estate | Loss
Credit risks rated loans
Construction - Commercial
Credit risks rated loans	9,324,000	12,913,000
Construction - Commercial | Pass
Credit risks rated loans	3,294,000	4,512,000
Construction - Commercial | Special Mention
Credit risks rated loans	2,950,000	1,656,000
Construction - Commercial | Substandard
Credit risks rated loans	3,080,000	6,745,000
Construction - Commercial | Doubtful
Credit risks rated loans
Construction - Commercial | Loss
Credit risks rated loans
Construction - Residential
Credit risks rated loans		252,000
Construction - Residential | Pass
Credit risks rated loans
Construction - Residential | Special Mention
Credit risks rated loans
Construction - Residential | Substandard
Credit risks rated loans		252,000
Construction - Residential | Doubtful
Credit risks rated loans
Construction - Residential | Loss
Credit risks rated loans
Total
Credit risks rated loans	$ 341,501,000	$ 362,214,000

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BORROWINGS (Tables)

12 Months Ended

Dec. 31, 2012

Borrowings Tables

Schedule of maturities of FHLB Advances

The following table presents Federal Home Loan Bank of New York ("FHLB-NY") advances by maturity date:

	December 31, 2012					December 31, 2011
			Weighted Average					Weighted Average
Advances maturing	Amount		Rate			Amount		Rate
Within one year	$	—		—	%	$	7,700,000		1.30	%
After one year, but within two years		—		—	%		—		—	%
After two years, but within three years		—		—	%		5,000,000		1.72	%
After three years, but within four years		10,000,000		1.64	%		—		—	%
After four years, but within five years		5,000,000		1.16	%		10,000,000		1.64	%
After five years		10,000,000		1.85	%		10,000,000		1.85	%
	$	25,000,000		1.63	%	$	32,700,000		1.64	%

Schedule of securities sold under agreements to repurchase

Information concerning securities sold under agreements to repurchase is summarized as follows:

	December 31,
	2012			2011
Balance	$	7,343,000		$	14,342,000
Weighted average interest rate at year end		4.92	%		5.04	%
Maximum amount outstanding at any month end
during the year	$	14,342,000		$	16,993,000
Average amount outstanding during the year	$	12,468,000		$	15,246,000
Average interest rate during the year		5.10	%		4.82	%

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OTHER REAL ESTATE OWNED (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Other Real Estate Owned Details 1
Beginning of year	$ 38,000
Additions charged to expense	188,000	38,000
Reductions from sales of other real estate owned	(226,000)
End of year		$ 38,000

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EARNINGS PER COMMON SHARE

12 Months Ended

Dec. 31, 2012

Earnings Per Share [Abstract]

EARNINGS PER COMMON SHARE

Note 14. EARNINGS PER COMMON SHARE

The following reconciles the income available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for 2012 and 2011:

	2012		2011
Net income	$	520,000	$	684,000
Dividends on preferred stock and accretion		352,000		558,000
Net income available to common shareholders	$	168,000	$	126,000
Weighted average common shares outstanding - basic		5,908,503		5,861,465
Effect of dilutive securities - stock options		—		—
Weighted average common shares outstanding - diluted		5,908,503		5,861,465
Earnings per common share:
Basic	$	0.03	$	0.02
Diluted	$	0.03	$	0.02

For the years ended December 31, 2012 and 2011, stock options to purchase 31,683 and 64,728 average shares of common stock, respectively, were not considered in computing diluted earnings per share of common stock because they were antidilutive. The U.S. Treasury’s warrant to purchase 108,974 average shares of common stock was not considered in computing diluted earnings per common share for the year ended December 31, 2011 because it was antidilutive.

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REGULATORY CAPITAL REQUIREMENTS (Tables)

12 Months Ended

Dec. 31, 2012

Regulatory Capital Requirements Tables

Schedule of Regulatory Capital Requirements

Management believes that, as of December 31, 2012, the Bank and the Corporation have met all capital adequacy requirements to which they are subject. The following is a summary of the Corporation's and the Bank's actual capital amounts and ratios as of December 31, 2012 and 2011 compared to the minimum capital adequacy requirements and the requirements for classification as a well-capitalized institution under the prompt corrective action regulations:

	Actual					Required for Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Leverage (Tier 1) capital
Consolidated	$	62,887,000		9.09	%	$	27,682,000		4.00	%		N/A		N/A
Bank		61,558,000		8.91	%		27,625,000		4.00	%	$	34,531,000		5.00	%
Risk-based capital:
Tier 1
Consolidated		62,887,000		13.63	%		18,459,000		4.00	%		N/A		N/A
Bank		61,558,000		13.35	%		18,440,000		4.00	%		27,660,000		6.00	%
Total
Consolidated		68,715,000		14.89	%		36,917,000		8.00	%		N/A		N/A
Bank		67,380,000		14.62	%		36,880,000		8.00	%		46,100,000		10.00	%
December 31, 2011
Leverage (Tier 1) capital
Consolidated	$	63,418,000		8.86	%	$	28,634,000		4.00	%		N/A		N/A
Bank		61,193,000		8.57	%		28,546,000		4.00	%	$	35,683,000		5.00	%
Risk-based capital:
Tier 1
Consolidated		63,418,000		12.65	%		20,051,000		4.00	%		N/A		N/A
Bank		61,193,000		12.22	%		20,023,000		4.00	%		30,034,000		6.00	%
Total
Consolidated		69,750,000		13.91	%		40,103,000		8.00	%		N/A		N/A
Bank		67,516,000		13.49	%		40,046,000		8.00	%		50,057,000		10.00	%

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QUARTERLY FINANCIAL DATA (Unaudited) (Details) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Quarterly Financial Data Details
Total interest income	$ 6,754,000	$ 7,120,000	$ 7,317,000	$ 7,516,000	$ 7,748,000	$ 8,018,000	$ 8,033,000	$ 7,775,000	$ 28,707,000	$ 31,574,000
Total interest expense	1,094,000	1,259,000	1,357,000	1,465,000	1,594,000	1,732,000	1,812,000	1,826,000	5,175,000	6,964,000
Net interest income before provision for loan losses	5,660,000	5,861,000	5,960,000	6,051,000	6,154,000	6,286,000	6,221,000	5,949,000	23,532,000	24,610,000
Provision for loan losses	3,330,000	2,000,000	2,900,000	1,765,000	4,925,000	2,330,000	1,915,000	1,675,000	9,995,000	10,845,000
Net interest income after provision for loan losses	2,330,000	3,861,000	3,060,000	4,286,000	1,229,000	3,956,000	4,306,000	4,274,000	13,537,000	13,765,000
Total noninterest income	2,209,000	1,719,000	911,000	1,550,000	1,783,000	1,350,000	943,000	1,094,000	6,389,000	5,170,000
Total noninterest expenses	5,239,000	5,206,000	4,454,000	4,754,000	4,821,000	4,615,000	4,536,000	4,694,000	19,653,000	18,666,000
Income before income tax benefit	(700,000)	374,000	(483,000)	1,082,000	(1,809,000)	691,000	713,000	674,000	273,000	269,000
Income tax expense	(440,000)	46,000	(159,000)	306,000	(847,000)	113,000	128,000	191,000	(247,000)	(415,000)
Net income	(260,000)	328,000	(324,000)	776,000	(962,000)	578,000	585,000	483,000	520,000	684,000
Dividends on preferred stock and accretion	127,000	112,000	38,000	75,000	38,000	244,000	138,000	138,000	352,000	558,000
Net income available to common stockholders	$ (387,000)	$ 216,000	$ (362,000)	$ 701,000	$ (1,000,000)	$ 334,000	$ 447,000	$ 345,000	$ 168,000	$ 126,000
Basic earnings per common share	$ (0.07)	$ 0.04	$ (0.06)	$ 0.12	$ (0.17)	$ 0.05	$ 0.08	$ 0.06	$ 0.03	$ 0.02
Diluted earnings per common share	$ (0.07)	$ 0.04	$ (0.06)	$ 0.12	$ (0.17)	$ 0.05	$ 0.08	$ 0.06	$ 0.03	$ 0.02

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

Note 16. COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At December 31, 2012, the Corporation had residential mortgage commitments to extend credit aggregating approximately $417,000 at variable rates averaging 3.13% and $1.8 million at fixed rates averaging 3.87%. Approximately $1.8 million of these loan commitments will be sold to investors upon closing. Commercial, construction, and home equity loan commitments of approximately $9.3 million were extended with variable rates averaging 3.88% and $140,000 were extended at fixed rates averaging 4.88%. Generally, commitments were due to expire within approximately 60 days.

Additionally, at December 31, 2012, the Corporation was committed for approximately $60.0 million of unused lines of credit, consisting of $13.5 million relating to a home equity line of credit program and an unsecured line of credit program (cash reserve), $4.8 million relating to an unsecured overdraft protection program, and $41.7 million relating to commercial and construction lines of credit. Amounts drawn on the unused lines of credit are predominantly assessed interest at rates which fluctuate with the base rate.

Commitments under standby letters of credit were approximately $1.4 million at December 31, 2012, of which $1.3 million expires within one year. Should any letter of credit be drawn on, the interest rate charged on the resulting note would fluctuate with the Corporation's base rate. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee payment or performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation obtains collateral supporting those commitments for which collateral is deemed necessary.

Lease Commitments

Rental expense under long-term operating leases for branch offices amounted to approximately $1,153,000 and $1,132,000 during the years ended December 31, 2012 and 2011, respectively. At December 31, 2012, the minimum rental commitments on the noncancellable leases with an initial term of one year and expiring thereafter are as follows:

Year Ending December 31	Minimum Rent
2013	$	1,006,000
2014		740,000
2015		381,000
2016		313,000
2017		293,000
Thereafter		2,012,000
	$	4,745,000

Contingencies

The Corporation is also subject to litigation which arises primarily in the ordinary course of business. In the opinion of management the ultimate disposition of such litigation should not have a material adverse effect on the financial position of the Corporation.

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DEPOSITS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Deposits Details
Noninterest-bearing	$ 124,286,000	$ 115,776,000
Interest-bearing checking accounts	177,516,000	175,514,000
Money market accounts	63,955,000	73,544,000
Total interest-bearing demand	241,471,000	249,058,000
Statement savings and clubs	60,478,000	51,769,000
Business savings	7,860,000	6,198,000
Total savings	68,338,000	57,967,000
IRA investments and variable rate savings	35,058,000	38,257,000
Money market certificates	121,101,000	132,494,000
Total certificates of deposit	156,159,000	170,751,000
Interest-bearing	465,968,000	477,776,000
Total deposits	$ 590,254,000	$ 593,552,000

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Consolidated Statements of Changes in Shareholders' Equity (Parenthetical) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Statement of Stockholders' Equity [Abstract]
Cash dividends declared on common stock, dividend per share	$ 0.15	$ 0.20

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Consolidated Statements of Financial Condition (Parenthetical) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Statement of Financial Position [Abstract]
Estimated fair value of securities	$ 31,768,000	$ 40,984,000
Allowance for loan losses	10,641,000	11,604,000
Preferred stock, par value	$ 0.00	$ 0.00
Preferred stock, shares authorized	2,500,000	2,500,000
Preferred stock, shares issued	15,000	15,000
Preferred stock, shares outstanding	15,000	15,000
Preferred stock, liquidation preference	$ 15,000,000	$ 15,000,000
Common stock, par value	$ 0.00	$ 0.00
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	5,924,865	5,882,504
Common stock, shares outstanding	5,924,865	5,882,504

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SUBORDINATED DEBENTURES

12 Months Ended

Dec. 31, 2012

Subordinated Debentures

SUBORDINATED DEBENTURES

Note 9. SUBORDINATED DEBENTURES

In 2003, the Corporation formed Stewardship Statutory Trust I (the “Trust”), a statutory business trust, which on September 17, 2003 issued $7.0 million Fixed/Floating Rate Capital Securities (“Capital Securities”). The Trust used the proceeds to purchase from the Corporation, $7,217,000 of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (“Debentures”) maturing September 17, 2033. The Trust is obligated to distribute all proceeds of a redemption whether voluntary or upon maturity, to holders of the Capital Securities. The Corporation’s obligation with respect to the Capital Securities, and the Debentures, when taken together, provide a full and unconditional guarantee on a subordinated basis by the Corporation of the Trust’s obligations to pay amounts when due on the Capital Securities. The Corporation is not considered the primary beneficiary of this Trust (variable interest entity); therefore the trust is not consolidated in the Corporation’s consolidated financial statements, but rather the subordinated debentures are shown as a liability.

Prior to September 17, 2008, the Capital Securities and the Debentures both had a fixed interest rate of 6.75%. Beginning September 17, 2008, the rate floats quarterly at a rate of three month London Interbank Offered Rate (LIBOR) plus 2.95%. At December 31, 2012 and 2011, the rate on both the Capital Securities and the Debentures was 3.26% and 3.51%, respectively. The Corporation has the right to defer payments of interest on the subordinated debentures by extending the interest payment period for up to 20 consecutive quarterly periods.

The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 2) (Fair Value Measured on Non Recurring Basis, Significant Unobservable Inputs (Level 3), USD $)	12 Months Ended
	Dec. 31, 2012
Impaired Loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value of financial assets	$ 22,521,000
Valuation Technique1	Comparable real estate sales and/or the income approach
Unobservable Input	Adjustments for differences between comparable sales and income data available
Unobservable Input2	Estimated Selling Costs
Range of Unobservable inputs used in fair value & weighting factor	5%-10%
Range of Unobservable inputs used in fair value & weighting factor2	7%
Other Real Estate Owned
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value of financial assets	$ 1,058,000
Valuation Technique1	Comparable real estate sales and/or the income approach
Unobservable Input	Adjustments for differences between comparable sales and income data available
Unobservable Input2	Estimated Selling Costs
Range of Unobservable inputs used in fair value & weighting factor	5%-12%
Range of Unobservable inputs used in fair value & weighting factor2	7%

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Assets, Fair Value
Total available for sale securities	$ 174,700,000	$ 170,925,000
Fair Value Measured on a Recurring Basis | Carrying Value
Assets, Fair Value
U.S. Treasuries	4,006,000	4,050,000
U.S. government-sponsored agencies	37,255,000	20,744,000
Obligations of state and political subdivisions	14,170,000	9,318,000
Mortgage-backed securities - residential	105,428,000	133,467,000
Asset backed securities	9,884,000
Corporate debt	495,000
Other equity investments	3,462,000	3,346,000
Total available for sale securities	174,700,000	170,925,000
Liabilities, Fair Value
Interest rate swap	512,000	893,000
Fair Value Measured on a Recurring Basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets, Fair Value
U.S. Treasuries	4,006,000	4,050,000
U.S. government-sponsored agencies
Obligations of state and political subdivisions
Mortgage-backed securities - residential
Asset backed securities
Corporate debt
Other equity investments	3,402,000
Total available for sale securities	7,408,000	4,050,000
Liabilities, Fair Value
Interest rate swap
Fair Value Measured on a Recurring Basis | Significant Other Observable Inputs (Level 2)
Assets, Fair Value
U.S. Treasuries
U.S. government-sponsored agencies	37,255,000	20,744,000
Obligations of state and political subdivisions	14,170,000	9,318,000
Mortgage-backed securities - residential	105,428,000	133,467,000
Asset backed securities	9,884,000
Corporate debt	495,000
Other equity investments	60,000	3,346,000
Total available for sale securities	167,292,000	166,875,000
Liabilities, Fair Value
Interest rate swap	812,000	893,000
Fair Value Measured on a Recurring Basis | Significant Unobservable Inputs (Level 3)
Assets, Fair Value
U.S. Treasuries
U.S. government-sponsored agencies
Obligations of state and political subdivisions
Mortgage-backed securities - residential
Asset backed securities
Corporate debt
Other equity investments
Total available for sale securities
Liabilities, Fair Value
Interest rate swap

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Mar. 22, 2013	Jun. 30, 2012
Document And Entity Information
Entity Registrant Name	STEWARDSHIP FINANCIAL CORP
Entity Central Index Key	0001023860
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float			$ 21,378,000
Entity Common Stock, Shares Outstanding		5,933,028
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2012

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REGULATORY CAPITAL REQUIREMENTS

12 Months Ended

Dec. 31, 2012

Banking and Thrift [Abstract]

REGULATORY CAPITAL REQUIREMENTS

Note 10. REGULATORY CAPITAL REQUIREMENTS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Regulations of the Board of Governors of the Federal Reserve System require bank holding companies to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2012, the Corporation was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0% and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. The Bank must comply with substantially similar capital regulations promulgated by the FDIC.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

At year end 2012 and 2011, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events that have occurred since that notification that management believes would change the Bank's category.

Management believes that, as of December 31, 2012, the Bank and the Corporation have met all capital adequacy requirements to which they are subject. The following is a summary of the Corporation's and the Bank's actual capital amounts and ratios as of December 31, 2012 and 2011 compared to the minimum capital adequacy requirements and the requirements for classification as a well-capitalized institution under the prompt corrective action regulations:

	Actual					Required for Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Leverage (Tier 1) capital
Consolidated	$	62,887,000		9.09	%	$	27,682,000		4.00	%		N/A		N/A
Bank		61,558,000		8.91	%		27,625,000		4.00	%	$	34,531,000		5.00	%
Risk-based capital:
Tier 1
Consolidated		62,887,000		13.63	%		18,459,000		4.00	%		N/A		N/A
Bank		61,558,000		13.35	%		18,440,000		4.00	%		27,660,000		6.00	%
Total
Consolidated		68,715,000		14.89	%		36,917,000		8.00	%		N/A		N/A
Bank		67,380,000		14.62	%		36,880,000		8.00	%		46,100,000		10.00	%
December 31, 2011
Leverage (Tier 1) capital
Consolidated	$	63,418,000		8.86	%	$	28,634,000		4.00	%		N/A		N/A
Bank		61,193,000		8.57	%		28,546,000		4.00	%	$	35,683,000		5.00	%
Risk-based capital:
Tier 1
Consolidated		63,418,000		12.65	%		20,051,000		4.00	%		N/A		N/A
Bank		61,193,000		12.22	%		20,023,000		4.00	%		30,034,000		6.00	%
Total
Consolidated		69,750,000		13.91	%		40,103,000		8.00	%		N/A		N/A
Bank		67,516,000		13.49	%		40,046,000		8.00	%		50,057,000		10.00	%

In February, 2013 the Bank agreed with its regulators to maintain a minimum Leverage (Tier 1) capital ratio of at least 8% and a minimum Total Risk-based capital ratio of at least 10%. As presented above, at December 31, 2012, the Bank’s regulatory capital ratios exceeded the established minimum capital requirements.

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EARNINGS PER COMMON SHARE (Details) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Earnings Per Common Share Details
Net income	$ (260,000)	$ 328,000	$ (324,000)	$ 776,000	$ (962,000)	$ 578,000	$ 585,000	$ 483,000	$ 520,000	$ 684,000
Dividends on preferred stock and accretion	127,000	112,000	38,000	75,000	38,000	244,000	138,000	138,000	352,000	558,000
Net income available to common stockholders	$ (387,000)	$ 216,000	$ (362,000)	$ 701,000	$ (1,000,000)	$ 334,000	$ 447,000	$ 345,000	$ 168,000	$ 126,000
Weighted average shares (in shares)									5,908,503	5,861,465
Effect of dilutive stock options (in shares)
Total weighted average dilutive shares (in shares)									5,908,503	5,861,465
Basic earnings per common share (in dollars per share)	$ (0.07)	$ 0.04	$ (0.06)	$ 0.12	$ (0.17)	$ 0.05	$ 0.08	$ 0.06	$ 0.03	$ 0.02
Diluted earnings per common share (in dollars per share)	$ (0.07)	$ 0.04	$ (0.06)	$ 0.12	$ (0.17)	$ 0.05	$ 0.08	$ 0.06	$ 0.03	$ 0.02

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details Narrative) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Related Allowance	$ 266,000				$ 3,121,000				$ 266,000	$ 3,121,000
Additional provision for loan losses	3,330,000	2,000,000	2,900,000	1,765,000	4,925,000	2,330,000	1,915,000	1,675,000	9,995,000	10,845,000
Fair Value Measured on Non Recurring Basis
Recorded Investment With an allowance recorded	22,699,000				25,478,000				22,699,000	25,478,000
Related Allowance	178,000				612,000				178,000	612,000
Additional provision for loan losses									$ 4,501,000	$ 4,915,000

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Consolidated Statements of Income (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Interest income:
Loans	$ 24,056,000	$ 26,312,000
Securities held to maturity
Taxable	487,000	687,000
Non-taxable	817,000	878,000
Securities available for sale
Taxable	2,923,000	3,316,000
Non-taxable	275,000	217,000
FHLB dividends	108,000	122,000
Other interest-earning assets	41,000	42,000
Total interest income	28,707,000	31,574,000
Interest expense:
Deposits	3,402,000	4,860,000
Borrowed money	1,773,000	2,104,000
Total interest expense	5,175,000	6,964,000
Net interest income before provision for loan losses	23,532,000	24,610,000
Provision for loan losses	9,995,000	10,845,000
Net interest income after provision for loan losses	13,537,000	13,765,000
Noninterest income:
Fees and service charges	1,998,000	2,074,000
Bank owned life insurance	325,000	325,000
Gain on calls and sales of securities, net	2,340,000	1,161,000
Gain on sales of mortgage loans	887,000	1,209,000
Gain on sales of other real estate owned	429,000	10,000
Miscellaneous	410,000	391,000
Total noninterest income	6,389,000	5,170,000
Noninterest expenses:
Salaries and employee benefits	9,470,000	8,983,000
Occupancy, net	1,967,000	2,023,000
Equipment	971,000	970,000
Data processing	1,291,000	1,351,000
Advertising	537,000	446,000
FDIC insurance premium	612,000	714,000
Charitable contributions	86,000	398,000
Stationary and supplies	208,000	196,000
Legal	485,000	502,000
Bank-card related services	546,000	496,000
Other real estate owned	603,000	95,000
Miscellaneous	2,877,000	2,492,000
Total noninterest expenses	19,653,000	18,666,000
Income before income tax benefit	273,000	269,000
Income tax expense	(247,000)	(415,000)
Net income	520,000	684,000
Dividends on preferred stock and accretion	352,000	558,000
Net income available to common stockholders	$ 168,000	$ 126,000
Basic earnings per common share	$ 0.03	$ 0.02
Diluted earnings per common share	$ 0.03	$ 0.02
Weighted average number of common shares outstanding	5,908,503	5,861,465
Weighted average number of diluted common shares outstanding	5,908,503	5,861,465

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LOANS AND ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2012

Loans And Allowance For Loan Losses

LOANS AND ALLOWANCE FOR LOAN LOSSES

Note 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

At December 31, 2012 and 2011, respectively, the loan portfolio consisted of the following:

	December 31,
	2012			2011
Commercial:
Secured by real estate	$	58,160,000		$	60,650,000
Other		31,254,000			41,850,000
Commercial real estate		242,763,000			246,549,000
Construction:
Commercial		9,324,000			12,913,000
Residential		—			252,000
Residential real estate		67,200,000			54,694,000
Consumer:
Secured by real estate		30,982,000			38,278,000
Other		624,000			1,086,000
Other		116,000			141,000
Total gross loans		440,423,000			456,413,000
Less:  Deferred loan (fees) costs, net		(50,000	)		6,000
Allowance for loan losses		10,641,000			11,604,000
		10,591,000			11,610,000
Loans, net	$	429,832,000		$	444,803,000

At December 31, 2012 and 2011, loans participated by the Corporation to other organizations totaled approximately $20,559,000 and $31,060,000, respectively. These amounts are not included in the totals presented above.

The Corporation has entered into lending transactions with directors, executive officers and principal shareholders of the Corporation and their affiliates. At December 31, 2012 and 2011, these loans aggregated approximately $2,927,000 and $2,905,000, respectively. During the year ended December 31, 2012, new loans totaling $1,228,000 were granted and repayments totaled approximately $1,206,000. The loans, at December 31, 2012, were current as to principal and interest payments.

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

	For the year ended December 31, 2012
	Balance beginning of period		Provision charged to operations			Loans charged-off			Recoveries of loans charged-off		Balance end of period
Commercial	$	5,368,000	$	6,368,000		$	(7,144,000	)	$	240,000	$	4,832,000
Commercial real estate		4,943,000		3,570,000			(3,577,000	)		—		4,936,000
Construction		480,000		78,000			(394,000	)		5,000		169,000
Residential real estate		303,000		25,000			(21,000	)		1,000		308,000
Consumer		498,000		(79,000	)		(69,000	)		2,000		352,000
Other		2,000		2,000			(5,000	)		4,000		3,000
Unallocated		10,000		31,000			—			—		41,000
Balance, ending	$	11,604,000	$	9,995,000		$	(11,210,000	)	$	252,000	$	10,641,000

	For the year ended December 31, 2011
	Balance beginning of period		Provision charged to operations		Loans charged-off			Recoveries of loans charged-off		Balance end of period
Commercial	$	3,745,000	$	6,197,000	$	(4,603,000	)	$	29,000	$	5,368,000
Commercial real estate		3,112,000		3,742,000		(1,911,000	)		—		4,943,000
Construction		930,000		386,000		(839,000	)		3,000		480,000
Residential real estate		184,000		231,000		(112,000	)		—		303,000
Consumer		510,000		281,000		(296,000	)		3,000		498,000
Other		2,000		5,000		(8,000	)		3,000		2,000
Unallocated		7,000		3,000		—			—		10,000
Balance, ending	$	8,490,000	$	10,845,000	$	(7,769,000	)	$	38,000	$	11,604,000

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2012 and 2011:

	December 31, 2012
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer		Other		Unallocated		Total
Allowance for loan losses:
Ending Allowance balance attributable to loans
Individually evaluated for impairment	$	251,000	$	15,000	$	—	$	—	$	—	$	—	$	—	$	266,000
Collectively evaluated for impairment		4,581,000		4,921,000		169,000		308,000		352,000		3,000		41,000		10,375,000
Total ending allowance balance	$	4,832,000	$	4,936,000	$	169,000	$	308,000	$	352,000	$	3,000	$	41,000	$	10,641,000
Loans:
Loans individually evaluated for impairment	$	8,641,000	$	12,803,000	$	6,029,000	$	413,000	$	800,000	$	—	$	—	$	28,686,000
Loans collectively evaluated for impairment		80,773,000		229,960,000		3,295,000		66,787,000		30,806,000		116,000		—		411,737,000
Total ending Loan balance	$	89,414,000	$	242,763,000	$	9,324,000	$	67,200,000	$	31,606,000	$	116,000	$	—	$	440,423,000

	December 31, 2011
	Commercial		Commercial Real Estate		Construction		Residential Real Estate		Consumer		Other Loans		Unallocated		Total
Allowance for loan losses:
Ending Allowance balance attributable to loans
Individually evaluated for impairment	$	1,908,000	$	947,000	$	266,000	$	—	$	—	$	—	$	—	$	3,121,000
Collectively evaluated for impairment		3,460,000		3,996,000		214,000		303,000		498,000		2,000		10,000		8,483,000
Total ending allowance balance	$	5,368,000	$	4,943,000	$	480,000	$	303,000	$	498,000	$	2,000	$	10,000	$	11,604,000
Loans:
Loans individually evaluated for impairment	$	10,265,000	$	13,128,000	$	8,653,000	$	779,000	$	891,000	$	—	$	—	$	33,716,000
Loans collectively evaluated for impairment		92,235,000		233,421,000		4,512,000		53,915,000		38,473,000		141,000		—		422,697,000
Total ending Loan balance	$	102,500,000	$	246,549,000	$	13,165,000	$	54,694,000	$	39,364,000	$	141,000	$	—	$	456,413,000

The following table presents the recorded investment in nonaccrual loans at the dates indicated:

	December 31,
	2012		2011
Commercial:
Secured by real estate	$	3,374,000	$	6,178,000
Other		261,000		2,494,000
Commercial real estate		10,083,000		9,302,000
Construction:
Commercial		3,080,000		7,840,000
Residential		—		252,000
Residential real estate		413,000		779,000
Consumer:
Secured by real estate		800,000		891,000
Other		—		—
Other		—		—
Total nonaccrual loans	$	18,011,000	$	27,736,000

At December 31, 2012 there was one Commercial – Secured by real estate loan for $237,000 that was past due 90 days and still accruing. This loan is in the process of collection and adequately collateralized. Management believes all interest and principal owed will be collected. There were no loans past due 90 days and still accruing at December 31, 2011.

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

	At and for the year ended December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	9,689,000	$	6,557,000			$	4,221,000	$	92,000
Other		424,000		146,000				109,000		5,000
Commercial real estate		17,211,000		12,149,000				10,054,000		158,000
Construction:
Commercial		7,300,000		6,029,000				6,041,000		53,000
Residential		—		—				—		—
Residential real estate		451,000		413,000				393,000		—
Consumer:
Secured by real estate		834,000		800,000				922,000		—
Other		—		—				—		—
Other		—		—				—		—
With an allowance recorded:
Commercial:
Secured by real estate		965,000		781,000	$	176,000		2,589,000		25,000
Other		1,163,000		1,157,000		75,000		2,195,000		43,000
Commercial real estate		923,000		654,000		15,000		2,940,000		18,000
Construction:
Commercial		—		—		—		1,224,000		—
Residential		—		—		—		596,000		—
Residential real estate		—		—		—		239,000		—
Consumer:
Secured by real estate		—		—		—		—		—
Other		—		—		—		—		—
Other		—		—		—		—		—
Total nonperforming loans	$	38,960,000	$	28,686,000	$	266,000	$	31,523,000	$	394,000

During the year ended December 31, 2012, no interest income was recognized on a cash basis.

	At and for the year ended December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	3,306,000	$	2,831,000			$	2,260,000	$	22,000
Other		—		—				396,000		23,000
Commercial real estate		10,691,000		8,523,000				7,110,000		52,000
Construction:
Commercial		8,453,000		7,609,000				2,888,000		26,000
Residential		—		—				219,000		—
Residential real estate		866,000		779,000				404,000		—
Consumer:
Secured by real estate		911,000		891,000				811,000		—
Other		—		—				—		—
Other		—		—				—		—
With an allowance recorded:
Commercial:
Secured by real estate		7,287,000		4,590,000	$	468,000		4,788,000		34,000
Other		2,876,000		2,844,000		1,440,000		1,822,000		5,000
Commercial real estate		4,747,000		4,605,000		947,000		5,962,000		63,000
Construction:
Commercial		1,085,000		792,000		264,000		643,000		12,000
Residential		273,000		252,000		2,000		50,000		—
Residential real estate		—		—		—		537,000		—
Consumer:
Secured by real estate		—		—		—		31,000		—
Other		—		—		—		—		—
Other		—		—		—		—		—
Total nonperforming loans	$	40,495,000	$	33,716,000	$	3,121,000	$	27,921,000	$	237,000

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2012 and 2011. Nonaccrual loans are included in the disclosure by payment status:

	December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial:
Secured by real estate	$	101,000	$	179,000	$	2,674,000	$	2,954,000	$	55,206,000	$	58,160,000
Other		25,000		98,000		52,000		175,000		31,079,000		31,254,000
Commercial real estate		2,582,000		—		9,023,000		11,605,000		231,158,000		242,763,000
Construction:
Commercial		—		460,000		815,000		1,275,000		8,049,000		9,324,000
Residential		—		—		—		—		—		—
Residential real estate		161,000		—		413,000		574,000		66,626,000		67,200,000
Consumer:
Secured by real estate		67,000		—		647,000		714,000		30,268,000		30,982,000
Other		—		—		—		—		624,000		624,000
Other		—		—		—		—		116,000		116,000
Total	$	2,936,000	$	737,000	$	13,624,000	$	17,297,000	$	423,126,000	$	440,423,000

	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial:
Secured by real estate	$	875,000	$	546,000	$	3,977,000	$	5,398,000	$	55,252,000	$	60,650,000
Other		53,000		260,000		1,752,000		2,065,000		39,785,000		41,850,000
Commercial real estate		—		736,000		5,352,000		6,088,000		240,461,000		246,549,000
Construction:
Commercial		—		561,000		2,640,000		3,201,000		9,712,000		12,913,000
Residential		—		—		252,000		252,000		—		252,000
Residential real estate		—		—		779,000		779,000		53,915,000		54,694,000
Consumer:
Secured by real estate		581,000		—		719,000		1,300,000		36,978,000		38,278,000
Other		4,000		—		—		4,000		1,082,000		1,086,000
Other		—		—		—		—		141,000		141,000
Total	$	1,513,000	$	2,103,000	$	15,471,000	$	19,087,000	$	437,326,000	$	456,413,000

Troubled Debt Restructurings

At December 31, 2012 and 2011, the Corporation had $11.7 million and $15.1 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $10.4 million and $6.0 million were performing in accordance with their new terms at December 31, 2012 and 2011, respectively. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of $246,000 and $1.2 million have been allocated for the troubled debt restructurings at December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, the Corporation had committed $241,000 and $416,000, respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

During the years ended December 31, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans primarily represents an extension of the maturity date at terms more favorable than the current market terms for new debt with similar risk, including a lower interest rate. Many of the modifications represent the term out of previous lines of credit that were not renewed. Modifications involving an extension of the maturity date were for periods ranging from 3 months to 15 years.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2012 and 2011:

	December 31, 2012								December 31, 2011
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial:
Secured by real estate		9	$	1,875,000	$	1,875,000		15	$	3,002,000	$	3,002,000
Other		7		3,735,000		3,735,000		11		678,000		678,000
Commercial real estate		1		755,000		755,000		3		2,864,000		2,864,000
Construction:
Commercial		1		300,000		300,000		7		5,961,000		5,961,000
Residential		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		—
Consumer:
Secured by real estate		—		—		—		—		—		—
Other		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total		18	$	6,655,000	$	6,655,000		36	$	12,505,000	$	12,505,000

For the year ended December 31, 2012, the troubled debt restructurings described above increased the allowance for loan losses by $2.4 million. There were $3.3 million of charge-offs in 2012 related to these troubled debt restructurings. For the year ended December 31, 2011, the troubled debt restructurings described above increased the allowance for loan losses by $1.6 million. There were $1.1 million of charge-offs in 2011 related to these troubled debt restructurings.

A loan is considered to be in payment default once it is contractually 90 days past due under the modified terms. There are no troubled debt restructurings for which there was a payment default within twelve months following the modification.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

Credit Quality Indicators

The Corporation categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate and commercial construction loans. This analysis is performed at the time the loan is originated and annually thereafter. The Corporation uses the following definitions for risk ratings.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard – Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – A Doubtful loan with all weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable or improbable. The likelihood of loss is extremely high, but because of certain important and reasonably specific factors, an estimated loss is deferred until a more exact status can be determined.

Loss – A loan classified Loss is considered uncollectible and of such little value that its continuance as an asset is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be affected in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of December 31, 2012 and 2011, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:

	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	47,524,000	$	7,368,000	$	3,268,000	$	—	$	—	$	58,160,000
Other		29,484,000		1,508,000		185,000		77,000		—		31,254,000
Commercial real estate		215,158,000		16,003,000		9,007,000		2,595,000		—		242,763,000
Construction:
Commercial		3,294,000		2,950,000		3,080,000		—		—		9,324,000
Residential		—		—		—		—		—		—
Total	$	295,460,000	$	27,829,000	$	15,540,000	$	2,672,000	$	—	$	341,501,000

	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	52,004,000	$	3,234,000	$	5,248,000	$	164,000	$	—	$	60,650,000
Other		38,790,000		566,000		617,000		1,877,000		—		41,850,000
Commercial real estate		233,295,000		3,512,000		7,333,000		2,409,000		—		246,549,000
Construction:
Commercial		4,512,000		1,656,000		6,745,000		—		—		12,913,000
Residential		—		—		252,000		—		—		252,000
Total	$	328,601,000	$	8,968,000	$	20,195,000	$	4,450,000	$	—	$	362,214,000

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate and consumer loan segments, the Corporation evaluates credit quality based on payment activity. The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of December 31, 2012 and 2011.

	December 31, 2012
	Current		Past Due and Nonaccrual		Total
Residential real estate	$	66,626,000	$	574,000	$	67,200,000
Consumer:
Secured by real estate		30,268,000		714,000		30,982,000
Other		624,000		—		624,000
Total	$	97,518,000	$	1,288,000	$	98,806,000

	December 31, 2011
	Current		Past Due and Nonaccrual		Total
Residential real estate	$	53,915,000	$	779,000	$	54,694,000
Consumer:
Secured by real estate		36,978,000		1,300,000		38,278,000
Other		1,082,000		4,000		1,086,000
Total	$	91,975,000	$	2,083,000	$	94,058,000

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SECURITIES - AVAILABLE-FOR-SALE AND HELD TO MATURITY

12 Months Ended

Dec. 31, 2012

Investments, Debt and Equity Securities [Abstract]

SECURITIES - AVAILABLE-FOR-SALE AND HELD TO MATURITY

Note 3. 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:

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,003,000	$	3,000	$	—	$	4,006,000
U.S. government-sponsored agencies		37,287,000		35,000		67,000		37,255,000
Obligations of state and political subdivisions		13,724,000		468,000		22,000		14,170,000
Mortgage-backed securities-residential		104,341,000		1,176,000		89,000		105,428,000
Asset-backed securities (a)		9,874,000		22,000		12,000		9,884,000
Corporate debt		492,000		3,000		—		495,000
Total debt securities		169,721,000		1,707,000		190,000		171,238,000
Other equity investments		3,425,000		37,000		—		3,462,000
	$	173,146,000	$	1,744,000	$	190,000	$	174,700,000

	December 31, 2011
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,027,000	$	23,000	$	—	$	4,050,000
U.S. government-sponsored agencies:		20,702,000		46,000		4,000		20,744,000
Obligations of state and political subdivisions		8,866,000		461,000		9,000		9,318,000
Mortgage-backed securities-residential		130,912,000		2,583,000		28,000		133,467,000
Total debt securities		164,507,000		3,113,000		41,000		167,579,000
Other equity investments		3,287,000		59,000		—		3,346,000
	$	167,794,000	$	3,172,000	$	41,000	$	170,925,000

(a) Collateralized by student loans

Cash proceeds realized from sales and calls of securities available-for-sale for the years ended December 31, 2012 and 2011 were $102,300,000 and $46,245,000, respectively. There were gross gains totaling $2,290,000 and gross losses totaling $8,000 realized on sales or calls during the year ended December 31, 2012. The tax provision related to these realized gains was $892,000. There were gross gains totaling $1,157,000 and gross losses totaling $1,000 realized on sales or calls during the year ended December 31, 2011. The tax provision related to these realized gains was $455,000.

The fair value of available-for-sale securities pledged to secure public deposits for the year ending December 31, 2012 and 2011 was $1,246,000 and $1,440,000, respectively. See also Note 8 to the consolidated financial statements regarding securities pledged as collateral for Federal Home Loan Bank of New York advances and securities sold under agreements to repurchase.

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

	December 31, 2012
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	260,000	$	46,000	$	—	$	306,000
Obligations of state and political subdivisions		22,787,000		1,407,000		—		24,194,000
Mortgage-backed securities-residential		6,671,000		597,000		—		7,268,000
	$	29,718,000	$	2,050,000	$	—	$	31,768,000

	December 31, 2011
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	2,770,000	$	80,000	$	—	$	2,850,000
Obligations of state and political subdivisions		24,575,000		1,705,000		—		26,280,000
Mortgage-backed securities-residential		11,009,000		845,000		—		11,854,000
	$	38,354,000	$	2,630,000	$	—	$	40,984,000

Cash proceeds realized from sales and calls of securities held to maturity for the years ended December 31, 2012 and 2011 were $4,418,000 and $1,895,000, respectively. There were gross gains totaling $58,000 and no gross losses realized from sales and calls for the year ended December 31, 2012. The tax provision related to these realized gains was $22,000. There were gross gains totaling $5,000 and no gross losses realized from calls for the year ended December 31, 2011. The tax provision related to these realized gains was $2,000.

See also Note 8 to the consolidated financial statements regarding securities pledged as collateral for Federal Home Loan Bank of New York advances and securities sold under agreements to repurchase.

Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This might cause actual maturities to differ from the contractual maturities.

Mortgage-backed securities are comprised primarily of government agencies such as the Government National Mortgage Association and government sponsored agencies such as the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Banks and the Federal Home Loan Mortgage Corporation. At year end 2012 and 2011, there were no holdings of securities of any one issuer other than the U.S. government and its agencies in an amount greater than 10% of shareholders' equity.

The following tables summarize the fair value and unrealized losses in the available-for-sale securities portfolio of those investment securities which reported an unrealized loss at December 31, 2012 and 2011, and if the unrealized loss position was continuous for the twelve months prior to December 31, 2012 and 2011. There were no investment securities in the held to maturity portfolio which reported an unrealized loss at December 31, 2012 or 2011.

Available-for-Sale

2012	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		20,716,000		(67,000	)		—		—		20,716,000		(67,000	)
Obligations of state and political
subdivisions		3,257,000		(22,000	)		—		—		3,257,000		(22,000	)
Mortgage-backed securities-residential		23,715,000		(89,000	)		—		—		23,715,000		(89,000	)
Asset-backed securities		3,047,000		(12,000	)		—		—		3,047,000		(12,000	)
Corporate debt		—		—			—		—		—		—
Other equity investments		—		—			—		—		—		—
Total temporarily impaired securities	$	50,735,000	$	(190,000	)	$	—	$	—	$	50,735,000	$	(190,000	)

2011	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		1,993,000		(4,000	)		—		—		1,993,000		(4,000	)
Obligations of state and political
subdivisions		1,335,000		(9,000	)		—		—		1,335,000		(9,000	)
Mortgage-backed securities-residential		10,637,000		(28,000	)		—		—		10,637,000		(28,000	)
Other equity investments		—		—			—		—		—		—
Total temporarily impaired securities	$	13,965,000	$	(41,000	)	$	—	$	—	$	13,965,000	$	(41,000	)

Other-Than-Temporary-Impairment

At December 31, 2012, there were no securities in a continuous loss position for 12 months or longer. The Corporation’s unrealized losses are primarily due to market conditions. These securities have not been considered other than temporarily impaired as scheduled principal and interest payments have been made and management anticipates collecting the entire principal balance as scheduled. 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 December 31, 2012.

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INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Taxes

INCOME TAXES

Note 15. INCOME TAXES

The components of income tax benefit are summarized as follows:

	Years ended December 31,
	2012			2011
Current tax expense (benefit):
Federal	$	(440,000	)	$	1,050,000
State		78,000			385,000
		(362,000	)		1,435,000
Deferred tax expense (benefit):
Federal		158,000			(1,432,000	)
State		(93,000	)		(432,000	)
Valuation allowance		50,000			14,000
		115,000			(1,850,000	)
	$	(247,000	)	$	(415,000	)

The following table presents a reconciliation between the reported income taxes and the income taxes which would be computed by applying the normal federal income tax rate (34%) to income before income taxes:

	Years Ended December 31,
	2012			2011
Federal income tax	$	93,000		$	92,000
Add (deduct) effect of:
State income taxes, net of federal income tax effect		(2,000	)		(17,000	)
Nontaxable interest income		(399,000	)		(401,000	)
Life insurance		(113,000	)		(113,000	)
Nondeductible expenses		17,000			17,000
Write-off of Federal deferred tax asset		133,000			—
Change in valuation reserve		42,000			—
Other items, net		(18,000	)		7,000
Effective federal income taxes	$	(247,000	)	$	(415,000	)

The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

	December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	4,250,000		$	4,635,000
Stock compensation		—			107,000
Nonaccrual loan interest		1,112,000			1,136,000
Depreciation		425,000			406,000
Contribution carry forward		253,000			276,000
State capital loss carry forward		165,000			17,000
Unrealized loss on fair value of interest rate swap		295,000			325,000
Alternate minimum tax		307,000			—
		6,807,000			6,902,000
Valuation reserve		(179,000	)		(129,000	)
		6,628,000			6,773,000
Deferred tax liabilities:
Unrealized gains on securities available-for-sale		607,000			1,221,000
Other		4,000			4,000
		611,000			1,225,000
Net deferred tax assets	$	6,017,000		$	5,548,000

The Corporation has provided a full valuation allowance relating to all of the state tax benefits of both net operating loss carryforwards and contribution carryforwards. Management has determined that it is more likely than not that it will not be able to realize the deferred tax benefits described above. For the year ended December 31, 2012 the Corporation wrote-off deferred tax assets related to expired stock options and those associated with the expiration of certain contribution carryovers.

The Corporation has approximately $856,000 of taxes paid in the carryback period that could be utilized against the deferred tax asset. The remaining $5.2 million of net deferred tax assets more likely than not will be utilized through future earnings.

The Corporation has alternate minimum tax (AMT) credit carryforwards of approximately $307,000 to reduce regular Federal income taxes in future years to the extent that that regular tax exceeds AMT. The AMT credit carryforwards have no expiration date.

There were no unrecognized tax benefits during the years or at the years ended December 31, 2012 and 2011 and management does not expect a significant change in unrecognized benefits in the next twelve months. There were no tax interest and penalties recorded in the income statement for the years ended December 31, 2012 and 2011. There were no tax interest and penalties accrued for the years ended December 31, 2012 and 2011.

The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the State of New Jersey.

The Corporation is no longer subject to examination by taxing authorities for years before 2009.

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PREFERRED STOCK

12 Months Ended

Dec. 31, 2012

PreferredStockAbstract

PREFERRED STOCK

Note 11. PREFERRED STOCK

In connection with the Corporation’s participation in the U.S. Department of the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion, on September 1, 2011, the Corporation issued 15,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Shares”) to the Treasury for an aggregate purchase price of $15 million, in cash.

Using the proceeds of the issuance of the Series B Preferred Shares, the Corporation simultaneously repurchased all 10,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Shares”) previously issued under the Treasury’s Troubled Assets Relief Program (“TARP”) Capital Purchase Program (the “CPP”) for an aggregate purchase price of $10,022,222, in cash, including accrued but unpaid dividends through the date of repurchase.

The terms of the newly-established Series B Preferred Shares provide for a liquidation preference of $1,000 per share and impose restrictions on the Corporation’s ability to declare or pay dividends or purchase, redeem or otherwise acquire for consideration, shares of the Corporation’s Common Stock and any class or series of stock of the Corporation the terms of which do not expressly provide that such class or series will rank senior or junior to the Series B Preferred Shares as to dividend rights and/or rights on liquidation, dissolution or winding up of the Corporation. Specifically, the terms provide for the payment of a non-cumulative quarterly dividend, payable in arrears, which the Corporation accrues as earned over the period that the Series B Preferred Shares are outstanding. The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement) from 1% to 5% per annum and, thereafter, for the eleventh through the first half of the nineteenth dividend periods, from 1% to 7%. In general, the dividend rate decreases as the level of the Bank’s QSBL increases. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%. During 2012, the dividend rate ranged between 1% and 3.39%. Such dividends are not cumulative but the Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level.

In addition, the Series B Preferred Shares are non-voting except in limited circumstances. In the event that the Corporation has not timely declared and paid dividends on the Series B Preferred Shares for six dividend periods or more, whether or not consecutive, and shares of Series B Preferred Stock with an aggregate liquidation preference of at least $25,000,000 are still outstanding, the Treasury may designate two additional directors to be elected to the Corporation’s Board of Directors. Subject to the approval of the Bank’s federal banking regulator, the Federal Reserve, the Corporation may redeem the Series B Preferred Shares at any time at the Corporation’s option, at a redemption price equal to the liquidation preference per share plus the per share amount of any unpaid dividends for the then-current period through the date of the redemption. The Series B Preferred Shares are includable in Tier I capital for regulatory capital.

On October 26, 2011, the Corporation completed the repurchase of a warrant held by the United States Treasury Department. The 10-year warrant was issued on January 29, 2009 as part of the Corporation's participation in the TARP CPP, and entitled the Treasury to purchase 133,475 shares of Stewardship Financial Corporation stock at an exercise price of $11.24 per share. The Corporation paid a total of $107,398 to the Treasury to repurchase the warrant.

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INCOME TAXES (Details 2) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Deferred tax assets:
Allowance for loan losses	$ 4,250,000	$ 4,635,000
Stock compensation		107,000
Nonaccrual loan interest	1,112,000	1,136,000
Depreciation	425,000	406,000
Contribution carry forward	253,000	276,000
State capital loss carry forward	165,000	17,000
Unrealized loss on fair value of interest rate swap	295,000	325,000
Alternate minimum tax	307,000
[DeferredTaxAssetsGross]	6,807,000	6,902,000
Valuation reserve	(179,000)	(129,000)
[DeferredTaxAssetsNet]	6,628,000	6,773,000
Deferred tax liabilities:
Unrealized gains on securities available for sale	607,000	1,221,000
Other	4,000	4,000
[DeferredTaxLiabilities]	611,000	1,225,000
Net deferred tax assets	$ 6,017,000	$ 5,548,000

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DEPOSITS

12 Months Ended

Dec. 31, 2012

Deposits:

DEPOSITS

Note 7. DEPOSITS

	December 31,
	2012		2011
Noninterest-bearing demand	$	124,286,000	$	115,776,000
Interest-bearing checking accounts		177,516,000		175,514,000
Money market accounts		63,955,000		73,544,000
Total interest-bearing demand		241,471,000		249,058,000
Statement savings and clubs		60,478,000		51,769,000
Business savings		7,860,000		6,198,000
Total savings		68,338,000		57,967,000
IRA investment and variable rate savings		35,058,000		38,257,000
Money market certificates		121,101,000		132,494,000
Total certificates of deposit		156,159,000		170,751,000
Total interest-bearing deposits		465,968,000		477,776,000
Total deposits	$	590,254,000	$	593,552,000

Certificates of deposit with balances of $100,000 or more at December 31, 2012 and 2011, totaled $94,883,000 and $102,348,000, respectively.

The scheduled maturities of certificates of deposit were as follows:

	December 31,
2013	$	89,470,000
2014		45,159,000
2015		9,625,000
2016		8,858,000
2017		3,047,000
	$	156,159,000

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 8) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Current	$ 423,126,000	$ 437,326,000
Past Due and non accrual	17,297,000	19,087,000
Total Loans	440,423,000	456,413,000
Residential real estate
Current	66,626,000	53,915,000
Past Due and non accrual	574,000	779,000
Total Loans	67,200,000	54,694,000
Consumer loan secured by real estate
Current	30,268,000	36,978,000
Past Due and non accrual	714,000	1,300,000
Total Loans	30,982,000	38,278,000
Consumer loan - Other
Current	624,000	1,082,000
Past Due and non accrual		4,000
Total Loans	624,000	1,086,000
Residential real estate and consumer loan
Current		91,975,000
Past Due and non accrual		2,083,000
Total Loans		$ 94,058,000

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PREMISES AND EQUIPMENT, NET

12 Months Ended

Dec. 31, 2012

Premises And Equipment Net

PREMISES AND EQUIPMENT, NET

Note 5. PREMISES AND EQUIPMENT, NET

The balance of premises and equipment consists of the following at December 31, 2012 and 2011:

	December 31,
	2012		2011
Land	$	2,999,000	$	2,999,000
Buildings and improvements		2,883,000		2,936,000
Leasehold improvements		2,244,000		2,244,000
Furniture, fixtures and equipment		3,034,000		3,219,000
		11,160,000		11,398,000
Less: accumulated depreciation and amortization		5,515,000		5,297,000
Total premises & equipment, net	$	5,645,000	$	6,101,000

Amounts charged to net occupancy expense for depreciation and amortization of banking premises and equipment amounted to $532,000 and $594,000 in 2012 and 2011, respectively.

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OTHER REAL ESTATE OWNED

12 Months Ended

Dec. 31, 2012

OtherRealEstateOwnedAbstract

OTHER REAL ESTATE OWNED

Note 6. OTHER REAL ESTATE OWNED

The balance of other real estate owned consists of the following at December 31, 2012 and 2011:

	December 31,
	2012		2011
Acquired by foreclosure or deed in lieu of foreclosure	$	1,058,000	$	3,873,000
In-substance foreclosure		—		1,453,000
Allowance for losses on other real estate owned		—		(38,000	)
Other real estate owned, net	$	1,058,000	$	5,288,000

Activity in the allowance for losses on other real estate owned was as follows:

	For the year ended December 31,
	2012			2011
Beginning of year	$	38,000		$	—
Additions charged to expense		188,000			38,000
Reductions from sales of other real estate owned		(226,000	)		—
End of year	$	—		$	38,000

Net gain on sale of other real estate owned totaled $429,000 and $10,000 for the year ended December 31, 2012 and 2011, respectively.

Expenses related to other real estate owned include:

	For the year ended December 31,
	2012		2011
Provision for unrealized losses	$	188,000	$	38,000
Operating expenses, net of rental income		415,000		57,000
	$	603,000	$	95,000

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BORROWINGS

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

BORROWINGS

Note 8. BORROWINGS

Federal Home Loan Bank of New York Advances

The following table presents Federal Home Loan Bank of New York ("FHLB-NY") advances by maturity date:

	December 31, 2012					December 31, 2011
			Weighted Average					Weighted Average
Advances maturing	Amount		Rate			Amount		Rate
Within one year	$	—		—	%	$	7,700,000		1.30	%
After one year, but within two years		—		—	%		—		—	%
After two years, but within three years		—		—	%		5,000,000		1.72	%
After three years, but within four years		10,000,000		1.64	%		—		—	%
After four years, but within five years		5,000,000		1.16	%		10,000,000		1.64	%
After five years		10,000,000		1.85	%		10,000,000		1.85	%
	$	25,000,000		1.63	%	$	32,700,000		1.64	%

During the fiscal years 2012 and 2011, the maximum amount of FHLB-NY advances outstanding at any month end was $36.8 million and $36.0 million, respectively. The average amount of advances outstanding during the year ended December 31, 2012 and 2011 was $26.9 million and $33.3 million, respectively.

On September 21, 2012 the Corporation refinanced borrowings with the FHLB in the amount of $5 million. The FHLB amount that was repaid had a rate of 1.72% and a remaining average life of 1.9 years. The new borrowing has a stated rate of 1.16% and an average life of 5.0 years. In connection with the repayment, the Corporation incurred a prepayment premium of $135,000 which is being amortized into earnings over the life of the new borrowings resulting in an effective interest rate for the borrowings of 1.70%.

On August 19, 2011 the Corporation refinanced borrowings with the FHLB in the amount of $15.0 million. The FHLB advances repaid had a blended rate of 3.30% and an average life of 1.8 years. The new borrowings have a blended stated rate of 1.67% and an average life of 4.0 years. In connection with the repayment, the Corporation incurred a prepayment penalty of $814,000. The prepayment penalty is being amortized into earnings over the life of the new borrowings resulting in an effective interest rate for the borrowings of 2.75%. In addition, on December 14, 2011 the Corporation prepaid a borrowing with the FHLB in the amount of $5 million. This advance had a rate of 1.85% and a remaining life of 3.2 years. This transaction resulted in a prepayment penalty of $268,000 which was fully expensed in 2011 and is included in miscellaneous expense on the Consolidated Statement of Income.

At December 31, 2012, FHLB advances totaling $10.0 million had a quarterly call feature which has reached its first call date.

Advances from the FHLB-NY are all fixed rate borrowings and are secured by a blanket assignment of the Corporation's unpledged, qualifying mortgage loans and by mortgage-backed securities or investment securities. The loans remain under the control of the Corporation. Securities are maintained in safekeeping with the FHLB-NY. As of December 31, 2012 and 2011, the advances were collateralized by $55.2 million and $37.7 million, respectively, of first mortgage loans under the blanket lien arrangement. Additionally, the advances were collateralized by $5.3 million and $14.3 million of investment securities as of December 31, 2012 and 2011, respectively. Based on the collateral the Corporation was eligible to borrow up to a total of $60.5 million at December 31, 2012 and $52.0 million at December 31, 2011.

The Corporation has the ability to borrow overnight with the FHLB-NY. There were no overnight borrowings with the FHLB-NY at December 31, 2012. At December 31, 2011 there was $4.7 million in overnight borrowings with the FHLB-NY. The overall borrowing capacity is contingent on available collateral to secure borrowings and the ability to purchase additional activity-based capital stock of the FHLB-NY.

The Corporation may also borrow from the Discount Window of the Federal Reserve Bank of New York based on the market value of collateral pledged. At December 31, 2012 and 2011, the borrowing capacity at the Discount Window was $5.1 million. In addition, the Corporation had available overnight variable repricing lines of credit with other correspondent banks totaling $11 million on an unsecured basis. There were no borrowings under these lines of credit at December 31, 2012 and 2011.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase represent financing arrangements.

Included in the balance of securities sold under agreements to repurchase is a wholesale repurchase agreement with a broker with a maturity in 2014. The borrowing has a fixed interest rate of 3.25% for the first year and then converted to a floating rate at 9.00% minus 3-month LIBOR measured on a quarterly basis with a 5.15% cap and a 0.0% floor. This repurchase agreement is collateralized by agency securities maintained in safekeeping with the broker. On September 25, 2012 the Corporation repaid $7 million of the original $14 million wholesale repurchase agreement. In connection with the repayment, the Corporation incurred a prepayment premium of $691,000 which is included in noninterest expenses.

The remaining balances at December 31, 2012 as well as the balances at December 31, 2011 were securities sold to Bank customers at fixed rates with maturities varying from 6 months to one year. These securities were maintained in a separate safekeeping account within the Corporation's control.

At December 31, 2012 and 2011, securities sold under agreements to repurchase were collateralized by U.S. Treasury and U.S. government-sponsored agency securities having a carrying value of approximately $11,002,000 and $19,269,000, respectively.

Information concerning securities sold under agreements to repurchase is summarized as follows:

	December 31,
	2012			2011
Balance	$	7,343,000		$	14,342,000
Weighted average interest rate at year end		4.92	%		5.04	%
Maximum amount outstanding at any month end
during the year	$	14,342,000		$	16,993,000
Average amount outstanding during the year	$	12,468,000		$	15,246,000
Average interest rate during the year		5.10	%		4.82	%

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OTHER REAL ESTATE OWNED (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Other Real Estate Owned Details
Acquired by foreclosure or deed in lieu of foreclosure	$ 1,058,000	$ 3,873,000
In-substance foreclosure		1,453,000
Allowance for losses on other real estate owned		(38,000)
Other real estate owned, net	$ 1,058,000	$ 5,288,000

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COMMITMENTS AND CONTINGENCIES (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Commitments
Rental Expense	1,153,000	1,132,000
Unused lines of Credit
Commitments	60,000,000
Standby Letters of Credit
Commitments	1,400,000
Credit commitment due to expire in next twelve months	1,300,000
Residential real estate
Commitment to extend credit at variable rates	417,000
Variable interest rate committed to	3.13%
Commitment to extend credit at fixed rates	1,800,000
Fixed interest rate agreed to	3.87%
Commercial, construction and home equity loan commitments
Commitment to extend credit at variable rates	9,300,000
Variable interest rate committed to	3.88%
Commitment to extend credit at fixed rates	140,000
Fixed interest rate agreed to	4.88%
Home Equity Line of Credit | Unused lines of Credit
Commitments	13,500,000
Cash Overdraft | Unused lines of Credit
Commitments	4,800,000
Commercial and Construction | Unused lines of Credit
Commitments	$ 41,700,000

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OTHER REAL ESTATE OWNED (Details 2) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Other Real Estate Owned Details 2
Provision for unrealized losses	$ 188,000	$ 38,000
Operating expenses, net of rental income	415,000	57,000
[RealEstateOwnedExpenses]	$ 603,000	$ 95,000

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OTHER REAL ESTATE OWNED (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Other Real Estate Owned Details Narrative
Gain on sale of other real estate owned	$ 429,000	$ 10,000

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 1) (Fair Value Measured on Non Recurring Basis, USD $)	Dec. 31, 2012	Dec. 31, 2011
Carrying Value
Assets, Fair Value
Commercial loan secured by real estate	$ 6,490,000	$ 5,106,000
Commercial loan - Other
Commercial real estate	10,445,000	9,702,000
Construction - Commercial	4,373,000	8,138,000
Construction - Residential		250,000
Residential real estate	413,000	779,000
Consumer loan secured by real estate	800,000	891,000
Other real estate owned	1,058,000	5,288,000
Impaired loans, Fair Value	25,579,000	30,154,000
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets, Fair Value
Commercial loan secured by real estate
Commercial loan - Other
Commercial real estate
Construction - Commercial
Construction - Residential
Residential real estate
Consumer loan secured by real estate
Other real estate owned
Impaired loans, Fair Value
Significant Other Observable Inputs (Level 2)
Assets, Fair Value
Commercial loan secured by real estate
Commercial loan - Other
Commercial real estate
Construction - Commercial
Construction - Residential
Residential real estate
Consumer loan secured by real estate
Other real estate owned
Impaired loans, Fair Value
Significant Unobservable Inputs (Level 3)
Assets, Fair Value
Commercial loan secured by real estate	6,490,000	5,106,000
Commercial loan - Other
Commercial real estate	10,445,000	9,702,000
Construction - Commercial	4,373,000	8,138,000
Construction - Residential		250,000
Residential real estate	413,000	779,000
Consumer loan secured by real estate	800,000	891,000
Other real estate owned	1,058,000	5,288,000
Impaired loans, Fair Value	$ 25,579,000	$ 30,154,000

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DEPOSITS (Tables)

12 Months Ended

Dec. 31, 2012

Deposits Tables

Schedule of Deposit Liabilities

	December 31,
	2012		2011
Noninterest-bearing demand	$	124,286,000	$	115,776,000
Interest-bearing checking accounts		177,516,000		175,514,000
Money market accounts		63,955,000		73,544,000
Total interest-bearing demand		241,471,000		249,058,000
Statement savings and clubs		60,478,000		51,769,000
Business savings		7,860,000		6,198,000
Total savings		68,338,000		57,967,000
IRA investment and variable rate savings		35,058,000		38,257,000
Money market certificates		121,101,000		132,494,000
Total certificates of deposit		156,159,000		170,751,000
Total interest-bearing deposits		465,968,000		477,776,000
Total deposits	$	590,254,000	$	593,552,000

Schedule of maturities of time deposits

The scheduled maturities of certificates of deposit were as follows:

	December 31,
2013	$	89,470,000
2014		45,159,000
2015		9,625,000
2016		8,858,000
2017		3,047,000
	$	156,159,000

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Loans participated by the Corporation to other organizations, recorded off-balance sheet	$ 20,559,000	$ 31,060,000
Loans receivable from related parties	2,927,000	2,905,000
Draws	1,228,000
Repayments	1,206,000
Total value of modified loans in troubled debt restructurings	11,700,000	15,100,000
Trouble debt restructuring classified as performing	10,400,000	6,000,000
Specific reserve related to TDR	246,000	1,200,000
Construction loan, Classified as troubled debt restructuring	241,000	416,000
Troubled Debt Restructurings, increase in allowance for loan losses	2,400,000
Troubled debt restructurings, charge-offs	3,300,000
Allowance for loan losses, increase	1,600,000	1,100,000
Commercial loan secured by real estate
Loans past due over 90 days still accruing	$ 237,000
Number of loans past due over 90 days still accruing	1

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STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2012

Stock-Based Compensation

STOCK-BASED COMPENSATION

Note 13. STOCK-BASED COMPENSATION

At December 31, 2012, the Corporation had various types of stock award programs.

Director Stock Plan

The Director Stock Plan permits members of the Board of Directors of the Bank to receive any monthly Board of Directors’ fees in shares of the Corporation’s common stock, rather than in cash. Shares are purchased for directors in the open market and resulted in purchases of 5,591 and 3,715 shares for 2012 and 2011, respectively. At December 31, 2012, the Corporation had 540,316 shares authorized but unissued for this plan.

Employee Stock Option Plan

The Employee Stock Option Plan provided for options to purchase shares of common stock to be issued to employees of the Corporation at the discretion of the Compensation Committee. There were no options granted during 2012 or 2011. While there are still options outstanding under this plan, the plan does not allow for additional grants after May 2006. Under the plan, the exercise price of options may be paid in cash or with shares already owned. There were no options exercised during 2012 or 2011. A summary of the status of the qualified stock options as of December 31, 2012 and changes during the year then ended is presented as follows:

	2012
			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at beginning of year		7,598	$	11.19
Exercised		—		—
Forfeited		844		11.19
Outstanding at end of year		6,754	$	11.19
Intrinsic value at year end	$	—
Options exercisable at year end		6,754
Intrinsic value of options exercisable	$	—
Weighted-average remaining contractual term (years)		0.54

Non-Employee Directors Stock Option Plan

The 2006 Stock Option Plan for Non-Employee Directors provided for options to purchase shares of common stock to be granted to non-employee directors of the Corporation. The options granted under the plan had exercise prices which represented market price of the stock at the date of grant. No options have been granted since 2009. Under this plan, options vested in equal installments over a period of five years on an annual basis. Options expired on the earlier of the sixth anniversary of the date of the grant or May 15, 2012. Therefore, at December 31, 2012 all options had expired.

Total compensation cost that has been charged against income for this plan was $19,000 for the year ended December 31, 2011. There was no compensation expense for the year ended December 31, 2012.

A summary of the status of the nonqualified stock options issued under the 2006 Stock Option Plan for Non-Employee Directors as of December 31, 2012 is presented below:

	2012
				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at beginning of year		57,130		$	11.02
Expired		(57,130	)		11.02
Outstanding at end of year		—		$	—

No options were exercised under the 2006 Stock Option Plan for Non-Employee Directors during the years ended December 31, 2012 and 2011.

Stock Incentive Plan

The 2010 Stock Incentive Plan covers both employees and directors. The purpose of the 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. During 2011 each non-employee director received an award of 250 shares under the 2010 Stock Incentive Plan for a total of 2,500 shares. In addition, during 2011 5,145 shares were awarded to employees. Total cost that has been charged against income for this plan was $26,000 for the year ended December 31, 2011. No awards were granted during the year ended December 31, 2012. At December 31, 2012 the Corporation had 192,355 shares authorized but unissued for this plan.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2012

Fair Value Of Financial Instruments

FAIR VALUE OF FINANCIAL INSTRUMENTS

Note 18. 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) or 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 quoted market prices, if available (Level 1). For securities where quoted prices are not available, 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 the collateral, incorporating assumptions that experienced parties might use in estimating the value of such collateral (Level 3 inputs). At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Generally, impaired loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, the net book value recorded for the collateral on the borrower’s financial statements, or aging reports. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the borrower and borrower’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals are generally obtained to support the fair value of collateral. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by licensed appraisers whose qualifications and licenses have been reviewed and verified by the Corporation. The Corporation utilizes a third party to order appraisals and, once received, review the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. 

Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. In addition, appraisers may make adjustments to the sales price of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 12% discount to real estate appraised values to cover disposition / selling costs and to reflect the potential price reductions in the market necessary to complete an expedient transaction and to factor in impact of the perception that a transaction being completed by a bank may result in further price reduction pressure.

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
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2012
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,006,000	$	4,006,000	$	—	$	—
U.S. government -
sponsored agencies		37,255,000		—		37,255,000		—
Obligations of state and
political subdivisions		14,170,000		—		14,170,000		—
Mortgage-backed securities-
residential		105,428,000		—		105,428,000		—
Asset-backed securities		9,884,000		—		9,884,000		—
Corporate bonds		495,000		—		495,000		—
Other equity investments		3,462,000		3,402,000		60,000		—
Total available-for-
sale securities	$	174,700,000	$	7,408,000	$	167,292,000	$	—
Liabilities:
Interest rate swap	$	812,000	$	—	$	812,000	$	—

	December 31, 2011
Assets:
Available-for-sale securities
U.S. Treasuries	$	4,050,000	$	4,050,000	$	—	$	—
U.S. government -
sponsored agencies		20,744,000		—		20,744,000		—
Obligations of state and
political subdivisions		9,318,000		—		9,318,000		—
Mortgage-backed securities-
residential		133,467,000		—		133,467,000		—
Other equity investments		3,346,000		3,286,000		60,000		—
Total available-for-
sale securities	$	170,925,000	$	7,336,000	$	163,589,000	$	—
Liabilities:
Interest rate swap	$	893,000	$	—	$	893,000	$	—

There were no transfers between Level 1 and Level 2 during 2012 and 2011.

Assets and Liabilities Measured on a Non-Recurring Basis

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

			Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	December 31, 2012
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,490,000	$	—	$	—	$	6,490,000
Other		—		—		—		—
Commercial real estate		10,445,,000		—		—		10,445,000
Construction:
Commercial		4,373,000		—		—		4,373,000
Residential		—		—		—		—
Residential real estate		413,000		—		—		413-
Consumer:
Secured by real estate		800,000		—		—		800,000
Other real estate owned		1,058,000		—		—		1,058,000
	$	25,579,000	$	—	$	—	$	25,579,000

	December 31, 2011
Assets:
Impaired loans
Commercial:
Secured by real estate	$	5.106,000	$	—	$	—	$	5,106,000
Other		—		—		—		—
Commercial real estate		9,702,000		—		—		9,702,000
Construction:
Commercial		8,138,000		—		—		8,138,000
Residential		250,000		—		—		250,000
Residential real estate		779,000		—		—		779,000
Consumer:
Secured by real estate		891,000		—		—		891,000
Other real estate owned		5,288,000		—		—		5,288,000
	$	30,154,000	$	—	$	—	$	30,154,000

Collateral dependent impaired loans measured for impairment using the fair value of the collateral had a recorded investment of $22,699,000, with a valuation allowance of $178,000, resulting in an additional provision for loan losses of $4,501,000 for the year ended December 31, 2012. 

Collateral dependent impaired loans had a recorded investment of $25,478,000, with a valuation allowance of $612,000, resulting in an additional provision for loan losses of $4,915,000 for the year ended December 31, 2011.

OREO had a recorded investment of $1,058,000 with no valuation allowances at December 31, 2012. OREO had a recorded investment of $5,326,000 with a valuation allowance of $38,000 at December 31, 2011. Additional valuation allowances of $188,000 and $38,000 were recorded for the years ended December 31, 2012 and 2011, respectively.

For the Level 3 assets measured at fair value on a non-recurring basis at December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

Assets	Fair Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans	$	22,521,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.	5% - 10%
				Estimated selling costs.	7%
Other real estate owned	$	1,058,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.	5% - 10%
				Estimated selling costs.	7%

Fair value estimates for the Corporation’s financial instruments are summarized below:

			Fair  Value  Measurements Using
	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	At December 31, 2012
Financial assets:
Cash and cash equivalents	$	21,016,000		$	21,016,000	$	—	$	—
Securities available-for-sale		174,700,000			7,408,000		167,292,000		—
Securities held to maturity		29,718,000			—		31,768,000		—
FHLB-NY stock		2,213,000			N/A		N/A		N/A
Mortgage loans held for sale		784,000			—		784,000		—
Loans, net		429,832,000			—		—		449,041,000
Accrued interest receivable		2,372,000			2,000		908,000		1,462,000
Financial liabilities
Deposits		590,254,000			434,569,000		157,219,000		—
FHLB-NY advances		25,000,000			—		25,825,000		—
Securities sold under
agreements to repurchase		7,343,000			—		7,883,000		—
Subordinated debenture		7,217,000			—		—		7,112,000
Accrued interest payable		560,000			1,000		540,000		19,000
Interest rate swap		812,000			—		812,000		—

	At December 31, 2011
	Carrying		Estimated
	Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	13,698,000	$	13,698,000
Securities available-for-sale		170,925,000		170,925,000
Securities held to maturity		38,354,000		40,984,000
FHLB-NY stock		2,478,000		N/A
Net loans, including impaired loans		444,803,000		453,604,000
Accrued interest receivable		2,618,000		2,618,000
Financial liabilities:
Deposits		593,552,000		595,939,000
FHLB-NY Advances		32,700,000		33,482,000
Securities sold under agreements to repurchase		14,342,000		14,786,000
Subordinated debenture		7,217,000		6,297,000
Accrued interest payable		775,000		775,000
Interest rate swap		893,000		893,000

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 and is classified as Level 1.

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.

Mortgage loans held for sale – Loans in this category have been committed for sale to third party investors at the current carrying amount resulting in a Level 2 classification.

Loans, net – 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 loans. The fair value of loans is estimated by discounting cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans resulting in a Level 3 classification.

Accrued interest receivable – The carrying amount approximates fair value.

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 resulting in a Level 1 classification. The fair value of certificates of deposit is based on the discounted value of cash flows resulting in a Level 2 classification. The discount rate is estimated using market discount rates which reflect interest rate risk inherent in the certificates of deposit. 

FHLB-NY advances – With respect to FHLB-NY borrowings, 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 and credit risk inherent in the term borrowings resulting in a Level 2 classification.

Securities sold under agreements to repurchase – The carrying value approximates fair value due to the relatively short time before maturity resulting in a Level 2 classification.

Subordinated debenture – The fair value of the subordinated debenture is based on the discounted value of the cash flows. The discount rate is estimated using market rates which reflect the interest rate risk inherent in the debenture resulting in a Level 3 classification.

Accrued interest payable – The carrying amount approximates fair value.

Interest rate swap – The methods for determining fair values were described previously.

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 December 31, 2012 and 2011 the fair value of such commitments were not material.

Limitations

The preceding fair value estimates were made at December 31, 2012 and 2011 based on pertinent market data and relevant information on the financial instruments. These estimates do not include any premiums 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 approximations were made solely for on and off balance sheet financial instruments at December 31, 2012 and 2011, 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.

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PARENT COMPANY ONLY (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Cash and due from banks	$ 19,962,000	$ 13,289,000
Securities available for sale	174,700,000	170,925,000
Securities held to maturity	29,718,000	38,354,000
Accrued interest receivable	2,372,000	2,618,000
Other assets	10,580,000	9,697,000
Total assets	688,388,000	708,818,000
Subordinated debentures	7,217,000	7,217,000
Total stockholders' equity	56,346,000	57,792,000	52,132,000
Total liabilities and stockholders' equity	688,388,000	708,818,000
Parent Company
Cash and due from banks	263,000	861,000
Securities available for sale	1,004,000
Securities held to maturity		993,000
Investment in subsidiary	62,502,000	63,103,000
Accrued interest receivable	5,000	12,000
Other assets	452,000	646,000
Total assets	64,226,000	65,615,000
Subordinated debentures	7,217,000	7,217,000
Other Liabilities	663,000	606,000
Total stockholders' equity	56,346,000	57,792,000
Total liabilities and stockholders' equity	$ 64,226,000	$ 65,615,000

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SECURITIES - AVAILABLE-FOR-SALE AND HELD TO MATURITY (Details 1) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Held to maturity securities
Amortized Cost	$ 29,718,000	$ 38,354,000
Gross Unrealized Gains	2,050,000	2,630,000
Gross Unrealized Losses
Fair Value	31,768,000	40,984,000
U.S. government-sponsored agencies
Held to maturity securities
Amortized Cost	260,000	2,770,000
Gross Unrealized Gains	46,000	80,000
Gross Unrealized Losses
Fair Value	306,000	2,850,000
Obligations of state and political and subdivisions
Held to maturity securities
Amortized Cost	22,787,000	24,575,000
Gross Unrealized Gains	147,000	1,705,000
Gross Unrealized Losses
Fair Value	24,194,000	26,280,000
Mortgage-backed securities - residential
Held to maturity securities
Amortized Cost	6,671,000	11,009,000
Gross Unrealized Gains	597,000	845,000
Gross Unrealized Losses
Fair Value	$ 7,268,000	$ 11,854,000

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INTEREST RATE SWAP (Tables)

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of Derivative Summary information

Summary information as of December 31, 2012 about the interest rate swap designated as a cash flow hedge 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	($812,000)

Schedule of Derivatives recorded in accumulated comprehensive income

The following table presents the after tax net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the periods indicated.

	For the year ended December 31, 2012
	Amount of gain (loss) recognized in OCI (Effective Portion)		Amount of gain (loss) reclassified from OCI to interest income		Amount of gain (loss) recognized in other noninterest income (Ineffective Portion)
Interest rate contract	$	49,000	$	—	$	—

	For the year ended December 31, 2011
	Amount of gain (loss) recognized in OCI (Effective Portion)			Amount of gain (loss) reclassified from OCI to interest income		Amount of gain (loss) recognized in other noninterest income (Ineffective Portion)
Interest rate contract	$	(138,000	)	$	—	$	—

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Consolidated Statements of Comprehensive Income (USD $)	3 Months Ended		12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Income Statement [Abstract]
Net income	$ (260,000)	$ (962,000)	$ 520,000	$ 684,000
Other comprehensive income:
Change in unrealized holding gains on securities available for sale arising during the period			763,000	3,837,000
Reclassification adjustment for gains in net income			(2,340,000)	(1,161,000)
Net unrealized (losses) gains			(1,577,000)	2,676,000
Tax effect			614,000	(1,038,000)
Net unrealized gain (losses), net of tax amount			(963,000)	1,638,000
Change in fair value of interest rate swap			81,000	(230,000)
Tax effect			(32,000)	92,000
Change in fair value of interest rate swap, net of tax amount			49,000	(138,000)
Total other comprehensive income (loss)			(914,000)	1,500,000
Total comprehensive income (loss)			(394,000)	2,184,000
The following is a summary of the accumulated other comprehensive income balances, net of tax
Unrealized gains on securities available-for-sale	947,000	947,000	947,000	947,000
Unrealized loss on fair value of interest rate swap	(487,000)	(536,000)	(487,000)	(536,000)
Accumulated other comprehensive income, net	$ 460,000	$ 1,374,000	$ 460,000	$ 1,374,000

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INTEREST RATE SWAP (Details) (USD $)	Dec. 31, 2012
Interest Rate Swap Details
Interest rate swap, designated as cash flow hedge notional amount	$ 7,000,000

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RESTRICTIONS ON CASH AND DUE FROM BANKS

12 Months Ended

Dec. 31, 2012

Cash and Cash Equivalents [Abstract]

RESTRICTIONS ON CASH AND DUE FROM BANKS

Note 2. RESTRICTIONS ON CASH AND DUE FROM BANKS

Prior to July 26, 2012, cash reserves were required to be maintained on deposit with the Federal Reserve Bank based on the Bank’s deposits. The average amounts of the reserves on deposit for 2012 through this date as well as for the year ended December 31, 2011 were approximately $25,000. After July 26, 2012 no required reserves were held at the Federal Reserve Bank.

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 6) (USD $)	Dec. 31, 2012 N	Dec. 31, 2011 N
Number of Loans in Troubled Debt Restructurings	18	36
TDRs arising during period Pre-Modification Recorded Investment	$ 6,655,000	$ 12,505,000
TDRs arising during period Post-Modification Recorded Investment	6,655,000	12,505,000
Commercial loan secured by real estate
Number of Loans in Troubled Debt Restructurings	9	15
TDRs arising during period Pre-Modification Recorded Investment	1,875,000	3,002,000
TDRs arising during period Post-Modification Recorded Investment	1,875,000	3,002,000
Commercial loan - Other
Number of Loans in Troubled Debt Restructurings	7	11
TDRs arising during period Pre-Modification Recorded Investment	3,735,000	678,000
TDRs arising during period Post-Modification Recorded Investment	3,735,000	678,000
Commercial real estate
Number of Loans in Troubled Debt Restructurings	1	3
TDRs arising during period Pre-Modification Recorded Investment	755,000	2,864,000
TDRs arising during period Post-Modification Recorded Investment	755,000	2,864,000
Construction - Commercial
Number of Loans in Troubled Debt Restructurings	1	7
TDRs arising during period Pre-Modification Recorded Investment	300,000	5,961,000
TDRs arising during period Post-Modification Recorded Investment	300,000	5,961,000
Construction - Residential
Number of Loans in Troubled Debt Restructurings
TDRs arising during period Pre-Modification Recorded Investment
TDRs arising during period Post-Modification Recorded Investment
Residential real estate
Number of Loans in Troubled Debt Restructurings
TDRs arising during period Pre-Modification Recorded Investment
TDRs arising during period Post-Modification Recorded Investment
Consumer loan secured by real estate
Number of Loans in Troubled Debt Restructurings
TDRs arising during period Pre-Modification Recorded Investment
TDRs arising during period Post-Modification Recorded Investment
Consumer loan - Other
Number of Loans in Troubled Debt Restructurings
TDRs arising during period Pre-Modification Recorded Investment
TDRs arising during period Post-Modification Recorded Investment
Other
Number of Loans in Troubled Debt Restructurings
TDRs arising during period Pre-Modification Recorded Investment
TDRs arising during period Post-Modification Recorded Investment

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INCOME TAXES (Details) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Income Taxes Details
Federal									$ (440,000)	$ 1,050,000
State									78,000	385,000
Current income tax (benefit) expense									(362,000)	1,435,000
Deferred tax expense (benefit):
Federal									158,000	(1,432,000)
State									(93,000)	(432,000)
Valuation allowance									50,000	14,000
Deferred tax (benefit) expense									115,000	(1,850,000)
Income Tax Expense	$ (440,000)	$ 46,000	$ (159,000)	$ 306,000	$ (847,000)	$ 113,000	$ 128,000	$ 191,000	$ (247,000)	$ (415,000)

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DEPOSITS (Details 1) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Deposits Details 1
2013	$ 89,470,000
2014	45,159,000
2015	9,625,000
2016	8,858,000
2017	3,047,000
Total certificates of deposit	$ 156,159,000	$ 170,751,000

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PARENT COMPANY ONLY

12 Months Ended

Dec. 31, 2012

Parent Company Only

PARENT COMPANY ONLY

Note 19. PARENT COMPANY ONLY

The Corporation was formed in January 1995 as a bank holding company to operate its wholly-owned subsidiary, Atlantic Stewardship Bank. The earnings of the Bank are recognized by the Corporation using the equity method of accounting. Accordingly, the Bank dividends paid reduce the Corporation's investment in the subsidiary. Condensed financial statements are presented below:

Condensed Statements of Financial Condition

	December 31,
	2012		2011
Assets
Cash and due from banks	$	263,000	$	861,000
Securities available-for-sale		1,004,000		—
Securities held to maturity		—		993,000
Investment in subsidiary		62,502,000		63,103,000
Accrued interest receivable		5,000		12,000
Other assets		452,000		646,000
Total assets	$	64,226,000	$	65,615,000
Liabilities and Shareholders’ Equity
Subordinated debentures	$	7,217,000	$	7,217,000
Other liabilities		663,000		606,000
Shareholders' equity		56,346,000		57,792,000
Total liabilities and Shareholders' equity	$	64,226,000	$	65,615,000

Condensed Statements of Income

	Years ended December 31,
	2012			2011
Interest income - securities available-for-sale	$	9,000		$	23,000
Interest income - securities held to maturity		15,000			54,000
Dividend income		675,000			—
Other income		15,000			27,000
Total income		714,000			104,000
Interest expense		506,000			504,000
Other expenses		319,000			306,000
Total expenses		825,000			810,000
Loss before income tax benefit		(111,000	)		(706,000	)
Tax benefit		(266,000	)		(239,000	)
Income (loss) before equity in undistributed earnings of subsidiary		155,000			(467,000	)
Equity in undistributed earnings of subsidiary		365,000			1,151,000
Net income		520,000			684,000
Dividends on preferred stock and accretion		352,000			558,000
Net income available to common shareholders	$	168,000		$	126,000

Condensed Statements of Cash Flows

	Years ended December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	520,000		$	684,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary		(365,000	)		(1,151,000	)
Amortization of premiums and accretion of discounts, net		—			4,000
Gains on sales and calls of securities		(7,000	)		(19,000	)
Decrease in accrued interest receivable		7,000			4,000
(Increase) decrease in other assets		193,000			(102,000	)
Increase (decrease) in other liabilities		105,000			(29,000	)
Net cash provided by (used in) operating activities		453,000			(609,000	)
Cash flows from investing activities:
Purchase of securities available-for-sale		(1,499,000	)		—
Proceeds from principal repayments on securities available-for-sale		—			149,000
Proceeds from calls on securities available-for-sale		500,000			1,071,000
Proceeds from calls on securities held to maturity		1,000,000			—
Investment in subsidiary bank		—			(5,000,000	)
Net cash provided by (used in) investing activities		1,000			(3,780,000	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock		—			14,952,000
Repurchase of preferred stock and warrant		—			(10,108,000	)
Cash dividends paid on common stock		(886,000	)		(1,171,000	)
Cash dividends paid on preferred stock and accretion		(352,000	)		(383,000	)
Payment of discount on dividend reinvestment plan		(8,000	)		(15,000	)
Issuance of common stock		194,000			182,000
Net cash provided by (used in) financing activities		(1,052,000	)		3,457,000
Net decrease in cash and cash equivalents		(598,000	)		(932,000	)
Cash and cash equivalents - beginning		861,000			1,793,000
Cash and cash equivalents - ending	$	263,000		$	861,000

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REGULATORY CAPITAL REQUIREMENTS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Consolidated
Tier 1 Capital	$ 62,887,000	$ 63,418,000
Tier 1 Capital (to average assets) ratio	9.09%	8.86%
Minimum amount of Tier 1 Capital for adequacy purposes	27,682,000	28,634,000
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	4.00%	4.00%
Tier 1 Capital	62,887,000	63,418,000
Tier 1 Capital (to risk-weighted assets) ratio	13.63%	12.65%
Minimum amount of Tier 1 Capital for adequacy purposes	18,459,000	20,051,000
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	4.00%	4.00%
Total Capital	68,715,000	69,750,000
Total Capital (to risk-weighted assets) ratio	14.89%	13.91%
Minimum amount of capital for adequacy purposes	36,917,000	40,103,000
Minimum amount of capital for adequacy purposes, ratio	4.00%	4.00%
Bank
Tier 1 Capital	61,558,000	61,193,000
Tier 1 Capital (to average assets) ratio	8.91%	8.57%
Minimum amount of Tier 1 Capital for adequacy purposes	27,625,000	28,546,000
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	4.00%	4.00%
Minimum Tier 1 Capital required to be well-capitalized	34,531,000	35,683,000
Minimum Tier 1 Capital required to be well-capitalized, ratio	5.00%	5.00%
Tier 1 Capital	61,558,000	61,193,000
Tier 1 Capital (to risk-weighted assets) ratio	13.35%	12.22%
Minimum amount of Tier 1 Capital for adequacy purposes	18,440,000	20,023,000
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	4.00%	4.00%
Minimum Tier 1 Capital required to be well-capitalized	27,660,000	30,034,000
Minimum Tier 1 Capital required to be well-capitalized, ratio	6.00%	6.00%
Total Capital	67,380,000	67,516,000
Total Capital (to risk-weighted assets) ratio	14.62%	13.49%
Minimum amount of capital for adequacy purposes	36,880,000	40,046,000
Minimum amount of capital for adequacy purposes, ratio	4.00%	4.00%
Minimum Capital required to be well-capitalized	$ 46,100,000	$ 50,057,000
Minimum Capital required to be well-capitalized, ratio	10.00%	10.00%

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EARNINGS PER COMMON SHARE (Tables)

12 Months Ended

Dec. 31, 2012

Earnings Per Common Share Tables

Schedule of Earnings Per Common Share

The following reconciles the income available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share for 2012 and 2011:

	2012		2011
Net income	$	520,000	$	684,000
Dividends on preferred stock and accretion		352,000		558,000
Net income available to common shareholders	$	168,000	$	126,000
Weighted average common shares outstanding - basic		5,908,503		5,861,465
Effect of dilutive securities - stock options		—		—
Weighted average common shares outstanding - diluted		5,908,503		5,861,465
Earnings per common share:
Basic	$	0.03	$	0.02
Diluted	$	0.03	$	0.02

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BENEFIT PLANS

12 Months Ended

Dec. 31, 2012

Benefit Plans

BENEFIT PLANS

Note 12. BENEFIT PLANS

The Corporation has a noncontributory profit sharing plan covering all eligible employees. Contributions are determined by the Corporation’s Board of Directors on an annual basis. There was no profit sharing plan expense for the year ended December 31, 2012 or 2011.

The Corporation also has a 401(k) plan which covers all eligible employees. Participants may elect to contribute up to 100% of their salaries, not to exceed the applicable limitations as per the Internal Revenue Code. The Corporation, on an annual basis, may elect to match 50% of the participant’s first 5% contribution. Total 401(k) expense for the years ended December 31, 2012 and 2011 amounted to approximately $145,000 and $136,000, respectively.

During 1996, the Corporation adopted an Employee Stock Purchase Plan which allows all eligible employees to authorize a specific payroll deduction from his or her base compensation for the purchase of the Corporation’s Common Stock. Total stock purchases amounted to 7,589 and 8,824 shares during 2012 and 2011, respectively. At December 31, 2012, the Corporation had 194,519 shares reserved for issuance under this plan.