UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

FORM 10-Q

x Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~March 3031, ~~2011~~2012

-OR-

 Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to _____________.

CORNERSTONE FINANCIAL CORPORATION

(Exact name of registrant, as specified in its charter)

New Jersey 80-0282551

(State or other jurisdiction of incorporation (I.R.S. Employer

or organization) Identification No.)

6000 Midlantic Drive, Suite 120 S, Mount Laurel, New Jersey 08054

(Address of principal executive offices) Zip Code

Registrant's telephone number, including area code: (856) 439-0300

Securities registered pursuant to Section 12(b) of the Act: None

None

(Title of Class)

Securities registered pursuant to Section 12(g) of the Act:

Common stock, no par value

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __.

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 SD-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES X NO __.

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. (Check one):

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [X]

(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES __ NO X

As of ~~November~~May 1011, ~~2011~~2012, there were 1,954,~~428~~302 outstanding shares of the registrant's Common stock.

CORNERSTONE FINANCIAL CORPORATION

Contents

Pages

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements............................................................................................ 13

Consolidated Statements of Financial Condition at ~~September~~March 3031, ~~2011~~2012 (unaudited)

and December 31, ~~2010~~2011...............................................................................................................1.... 3

Consolidated Statements of Operations (unaudited) for the three months ended March 31,

~~September~~2012 ~~30,~~and 2011 ~~and 2010~~ …………………......………………………………………………………………..2…..4

Consolidated ~~Statements~~Statement of ~~Operations~~Comprehensive Income (unaudited) ~~for the nine months ended~~

~~September~~ for 30the three months ended March 31, ~~2011~~2012 and ~~2010………………………………………………………………………~~2011...3...................................................................... 5

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

for the ~~nine~~three months ended ~~September~~March 3031, 2012 and 2011.........................................................................~~.....4~~ 6

Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~three months ended

~~September~~March 3031, ~~2011~~2012 and ~~2010~~2011.......................................................................................................5.......... 7

Notes to Consolidated Financial Statements (unaudited) ................................................................ 6.... 8

Item 2. Management's Discussion and Analysis ................................................................................. 21

Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. .31..... 32

Item 4. Controls and Procedures................................................................................................... 31... 32

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.......................................................................................................... ........32

Item 1A. Risk Factors………………………………………………………………………………~~...32~~…… 33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................................... 3233

Item 3. Defaults upon Senior Securities..........................................................................................32.... 33

Item 4. ~~[removed~~Mine ~~and~~Safety ~~reserved]~~Disclosures.....................................................................................................32... 33

Item 5. Other Information..............................................................................................................32... 33

Item 6. Exhibits.............................................................................................................................32... 33

Signatures.........................................................................................................................................33... 34

Exhibit 31.1.......................................................................................................................................... 3435

Exhibit 31.2.......................................................................................................................................... 3536

Exhibit 32.1 ......................................................................................................................................... 3637

Exhibit 32.2 ......................................................................................................................................... 3738

~~Exhibit 101.INS* - XBRL Instance Document~~2

ExhibitCORNERSTONE 101.SCH*FINANCIAL - XBRL Taxonomy Extension SchemaCORPORATION

ExhibitCONSOLIDATED 101.CAL*STATEMENTS -OF XBRLFINANCIAL Taxonomy Extension Calculation Linkbase DocumentCONDITION

Exhibit 101.DEF* - XBRL Taxonomy Extension Definition Linkbase Document

(In thousands, except share data)	31-Mar-12 ____________________	31-Dec-11
Assets:	(Unaudited)
Cash and due from banks	$5,736	$5,039
Federal funds sold	36,500	32,800
Cash and cash equivalents	42,236	37,839
Investment securities:
Available for sale (amortized cost 2012- $87,008; 2011 - $83,232)	86,608	83,727
Loans receivable	234,316	241,917
Less allowance for loan losses	6,425	4,995
Loans receivable, net	$227,891	$236,922
Federal Home Loan Bank stock	763	1,438
Premises and equipment, net	7,912	7,710
Accrued interest receivable	1,768	1,577
Bank owned life insurance	6,257	6,206
Deferred taxes	2,128	1,233
Other real estate owned	6,062	5,262
Other assets	1,559	1,871
Total Assets	$383,184	$383,785

Liabilities:
Non-interest bearing deposits	38,001	29,963
Interest bearing deposits	204,238	201,066
Certificates of deposit	99,634	99,279
Total deposits	341,873	330,308
Advances from the Federal Home Loan Bank	10,000	25,000
Line of credit	5,000	5,000
Subordinated debt	3,000	3,000
Other liabilities	1,178	1,410
Unsettled Investment Security payable	4,000	-
Total Liabilities	365,051	364,718

Stockholders’ Equity:
Preferred Stock Series A: $0 par value; $1,000 per share stated value, authorized 1,000,000 shares; issued and outstanding 1,900 at March 31, 2012 and December 31, 2011, respectively.	1,900	1,900
Preferred Stock Series B: $0 par value; $20 per share stated value, authorized 10,000 shares; issued and outstanding 10,000 at March31, 2012 and December 31, 2011, respectively.	200	200
Common stock:	-	-
$0 par value: authorized 10,000,000 shares; issued and outstanding 1,954,302 at March,31, 2012 and December 31, 2011, respectively	-	-
Additional paid-in capital	17,770	17,735
Accumulated other comprehensive (loss) income	(240)	297
Retained deficit	(1,497)	(1,065)
Total Shareholders’ Equity	18,133	19,067
Total Liabilities and Shareholders’ Equity	$383,184	$383,785

~~Exhibit~~ See 101.LAB*accompanying -notes ~~XBRL~~to ~~Taxonomy~~consolidate ~~Extension~~financial ~~Labels Linkbase Document~~statements

~~Exhibit~~ CORNERSTONE 101.PRE*FINANCIAL ~~- XBRL Taxonomy Extension Presentation Linkbase Document~~CORPORATION

* Pursuant CONSOLIDATED toSTATEMENTS ~~Rule 406T~~OF ~~of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration~~ OPERATIONS

~~statement~~Three orMonths ~~prospectus~~Ended ~~for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of~~

Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


(In thousands, except per share data)	March 31, 2012	March 31, 2011
Interest Income	(Unaudited)	(Unaudited)
Interest and fees on loans	$ 3,183	$ 3,385
Interest on investment securities	784	886
Interest on federal funds	4	3
Total interest income	3,971	4,274

Interest Expense
Interest on deposits	717	905
Interest on borrowings	121	176
Total interest expense	838	1,081
Net interest income	3,133	3,193
Provision for loan losses	1,403	953
Net interest income after loan loss provision	1,730	2,240

Non-Interest Income
Service charges on deposit accounts	36	43
Bank owned life insurance income	51	40
Gain on sale of loans	82	156
Miscellaneous fee income	94	54
Total non-interest income	263	293

Non-Interest Expense
Salaries and employee benefits	1,503	1,377
Net occupancy	388	367
Data processing and other service costs	129	119
Professional services	219	158
Advertising and promotion	43	37
Other real estate owned expense	49	29
FDIC expense	115	133
Other operating expenses	219	148
Total non-interest expense	2,665	2,368

(Loss) income before income taxes	(672)	165
Income tax (benefit) expense	(277)	56
Net (Loss) income	(395)	109
Preferred stock dividends	37	33
Net (loss) income available to common shareholders	$ (432)	$ 76

Earnings (loss) per share
Basic	$ (0.22)	$ 0.04
Diluted	$ (0.22)	$ 0.04
Weighted average shares outstanding
Basic	1,954	1,954
Diluted	1,954	1,962

. See accompanying notes to consolidate financial statements

~~PART I. FINANCIAL INFORMATION~~4

~~Item~~ CORNERSTONE 1FINANCIAL ~~– Consolidated Financial Statements~~CORPORATION

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~FINANCIAL~~COMPREHENSIVE ~~CONDITION~~INCOME

(In thousands, except share data)	September 30, 2011		December 31, 2010
Assets:		(unaudited)
Cash and due from banks	$	6,297		$	5,331
Federal funds sold		40,400			3,700
Cash and cash equivalents		46,697			9,031
Investment securities:
Held to maturity (fair value 2011 - $22,569; 2010 - $39,520)		21,929			40,435
Available for sale (amortized cost 2011- $61,440; 2010 - $47,945)		62,081			44,635
Loans receivable		244,286			242,856
Less allowance for loan losses		2,848			3,826
Loans receivable, net		241,438			239,030
Federal Home Loan Bank stock		1,438			1,435
Premises and equipment, net		7,693			7,806
Accrued interest receivable		1,815			2,152
Bank owned life insurance		4,806			4,685
Deferred taxes		557			2,600
Other real estate owned		830			830
Other assets		1,139			1,378
Total Assets	$	390,423		$	354,017
Liabilities:
Non-interest bearing deposits	$	28,651		$	40,514
Interest bearing deposits		190,586			148,259
Certificates of deposit		110,506			113,497
Total deposits		329,743			302,270
Advances from the Federal Home Loan Bank		25,000			25,000
Line of credit		5,000			4,877
Subordinated debt		3,000			3,000
Other liabilities		1,388			1,122
Unsettled Security payable		5,250			-
Total Liabilities		369,381			336,269
Commitments and Contingencies (Note 4)
Stockholders’ Equity:
Preferred stock:
$0 par value; $1,000 per share stated value, authorized 1,000,000 shares; issued and outstanding 1,900 at September 30, 2011 and December 31, 2010, respectively		1,900			1,900
Common stock:
$0 par value: authorized 10,000,000 shares; issued and outstanding 1,954,428 at September 30, 2011 and December 31, 2010, respectively		-			-
Additional paid-in capital		17,700			16,727
Accumulated other comprehensive income (loss)		385			(1,988)
Retained earnings		1,057			1,109
Total Shareholders’ Equity		21,042			17,748
Total Liabilities and Shareholders’ Equity	$	390,423		$	354,017

Three Months Ended

~~See~~(In ~~accompanying~~thousands, ~~notes~~except toper ~~consolidated~~share ~~financial~~data) ~~statements.~~March 31, 2012 March 31, 2011

1 (Unaudited) (Unaudited)

~~CORNERSTONE~~Net ~~FINANCIAL~~(loss) ~~CORPORATION~~ income $ (395) $ 109

~~CONSOLIDATED~~ Other ~~STATEMENTS~~Comprehensive OF(loss) ~~OPERATIONS~~income, net of tax

~~Three~~ unrealized ~~Months~~loss ~~Ended~~arising from available for sale $ (537) $ 87

(In thousands, except per share data)	September 30, 2011	September 30, 2010
Interest Income	(Unaudited)	(Unaudited)
Interest and fees on loans	$ 3,295	$ 3,460
Interest on investment securities	956	593
Interest on federal funds	3	16
Total interest income	4,254	4,069
Interest Expense
Interest on deposits	915	991
Interest on borrowings	176	171
Total interest expense	1,091	1,162
Net interest income	3,163	2,907
Provision for loan losses	207	235
Net interest income after loan loss provision	2,956	2,672
Non-Interest Income
Service charges on deposit accounts	46	50
Bank owned life insurance income	42	41
Gain on sale of loan	18	291
Gain on sale of securities	44	-
Miscellaneous fee income	44	30
Total non-interest income	194	412
Non-Interest Expense
Salaries and employee benefits	1,453	1,231
Net occupancy	384	298
Data processing and other service costs	127	115
Professional services	173	322
Advertising and promotion	41	26
Other real estate owned expense	22	10
FDIC expense	31	131
Other operating expenses	188	161
Total non-interest expense	2,419	2,294
Income before income taxes	731	790
Income tax expense	282	311
Net income	449	479
Preferred stock dividends	33	33
Net income available to common shareholders	$ 416	$ 446
Earnings per share
Basic	$ 0.21	$ 0.23	(1)
Diluted	$ 0.21	$ 0.23	(1)
Weighted average shares outstanding
Basic	1,954	1,954	(1)
Diluted	1,954	1,978	(1)

securities during period

Comprehensive (1loss) ~~All share~~ ~~and per share amounts have been restated to reflect the 8.0% common stock dividend paid on May 16, 2011 to~~ income $ (932) $ 196

~~common~~ See ~~shareholders~~accompanying ofnotes ~~record~~to asconsolidate offinancial ~~April 15, 2011.~~statements

~~See accompanying notes to consolidated financial statements.~~ 5

2CORNERSTONE FINANCIAL CORPORATION

~~CORNERSTONE~~CONSOLIDATED ~~FINANCIAL~~STATEMENTS ~~CORPORATION~~OF CHANGES IN SHAREHOLDERS’ EQUITY

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~(Unaudited)

~~Nine~~(In ~~Months~~thousands, ~~Ended~~except per share data)

(In thousands, except per share data)	September 30, 2011	September 30, 2010
			Preferred Stock Series A		Preferred Stock Series B		Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive (Loss) income			Accumulated Earnings (Deficit)			Total
Interest Income	(Unaudited)	(Unaudited)
	Balance at Januray1, 2012	$	1,900	$	200	$	-	$	17,735	$		297	$	(1,065)	$	19,067
Interest and fees on loans	$ 9,939	$ 10,248
	Net loss		-		-		-		-			-		(395)		(395)
Interest on investment securities	2,729	1,781
	Unrealized loss on securities available for sale, net of tax		-		-		-		-			(537)		-		(537)
Interest on federal funds	9	24
	Stock based compensation		-		-		-		35			-		-		35
Total interest income	12,677	12,053
	Preferred stock dividend payment		-		-		-		-			-		(37)		(37)
Interest Expense
	Balance at March 31, 2012	$	1,900	$	200	$	-	$	17,770	$		(240)	$	(1,497)	$	18,133
Interest on deposits	2,752	2,932
Interest on borrowings	530	523
Total interest expense	3,282	3,455
Net interest income	9,395	8,598
Provision for loan losses	1,378	382
Net interest income after loan loss provision	8,017	8,216
Non-Interest Income
Service charges on deposit accounts	136	148
Bank owned life insurance income	121	123
Gain on sale of loans	174	330
Gain on sale of securities	44	-
Miscellaneous fee income	161	85
Total non-interest income	636	686
Non-Interest Expense
Salaries and employee benefits	4,191	3,648
Net occupancy	1,113	925
Data processing and other service costs	368	352
Professional services	501	609
Advertising and promotion	119	99
Other real estate owned expense	89	24
FDIC expense	286	355
Other operating expenses	506	476
Total non-interest expense	7,173	6,488
Income before income taxes	1,480	2,414
Income tax expense	563	939
Net income	917	1,475
Preferred stock dividends	100	99
Net income available to common shareholders	$ 817	$ 1,376
Earnings per share
Basic	$ 0.42	$ 0.70	(1)
Diluted	$ 0.42	$ 0.70	(1)
Weighted average shares outstanding
Basic	1,954	1,954	(1)
Diluted	1,958	1,967	(1)

(1) All share and per share amounts have been restated to reflect the 8.0% common stock dividend paid on May 16, 2011 to

		Preferred Stock Series A		Preferred Stock Series B		Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive (Loss)			Accumulated Earnings			Total
Balance at January 1, 2011	$	1,900	$	-	$	-	$	16,727	$		(1,988)	$	1,109	$	17,748
Net income		-		-		-		-			-		109		109
Unrealized gain on securities available for sale, net of tax		-		-		-		-			87		-		87
Stock based compensation		-		-		-		35			-		-		35
Declaration of 8% Common Stock Dividend (1)		-		-		-		869			-		(869)		-
Preferred stock dividend payment		-		-		-		-			-		(33)		(33)
Balance at March 31, 2011	$	1,900	$	-	$	-	$	17,631	$		(1,901)	$	316	$	17,946

(1) An 8.0% common stock dividend, declared on March 17, 2011 and payable on May 16, 2011 to common shareholders of record as of April 15, 2011. resulted in the issuance of 144,772

~~See~~ additional ~~accompanying~~shares ~~notes~~and resulted in $869 thousand being transferred from retained earnings to ~~consolidated~~additional ~~financial~~paid ~~statements~~in capital.

CORNERSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGESCASH IN SHAREHOLDERS’ EQUITYFLOWS

~~(Unaudited)~~Three Months Ended

(In thousands, except per share data)

(In thousands)	March 31, 2012	March 31, 2011
	(Unaudited)	(Unaudited)
Cash flows from operating activities:
Net (loss) Income	$ (395)	$ 109
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses	1,403	953
Depreciation	113	108
Amortization of premiums and discounts, net	7	9
Stock option expense	35	35
Gain on sale of loans	(82)	(156)
Deferred tax (benefit) expense	(537)	394
(Increase) in other real estate owned	(800)	-
Income on bank owned life Insurance	(51)	(40)
Decrease, net in accrued interest receivable
and other assets	121	11
(Decrease) increase in other liabilities	(232)	25
Net cash (used) provided by operating activities	(418)	1,448
Cash flows from investing activities:
Purchases of securities available for sale	(18,500)	-
Repayment of investments available for sale	18,717	-
Repayment of investments held to maturity	-	267
Redemption of FHLB stock	675	-
Net decrease in loans	7,710	3,193
Purchases of premises and equipment	(315)	(75)
Net cash provided in investing activities	8,287	3,385
Cash flows from financing activities:
Net increase in deposits	11,565	1,903
Proceeds from borrowings	-	52
Principal payments on advance from the FHLB	(15,000)	-
Cash dividend paid on preferred stock	(37)	(33)
Net cash (used) provided by financing activities	(3,472)	1,922

Net increase in cash and cash equivalents	4,397	6,755
Cash and cash equivalents at the beginning of the period	37,839	9,031
Cash and cash equivalents at the end of the period	$ 42,236	$ 15,786

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$ 870	$ 1,066
Cash paid during the period for income taxes	2	96
Net change in unrealized (loss) gain on securities, net of tax	(537)	87
Supplemental non-cash investing and financing activities:
Unsettled securities payable	$ 4,000	$ -

		Comprehensive Income		Preferred Stock		Common Stock		Additional Paid-in Capital		Accumulated Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at December 31, 2010			$	1,900	$	-	$	16,727	$		1,109	$	(1,988)	$	17,748
Comprehensive income
Net income	$	917		-		-		-			917		-		917
Unrealized gain on securities available for sale, net of tax		2,373											2,373		2,373
Comprehensive income	$	3,290
Stock based compensation				-		-		104			-		-		104
7 % Preferred stock dividend				-		-		-			(100)		-		(100)
Declaration of 8% common stock dividend				-		-		869			(869)		-		-
Balance at September 30, 2011			$	1,900	$	-	$	17,700	$		1,057	$	385	$	21,042

See accompanying notes to consolidated financial statements.

~~See accompanying notes to consolidated financial statements.~~7

4CORNERSTONE FINANCIAL CORPORATION

~~CORNERSTONE~~NOTES TO CONSOLIDATED FINANCIAL ~~CORPORATION~~STATEMENTS

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~(UNAUDITED)

~~Nine~~NOTE ~~Months~~1 ~~Ended~~- BASIS OF PRESENTATION AND BUSINESS UPDATE

(In thousands)	September 30, 2011	September 30, 2010
	(Unaudited)	(Unaudited)
Cash flows from operating activities:
Net Income	$ 917	$ 1,475
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses	1,378	382
Depreciation	328	293
Amortization of premiums and discounts, net	(120)	39
Stock option expense	104	101
Gain on sale of loans	(174)	-
Gain on sale of securities	(44)	-
Deferred tax expense(benefit)	465	(54)
Income on bank owned life Insurance	(121)	(123)
Decrease in accrued interest receivable
and other assets	577	94
Increase in other liabilities	266	197
Net cash provided by operating activities	3,576	2,404
Cash flows from investing activities:
Purchases of investments held to maturity	-	(44,509)
Purchases of securities available for sale	(26,309)	(28,519)
Repayment of investments available for sale	8,178	-
Repayment of investments held to maturity	18,511	48,320
Sale of investments available for sale	10,044	-
(Purchase) redemption of FHLB stock	(3)	137
Net increase in loans	(3,612)	(3,851)
Purchases of premises and equipment	(215)	(159)
Net cash provided (used) in investing activities	6,594	(28,581)
Cash flows from financing activities:
Net increase in deposits	27,473	60,340
Proceeds from borrowings	10,123	242,753
Principal payments on borrowings	(10,000)	(247,483)
Cash dividend paid for preferred stock	(100)	(99)
Net cash provided by financing activities	27,496	55,511
Net increase in cash and cash equivalents	37,666	29,334
Cash and cash equivalents at the beginning of the period	9,031	4,742
Cash and cash equivalents at the end of the period	46,697	$ 34,076
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$ 3,296	$ 3,466
Cash paid during the period for income taxes	96	991
Net change in unrealized gain on securities, net of tax	2,373	101
Supplemental non-cash investing and financing activities:
Unsettled securities payable	$ 5,250	$ 4,000

The consolidated financial statements include the accounts of Cornerstone Financial Corporation (the “Company”) and its wholly owned subsidiary, Cornerstone Bank (the “Bank”). These interim statements, which are unaudited, were prepared in accordance with instructions for Form 10-Q. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for fair presentation of the interim financial statements have been included.

~~See~~Cornerstone ~~accompanying~~Financial ~~notes~~Corporation was formed in 2008 at the direction of the Board of Directors of Cornerstone Bank to serve as a holding company for the Bank. The holding company reorganization was completed in January 2009. The statement of financial condition as of December 31, 2011 has been derived from audited financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Cornerstone Financial Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the United States Securities and Exchange Commission.

5During the past two years, many of our borrowers have been adversely affected by the recession of 2008 and the subsequent slow economic recovery. As a result, we have experienced elevated levels of non-performing assets, which have continued to increase through the first quarter of 2012. Our primary focus has turned toward managing our credit quality and capital levels while continuing to meet the credit needs of the communities served by our branches. We expect that we will not continue our historical rate of growth until the economy strengthens and our non-performing assets have returned to more normalized levels.

~~CORNERSTONE~~The ~~FINANCIAL~~Company ~~CORPORATION~~has certain cash requirements that are independent of the Bank, such as paying certain operating expenses and dividends on outstanding preferred stock. Historically, the Company has obtained funds through dividends paid by the Bank. At March 31, 2012, the Company had unconsolidated assets of $112 thousand (exclusive of its investment in the Bank), consisting of $101 thousand in cash and $11 thousand in prepaid assets. If the Bank is unable to pay dividends to the Company, this may result in the Company’s inability to meet certain of its cash obligations.

~~NOTES~~NOTE TO2 ~~CONSOLIDATED~~– ~~FINANCIAL~~USE ~~STATEMENTS~~OF ESTIMATES

~~(UNAUDITED)~~The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the allowance for loan losses and the evaluation of deferred taxes.

NOTE 13 - ~~BASIS OF PRESENTATION~~CONTINGENCIES

The ~~consolidated~~Company, ~~financial~~from ~~statements~~time ~~include~~to time, is a party to routine litigation that arises in the ~~accounts~~normal course of ~~Cornerstone~~business. Management ~~Financial~~does ~~Corporation~~not ~~and~~believe ~~its~~the ~~wholly~~resolution ~~owned~~of ~~subsidiary~~this litigation, ~~Cornerstone~~either ~~Bank~~any ~~(together,~~individual ~~the~~case ~~“Company”).~~or ~~These~~in ~~interim~~the ~~statements~~aggregate, ~~which~~would ~~are~~have ~~unaudited,~~a ~~were~~material ~~prepared~~adverse ineffect ~~accordance~~on ~~with~~the ~~instructions~~Company’s ~~for~~financial ~~Form~~condition ~~10-Q~~or results of operations. InHowever, the ~~opinion~~ultimate outcome of ~~management~~any such matter, ~~all~~as ~~adjustments~~with litigation generally, ~~consisting~~is ofinherently ~~normal~~uncertain ~~recurring~~and ~~accruals,~~it ~~necessary~~is ~~for~~possible ~~fair~~that ~~presentation~~some of ~~the~~these ~~interim~~matters ~~financial~~may ~~statements~~be ~~have~~resolved ~~been~~in ~~included.~~a manner that is materially adverse to the Company.

~~Cornerstone~~NOTE ~~Financial~~4 Corporation was formed in 2008 at the direction of the Board of Directors of Cornerstone Bank to serve as a holding company for the Bank. The holding company reorganization was completed in January 2009. The statement of financial condition as of December 31, 2010 has been derived from audited financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Cornerstone Financial Corporation’s Annual Report on Form 10-K ~~for~~EARNINGS ~~the~~PER ~~year ended December 31, 2010 as filed with the United States Securities and Exchange Commission.~~SHARE

~~NOTE~~Basic 2earnings –per ~~USE~~share OFis ~~ESTIMATES~~calculated on the basis of net income available to common shareholders divided by the weighted average number of shares outstanding. Diluted earnings per share includes dilutive potential common shares as computed under the treasury stock method using average common stock prices.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the allowance for loan losses and the evaluation of deferred taxes.

NOTE 3 - CONTINGENCIES

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. Management does not believe the resolution of this litigation, either any individual case or in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations. However, the ultimate outcome of any such matter, as with litigation generally, is inherently uncertain and it is possible that some of these matters may be resolved in a manner that is materially adverse to the Company.

NOTE 4 - EARNINGS PER SHARE

Basic earnings per share is calculated on the basis of net income divided by the weighted average number of shares outstanding. Diluted earnings per share includes dilutive potential common shares as computed under the treasury stock method using average common stock prices.

All share and per share amounts have been restated to reflect the 8.0% common stock dividend, declared on March 17, 2011, and paid on May 16, 2011 to common shareholders of record as of April 15, 2011. This stock dividend resulted in the issuance of 144,772 additional shares and resulted in $869 thousand being transferred from retained earnings to additional paid in capital.

NOTE 5 – STOCK OPTIONS

The Company accounts for stock options in accordance with FASB Accounting Standards Codification (ASC) 718 Stock Compensation. The Company recognizes the grant-date fair-value of stock options and other equity-based compensation issued to employees in the statement of operations. The Company had $~~159~~89 thousand in unrecognized compensation costs relating to non-vested stock based compensation awards at ~~September~~March 3031, ~~2011~~2012.

OnNo ~~July~~stock ~~16, 2009,~~ options ~~to purchase a total of 48,600 shares of common stock~~ were granted ~~with~~during an2011 ~~exercise~~or ~~price~~during ~~of $4.63 per share. These options will expire ten years from~~ the ~~date~~three ofmonth ~~the~~period ~~grant~~ended ~~and~~March ~~vest on a one-third per year basis beginning on July 16~~31, ~~2010, with vesting accelerating in certain circumstances such as change in control of the Company~~2012. ~~The exercise price of each option equals the market price of the common stock on the date of the grant.~~

On January 16, 2010, options to purchase a total of 119,880 shares of common stock were granted with an exercise price of $4.17 per share. These options will expire ten years from the date of the grant and vest on a one-third per year basis beginning on January 21, 2011, with vesting accelerating in certain circumstances such as change in control of the Company. The exercise price of each option equals the market price of the common stock on the date of the grant.8

NOTE 6 - INVESTMENT SECURITIES

A comparison of amortized cost and approximate fair value of investment securities held to maturity at ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011 is as follows (in thousands):

~~September~~March 3031, ~~2011~~2012

		Gross	Gross
		Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
Investments held to maturity:
Investments available for sale:
Government agency obligations	$ 1487,~~982~~008	$ ~~163~~137	$ (10537)	$ 1586,~~135~~608
Mortgage backed securities	6,947	487	-	7,434
Total	$ 87,008	$ 137	$ (537)	$ 86,608
Total	$ 21,929	$ 650	$ (10)	$ 22,569

Investments available for sale:
Government agency obligations	$ 61,440	650	$ (9)	$ 62,081
Total	$ 61,440	$ 650	$ (9)	$ 62,081

December 31, 2011

December 31, 2010

		Gross	Gross
		Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
Investments available for sale:
Government agency obligations	$ 83,232	$ 495	$ -	$ 83,727
Total	$ 83,232	$ 495	$ -	$ 83,727

		Gross	Gross
		Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
Investments held to maturity:
Government agency obligations	$ 32,706	$ 68	$ (1,131)	$ 31,643
Mortgage backed securities	7,729	148	-	7,877
Total	$ 40,435	$ 216	$ (1,131)	$ 39,520

The following table sets forth information regarding the fair value and unrealized losses on the Company’s temporarily impaired investment securities at March 31, 2012 and December 31, 2011 for the time periods shown (in thousands):

Investments available for sale:
Government agency obligations	$ 38,056	$ -	$ (2,496)	$ 35,560
US Treasury Securities	9,889	-	(814)	9,075
Total	$ 47,945	$ -	$ (3,310)	$ 44,635

March 31, 2012

The following table sets forth information regarding the fair value and unrealized losses on the Company’s temporarily impaired

	Less than 12 months		12 months or longer		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses

Investments available for sale:
Government agency obligations	$ 50,716	$ (537)	$ -	$ -	$ 50,716	$ (537)
Total temporarily impaired investment securities	$ 50,716	$ ( 537)	$ -	$ -	$ 50,716	$ (537)

~~investment~~The ~~securities~~Company athad ~~September~~no ~~30,~~unrealized ~~2011~~losses ~~and~~on ~~December~~temporarily ~~31,~~impaired ~~2010~~investment ~~for~~securities ~~the~~at ~~time~~December ~~periods~~31, ~~shown (in thousands):~~ 2011.

7Management has taken into consideration the following information in reaching the conclusion that the impairment of the securities listed in the table above is not other than temporary: the unrealized losses disclosed above are the result of fluctuations in market interest rates currently offered on like securities and do not reflect a deterioration or downgrade of the investment issuer’s credit-worthiness or ability to meet its cash flow requirements. The Company believes that it is probable that it will receive all future contractual cash flows and does not intend to sell, and it is more likely than not, it will not be required to sell these investment securities until recovery or maturity. The U.S. Government agency sponsored securities which are listed have call provisions priced at par if called prior to their respective maturity dates.

~~September 30, 2011~~9

	Less than 12 months		12 months or longer		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Investments held to maturity:
Government agency obligations	$ 3,680	$ (10)	$ -	$ -	$ 3,680	$ (10)
Investments available for sale:
Government agency obligations	4,825	(9)	-	-	4,825	(9)
Total temporarily impaired investment securities	$ 8,505	$ ( 19)	$ -	$ -	$ 8,505	$ (19)

December 31, 2010

	Less than 12 months		12 months or longer		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Investments held to maturity:
Government agency obligations	$ 27,132	$ (1,131)	$ -	$ -	$ 27,132	$ (1,131)
Investments available for sale:
Government agency obligations	35,560	( 2,496)	-	-	35,560	( 2,496)
US Treasury Securities	9,075	(814)	-	-	9,075	(814)
Total temporarily impaired investment securities	$ 71,767	$ (4,441)	$ -	$ -	$ 71,767	$ (4,441)

Management has taken into consideration the following information in reaching the conclusion that the impairment of the securities listed in the table above is not other than temporary. The unrealized losses disclosed above are the result of fluctuations in market interest rates currently offered on like securities and do not reflect a deterioration or downgrade of the investment issuer’s credit-worthiness or ability to meet its cash flow requirements. The Company believes that it is probable that it will receive all future contractual cash flows and does not intend to sell and will not be required to sell these investment securities until recovery or maturity. The U.S. Government agency sponsored securities which are listed have call provisions priced at par if called prior to their respective maturity dates.

Other Comprehensive Income (Loss)

The change in other comprehensive income (loss) components and related tax benefit are as follows for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 and ~~September~~March 3031, ~~2010.~~2011 (In thousands):

~~September~~ March 3031,

				2011
				2012
		Before-Tax				Net-of-Tax
Unrealized gain on securities available for sale:		Amount		Tax Benefit		Amount
Unrealized (loss) on securities available for sale:		Amount		Tax Benefit		Amount
Unrealized holding gain arising during the year	$	3,951	$	(1,578)	$	2,373
Unrealized holding (loss) arising during the year	$	(895)	$	358	$	(537)
Other comprehensive income	$	3,951	$	(1,578)	$	2,373
Other comprehensive (loss)	$	(895)	$	358	$	(537)

~~September~~ March 3031,

				2010
				2011
		Before-Tax				Net-of-Tax
Unrealized gain on securities available for sale:		Amount		Tax Benefit		Amount
Unrealized holding gain arising during the year	$	~~169~~144	$	(6857)	$	~~101~~87
Other comprehensive income	$	~~169~~144	$	(6857)	$	~~101~~87

NOTE 7 – LOANS RECEIVABLE

The Company monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the ~~company~~Company ~~monitors the performance of its loan portfolio and~~ estimates its allowance for loan losses.

Commercial loans include short and long-term business loans and commercial lines of credit for the purposes of providing working capital, supporting accounts receivable, purchasing inventory and acquiring fixed assets. The loans generally are secured by these types of assets as collateral and/or by personal guarantees provided by principals of the borrowers.

Commercial real estate loans are generally originated in amounts up to the lower of 75% of the appraised value or cost of the property and are secured by improved property such as multi-family dwelling units, office buildings, retail stores, warehouses, church buildings and other non-residential buildings, most of which are located in the Company’s market area. Commercial real estate loans are generally made with fixed interest rates which mature or reprice in five to seven years with principal amortization of up to 25 years.

Residential real estate loans consist of loans secured by one- to four-family residences located in the ~~Bank'~~Company’s market area. The Bank has originated one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property without requiring mortgage insurance. A mortgage loan originated by the Bank, for owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 30 years. Loans secured by non-owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 25 years. Adjustable rate loan terms limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan based on the type of loan.

Loans secured by non-owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 25 years. Adjustable rate loan terms limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan based on the type of loan.

Construction loans will be made only if there is a permanent mortgage commitment in place. Interest rates on commercial construction loans are typically in line with normal commercial mortgage loan rates, while interest rates on residential construction loans are slightly higher than normal residential mortgage loan rates. These loans usually are adjustable rate loans and generally have terms of up to one year.

Consumer loans include installment loans and home equity loans, secured by first or second mortgages on homes owned or being purchased by the loan applicant. Home equity term loans and credit lines are credit accommodations secured by either a first or second mortgage on the borrower's residential property. Interest rates charged on home equity term loans are generally fixed; interest on credit lines is usually a floating rate related to the prime rate. The Bank generally requires a loan to value ratio of less than or equal to 80% of the appraised value, including any outstanding prior mortgage balance.

Interest rates charged on home equity term loans are generally fixed; interest on credit lines is usually a floating rate related to the prime rate. The Bank generally requires a loan to value ratio of less than or equal to 80% of the appraised value, including any outstanding prior mortgage balance.

Loans receivable consist of the following (in thousands):

	September 30, 2011	December 31, 2010
	March 31, 2012	December 31, 2011
Commercial	$ ~~105~~94,~~859~~128	$ 9597,~~441~~783
Real estate, Commercial	~~110~~115,~~637~~289	~~112~~116,~~217~~079
Real estate, Residential	97,~~131~~247	148,~~780~~976
Construction	1110,~~741~~952	1312,~~177~~108
Consumer loans	7,190	7,450
Consumer	6,985	7,245
Net deferred loan fees	(~~272~~285)	(~~209~~274)
	244,286	242,856
	234,316	241,917
Allowance for loan losses	(26,~~848~~425)	(34,~~826~~995)
Loans receivable, net	$ ~~241~~227,~~438~~891	$ ~~239~~236,~~030~~922

Under New Jersey banking laws, the Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds for most loans. At March 31, 2012, the loans-to-one-borrower limitation was approximately $4.9 million; this excludes an additional 10% of capital funds, or approximately $3.2 million which may be loaned if collateralized by readily marketable securities. At March 31, 2012, there were no loans outstanding or committed to any one borrower which individually or in the aggregate exceeded the Bank’s loans-to-one-borrower limitation of 15% of capital funds.

Under New Jersey banking laws, the Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds for most loans. At September 30, 2011, the loans-to-one-borrower limitation was approximately $4.7 million; this excludes an additional 10% of capital funds, or approximately $3.1 million which may be loaned if collateralized by readily marketable securities. At September 30, 2011, there were no loans outstanding or committed to any one borrower which individually or in the aggregate exceeded the Bank’s loans-to-one-borrower limitation of 15% of capital funds.

A summary of the Company’s credit quality indicators is as follow:

Pass - A credit which is assigned a rating of Pass shall exhibit some or all of the following characteristics:

a. Loans that present an acceptable degree of risk associated with the financing being considered as measured against earnings and balance sheet trends, industry averages, etc. Actual and projected indicators and market conditions provide satisfactory evidence that the credit will perform as agreed.

b. Loans to borrowers that display acceptable financial conditions and operating results. Debt service capacity is demonstrated and future prospects are considered good.

c. Loans to borrowers where a comfort level is achieved by the strength of the cash flows from the business or project and the strength and quantity of the collateral or security position (i.e.: receivables, inventory and other readily marketable securities) as supported by a current valuation and/or the strong capabilities of a guarantor.

Special Mention - Loans on which the credit risk requires more than ordinary attention by the Loan Officer. This may be the result of some erosion in the borrower's financial condition, the economics of the industry, the capability of management, or changes in the original transaction. Loans which are currently sound yet exhibit potentially unacceptable credit risk or deteriorating long term prospects, will receive this classification. Loans which deviate from loan policy or regulations will not generally be classified in this category, but will be separately reported as an area of concern.

Classified – Classified loans include those considered by the Company to be substandard, doubtful or loss.

An asset is considered “substandard” if it involves more than an acceptable level of risk due to a deteriorating financial condition, unfavorable history of the borrower, inadequate payment capacity, insufficient security or other negative factors within the industry, market or management. Substandard loans have clearly defined weaknesses which can jeopardize the timely payment of the loan.

Assets classified as “doubtful” exhibit all of the weaknesses defined under the substandard category but with enough risk to present a high probability of some principal loss on the loan, although not yet fully ascertainable in amount.

Assets classified as “loss” are those considered uncollectible or of little value, even though a collection effort may continue after the classification and potential charge-off.

Non-Performing Loans

Non-performing loans consist of non-accrual loans (loans on which the accrual of interest has ceased), loans over ninety days delinquent and still accruing interest, ~~renegotiated~~troubled debt restructurings loans and impaired loans. Loans are generally placed on non-accrual status if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more, unless the collateral is considered sufficient to cover principal and interest and the loan is in the process of collection. At ~~September~~March 3031, ~~2011~~2012 the Company had ~~twenty~~thirty ~~one~~seven loan relationships totaling $1523.9 million in non-accrual loans compared to ~~twelve~~twenty one relationships totaling $9.8.9 million in non-accrual loans at December 31, ~~2010~~2011. The Company recognized no interest income on non-accrual loans during the ~~nine~~three month period ended ~~September~~March 3031, ~~2011~~2012 asand ~~compared~~March ~~to $149 thousand for the nine month period ended September 30~~31, ~~2010~~2011.

10The following table represents loans by credit quality indicator at March 31, 2012.

The following table represents loans by credit quality indicator at September 30, 2011.

(In thousands)		Special	Accruing	Non
		Mention	Classified	Accrual
	Pass	Loans	Loans	Loans	Total
Commercial	$ 76,130	$ 7,627	$ 5,031	$ 5,198	$ 93,986
Real Estate, Commercial	100,713	6,914	198	7,311	115,136
Real Estate, Residential	6,366	-	-	875	7,241
Construction	1,040	-	-	9,900	10,940
Consumer	6,353	-	-	660	7,013
Total loans	$ 190,602	$ 14,541	$ 5,229	$ 23,944	$ 234,316

(In thousands)		Special		Non
		Mention	Classified	Performing
	Pass	Loans	Loans	Loans	Total
Commercial	$ 97,686	$ -	$ 3,724	$ 311	$ 105,721
Real Estate, Commercial	97,594	246	2,352	10,312	110,504
Real Estate, Residential	8,159	-	-	964	9,123
Construction	11,714	-	-	-	11,714
Consumer	6,644	-	243	337	7,224
Total loans	$ 221,797	$ 246	$ 6,319	$ 15,924	$ 244,286

The following table represents loans by credit quality indicator at December 31, 2011.

The following table represents loans by credit quality indicator at December 31, 2010.

(In thousands)		Special	Accruing	Non
		Mention	Classified	Accrual
	Pass	Loans	Loans	Loans	Total
Commercial	$ 80,872	$ 13,956	$ 882	$ 1,935	$ 97,645
Real Estate, Commercial	103,804	3,104	3,548	5,479	115,935
Real Estate, Residential	8,095	-	-	875	8,970
Construction	7,523	-	4,569	-	12,092
Consumer	6,694	-	-	581	7,275
Total loans	$ 206,988	$ 17,060	$ 8,999	$ 8,870	$ 241,917

(In thousands)		Special		Non
		Mention	Classified	Performing
	Pass	Loans	Loans	Loans	Total
Commercial	$ 93,209	$ 845	$ -	$ 1,296	$ 95,350
Real Estate, Commercial	101,718	2,175	-	8,213	112,106
Real Estate, Residential	13,596	-	1,170	-	14,766
Construction	13,145	-	-	-	13,145
Consumer	6,905	244	51	289	7,489
Total loans	$ 228,572	$ 3,264	$ 1,221	$ 9 ,798	$ 242,856

The following table represents past-due loans as of March 31, 2012.

The following table represents past-due loans as of September 30, 2011.

(In thousands)	30-89 Days	90 Days or more	Total Past	Accruing	Non-
	Past Due and	Past Due and	Due and	Current	Accrual	Total Loan
	Still Accruing	Still Accruing	Still Accruing	Balances	Balances	Balances
Commercial	$ 3,878	$ -	$ 3,878	$ 84,910	$ 5,198	$ 93,986
Real Estate, Commercial	275	-	275	107,550	7,311	115,136
Real Estate, Residential	323	-	323	6,043	875	7,241
Construction	-	-	-	1,040	9,900	10,940
Consumer	-	-	-	6,353	660	7,013
Total loans	$ 4,476	$ -	$ 4,476	$ 205,896	$ 23,944	$ 234,316

Percentage of total loans	1.91%	0.00%	1.91%	87.87%	10.22%

(In thousands)	30-89 Days	90 Days or more	Total Past	Accruing	Non-
	Past Due and	Past Due and	Due and	Current	Accrual	Total Loan
	Still Accruing	Still Accruing	Still Accruing	Balances	Balances	Balances
Commercial	$ 2,032	$ -	$ 2,032	$ 101,410	$ 4,311	$ 105,721
Real Estate, Commercial	-	-	-	100,192	10,312	110,504
Real Estate, Residential	-	-	-	8,159	964	9,123
Construction	-	138	138	11,714	-	11,714
Consumer	1	243	244	6,887	337	7,224
Total loans and leases	$ 2,033	$ 381	$ 2,414	$ 228,362	$ 15,924	$ 244,286
Percentage of total loans	0.84%	0.16%	1.00%	94.60%	6.60%

The following table represents past-due loans as of December 31, 2010.

(In thousands)	30-89 Days	90 Days or more	Total Past	Accruing	Non-
	Past Due and	Past Due and	Due and	Current	Accrual	Total Loan
	Still Accruing	Still Accruing	Still Accruing	Balances	Balances	Balances
Commercial	$ 209	$ 634	$ 843	$ 94,054	$ 1,296	$ 95,350
Real Estate, Commercial	-	-	-	103,893	8,213	112,106
Real Estate, Residential	-	244	244	14,766	-	14,766
Construction	-	-	-	13,145	-	13,145
Consumer	-	-	-	7,200	289	7,489
Total loans	$ 209	$ 878	$ 1,087	$ 233,058	$ 9,798	$ 242,856
Percentage of total loans	0.09%	0.36%	0.45%	95.97%	4.03%

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above. At September 30, 2011, the Company had thirty impaired loan relationships totaling $17.5 million (included within the non-accrual loans discussed above) in which $8.7 million in impaired loans had a related allowance for credit losses of $1.2 million and $8.8 million in impaired loans in which there is no related allowance for credit losses. The average balance of impaired loans totaled $17.9 million as of September 30, 2011, and interest income recorded on impaired loans during the nine months ended September 30, 2011 totaled $9 thousand, as compared to $149 thousand for the nine months ended September 30, 2010.

At September 30, 2011 the Company had two loan relationships totaling $381 thousand that were delinquent ninety days or more and still accruing interest. At December 31, 2010, the Company had two loan relationships totaling $878 thousand that were delinquent ninety days or more and still accruing interest.

The following table represents data on impaired loans at September 30, 2011 and September 30, 2010.

(In thousands)	2011	2010
Impaired loans for which a valuation allowance has been provided	$ 8,652	$ 3,696
Impaired loans for which no valuation allowance has been provided	8,802	8,004
Total loans determined to be impaired	17,454	11,700
Allowance for loan losses related to impaired loans	1,229	1,848
Average recorded investment in impaired loans	17,919	12,717
Cash basis interest income recognized on impaired loans	$ 9	$ 149

The following table presents impaired loans by portfolio class at September 30, 2011.

(In thousands)				Average	Interest Income
		Unpaid	Related	Annual	Recognized
	Recorded	Principal	Valuation	Recorded	While
	Investment	Balance	Allowance	Investment	Impaired
Impaired loans with a valuation allowance:
Commercial	$ 1,669	$ 1,669	$ 151	$ 1,725	$ -
Real Estate, Commercial	5,824	5,824	911	6,091	-
Real Estate, Residential	964	964	69	1,105	-
Consumer	195	195	98	196	-
Subtotal	8,652	8,652	1,229	9,117	-

Impaired loans with no valuation allowance:
Commercial	3,791	3,791	-	3,791	-
Real Estate, Commercial	4,626	4,626	-	4,626	3
Real Estate, Residential	-	-	-	-	-
Consumer	385	385	-	385	6
Subtotal	8,802	8,802	-	8,802	9
Total Impaired loans:
Commercial	5,460	5,460	151	5,516	-
Real Estate, Commercial	10,450	10,450	911	10,717	3
Real Estate, Residential	964	964	69	1,105	-
Consumer	580	580	98	581	6
Total	$ 17,454	$ 17,454	$ 1,229	$ 17,919	$ 9

The following table ~~presents~~represents ~~impaired~~past-due loans byas ~~portfolio~~of ~~class at~~ December 31, ~~2010~~2011.

(In thousands)	30-89 Days	90 Days or more	Total Past	~~Average~~Accruing	~~Interest Income~~Non-
		Unpaid	Related	Annual	Recognized
	Past Due and	Past Due and	Due and	Current	Accrual	Total Loan
	Recorded	Principal	Valuation	Recorded	While
	Still Accruing	Still Accruing	Still Accruing	Balances	Balances	Balances
	Investment	Balance	Allowance	Investment	Impaired
Commercial	$ 495	$ -	$ 495	$ 95,215	$ 1,935	$ 97,645
Impaired loans with a valuation allowance:
Real Estate, Commercial	1,201	-	1,201	109,255	5,479	115,935
Commercial	$ 1,198	$ 1,198	$ 962	$ 1,209	$ 6
Real Estate, Residential	1	-	1	8,094	875	8,970
Real Estate, Commercial	2,060	2,060	1,020	2,064	-
Construction	-	-	-	12,092	-	12,092
Consumer	~~199~~81	~~199~~-	9981	~~200~~6,613	5581	7,275
Subtotal	3,457	3,457	2,081	3,473	11
Total loans	$ 1,778	$ -	$ 1,778	$ 231,269	$ 8,870	$ 241,917
Percentage of total loans	0.73%	0.00%	0.73%	95.60%	3.67%

Impaired loans with no valuation allowance:
Commercial	732	732	-	1,341	2
Real Estate, Commercial	6,153	6,153	-	7,085	10
Consumer	385	385	-	381	13
Subtotal	7,271	7,271	-	8,807	25
Total Impaired loans:
Commercial	1,930	1,930	962	2,550	8
Real Estate, Commercial	8,213	8,213	1,020	9,149	10
Consumer	584	584	99	581	18
Total	$ 10,728	$ 10,728	$ 2,081	$ 12,280	$ 36

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above. At March 31, 2012, the Company had forty impaired loan relationships totaling $29.4 million (included within the non-accrual loans discussed above) in which $21.1 million in impaired loans had a related allowance for credit losses of $4.0 million and $8.3 million in impaired loans in which there is no related allowance for credit losses. The average balance of impaired loans totaled $20.6 million for the period ending March 31, 2012, and interest income recorded on impaired loans during the three months ended March 31, 2012 totaled $2 thousand, as compared to $13 thousand for the three months ended March 31, 2011.

~~Included~~At inMarch the balance of non accrual commercial loans is a principal balance of $634 thousand dollars representing the Company’s participation interest in two loans originated by another New Jersey based institution. Although the borrowers have ceased making payments on these loans31, we2012 ~~have received a legal opinion from our legal counsel that the Company has valid claims against the lead/originating bank for violations of the participation agreements,~~ and weDecember ~~have filed suit asserting these claims. In the event the lead bank is unable to collect from the borrowers~~31, we2011 ~~believe~~respectively, ~~based~~the onCompany ~~said~~had ~~legal~~no ~~opinion,~~loan ~~that~~relationships wedelinquent ~~may~~ninety ~~collect~~days ~~our~~or ~~principal~~more and ~~interest~~still ~~from~~accruing ~~the lead/originating bank~~interest. ~~However, in that case our ability to collect on these loans will depend upon the outcome of our legal action against the lead/originating bank.~~

The following table ~~provides~~represents ~~information~~data ~~regarding~~on ~~risk~~impaired ~~elements~~loans inat ~~the~~March ~~loan portfolio as of September 30~~31, ~~2011~~2012 and ~~December~~March 31, ~~2010~~2011.

(In thousands)	~~September 30, 2011~~2012	~~December 31, 2010~~2011
Non-performing assets:
Impaired loans for which a valuation allowance has been provided	$ 21,106	$ 3,781
Loans past due 90 days or more and accruing
Impaired loans for which no valuation allowance has been provided	8,278	7,212
Commercial	$ -	$ 634
Total loans determined to be impaired	29,384	10,993
Construction	138	-
Allowance for loan losses related to impaired loans	3,957	1,096
Consumer	243	244
Average recorded investment in impaired loans	20,635	11,391
Total loans past due 90 days or more and accruing	381	878
Cash basis interest income recognized on impaired loans	$ 2	$ 13
Non-accrual loans:
Commercial	4,311	1,296
Real Estate, Commercial	10,312	8,213
Real Estate, Residential	964	-
Consumer	337	289
Total non-accrual loans	15,924	9,798
Impaired loans	455	51
Restructured loans	694	-
Total non-performing loans	17,073	9,849
Real estate owned	830	830
Total non-performing assets	$ 18,284	$ 11,557
Non-performing loans as a percentage of loans	6.99%	4.06%
Non-performing assets as a percentage of loans and real estate owned	7.46%	4.76%
Non-performing assets as a percentage of total assets	4.68%	3.26%

The following table presents impaired loans by portfolio class at March 31, 2012.

(In thousands)				Average	Interest Income
		Unpaid	Related	Annual	Recognized
	Recorded	Principal	Valuation	Recorded	While
	Investment	Balance	Allowance	Investment	Impaired
Impaired loans with a valuation allowance:
Commercial	$ 8,291	$ 8,386	$ 2,130	$ 5,609	$ -
Real Estate, Commercial	6,759	7,718	1,329	6,429	-
Real Estate, Residential	875	1,245	64	875	-
Construction	4,908	4,908	335	2,454	-
Consumer	273	273	99	254	-
Subtotal	$ 21,106	$ 22,530	$ 3,957	$ 15,621	$ -

During the nine month period ended September 30, 2011 the Company experienced a $6.1 million increase in non-accrual loans. This change reflects the downgrading of eleven credit relationships to non-accrual status totaling $8.8 million partially offset by partial and total charge offs of nine credit relationships representing twenty one loans in the amount of $2.4 million and principal reductions on non accrual loans of $334 thousand during the nine month period ended September 30, 2011. The downgraded loans consisted of two residential mortgage loans totaling $964 thousand, six commercial relationships representing eleven loans totaling $4.3 million, three commercial real estate loans totaling $2.6 million and one consumer loan totaling $48 thousand.

Impaired loans with no valuation allowance:
Commercial	$ 2,149	$ 2,149	$ -	$ 1,267	2
Real Estate, Commercial	750	750	-	864	-
Real Estate, Residential	-	-	-	-	-
Construction	4,992	4,992	-	2,496	-
Consumer	387	387	-	387	-
Subtotal	$ 8,278	$ 8,278	$ -	$ 5,014	$ 2

Total Impaired loans:
Commercial	$ 10,440	$ 10,535	$ 2,130	$ 6,876	$ 2
Real Estate, Commercial	7,509	8,468	1,329	7,293	-
Real Estate, Residential	875	1,245	64	875	-
Construction	9,900	9,900	335	4,950	-
Consumer	660	660	99	641	-
Total	$ 29,384	$ 30,808	$ 3,957	$ 20,635	$ 2

The following ~~tables~~table ~~set~~presents ~~forth~~impaired ~~activity~~loans ~~within the Bank’s allowance for losses~~ by portfolio class ~~during~~at ~~the~~December ~~three and nine month periods ended September 30~~31, 2011. ~~and September 30, 2010:~~

Three months ended September 30, 2011 and September 30, 2010:

(In thousands)				Average	Interest Income
		Unpaid	Related	Annual	Recognized
	Recorded	Principal	Valuation	Recorded	While
	Investment	Balance	Allowance	Investment	Impaired
Impaired loans with a valuation allowance:
Commercial	$ 2,649	$ 2,649	$ 705	$ 2,635	$ 12
Real Estate, Commercial	5,880	5,880	1,291	8,390	-
Real Estate, Residential	875	875	64	824	-
Construction	-	-	-	-	-
Consumer	194	194	97	196	-
Subtotal	$ 9,598	$ 9,598	$ 2,157	$ 12,045	$ 12

		Commercial	Residential
Impaired loans with no valuation allowance:
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Consumer	Total
Commercial	$ 569	$ 569	$ -	$ 343	$ 10
Beginning Balance, July 1, 2011	$ 833	$ 1,366	$ 337	$ 129	$ 2,665
Real Estate, Commercial	1,571	1,571	-	540	4
Charge-off	(50)	-	-	-	(50)
Real Estate, Residential	-	-	-	-	-
Provision	146	75	(28)	14	207
Construction	-	-	-	-	-
Recovery	26	-	-	-	26
Consumer	387	387	-	385	-
Ending Balance, September 30, 2011	$ 955	$ 1,441	$ 309	$ 143	$ 2,848
Subtotal	$ 2,527	$ 2,527	$ -	$ 1,268	$ 14
Total Impaired loans:
Commercial	$ 3,218	$ 3,218	$ 705	$ 2,978	$ 22
Real Estate, Commercial	7,451	7,451	1,291	8,930	4
Real Estate, Residential	875	875	64	824	-
Construction	-	-	-	-	-
Consumer	581	581	97	581	-
Total	$ 12,125	$ 12,125	$ 2,157	$ 13,313	$ 26

		Commercial	Residential
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Consumer	Total
Beginning Balance, July 1, 2010	$ 1,789	$ 1,146	$ 416	$ 78	$ 3,429
Charge-off	-	-	-	-	-
Recovery	1	-	-	-	1
Provision	56	228	(30)	(19)	235
Ending Balance, September 30, 2010	$ 1,846	$ 1,374	$ 386	$ 59	$ 3,665

Included in the balance of non-accrual commercial loans is a principal balance of $634 thousand dollars representing the Company’s participation interest in two loans originated by another New Jersey based institution. Although the borrowers have ceased making payments on these loans, we have received a legal opinion from our legal counsel that the Company has valid claims against the lead/originating bank for violations of the participation agreements, and we have filed suit asserting these claims. In the event the lead bank is unable to collect from the borrowers, we believe, based on said legal opinion, that we may collect our principal and interest from the lead/originating bank. However, in that case our ability to collect on these loans will depend upon the outcome of our legal action against the lead/originating bank.

~~Nine~~Subsequent ~~months~~to ~~ended~~quarter ~~September 30~~end, ~~2011~~the Company reached a settlement agreement with the lead/originating bank under which the parties have agreed to mutually release and ~~September~~forever 30discharge each other from any and all claims that have been asserted in the suit. The Company will record a $484 thousand charge-off, ~~2010:~~related to this credit, in the second quarter of 2012. This charge-off will also be considered by the Company in the analysis of historical loss rates within the respective portfolios and may result in an increased provision in the second quarter of 2012.

		Commercial	Residential
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Consumer	Total
Beginning Balance, December 31, 2010	$ 1,743	$ 1,527	$ 417	$ 139	$ 3,826
Charge-off	(2,101)	-	(281)	-	(2,382)
Provision	1,287	(86)	173	4	1,378
Recovery	26	-	-	-	26
Ending Balance, September 30, 2011	$ 955	$ 1,441	$ 309	$ 143	$ 2,848

		Commercial	Residential
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Consumer	Total
Beginning Balance, January 1, 2010	$ 1,838	$ 1,051	$ 447	$ 96	$ 3,432
Charge-off	(149)	-	-	-	(149)
Provision	157	323	(61)	(37)	382
Ending Balance, September 30, 2010	$ 1,846	$ 1,374	$ 386	$ 59	$ 3,665

September 30, 2011 September 30, 2010 Period-end loans outstanding $ 244,286 $ 242,125 Average loans outstanding $ 239,844 $ 237,288 Allowance as a percentage of period-end loans 1.17% 1.51% Net charge-offs as a percentage of average loans 0.98% 0.06%

		Commercial	Residential
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Consumer	Total
Ending balance individually evaluated for impairment	$ 151	$ 912	$ 69	$ 97	$ 1,229
Ending balance collectively evaluated for impairment	804	529	240	46	1,619
Ending Balance, September 30, 2011	$ 955	$ 1,441	$ 309	$ 143	$ 2,848

The following table provides information regarding risk elements in the loan portfolio as of March 31, 2012 and December 31, 2011

		Commercial	Residential
(In thousands)	March 31, 2012	December 31, 2011
Financing receivable:	Commercial	Real Estate	Real Estate	Consumer	Construction	Total
Non-performing assets:
Ending balance	$ 105,721	$ 110,504	$ 9,123	$ 7,224	$11,714	$ 244,286
Loans past due 90 days or more and accruing
Ending balance individually evaluated for impairment	8,035	12,663	964	580	-	2,242
Commercial	$ -	$ -
Ending balance collectively evaluated for impairment	97,686	97,841	8,159	6,644	11,714	222,044
Construction	-	-
Consumer	-	-
Total loans past due 90 days or more and accruing	-	-
Non-accrual loans:
Commercial	5,198	1,935
Real Estate, Commercial	7,311	5,479
Real Estate, Residential	875	875
Construction	9,900	-
Consumer	660	581
Total non-accrual loans(1)	23,944	8,870
Loans less than 90 days and still accruing	5,229	1,451
Restructured loans	211	1,804
Total non-performing loans	29,384	12,125
Real estate owned	6,062	5,262
Total non-performing assets	$ 35,446	17,387
Non-performing loans as a percentage of loans	12.54%	5.01%
Non-performing assets as a percentage of loans and real estate owned	14.75%	7.03%
Non-performing assets as a percentage of total assets	9.25%	4.53%

The Company prepares an allowance for loan loss model on a quarterly basis to determine the adequacy of the allowance. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the loan portfolio, delinquency statistics, results of independent loan review and related classifications. Historic loss rates and the loss rates of peer financial institutions are also considered. In evaluating the Company’s allowance for loan loss the Company maintains a Criticized Asset Committee (~~“CAC”~~1) Nonaccrual ~~consisting of senior management that monitors problem~~ loans ~~and formulates collection efforts and resolution plans for each borrower. On a monthly basis the CAC meets to review each problem loan and determines if there has been any change~~ in ~~collateral value due to changes in market conditions. Each quarter, when calculating~~ the ~~allowance~~table ~~for~~above ~~loan~~include ~~loss,~~TDR’S ~~the~~totaling ~~CAC~~$ ~~reviews an updated loan impairment analysis on each problem loan to determine if a specific provision for loan loss is warranted~~11. Management reviews the most recent appraisal on each loan adjusted for holding and selling costs. In the event there is no recent appraisal on file, the Company will use the aged appraisal and apply a discount factor to the appraisal then deduct the holding and selling costs from the discounted appraisal value. At September 30, 2011, the Company maintained an allowance for loan loss ratio of 1.17% to period end loans outstanding. On a linked basis, our non-performing assets have increased by $6.7 million ~~over their levels~~ at ~~December~~March 31, ~~2010~~2012 ~~representing~~and a$0 ~~non-performing asset to total asset ratio of 4.68%~~ at ~~September 30, 2011 as compared to a non-performing asset to total asset ratio 3.26% at~~ December 31, ~~2010~~2011.

~~The~~During ~~Company’s~~the ~~charge-off~~three ~~policy~~month ~~states~~period ~~any~~ended ~~asset~~March ~~classified~~31, ~~loss~~2012 ~~shall~~the beCompany ~~charged-off~~experienced ~~within~~a ~~thirty~~$15.0 ~~days~~million ofincrease ~~such~~in ~~classification~~non-accrual ~~unless~~loans. ~~the~~This ~~asset~~change ~~has~~reflects ~~already~~the ~~been~~downgrade ~~eliminated~~of ~~from~~seventeen ~~the~~credit ~~books~~relationships byto ~~collection~~non-accrual orstatus ~~other~~totaling ~~appropriate entry~~$15.9 Onmillion, apartially ~~quarterly~~offset ~~basis~~by ~~the~~total ~~Board~~charge ~~Loan~~offs ~~Committee~~of ~~(“BLC”)~~two ~~reviews~~credit ~~past~~relationships ~~due,~~in ~~classified,~~the ~~non-performing~~amount ~~and~~of ~~other~~$1 ~~loans~~thousand, asprincipal itreductions ~~deems~~on ~~appropriate,~~non-accrual toloans ~~determine the collectability~~ of ~~such~~$6 ~~loans.~~thousand Ifand ~~the~~one ~~BLC~~loan ~~determines~~relationship ataken ~~loan~~into toother bereal ~~uncollectible,~~estate ~~the~~owned ~~loan~~for is$800 ~~charged~~thousand toduring the ~~allowance~~three ~~for~~month ~~loan~~period ~~loss. In~~ended ~~addition~~March 31, ~~upon~~2012. ~~reviewing~~The ~~the~~downgraded ~~collectability~~loans consisted of aeight commercial loan, ~~the~~relationships ~~BLC~~totaling ~~may~~$3.3 ~~determine~~million, afour ~~portion~~commercial ofreal ~~the~~estate ~~loan~~relationships tototaling be$2.6 ~~uncollectible;~~million, insix ~~which~~construction ~~case that portion of the~~ loan ~~deemed~~relationships ~~uncollectable~~totaling ~~will~~$9.9 bemillion ~~partially~~and ~~charged-off~~one ~~against~~consumer ~~the~~loan ~~allowance~~relationship ~~for~~totaling ~~loan~~$80 ~~loss~~thousand.

~~For~~The ~~the~~following ~~nine~~tables ~~month~~set ~~period~~forth ~~ending~~activity ~~September~~within ~~30, 2011~~ the ~~Company~~Bank’s ~~experienced~~allowance ~~fifteen~~for ~~total~~losses ~~charge~~by ~~offs~~portfolio ~~relating~~class toduring ~~seven~~the ~~loan~~three ~~relationships totaling $1.5 million~~ and ~~seven~~periods ~~partial~~ended ~~charge-offs~~March ~~relating~~31, to2012 ~~five~~and ~~loan~~March ~~relationships totaling $872 thousand as compared to charge-offs of four loans representing one relationship totaling $382 thousand for the period ended December~~ 31, ~~2010.~~2011:

15Three months ended March 31, 2012 and March 31, 2011:

The Company modifies loans by offering a restructuring in loan terms that may include but is not limited to, principal moratoriums and interest rate reductions. Of the 7 loan modifications classified as troubled debt restructures in 2011, 6 involved principal moratoriums and 1 involved a payment restructure which was a concession from the original loan terms.

		Commercial	Residential
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Construction	Consumer	Total

Beginning Balance January 1, 2012	$ 2,930	$ 1,788	$ 173	$ -	$ 104	$ 4,995
Charge-off	-	-	-	-	(1)	(1)
Provision	992	95	(22)	335	3	1,403
Recoveries	28	-	-	-	-	28
Ending Balance March 31, 2012	$ 3,950	$ 1,883	$ 151	$ 335	$ 106	$ 6,425

~~The following tables present loans by class which were modified as trouble debt restructurings during the three and nine month periods ended September 30, 2011, respectively (in thousands);~~15

Three Months ended September 30, 2011:


		Commercial	Residential
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Construction	Consumer	Total
Beginning Balance January 1, 2011	$ 1,743	$ 1,527	$ 417	$ -	$ 139	$ 3,826
Charge-off	(1,536)	-	(281)	-	-	(1,817)
Provision	943	(344)	323	-	31	953
Recoveries	-	-	-	-	-	-
Ending Balance March 31,2011	$ 1,150	$ 1,183	$ 459	$ -	$ 170	$ 2,962

Trouble Debt Restructuring	Number of loans	Pre Modification Outstanding Recorded Investment	Post- Modification Outstanding Recorded Investment
Commercial	4	$ 374	$ 374
Commercial Real Estate	1	219	219
Total	5	$ 593	$ 593

March 31, 2012 March 31, 2011

~~Nine~~Period-end ~~Months~~loans ~~ended~~outstanding ~~September~~$234,316 30$238,002 ~~2011:~~Average loans outstanding $237,957 $239,449 Allowance as a percentage of period-end loans 2.74% 1.24% Net charge-offs as a percentage of average loans 0.00% 0.76%

Trouble Debt Restructuring	Number of loans	Pre Modification Outstanding Recorded Investment	Post- Modification Outstanding Recorded Investment
		Commercial	Residential
Commercial	6	$ 475	$ 475
Allowance for Loan Losses	Commercial	Real Estate	Real Estate	Construction	Consumer	Total
Commercial Real Estate	1	219	219
Ending balance individually evaluated for impairment	$ 2,130	$ 1,329	$ 64	$ 335	$ 99	$3,957
Total	7	$ 694	$ 694
Ending balance collectively evaluated for impairment	1,820	554	87	-	7	2,468
Ending Balance, March 31, 2012	$ 3,950	$ 1,883	$ 151	$ 335	$ 106	$6,425

Trouble Debt Restructuring That Subsequently Defaulted	Number of loans	Recorded Investment
			Commercial	Residential
Commercial	2	$ 101
	Financing receivable:	Commercial	Real Estate	Real Estate	Consumer	Construction	Total
Total	2	$ 101
	Ending balance	$ 93,986	$ 115,136	$ 7,241	$ 7,013	$ 10,940	$234,316
	Ending balance individually evaluated for impairment	10,440	7,509	875	660	9,900	29,384
	Ending balance collectively evaluated for impairment	83,546	107,627	6,366	6,353	1,040	204,932

ThereManagement wereconsiders noa troubledvariety debtof restructuringsfactors duringwhen establishing the threeallowance, orsuch nineas monththe periodsimpact endedof Septembercurrent 30economic conditions, 2010diversification of the loan portfolio, delinquency statistics, results of independent loan review and related classifications. Historic loss rates and the loss rates of peer financial institutions are also considered. In evaluating the Company’s allowance for loan losses, the Company maintains a Criticized Asset Committee (“CAC”) consisting of senior management that monitors problem loans and formulates collection efforts and resolution plans for each borrower. On a monthly basis the CAC meets to review each problem loan and determines if there has been any change in collateral value due to changes in market conditions. Each quarter, when calculating the allowance for loan losses, the CAC reviews an updated loan impairment analysis on each problem loan to determine if a specific provision for loan loss is warranted. Management reviews the most recent appraisal on each loan adjusted for holding and selling costs. In the event there is no recent appraisal on file, the Company will use the aged appraisal and apply a discount factor to the appraisal then deduct the holding and selling costs from the discounted appraisal value.

At March 31, 2012, the Company maintained an allowance for loan loss ratio of 2.74% to period end loans outstanding, compared to 2.06% to period end loans at year end 2011. On a linked basis, our non-performing assets have increased by $18.0 million over their levels at December 31, 2011 representing a non-performing asset to total asset ratio of 9.25% at March 31, 2012 as compared to a non-performing asset to total asset ratio 4.56% at December 31, 2011.

The Company’s charge-off policy states that any asset classified loss shall be charged-off within thirty days of such classification unless the asset has already been eliminated from the books by collection or other appropriate entry. On a quarterly basis the Board Loan Committee (“BLC”) reviews past due, classified, non-performing and other loans, as it deems appropriate, to determine the collectability of such loans. If the BLC determines a loan to be uncollectible, the loan is charged to the allowance for loan loss. In addition, upon reviewing the collectability of a loan, the BLC may determine a portion of the loan to be uncollectible; in which case that portion of the loan deemed uncollectable will be partially charged-off against the allowance for loan loss.

For the three month period ending March 31, 2012 the Company experienced two total charge offs relating to two loan relationships totaling $1 thousand as compared to total charge-offs of eighteen loans representing ten relationship totaling $4.3 million and ten partial charge-offs relating to seven loan relationships totaling $1.3 million for the period ended December 31, 2011.

The Company modifies loans by offering a restructuring in loan terms that may include, but is not limited to, principal moratoriums and interest rate reductions. There was one loan modification classified as a troubled debt restructure during the three months ended March 31, 2012.

The following tables present loans by class which were modified as trouble debt restructurings during the three period ended March 31, 2012, (in thousands);

Three Months ended March 31, 2012:

		Pre Modification	Post Modification
	Number of	Outstanding Recorded	Outstanding Recorded
Trouble Debt Restructuring	Loans	Investment	Investment
Construction	8	$ 9,900	$ 9,900
Total	8	$ 9,900	$ 9,900

Trouble Debt Restructuring That Subsequently Defaulted	Number of loans	Recorded Investment
	-	$ -
Total	-	$ -

There were no troubled debt restructurings during the three month period ended March 31, 2011.

NOTE 8 – Bank Owned Life Insurance

Bank owned life insurance (“BOLI”) is carried at its aggregate cash surrender value less surrender charges and totaled $46.83 million at ~~September~~March 3031, ~~2011~~2012. Income of $~~121~~51 thousand was recognized on BOLI during the ~~nine~~three month period ended ~~September~~March 3031, ~~2011~~2012 as compared to $~~123~~40 thousand for the ~~nine~~three month period ended ~~September~~March 3031, ~~2010~~2011. The Bank is the sole owner and beneficiary of the BOLI.

NOTE 9 – Deferred Compensation Plans

Effective January 1, 2006, the Bank adopted a Nonqualified Deferred Compensation Plan (The “Executive Plan”) and the Directors’ Fee Deferral and Death Benefit Plan (the “Directors’ Plan”). Both plans provide for payments of deferred compensation to participants. The Company recorded $~~238~~ 85 thousand in deferred compensation expense during the ~~nine~~three month period ended ~~September~~March 3031, ~~2011~~2012 as compared to $~~128~~79 thousand for the ~~nine~~three month period ended ~~September~~March 3031, ~~2010~~2011.

NOTE 10 – Income Taxes

The Company accounts for uncertainties in income taxes in accordance with ASC 740, Accounting for Uncertainty in Income Taxes. ASC 740 prescribes a threshold and measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has determined that there are no significant uncertain tax positions requiring recognition in its financial statements.

16Federal tax years 2008 through 2010 remain subject to examination as of March 31, 2012, while tax years 2007 through 2010 remain subject to examination by state taxing jurisdictions. In the event the Company is assessed for interest and/or penalties by taxing authorities, such assessed amounts will be classified in the financial statements as income tax expense.

~~derecognition~~The ability to realize deferred tax assets is dependent upon a variety of factors, ~~classification~~including the generation of future taxable income, ~~interest~~the existence of taxes paid and ~~penalties~~recoverable, ~~accounting~~the inreversal ~~interim~~of ~~periods~~deferred tax liabilities, ~~disclosure~~and tax planning strategies. Based upon these and ~~transition~~other factors, the Company determined that it is more likely than not that our deferred tax asset will be realized. As such, no valuation allowance was established for the deferred tax asset as of March 31, 2012 or December 31, 2011. The Company ~~has~~will continue to reassess the realizability of the deferred tax asset in future periods. If, in the future, it is determined that ~~there~~the ~~are~~Company’s nodeferred ~~significant~~tax ~~uncertain~~asset is not realizable, a valuation allowance may be established against the deferred tax ~~positions~~asset, ~~requiring~~which ~~recognition~~may have a material impact on the Company’s net income in ~~its~~the ~~financial~~period ~~statements.~~in which it is recorded.

Federal tax years 2008 through 2010 remain subject to examination as of September 30, 2011, while tax years 2007 through 2010 remain subject to examination by state taxing jurisdictions. In the event the Company is assessed for interest and/or penalties by taxing authorities, such assessed amounts will be classified in the financial statements as income tax expense.

The ability to realize deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities, and tax planning strategies. Based upon these and other factors, the Company determined that it is more likely than not that our deferred tax asset will be realized. As such, no valuation allowance was established for the deferred tax asset as of September 30, 2011 or December 31, 2010. The Company will continue to reassess the realizability of the deferred tax asset in future periods. If, in the future, it is determined that the Company’s deferred tax asset is not realizable, a valuation allowance may be established against the deferred tax asset, which may have a material impact on the Company’s net income in the period in which it is recorded.

NOTE 11 – Fair Value of Financial Instruments

ASC 820 Fair Value Measurements and Disclosures establishes a framework for measuring fair value under U.S. generally accepted accounting principles, and expands disclosure requirements for fair value measurements.

ASC 820 does not require any new fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as described below:

· Level 1. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

· Level 2. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets, quoted prices in markets that are not considered to be active, and observable inputs other than quoted prices such as interest rates.

· Level 3. Level 3 inputs are unobservable inputs.

The fair value of securities available for sale are determined by obtaining quoted prices on a nationally recognized securites exchange ( Level 1 inputs) or 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).

A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input significant to the fair value measurement.

1718

Assets and Liabilities Measured on a Recurring Basis

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

	Fair Value Measurements at September 30, 2011			Fair Value Measurements at December 31, 2010
	Fair Value Measurements at March 31, 2012			Fair Value Measurements at December 31, 2011
	Quoted Prices	Significant	Significant	Quoted Prices	Significant	Significant
	in Active Markets	other	other	in Active Markets	other	other
	for Identical	Observable	Unobservable	for Identical	Observable	Unobservable
	Assets	Inputs	Inputs	Assets	Inputs	Inputs
	(Level 1)	Level (2)	Level (3)	(Level 1)	Level (2)	Level (3)
Assets :
Investment Securities
US Government Obligations	$ -	$ 6286,~~081~~608	$ -	$ -	$ 3583,~~560~~727	$ -
US Treasury Securities	$ -	$ -	$ -	$ 9 ,075	$ -	$ -
Total assets on a recurring basis at fair value	$ -	$ 86,608	$ -	$ -	$ 83,727	$ -
Total assets on a recurring basis at fair value	$ -	$ 62,081	$ -	$ 9,075	$ 35,560	$ -

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 at September 30, 2011			Fair Value Measurements at December 31, 2010
	Fair Value Measurements at March 31, 2012			Fair Value Measurements at December 31, 2011
	Quoted Prices	Significant	Significant	Quoted Prices	Significant	Significant
	in Active Markets	other	other	in Active Markets	other	other
	for Identical	Observable	Unobservable	for Identical	Observable	Unobservable
	Assets	Inputs	Inputs	Assets	Inputs	Inputs
	(Level 1)	Level (2)	Level (3)	(Level 1)	Level (2)	Level (3)
Assets :
Impaired loans	$ -	$ 1729,~~454~~384	$ -	$ -	$ 1012,~~727~~125	$ -
Other real estate owned	$ -	~~$ 830~~6,062	$ -	$-	~~$ 830~~5,262	$ -
Total assets on a non recurring basis at fair value	$ -	$ 18,284	$ -	$	$ 11,557	$ -
Total assets on a non-recurring basis at fair value	$ -	$ 35,446	$ -	$ -	$ 17,387	$ -

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

~~These~~The ~~appraisals~~following ~~may~~required ~~utilize~~disclosure aof ~~single~~the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation ~~approach~~methodologies. However, orconsiderable ajudgment ~~combination~~is required to interpret market data to develop the estimates of ~~approaches~~fair ~~including~~value. Accordingly, ~~comparable~~the ~~sales~~use of different market assumptions and/or estimation methodologies may have a material effect on the ~~income~~estimated ~~approach~~fair value amounts.

As required by ASC 825-10-65, the estimated fair value of financial instruments at September 30, 2011 and December 31, 2010 was as follows:

	September 30, 2011				December 31, 2010
(In thousands)	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets:
Cash and cash equivalents	$	46,697	$	46,697	$	9,031	$	9,031
Investments held to maturity
Federal Agency Securities		14,982		15,135		32,706		31,643
Mortgage-backed Securities		6,947		7,434		7,729		7,877
Investments available for sale
US Treasury Securities		-		-		9,075		9,075
Federal Agency Securities		62,081		62,081		35,560		35,560
Loans receivable		244,286		274,217		242,856		265,397
FHLB stock		1,438		1,438		1,435		1,435
Bank owned life insurance		4,806		4,806		4,685		4,685
Accrued interest receivable		1,815		1,815		2,152		2,152
Total financial assets	$	383,052	$	413,623	$	345,229	$	366,855
Financial Liabilities:
Checking accounts	$	53,193	$	53,193	$	59,625	$	59,625
Statement savings accounts		3,530		3,530		3,203		3,203
Money market accounts		9,883		9,883		10,248		10,248
Index accounts		152,631		152,631		115,697		115,697
Certificates of deposit		110,506		108,662		113,497		112,495
FHLB advances		25,000		25,000		25,000		25,000
Line of credit		5,000		5,000		4,877		4,877
Subordinated debt		3,000		3,000		3,000		3,000
Accrued interest payable		173		173		187		187
Total financial liabilities	$	362,916	$	361,072	$	335,334	$	334,332
	Contract Value		Estimated Fair Value		Contract Value		Estimated Fair Value
Off-balance sheet instruments:
Commitments to extend credit	$	46,760	$	-	$	58,051	$	-

The forgoing fair values are presented pursuant to the requirements of GAAP and ASC topic 825-10-65 for disclosure purposes only, and should

not be considered to represent the value of the Company as a whole.

As required by ASC 825-10-65, the estimated fair value of financial instruments at March 31, 2012 and December 31, 2011 was as follows:

		March 31, 2012				December 31, 2011
(In thousands)	Level in fair value hierarchy	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets:
Cash and cash equivalents	Level 1	$	42,236	$	42,236	$	37,839	$	37,839
Investments available for sale
Federal Agency Securities	Level 2		86,608		86,608		83,727		83,727
Loans receivable	Level 3		234,316		246,393		241,917		272,384
FHLB stock	Level 3		763		763		1,438		1,438
Bank owned life insurance	Level 3		6,257		6,257		6,206		6,206
Accrued interest receivable	Level 2		1,768		1,768		1,577		1,577
Total financial assets		$	371,948	$	384,025	$	372,704	$	403,171

Financial Liabilities:
Non-interest bearing deposits	Level 1	$	38,001	$	38,001	$	29,963	$	29,963
Interest bearing deposits	Level 2		204,238		204,238		201,066		201,066
Certificates of deposit	Level 2		99,634		97,449		99,279		97,069
FHLB advances	Level 2		10,000		10,000		25,000		25,000
Line of credit	Level 2		5,000		5,000		5,000		5,000
Subordinated debt	Level 2		3,000		3,000		3,000		3,000
Accrued interest payable	Level 2		135		135		167		167
Total financial liabilities		$	360,008	$	357,823	$	363,475	$	361,265

		Contract Value		Estimated Fair Value		Contract Value		Estimated Fair Value
Off-balance sheet instruments:
Commitments to extend credit		$	57,559	$	-	$	49,568	$	-

The forgoing fair values are presented pursuant to the requirements of GAAP and ASC topic 825-10-65 for disclosure purposes only, and should not be considered to represent the value of the Company as a whole.

NOTE 12 – Recent Accounting Pronouncements

Below is a discussion of recent accounting pronouncements. Recent pronouncements not discussed below were deemed to not be applicable to the Company.

In ~~January~~May 2011, the FASB issued ASU ~~No.~~ 2011-0104, ~~Deferral~~Amendments ofto ~~the~~Achieve ~~Effective~~Common ~~Date~~Fair ofValue ~~Disclosures~~Measurement ~~about~~and ~~Troubled~~Disclosure ~~Debt~~Requirements ~~Restructurings~~ in ~~Update No~~U. ~~2010-20~~S. ~~This~~GAAP ~~Update~~and ~~temporarily~~IFRSs, ~~delayed~~to ~~the~~provide ~~effective~~largely ~~date~~identical ofguidance ~~the~~about ~~disclosures~~fair ~~about~~value ~~troubled~~measurement ~~debt~~and ~~restructurings~~disclosure inrequirements ~~Update~~with ~~2010-20~~the ~~for~~IASB's ~~public~~new ~~entities.~~IFRS ~~The~~13, ~~amendments~~Fair inValue Measurement. Issuing this ~~Update~~standard ~~delayed~~completed ~~the~~a ~~effective~~major ~~date~~project of the ~~new~~Boards' ~~disclosures~~joint ~~about~~work ~~troubled~~to ~~debt~~improve ~~restructurings~~and ~~for~~converge ~~public~~IFRS ~~entities~~ and U.S. GAAP. The new standard does not extend the ~~coordination~~use of ~~the~~fair value but, rather, provides guidance ~~for~~about ~~determining~~how ~~what~~fair ~~constitutes~~value ashould ~~troubled~~be ~~debt~~applied ~~restructuring~~where ~~until~~it already is required or permitted under U.S. GAAP. ASU 2011-04 is effective for interim and annual periods beginning after ~~June~~ December 15, 2011. The Company adopted ASU 2011-0104 ~~during the third quarter 2011~~ and ~~the~~did ~~relevant~~not ~~disclosures~~have ~~are~~a ~~included~~material inimpact ~~this~~to ~~Form~~the ~~10-Q~~financial statements.

In ~~April~~June 2011, ~~The~~the ~~FAS~~FASB issued ASU No. 2011-0205, APresentation ~~Creditor’s Determination~~ of ~~Whether~~Comprehensive aIncome. This ~~Restructuring~~ASU Isincreases ~~a Troubled Debt Restructuring, which amended guidance for evaluating whether~~ the ~~restructuring~~prominence of aother ~~receivable~~comprehensive byincome ain ~~creditor~~financial isstatements. aUnder ~~troubled~~this ~~debt~~ASU, ~~restructuring~~an ~~(TDR).~~entity ~~The~~will ~~ASU~~have ~~responded~~the option to ~~concerns~~present ~~that~~the ~~creditors~~components ~~are~~of ~~inconsistently~~net ~~applying~~income ~~existing~~and ~~guidance~~comprehensive ~~for~~income ~~identifying~~in ~~TDRs.~~either Itone isor ~~effective~~two ~~for~~consecutive ~~interim~~financial ~~and~~ statements. ~~annual~~The ~~periods~~ASU ~~beginning~~eliminates onthe oroption ~~after~~in ~~June 15, 2011~~U.S. ~~The~~GAAP ~~adoption~~to ofpresent ~~ASU~~other ~~2011-02~~comprehensive ~~did~~income ~~not~~in ~~have~~the astatement ~~material~~of ~~impact~~changes toin ~~the financial statements~~equity.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to provide largely identical guidance about fair value measurement and disclosure requirements with the IASB's new IFRS 13, Fair Value Measurement. Issuing this standard completed a major project of the Boards' joint work to improve and converge IFRS and U.S. GAAP. The new standard does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under U.S. GAAP. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material impact to the financial statements.20

~~In June 2011, the FASB issued~~ ASU ~~No.~~ 2011-05, Presentation of Comprehensive Income. This ASU increases the prominence of other comprehensive income in financial statements. Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 ~~will~~impacted ~~impact~~ the Company’s presentation of comprehensive income within the financial statements. However, it ~~will~~did not impact the financial statements amounts.

NOTE 13– Private Placement Common Stock Offering and Preferred Stock Issuance

In June 2009, the Board of Directors of the Company approved a private placement common stock offering to accredited investors. In connection with this offering, the Board of Directors approved the issuance of common stock purchase warrants. As part of the offering, one warrant was issued for each share of Company common stock, no par value, sold in the stock offering. Each warrant issued under the offering will allow the holder of the warrant to purchase one share of Company common stock, for a price of $9.00 per share through June 26, 2013. For the year ended December 31, 2009, the Company sold 153,889 shares under this offering and issued 153,889 common stock warrants. The $1.1 million proceeds received from the common stock offering were recorded as additional paid in capital.

In December 2009, the Company authorized the establishment of ~~2,000~~1 million shares of no par, $1~~,000~~ thousand stated value, Series A Perpetual Non-Cumulative Convertible Preferred Stock. The preferred stock is entitled to receive, as and when declared by the Company’s Board of Directors, non-cumulative cash dividends at an annual rate of 7% of the stated value. In December 2009, the Company sold 1,900 preferred shares. The preferred stock is redeemable at the Company’s option at any time after six months from the issue date at the stated value plus any dividends declared but unpaid. The preferred shares have priority ofwith regards to dividends such that, no dividends or distributions shall be declared or paid to common shareholders for any quarter unless full dividends on all outstanding preferred shares have been declared and paid for the most recently completed calendar quarter.

In December 2011, the Company authorized the establishment of 10 thousand shares of no par, $20 stated value, Series B Perpetual Non-Cumulative Convertible Preferred Stock. The preferred stock is entitled to receive, as and when declared by the Company’s Board of Directors, non-cumulative cash dividends at an annual rate of 7% of the stated value. In December 2011, the Company sold 10,000 preferred shares. The preferred stock is redeemable at the Company’s option at any time after six months from the issue date at the stated value plus any dividends declared but unpaid. The preferred shares have priority with regards to dividends such that, no dividends or distributions shall be declared or paid to common shareholders for any quarter unless full dividends on all outstanding preferred shares have been declared and paid for the most recently completed calendar quarter.

NOTE 14 – Subsequent Events

The Company has evaluated subsequent events through the filing date of this report, and has determined that, ~~there~~except ~~were~~for nothe ~~recognized~~following, orthere ~~unrecognized~~were no subsequent events to report in the March 31, 2012 financial statements.

~~Item~~Subsequent 2to quarter end, the Company reached a settlement agreement with the lead/originating bank under which the parties have agreed to mutually release and forever discharge each other from any and all claims that have been asserted in the suit. ~~Management's~~The ~~Discussion~~Company will record a $484 thousand charge-off, related to this credit, in the second quarter of 2012. This charge-off will also be considered by the Company in the analysis of historical loss rates within the respective portfolios and ~~Analysis~~may result in an increased provision in the second quarter of 2012.

Item 2. Management's Discussion and Analysis

Forward-Looking Statements

Cornerstone Financial Corporation (the "Company") may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (many of which are beyond the Company's control). Forward-looking statements may be identified by the use of words such as “expects,” “subject,” “believe,” “will,” “intends,” “will be,” or “would.” The factors which could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements include those items listed under “Item 1A-Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and the following factors, among others: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”); inflation; interest rates; market and monetary fluctuations; the timely development of new products and services by the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the success of the Company in gaining regulatory approval of its products, services, dividends and of new branches, when required; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; the ability to continue to effectively manage costs, including the costs incurred in connection with the opening of new branches; changes in consumer spending and saving habits; the Company’s ability to access the capital markets to maintain its regulatory capital standing and the success of the Company at managing the risks resulting from these factors. 21

The factors which could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements include those items listed under “Item 1A-Risk Factors” in both our Annual Report on Form 10-K for the year ended December 31, 2011 and in this Quarterly Report on Form 10-Q and include the following factors, among others: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”); inflation; interest rates; market and monetary fluctuations; the timely development of new products and services by the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the success of the Company in gaining regulatory approval of its products, services, dividends and of new branches, when required; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; the ability to continue to effectively manage costs, changes in consumer spending and saving habits; the Company’s ability to access the capital markets to maintain its regulatory capital standing and the success of the Company at managing the risks resulting from these factors.

The Company cautions that the above listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Overview

Cornerstone Financial Corporation

The Company was formed in 2008 at the direction of the Board of Directors of Cornerstone Bank (the “Bank”) to serve as a holding company for the Bank. The Board believed that establishing a holding company would provide greater flexibility in raising capital and conducting the Bank’s business. The holding company reorganization was completed in January 2009.

At ~~September~~March 3031, ~~2011~~2012, we had total assets of $~~390~~383.42 million, total loans, gross of $~~244~~234.3 million, total investment securities of $8486.06 million and total deposits of $~~329~~341.79 million compared to total assets of $~~354~~383.08 million, total loans, gross of $241.9 million, total investment securities of $83.7 million and total deposits of $330.3 million at December 31, 2011. During the past two years, many of our borrowers have been adversely affected by the recession of 2008 and the subsequent slow economic recovery. As a result, we have experienced elevated levels of nonperforming assets, which have continued to increase through the first quarter of 2012. Our primary focus has turned toward managing our credit quality and capital levels while continuing to meet the credit needs of the communities served by our branches. We expect that we will not continue our historical rate of growth until the economy strengthens and our non-performing assets have returned to more normalized levels. Because of the growth in our non-performing assets, it is possible that our Federal and state regulators may decide to take a formal or informal enforcement action against the Bank. In the event of any such action, our growth may be further limited, and we may incur substantial expense in complying with any such action.

loans, gross of $242.8 million, total investment securities of $85.1 million and total deposits of $302.3 million at December 31, 2010. Our growth in assets and deposits reflects our commitment to provide outstanding customer service and a broad array of banking products driven by our customers’ needs. We believe our strategy provides us with a competitive advantage over other financial institutions by developing lasting customer relationships that will enable us to continue to attract core deposits and loans within our market area.

Interest Rate Risk

Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income while creating an asset/liability structure that maximizes earnings. ~~Our Asset Liability Management Committee actively monitors and manages our interest rate exposure using gap analysis and interest rate simulation models.~~

Our Asset Liability Management Committee actively monitors and manages our interest rate exposure using gap analysis and interest rate simulation models.

Gap analysis measures the difference between volumes of rate-sensitive assets and liabilities and quantifies these repricing differences for various time intervals. Static gap analysis describes interest rate sensitivity at a point in time. However, gap analysis alone does not accurately measure the potential magnitude of changes in net interest income since changes in interest rates do not affect assets and liabilities at the same rate, to the same extent, or on the same basis. Furthermore, static gap analysis does not consider future growth or changes in the asset mix.

A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) indicates that more liabilities reprice during a given period compared to assets.

Generally, during a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, in general, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. However, certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same or similar time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Also, certain assets (e.g., adjustable rate mortgages) often have provisions that may limit changes both each time the interest rate changes and on a cumulative basis over the life of the loan. Additionally, the actual prepayments and withdrawals in the event of a change in interest rates may differ significantly from those assumed in the calculations shown in the table below. Finally, the ability of borrowers to service their debt may decrease in the event of an interest rate increase. Consequently, any model used to analyze interest rate sensitivity will be vulnerable to the assumptions made with respect to the foregoing factors.

We use a computer-based simulation model to assess the impact of changes in interest rates on net interest income. The model incorporates management’s business plan assumptions and related asset and liability yields/costs, deposit sensitivity and the size, composition and maturity or repricing characteristics of our assets and liabilities. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Actual results may differ from simulated results due to the various factors discussed above.

The following table sets forth the amount of our interest-earning assets and interest-bearing liabilities at ~~September~~March 3031, ~~2011~~2012, which are expected to mature or reprice in each of the time periods shown:

(In thousands)	One Year or Less	One-Five Years	Over Five Years	Non-Rate Sensitive Assets/ Liabilities	Total
Interest-earning assets:
Short term investments	$ 4036,~~400~~500	$ -	$ -	$ -	$ 4036,~~400~~500
Investment securities held to maturity	-	-	21,929	-	21,929
Investment securities available for sale		-	86,608	-	86,608
Investment securities available for sale			62,081	-	62,081
Loans receivable	112,782	68,356	53,178	-	234,316
Loans receivable	126,910	67,576	49,800	-	244,286
Total interest-earning assets	149,282	68,356	139,786	-	357,424
Total interest-earning assets	167,310	67,576	133,810	-	368,696
Non-rate sensitive assets: Other assets	-	-	-	25,760	25,760
Non-rate sensitive assets: Other assets	-	-	-	21,727	21,727
Total assets	$ 149,282	$ 68,356	$ 139,786	$ 25,760	$ 383,184
Total assets	$ 67 ,310	$ 67,576	$ 133,810	$ 21,727	$ 390,423
Interest-bearing liabilities:
Interest-bearing demand	$ 2440,~~542~~478	$ -	$ -	$ -	$ 2440,~~542~~478
Statement savings	3,~~530~~663	-	-	-	3,~~530~~663
Money market	~~162~~160,~~514~~097	-	-	-	~~162,514~~160.097
Certificates of deposit	5936,~~640~~153	5063,~~866~~481	-	-	~~110~~99,~~506~~634
Subordinated debt	-	3,000	-	-	3,000
Borrowings	205,000	10,000	-	-	3015,000
Total interest-bearing liabilities	~~270~~245,~~226~~391	6376,~~866~~481	-	-	~~334~~321,~~092~~872
Non-rate sensitive liabilities:
Non-interest bearing deposits	-	-	-	2838,~~651~~001	2838,~~651~~001
Other liabilities	-	-	-	65,~~638~~178	65,~~638~~178
Capital	-	-	-	2118,~~042~~133	2118,~~042~~133
Total liabilities and capital	$ ~~270~~245,~~226~~391	$ 6376,~~866~~481	$ -	$ 5661,~~331~~312	$ ~~390~~383,~~423~~184
Period GAP	$ (~~102~~96,~~916~~109)	$ 3(8,~~710~~125)	$ ~~133~~139,~~810~~786	$ (3435,~~604~~552)
Cumulative interest-earning assets	$ ~~167~~149,~~310~~282	$ ~~234~~217,~~886~~638	$ ~~368~~357,~~696~~424
Cumulative interest-bearing liabilities	$ ~~270~~245,~~226~~391	$ ~~334~~321,~~092~~872	$ ~~334~~321,~~092~~872
Cumulative GAP	$ (~~102~~96,~~916~~109)	$ (99104,~~206~~234)	$ 3435,~~604~~552
Cumulative RSA/RSL (1)	6160.9183%	7067.3162%	~~110~~111.3605%

(1) Cumulative rate sensitive (interest-earning) assets divided by cumulative rate sensitive (interest-bearing) liabilities. ~~At September 30, 2011, our interest rate sensitivity gap was within Board approved guidelines. 22~~

At March 31, 2012, our interest rate sensitivity gap was within Board approved guidelines.

Gap analysis and interest rate simulation models require assumptions about certain categories of assets and deposits. For purposes of these analyses, assets and liabilities are stated at their contractual maturity, estimated likely call date, or earliest repricing opportunity. Interest-bearing demand deposits, statement savings and money market accounts do not have a stated maturity or repricing term and can be withdrawn or repriced at any time. This may impact our net interest income if more expensive alternative sources of deposits are required to fund loan growth or deposit runoff. Management projects the repricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity.

The following discussion focuses on the major components of our operations and presents an overview of the significant changes in our financial condition at September 30, 2011 as compared to December 31, 2010 and our results of operations for the three and nine month periods ended September 30, 2011 as compared to the same period in 2010.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Total assets at September 30, 2011 were $390.4 million, an increase of $36.4 million or 10.3% over December 31, 2010. This change was primarily due to increases in cash and cash equivalents of $37.7 million, bank owned life insurance of $121 thousand, investment securities available for sale of $17.4 million, loans receivable, net , of $2.4 million and FHLB stock of $3 thousand, partially offset by decreases in other assets of $239 thousand, in investment securities held to maturity of $18.5 million, accrued interest receivable of $337 thousand, deferred taxes of $2.0 million, and premises and equipment of $113 thousand. Management has elected to keep excess cash flow in short term, liquid assets to fund anticipated loan demand over the next several quarters.

~~Gross~~Gap ~~loans~~analysis ~~receivable~~and atinterest ~~September~~rate ~~30,~~simulation ~~2011,~~models ~~totaled~~require ~~$244.3~~assumptions ~~million,~~about ancertain ~~increase~~categories of ~~$1.4~~assets ~~million~~and ~~or 0~~deposits.6% For ~~from December~~purposes 31of these analyses, ~~2010. This~~assets ~~change~~and ~~was~~liabilities ~~attributable~~are tostated anat ~~increase~~their ofcontractual ~~$10.4~~maturity, ~~million~~estimated inlikely ~~commercial~~call ~~loans~~date, ~~offset~~or byearliest ~~decreases~~repricing ~~of $5~~opportunity.7 Interest-bearing ~~million~~demand indeposits, ~~residential~~statement ~~real~~savings ~~estate~~and ~~loans,~~money ~~$1.6~~market ~~million~~accounts indo ~~commercial~~not ~~real~~have ~~estate~~a ~~loans,$1.4~~stated ~~million~~maturity inor ~~construction~~repricing ~~loans,~~term and ~~$260~~can ~~thousand~~be inwithdrawn ~~consumer~~or ~~loans~~repriced at any time. This ~~The~~may ~~decline~~impact inour ~~gross~~net ~~loans~~interest ~~represents~~income ~~significant~~if ~~payoffs~~more ~~received~~expensive ~~during~~alternative ~~the~~sources ~~nine~~of ~~months~~deposits ~~ended~~are ~~September~~required ~~30,~~to ~~2011~~fund ~~coupled~~loan ~~with~~growth ~~recording~~or $2deposit runoff.4 Management ~~million~~projects inthe ~~loan~~repricing ~~charge-offs.~~characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity.

The following discussion focuses on the major components of our operations and presents an overview of the significant changes in our financial condition at March 31, 2012 as compared to December 31, 2011 and our results of operations for the three month periods ended March 31, 2012 as compared to the same period in 2011.

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Total assets at March 31, 2012 were $383.2 million, a decrease of $601 thousand or .2% over December 31, 2011. This change was due to increases in cash and cash equivalents of $4.4 million, bank owned life insurance of $51 thousand, investment securities available for sale of $2.9 million, accrued interest receivable of $191 thousand, deferred taxes of $895 thousand, other real estate owned of $800 thousand and premises and equipment of $202 thousand, offset by decreases in loans receivable, net, of $9.0 million, other assets of $312 thousand and FHLB stock of $675 thousand. Management has elected to keep excess cash flow in short term, liquid assets to maintain a strong liquidity base while managing our level of capital.

Gross loans receivable at March 31, 2012, totaled $234.3 million, a decrease of $7.6 million or 3.1% from December 31, 2011. This change was attributable to decreases of $3.7 million in commercial loans, $1.7 million in residential real estate loans, $790 thousand in commercial real estate loans, $1.2 million in construction loans, and $260 thousand in consumer loans. The decline in gross loans represents payoffs received during the three months ended March 31, 2012 coupled with $800 thousand in other real estate owned.

See Footnote 7 to our Consolidated Financial Statements for a breakdown of the components of our loan portfolio.

Non-performing assets consist of non-accrual loans (loans on which the accrual of interest has ceased), loans over ninety days delinquent and still accruing interest, renegotiated loans, impaired loans, and real estate owned. Loans are generally placed on non-accrual status if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more unless the collateral is considered sufficient to cover principal and interest and the loan is in the process of collection. The Company recognized no interest income on non-accrual loans during the ~~nine~~three month ~~period~~periods ended ~~September~~March 3031, ~~2011~~2012 asand ~~compared~~March ~~to $149 thousand for the nine month period ended September 30~~31, ~~2010~~2011.

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above. At September 30, 2011 the Company had twenty one loan relationships totaling $15.9 million on non-accrual status compared to twelve relationships totaling $9.8 million on non-accrual status at December 31, 2010. At September 30, 2011, the Company had thirty impaired loan relationships totaling $17.5 million (included within the non-accrual loans discussed above) in which $8.7 million in impaired loans had a related allowance for credit losses of $1.2 million and $8.8 million in impaired loans in which there is no related allowance for credit losses. The average balance of impaired loans totaled $17.9 million as of September 30, 2011, and interest income recorded on impaired loans during the nine months ended September 30, 2011 totaled $9 thousand, as compared to $149 thousand for the nine months ended September 30, 2010.

The balance in loans 90-days past due and still accruing at September 30, 2011 equaled $381 thousand, a decrease of $497 thousand from the reported levels at December 31, 2010. The change was a result of one commercial loan relationship migrating from 90-days past due and still accruing to non accrual status and the addition of one consumer loan totaling $243 thousand and one construction loan totaling $138 thousand.24

~~Included~~At inMarch ~~the~~31, ~~balance~~2012 ofthe ~~non~~Company ~~accrual~~had ~~commercial~~thirty ~~loans~~seven isloan arelationships ~~principal~~totaling ~~balance~~$23.9 ofmillion ~~$634~~on ~~thousand~~non-accrual ~~dollars~~status ~~representing~~compared ~~the~~to ~~Bank’s~~twenty ~~participation~~one ~~interest~~relationships intotaling ~~two~~$8.9 ~~loans~~million ~~originated~~on bynon-accrual ~~another~~status ~~New~~at ~~Jersey~~December ~~based~~31, ~~institution~~2011. ~~Although~~During the ~~borrowers~~three ~~have~~month ~~ceased~~period ~~making~~ended ~~payments~~March ~~on these loans~~31, we2012 ~~have~~the ~~received~~Company experienced a ~~legal~~$15.0 ~~opinion~~million ~~from~~increase ~~our~~in ~~legal~~non-accrual ~~counsel~~loans. ~~that~~This change reflects the ~~Bank~~downgrade ~~has~~of ~~valid~~seventeen ~~claims~~credit ~~against~~relationships ~~the~~to ~~lead/originating~~non-accrual ~~bank~~status ~~for~~totaling ~~violations~~$15.9 million partially offset by total charge offs of two credit relationships in the ~~participation~~amount ~~agreements~~of $1 thousand, principal reductions on non-accrual loans of $6 thousand and weone ~~have~~loan ~~filed~~relationship ~~suit~~taken ~~asserting~~into ~~these~~other ~~claims. In~~real ~~the~~estate ~~event~~owned for $800 thousand during the ~~lead~~three ~~bank~~month isperiod ~~unable~~ended toMarch ~~collect~~31, ~~from~~2012. ~~the~~The ~~borrowers~~downgraded loans consisted of eight commercial loan relationships totaling $3.3 million, wefour ~~believe~~commercial real estate relationships totaling $2.6 million, ~~based~~six onconstruction ~~said~~loan ~~legal~~relationships ~~opinion~~totaling ~~that~~$9.9 wemillion ~~will~~and ~~collect~~one ~~our~~consumer ~~investment~~loan ~~from~~relationship ~~the~~totaling ~~lead/originating~~$80 ~~bank~~thousand. ~~However,~~These indowngrades ~~that~~reflect ~~case~~further ~~our~~evidence ~~ability~~that toour ~~collect~~borrowers oncontinue ~~these~~to ~~loans~~be ~~will~~adversely ~~depend~~affected ~~upon~~by the ~~outcome~~recession of ~~our~~2008 ~~legal~~and ~~action~~the ~~against~~subsequent ~~the~~slow ~~lead/originating~~economic ~~bank~~recovery.

~~During~~At ~~the~~March ~~nine~~31, ~~month~~2012, ~~period~~the ~~ended~~Company ~~September~~had ~~30,~~forty ~~2011~~impaired ~~the~~loan ~~Company~~relationships ~~experienced~~totaling a $629.14 million ~~increase~~(included inwithin the non-accrual loans. ~~This~~discussed ~~change~~above) ~~reflects~~in ~~the~~which ~~downgrading~~$21.1 ofmillion ~~eleven~~in ~~credit~~impaired ~~relationships~~loans tohad ~~non-accrual~~a ~~status~~related ~~totaling~~allowance ~~$8.8~~for ~~million~~credit ~~partially~~losses ~~offset~~of by$4.0 ~~partial~~million and ~~total~~$8.3 ~~charge~~million ~~offs~~in ofimpaired ~~nine~~loans ~~credit~~in ~~relationships~~which ~~representing~~there ~~twenty~~is ~~one~~no ~~loans~~related inallowance ~~the~~for ~~amount~~credit ~~of $2~~losses.4 ~~million~~The ~~and~~average ~~principal~~balance ~~reductions~~of onimpaired ~~non accrual~~ loans oftotaled $~~334~~20.6 ~~thousand~~million ~~during~~as ~~the~~of ~~nine month~~March ~~period~~31, ~~ended September 30~~2012, ~~2011.~~and ~~The~~interest ~~downgraded~~income ~~loans~~recorded ~~consisted~~on ofimpaired ~~two residential mortgage~~ loans ~~totaling~~during ~~$964~~the ~~thousand,~~three ~~six~~months ~~commercial~~ended ~~relationships~~March ~~representing~~31, ~~eleven~~2012 ~~loans~~totaled ~~totaling~~ $~~4.3~~2 ~~million~~thousand, ~~three~~as ~~commercial~~compared ~~real~~to ~~estate loans totaling~~ $~~2.6~~13 ~~million~~thousand ~~and~~for ~~one~~the ~~consumer~~three ~~loan~~months ~~totaling~~ended ~~$48~~March ~~thousand~~30, 2011.

~~The~~There ~~Company~~was ~~prepares~~no anbalance ~~allowance~~in ~~for~~loans ~~loan~~90-days ~~loss~~past ~~model~~due onand astill ~~quarterly~~accruing ~~basis~~at toMarch ~~determine the adequacy of the allowance. Management considers a variety of factors when establishing the allowance~~31, ~~such~~2012 asand ~~the~~December ~~impact~~31 ~~of current economic conditions~~2011, ~~diversification of the loan portfolio, delinquency statistics, results of independent loan~~respectively.

24Included in the balance of non-accrual commercial loans is a principal balance of $634 thousand dollars representing the Bank’s participation interest in two loans originated by another New Jersey based institution. Although the borrowers have ceased making payments on these loans, we have received a legal opinion from our legal counsel that the Bank has valid claims against the lead/originating bank for violations of the participation agreements, and we have filed suit asserting these claims. In the event the lead bank is unable to collect from the borrowers, we believe, based on said legal opinion that we will collect our investment from the lead/originating bank. However, in that case our ability to collect on these loans will depend upon the outcome of our legal action against the lead/originating bank.

~~review~~Subsequent ~~and~~to ~~related~~quarter ~~classifications.~~end, ~~Historic loss rates and~~ the ~~loss~~Company ~~rates~~reached ofa ~~peer~~settlement ~~financial~~agreement ~~institutions~~with ~~are also considered. In evaluating~~ the ~~Company’s~~lead/originating ~~allowance~~bank ~~for~~under ~~loan~~which ~~loss~~ the ~~Company~~parties ~~maintains~~have aagreed ~~Criticized~~to ~~Asset~~mutually ~~Committee~~release ~~(“CAC”) consisting of senior management that monitors problem loans~~ and ~~formulates~~forever ~~collection~~discharge ~~efforts and resolution plans for~~ each ~~borrower.~~other Onfrom aany ~~monthly basis the CAC meets to review each problem loan~~ and ~~determines~~all ifclaims ~~there~~that ~~has~~have been ~~any~~asserted ~~change~~ in ~~collateral~~the ~~value due to changes in market conditions~~suit. ~~Each~~The ~~quarter,~~Company ~~when~~will ~~calculating~~record ~~the~~a ~~allowance~~$484 ~~for~~thousand ~~loan losses~~charge-off, ~~the~~related ~~CAC~~to ~~reviews~~this ~~an updated loan impairment analysis on each problem~~ credit, toin ~~determine if a specific provision for loan loss is warranted. Management reviews~~ the ~~most~~second ~~recent~~quarter ~~appraisal~~of ~~on each loan, adjusted for holding and selling costs~~2012. InThis ~~the~~charge-off ~~event~~will ~~there~~also isbe noconsidered ~~recent~~by ~~appraisal on file,~~ the Company ~~will~~in ~~use~~ the ~~aged~~analysis ~~appraisal~~of ~~and~~historical ~~apply~~loss arates ~~discount~~within ~~factor to~~ the ~~appraisal~~respective ~~then~~portfolios ~~adjust the holding~~ and ~~selling~~may ~~costs~~result ~~from~~in ~~the~~an ~~discounted~~increased ~~appraisal~~provision ~~value.~~in ~~At September 30, 2011,~~ the ~~Company~~second ~~maintained~~quarter ~~an allowance for loan loss ratio~~ of 12012.~~17%~~ ~~to period end loans outstanding.~~

Any asset classified as loss is charged-off within thirty days of such classification unless the asset has already been eliminated from the books by collection or other appropriate entry. On a quarterly basis the Board Loan Committee (“BLC”) will review past due, classified, non-performing and other loans, as it deems appropriate, to determine the collectability of such loans. If the BLC determines a loan to be uncollectible, the loan is charged to the allowance for loan loss. In addition, upon reviewing the collectability of a loan, the BLC may determine a portion of the loan to be uncollectible; in which case that portion of the loan deemed uncollectable will be partially charged-off against the allowance for loan loss.25

ForManagement considers a variety of factors when establishing the nineallowance, monthsuch periodas endingthe Septemberimpact 30of current economic conditions, 2011diversification of the Companyloan experiencedportfolio, fifteendelinquency totalstatistics, chargeresults offsof relatingindependent toloan sevenreview and related classifications. Historic loss rates and the loss rates of peer financial institutions are also considered. In evaluating the Company’s allowance for loan relationshipsloss totalingthe $1Company maintains a Criticized Asset Committee (“CAC”) consisting of senior management that monitors problem loans and formulates collection efforts and resolution plans for each borrower.5 millionOn a monthly basis the CAC meets to review each problem loan and sevendetermines partialif charge-offsthere relatinghas been any change in collateral value due to fivechanges in market conditions. Each quarter, when calculating the allowance for loan relationshipslosses, totalingthe $872CAC thousandreviews asan comparedupdated loan impairment analysis on each problem credit to charge-offsdetermine ofif foura loansspecific representingprovision onefor relationshiploan totalingloss $382is thousandwarranted. Management reviews the most recent appraisal on each loan, adjusted for holding and selling costs. In the periodevent endedthere Decemberis no recent appraisal on file, the Company will use the aged appraisal and apply a discount factor to the appraisal then adjust the holding and selling costs from the discounted appraisal value. At March 31, 20102012, the Company maintained an allowance for loan loss ratio of 2.74% to period end loans outstanding.

~~Real~~Any ~~estate~~asset ~~acquired~~classified as loss is charged-off within thirty days of such classification unless the asset has already been eliminated from the books by ~~foreclosure~~collection or byother ~~deed~~appropriate inentry. ~~lieu~~On ofa ~~foreclosure~~quarterly isbasis the Board Loan Committee (“BLC”) will review past due, classified, asnon-performing ~~real~~and ~~estate~~other ~~owned~~loans, ~~until~~as it deems appropriate, to determine the collectability of such loans. If the BLC determines a loan to be uncollectible, the loan is ~~sold~~charged to the allowance for loan loss. At ~~September~~In 30addition, ~~2011~~upon ~~and~~reviewing ~~December~~the 31collectability of a loan, ~~2010~~the BLC may determine a portion of the ~~Company~~loan ~~had~~to ~~$830~~be ~~thousand~~uncollectible; in ~~real~~which ~~estate~~case ~~owned.~~that portion of the loan deemed uncollectable will be partially charged-off against the allowance for loan loss.

~~Our~~For ~~investment~~the ~~securities~~three ~~are~~month ~~classified~~period asending ~~either~~March ~~held~~31, to2012, ~~maturity~~the orCompany ~~available~~experienced ~~for~~two ~~sale.~~total ~~Our~~charge ~~investment~~offs ~~portfolio~~relating ~~decreased by $1.1 million or 1.3%~~ to ~~$84.0~~two ~~million~~loan atrelationships ~~September~~totaling ~~30, 2011, from~~ $~~85.~~1 ~~million~~thousand atas ~~December~~compared ~~31, 2010. The change in our investment portfolio is related~~ to ~~purchases~~total charge-offs of ~~available~~eighteen ~~for~~loans ~~sale~~representing ~~securities~~ten ofrelationship ~~$31.6~~totaling ~~million offset by~~ $174.83 million inand ~~calls~~ten ~~within~~partial ~~our~~charge-offs ~~held~~relating to ~~maturity~~seven ~~securities~~loan ~~portfolio,~~relationships totaling $81.23 million ~~in our available~~ for ~~sale portfolio and~~ the ~~sale~~period ofended ~~$10~~December ~~million in US Treasury securities~~31, ~~coupled with paydowns and associated premium and discount amortization associated within our mortgage backed securities portfolio~~2011. ~~See Footnote 6 to our Consolidated Financial statements for more information regarding our investment securities portfolio.~~

~~Our~~Real ~~cash~~estate ~~and~~acquired ~~cash~~by ~~equivalents~~foreclosure ~~increased~~or by ~~$37.7~~deed ~~million to $46.7 million at September 30, 2011 from $9.0 million at December 31, 2010. The increase reflects cash inflows from an increase~~ in ~~deposits,~~lieu ~~repayments~~ of ~~higher~~foreclosure ~~yielding~~is ~~investment~~classified ~~securities~~as inreal aestate ~~lower~~owned ~~rate~~until ~~environment~~it ~~and~~is ~~loan repayment and prepayments exceeding current loan funding demands~~sold. At ~~The~~March ~~increase in deposits reflects~~31, in2012 ~~part,~~ the ~~Bank~~Company ~~benefiting~~had ~~from~~$6.1 ~~merger activity~~million ~~involving~~in ~~competing~~real ~~institutions~~estate ~~and~~owned ~~resulting~~as ~~customer~~compared ~~dislocation. Management has elected~~ to ~~keep~~$5.3 ~~excess~~million ~~cash~~at ~~flow~~December ~~in short term~~31, ~~liquid assets to fund anticipated loan demand over the next several quarters~~2011.

~~Total~~Our ~~liabilities~~investment atsecurities ~~September~~are ~~30,~~classified ~~2011~~as ~~amounted~~available tofor ~~$369~~sale.4 ~~million,~~Our aninvestment ~~increase~~portfolio ofincreased by $332.19 million or 93.85% to $86.6 million at March 31, 2012, from $83.7 million at December 31, ~~2010~~2011. ~~This~~ The change ~~was~~in ~~primarily~~our ~~due~~investment toportfolio ~~increases~~is inrelated ~~total~~to ~~deposits~~purchases of $2718.5 million ~~and~~offset ~~line~~by of$18.7 ~~credit~~million ~~borrowings~~in ~~from~~calls ~~Atlantic~~within ~~Central~~our ~~Bankers~~available ~~Bank~~for ~~(ACBB)~~sale ofinvestment ~~$123 thousand, unsettled securities payable of $5~~portfolio.2 ~~million,~~See ~~representing~~Footnote ~~securities~~6 ~~purchased~~to inour ~~September~~Consolidated ~~with~~Financial ~~October~~statements ~~settlements,~~for ~~and~~more ~~other~~information ~~liabilities~~regarding ofour ~~$266~~investment ~~thousand~~securities portfolio.

~~Total~~Our ~~deposits~~cash atand ~~September~~cash ~~30,~~equivalents ~~2011~~increased ~~were~~by $~~329~~4.74 million, anto ~~increase of~~ $2742.52 million orat ~~9.1%~~March 31, 2012 from $37.8 million at December 31, ~~2010~~2011. The increase inreflects cash ~~deposits~~inflows ~~was~~from ~~attributable to~~ an increase in deposits, repayments of ~~$42.3~~higher ~~million~~yielding investment securities in ~~interest~~a ~~bearing~~lower ~~deposit~~rate ~~accounts~~environment ~~which~~and ~~partially~~loan ~~represents~~repayment ~~migration~~and ofprepayments ~~$11~~exceeding current loan funding demands.9 ~~million~~The ~~from~~increase ~~non-interest~~in ~~bearing~~deposits ~~deposit~~reflects, ~~accounts~~in ~~and~~part, ~~$2.9~~the ~~million~~Bank benefiting from ~~certificates~~merger activity ofinvolving ~~deposit.~~competing ~~The~~institutions ~~remaining~~and ~~increase~~resulting ~~represents~~customer ~~new~~dislocation. ~~funds~~Management ~~deposited~~has ~~with~~elected ~~the~~to ~~Bank,~~keep asexcess acash ~~result~~flow ofin ~~competitive~~short ~~pricing~~term, ofliquid ~~deposit~~assets ~~products~~to ~~coupled~~maintain ~~with~~a ~~the~~strong ~~continued~~liquidity ~~development~~base ofwhile ~~relationships~~managing ~~with~~our ~~local~~level ~~small~~of capital.

25Total liabilities at March 31, 2012 amounted to $365.1 million, an increase of $333 thousand or .1% from December 31, 2011. This change was primarily due to increases in total deposits of $11.6 million and unsettled securities payable of $4.0 million, representing an investment security purchased in March with an April settlement, offset by decreases in other liabilities of $232 thousand and the payoff of $15 million in FHLB advances.

~~businesses~~Total ~~along~~deposits ~~with~~at ~~the~~March ~~high~~31, ~~level~~2012 were $341.9 million, an increase of ~~individualized~~$11.6 ~~service~~million ~~provided~~or by3.5% ~~our~~from ~~team~~December 31, 2011. The increase in deposits was attributable to an increase of ~~retail~~$3.2 ~~branch~~million ~~managers~~in interest bearing deposit accounts, $8.0 million in non-interest bearing deposit accounts and $355 thousand from certificates of deposit.

AtThe ~~September~~increase ~~30,~~represents ~~2011~~new ~~and~~funds ~~December~~deposited ~~31,~~with ~~2010~~the ~~respectively~~Bank, weas ~~had~~a ~~advances~~result ~~from~~of ~~the~~competitive ~~FHLB~~pricing inof ~~the~~deposit ~~amount~~products ofcoupled ~~$25.0~~with ~~million.~~the ~~The~~continued ~~weighted~~development ~~average~~of ~~interest~~relationships ~~rate~~with onlocal ~~these~~small ~~borrowings~~businesses ~~from~~along with the ~~FHLB~~high ~~was~~level ~~1.14%~~of at individualized ~~September~~service ~~30,~~provided ~~2011~~by ~~and~~our ~~1.49%~~team atof ~~December~~retail ~~31,~~branch ~~2010~~managers.

On February 17, 2009, the Company entered into a non-revolving line of credit loan agreement with Atlantic Central Bankers Bank in an amount up to $5.0 million. The term of the debt is for a three year period with a maturity date of February 17, 2012. The interest rate adjusts at a variable rate equal to prime plus 25 basis points with a floor of 4.25%. The Company has an outstanding balance on the line of credit of $5.0 million at September 30, 2011 as compared to $4.9 million at December 31, 2010 and has contributed $4.4 million as additional capital to the Bank. 26

OnAt ~~November~~March 131, ~~2010,~~2012 ~~the~~we ~~Bank~~had ~~modified~~advances ~~the~~from ~~terms of~~ the ~~hybrid~~FHLB ~~capital instrument originally issued on October 31, 2008,~~ in the ~~aggregate~~ amount of $310.0 million ~~in the form of subordinated debt. This instrument qualifies~~ as ~~Tier~~compared IIto ~~capital.~~FHLB ~~The~~advances ~~new term~~ of ~~the~~$25 ~~debt~~million isat ~~for~~December ~~a ten year period with a maturity date of November 1~~31, ~~2020~~2011. The ~~interest~~weighted ~~rate~~average isinterest ~~at a variable~~ rate ~~equal~~on tothese ~~the~~borrowings ~~prime~~from ~~rate plus 100 basis points for~~ the ~~entire~~FHLB ~~ten~~was ~~year term~~0.72% ~~The~~at ~~debt~~March ~~security is redeemable~~31, at2012 ~~the~~and ~~Bank’s~~1.14% ~~option,~~ at ~~par~~December ~~on any January 31st~~31, ~~April 30th, July 31st, or October 31st that the debt security remains outstanding~~2011.

~~Stockholders'~~On ~~equity~~February at28, ~~September 30~~2012, ~~2011~~the ~~amounted~~Company torenewed its non-revolving line of credit loan agreement with Atlantic Central Bankers Bank in the amount of $215.0 million,. anThe ~~increase~~term of ~~$3.3~~the ~~million~~debt oris ~~18.6%~~for ~~over~~a ~~December~~six 31month period with a maturity date of August 17, ~~2010~~2012. ~~This~~The ~~increase~~interest ~~reflects~~rate ~~net~~adjusts ~~income~~at a variable rate at the greater of ~~$917~~prime ~~thousand~~plus ~~and~~100 ~~other~~basis ~~comprehensive~~points ~~income~~with a floor of $25.400%. ~~million~~The loan agreement contains representations, ~~partially~~warranties ~~offset~~and bycovenants ~~$100~~typical ~~thousand~~of inagreements ~~cash~~of ~~paid~~this ~~for~~type, ~~the~~including ~~declaration~~a ofprovision ~~dividends~~making onit ~~preferred~~an ~~stock~~event of default for the ~~nine~~Bank ~~month~~to ~~period~~enter ~~ended~~into ~~September~~any ~~30,~~formal ~~2011~~or informal enforcement agreement with its primary regulators.

As previously discussed, due to the increase in our non-performing assets, it is possible our Federal or state regulators may decide to take a formal or informal enforcement action against the Bank. The Company has an outstanding balance on the line of credit of $5.0 million at March 31, 2012 and at December 31, 2011 respectively, and has contributed $4.4 million as additional capital to the Bank.

On November 1, 2010, the Bank modified the terms of the hybrid capital instrument originally issued on October 31, 2008, in the aggregate amount of $3.0 million in the form of subordinated debt. This instrument qualifies as Tier II capital. The new term of the debt is for a ten year period with a maturity date of November 1, 2020. The interest rate is at a variable rate equal to the prime rate plus 100 basis points for the entire ten year term. The debt security is redeemable, at the Bank’s option, at par on any January 31^st, April 30^th, July 31^st, or October 31^st that the debt security remains outstanding.

Stockholders' equity at March 31, 2012 amounted to $18.1 million, a decrease of $934 thousand or 4.9% over December 31, 2011. This increase reflects a net loss of $395 thousand and other comprehensive loss of $537 thousand and $37 thousand in cash paid for the declaration of dividends on preferred stock for the three month period ended March 31, 2012.

Results of Operations

Net Income. We recorded a net ~~income~~loss for the three month period ended ~~September~~March 3031, ~~2011~~2012 of $~~449~~432 thousand or $0.21 22 per common and diluted share, ~~respectively~~ (after preferred stock dividend) as compared to net income of $~~479~~76 thousand or $0.2304 per common and diluted share, ~~respectively~~ for the same period in ~~2010~~2011. The change in net income for the three-month period compared to the prior period was attributable to ~~increases~~a of $~~256~~450 thousand increase in ~~net~~provision ~~interest~~for ~~income~~loan loss, a decrease of $2860 thousand ~~decrease~~ in ~~provision~~net ~~for~~interest ~~loan loss~~income, ~~and~~ a $~~218~~30 thousand decrease in non-interest income, ~~offset~~and by an increase of $~~125~~297 thousand in non-interest expense., offset by a decrease in income tax expense of $333 thousand. The net interest margin for the three-month period ended ~~September~~March 3031, ~~2011~~2012 decreased by 225 basis points to 3.5561% as compared to 3.5786% for the same period in ~~2010~~2011.

WeInterest ~~recorded~~Income. ~~net~~Total interest income amounted to $4.0 million for the ~~nine~~ three-month period ended ~~September~~March 3031, ~~2011~~2012, a decrease of $~~917~~303 thousand or $07.421% ~~per~~when ~~common and diluted share, respectively (after preferred stock dividend) as~~ compared to ~~net income of $1.5 million or $0.70 per common and diluted share, respectively for~~ the same period in ~~2010~~2011. The ~~change~~decrease in ~~net~~interest income ~~for~~was ~~the~~due ~~nine-month~~to ~~period~~a ~~compared~~reduction toin the ~~prior~~average ~~period~~yield, ~~was~~partially ~~attributable~~offset toby anvolume ~~increase~~increases ~~of $797 thousand~~ in ~~net~~our interest-earning ~~income~~assets. ~~and~~The aaverage ~~$376~~yield ~~thousand~~on ~~decrease~~our ininterest-earning ~~income~~assets ~~tax~~was ~~expense~~4.51% ~~offset~~for bythe athree ~~decrease~~month ofperiod ~~$50~~ended ~~thousand~~March in31, ~~non~~2012 ~~interest~~compared ~~income~~to ~~and~~5.14% ~~increases~~during ofthe ~~$996~~same ~~thousand~~period in ~~the~~2011.The ~~provision~~reduction ~~for~~in ~~loan~~yield ~~losses~~in ~~and~~the ~~$685~~quarterly ~~thousand~~period inreflects ~~non-interest~~the ~~expense.~~sustained ~~The~~low ~~net~~ interest ~~margin~~rate ~~for~~environment ~~the~~as ~~nine~~long-~~month~~term, ~~period~~higher ~~ended~~yielding ~~September~~assets ~~30,~~mature ~~2011~~ and ~~September~~are 30replaced ~~2010~~with ~~was~~lower 3yielding assets.~~70%.~~

Interest ~~Income~~Expense. Total interest ~~income~~expense amounted to $~~4.3~~838 ~~million~~thousand for the three-month period ended ~~September~~March 3031, ~~2011~~2012, ana ~~increase~~decrease of $~~185~~243 thousand or 422.5 % when compared to the same period in ~~2010~~2011. The ~~increase~~decrease in interest ~~income~~expense ~~was~~resulted ~~due~~from tolower ~~volume~~rates ~~increases~~paid inon ~~our~~deposit ~~interest-earning~~and ~~assets,~~borrowing ~~partially~~products ~~offset~~when bycompared ato ~~reduction~~the insame ~~the~~period ~~average~~in ~~yield~~2011. The average ~~yield~~cost onof ~~our~~ interest-~~earning~~bearing ~~assets~~liabilities was 40.7198% for the three -month period ended ~~September~~March 3031, ~~2011~~2012 compared to 41.8038% during the same period in ~~2010~~2011. The reduction in ~~yield~~rate inwas ~~the~~partially ~~quarterly~~offset ~~period~~by ~~reflects~~ the ~~sustained~~increased ~~low~~volume of interest ~~rate~~bearing ~~environment as long-term, higher yielding assets mature and are replaced with lower yielding assets~~liabilities.

Total interest income amounted to $12.7 million for the nine-month period ended September 30, 2011, an increase of $624 thousand or 5.2% when compared to the same period in 2010. The increase in interest income was due to

volume increases in our interest-earning assets, partially offset by a reduction in the average yield. The average yield on our interest-earning assets was 4.89% for the nine month period ended September 30, 2011 compared to 5.14% during the same period in 2010. The reduction in yield in the nine-month period reflects the sustained low interest rate environment as long-term, higher yielding assets mature and are replaced with lower yielding assets.

Interest Expense. Total interest expense amounted to $1.1 million for the three-month period ended September 30, 2011, a decrease of $71 thousand or 6.1 % when compared to the same period in 2010. The decrease in interest expense resulted from lower rates paid on deposit and borrowing products when compared to the same period in 2010. The average cost of interest-bearing liabilities was 1.27% for the three-month period ended September 30, 2011 compared to 1.48% during the same period in 2010. The reduction in rate was partially offset by the increased volume of interest bearing liabilities.

Total interest expense amounted to $3.3 million for the nine-month period ended September 30, 2011, a decrease of $173 thousand or 5.0 % when compared to the same period in 2010. The decrease in interest expense resulted from lower rates paid on deposit and borrowing products when compared to the same period in 2010. The average cost of interest-bearing liabilities was 1.34% for the nine-month period ended September 30, 2011 compared to 1.61% during the same period in 2010. The reduction in rate was partially offset by the increased volume of interest bearing liabilities. The reduction in rates paid on deposit liabilities and borrowings reflects the same factors, discussed above, affecting the yield on our earning assets.

Allowance for Loan Losses. We recorded a provision for loan losses for the three month period ended September 30, 2011 of $207 thousand compared to a provision of $235 thousand for the same period in 2010.

We recorded a provision for loan losses for the nine-month period ended September 30, 2011 of $1.4 million compared to a provision of $382 thousand for the same period in 2010. As a result of the $2.4 million in charge-offs recorded during the first nine months of 2011, the Company’s historical loss rates within the respective portfolios have increased and have resulted in an increased provision for loan loss in the first nine months of 2011. At September 30, 2011, our allowance for loan losses represented 1.17% of total loans outstanding and 16.7% of non-performing loans.

Non-Interest Income. For the three-months ended September 30, 2011, non-interest income, which is comprised principally of service charges on deposit accounts, gain on sale of loans, origination fees on residential mortgage loans sold, bank owned life insurance income, ATM fees and other miscellaneous fee income totaled $194 thousand. This represents a decrease of $218 thousand or 52.9% when compared to the same period in 2010.This decrease resulted from decrease in services charges on deposits accounts of $4 thousand and gain on sale of loans of $273 thousand, partially offset by a gain on sale of securities of $44 thousand and increases in miscellaneous fee income of $14 and $1 thousand in Bank owned life insurance.

Non-interest income for the nine-months ended September 30, 2011, totaled $636 thousand, a decrease of $50 thousand or 7.3% when compared to the same period in 2010. This decrease resulted from decreases of $156 thousand in gain on sale of loans, $8 thousand in service charges on deposit accounts and a $2 thousand decrease in Bank owned life insurance, partially offset by increases of $76 in miscellaneous fee income and $44 thousand in gain on sale of securities.

Non-Interest Expense. Non-interest expense, which is comprised principally of salaries and employee benefits, net occupancy costs, FDIC insurance premium expense, advertising costs, data processing costs and professional services and other operating costs, totaled $2.4 million for the three months ended September 30, 2011. This represents an increase of $125 thousand or 5.4% when compared to the same period in 2010. The increase in non-interest expense was primarily the result of increased salary and benefit costs of $222 thousand, net occupancy costs of $86 thousand, data processing costs of $12 thousand, advertising and promotion of $15 thousand, other real estate owned expense of $12 thousand, and other operating expenses of $27 thousand, partially offset by decrease in professional services of $149 thousand and FDIC expense of $100 thousand.

~~Non-interest~~Allowance ~~expense~~ for ~~the~~Loan ~~nine months ended September 30, 2011 totaled $7~~Losses.2 We ~~million,~~recorded ana ~~increase~~provision offor ~~$685~~loan ~~thousand~~losses orfor ~~10.6% when compared to~~ the ~~same~~three month period inended ~~2010. The~~March ~~increase~~31, in2012 ~~non-interest expense was primarily the result~~ of ~~increases~~$1.4 inmillion ~~salary~~compared ~~and~~to ~~benefit~~a ~~costs~~provision of $~~543~~953 thousand, ~~data~~for ~~processing~~the ~~costs~~same ofperiod ~~$16~~in ~~thousand,~~2011. ~~other~~The ~~operating~~increased ~~expenses~~provision ofreflects ~~$30~~our ~~thousand,~~elevated ~~net~~level ~~occupancy costs~~ of ~~$188~~non-performing ~~thousand, advertising~~ and ~~promotion~~classified ~~expense~~assets. ofAt ~~$20~~March ~~thousand~~31, ~~and other real estate owned expense of $65 thousand~~2012, ~~partially~~our ~~offset~~allowance byfor ~~decreases~~loan inlosses ~~professional~~represented ~~service~~2.74% of $total ~~108~~loans ~~thousand~~outstanding and ~~FDIC deposit insurance premium expense of $69 thousand~~21.87% ~~The increase in salary, benefit and net occupancy costs was related to adding necessary key administrative and branch personnel to staff coupled with the effect~~ of ~~operating~~non-performing ~~expenses related to the Marlton office, which opened in November 2010~~loans.

~~Income~~Non-Interest ~~Taxes~~Income. We ~~recorded~~For athe ~~federal~~three-months ~~and~~ended ~~state~~March 31, 2012, non-interest income, ~~tax~~which ~~expense~~is comprised principally of ~~$282~~service ~~thousand~~charges ~~during~~on ~~the~~deposit ~~three~~accounts, ~~month~~gain ~~period~~on ~~ended~~sale ~~September~~of 30loans, ~~2011~~origination ~~compared~~fees toon anresidential mortgage loans sold, bank owned life insurance income, ~~tax~~ATM ~~expense~~fees and other miscellaneous fee income totaled $263 thousand. This represents a decrease of $~~311~~30 thousand ~~for~~or 10.2% when compared to the same period in ~~2010~~2011.This ~~The~~decrease ~~effective~~resulted ~~tax~~from ~~rate~~decreases ~~for~~in ~~the~~services ~~three~~charges ~~month~~on ~~period~~deposits ~~ended~~accounts ~~September~~of 30$7 thousand and gain on sale of loans of $74 thousand, ~~2011~~partially ~~was~~offset 38by increases in miscellaneous fee income of $40 and $11 thousand in Bank owned life insurance.6% The decrease in gain on sale of loans is the result of fewer loan originations reducing income earned on the sale of Small Business loans at March 31, 2012 as compared to 39March 31, 2011.4% ~~for~~The ~~the~~increase ~~three~~in ~~month~~miscellaneous ~~period~~fee ~~ended~~income ~~September~~resulted ~~30,~~from ~~2010~~an increase in loan prepayment penalties and other loan fees.

WeNon-Interest ~~recorded~~Expense. Non-interest aexpense, ~~federal~~which is comprised principally of salaries and ~~state~~employee ~~income~~benefits, ~~tax~~net occupancy costs, FDIC insurance premium expense, ofadvertising costs, data processing costs and professional services and other operating costs, totaled $~~563~~2.7 ~~thousand~~million ~~during~~for the ~~nine~~three ~~month~~months ~~period~~ ended ~~September~~March 3031, ~~2011~~2012. ~~compared~~This torepresents an ~~income~~increase ~~tax expense~~ of $~~939~~297 thousand ~~for~~or 12.5% when compared to the same period in ~~2010~~2011. The ~~effective~~increase ~~tax~~in ~~rate~~non-interest ~~for~~expense was primarily the ~~nine~~result ~~month~~of ~~period~~increased ~~ended~~salary ~~September~~and 30benefit costs of $126 thousand, ~~2011~~net ~~was~~occupancy ~~38.0%~~costs ~~compared~~of to$21 ~~38.9%~~thousand, ~~for~~data ~~the~~processing ~~nine~~costs ~~month~~of ~~period~~$10 ~~ended~~thousand, ~~September~~advertising 30and promotion of $6 thousand, ~~2010~~other real estate owned expense of $20 thousand, other operating expenses of $71 thousand, and professional services of $61 thousand, partially offset by decrease FDIC expense of $18 thousand. The ~~decrease~~increase in ~~the~~salary ~~effective~~and ~~tax~~benefit ~~rate~~costs ~~for~~of $126 thousand resulted from the ~~nine-~~hiring ~~month~~of ~~period~~a ~~ended~~marketing ~~September~~president ~~30,~~in August of 2011 isand ~~due~~additional tostaff ~~tax~~added ~~exempt~~in ~~income~~connection ~~comprising~~with aour ~~larger~~Woodbury ~~portion~~branch opening in March 2012. The increase in professional services of ~~pretax~~$61 ~~income~~thousand asis ~~compared~~related to ~~the~~expenses ~~nine-month~~incurred ~~period~~for ~~ended~~audit ~~September~~and 30tax preparation services, ~~2010~~consulting fees, and legal fees in connection with general matters as well as matters relating to our loan portfolio.

Income Taxes. We recorded a federal and state income tax benefit of $277 thousand during the three month period ended March 31, 2012 compared to an income tax expense of $56 thousand for the same period in 2011. The effective tax rate for the three month period ended March 31, 2012 was 41.2% compared to 33.9% for the three month period ended March 31, 2011.

Liquidity and Capital Resources

Liquidity. Liquidity represents our ability to meet our normal cash flow requirements for the funding of loans, repayment of deposits and payment of operating costs. Our primary sources of liquidity include growth in deposits, amortization and prepayment of loans, maturities of investment securities, and our borrowing capability. Management monitors liquidity daily, and on a monthly basis incorporates liquidity analysis into its asset/liability management program.

In addition to using growth in deposits, loan repayments and the investment portfolio as a source of liquidity, we also have access to unsecured, overnight lines of credit aggregating $5830.73 million, consisting of $3.0 million, on an uncommitted basis, through ACBB and $5527.73 million through the FHLB of New York. The Bank has $10 million in outstanding FHLB advances which would reduce the availability of borrowing potential to $20.3 million. The arrangements with ACBB are for the sale of federal funds to the Bank, subject to the availability of such funds. Pursuant to a collateral agreement with the FHLB, advances under this line of credit are secured by a blanket lien on our residential mortgage loan portfolio. At September 30, 2011, we had no outstanding balance against the overnight line of credit at ACBB. In addition, the Company has a non revolving line of credit with ACBB for up to $5.0 million and ascommercial ofloan ~~September 30, 2011 there is an outstanding balance of $5~~portfolios.0 million under this line, an increase from $4.9 million outstanding as of December 31, 2010. In addition, the Bank’s membership in the FHLB provides the Bank with additional secured borrowing capacity of up to a maximum of 50% of the Bank’s total assets, subject to certain conditions.

WeAt ~~had~~March ~~cash~~31, ~~and~~2012, ~~cash~~we ~~equivalents~~had ofno ~~$46.7~~outstanding ~~million~~balance atagainst ~~September 30, 2011 in~~ the ~~form~~overnight ofline ~~cash and due from banks. At September 30, 2011, unused lines~~ of credit ~~available~~at toACBB. ~~our~~In ~~customers~~addition, ~~committed~~the ~~undisbursed~~Company ~~loan~~has ~~proceeds~~a ~~and~~non-revolving ~~standby~~line ~~letters~~ of credit ~~totaled~~with ~~$46.8~~ACBB ~~million.~~for ~~Certificates~~up ~~of deposit scheduled~~ to ~~mature in one year or less totaled~~ $595.60 million atand ~~September~~as ~~30,~~of ~~2011. We~~March ~~anticipate~~31, ~~that~~2012 weand ~~will~~December ~~continue~~31, to2011 ~~have~~there ~~sufficient~~is ~~funds~~an ~~available~~outstanding tobalance ~~meet the needs~~ of ~~our~~$5.0 ~~customers~~million ~~for~~under ~~deposit~~this ~~repayments and loan fundings~~line.

~~Our~~In ~~ability~~addition, tothe ~~generate~~Bank’s ~~deposits~~membership ~~depends~~in on the ~~success~~FHLB ofprovides ~~our~~the ~~branches.~~Bank ~~Our~~with ~~success~~additional issecured ~~dependent~~borrowing oncapacity ~~a number~~ of ~~factors,~~ up ~~including our ability~~ to ~~establish branches in favorable locations, our ability to meet the needs of our customers through personalized services and~~ a ~~broad~~maximum ~~array~~ of ~~financial~~50% ~~products, and the general economic conditions~~ of the ~~market~~Bank’s ~~area~~total inassets, ~~which~~subject ~~they are located. Unexpected changes in the national and local economy may also adversely affect our ability~~ to ~~attract~~certain ~~or retain deposits and foster new loan relationships~~conditions.

We had cash and cash equivalents of $42.2 million at March 31, 2012 in the form of cash and due from banks. At March 31, 2012, unused lines of credit available to our customers, committed undisbursed loan proceeds and standby letters of credit totaled $57.6 million. Certificates of deposit scheduled to mature in one year or less totaled $36.2 million at March 31, 2012. We anticipate that we will continue to have sufficient funds available to meet the needs of our customers for deposit repayments and loan fundings.

Our ability to generate deposits depends on the success of our branches. Our success is dependent on a number of factors, including our ability to establish branches in favorable locations, our ability to meet the needs of our customers through personalized services and a broad array of financial products, and the general economic conditions of the market area in which they are located. Unexpected changes in the national and local economy may also adversely affect our ability to attract or retain deposits and foster new loan relationships.

Capital Resources. Capital adequacy is the ability to support growth while protecting the interests of depositors and the deposit insurance fund. Bank regulatory agencies have developed certain capital ratio requirements, which are used to assist them in monitoring the safety and soundness of financial institutions. Management continually monitors these capital requirements.

The Bank is subject to risk-based capital guidelines promulgated by the FDIC 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. Under the 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. 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 total risk-weighted capital must consist of "Tier I Capital," consisting of common stockholders' equity and qualifying hybrid instruments, 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 hybrid instruments, (c) perpetual debt (d) mandatory convertible securities, and (e) qualifying subordinated debt and intermediate-term preferred stock up to 50% of Tier I capital. 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 FDIC (determined on a case-by-case basis or as a matter of policy after formal rule-making.

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 hybrid instruments, (c) perpetual debt (d) mandatory convertible securities, and (e) qualifying subordinated debt and intermediate-term preferred stock up to 50% of Tier I capital. 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 FDIC (determined on a case-by-case basis or as a matter of policy after formal rule-making.

In addition to the risk-based capital guidelines, the FDIC has adopted a minimum Tier I capital (leverage) ratio, under which banks must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other banks are expected to maintain a leverage ratio of at least 1% to 2% above the stated minimum.

The Bank was in compliance with all applicable minimum capital requirements for all periods presented. At ~~September~~March 3031, ~~2011~~2012 the Bank maintained a Tier I leverage ratio of 6.6502%, a Tier I risk-based capital ratio of 8.7702% and a total risk-based capital ratio of 10.7933%. ~~The Bank’s management believes that the Bank would be categorized as well capitalized under applicable FDIC capital adequacy regulations.~~

The Board of Governors of the Federal Reserve System has established similar capital requirements for bank holding companies, on a consolidated basis. However, these requirements only apply to bank holding companies with assets of $500 million or more. As such, the Company is not subject to these requirements.

On February 1728, ~~2009~~2012, the Company ~~entered~~renewed ~~into~~its a non-revolving line of credit loan agreement with ~~ACBB~~Atlantic Central Bankers Bank in anthe amount upof to $5.0 million. The term of the debt is for a ~~three~~six ~~year~~month period with a maturity date of ~~February~~August 17, 2012. The interest rate adjusts at a variable rate ~~equal~~at tothe greater of prime plus 25100 basis points with a floor of 45.2500%. The Company has an outstanding balance on the line of credit of $5.0 million at September 30, 2011 as compared to $4.9 million at December 31, 2011 and has contributed $4.4 million of this debt as additional capital to the Bank.

The loan agreement contains representations, warranties and covenants typical of agreements of this type, including a provision making it an event of default for the Bank to enter into any formal or informal enforcement agreement with its primary regulators. As previously discussed, due to the increase in our non-performing assets, it is possible our Federal or state regulators may decide to take a formal or informal enforcement action against the Bank. The Company has an outstanding balance on the line of credit of $5.0 million at March 31, 2012 and at December 31, 2011 respectively, and has contributed $4.4 million as additional capital to the Bank.

In June 2009, the Board of Directors of the Company approved a private placement common stock offering to accredited investors. In connection with this offering, the Board of Directors approved the issuance of common stock purchase warrants. As part of the offering, one warrant was issued for each share of common stock, no par, sold in the stock offering. Each warrant issued under the offering will allow the holder of the warrant to purchase one share of common stock for a price of $9.00 per share through June 26, 2013. For the year ended December 31, 2009, the Company sold 153,889 shares under this offering and issued 153,889 common stock warrants. The $1.1 million proceeds received from the common stock offering were recorded as additional paid in capital.

29In December 2009, the Company authorized the establishment of 1 million shares of no par, $1 thousand stated value, Series A Perpetual Non-Cumulative Convertible Preferred Stock. The preferred stock is entitled to receive, as and when declared by the Company’s Board of Directors, non-cumulative cash dividends at an annual rate of 7% of the stated value. In December 2009, the Company sold 1,900 preferred shares. The preferred stock is redeemable at the Company’s option at any time after six months from the issue date at the stated value plus any dividends declared but unpaid. The preferred shares have priority with regards to dividends such that, no dividends or distributions shall be declared or paid to common shareholders for any quarter unless full dividends on all outstanding preferred shares have been declared and paid for the most recently completed calendar quarter.

In December ~~2009~~2011, the Company authorized the establishment of ~~2,000,~~10 thousand shares of no par, $~~1,000~~20 stated value, Series AB Perpetual Non-Cumulative Convertible Preferred Stock. The preferred stock is entitled to receive, as and when declared by the Company’s Board of Directors, non-cumulative cash dividends at ~~the~~an annual rate of 7% of the stated value. In December ~~2009~~2011, the Company sold 110,~~900~~000 preferred shares. The preferred stock is redeemable at the Company’s option at any time after six months from the issue date at the stated value plus any dividends declared but unpaid. The preferred shares have priority ofwith regards to dividends such that, no dividends or distributions shall be declared or paid to common shareholders for any quarter unless full dividends on all outstanding preferred shares have been declared and paid for the most recently completed calendar quarter.

The Bank’s capital ratios at ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011 are presented in the following table

		September 2011		December 2010
		March 2012		December 2011
Shareholders’ equity to total assets	54.37%		5.60%
Leverage ratio	6.70%		65.9%
Risk-based capital ratios:
Tier 1	8.80%		8.90%
Total Capital	10.83%		1110.23%

The Company has certain cash requirements that are independent of the Bank, such as paying certain operating expenses and dividends on outstanding preferred stock. Historically, the Company has obtained funds through dividends paid by the Bank. At March 31, 2012, the Company had unconsolidated assets of $112 thousand (exclusive of its investment in the Bank), consisting of $101 thousand in cash and $11 thousand in prepaid assets. Due to its recent losses and elevated levels of classified and non-performing assets, the Bank may not currently pay dividends to the Company without the prior approval of its regulators. If the Bank is unable to pay dividends to the Company, this may result in the Company’s inability to meet certain of its cash obligations.

Off-Balance Sheet Arrangements. We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statements of financial condition.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed dates or other termination clauses and may require the payment of a fee. Some of the commitments are expected to expire without being drawn upon, and the total commitments do not necessarily represent future cash requirements. Total commitments to extend credit at ~~September~~March 3031, ~~2011~~2012 were $4657.86 million. We evaluate each customer’s creditworthiness on a case by case basis. Collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, residential and commercial real estate.

Standby letters of credit are conditional commitments issued to a third party for a customer. The credit risk involved in issuing standby letters of credit is similar to that involved in extending credit to customers. We evaluate each customer’s creditworthiness on a case by case basis. Collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral varies, but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and residential and commercial real estate. At ~~September~~March 3031, ~~2011~~2012, our obligations under standby letters of credit totaled $12.90 million.

Critical Accounting Policies

Allowance for Losses on Loans

The allowance for losses on loans is based on management’s ongoing evaluation of the loan portfolio and reflects an amount considered by management to be its best estimate of known and inherent losses in the loan portfolio. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the loan portfolio, delinquency statistics, results of independent loan review and related classifications. Our historic loss rates and the loss rates of peer financial institutions are also considered. In addition, certain individual loans which management has identified as problematic are specifically provided for, based upon an evaluation of the borrower’s perceived ability to pay, the estimated adequacy of the underlying collateral and other relevant factors. Consideration is also given to examinations performed by regulatory agencies. Although provisions have been established and segmented by type of loan, based upon management’s assessment of their differing inherent loss characteristics, the entire allowance for losses on loans is available to absorb loan losses in any category.

Management uses significant estimates to determine the allowance for loan losses. Since the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond our control, it is possible that management’s estimate of the allowance for loan losses and actual results could differ materially in the near term.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for loan losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination.

The Company utilizes its own loss experience to estimate inherent losses on loans. Internal risk ratings are assigned to each commercial, real estate commercial, real estate construction and land development loan.

A portion of the allowance is allocated to the remaining loans by applying projected loss ratios, based on numerous factors such as recent charge-off experience, trends with respect to adversely risk rated commercial, real estate commercial, real estate construction and land development loans, trends with respect to past due and nonaccrual loans, changes in economic conditions and trends, changes in the value of underlying collateral and other credit risk factors.

Historical loss rates are calculated using the last nine quarters of a variable factor analysis. The analysis consists of economic conditions, concentrations of industry, quality of management and systems, general collateral quality, delinquency trends over the last four quarters, loan grade trends over the past four quarters, annual portfolio growth and credit/borrower concentration.

The loans are grouped into the following categories: Commercial loans and Letters of Credit, Commercial Mortgage Loans, Residential Mortgage Loans, Installment Loans, Home Equity and Credit Lines, and Lease Backed Term Loans.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the our control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.

Impact of Inflation and Changing Prices

The consolidated financial statements of the Company and the footnotes thereto, presented elsewhere herein, have been prepared in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

The Registrant’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Registrant's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that as of such date, the Registrant's disclosure controls and procedures were effective to ensure at a reasonable assurance level that material information relating to the Registrant is recorded, processed, summarized and reported in a timely manner. There were no changes in the Registrant's internal control over financial reporting that occurred during the Registrant's third fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

There were no changes in the Registrant's internal control over financial reporting that occurred during the Registrant's first fiscal quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. Management does not believe the resolution of this litigation, if any, would have a material adverse effect on the Company’s financial condition or results of operations. However, the ultimate outcome of any such matter, as with litigation generally, is inherently uncertain and it is possible that some of these matters may be resolved in a manner that is materially adverse to the Company.

Item 1A. Risk Factors

~~Not~~In ~~applicable.~~addition to those risk factors included under Item 1A of our Annual Report on Form 10-K, investors should consider the following information prior to making any investment decisions regarding the Company’s securities:

~~Item~~Our 2.elevated ~~Unregistered~~level ~~Sales~~ of ~~Equity~~classified ~~Securities~~and non-performing assets and ~~Use~~recent oflosses ~~Proceeds~~may cause our regulators to take formal or informal enforcement actions against us.

~~Not~~Our ~~applicable~~level of non-performing assets has continued to increase through the first quarter of 2012. At March 31, 2012 our non-performing assets totaled $35.4 million, or 9.25% of our total assets. As a result, we have incurred losses for 2011 and the first quarter of 2012. This deterioration in our operations and financial condition may result in our regulators taking a formal or informal enforcement action against the Bank. Any such action may restrict our ability to grow, and result in our incurring significant additional expense to comply with the requirements of such an action. In addition, the Bank has been informed that it may not pay dividends to the Company, nor engage in transactions that would materially change the composition of the Bank’s balance sheet (including increasing assets by 5% or more), without in each case the prior approval of the Bank’s regulators. Any additional regulatory actions may adversely effect our future results of operations.

Item 32. ~~Defaults~~ Unregistered ~~Upon~~Sales ~~Senior~~of Equity Securities and Use of Proceeds

Not applicable.

Item 43. Defaults ~~[Removed~~Upon ~~and~~Senior ~~reserved]~~Securities

~~Item~~Not 5applicable. ~~Other Information~~

~~Not~~Item ~~applicable~~4. Mine Safety Disclosures

~~Item~~ Not ~~6. Exhibits~~applicable

~~(a) The~~Item ~~following~~5. Other ~~are filed as exhibits to this report:~~Information

31 Not applicable.1 ~~Certification of Chief Executive Officer required under Section 302 of the Sarbanes – Oxley~~

~~Act~~Item ~~of 2002~~6. Exhibits

~~31.2~~(a) The ~~Certification~~following ofare ~~Chief~~filed ~~Financial~~as ~~Officer~~exhibits ~~required~~to ~~under~~this ~~Section 302 of the Sarbanes – Oxley~~ report:

~~Act~~ 31.1 Certification of ~~2002~~Chief Executive Officer required under Section 302 of the Sarbanes – Oxley

~~32.1~~ Act ~~Certification~~ of ~~Chief Executive Officer required under Section 906 of the Sarbanes – Oxley~~ 2002

~~Act~~ 31.2 Certification of ~~2002~~Chief Financial Officer required under Section 302 of the Sarbanes – Oxley

~~32.2~~ Act ~~Certification~~ of ~~Chief Financial Officer required under Section 906 of the Sarbanes – Oxley~~ 2002

~~Act~~ 32.1 Certification of ~~2002~~Chief Executive Officer required under Section 906 of the Sarbanes – Oxley

101.INS* Act ~~XBRL~~of Instance Document 101.SCH* XBRL Taxonomy Extension Schema 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definitions Linkbase Document 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document2002

*Pursuant 32.2 toCertification ~~Rule 406T~~ of ~~Regulation S-T,~~Chief ~~the~~Financial ~~Interactive~~Officer ~~Data~~required ~~Files~~under onSection ~~Exhibit 101~~906 ~~hereto are deemed not filed or part~~ of ~~a registration statement or prospectus for purposes of Sections 11 or 12 of~~ the ~~Securities~~Sarbanes ~~Act~~– ofOxley ~~1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.~~

32 Act of 2002

~~SIGNATURES~~33

~~In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed~~ SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CORNERSTONE FINANCIAL CORPORATION

Date: ~~November~~May 1011, ~~2011~~ 2012 By: /s/ George W. Matteo, Jr.

George W. Matteo, Jr.

President and Chief Executive Officer

(Principal Executive Officer)

Date: ~~November~~ May 1011, ~~2011~~ 2012 By: /s/ Keith Winchester

Keith Winchester

Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

3334

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

ExhibitCORNERSTONE 101.SCH*FINANCIAL - XBRL Taxonomy Extension SchemaCORPORATION

ExhibitCONSOLIDATED 101.CAL*STATEMENTS -OF XBRLFINANCIAL Taxonomy Extension Calculation Linkbase DocumentCONDITION

Interest Income

Total interest income

Interest Expense

Total interest expense

Non-Interest Income

Total non-interest income

Non-Interest Expense

Earnings (loss) per share

Weighted average shares outstanding

2CORNERSTONE FINANCIAL CORPORATION

CORNERSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGESCASH IN SHAREHOLDERS’ EQUITYFLOWS

NOTE 5 – STOCK OPTIONS

NOTE 6 - INVESTMENT SECURITIES

NOTE 8 – Bank Owned Life Insurance

Forward-Looking Statements

Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

Filing Compare · Cornerstone Financial Corp