SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-33934

Cape Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		26-1294270 (I.R.S. Employer Identification Number)
225 North Main Street, Cape May Court House, New Jersey (Address of Principal Executive Offices)		08210 Zip Code

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 preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES þ NO o.

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

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ

As of July 29, 2011 there were 13,313,521 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

 

 

CAPE BANCORP, INC.
FORM 10-Q

Index

		Page
Part I. Financial Information
Item 1. Financial Statements			3
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010			3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and June 30, 2010 (unaudited)			4
Consolidated Statements of Changes in Stockholders’ Equity for the Twelve Months Ended December 31, 2010 and Six Months Ended June 30, 2011 (unaudited)			5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and June 30, 2010 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			48
Part II. Other Information
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults upon Senior Securities			48
Item 4. (Reserved)			48
Item 5. Other Information			48
Item 6. Exhibits			49
Signature Page			50
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Item 1.		Financial Statements

CAPE BANCORP, INC. AND SUBSIDIARIES

		(unaudited)
		June 30,				December 31,
		2011				2010
		(in thousands)
ASSETS
Cash & due from financial institutions		$	17,268			$	10,181
Interest-bearing bank balances			5,275				4,816
Cash and cash equivalents			22,543				14,997
Interest-bearing time deposits			10,101				9,361
Investment securities available for sale, at fair value (amortized cost of $175,567 and $165,877 respectively)			171,664				157,407
Loans held for sale			1,547				1,224
Loans, net of allowance of $13,332 and $12,538 respectively			755,348				772,318
Accrued interest receivable			3,753				4,029
Premises and equipment, net			21,043				25,212
Other real estate owned			4,726				3,255
Federal Home Loan Bank (FHLB) stock, at cost			7,083				8,721
Prepaid FDIC insurance premium			2,614				3,195
Deferred income taxes			13,189				6,054
Bank owned life insurance (BOLI)			28,748				28,252
Goodwill			22,575				22,575
Intangible assets, net			389				445
Assets held for sale			—				479
Other assets			2,428				3,518
Total assets		$	1,067,751			$	1,061,042
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing deposits		$	80,931			$	68,267
Interest-bearing deposits			701,598				684,801
Federal funds purchased and repurchase agreements			37,512				37,507
Federal Home Loan Bank borrowings			96,528				132,130
Advances from borrowers for taxes and insurance			661				554
Accrued interest payable			562				714
Other liabilities			5,464				4,915
Total liabilities			923,256				928,888
Stockholders’ Equity
Common stock, $.01 par value: authorized 100,000,000 shares; issued 13,324,521 shares; outstanding 13,313,521 shares			133				133
Additional paid-in capital			127,117				126,864
Treasury stock at cost — 11,000 shares			(85	)			(85	)
Unearned ESOP shares			(9,167	)			(9,380	)
Accumulated other comprehensive loss, net			(2,576	)			(5,590	)
Retained earnings			29,073				20,212
Total stockholders’ equity			144,495				132,154
Total liabilities & stockholders’ equity		$	1,067,751			$	1,061,042

See accompanying notes to consolidated financial statements.

CAPE BANCORP, INC. AND SUBSIDIARIES

		For the three months								For the six months
		ended June 30,								ended June 30,
		2011				2010				2011				2010
		(dollars in thousands, except share data)
Interest income:
Interest on loans		$	10,379			$	11,433			$	21,214			$	23,039
Interest and dividends on investments
Taxable			537				480				1,173				480
Tax-exempt			240				322				473				636
Interest on mortgage-backed securities			335				594				743				1,239
Total interest income			11,491				12,829				23,603				25,394
Interest expense:
Interest on deposits			1,671				2,291				3,343				4,672
Interest on borrowings			1,250				1,445				2,604				3,032
Total interest expense			2,921				3,736				5,947				7,704
Net interest income before provision for loan losses			8,570				9,093				17,656				17,690
Provision for loan losses			3,911				1,708				6,311				1,952
Net interest income after provision for loan losses			4,659				7,385				11,345				15,738
Non-interest income:
Service fees			955				854				1,783				1,617
Net gains on sale of loans			37				28				79				40
Net income from BOLI			249				254				496				506
Net rental income			49				57				110				115
Gain (loss) on sale of investment securities held for sale, net			—				(33	)			148				(33	)
Net gain (loss) on sale of OREO			(63	)			(17	)			—				248
Gain on sale of bank premises			1,830				—				1,830				—
Other			94				103				172				169
Gross other-than-temporary impairment losses			317				(545	)			622				(2,967	)
Less: Portion of loss recognized in other comprehensive income			(317	)			31				(833	)			(118	)
Net other-than-temporary impairment losses			—				(514	)			(211	)			(3,085	)
Total non-interest income (expense)			3,151				732				4,407				(423	)
Non-interest expense:
Salaries and employee benefits			3,562				3,833				7,283				7,392
Occupancy expenses, net			464				478				959				1,024
Equipment expenses			310				433				663				917
Federal insurance premiums			305				312				618				632
Data processing			349				315				672				629
Loan related expenses			431				622				717				840
Advertising			120				102				219				197
Telecommunications			249				240				489				473
Professional services			178				121				378				323
OREO expenses			157				129				262				437
Other operating			914				833				1,897				1,648
Total non-interest expense			7,039				7,418				14,157				14,512
Income (loss) before income taxes			771				699				1,595				803
Income tax expense (benefit)			154				—				(7,266	)			(531	)
Net income		$	617			$	699			$	8,861			$	1,334
Earnings per share (see Note 10):
Basic		$	0.05			$	0.06			$	0.72			$	0.11
Diluted		$	0.05			$	0.06			$	0.71			$	0.11
Weighted average number of shares outstanding:
Basic			12,394,089				12,349,609				12,388,490				12,344,317
Diluted			12,409,282				12,349,609				12,397,409				12,344,317

See accompanying notes to unaudited consolidated financial statements.

CAPE BANCORP, INC. AND SUBSIDIARIES

																		Accumulated
														Unearned				Other								Total
		Common				Paid-In				Treasury				ESOP				Comprehensive				Retained				Stockholders’
		Stock				Capital				Stock				Shares				Income (Loss)				Earnings				Equity
		(in thousands)
Balance, December 31, 2009		$	133			$	126,695			$	—			$	(9,806	)		$	(6,645	)		$	16,171			$	126,548
Net income			—				—				—				—				—				4,041				4,041
Stock option compensation expense			—				268				—				—				—				—				268
Restricted stock compensation expense			—				8				—				—				—				—				8
Net unrealized gains, net of reclassification adjustments and taxes			—				—				—				—				1,055				—				1,055
Total comprehensive income																											5,372
Common stock repurchased — 11,000 shares			—				—				(85	)			—				—				—				(85	)
ESOP shares earned			—				(107	)			—				426				—				—				319
Balance, December 31, 2010			133				126,864				(85	)			(9,380	)			(5,590	)			20,212				132,154
Net income			—				—				—				—				—				8,861				8,861
Stock option compensation expense			—				247				—				—				—				—				247
Restricted stock compensation expense			—				8				—				—				—				—				8
Net unrealized gains, net of reclassification adjustments and taxes			—				—				—				—				3,014				—				3,014
Total comprehensive income																											12,130
ESOP shares earned			—				(2	)			—				213				—				—				211
Balance, June 30, 2011		$	133			$	127,117			$	(85	)		$	(9,167	)		$	(2,576	)		$	29,073			$	144,495

See accompanying notes to unaudited consolidated financial statements.

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		Six months ended June 30,
		2011				2010
		(in thousands)
Cash flows from operating activities
Net income		$	8,861			$	1,334
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			6,311				1,952
Net gain on the sale of loans			(79	)			(40	)
Gain on the sale of bank premises			(1,830	)			—
Net gain on the sale of other real estate owned			—				(248	)
Write-down of other real estate owned			77				226
Loss on impairment of securities			211				3,085
Net gain on sale of investments			(148	)			33
Earnings on BOLI			(496	)			(506	)
Origination of loans held for sale			(6,613	)			(4,146	)
Proceeds from sales of loans			6,290				3,959
Depreciation and amortization			825				1,017
ESOP and stock-based compensation expense			466				170
Deferred income taxes			(8,687	)			(1,739	)
Changes in assets and liabilities that (used) provided cash:
Accrued interest receivable			276				514
Other assets			2,149				2,801
Accrued interest payable			(152	)			(45	)
Other liabilities			(1,051)				187
Net cash provided by operating activities			6,410				8,554
Cash flows from investing activities
Proceeds from sales of AFS securities			10,166				2,788
Proceeds from calls, maturities, and principal repayments of AFS securities			36,633				48,379
Purchases of AFS securities			(56,523	)			(56,815	)
Redemption of Federal Home Loan Bank stock			1,638				2,481
Proceeds from sale of other real estate owned			1,280				3,412
Increase in interest-bearing time deposits			(739	)			(1,827	)
Decrease in loans, net			7,752				10,621
Proceeds from sales of premises and equipment			7,078				—
Purchases of premises and equipment			(121	)			(94	)
Net cash provided by investing activities			7,164				8,945
Cash flows from financing activities
Net increase in deposits			29,465				49,942
Increase in advances from borrowers for taxes and insurance			107				38
Increase in long-term borrowings			10,000				—
Repayments of long-term borrowings			(25,000	)			(25,000	)
Net change in short-term borrowings			(20,600	)			(29,950	)
Net cash used in financing activities			(6,028	)			(4,970	)
Net increase in cash and cash equivalents			7,546				12,529
Cash and cash equivalents at beginning of period			14,997				13,513
Cash and cash equivalents at end of period		$	22,543			$	26,042
Supplementary disclosure of cash flow information:
Cash paid during period for:
Interest		$	6,099			$	7,749
Income taxes, net of refunds		$	1,231			$	6
Deferred gain on the sale of bank premises		$	1,600			$	—
Supplementary disclosure of non-cash financing and investing activities:
Transfers from loans to other real estate owned		$	2,827			$	2,201

See accompanying notes to unaudited consolidated financial statements.

Notes to Financial Statements (Unaudited)

NOTE 1 — ORGANIZATION

Cape Bancorp (“Company”) is a Maryland corporation that was incorporated on September 14, 2007 for the purpose of becoming the holding company of Cape Bank (formerly Cape Savings Bank) in connection with Cape Bank’s mutual-to-stock conversion, Cape Bancorp’s initial public offering and simultaneous acquisition of Boardwalk Bancorp, Inc. (“Boardwalk Bancorp”), Linwood, New Jersey and its wholly-owned New Jersey chartered bank subsidiary, Boardwalk Bank. As a result of these transactions, Boardwalk Bancorp was merged with, and into, Cape Bancorp and Boardwalk Bank was merged with, and into, Cape Bank. As of January 31, 2008, Cape Savings Bank changed its name to Cape Bank.

Cape Bank (“Bank”) is a New Jersey-chartered stock savings bank. The Bank provides a complete line of business and personal banking products through its sixteen full service branch offices located throughout Atlantic and Cape May counties in southern New Jersey and a loan production office in Burlington County (opened in February 2011). The Bank received regulatory approval for the closing of one branch in Cape May County which was effective as of the close of business February 4, 2011.

The Bank competes with other banking and financial institutions in its primary market areas. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time certificates of deposit and all types of loans. Such institutions, as well as consumer financial and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders.

The Bank is subject to regulations of certain state and federal agencies, and accordingly, the Bank is periodically examined by such regulatory authorities. As a consequence of the regulation of commercial banking activities, the Bank’s business is particularly susceptible to future state and federal legislation and regulations.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation: The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America (US GAAP).

We have prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto included in our latest Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The consolidated financial statements include the accounts of Cape Bancorp, Inc. and its subsidiaries, all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current year presentations. The consolidated financial statements, as of and for the periods ended June 30, 2011 and 2010, have not been audited by the Company’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the SEC.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America (or with U.S. generally accepted accounting principles), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, deferred taxes, evaluation of investment securities for other-than-temporary impairment and fair values of financial instruments are particularly subject to change.

Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, overnight deposits, federal funds sold and interest-bearing bank balances. The Federal Reserve Bank required reserves of $719,000 as of June 30, 2011, and $657,000 as of December 31, 2010, are included in these balances.

Interest-Bearing Time Deposits: Interest-bearing time deposits are held to maturity, are carried at cost and have original maturities greater than three months.

Investment Securities: Investment securities classified as available for sale are carried at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of equity, net of related income tax effects. Gains and losses on sales of investment securities are recognized upon realization utilizing the specific identification method.

When the fair value of a debt security has declined below the amortized cost at the measurement date, an entity that intends to sell a security or is more likely than not to sell the security before the recovery of the security’s cost basis, the entity must recognize the other-than-temporary impairment (OTTI) in earnings. For a debt security with a fair value below the amortized cost at the measurement date where it is more likely than not that an entity will not sell the security before the recovery of its cost basis, but an entity does not expect to recover the entire cost basis of the security, the security is considered other-than-temporarily impaired. The related other-than-temporary impairment loss on the debt security will be recognized in earnings to the extent of the credit losses with the remaining impairment loss recognized in accumulated other comprehensive income. In estimating other-than-temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, cash flow, stress testing analysis on securities when applicable, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans and Allowance for Loan Losses: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by an allowance for loan losses. Interest on loans is accrued and credited to operations based upon the principal amounts outstanding. The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.

Recognition of interest income is discontinued when, in the opinion of management, the collectability of such interest becomes doubtful. A commercial loan is classified as non-accrual when the loan is 90 days or more delinquent, or when in the opinion of management, the collectability of such loan is in doubt. Consumer and residential loans are classified as non-accrual when the loan is 90 days or more delinquent with a loan to value ratio greater than 70 percent. Loan origination fees and certain direct origination costs are deferred and amortized over the life of the related loans as an adjustment to the yield on loans receivable in a manner which approximates the interest method.

All interest accrued, but not received, for loans placed on non-accrual, is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Commercial loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Payments are generally applied to reduce the principal balance but, in certain situations, the application of payments may vary. Consumer and residential loans are returned to accrual status when their delinquency becomes less than 90 days and/or the loan to value ratio is less than 70%.

The allowance for loan losses is maintained at an amount management deems appropriate to cover probable incurred losses. In determining the level to be maintained, management evaluates many factors including current economic trends, industry experience, historical loss experience, industry loan concentrations, the borrowers’ ability to repay and repayment performance, estimated collateral values, changes in loan policies and procedures, changes in loan volume, delinquency and troubled asset trends, loan management and personnel, internal and external loan review, total credit exposure of the individual or entity, and external factors including competition, legal, regulatory and seasonal factors. In the opinion of management, the allowance is appropriate to absorb probable loan losses. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for losses on loans. Such agencies may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. Charge-offs to the allowance are made when the loan is transferred to other real estate owned or a determination of loss is made.

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Included in the allowance for loan losses at June 30, 2011 was an impairment reserve for troubled debt restructurings (TDRs) in the amount of $450,000.

Included in the Company’s loan portfolio are modified loans. Per FASB ASC 310-40, Troubled Debt Restructuring, (“FASB ASC 310-40”), a modification is one in which the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider, such as providing for a below market interest rate and/or forgiving principal or previously accrued interest; this modification may stem from an agreement or be imposed by law or a court, and may involve a multiple note structure. Prior to the modification, if the loans which are modified as a troubled debt restructuring (“TDR”) are already classified as non-performing, these loans may only be returned to performing (i.e. accrual status) after considering the borrower’s sustained repayment performance for a reasonable amount of time, generally six months; this sustained repayment performance may include the period of time just prior to the restructuring. At June 30, 2011, the total carrying value of loans in TDR status is $22.4 million.

Other Real Estate Owned: Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned and is initially recorded at the lower of cost or estimated fair market value, less the estimated cost to sell, at the date of foreclosure, thereby establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 7 years.

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

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. The annual goodwill assessment is performed in the fourth quarter.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which range from 5 to 13 years. Other intangible assets are assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Bank Owned Life Insurance (BOLI): The Bank has an investment of bank owned life insurance. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees and directors. The Bank is the owner and beneficiary of the policies and in accordance with FASB Accounting Standards Codification (ASC) Topic 325 “Investments in Insurance Contracts”, the amount recorded is the cash surrender value, which is the amount realizable.

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

Defined Benefit Plan: The Bank participates in a multi-employer defined benefit plan. The plan was amended to freeze participation to new employees commencing January 1, 2008. Employees who became eligible to participate prior to January 1, 2008, will continue to accrue a benefit under the plan. The Bank accrues pension costs as incurred. The plan was further amended to freeze benefits as of December 31, 2008 for all employees eligible to participate prior to January 1, 2008.

401(k) Plan: The Bank maintains a tax-qualified defined contribution plan for all salaried employees of Cape Bank who have satisfied the 401(k) Plan’s eligibility requirements. The Bank’s matching contribution under the Plan is equal to 100% of the participant’s contribution on up to 3% of the participant’s salary contributed to the plan and 50% of contributions on the next 2% of salary contributed by the participant, with a maximum potential matching contribution of 4%.

Employee Stock Ownership Plan (ESOP): The cost of shares issued to the ESOP, but not yet earned is shown as a reduction of equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts and the shares become outstanding for earnings per share computations. As of June 30, 2011, 127,809 shares have been allocated to eligible participants in the Cape Bank Employee Stock Ownership Plan.

Stock Benefit Plan: The Company has an Equity Incentive Plan (the “Stock Benefit Plan”) under which incentive and non-qualified stock options, stock appreciation rights (SARs) and restricted stock awards (RSAs) may be granted periodically to certain employees and directors. Under the fair value method of accounting for stock options, the fair value is measured on the date of grant using the Black-Scholes option pricing model with market assumptions. This amount is amortized as salaries and employee benefits expense on a straight-line basis over the vesting period. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which, if changed, can significantly affect fair value estimates.

Income Taxes: Income taxes are accounted for under the asset and liability method. 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 and operating loss and tax credit carryforwards. The principal types of accounts resulting in differences between assets and liabilities for financial statement and tax purposes are the allowance for loan losses, deferred compensation, deferred loan fees, charitable contributions, depreciation and other-than-temporary impairment charges. 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 recorded against net deferred tax assets when management has concluded that it is not more likely than not that a portion or all will be realized.

Beginning with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, included in FASB ASC Subtopic 740-10 — Income Taxes — Overall, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of Interpretation 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained.

The Company records interest and penalties related to uncertain tax positions as non-interest expense.

Earnings Per Share: Basic earnings (loss) per common share is the net income (loss) divided by the weighted average number of common shares outstanding during the period. ESOP shares are not considered outstanding for this calculation unless earned. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock option and restricted stock awards, if any.

Comprehensive Income (Loss): Comprehensive income includes net income as well as certain other items which result in a change to equity during the period. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity as follows:

		Before Tax				Tax Benefit				Net of Tax
		Amount				(Expense)				Amount
		(in thousands)
Three months ended June 30, 2011
Unrealized holding gains arising during the period		$	3,530			$	(1,200	)		$	2,330
Non-credit related unrealized gain on other-than-temporarily impaired CDOs			317				(108	)			209
Reclassification adjustment for loss on sale of securities			—				—				—
Reclassification adjustment for credit related OTTI included in net income			—				—				—
Other comprehensive income, net		$	3,847			$	(1,308	)		$	2,539
Three months ended June 30, 2010
Unrealized holding gains arising during the period		$	650			$	(222	)		$	428
Non-credit related unrealized loss on other-than-temporarily impaired CDOs			(31	)			11				(20	)
Reclassification adjustment for loss on sale of securities			33				(11	)			22
Reclassification adjustment for credit related OTTI included in net income			514				(175	)			339
Other comprehensive income, net		$	1,166			$	(397	)		$	769
Six months ended June 30, 2011
Unrealized holding gains arising during the period		$	3,671			$	(1,248	)		$	2,423
Non-credit related unrealized gain on other-than-temporarily impaired CDOs			833				(283	)			550
Reclassification adjustment for gain on sale of securities			(148	)			50				(98	)
Reclassification adjustment for credit related OTTI included in net income			211				(72	)			139
Other comprehensive income, net		$	4,567			$	(1,553	)		$	3,014
Six months ended June 30, 2010
Unrealized holding gains arising during the period		$	1,075			$	(400	)		$	675
Non-credit related unrealized gain on other-than-temporarily impaired CDOs			118				(40	)			78
Reclassification adjustment for loss on sale of securities			33				(11	)			22
Reclassification adjustment for credit related OTTI included in net income			3,085				(1,049	)			2,036
Other comprehensive income, net		$	4,311			$	(1,500	)		$	2,811

Operating Segments: While the chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Effect of Newly Issued Accounting Standards: In December 2010, the FASB issued (ASU) 2010-28 Intangibles—Goodwill and Other (Topic 350) covering when to perform step 2 of the Goodwill Impairment Test for reporting units with zero or negative carrying amounts. This Update is intended to modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts as these entities will be required to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing step 1 of the goodwill impairment test is zero or negative. For public entities, the amendments in this Update are effective for fiscal years and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. There was no significant impact to amounts reported in the consolidated financial position or results of operations from the adoption of ASU 2010-28.

In January 2011, the FASB issued (ASU) 2011-01 Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This Update temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The amendments in this Update delay the effective date of the new disclosures about troubled debt restructurings for public entities and the coordination of the guidance for determining what constitutes a troubled debt restructuring until interim and annual periods ending after June 15, 2011. No significant impact to amounts reported in the consolidated financial position or results of operations are expected from the adoption of ASU 2011-01.

In April 2011, the FASB issued (ASU) 2011-02 which provides additional guidance related to determining whether a creditor has granted concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU 2010-20. The provisions of ASU 2011-02 are effective for the Company’s reporting period ending September 30, 2011. The adoption of ASU 2011-02 is not expected to have a material impact on the Company’s financial position or results of operation.

NOTE 3 — INVESTMENT SECURITIES

The amortized cost, gross unrealized gains or losses and the fair value of the Company’s investment securities available for sale are as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(in thousands)
June 30, 2011
Investment securities available for sale
Debt securities
U.S. Government and agency obligations		$	62,595			$	112			$	(149	)		$	62,558
Municipal bonds			24,261				586				(422	)			24,425
Collateralized debt obligations			9,533				—				(5,432	)			4,101
Corporate bonds			22,554				211				(28	)			22,737
Total debt securities		$	118,943			$	909			$	(6,031	)		$	113,821
Mortgage-backed securities
GNMA pass-through certificates		$	4,765			$	154			$	—			$	4,919
FHLMC pass-through certificates			2,966				117				(1	)			3,082
FNMA pass-through certificates			9,084				484				(32	)			9,536
Collateralized mortgage obligations			39,809				498				(1	)			40,306
Total mortgage-backed securities		$	56,624			$	1,253			$	(34	)		$	57,843
Total securities available for sale		$	175,567			$	2,162			$	(6,065	)		$	171,664

						Gross				Gross
		Amortized					Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(in thousands)
December 31, 2010
Investment securities available for sale
Debt securities
U.S. Government and agency obligations		$	72,470			$	52			$	(787	)		$	71,735
Municipal bonds			25,811				456				(861	)			25,406
Collateralized debt obligations			9,715				—				(8,581	)			1,134
Corporate bonds			17,994				187				(46	)			18,135
Total debt securities		$	125,990			$	695			$	(10,275	)		$	116,410
Mortgage-backed securities
GNMA pass-through certificates		$	2,318			$	50			$	—			$	2,368
FHLMC pass-through certificates			3,299				134				—				3,433
FNMA pass-through certificates			16,542				765				(41	)			17,266
Collateralized mortgage obligations			17,728				309				(107	)			17,930
Total mortgage-backed securities		$	39,887			$	1,258			$	(148	)		$	40,997
Total securities available for sale		$	165,877			$	1,953			$	(10,423	)		$	157,407

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2011.

		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
	(in thousands)
U.S. Government and agency obligations		$	25,053			$	(149	)		$	—			$	—			$	25,053			$	(149	)
Municipal bonds			1,334				(6	)			2,594				(416	)			3,928				(422	)
Corporate bonds			6,071				(28	)			—				—				6,071				(28	)
Collateralized debt obligations			100				(274	)			4,001				(5,158	)			4,101				(5,432	)
Mortgage-backed securities			3,185				(34	)			12				—				3,197				(34	)
Total temporarily impaired investment securities		$	35,743			$	(491	)		$	6,607			$	(5,574	)		$	42,350			$	(6,065	)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2010.

		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
	(in thousands)
U.S. Government and agency obligations		$	52,688			$	(787	)		$	—			$	—			$	52,688			$	(787	)
Municipal bonds			6,853				(220	)			2,916				(641	)			9,769				(861	)
Corporate bonds			9,427				(46	)			—				—				9,427				(46	)
Collateralized debt obligations			35				(364	)			1,099				(8,217	)			1,134				(8,581	)
Mortgage-backed securities			6,675				(110	)			3,140				(38	)			9,815				(148	)
Total temporarily impaired investment securities		$	75,678			$	(1,527	)		$	7,155			$	(8,896	)		$	82,833			$	(10,423	)

Management evaluates investment securities to determine if they are other-than-temporarily impaired on at least a quarterly basis. The evaluation process applied to each security includes, but is not limited to, the following factors: whether the security is performing according to its contractual terms, determining if there has been an adverse change in the expected cash flows for investments within the scope of FASB Accounting Standards Codification (ASC) Topic 325, “Investments Other”, the length of time and the extent to which the fair value has been less than cost, whether the Company intends to sell, or would more likely than not be required to sell an impaired debt security before a recovery of its amortized cost basis, credit rating downgrades, the percentage of performing collateral that would need to default or defer to cause a break in yield and/or a temporary interest shortfall, and a review of the underlying issuers.

At June 30, 2011, the Company’s investment securities portfolio consisted of 328 securities, 57 of which were in an unrealized loss position. The gross unrealized losses in the Company’s investment securities portfolio related primarily to the collateralized debt obligation securities, which are discussed in detail below, and accounted for 89.6% of the total gross unrealized losses at June 30, 2011. The remaining securities with unrealized losses consist of investments that are backed by the U.S. Government or U.S. sponsored agencies which the government has affirmed its commitment to support, and municipal obligations which had unrealized losses that were caused by changing credit spreads in the market as a result of the current economic environment. Because the Company has no intention to sell these securities, nor is it more likely than not that we will be required to sell the securities, the Company does not consider these investments to be OTTI.

As of June 30, 2011, the book value of our pooled trust preferred collateralized debt obligations totaled $9.5 million with an estimated fair value of $4.1 million and is comprised of 24 securities. Of those, 16 have been principally issued by bank holding companies (PreTSL deals, MM Community I, and Alesco VI), and 8 have been principally issued by insurance companies (I-PreTSL deals). All of our pooled securities are mezzanine tranches and possess credit ratings below investment grade. As of June 30, 2011, 16 of our securities had no excess subordination and 8 of our securities had excess subordination which ranged from 1.7% to 11.4% of the current performing collateral. Excess subordination is the amount by which the underlying performing collateral exceeds the outstanding bonds in the current class, plus all senior classes. It is a static measure of credit enhancement, but does not incorporate structural elements of the CDO. Management utilizes excess subordination as a measure to identify which tranches are at a greater risk for a future break in cash flows. However, a current subordination deficit or “zero excess subordination” does not indicate the tranche will not ultimately receive all principal and interest due. For example, this measure does not consider the potential for recovery of issuers that are currently deferring payments. Some issuers have elected to defer payments, which contractually they are permitted to do for a period of up to 5 years, even though going concern issues may not exist. This supports management’s position that a deferral is not necessarily indicative of a default or that a default is imminent. On average, deferring issuers underlying the bank issued CDOs comprise approximately 60% of the total dollar value related to issuer defaults and deferrals. As such, our assumptions used in the calculation of discounted cash flows anticipate a 15% recovery rate on deferring issuers as compared to no recovery of issuers that have defaulted. The recovery rate assumption represents management’s best estimate based on current facts and circumstances. In addition, due to projected discounted cash flows that do not support the receipt of interest, the Company is not accruing interest on any of the bank issued CDO securities. Accordingly, these securities are considered non-performing assets.

The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of June 30, 2011:

Pooled Trust Preferred Collateralized Debt Obligations
(dollars in thousands)

																														Amount of
																														Deferrals				Excess
																														and				Subordination
																										Current				Defaults				as a % of
		Number																						Moody’s/		Number of				as a % of				Current
		of						Book				Fair				Unrealized				Realized				Fitch		Performing				Current				Performing
Deal		Securities				Class		Value				Value				Loss				Loss				Ratings			Issuers				Collateral				Collateral
PreTSL II			2			Mezzanine		$	443			$	181			$	(262	)		$	(635	)		Ca/C			23				39.90	%			0.00	%
PreTSL VI			1			Mezzanine			42				32				(10	)			(16	)		Ca/D			3				73.60	%			0.00	%
PreTSL XIX			1			Mezzanine			974				395				(579	)			(826	)		C/C			51				27.50	%			0.00	%
I-PreTSL I			2			Mezzanine			1,835				800				(1,035	)			—			NR/CCC			15				16.80	%			1.66	%
I-PreTSL II			2			Mezzanine			2,720				1,200				(1,520	)			—			NR/B			27				4.90	%			11.36	%
I-PreTSL III			3			Mezzanine			2,706				1,193				(1,513	)			—			B2/CCC			23				11.60	%			6.02	%
I-PreTSL IV			1			Mezzanine			440				200				(240	)			—			Ba2/CCC			27				12.20	%			4.16	%
MM Comm I			1			Mezzanine			373				100				(273	)			(1,153	)		NR/C			7				61.80	%			0.00	%
Total			13					$	9,533			$	4,101			$	(5,432	)		$	(2,630	)

Lack of liquidity in the market for trust preferred collateralized debt obligations, credit rating downgrades and market uncertainties related to the financial industry are factors contributing to the impairment on these securities. The table above excludes 11 CDO securities which have been completely written-off and, therefore, have no book value. The recognized loss associated with these securities is $14.5 million.

The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of December 31, 2010:

Pooled Trust Preferred Collateralized Debt Obligations
(dollars in thousands)

																														Amount of
																														Deferrals				Excess
																														and				Subordination
																										Current				Defaults				as a % of
		Number																						Moody’s/		Number of				as a % of				Current
		of						Book				Fair				Unrealized				Realized				Fitch		Performing				Current				Performing
Deal		Securities				Class		Value				Value				Loss				Loss				Ratings		Issuers				Collateral				Collateral
PreTSL II			2			Mezzanine		$	419			$	15			$	(403	)		$	(635	)		Ca/C			23				37.70	%			0.00	%
PreTSL VI			1			Mezzanine			43				1				(41	)			(16	)		Ca/D			2				81.00	%			0.00	%
PreTSL XIX			1			Mezzanine			1,168				20				(1,148	)			(614	)		C/C			52				24.60	%			0.00	%
I-PreTSL I			2			Mezzanine			1,833				251				(1,582	)			—			NR/CCC			16				17.36	%			9.11	%
I-PreTSL II			2			Mezzanine			2,715				375				(2,340	)			—			NR/B			29				4.87	%			14.33	%
I-PreTSL III			3			Mezzanine			2,701				375				(2,326	)			—			B2/CCC			24				11.16	%			10.75	%
I-PreTSL IV			1			Mezzanine			439				63				(376	)			—			Ba2/CCC			29				11.58	%			2.82	%
MM Comm I			1			Mezzanine			399				35				(364	)			(1,153	)		NR/C			7				61.80	%			0.00	%
Total			13					$	9,715			$	1,134			$	(8,581	)		$	(2,418	)