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

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		Smaller Reporting Company o
				(Do not check if smaller reporting company)

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 October 31, 2011 there were 13,314,111 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 September 30, 2011 (unaudited) and December 31, 2010			3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and September 30, 2010 (unaudited)			4
Consolidated Statements of Changes in Stockholders’ Equity for the Twelve Months Ended December 31, 2010 and Nine Months Ended September 30, 2011 (unaudited)			5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and September 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			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Item 4. Controls and Procedures			50
Part II. Other Information
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults upon Senior Securities			50
Item 4. (Reserved)			51
Item 5. Other Information			51
Item 6. Exhibits			51
Signature Page			52
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)
		September 30,				December 31,
		2011				2010
		(in thousands)
ASSETS
Cash & due from financial institutions		$	19,071			$	10,181
Interest-bearing bank balances			14,050				4,816
Cash and cash equivalents			33,121				14,997
Interest-bearing time deposits			10,012				9,361
Investment securities available for sale, at fair value (amortized cost of $186,682 and $165,877 respectively)			183,674				157,407
Loans held for sale			13,404				1,224
Loans, net of allowance of $14,157 and $12,538 respectively			721,411				772,318
Accrued interest receivable			3,744				4,029
Premises and equipment, net			20,850				25,212
Other real estate owned			6,607				3,255
Federal Home Loan Bank (FHLB) stock, at cost			7,843				8,721
Prepaid FDIC insurance premium			2,310				3,195
Deferred income taxes			17,617				6,054
Bank owned life insurance (BOLI)			29,001				28,252
Goodwill			22,575				22,575
Intangible assets, net			362				445
Assets held for sale			—				479
Other assets			6,105				3,518
Total assets		$	1,078,636			$	1,061,042
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing deposits		$	79,622			$	68,267
Interest-bearing deposits			694,821				684,801
Federal funds purchased and repurchase agreements			37,494				37,507
Federal Home Loan Bank borrowings			113,426				132,130
Advances from borrowers for taxes and insurance			634				554
Accrued interest payable			549				714
Other liabilities			5,599				4,915
Total liabilities			932,145				928,888
Stockholders’ Equity
Common stock, $.01 par value: authorized 100,000,000 shares; issued 13,324,521 shares; outstanding 13,314,111 shares			133				133
Additional paid-in capital			127,246				126,864
Treasury stock at cost - 10,410 shares			(81	)			(85	)
Unearned ESOP shares			(9,061	)			(9,380	)
Accumulated other comprehensive loss, net			(1,985	)			(5,590	)
Retained earnings			30,239				20,212
Total stockholders’ equity			146,491				132,154
Total liabilities & stockholders’ equity		$	1,078,636			$	1,061,042

See accompanying notes to consolidated financial statements.

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2011				2010				2011				2010
		(dollars in thousands, except share data)
Interest income:
Interest on loans		$	10,362			$	11,220			$	31,576			$	34,259
Interest and dividends on investments
Taxable			572				555				1,745				1,035
Tax-exempt			237				304				710				940
Interest on mortgage-backed securities			393				576				1,136				1,815
Total interest income			11,564				12,655				35,167				38,049
Interest expense:
Interest on deposits			1,630				2,105				4,973				6,777
Interest on borrowings			1,252				1,453				3,856				4,485
Total interest expense			2,882				3,558				8,829				11,262
Net interest income before provision for loan losses			8,682				9,097				26,338				26,787
Provision for loan losses			8,762				2,700				15,073				4,652
Net interest income after provision for loan losses			(80	)			6,397				11,265				22,135
Non-interest income:
Service fees			904				926				2,687				2,543
Net gains on sale of loans			45				59				124				99
Net income from BOLI			253				254				749				760
Net rental income			23				58				133				173
Gain (loss) on sale of investment securities held for sale, net			19				343				167				310
Net gain (loss) on sale of OREO			(22	)			7				(22	)			255
Gain on sale of bank premises			—				—				1,830				—
Other			97				81				269				250
Gross other-than-temporary impairment losses			15				(1,914	)			637				(4,881	)
Less: Portion of loss recognized in other comprehensive income			(78	)			1,574				(911	)			1,456
Net other-than-temporary impairment losses			(63	)			(340	)			(274	)			(3,425	)
Total non-interest income (expense)			1,256				1,388				5,663				965
Non-interest expense:
Salaries and employee benefits			3,675				3,082				10,958				10,474
Occupancy expenses, net			468				503				1,427				1,527
Equipment expenses			267				362				930				1,279
Federal insurance premiums			319				320				937				952
Data processing			347				377				1,019				1,006
Loan related expenses			916				682				1,633				1,522
Advertising			155				86				374				283
Telecommunications			271				273				760				746
Professional services			203				199				581				522
OREO expenses			886				196				1,148				633
Other operating			710				819				2,607				2,467
Total non-interest expense			8,217				6,899				22,374				21,411
Income (loss) before income taxes			(7,041	)			886				(5,446	)			1,689
Income tax expense (benefit)			(8,207	)			(959	)			(15,473	)			(1,490	)
Net income		$	1,166			$	1,845			$	10,027			$	3,179
Earnings per share (see Note 10):
Basic		$	0.09			$	0.15			$	0.81			$	0.26
Diluted		$	0.09			$	0.15			$	0.81			$	0.26
Weighted average number of shares outstanding:
Basic			12,405,298				12,358,140				12,392,626				12,348,861
Diluted			12,406,150				12,368,865				12,398,826				12,359,770

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			—				—				—				—				—				10,027				10,027
Stock option compensation expense			—				386				—				—				—				—				386
Restricted stock compensation expense			—				13				—				—				—				—				13
Issuance of stock for stock options			—				—				4				—				—				—				4
Net unrealized gains, net of reclassification adjustments and taxes			—				—				—				—				3,605				—				3,605
Total comprehensive income																											14,035
ESOP shares earned			—				(17	)			—				319				—				—				302
Balance, September 30, 2011		$	133			$	127,246			$	(81	)		$	(9,061	)		$	(1,985	)		$	30,239			$	146,491

See accompanying notes to unaudited consolidated financial statements.

CAPE BANCORP, INC. AND SUBSIDIARIES

		Nine months ended September 30,
		2011				2010
		(in thousands)
Cash flows from operating activities
Net income		$	10,027			$	3,179
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			15,073				4,652
Net gain on the sale of loans			(124	)			(99	)
Gain on the sale of bank premises			(1,830	)			—
Net (gain) loss on the sale of other real estate owned			22				(255	)
Write-down of other real estate owned			824				335
Loss on impairment of securities			274				3,425
Net gain on sale of investments			(167	)			(310	)
Earnings on BOLI			(749	)			(760	)
Origination of loans held for sale			(10,249	)			(13,719	)
Proceeds from sales of loans			10,015				9,710
Depreciation and amortization			1,002				1,477
ESOP and stock-based compensation expense			701				378
Deferred income taxes			(13,420	)			(3,366	)
Changes in assets and liabilities that (used) provided cash:
Accrued interest receivable			285				580
Other assets			(1,224	)			1,670
Accrued interest payable			(165	)			(97	)
Other liabilities			(737	)			755
Net cash provided by operating activities			9,558				7,555
Cash flows from investing activities
Proceeds from sales of AFS securities			10,404				6,574
Proceeds from calls, maturities, and principal repayments of AFS securities			78,506				88,120
Purchases of AFS securities			(109,804	)			(97,827	)
Redemption of Federal Home Loan Bank stock			878				1,882
Proceeds from sale of other real estate owned			2,643				4,220
Increase in interest-bearing time deposits			(651	)			(2,115	)
Decrease in loans, net			16,933				22,733
Proceeds from sales of premises and equipment			7,078				—
Purchases of premises and equipment			(184	)			(164	)
Repurchase of common stock			—				(85	)
Net cash provided by investing activities			5,803				23,338
Cash flows from financing activities
Net increase in deposits			21,379				15,525
Increase in advances from borrowers for taxes and insurance			80				14
Increase in long-term borrowings			20,000				5,000
Repayments of long-term borrowings			(25,000	)			(30,000	)
Net change in short-term borrowings			(13,700	)			(16,650	)
Proceeds from exercise of shares from option plans			4				—
Net cash used in financing activities			2,763				(26,111	)
Net increase in cash and cash equivalents			18,124				4,782
Cash and cash equivalents at beginning of period			14,997				13,513
Cash and cash equivalents at end of period		$	33,121			$	18,295
Supplementary disclosure of cash flow information:
Cash paid during period for:
Interest		$	8,995			$	11,359
Income taxes, net of refunds		$	1,238			$	1,465
Deferred gain on sale of bank premises		$	1,600			$	—
Supplementary disclosure of non-cash financing and investing activities:
Transfers from loans to other real estate owned		$	6,842			$	3,667
Transfers from loans to loans held for sale		$	11,946			$	—

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 loan production offices in Burlington and Cape May Counties. 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 September 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 $835,000 as of September 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 (HFS): Loans held for sale (HFS) consist of residential mortgage loans originated and intended for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to HFS, all of which are carried at the lower of aggregate cost or fair market value. The fair value of residential mortgage loans is based on the price secondary markets are currently offering for similar loans using observable market data. The fair values of loans transferred from the loan portfolio to HFS are based on the amounts offered for these loans in currently pending sales transactions or as determined by outstanding commitments from investors. Write-downs on loans transferred to HFS are charged to the allowance for loan losses. Net unrealized losses, if any, and charged to operating income and the HFS balance is reduced. Gains and losses on sales of loans are based on the difference between the selling price and the carrying value of the related loans sold. For the periods ended, and as of, September 30, 2011, HFS are excluded from delinquencies, non-performing loans, non-performing assets, impaired loans and all related ratio calculations.

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 September 30, 2011 was an impairment reserve for troubled debt restructurings (TDRs) in the amount of $139,000.

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 September 30, 2011, TDRs totaled $10.9 million, of which $10.5 million were accruing TDRs and $405,000 were non-accruing. In addition, included in loans held for sale are $7.3 million of TDRs that are on non-accrual status.

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, an OREO write-down is recorded through expense and the OREO balance is lowered to reflect the current fair value. 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 for 2011 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 September 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 September 30, 2011
Unrealized holding gains arising during the period		$	773			$	(262	)		$	511
Non-credit related unrealized gain on other-than-temporarily impaired CDOs			78				(27	)			51
Reclassification adjustment for gain on sale of securities			(19	)			7				(12	)
Reclassification adjustment for credit related OTTI included in net income			63				(22	)			41
Other comprehensive income, net		$	895			$	(304	)		$	591
Three months ended September 30, 2010
Unrealized holding gains arising during the period		$	2,397			$	(814	)		$	1,583
Non-credit related unrealized loss on other-than-temporarily impaired CDOs			(1,517	)			516				(1,001	)
Reclassification adjustment for gain on sale of securities			(343	)			116				(227	)
Reclassification adjustment for credit related OTTI included in net income			340				(116	)			224
Other comprehensive income, net		$	877			$	(298	)		$	579
Nine months ended September 30, 2011
Unrealized holding gains arising during the period		$	4,444			$	(1,511	)		$	2,933
Non-credit related unrealized gain on other-than-temporarily impaired CDOs			911				(310	)			601
Reclassification adjustment for gain on sale of securities			(167	)			57				(110	)
Reclassification adjustment for credit related OTTI included in net income			274				(93	)			181
Other comprehensive income, net		$	5,462			$	(1,857	)		$	3,605
Nine months ended September 30, 2010
Unrealized holding gains arising during the period		$	3,529			$	(1,233	)		$	2,296
Non-credit related unrealized loss on other-than-temporarily impaired CDOs			(1,456	)			495				(961	)
Reclassification adjustment for gain on sale of securities			(310	)			105				(205	)
Reclassification adjustment for credit related OTTI included in net income			3,425				(1,165	)			2,260
Other comprehensive income, net		$	5,188			$	(1,798	)		$	3,390

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. There was no significant impact to amounts reported in the consolidated financial position or results of operations from the adoption of ASU 2010-01.

In April 2011,the FASB issued (ASU) 2011-02 which provides additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant. The guidance prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower and adds 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. There was no significant impact to amounts reported in the consolidated financial position or results of operations from the adoption of ASU 2011-02.

In June 2011, the FASB issued guidance to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments are effective for interim and annual periods beginning after December 15, 2011 with retrospective application. The Company will adopt the accounting standard during 2012, as required, with no material impact on its results of operations, financial position, and liquidity.

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
		Cost				Gains				Losses				Fair Value
		(in thousands)
September 30, 2011
Investment securities available for sale
Debt securities
U.S. Government and agency obligations		$	55,384			$	364			$	(34	)		$	55,714
Municipal bonds			22,765				670				(307	)			23,128
Collateralized debt obligations			9,483				—				(5,417	)			4,066
Corporate bonds			22,506				251				(204	)			22,553
Total debt securities		$	110,138			$	1,285			$	(5,962	)		$	105,461
Mortgage-backed securities
GNMA pass-through certificates		$	4,730			$	233			$	—			$	4,963
FHLMC pass-through certificates			4,924				121				(7	)			5,038
FNMA pass-through certificates			12,442				508				(2	)			12,948
Collateralized mortgage obligations			54,448				817				(1	)			55,264
Total mortgage-backed securities		$	76,544			$	1,679			$	(10	)		$	78,213
Total securities available for sale		$	186,682			$	2,964			$	(5,972	)		$	183,674

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair 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 September 30, 2011.

		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
Description of Securities		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(in thousands)
U.S. Government and agency obligations		$	12,038			$	(34	)		$	—			$	—			$	12,038			$	(34	)
Municipal bonds			1,011				(4	)			2,486				(303	)			3,497				(307	)
Corporate bonds			9,027				(204	)			—				—				9,027				(204	)
Collateralized debt obligations			100				(198	)			3,966				(5,219	)			4,066				(5,417	)
Mortgage-backed securities			8,147				(10	)			10				—				8,157				(10	)
Total temporarily impaired investment securities		$	30,323			$	(450	)		$	6,462			$	(5,522	)		$	36,785			$	(5,972	)

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
						Unrealized								Unrealized								Unrealized
Description of Securities		Fair Value				Losses				Fair Value				Losses				Fair 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 September 30, 2011, the Company’s investment securities portfolio consisted of 324 securities, 52 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 90.7% of the total gross unrealized losses at September 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 September 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 September 30, 2011, 16 of our securities had no excess subordination and 8 of our securities had excess subordination which ranged from 2.2% to 12.0% 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 September 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				$	455			$	257			$	(198	)		$	(635	)		Ca/C					16				48.30	%			0.00	%
PreTSL VI			1			Mezzanine					42				31				(11	)			(16	)		Ca/D					3				73.60	%			0.00	%
PreTSL XIX			1			Mezzanine					981				342				(639	)			(826	)		C/C					51				27.50	%			0.00	%
I-PreTSL I			2			Mezzanine					1,837				788				(1,049	)			—			NR/CCC					15				16.80	%			2.16	%
I-PreTSL II			2			Mezzanine					2,722				1,178				(1,544	)			—			NR/B					27				4.90	%			11.97	%
I-PreTSL III			3			Mezzanine					2,708				1,172				(1,536	)			—			B2/CCC					22				12.30	%			7.05	%
I-PreTSL IV			1			Mezzanine					440				198				(242	)			—			Ba2/CCC					26				12.80	%			4.96	%
MM Comm I			1			Mezzanine					298				100				(198	)			(1,215	)		NR/C					7				61.80	%			0.00	%
Total			13							$	9,483			$	4,066			$	(5,417	)		$	(2,692	)

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	)