NOTE 1 – ORGANIZATION

Cape Bancorp Inc., (the “Company”) is a Maryland corporation that was incorporated on September 14, 2007 for the purpose of becoming the holding company of Cape Bank.

Cape Bank (the “Bank”) is a New Jersey-chartered stock savings bank. The Bank provides a complete line of business and personal banking products. Following its April 1, 2015 acquisition of Colonial Financial Services, Inc. (“Colonial”) and Colonial Bank FSB (“Colonial Bank”), Vineland, New Jersey, Cape Bank operates through its twenty-two full service offices (including the Sun National Bank Hammonton, New Jersey branch location purchased on August 28, 2015) located throughout Atlantic, Cape May, Cumberland and Gloucester counties in New Jersey, including its main office located at 225 North Main Street, Cape May Court House, New Jersey, three market development offices (“MDOs”) located in Burlington, Cape May and Atlantic Counties in New Jersey, and two MDOs in Pennsylvania servicing the five county Philadelphia market located in Radnor, Delaware County and in Philadelphia (opened in Center City in January 2015).

On January 5, 2016, the Company entered into a definitive agreement and plan of merger with OceanFirst Financial Corp. (“OceanFirst”) pursuant to which Cape Bancorp will merge with and into OceanFirst and Cape Bank will merge with and into OceanFirst Bank. The transaction is subject to approval by the shareholders of each company, receipt of all required regulatory approvals and fulfillment of other customary closing conditions. All shareholder and regulatory approvals have been received as of the close of business on April 25, 2016. Closing is expected in early May 2016.

The Bank faces significant competition in attracting deposits and originating loans. Our most direct competition for deposits historically has come from the many financial institutions operating in our market area, including commercial banks, savings banks, savings and loan associations and credit unions, and, to a lesser extent, from other financial service companies, such as brokerage firms and insurance companies. 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 GAAP pursuant to such rules and regulations. 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 may have been reclassified to conform to current year presentations. The consolidated financial statements, as of and for the periods ended March 31, 2016 and 2015, 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 periods presented 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 GAAP, 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.

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 $1.5 million as of March 31, 2016, and $1.8 million as of December 31, 2015 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: The Bank classifies investment securities as either available-for-sale (“AFS”) or held-to-maturity (“HTM”). Investment securities classified as AFS 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. Investment securities classified as HTM are carried at cost, adjusted for amortization of premium and accretion of discount over the term of the related investments, using the level yield method. Investment securities are classified as HTM when management has the positive intent and ability to hold them to maturity. 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, if an entity 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 classified as OTTI. The related OTTI 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 OTTI losses, management considers: the length of time and extent that fair value of the security has been less than the cost of the security, 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”): From time to time, certain commercial loans are transferred from the loan portfolio to HFS, and are carried at the lower of aggregate cost or fair market value. The fair values 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. Subsequent declines in fair value, if any, are 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.

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. 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. The allowance for loan losses is established through a provision for loan losses charged to operations. The allowance for loan losses is comprised of both loan pool valuation allowances and individual valuation allowances. 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 the loan 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 60 percent.

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 as a reduction of the principal balance 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 60 percent.

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 historical loss experience, the borrowers’ ability to repay and repayment performance, current economic trends, estimated collateral values, industry experience, industry loan concentrations, 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 Company’s loan portfolio are modified loans. Per the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 310-40, “Troubled Debt Restructurings by Creditors” (“FASB ASC 310-40”), a loan restructuring 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 the creditor would not otherwise consider, such as providing for a below market interest rate and/or forgiving principal or previously accrued interest. This restructuring may stem from an agreement or may be imposed by law, and may involve a multiple note structure. Prior to the restructuring, if the loans which are modified as a troubled debt restructuring (“TDR”) are already classified as non-accrual, 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 March 31, 2016, TDRs totaled $3.8 million, of which $2.8 million were accruing TDRs and $1.0 million were non-accruing TDRs. This compares to $3.9 million of TDRs at December 31, 2015, of which $2.8 million were accruing TDRs and $1.1 million were non-accruing TDRs. (See Note 5 – Loans Receivable).

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on collateral. The following portfolio classes have been identified:

Commercial Secured by Real Estate: Commercial real estate properties primarily include office and medical buildings, retail space, restaurants, multifamily and warehouse or flex space. Some properties are considered “mixed use” as they are a combination of building types, such as an apartment building that may also have retail space. Multifamily loans are expected to be repaid from the cash flow of the underlying property, so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can all have an impact on the borrower and their ability to repay the loan. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.

Commercial Term Loans: Commercial term loans are term loans to operating companies for business purposes. These loans are generally secured by real estate or business assets such as accounts receivable, inventory and equipment. These loans are typically repaid first by the cash flow generated by the borrower’s business operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flow. Factors that may influence a business’s profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions.

Construction: Construction loans are granted to experienced and reputable builders and developers that have the capital and liquidity to carry a project to completion and stabilization. Construction loans are considered riskier than commercial financing on improved and established commercial real estate and loans for the purchase of existing residential properties. The risk of potential loss increases if the original cost estimates or estimated time to complete the project vary significantly from the actual costs or length of time in which the project was completed.

Other Commercial: The Bank provides commercial lines of credit loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory and equipment. These loans are typically repaid first by the cash flow generated by the borrower’s business operation. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flow. Factors that may influence a business’s profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Commercial lines of credit loans are generally secured by business assets; however, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain.

Non-Profit: The Bank provides a variety of types of loans, real estate based, term, and, or lines of credit to non-profit organizations. These loans are consistent with the criteria indicated previously for these similar types of loans, although a non-profit organization may have additional sources of financial support in the form of foundations and, or, endowments. As these loans are exposed to the same economic conditions as other similarly structured loans, the additional financial resources results in a lower risk profile.

Residential Mortgage: Effective December 31, 2013, the Bank exited the residential mortgage loan origination business. Prior to December 31, 2013, the Bank originated one-to-four family residential mortgage loans within or near its primary geographic market area. The mortgage loans are secured by first liens on the primary residence or investment property. Primary risk characteristics associated with residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.

Home Equity & Lines of Credit: The Bank provides home equity loans and lines of credit in the form of amortizing home equity loans or revolving home equity lines of credit against one-to-four family residences within or near its primary geographic market. Primary risk characteristics associated with home equity lines of credit typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; divorce or death. In addition, home equity lines of credit typically are made with variable or floating interest rates, such as the Prime Rate, which could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate value could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank.

Other Consumer: These are loans to individuals for household, family and other personal expenditures. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments.

Other Real Estate Owned (“OREO”): 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 estimated fair market value, less the estimated cost to sell, at the date of foreclosure, thereby establishing a new cost basis. If the 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.

Derivative Instruments and Hedging Activities: Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. As part of its asset/liability management strategies, the Bank uses interest rate swaps to hedge variability in future cash flows caused by changes in interest rates. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income or loss and subsequently reclassified into earnings in the period during which the hedged forecasted transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We formally document our risk management objectives, strategy, and the relationship between the hedging instrument and the hedged item. We evaluate the effectiveness of the hedge relationship, both at inception of the hedge and on an ongoing basis, by comparing the changes in the cash flows of the derivative hedging instrument with the changes in the cash flows of the designated hedged item or transaction. Derivatives not designated as hedges do not meet the hedge accounting requirements under U.S. GAAP.

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 2016 will be performed in the fourth quarter. In the interim, the Company will continue to evaluate goodwill on a quarterly basis utilizing the methodology required for an annual goodwill assessment.

Other intangible assets consist of core deposit 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 also include loan servicing rights which are amortized on the level yield method over the life of the loan. 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 in 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 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 the Pentegra Defined Benefit Plan for Financial Institutions (The “Pentegra DB Plan”), a tax-qualified defined benefit pension plan. The Pentegra DB Plan’s Employer Identification Number is 13-5645888, and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB 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. Effective January 1, 2012, the Bank eliminated the matching contribution formula and replaced it with a discretionary form of matching contribution. Effective January 1, 2016, the plan structure changed to a Safe Harbor option whereby the Company will match 100% of the first 3% of an employee’s contribution to the plan and 50% of the next 2% of the employee’s contribution to the plan, or a maximum of 4% of the employee’s salary.

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. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce the annual ESOP debt service. As of March 31, 2016, 246,867 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. The fair value of the restricted stock is the market value of the stock on the date of grant. 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 OTTI 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. Management considers several factors in determining whether a portion, or all, of the valuation allowance should be reversed such as the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible and tax planning strategies.

Under 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.

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

Earnings Per Share: Basic earnings per common share is the net income 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 common 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 (loss) 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 and unrealized holding gains and losses arising during the period on interest rate swaps. (See the Consolidated Statement of Changes in Comprehensive Income).

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.

Treasury Stock: Stock held in the treasury by the Company is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. As shares of treasury stock are reissued to satisfy stock option exercises, the shares are issued using the average cost basis of the shares in the treasury at the time of issuance. At March 31, 2016, 2,523,746 shares were held in the treasury at an average repurchase price of $10.05 per share.

Effect of Newly Issued Accounting Standards: In May 2014, the FASB issued an update (ASU 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, “Revenue from Contracts with Customers”.  The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance provides steps to follow to achieve the core principle.  An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.  The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.  Early adoption is permitted in 2016. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

NOTE 3 – ACQUISITIONS

In the course of normal operations, the Cape board of directors routinely reviewed the financial performance of Cape Bank, its business model, and the limitations on the market value the investment community placed on financial institutions headquartered on the New Jersey shore. In addition, risk assessment, succession planning and opportunities for organic growth were also routinely reviewed by the Cape board. These efforts led to Cape’s restructuring of its product lines and balance sheet beginning in 2012, as well as its geographic expansion. Cape’s board of directors reviewed and discussed the Colonial transaction with Cape’s management and its financial and legal advisors in unanimously determining that the acquisition of Colonial was advisable and was fair to, and in the best interests of, Cape and its stockholders. In reaching its determination, the Cape board of directors considered a number of factors, including, among others, the following: the Merger would expand Cape’s branch network into Southern and Western New Jersey and towards the Philadelphia market area; the Merger would increase Cape’s assets by nearly 50% to $1.6 billion and increase its core deposits by over 70% to $897.0 million; the Merger would be less than 5% dilutive to tangible book value, with an anticipated earn-back of lost tangible book value of approximately 2.7 years and would provide a strong return on investment with an expected internal rate of return of approximately 18%, as well as economies of scale and improved efficiencies increasing Cape’s overall competitiveness and ability to deliver stockholder value.

On September 10, 2014, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Colonial Financial Services, Inc. (“Colonial”). The Agreement provided that, upon the terms and subject to the conditions set forth therein, Colonial would merge with and into Cape Bancorp, with Cape Bancorp continuing as the surviving entity. Thereafter, Colonial Bank, FSB, a wholly-owned subsidiary of Colonial, would merge with and into Cape Bank, with Cape Bank continuing as the surviving Bank. Under the Agreement, each shareholder of Colonial, subject to potential adjustments at closing, was entitled to elect to receive either $14.50 per share in cash or 1.412 shares of Cape Bancorp’s common stock, subject to 50% of the shares being exchanged for stock and 50% for cash.

On April 1, 2015, the Company announced that it had successfully completed its acquisition of Colonial and Colonial Bank. At closing, two members of the Colonial Board of Directors, Gregory J. Facemyer and Hugh J. McCaffrey, were added to the Boards of Directors of Cape and Cape Bank.

The assets acquired and liabilities assumed have been accounted for under the purchase method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of April 1, 2015 based on management’s best estimate using the information available as of the acquisition date. The application of purchase accounting resulted in an initial bargain purchase gain of $5.955 million and a core deposit intangible of $798,000. As of April 1, 2015, Colonial had total assets with a carrying value of approximately $569.8 million, including gross loans with a carrying value of approximately $273.8 million, and total deposits with a carrying value of approximately $502.0 million. The bargain purchase gain primarily results from the interest rate fair value adjustment applied to Colonial’s lower yielding asset base and the write-up of the Colonial premises acquired to fair market value. In the third and fourth quarters of 2015, there were adjustments to the bargain purchase gain totaling $524,000 primarily resulting from adjustments relative to collections on fully charged-off loans and purchase credit impaired loans. collections on fully charged-off loans and purchase credit impaired loans. In the first quarter of 2016, interest income on loans was enhanced $889,000 resulting from the additional accretion of interest income on loans with higher principal payments than originally anticipated in the analysis of the acquisition of Colonial.

The table below summarizes the amounts recognized as of the merger date for each major class of assets acquired and liabilities assumed, the estimated fair value adjustments and the amounts recorded in the Company’s financial statements at fair value as of April 1, 2015:

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Colonial were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, fair value was estimated by analyzing the value of the underlying collateral, assuming the fair values of the loan were derived from the eventual sale of the collateral. These values were discounted using marked derived rate of returns, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Colonial’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on April 1, 2015.

The acquired loan portfolio subject to purchased credit impairment accounting guidance (ASC 310-30) as of April 1, 2015 was comprised of collateral dependent loans with deteriorated credit quality as follows:

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the sum of the years method of amortization.

The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value, as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

Direct acquisition and integration costs for the Colonial merger were expensed as incurred and totaled $2.0 million and $802,000 for the twelve months ended December 31, 2015 and 2014, respectively. These items were recorded as merger-related expenses on the consolidated statements of income.

The Company has determined that it is impractical to report amounts of revenue and earnings of Cape Bancorp since the acquisition date, April 1, 2015. The back-office systems conversions of the combined entity took place on May 9, 2015. Accordingly, reliable and separate complete revenue and earnings information are no longer available. In addition, such amounts would require significant estimates related to the proper allocation of merger cost saves that cannot be objectively made.  

Branch Acquisition

On August 28, 2015, the Company completed its acquisition of the Sun Bank Hammonton branch office located in Hammonton, New Jersey. Under the terms of the Purchase and Assumption Agreement dated March 30, 2015, the Company paid a deposit premium of $1.4 million, equal to 4.00% of the average daily deposits for the 31 calendar day period immediately prior to the acquisition date. In addition, the Company acquired approximately $4.8 million in loans and $354,000 in premises and equipment.

The branch acquisition was accounted for using the purchase method of accounting in accordance with FASB ASC 805, Business Combinations. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.

The following table presents the assets acquired and liabilities assumed as of August 28, 2015 and their initial fair value estimates. The fair value adjustments shown in the following table continue to be evaluated by management and may be subject to further adjustment:

NOTE 4 – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains or losses and the fair value of the Bank’s investment securities available-for-sale and held-to-maturity at March 31, 2016 and December 31, 2015 are as follows:

Proceeds from sales of securities available for sale were $9.9 million and $9.6 million for the three months ended March 31, 2016 and 2015, respectively. Gross gains of $244,000 and $114,000 were realized on security sales during the three months ended March 31, 2016 and 2015, respectively. Proceeds from security calls, maturities, and return of principal were $13.1 million and $11.1 million for the three months ended March 31, 2016 and 2015, respectively.

Securities having a fair value of approximately $24.9 million and $25.7 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, Federal Home Loan Bank and other borrowings. The Bank did not hold any trading securities during the three months ended March 31, 2016 or during the twelve months ended December 31, 2015.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2016:

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2015:

Management evaluates investment securities to determine if they are OTTI 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. Additionally, and consistent with FDIC regulations, management, prior to acquiring and periodically thereafter, evaluates various factors of corporate securities that may include but is not limited to the following; evaluate that the risk of default is low and consistent with bonds of similar quality, evaluate the capacity to pay, understand applicable market demographics/economics and understand current levels and trends in operating margins, operating efficiency, profitability, return on assets and return on equity.

At March 31, 2016, the Company’s investment securities portfolio consisted of 321 securities, 119 of which were in an unrealized loss position. The securities 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.

On a quarterly basis, we evaluate our investment securities for OTTI. As required by FASB ASC Topic No. 320, “Investments – Debt and Equity Securities,” if we do not intend to sell a debt security, and it is not more likely than not that we will be required to sell the security, an OTTI write-down is separated into a credit loss portion and a portion related to all other factors. The credit loss portion is recognized in earnings as net OTTI losses, and the portion related to all other factors is recognized in accumulated other comprehensive income, net of taxes. The credit loss portion is defined as the difference between the amortized cost of the security and the present value of the expected future cash flows for the security. If the intent is to sell a debt security or if it is more likely than not that we will be required to sell the security, then the security is written down to its fair market value as a net OTTI loss in earnings. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary. The Company’s estimate of projected cash flows it expected to receive was more than the securities’ carrying value, resulting in no impairment charge to earnings for the three months ended March 31, 2016.

The amortized cost and fair value of debt securities and mortgage-backed securities available for sale at March 31, 2016, by contractual maturities, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the periods ended March 31, 2016 and 2015, there were no cumulative credit related OTTI charges recognized as components of earnings for CDO securities, as the Company no longer held CDO securities during the periods presented.

NOTE 5 – LOANS RECEIVABLE

Loans receivable consist of the following:

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans was $57,000 and $417,000 at March 31, 2016 and December 31, 2015, respectively, and is included in commercial loans secured by real estate.

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the quarter ended March 31, 2016 or for the year ended December 31, 2015. 

The following table summarizes activity related to the allowance for loan losses by category for the three months ended March 31, 2016: