Cape Bancorp 10K 2009 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

450 Fifth Street, N.W.
Washington, D.C. 20549

FORM 10-K


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

For the Year Ended December 31, 2009


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

For the transition period from to

Commission File No. 001-33934

Cape Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Maryland		26-1294270

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

225 North Main Street, Cape May Court House, New Jersey		08210

(Address of Principal Executive Offices)		Zip Code

(609) 465-5600

(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered

Common Stock, $0.01 par value		The NASDAQ Stock Market, LLC

Securities Registered Pursuant to Section 12(g) of the Act: None

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

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

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 twelve 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. YESþ NOo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ

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). YESo NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act).


Large accelerated filero		Accelerated filerþ		Non-accelerated filero		Smaller reporting companyo

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

As of March 16, 2010, there were issued and outstanding 13,313,521 shares of the Registrant’s Common Stock.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2009, was $114,896,000.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2010 Annual Meeting of Shareholders (Part III).

TABLE OF CONTENTS



PART I			1

ITEM 1. BUSINESS			1

ITEM 1A. RISK FACTORS			38

ITEM 1B. UNRESOLVED STAFF COMMENTS			43

ITEM 2. PROPERTIES			43

ITEM 3. LEGAL PROCEEDINGS			43

ITEM 4. (RESERVED)			44

PART II			44

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			44

ITEM 6. SELECTED FINANCIAL DATA			46

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			47

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			70

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			70

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			70

ITEM 9A. CONTROLS AND PROCEDURES			70

ITEM 9B. OTHER INFORMATION			71

PART III			71

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			71

ITEM 11. EXECUTIVE COMPENSATION			71

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			71

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			71

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			71

PART IV			72

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			72

Exhibit 21
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I


ITEM 1.		BUSINESS

Forward Looking Statements

Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the economic environment, particularly in the market areas in which Cape Bancorp, Inc. (“Cape Bancorp” or the “Company”) operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.

Cape Bancorp wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

Cape Bancorp, Inc.

Cape Bancorp is a Maryland corporation that was incorporated on September 14, 2007 for the purpose of becoming the holding company of Cape 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. These transactions were consummated on January 31, 2008. 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. At December 31, 2009, 2008 and 2007 the Company had total assets of $1.073 billion, $1.091 billion and $634 million respectively. For the twelve months ended December 31, 2009, 2008 and 2007, the Company had total revenues of $55.5 million, $47.3 million and $40.6 million, respectively. For the twelve months ended December 31, 2009, 2008 and 2007, the Company had net (loss)/income of ($17.9) million, ($42.5) million and $3.4 million, respectively.

In the offering, Cape Bancorp sold 7,820,000 shares of its common stock at $10.00 per share to Cape Bank’s depositors, Cape Bank’s tax qualified employee benefit plans and the general public in subscription, community and syndicated offerings. The Company also issued 547,400 shares of its common stock and contributed $782,000 in cash to The CapeBank Charitable Foundation.

In the acquisition of Boardwalk Bancorp, Cape Bancorp issued merger consideration of approximately $99.0 million, consisting of 4,946,121 shares of Cape Bancorp common stock and approximately $49.5 million in cash. As a result of the transactions, Cape Bancorp has 13,313,521 issued and outstanding shares of common stock. The stockholders of Boardwalk Bancorp and the depositors of Cape Saving Bank, the mutual savings bank predecessor of Cape Bank, in connection with the mutual-to-stock conversion and simultaneous acquisition of Boardwalk Bank, approved the merger by the requisite vote required by state law and federal law.

With the acquisition of Boardwalk Bank, Cape Bank operates 18 full service branches in Cape May and Atlantic Counties, New Jersey.

Cape Bancorp’s principal asset is its ownership of 100% of the outstanding common stock of Cape Bank, a New Jersey chartered savings bank. At December 31, 2009, Cape Bancorp had $1.073 billion in total assets, $736.6 million in deposits and $126.5 million in stockholders’ equity.

The Company’s executive offices are located at 225 North Main Street, Cape May Court House, New Jersey 08210, and the telephone number is (609) 465-5600.

Cape Bank

General

Cape Bank is a New Jersey chartered savings bank originally founded in 1923. We are a community bank focused on providing deposit and loan products to retail customers and to small and mid-sized businesses from our main office and 17 branch offices located in Atlantic and Cape May counties, New Jersey. We attract deposits from the general public and use those funds to originate a variety of loans, including commercial mortgages, commercial business loans, residential mortgage loans, home equity loans and lines of credit and construction loans. Our retail and business banking deposit products include savings accounts, checking accounts, money market accounts, and certificates of deposit with terms ranging from 30 days to 84 months. At December 31, 2009, 92.0% of our loan portfolio was secured by real estate and over 62% of our portfolio were commercial related loans. We also maintain an investment portfolio. At December 31, 2009, Cape Bank had total assets of $1.073 billion, deposits of $736.6 million and total stockholder’s equity of $126.5 million.

We offer banking services to individuals and businesses predominantly located in our primary market area which, as of December 31, 2009, consisted of Cape May and Atlantic Counties, New Jersey. The acquisition of Boardwalk Bank on January 31, 2008 expanded our market presence in Atlantic County, New Jersey. Cape Bank conducts business from its main office located at 225 North Main Street, Cape May Court House, New Jersey 08210, and its 17 branch offices located in Cape May and Atlantic Counties, New Jersey. Our business and results of operations are significantly affected by local and national economic conditions, as well as market interest rates. The severe recession of 2008 and 2009, and the continued weakness in the local and national economies has significantly increased our level of non-performing loans and assets and loan foreclosure activity. Nonperforming loans as a percentage of total loans increased from 2.65% at December 31, 2008 to 4.14% at December 31, 2009. Loan charge-offs increased from $5.7 million during 2008 to $11.7 million during 2009. In addition, classified assets, including other real estate owned, as a percentage of total assets increased from 2.00% at December 31, 2008 to 3.55% at December 31, 2009. Notwithstanding the significant deterioration in our loan and investment portfolios, loan demand has remained moderate. In 2009 we experienced growth in our loan portfolios, and in our loan originations. Our loan originations increased from $199.5 million in 2008 to $249.4 million in 2009, while our total loan portfolio increased from $795.1 million at December 31, 2008 to $802.8 million at December 31, 2009. Additionally we have experienced growth in deposits as total deposits increased from $711.1 million at December 31, 2008 to $736.6 million at December 31, 2009. This is discussed in more detail the Lending Activities and Non-Performing Asset section of this report. Accordingly, we believe our existing prudent loan underwriting practices are appropriate in the current market environment. Accordingly, we believe that current practices adequately address the economic conditions and the local credit needs.

Our website address iswww.capebanknj.com. Information on our website is not and should not be considered a part of this Annual Report on Form 10-K. Our website contains a direct link to our filings with the Securities and Exchange Commission, including copies of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these filings, if any. Copies may also be obtained, without charge, by written request to Investor Relations, 225 Main Street, Cape May Court House, New Jersey 08210. The telephone number at our main office is (609) 465-5600.

Market Area

Our market area consists of Cape May and Atlantic Counties, which includes communities along the barrier islands of the New Jersey shore and the mainland areas. While the economies along the New Jersey shore are more seasonal in nature, the mainland areas are comprised of year-round communities. The economy of our market area is dominated by the gaming industry, a variety of service businesses, vacation-related businesses concentrated along the coastal areas and, to a lesser degree, commercial fishing and agriculture. In addition, nearby Atlantic City is a major tourist destination, centered around its large gaming industry, and is an important regional economic hub. The severe national and local economic recession that began in late 2007 has had a significant negative impact on our market area. Unemployment has risen steadily each year for the past three years and as of November 2009 was at 13.0% for Atlantic County and 14.6% for Cape May County. Atlantic County had unemployment rates of 9.5% at December 31, 2008 and 6.1% at December 31, 2007, and Cape May County had unemployment rates of 11.9% at December 31, 2008 and 9.05% at December 31, 2007. Both residential and commercial real estate values have declined during this recession. Residential real estate values have decreased by approximately 13.3% within our market area during the past three years. Additionally, the number of residential building permits issued has declined. However, based on recent real estate transactions in our market area management believes that home and commercial property values may be stabilizing. The gaming industry has also been adversely affected by the recession. While we do not have loans outstanding to this industry, the employment or businesses of many of our customers are affected by the gaming industry, and weakness in this industry has adversely affected other sectors of the local community. We believe the success of the gaming industry within our market is important to our success, but neither our market area nor Cape Bank is solely dependent on this industry. Notwithstanding the recession, the year-round residency has increased in both Cape May and Atlantic Counties from 2008 to 2009. Median household income has remained relatively stable in each county for the past three years, and was $56,000 for Atlantic County and $54,400 for Cape May County during 2009. For the State of New Jersey, median household income during 2009 was $72,800.

Competition

We face 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. Several large holding companies operate banks in our market area, and these institutions are significantly larger than Cape Bank and, therefore, have significantly greater resources. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2009, which is the most recent date for which data are available from the Federal Deposit Insurance Corporation, we held approximately 13.7% of the deposits in Cape May County, which was the 2^nd largest market share out of the 14 financial institutions with offices in Cape May County, and we held approximately 8.8% of the deposits in Atlantic County, which was the 5th largest market share of the 16 financial institutions with offices in Atlantic County. On a combined market basis we held approximately 10.6% of the deposits which was the 3^rd largest market share of 21 financial institutions.

Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Our two county market area has in excess of 88 competitors offering real estate lending products. Data is not available to determine our competitive position among this group. Competition for deposits and the origination of loans could limit our growth in the future.

Lending Activities

We offer a variety of loans, including commercial mortgages, commercial loans, residential mortgage loans, home equity loans and lines of credit, and construction loans. Our commercial mortgage loan portfolio at December 31, 2009, comprised 51.3% of our total loan portfolio, which was greater than any other loan category.

In the future, we intend to continue to concentrate on ways to compete for a greater share of commercial mortgage and commercial business loan originations in our primary market area.

Loan Portfolio Composition.The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the dates indicated.


	At December 31,
	2009					2008					2007					2006					2005
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(dollars in thousands)
Real estate loans:
Commercial mortgage	$	412,475		51.3	%	$	411,809		51.8	%	$	199,777		43.0	%	$	183,091		40.6	%	$	157,128		37.9	%
Residential mortgage		244,897		30.5	%		226,963		28.5	%		175,809		37.8	%		183,692		40.7	%		179,373		43.2	%
Construction		28,839		3.6	%		54,187		6.8	%		38,554		8.3	%		38,669		8.6	%		32,917		7.9	%
Home equity loans and lines of credit		52,806		6.6	%		46,850		5.9	%		37,308		8.0	%		36,998		8.2	%		36,472		8.8	%
Commercial business loans		62,685		7.8	%		54,319		6.8	%		12,018		2.6	%		7,773		1.7	%		8,096		2.0	%
Other consumer loans		1,284		0.2	%		1,388		0.2	%		1,257		0.3	%		919		0.2	%		798		0.2	%

Total loans	$	802,986		100.0	%	$	795,516		100.0	%	$	464,723		100.0	%	$	451,142		100.0	%	$	414,784		100.0	%


Less:
Allowance for loan losses		13,311					11,240					4,121					4,009					3,792
Deferred loan fees, net		202					407					666					755					960

Total loans, net	$	789,473				$	783,869				$	459,936				$	446,378				$	410,032

Loan Portfolio Maturities and Yields.The following tables summarize the scheduled maturities of our loan portfolio at December 31, 2009 and December 31, 2008. Demand loans, loans having no stated repayment schedule at maturity and overdraft loans are reported as being due in one year or less. Maturities are based on final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization.


	Commercial					Residential										Home Equity Loans
	Mortgage Loans					Mortgage Loans					Construction Loans					and Lines of Credit
			Weighted					Weighted					Weighted					Weighted
			Average					Average					Average					Average
At December 31, 2009	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
	(dollars in thousands)
Due During the Years Ending December 31,
2010	$	12,934		6.35	%	$	436		5.89	%	$	16,593		5.40	%	$	1,757		4.59	%
2011		784		5.21	%		157		7.72	%		98		6.00	%		682		6.66	%
2012		8,801		6.14	%		967		5.65	%		783		5.96	%		407		6.80	%
2013 to 2014		2,016		6.09	%		2,987		5.61	%		308		6.50	%		3,577		5.88	%
2015 to 2019		7,230		6.81	%		25,015		5.43	%		172		6.91	%		10,902		5.47	%
2020 to 2024		32,543		6.70	%		43,504		5.22	%		844		6.06	%		31,126		5.54	%
2025 to 2027		39,744		7.12	%		5,209		6.32	%		3,185		6.77	%		2,613		4.71	%
2028 to 2030		46,648		6.44	%		27,902		5.26	%		533		6.43	%		568		6.12	%
2031 to 2032		55,406		7.21	%		3,633		6.60	%		2,040		7.55	%		306		7.92	%
2033 to 2034		48,907		6.22	%		30,753		5.51	%		652		6.90	%		755		8.14	%
2035 to 2037		47,204		7.43	%		43,983		5.92	%		84		5.88	%		—		—
2038 and beyond		110,258		6.18	%		60,351		5.93	%		3,547		6.01	%		113		6.50	%

Total	$	412,475		6.64	%	$	244,897		5.64	%	$	28,839		5.89	%	$	52,806		5.56	%


	Commercial					Other Consumer
	Business Loans					Loans (1)					Total
			Weighted					Weighted					Weighted
			Average					Average					Average
	Amount		Rate			Amount		Rate			Amount		Rate
	(dollars in thousands)
Due During the Years Ending December 31,
2010	$	49,726		5.24	%	$	63		5.26	%	$	81,509		5.44	%
2011		2,290		4.97	%		30		10.95	%		4,041		5.48	%
2012		799		8.45	%		56		11.52	%		11,813		6.29	%
2013 to 2014		3,857		6.47	%		27		13.67	%		12,772		6.06	%
2015 to 2019		4,157		6.83	%		—		—			47,476		5.78	%
2020 to 2024		974		6.08	%		1,108		4.87	%		110,099		5.76	%
2025 to 2027		65		7.00	%		—		—			50,816		6.89	%
2028 to 2030		—		—			—		—			75,651		6.00	%
2031 to 2032		354		7.75	%		—		—			61,739		7.19	%
2033 to 2034		463		4.25	%		—		—			81,530		5.96	%
2035 to 2037		—		—			—		—			91,271		6.70	%
2038 and beyond		—		—			—		—			174,269		6.09	%

Total	$	62,685		5.47	%	$	1,284		5.51	%	$	802,986		6.14	%


(1)		Includes overdrawn DDA accounts.


	Commercial					Residential					Construction					Home Equity Loans
	Mortgage Loans					Mortgage Loans					Loans					and Lines of Credit
			Weighted					Weighted					Weighted					Weighted
			Average					Average					Average					Average
At December 31, 2008	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
	(dollars in thousands)
Due During the Years Ending December 31,
2009	$	18,196		4.38	%	$	676		7.56	%	$	47,077		5.14	%	$	768		4.73	%
2010		3,020		5.64	%		11		7.68	%		4,650		3.77	%		422		6.59	%
2011		1,102		3.99	%		220		7.60	%		—		—			516		6.71	%
2012 to 2013		12,282		6.19	%		4,694		5.42	%		1,296		6.50	%		2,830		6.30	%
2014 to 2018		11,086		6.41	%		28,099		5.61	%		—		—			8,817		6.06	%
2019 to 2023		29,977		7.12	%		30,515		5.80	%		—		—			29,789		6.03	%
2024 to 2026		45,510		7.03	%		5,065		6.68	%		—		—			2,213		4.24	%
2027 to 2029		41,530		6.61	%		4,492		6.90	%		—		—			1,179		4.69	%
2030 to 2031		52,271		7.03	%		2,526		7.15	%		310		7.75	%		—		—
2032 to 2033		70,453		6.90	%		21,272		5.94	%		—		—			—		—
2034 to 2036		45,766		6.89	%		67,719		6.00	%		86		5.88	%		—		—
2037 and beyond		80,616		6.49	%		61,674		6.22	%		768		6.00	%		316		7.50	%

Total	$	411,809		6.67	%	$	226,963		6.02	%	$	54,187		5.08	%	$	46,850		5.93	%


	Commercial					Other Consumer
	Business Loans					Loans (1)					Total
			Weighted					Weighted					Weighted
			Average					Average					Average
	Amount		Rate			Amount		Rate			Amount		Rate
	(dollars in thousands)
Due During the Years Ending December 31,
2009	$	36,044		4.77	%	$	158		1.54	%	$	102,919		4.88	%
2010		1,518		4.98	%		64		11.60	%		9,685		4.72	%
2011		2,702		6.63	%		40		10.82	%		4,580		6.09	%
2012 to 2013		3,879		6.38	%		57		10.93	%		25,038		6.12	%
2014 to 2018		7,914		6.72	%		—		—			55,916		6.00	%
2019 to 2023		1,107		7.42	%		—		—			91,388		6.33	%
2024 to 2026		—		—			1,069		6.17	%		53,857		6.87	%
2027 to 2029		762		6.59	%		—		—			47,963		6.59	%
2030 to 2031		—		—			—		—			55,107		7.04	%
2032 to 2033		393		5.75	%		—		—			92,118		6.67	%
2034 to 2036		—		—			—		—			113,571		6.36	%
2037 and beyond		—		—			—		—			143,374		6.37	%

Total	$	54,319		5.35	%	$	1,388		6.22	%	$	795,516		6.24	%


(1)		Includes overdrawn DDA accounts.

The following table sets forth the scheduled repayments of fixed and adjustable rate loans at December 31, 2009 and December 31, 2008 that are contractually due within one year and after one year.


	At December 31, 2009
	Fixed Rate						Adjustable Rate
	Due Within		Due After				Due Within		Due After				Total
	One Year		One Year		Total		One Year		One Year		Total		Loans
	(in thousands)
Real estate loans:
Commercial mortgage	$	6,999	$	13,764	$	20,763	$	5,935	$	385,777	$	391,712	$	412,475
Residential mortgage		433		201,057		201,490		3		43,404		43,407		244,897
Construction		6,009		12,069		18,078		10,584		177		10,761		28,839
Home equity loans and lines of credit		235		30,303		30,538		1,522		20,746		22,268		52,806
Commercial business loans		5,048		10,307		15,355		44,678		2,652		47,330		62,685
Other consumer loans		51		105		156		12		1,116		1,128		1,284

Total	$	18,775	$	267,605	$	286,380	$	62,734	$	453,872	$	516,606	$	802,986


	At December 31, 2008
	Fixed Rate						Adjustable Rate
	Due Within		Due After				Due Within		Due After				Total
	One Year		One Year		Total		One Year		One Year		Total		Loans
	(in thousands)
Real estate loans:
Commercial mortgage	$	3,949	$	16,969	$	20,918	$	14,247	$	376,644	$	390,891	$	411,809
Residential mortgage		676		176,225		176,901		—		50,062		50,062		226,963
Construction		19,072		2,044		21,116		28,005		5,066		33,071		54,187
Home equity loans and lines of credit		574		29,170		29,744		194		16,912		17,106		46,850
Commercial business loans		8,098		14,768		22,866		27,946		3,507		31,453		54,319
Other consumer loans		157		134		291		1		1,096		1,097		1,388

Total	$	32,526	$	239,310	$	271,836	$	70,393	$	453,287	$	523,680	$	795,516

The following table sets forth fixed and adjustable rate loans at December 31, 2009 and at December 31, 2008 as a percentage of the total loan portfolio.


	Percentage of Total Loan Portfolio
	At December 31, 2009
	(dollars in thousands)
			Percent					Percent
	Fixed		of Total			Adjustable		of Total
	Rate		Loans			Rate		Loans			Total
Real estate loans:
Commercial mortgage	$	20,763		2.6	%	$	391,712		48.7	%	$	412,475
Residential mortgage		201,490		25.1	%		43,407		5.4	%		244,897
Construction		18,078		2.3	%		10,761		1.3	%		28,839
Home equity loans and lines of credit		30,538		3.8	%		22,268		2.8	%		52,806
Commercial business loans		15,355		1.9	%		47,330		5.9	%		62,685
Other consumer loans		156		—			1,128		0.2	%		1,284

Total	$	286,380		35.7	%	$	516,606		64.3	%	$	802,986


	Percentage of Total Loan Portfolio
	At December 31, 2008
	(dollars in thousands)
			Percent					Percent
	Fixed		of Total			Adjustable		of Total
	Rate		Loans			Rate		Loans			Total
Real estate loans:
Commercial mortgage	$	20,918		2.7	%	$	390,891		49.1	%	$	411,809
Residential mortgage		176,901		22.2	%		50,062		6.3	%		226,963
Construction		21,116		2.7	%		33,071		4.1	%		54,187
Home equity loans and lines of credit		29,744		3.7	%		17,106		2.2	%		46,850
Commercial business loans		22,866		2.9	%		31,453		3.9	%		54,319
Other consumer loans		291		—			1,097		0.2	%		1,388

Total	$	271,836		34.2	%	$	523,680		65.8	%	$	795,516

The Bank’s fixed rate loans increased as a percentage of total loans to 35.7% in 2009 from 34.2% in 2008. This increase in fixed rate loans resulted from the predominately fixed rate residential loan portfolio increasing at a faster rate than the predominately adjustable rate commercial loan portfolio. Having a larger percentage of the loan portfolio in adjustable rate loans helps us better manage interest rate risk. During the past two years while market interest rates fell to historically low levels, we were able to maintain a net interest margin of 3.54% and 3.48% for 2009 and 2008, respectively. This resulted from the decrease in the yield on our interest earning assets being more than offset by the decrease in the cost of our interest-bearing liabilities. Based on our interest rate risk modeling, when market interest rates rise our net interest income will be negatively affected based on the assumptions used in our analysis located in the section within this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Management of Market Risk.”

The following table sets forth fixed and adjustable rate loans at December 31, 2009 maturing within ten years, twenty years and over twenty years as a percentage of the total loan portfolio.


	At December 31, 2009
	Fixed Rate
	(dollars in thousands)
			Percent			Ten to		Percent			Over		Percent
	Within		of Total			Twenty		of Total			Twenty		of Total
	Ten Years		Loans			Years		Loans			Years		Loans			Total
Real estate loans:
Commercial mortgage	$	16,542		2.1	%	$	1,725		0.2	%	$	2,496		0.3	%	$	20,763
Residential mortgage		27,958		3.5	%		74,436		9.3	%		99,096		12.3	%		201,490
Construction		7,272		0.9	%		4,484		0.6	%		6,322		0.8	%		18,078
Home equity loans and lines of credit		11,662		1.5	%		17,501		2.1	%		1,375		0.3	%		30,538
Commercial business loans		14,026		1.7	%		974		0.1	%		355		0.0	%		15,355
Other consumer loans		156		0.0	%		—		0.0	%		—		0.0	%		156

Total loans	$	77,616		9.7	%	$	99,120		12.3	%	$	109,644		13.7	%	$	286,380


	At December 31, 2009
	Adjustable Rate
	(dollars in thousands)
			Percent			Ten to		Percent			Over		Percent
	Within		of Total			Twenty		of Total			Twenty		of Total
	Ten Years		Loans			Years		Loans			Years		Loans			Total
Real estate loans:
Commercial mortgage	$	15,223		1.8	%	$	96,439		12.0	%	$	280,050		34.9	%	$	391,712
Residential mortgage		1,604		0.2	%		1,279		0.2	%		40,524		5.0	%		43,407
Construction		10,682		1.3	%		79		0.0	%		—		0.0	%		10,761
Home equity loans and lines of credit		5,663		0.7	%		16,605		2.1	%		—		0.0	%		22,268
Commercial business loans		46,803		5.9	%		65		0.0	%		462		0.1	%		47,330
Other consumer loans		20		0.0	%		25		0.0	%		1,083		0.2	%		1,128

Total loans	$	79,995		9.9	%	$	114,492		14.3	%	$	322,119		40.2	%	$	516,606


	At December 31, 2009
	Total Loans
	(dollars in thousands)
			Percent			Ten to		Percent			Over		Percent
	Within		of Total			Twenty		of Total			Twenty		of Total
	Ten Years		Loans			Years		Loans			Years		Loans			Total
Real estate loans:
Commercial mortgage	$	31,765		3.9	%	$	98,164		12.2	%	$	282,546		35.2	%	$	412,475
Residential mortgage		29,562		3.7	%		75,715		9.4	%		139,620		17.4	%		244,897
Construction		17,954		2.2	%		4,563		0.6	%		6,322		0.8	%		28,839
Home equity loans and lines of credit		17,325		2.2	%		34,106		4.2	%		1,375		0.2	%		52,806
Commercial business loans		60,829		7.6	%		1,039		0.1	%		817		0.1	%		62,685
Other consumer loans		176		0.0	%		25		0.0	%		1,083		0.1	%		1,284

Total loans	$	157,611		19.6	%	$	213,612		26.6	%	$	431,763		53.8	%	$	802,986

Fixed rate long-term loans present interest rate risk to the Bank and will constrain net income in a rising interest rate environment. The magnitude of this long-term risk associated with fixed rate long-term loans is factored into our Management of Market Risk analysis. The Bank’s Cumulative Gap Analysis with assumptions results in the Bank being liability sensitive out to 15 years.

The following table indicates our commercial loan portfolio concentrations as of December 31, 2009:

Commercial Loan Concentration
December 31, 2009


Hotels, Motels and Bed & Breakfast (non-casino)	20.2	%
Full Service Restaurants	10.4	%
Real Estate and Rental and Leasing	20.2	%
Construction/Land Development	9.5	%
Retail Trade	12.3	%
Arts, Entertainment and Recreation	7.9	%
Health Care and Social Assistance	6.4	%
Other Services (except Public Administration)	5.5	%
Professional, Scientific and Technical Services	2.5	%
Agriculture, Forestry, Fishing and Hunting	2.1	%
Transportation and Warehousing	1.6	%
Wholesale Trade	1.4	%

	100.0	%

Commercial Mortgage Loans.At December 31, 2009, commercial mortgage loans totaled $412.5 million, or 51.3% of our total loan portfolio, which was greater than any other loan category, including one-to-four family residential mortgage loans. The commercial mortgage loan category includes multi-family residential loans.

We offer commercial mortgage loans secured by real estate primarily with interest rates that adjust every three to five years. We originate a variety of commercial mortgage loans generally for terms of up to 30 years and payments based on an amortization schedule of up to 30 years. These loans are typically based on the U.S. Treasury rate and adjust every three to five years. Commercial mortgage loans also are originated for the acquisition and development of land. Commercial mortgage loans for the acquisition and development of land are typically based upon the prime interest rate as published inThe Wall Street Journal. Commercial mortgage loans for developed real estate are originated with loan-to-value ratios of up to 75%, while loans for only the acquisition of land are originated with a maximum loan to value ratio of 50%. The loan-to-value ratio is defined as the lesser of the actual acquisition cost or the estimated value determined by an independent appraiser.

As of December 31, 2009, our largest commercial mortgage loan relationship had a balance of $15.1 million and consisted of 14 loans secured by real estate. These loans were performing in accordance with their original terms at December 31, 2009.

Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one-to-four family residential mortgage loans. Of primary concern in commercial mortgage lending is the borrower’s creditworthiness and cash flow potential of the project. Repayments of loans secured by income-producing properties often depend on the successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy, to a greater extent than residential mortgage loans. See “Risk Factors — Our Emphasis on Commercial Real Estate and Commercial Business Loans May Continue to Expose us to Increased Lending Risks.” To monitor cash flows on income-producing properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls where applicable. In reaching a decision whether to make a commercial mortgage loan, we consider and review a cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the borrowers for loans secured by real estate have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20%. An environmental report from a third party is obtained on all commercial real estate loans up to $1 million. Loans in excess of $1 million may require a Phase I or Phase II analysis when the possibility exists that hazardous materials may have existed on the site, or the site may have been affected by adjoining properties that handled hazardous materials.

During 2009, Cape Bank continued to experience deterioration in the credit quality of its commercial mortgage loan portfolio. At December 31, 2009, 71 commercial mortgage loans totaling $26.8 million were 30 days or more delinquent and 63 of such commercial mortgage loans were more than 90 days delinquent. By comparison, at December 31, 2008, 40 commercial mortgage loans totaling $18.9 million were 30 days or more delinquent with 26 commercial mortgage loans more than 90 days delinquent.

One-to-Four Family Residential Mortgage Loans.At December 31, 2009, one-to-four family residential mortgage loans totaled $244.9 million, or 30.5% of our total loan portfolio. We offer two types of residential mortgage loans: fixed rate loans and adjustable rate loans. We offer fixed rate mortgage loans with terms of up to 30 years. We offer adjustable rate mortgage loans with interest rates and payments that adjust annually after an initial fixed period of one, three, five or seven years. Interest rates and payments on our adjustable rate loans generally are adjusted to a rate equal to a percentage above the U.S. Treasury Bill Constant Maturity Index. The maximum amount by which the interest rate may be increased or decreased is generally 2.0% per adjustment period and the maximum interest rate increase over the life of the loan is generally 6.0% over the initial interest rate on the loan. We generally sell conforming fixed rate loans we originate with terms of up to 30 years with servicing released.

Borrower demand for adjustable rate loans compared to fixed rate loans is a function of the level of market interest rates, the expectations of changes in interest rates, and the difference between the interest rates and loan fees offered for fixed rate mortgage loans as compared to adjustable rate mortgage loans. The relative amount of fixed rate and adjustable rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

Our general policy is not to make high loan-to-value loans (defined as loans with a loan-to-value ratio of 80% or more) without mortgage insurance; however, we do offer loans with loan-to-value ratios of up to 95% with mortgage insurance, including our first-time home owner loan program. We require all properties securing mortgage loans to be appraised by a board approved independent appraiser. We require title insurance on all first mortgage loans secured by a residence, and borrowers must obtain hazard insurance. Additionally, we require flood insurance for loans on properties located in a flood zone.

Cape Bank has also provided a limited number of interest only loans which allow the borrower to pay only the interest due on the loan for the initial term and then rates adjust annually and payments are fully amortized until maturity. At times, the balances on such loans may exceed the value of the collateral held by Cape Bank. Cape Bank has a portfolio of $4.8 million in interest only loans, all of which were current at December 31, 2009. This program is no longer offered.

As a result of our prudent lending standards we do not offer, or have, any payment option adjustable rate loans or sub-prime loans.

Generally, adjustable rate loans may better insulate Cape Bank from interest rate risk as compared to fixed rate mortgages. In a rising interest rate environment, however, the monthly mortgage payment on adjustable rate loans normally would also increase which could cause an increase in delinquencies and defaults. To mitigate against this risk associated with increases in monthly mortgage payments on adjustable rate loans, we adhere to strict underwriting guidelines by initially qualifying each borrower at a higher interest rate. In addition, although adjustable rate mortgage loans make our assets more responsive to changes in interest rates, the extent of this interest rate sensitivity is limited by the annual and lifetime interest rate adjustment limits.

The following table indicates the amount and percent of residential mortgage loans that are single family and multi-family as of December 31, 2009 and 2008:


	At December 31,
	2009					2008
	Amount		Percent			Amount		Percent
	(dollars in thousands)

Single Family Mortgage Loans	$	228,964		93.5	%	$	214,090		94.3	%
Multi-Family Mortgage Loans		15,933		6.5	%		12,873		5.7	%

Total	$	244,897		100.0	%	$	226,963		100.0	%

The following table segregates loans with original loan-to-value ratios greater than 80% and less than 80%:


	At December 31,
	2009					2008
	Amount		Percent			Amount		Percent
	(dollars in thousands)

Loan to Value greater than 80%	$	3,347		1.4	%	$	3,237		1.4	%
Loan to Value less than 80%		241,550		98.6	%		223,726		98.6	%

Total Residential Mortgage Loans	$	244,897		100.0	%	$	226,963		100.0	%


(1)		All loans with an original loan-to-value greater than 80% were single family loans for both periods presented.

Commercial Business Loans.We offer commercial business loans to professionals, sole proprietorships and small businesses in our market area. We offer term loans for capital improvements and equipment acquisition. These loans are typically based on a competitive fixed market rate. These loans may be secured by business assets other than real estate, such as business equipment and inventory and are backed by personal guarantees.

When making commercial business loans, we consider the financial statements of the borrower and guarantors, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower and guarantors, the projected cash flows of the business, the viability of the industry in which the customer operates and the value of the collateral.

At December 31, 2009, our largest commercial business loan relationship totaled $11.1 million, and consisted of 4 loans secured by real estate. These loans were performing in accordance with their original terms at December 31, 2009.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay from his or her employment or other income, and which are secured by residential real property, the value of which tends to be more easily ascertainable, commercial business loans have greater risk and typically are made on the basis of the borrower’s ability to repay from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We have generally required these loans to have debt service coverage of at least 1.20x, and we generally require personal guarantees. See “Risk Factors — Our Emphasis on Commercial Real Estate and Commercial Business Loans May Continue to Expose us to Increased Lending Risks.”

Construction Loans.We offer interim construction financing secured by residential property for the purpose of constructing one-to-four family homes. Our construction program offers two types of loans: short-term interest only or construction/permanent loans. The short-term loans require monthly interest-only payments based on the amount of funds disbursed. The construction/permanent loans require interest-only payments during the construction phase, and convert to a fully amortized fixed rate loan at the end of the interest-only period. Under both programs, construction must be completed within 12 months of the initial disbursement date for one-to-four family homes, and for commercial construction loans the term is a maximum of 24 months. The maximum loan-to-value ratio will be 80% of the appraised value. At December 31, 2009, our largest construction loan relationship for a one-to-four family home was $720,000 and was performing in accordance with its original terms. At December 31, 2009, our largest construction loan relationship for commercial construction was $3.8 million, was performing in accordance with its original terms, and was secured by condominium units.

While providing us with a comparable, and in some cases, higher yield than conventional mortgage loans, construction loans may involve a higher level of risk. For example, if a project is not completed and the borrower defaults, we may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be saleable, resulting in the borrower defaulting and Cape Bank taking title to the property.

Home Equity Loans and Lines of Credit.We generally offer home equity loans and lines of credit with a maximum combined loan-to-value ratio of 80% based on the appraised value of the property. Home equity loans have fixed rates of interest and are originated with terms of up to 15 years. Home equity lines of credit have adjustable interest rates and are based upon the prime interest rate as published inThe Wall Street Journalwith a floor of 5.5% on lines of $100,000. We hold a first or second mortgage position on the homes that secure our home equity loans and lines of credit.

Other Consumer Loans.We offer consumer loans secured by certificates of deposit held at Cape Bank, the pricing of which is based upon the rate of the certificate of deposit. We will offer such loans up to 90% of the principal balance of the certificate of deposit. We also offer unsecured loans with terms of up to four years. Our unsecured loans bear a substantially higher interest rate than our secured loans and lines of credit. For more information on our loan commitments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Unsecured loans and lines of credit generally have greater risk than residential mortgage loans. At December 31, 2009 and 2008, there was $113,000 and $130,000 respectively, of unsecured loans. Repayments of these loans depends on the borrower’s financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Loan Originations, Sales, Purchases and Participations. Loan originations come from a number of sources, including existing customers, walk-in traffic, advertising and referrals from customers. From time to time, we will participate in loans originated by other banks to supplement our loan portfolio. During 2009, we did not participate in loans originated by other banks and we have none in our loan portfolio as of December 31, 2009. We are permitted to review all of the documentation relating to any loan in which we participate. However, in a purchased participation loan, we do not service the loan and thus are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings. Cape Bank services loans for other financial institutions, which generally consists of collecting mortgage payments, disbursing payments to investors and, where necessary, instituting foreclosure proceedings. A mortgage servicing asset of approximately $10,000 and $24,000 as of December 31, 2009 and December 31, 2008, respectively, was recorded relating to the servicing of loans for others, and is included in other assets on our balance sheet.

Correspondent Lending Relationships.Cape Bank has residential correspondent banking relationships with other financial institutions which enable us to sell conforming loans that we originate on a servicing—released, non-recourse basis that we would normally not retain in our loan portfolio because of interest rate risk or they do not conform to our standard underwriting guidelines. These correspondent relationships enable us to offer a full range of residential loan products and compete more effectively for residential loans within Atlantic and Cape May Counties. During the year ended December 31, 2009, Cape Bank sold approximately $11.0 million of loans. Cape Bank’s strategy in the current interest rate environment is to continue to sell loans during this historically low period of interest rates. The amount of loans sold varies according to market pricing and the portfolio needs of Cape Bank.

Loan Approval Procedures and Authority.Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures recommended by management and reviewed and approved by our Board of Directors and management. The Board of Directors has granted loan approval authority to certain officers or groups of officers up to prescribed limits, based on the type of loan, whether the loan is secured or unsecured and the officer’s position and experience. For example, the loan approval policy for secured commercial loans is as follows: (i) loans up to $100,000 may be approved by Vice Presidents/Loan Officers, (ii) loans in excess of $100,000 but less than $250,000 must be approved by Senior Vice Presidents/Loan Officers, (iii) loans in excess of $250,000 but less than $500,000 must be approved by the Chief Lending Officer, (iv) loans in excess of $500,000 but less than $2.0 million must be approved by the Management Loan Committee, (v) loans in excess of $2.0 million but less than $10.0 million must be approved by the Board of Director’s Loan Committee, and (vi) loans in excess of $10.0 million must be approved by the Board of Directors.

Loans to One Borrower.The maximum amount that we may lend to one borrower and the borrower’s related entities is limited by regulation to generally 15% of our stated capital and reserves. At December 31, 2009, our regulatory limit on loans to one borrower was $16.4 million. At that date, our largest lending relationship was $15.1 million, and consisted of 14 loans and was secured by commercial real estate. At December 31, 2009, these loans were performing in accordance with their terms.

Loan Commitments.We issue commitments for fixed and adjustable rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 60 days.

Non-Performing and Problem Assets

When a loan is 15 days past due, we send the borrower a late charge notice. If the loan delinquency is not corrected, other collection procedures are implemented, including telephone calls and collection letters. We attempt personal, direct contact with the borrower to determine the reason for the delinquency, to ensure that the borrower correctly understands the terms of the loan and to emphasize the importance of making payments on or before the due date. If necessary, subsequent late charges and delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90^th day of delinquency, we send the borrower a demand for payment. If the account is not made current by the 120^th day of delinquency, we may refer the loan to legal counsel. Any of our loan officers can shorten these time frames in consultation with Executive Management.

Generally, loans are placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless the loan is considered well-secured and in the process of collection. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current and factors indicating doubtful collection no longer exist. Our Management reports to the Directors Loan Committee on a monthly basis all loans on the Watch List and all Classified Loans.

Non-Performing Assets.The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.


	At December 31,
	2009			2008			2007			2006			2005
	(dollars in thousands)
Non-accrual loans:
Real estate loans:
Commercial mortgage	$	25,132		$	12,117		$	3,887		$	3,381		$	2,420
Residential mortgage		2,081			692			—			48			—
Construction		1,298			4,109			—			—			—
Home equity and line of credit		398			—			—			—			—
Commercial business loans		3,085			3,287			54			141			124
Other consumer loans		—			92			11			16			10


Total non-accrual loans		31,994			20,297			3,952			3,586			2,554


Loans greater than 90 days delinquent and still accruing:
Real estate loans:
Commercial mortgage		—			—			—			—			—
Residential mortgage		1,170			504			39			225			265
Construction		—			—			—			—			—
Home equity and line of credit		84			250			16			—			—
Commercial business loans		—			—			—			—			—
Other consumer loans		—			—			—			—			—

Total loans 90 days and still accruing		1,254			754			55			225			265


Total non-performing loans		33,248			21,051			4,007			3,811			2,819


Other real estate owned		4,817			798			—			—			—


Total non-performing assets	$	38,065		$	21,849		$	4,007		$	3,811		$	2,819


Ratios:
Non-performing loans to total loans		4.14	%		2.65	%		0.86	%		0.84	%		0.68	%
Non-performing assets to total assets		3.55	%		2.00	%		0.63	%		0.62	%		0.49	%

For the years ended December 31, 2009 and 2008, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $4,589,000 and $1,951,000, respectively. Income recorded for such loans was $49,000 and $10,000 for the years ended December 31, 2009 and December 31, 2008, respectively.

The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.


	Loans Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(dollars in thousands)

At December 31, 2009
Real estate loans:
Commercial mortgage		4	$	802		48	$	20,592		52	$	21,394
Residential mortgage		3		1,551		16		3,251		19		4,802
Construction		—		—		4		1,298		4		1,298
Home equity loans and lines of credit		1		50		6		482		7		532
Commercial business loans		3		101		12		3,085		15		3,186
Other consumer loans		—		—		—		—		—		—

Total		11	$	2,504		86	$	28,708		97	$	31,212


At December 31, 2008
Real estate loans:
Commercial mortgage		7	$	4,142		26	$	12,117		33	$	16,259
Residential mortgage		2		105		8		1,196		10		1,301
Construction		—		—		8		4,109		8		4,109
Home equity loans and lines of credit		—		—		1		250		1		250
Commercial business loans		8		1,909		12		3,287		20		5,196
Other consumer loans		5		122		5		89		10		211

Total		22	$	6,278		60	$	21,048		82	$	27,326


At December 31, 2007
Real estate loans:
Commercial mortgage		4	$	3,234		5	$	3,887		9	$	7,121
Residential mortgage		4		601		1		39		5		640
Construction		—		—		—		—		—		—
Home equity loans and lines of credit		—		—		—		—		—		—
Commercial business loans		—		—		3		54		3		54
Other consumer loans		2		72		5		21		7		93

Total		10	$	3,907		14	$	4,001		24	$	7,908


At December 31, 2006
Real estate loans:
Commercial mortgage		—	$	—		5	$	3,381		5	$	3,381
Residential mortgage		6		252		3		273		9		525
Construction		—		—		—		—		—		—
Home equity loans and lines of credit		—		—		—		—		—		—
Commercial business loans		—		—		3		141		3		141
Other consumer loans		2		33		2		16		4		49

Total		8	$	285		13	$	3,811		21	$	4,096


At December 31, 2005
Real estate loans:
Commercial mortgage		1	$	493		3	$	2,420		4	$	2,913
Residential mortgage		2		57		3		265		5		322
Construction		—		—		—		—		—		—
Home equity loans and lines of credit		—		—		—		—		—		—
Commercial business loans		1		39		3		124		4		163
Other consumer loans		5		75		1		10		6		85

Total		9	$	664		10	$	2,819		19	$	3,483

Other Real Estate Owned.Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned. When property is acquired it is recorded at the lower of cost or estimated fair market value, less the cost to sell, at the date of foreclosure, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in estimated fair market value result in charges to expense after acquisition. At December 31, 2009, we had $4.8 million in other real estate owned compared to $798,000 at December 31, 2008.

Classification of Assets.Our policies provide for the classification of loans and other assets that are considered to be of lesser quality. We classify loans based on an analysis of the credit conditions of the borrower and the value of the collateral when appropriate. A Watch List reflects loans that management believes warrant special consideration and may be loans that are delinquent or current in their payments. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. A persistent problem with untimely payments will prompt an analysis of the loan to gauge the need for a specific reserve or charge-off. Generally, loans whose primary source of payment is the collateral will have the balance reduced through a charge-off to the value of the collateral as determined by an independent appraisal. Our classified assets total includes $33.2 million of non-performing loans at December 31, 2009.

Allowance for Loan Losses

Our allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. In determining the allowance for loan losses, management considers the losses inherent in our loan portfolio and changes in the type and volume of loan activities, along with the general economic and real estate market conditions. A description of our methodology in establishing our allowance for loan losses is set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Allowance for Loan Losses.” The allowance for loan losses as of December 31, 2009 was maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable. However, this analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment. The economic information located within the Market Area section of this report was considered by management and used as a factor in our analysis of determining the adequacy of our general allowance for loan losses.

In addition, as an integral part of their examination process, the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance have authority to periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance based on their judgment of information available to them at the time of their examination.

The following table sets forth activity in our allowance for loan losses for the periods indicated.


	At or For the Years ended December 31,
	2009			2008			2007			2006			2005
	(dollars in thousands)

Balance at beginning of year	$	11,240		$	4,121		$	4,009		$	3,792		$	3,603

Allowance from acquired entity		—			3,791			—			—			—

Charge-offs:
Real estate loans:
Commercial mortgage		(8,043	)		(2,406	)		—			—			—
Residential mortgage		(239	)		(572	)		—			—			—
Construction		(2,378	)		(1,806	)		—			—			—
Commercial business loans		(872	)		(786	)		(119	)		—			—
Other consumer loans		(124	)		(138	)		(113	)		(128	)		(4	)

Total charge-offs		(11,656	)		(5,708	)		(232	)		(128	)		(4	)


Recoveries:
Real estate loans:
Commercial mortgage		406			—			—			—			—
Construction		114			—			—			—			—
Commercial business loans		18			—			—			—			—
Other consumer loans		30			27			43			33			—

Total recoveries		568			27			43			33			—


Net (charge-offs) recoveries		(11,088	)		(5,681	)		(189	)		(95	)		(4	)


Provision for loan losses		13,159			9,009			357			312			193
Reclassification to other liabilities for reserve on off-balance sheet items		—			—			(56	)		—			—


Balance at end of year	$	13,311		$	11,240		$	4,121		$	4,009		$	3,792


Ratios:
Net charge-offs to average loans outstanding		1.37	%		0.74	%		0.06	%		0.02	%		0.01	%
Allowance for loan losses to non- performing loans at end of year		40.04	%		53.39	%		102.85	%		105.20	%		134.52	%
Allowance for loan losses to total loans at end of year		1.66	%		1.41	%		0.89	%		0.89	%		0.91	%

Allocation of Allowance for Loan Losses.The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (including loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.


	At December 31,
	2009					2008					2007
			Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each
	Allowance for		Category to			Allowance for		Category to			Allowance for		Category to
	Loan Losses		Total Loans			Loan Losses		Total Loans			Loan Losses		Total Loans
	(dollars in thousands)
Real estate loans:
Commercial mortgage	$	9,571		71.9	%	$	6,829		51.8	%	$	2,381		43.0	%
Residential mortgage		2,048		15.4	%		1,696		28.5			978		37.8
Construction		388		2.9	%		1,477		6.8			336		8.3
Home equity loans and lines of credit		771		5.8	%		346		5.9			208		8.0
Commercial business loans		492		3.7	%		809		6.8			97		2.6
Other consumer loans		41		0.3	%		83		0.2			121		0.3

Total allocated allowance		13,311		100.0	%		11,240		100.0	%		4,121		100.0	%

Unallocated		—					—					—

Total	$	13,311				$	11,240				$	4,121


	At December 31,
	2006					2005
			Percent of					Percent of
			Loans in Each					Loans in Each
	Allowance for		Category to			Allowance for		Category to
	Loan Losses		Total Loans			Loan Losses		Total Loans
	(dollars in thousands)

Real estate loans:
Commercial mortgage	$	2,165		40.6	%	$	1,799		37.9	%
Residential mortgage		1,071		40.7			1,137		43.2
Construction		370		8.6			399		7.9
Home equity loans and lines of credit		222		8.2			255		8.8
Commercial business loans		79		1.7			200		2.0
Other consumer loans		102		0.2			2		0.2

Total allocated allowance		4,009		100.0	%		3,792		100.0	%

Unallocated		—					—

Total	$	4,009				$	3,792

Investment Activities

We have authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various U.S. Government sponsored enterprises, federal agencies and state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities (equity as well as debt) and mutual funds. As a member of the Federal Home Loan Bank of New York, we also are required to maintain an investment in Federal Home Loan Bank of New York stock.

At December 31, 2009, our investment portfolio, excluding Federal Home Loan Bank stock, totaled $152.8 million and consisted primarily of municipal bonds, mortgage-backed securities, including collateralized mortgage obligations, collateralized debt obligations, U.S. Government and agency securities, including securities issued by U.S. Government sponsored enterprises. Our entire investment portfolio is classified as available-for-sale (AFS) after reclassifying the held-to-maturity portion of the portfolio to AFS effective December 31, 2009.

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return on our investment. Our Board of Directors has the overall responsibility for the investment portfolio, including approval of our investment policy, which is reviewed and approved annually. The Management Investment Committee (a subcommittee of ALCO), consisting of the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Controller, meets on a monthly basis and is responsible for implementation of the investment policy and monitoring our investment performance. Our Board of Directors reviews the status of our investment portfolio on a monthly basis.

Municipal Securities.We invest in municipal bonds issued by counties, cities and school districts; primarily general obligation and some revenue bonds. Our policy allows us to purchase such securities rated “Baa” or higher. No more than 20% of our investment portfolio can be invested in obligations of local or municipal entities without approval of our Board of Directors. As of December 31, 2009, our municipal securities portfolio consisted primarily of issuers within the State of New Jersey in the amount of $7.6 million while issuers within other states consisted of $26.8 million.

U.S. Government and Federal Agency Obligations.While U.S. Government and federal agency securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and as an interest rate risk hedge in the event of significant mortgage loan prepayments.

Mortgage-Backed Securities.We invest in mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Our policy allows us to purchase privately-issued mortgage-backed securities rated “A” or higher, although in practice we generally limit purchases of such securities to those rated “AAA.” We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae.

Mortgage-backed securities are created by pooling mortgages and issuing a security with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Cape Bank. Some securities pools are guaranteed as to payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations. Finally, mortgage-backed securities are assigned lower risk weightings for purposes of calculating our risk-based capital level.

Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. Aside from this traditional risk, the current economic environment and resulting decline in real estate values has created additional risks. Mortgage backed securities may have individual loans in which the outstanding balance due is greater than the current value of the home. This could result in the borrower defaulting.

Collateralized Mortgage Obligations. Collateralized Mortgage Obligation’s (CMOs) are debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. With the exception of 3 private label (non-agency) securities, all of the securities are backed by U.S. Government agencies or Government sponsored enterprises. The non-agency CMOs are performing according to their contractual terms. See theSecurities Impairmentsection of Item 7 (Management’ Discussion and Analysis of Financial Condition and Result of Operations) for information related to the risks associated with the non-agency CMOs.

Collateralized Debt Obligations.We own 24 collateralized debt obligation securities (CDOs) that are backed by trust preferred securities, 16 of which have been principally issued by bank holding companies and 8 of which have been principally issued by insurance companies. During 2009, 15 of these securities were determined to be other-than-temporarily impaired (OTTI) resulting in the Company recording a $5.1 million charge to earnings for the credit-related portion of OTTI. Given the current illiquidity in the market for these securities, determining their estimated fair value requires substantial judgment and estimation of factors that are not currently observable. Because of changes in the creditworthiness of the underlying financial institutions, market conditions, and other factors, it is possible that, in future reporting periods, we could deem more of our CDOs to be OTTI. Such a determination would require us to write down their value and incur a non-cash OTTI charge. SeeNote 3 — Investment Securities — of the Notes to Consolidated Financial Statementsfor more information related to our CDO portfolio.

Investment Securities Portfolio.The following tables set forth the composition of our investment securities portfolio.


	At December 31,
	2009				2008				2007
	Amortized				Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
	(in thousands)
Investment securities available-for-sale:
Debt securities:
U.S. Government and agency obligations	$	46,004	$	45,972	$	31,296	$	31,766	$	15,992	$	16,211
Corporate bonds		10,851		11,046		4,975		4,777		6,914		6,908
Municipal bonds		33,901		34,381		11,024		10,715		—		—
Collateralized debt obligations		13,038		1,456		11,832		3,033		—		—
Equity securities		—		—		—		—		247		172
Mortgage-backed securities:
GNMA pass-through certificates		677		693		773		763		1,083		1,092
FHLMC pass-through certificates		5,338		5,513		20,449		20,771		17,473		17,612
FNMA pass-through certificates		26,612		27,588		33,465		33,397		19,949		20,133
Collateralized mortgage obligations		26,514		26,166		10,017		9,433		—		—

Total securities available-for-sale	$	162,935	$	152,815	$	123,831	$	114,655	$	61,658	$	62,128


	At December 31,
	2009				2008				2007
	Amortized				Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
	(in thousands)
Investment securities held-to-maturity:
Municipal bonds	$	—	$	—	$	24,582	$	25,154	$	19,658	$	19,786
U.S. Government and agency obligations		—		—		—		—		1,000		1,000
Mortgage-backed securities:
GNMA pass-through certificates		—		—		17		18		30		31
FHLMC pass-through certificates		—		—		2,670		2,715		3,780		3,811
FNMA pass-through certificates		—		—		10,897		11,203		11,063		11,138
Collateralized mortgage obligations		—		—		9,922		10,111		9,609		9,661
Grantor Trust (money market fund)		—		—		737		737		—		—

Total securities held-to-maturity	$	—	$	—	$	48,825	$	49,938	$	45,140	$	45,427

Effective December 31, 2009 the Company reclassified the Held-to-Maturity portion of its investment portfolio, which had a market value of $44.5 million and an amortized cost of $43.0 million, to Available-for-Sale.

Portfolio Maturities and Yields.The composition and maturities of the investment securities portfolio at December 31, 2009 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities’ yields have not been adjusted to a tax-equivalent basis, which as of December 31, 2009 was 5.52%.


	One Year or Less					More than One Year					More than Five Years					More than Ten Years					Total Securities
			Weighted					Weighted					Weighted					Weighted							Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized				Average
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Fair Value		Yield
	(dollars in thousands)
Investment securities available-for-sale:
Debt securities:
U.S. Government and agency obligations	$	4,000		0.93	%	$	42,004		1.72	%	$	—		—		$	—		—		$	46,004	$	45,972		1.65	%
Corporate bonds		3,042		1.44	%		7,809		3.33	%		—		—			—		—			10,851		11,046		2.80	%
Municipal bonds		1,923		3.59	%		9,893		3.52	%		11,363		3.73	%		10,722		4.47	%		33,901		34,381		3.90	%
Collateralized debt obligations		—		—			—		—			—		—			13,038		3.33	%		13,038		1,456		3.33	%
Mortgage-backed securities:
GNMA pass-through certificates		—		—			—		—			223		4.35	%		454		3.65	%		677		693		3.88	%
FHLMC pass-through certificates		723		4.21	%		565		5.26	%		7		2.62	%		4,043		4.17	%		5,338		5,513		4.29	%
FNMA pass-through certificates		102		3.35	%		2,902		5.45	%		4,278		4.93	%		19,330		4.69	%		26,612		27,588		4.81	%
Collateralized mortgage obligations		—		—			4,452		3.39	%		7,656		3.99	%		14,406		4.33	%		26,514		26,166		4.08	%

Total securities available-for-sale	$	9,790		1.88	%	$	67,625		2.47	%	$	23,527		4.04	%	$	61,993		4.24	%	$	162,935	$	152,815		3.33	%

Deposit Activities and Other Sources of Funds

General.Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts.We obtain deposits within our market area primarily by offering a broad selection of deposit accounts, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts and certificates of deposit. At December 31, 2009, we also had $45.0 million of deposit accounts from a variety of local municipal relationships. At December 31, 2009, we had $38.5 million of brokered deposits, or 5.0% of our total deposits. Included in the brokered deposits were $10.8 million of reciprocal certificates of deposits offered under the Certificate of Deposit Account Registry Service^® (“CDARS”), a program in which Cape Bank participates. Under CDARS, participating banks are able to match customer’s deposits that would otherwise exceed the limits for FDIC insurance with certificates of deposits offered at other participating banks and thereby provide FDIC insurance to these excess deposits.

We also offer a variety of deposit accounts designed for the businesses operating in our market area. Our business banking deposit products include a commercial checking account, a commercial money market account and a checking account specifically designed for small businesses. We offer bill paying and cash management services through our online banking system.

Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the interest rates offered by our competition, the interest rates available on borrowings, rates on brokered deposits, our liquidity needs, and customer preferences. We generally review our deposit mix and deposit pricing weekly. Our deposit pricing strategy generally has been to offer competitive rates on all types of deposit products, and to periodically offer special rates in order to attract deposits of a specific type or term.

The following table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated.


	For the year ended December 31,
	2009									2008
						Weighted									Weighted
	Average					Average				Average					Average
	Balance		Percent			Rate			��	Balance		Percent			Rate
	(dollars in thousands)

Non-interest bearing	$	68,364		9.0	%		n/a			$	68,158		9.4	%		n/a
Savings accounts		80,248		10.6			0.48	%			82,309		11.3			1.29	%
NOW and money market		236,984		31.3			0.89	%			224,647		30.8			1.81	%
Certificates of deposit		371,664		49.1			2.66	%			353,501		48.5			3.55	%


Total deposits	$	757,260		100.0	%		1.64	%		$	728,615		100.0	%		2.43	%


	For the year ended December 31,
	2007
						Weighted
	Average					Average
	Balance		Percent			Rate
	(dollars in thousands)

Non-interest bearing	$	45,039		9.7	%		n/a
Savings accounts		79,160		17.2			1.63	%
NOW and money market		161,353		35.0			2.63	%
Certificates of deposit		175,924		38.1			4.56	%


Total deposits	$	461,476		100.0	%		2.94	%

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.


	At December 31,
	2009		2008		2007
	(in thousands)
Interest Rate
Less than 2.00%	$	162,486	$	22,382	$	11
2.00% - 2.99%		113,358		79,179		51
3.00% - 3.99%		23,881		170,565		12,878
4.00% - 4.99%		33,737		74,656		145,312
5.00% - 5.99%		3,449		9,403		17,398
6.00% - 6.99%		—		8		8

Total	$	336,911	$	356,193	$	175,658

The following table sets forth the amount and maturities of certificates of deposit at December 31, 2009.


	Period to Maturity at December 31, 2009
	Less Than		More Than		More Than		More Than		More
	or Equal		One to Two		Two to		Three to		Than Four
	to a Year		Years		Three Years		Four Years		Years		Total
	(in thousands)
Interest Rate
Less than 2.00%	$	147,242	$	12,902	$	1,358	$	222	$	762	$	162,486
2.00% - 2.99%		106,923		3,617		2,048		230		540		113,358
3.00% - 3.99%		14,350		3,892		1,057		2,230		2,352		23,881
4.00% - 4.99%		10,490		7,418		7,850		7,879		100		33,737
5.00% - 5.99%		721		1,151		1,577		—		—		3,449

Total	$	279,726	$	28,980	$	13,890	$	10,561	$	3,754	$	336,911

As of December 31, 2009, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $135.6 million. The following table sets forth the maturity of these certificates as of December 31, 2009.


	At December 31, 2009
	(in thousands)
Maturities
Three months or less	$	80,132
Over three months through six months		15,965
Over six months through one year		23,009
Over one year to three years		11,567
Over three years		4,935

Total	$	135,608

Borrowings.We have the ability to borrow from the Federal Home Loan Bank of New York to supplement our investable funds. The Federal Home Loan Bank functions as a central credit bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness.

Our borrowings consist of advances and repurchase agreements from the Federal Home Loan Bank of New York totaling $194 million at December 31, 2009. Additionally we had $10 million in repurchase agreements with Citigroup at December 31, 2009. At December 31, 2009, we had access to additional Federal Home Loan Bank advances of up to $27.7 million based on our unused qualifying collateral available to support such advances. The following table sets forth information concerning balances and interest rates on all of our borrowings at the dates and for the period indicated.


	2009
	FHLB			Repurchase
	Borrowings			Agreements			Total
	(dollars in thousands)

Average daily balance during the year	$	153,582		$	37,674		$	191,256
Average interest rate during the year		3.27	%		4.30	%		3.47	%
Maximum month-end balance during the year	$	193,897		$	37,778		$	231,675
Weighted average interest rate at year-end		3.09	%		4.32	%		3.32	%

Personnel

As of December 31, 2009, we had 192 full-time employees and 21 part-time employees, none of whom is represented by a collective bargaining unit. We believe we have a good relationship with our employees.

SUPERVISION AND REGULATION

General

Federal law allows a state savings bank, such as Cape Bank, that qualifies as a “qualified thrift lender” (discussed below), to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of the Home Owners’ Loan Act, as amended (“HOLA”). Such election results in its holding companies being regulated as savings and loan holding companies by the Office of Thrift Supervision (“OTS”) rather than as bank holding companies regulated by the Board of Governors of the Federal Reserve System. At the time of its mutual to stock conversion, Cape Bank elected to be treated as a savings association under the applicable provisions of the HOLA. Accordingly, Cape Bancorp is a savings and loan holding company and is required to file certain reports with, and is subject to examination by, and otherwise must comply with the rules and regulations of the OTS. Cape Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Cape Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). Cape Bank is subject to extensive regulation, examination and supervision by the Commissioner of the New Jersey Department of Banking and Insurance (the “Commissioner”) as its chartering authority, and by the FDIC as the deposit insurer and its primary federal regulator. Cape Bank must file reports with the Commissioner and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and the FDIC conduct periodic examinations to assess Cape Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

Any change in these laws or regulations, whether by the New Jersey Department of Banking and Insurance (the “Department”), the FDIC, the OTS or the U.S. Congress, could have a material adverse impact on Cape Bancorp, Cape Bank and our operations.

Certain of the regulatory requirements that are or will be applicable to Cape Bank and Cape Bancorp are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Cape Bank and Cape Bancorp and is qualified in its entirety by reference to the actual statutes and regulations.

New Jersey Banking Regulation

Activity Powers.Cape Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, New Jersey savings banks, including Cape Bank, generally may invest in: real estate mortgages; consumer and commercial loans; specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies; certain types of corporate equity securities; and certain other assets.

A savings bank may also invest pursuant to a “leeway” power that permits investments not otherwise permitted by the New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon approval of the Department. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the Department by regulation or by specific authorization is required. The exercise of these lending, investment and activity powers is further limited by federal law and the related regulations. See “—Federal Banking Regulation—Activity Restrictions on State-Chartered Banks” below.

Loans to One Borrower Limitations.With certain specified exceptions, a New Jersey chartered savings bank may not make loans or extend credit to a single borrower and to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. Cape Bank currently complies with applicable loans-to-one-borrower limitations.

Dividends.Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Cape Bank. See “—Federal Banking Regulation—Prompt Corrective Action” below.

Minimum Capital Requirements.Regulations of the Department impose on New Jersey chartered depository institutions, including Cape Bank, minimum capital requirements similar to those imposed by the FDIC on insured state banks. See “—Federal Banking Regulation—Capital Requirements.”

Examination and Enforcement.The Department may examine Cape Bank whenever it deems an examination advisable. The Department examines Cape Bank at least once every two years, alternating annual examinations with the FDIC. The Department may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Department has ordered the activity to be terminated, to show cause at a hearing before the Commissioner of the Department why such person should not be removed.

Federal Banking Regulation

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2009, the Company and Bank meet all capital adequacy requirements to which it is subject.

Capital Requirements.FDIC regulations require banks to maintain minimum levels of capital. The FDIC regulations define two tiers, or classes, of capital.

Tier 1 capital is comprised of the sum of:

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common stockholders’ equity, excluding the unrealized appreciation or depreciation, net of tax, from available-for-sale securities;

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non-cumulative perpetual preferred stock, including any related retained earnings; and

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minority interests in consolidated subsidiaries minus all intangible assets, other than qualifying servicing rights and any net unrealized loss on marketable equity securities.

The components of Tier 2 capital currently include:

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cumulative perpetual preferred stock;

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certain perpetual preferred stock for which the dividend rate may be reset periodically;

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hybrid capital instruments, including mandatory convertible securities;

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term subordinated debt;

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intermediate term preferred stock;

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allowance for loan losses; and

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up to 45% of pretax net unrealized holding gains on available-for-sale equity securities with readily determinable fair market values.

The allowance for loan losses includible in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets (as discussed below). Overall, the amount of Tier 2 capital that may be included in total capital cannot exceed 100% of Tier 1 capital. The FDIC regulations establish a minimum leverage capital requirement for banks in the strongest financial and managerial condition, with a rating of 1 (the highest examination rating of the FDIC for banks) under the Uniform Financial Institutions Rating System, of not less than 3% of Tier 1 capital to total assets. For all other banks, the minimum leverage capital requirement is 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution.

The FDIC regulations also require that banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of a ratio of total capital, which is defined as the sum of Tier 1 capital and Tier 2 capital, to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item.

The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of an institution’s exposure to declines in the economic value of a bank’s capital due to changes in interest rates when assessing the bank’s capital adequacy. Under such a risk assessment, examiners evaluate a bank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. According to the agencies, applicable considerations include:

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the quality of the bank’s interest rate risk management process;

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the overall financial condition of the bank; and

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the level of other risks at the bank for which capital is needed.

Institutions with significant interest rate risk may be required to hold additional capital. The agencies also issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies’ evaluation of interest rate risk in connection with capital adequacy.

As of December 31, 2009, Cape Bank was considered “well-capitalized” under FDIC guidelines.

Activity Restrictions on State-Chartered Banks.Federal law and FDIC regulations generally limit the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the FDIC.

Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC deposit insurance fund. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions.

Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 million. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State-chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Cape Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it currently is not engaging in such activities and has no plans to do so.

Federal Home Loan Bank System.Cape Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, Cape Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 1/20th of its borrowings from the Federal Home Loan Bank, or 0.3% of assets, whichever is greater. As of December 31, 2009, Cape Bank was in compliance with this requirement.

Enforcement.The FDIC has extensive enforcement authority over insured savings banks, including Cape Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.

Prompt Corrective Action.The Federal Deposit Improvement Act established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC, as well as the other federal banking regulators, adopted regulations governing the supervisory actions that may be taken against undercapitalized institutions. The regulations establish five categories, consisting of “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The FDIC’s regulations define the five capital categories as follows:

An institution will be treated as “well-capitalized” if:

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its ratio of total capital to risk-weighted assets is at least 10%;

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its ratio of Tier 1 capital to risk-weighted assets is at least 6%; and

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its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specific capital level.

An institution will be treated as “adequately capitalized” if:

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its ratio of total capital to risk-weighted assets is at least 8%;

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its ratio of Tier 1 capital to risk-weighted assets is at least 4%; and

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its ratio of Tier 1 capital to total assets is at least 4% (3% if the bank receives the highest rating under the Uniform Financial Institutions Rating System) and it is not a well-capitalized institution.

An institution will be treated as “undercapitalized” if:

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its ratio of total capital to risk-based capital is less than 8%;

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its ratio of Tier 1 capital to risk-weighted assets is less than 4%; and

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its ratio of Tier 1 capital to total assets is less than 4% (or less than 3% if the institution receives the highest rating under the Uniform Financial Institutions Rating System).

An institution will be treated as “significantly undercapitalized” if:

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its ratio of total capital to risk-weighted assets is less than 6%;

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its ratio of Tier 1 capital to risk-weighted assets is less than 3%; or

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its leverage ratio is less than 3%.

An institution that has a tangible capital to total assets ratio equal to or less than 2% would be deemed to be “critically undercapitalized.”

The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is “critically undercapitalized.” For this purpose, “critically undercapitalized” means having a ratio of tangible capital to total assets of less than 2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition or upon the occurrence of certain events, including:

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insolvency, or when the assets of the bank are less than its liabilities;

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substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;

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existence of an unsafe or unsound condition to transact business;

	•		likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; or

	•		insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance.

Cape Bank is in compliance with the Prompt Corrective Action rules.

Insurance of Deposit Accounts.Cape Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts at Cape Bank are insured by the FDIC, generally up to a maximum of $100,000 for each separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. However, the FDIC increased the deposit insurance available on all deposit accounts to $250,000, effective until December 31, 2013. In addition, certain noninterest-bearing transaction accounts maintained with financial institutions participating in the FDIC’s Temporary Liquidity Guarantee Program are fully insured regardless of the dollar amount until June 30, 2010. Cape Bank has opted to participate in the FDIC’s Temporary Liquidity Guarantee Program. See “—Temporary Liquidity Guarantee Program.”

The FDIC imposes an assessment against all depository institutions for deposit insurance. This assessment is based on the risk category of the institution and, prior to 2009, ranged from 5 to 43 basis points of the institution’s deposits. On February 27, 2009, the FDIC published a final rule raising the current deposit insurance assessment rates to a range from 12 to 45 basis points beginning April 1, 2009. Additionally, the FDIC issued an interim final rule that imposed a special 5 basis point special assessment on total assets as of June 30, 2009, which was payable on September 30, 2009 and totaled $499,000. The FDIC has also required banking institutions to pre-pay deposit insurance premiums in order to replenish the liquid assets of the Deposit Insurance Fund. On December 30, 2009, the Bank prepaid $4.7 million of FDIC premiums.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that might lead to termination of our deposit insurance.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2009, the annualized FICO assessment was equal to 1.06 basis points for each $100 in domestic deposits maintained at an institution.

Temporary Liquidity Guarantee Program.The FDIC’s Temporary Liquidity Guarantee Program has two components. One guarantees newly issued senior unsecured debt of a participating organization, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009. The FDIC will pay the unpaid principal and interest on a FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest in accordance with the terms of the instrument. The guarantee will remain in effect until June 30, 2012. In return for the FDIC’s guarantee, participating institutions must pay the FDIC a fee based on the amount and maturity of the debt. Cape Bank determined not to participate in this component of the Temporary Liquidity Guarantee Program.

The other component of the program provides full federal deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until June 30, 2010. An annualized 15 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis to insured depository institutions that have not opted out of this component of the Temporary Liquidity Guarantee Program. Cape Bank is participating in this component of the Temporary Liquidity Guarantee Program.

U.S. Treasury’s Troubled Asset Relief Program Capital Purchase Program. The Emergency Economic Stabilization Act of 2008 provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the legislation is the Troubled Asset Relief Program Capital Purchase Program (CPP), which provides for direct equity investment in perpetual preferred stock by the U.S. Treasury Department in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. The CPP provides for a minimum investment of one percent of total risk-weighted assets and a maximum investment equal to the lesser of three percent of total risk-weighted assets or $25 billion. Participation in the program is not automatic and is subject to approval by the U.S. Treasury Department. Cape Bancorp determined not to participate in the CPP.

Transactions with Affiliates of Cape Bank.Transactions between an insured bank, such as Cape Bank, and any of its affiliates is governed by Sections 23A and 23B of the Federal Reserve Act and implementing regulations. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. Generally, a subsidiary of a bank that is not also a depository institution or financial subsidiary is not treated as an affiliate of the bank for purposes of Sections 23A and 23B.

Section 23A:

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limits the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and retained earnings, and limits all such transactions with all affiliates to an amount equal to 20% of such capital stock and retained earnings; and

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requires that all such transactions be on terms that are consistent with safe and sound banking practices.

The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered transaction by a bank with an affiliate and any purchase of assets or services by a bank from an affiliate must be on terms that are substantially the same, or at least as favorable to the bank, as those that would be provided to a non-affiliate. At December 31, 2009, the Company had no covered transactions.

Prohibitions Against Tying Arrangements.Banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the bank or its affiliates or not obtain services of a competitor of the institution.

Community Reinvestment Act and Fair Lending Laws.All FDIC insured banks have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low and moderate income neighborhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice. Cape Bank received a satisfactory Community Reinvestment Act rating in its most recent federal examination.

Loans to a Bank’s Insiders

Federal Regulation.A bank’s loans to its executive officers, directors, any owner of 10% or more of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Sections 22(g) and 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans to one borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Cape Bank. See “—New Jersey Banking Regulation—Loans to One Borrower Limitations.” All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s primary residence, may not exceed the lesser of (i) $100,000 or (ii) the greater of $25,000 or 2.5% of the bank’s unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either (i) $500,000 or (ii) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons.

An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.

In addition, federal law prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.

New Jersey Regulation.Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons, that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act.

The USA PATRIOT Act

The USA PATRIOT Act of 2001 gave the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also required the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. We have policies, procedures and systems designed to ensure compliance with these regulations.

Holding Company Regulation

General.Cape Bancorp is a unitary savings and loan holding company subject to OTS regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the OTS has enforcement authority over Cape Bancorp’s non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to Cape Bank.

As a unitary savings and loan holding company, Cape Bancorp is permitted to engage in those activities permissible for financial holding companies or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain additional activities authorized by OTS regulations.

The OTS also takes the position that its capital distribution regulations apply to state savings banks in savings and loan holding company structures. Those regulations impose limitations upon all capital distributions by an institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution, or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution if, like Cape Bank, it is a subsidiary of a holding company. In the event Cape Bank’s capital fell below its regulatory requirements or the OTS notified it that it was in need of increased supervision, Cape Bank’s ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice.

Acquisition of Control.Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of any company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the savings institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community, the effectiveness of each parties’ anti-money laundering program, and competitive factors.

Under the federal Change in Bank Control Act, a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or as otherwise defined by the OTS. Under the Change in Bank Control Act, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

Qualified Thrift Lender Test.In order for Cape Bancorp to be regulated as savings and loan holding company by the OTS (rather than as a bank holding company by the Board of Governors of the Federal Reserve System), Cape Bank must qualify as a “qualified thrift lender” under OTS regulations or satisfy the “domestic building and loan association” test under the Internal Revenue Code. Under the qualified thrift lender test, a savings institution is required to maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangible assets, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine out of each 12 month period. At December 31, 2009, Cape Bank maintained 72.6% of its portfolio assets in qualified thrift investments. Cape Bank also met the Qualified Thrift Lender test in each of the prior four quarters.

Federal Securities Laws

Cape Bancorp’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Cape Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Cape Bancorp common stock held by persons who are affiliates (generally officers, directors and principal stockholders) of Cape Bancorp may not be resold without registration or unless sold in accordance with certain resale restrictions. If Cape Bancorp meets specified current public information requirements, each affiliate of Cape Bancorp is able to sell in the public market, without registration, a limited number of shares in any three month period.


ITEM 1A.		RISK FACTORS

The risks set forth below, in addition to the other risks described in this Annual Report on Form 10-K, may adversely affect our business, financial condition and operating results. In addition to the risks set forth below and the other risks described in this annual report, there may also be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results. As a result, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The United States Economy Was In a Significant Recession. A Prolonged Economic Downturn, Especially One Affecting Our Geographic Market Area, Will Continue to Materially Affect our Business and Financial Results.

The United States economy entered a recession in the fourth quarter of 2007. Throughout the course of 2008 and 2009, economic conditions continued to worsen, due initially to the fallout from the collapse of the sub-prime mortgage market. While we did not originate or invest in sub-prime mortgages, our lending business is tied, in large part, to the housing market. Declines in home prices, increases in foreclosures and higher unemployment have adversely affected the credit performance of real estate-related loans, resulting in the write-down of asset values. The continuing housing slump also has resulted in reduced demand for the construction of new housing, further declines in home prices, and increased delinquencies on our construction, residential and commercial mortgage loans. Further, the ongoing concern about the stability of the financial markets in general has caused many lenders to reduce or cease providing funding to borrowers. These conditions may also cause a further reduction in loan demand, and increases in our non-performing assets, net charge-offs and provisions for loan losses.

Legislative or Regulatory Actions Responding to Financial and Market Weakness Could Affect Us Adversely. There Can Be No Assurance that Actions of the U.S. Government, Federal Reserve and Other Governmental and Regulatory Bodies For the Purpose of Stabilizing the Financial Markets Will Achieve the Intended Effect.

In response to the financial crises affecting the financial markets and the economy as a whole, the U.S. Congress has passed legislation and the U.S. Treasury has promulgated programs designed to stimulate the economy and purchase assets from, provide equity capital to, and guarantee the liquidity of the financial services industry. Specifically, Congress adopted the Emergency Economic Stabilization Act of 2008, under which the U.S. Treasury was granted the authority to expend up to $700 billion to assist in stabilizing and providing liquidity to the U.S. financial system. In October 2008, the U.S. Treasury announced the Capital Purchase Program, which authorized the U.S. Treasury to purchase up to $250 billion of non-voting senior preferred shares of certain qualified financial institutions in an attempt to encourage financial institutions to build capital to increase the flow of financing to businesses and consumers and to support the economy. In addition, Congress temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009, which was subsequently extended to June 30, 2010. The FDIC has also announced the creation of the Temporary Liquidity Guarantee Program which is intended to strengthen confidence and encourage liquidity in financial institutions by temporarily guaranteeing newly issued senior unsecured debt of participating organizations and providing full insurance coverage for noninterest-bearing transaction deposit accounts (such as business checking accounts, interest-bearing transaction accounts paying 50 basis points or less and lawyers’ trust accounts), regardless of dollar amount until June 30, 2010. Finally, in February 2009, the American Recovery and Reinvestment Act of 2009 was enacted, which expanded government spending programs to stimulate the economy. The U.S. government continues to evaluate and develop various programs and initiatives designed to stabilize the financial and housing markets and stimulate the economy.

The potential exists for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, and the issuance of many formal enforcement orders is expected. Actions taken to date, as well as potential actions, may not have the beneficial effects that are intended, particularly with respect to the limited credit availability currently being experienced. In addition, new laws, regulations, and other regulatory changes will increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. Our FDIC insurance premiums have increased, and may continue to increase, because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. New laws, regulations, and other regulatory changes, along with negative developments in the financial services industry and the credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability.

Continuing Weakness in the Financial Services Industry And the Credit Markets May Subject Us to Additional Regulation.

As a result of the financial crisis, the potential exists for the promulgation of new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, which are expected to result in the issuance of many formal enforcement orders. Negative developments in the financial services industry and the credit markets, and the impact of new legislation in response to these developments, may negatively affect our operations by restricting our business operations, including our ability to originate or sell loans and pursue business opportunities. Compliance with such regulation also will likely increase our costs.

Our Expenses Will Increase as a Result of Increases in FDIC Insurance Premiums.

The FDIC imposes an assessment against financial institutions for deposit insurance. This assessment is based on the risk category of the institution and currently ranges from 5 to 43 basis points of the institution’s deposits. On February 27, 2009, the FDIC issued a final rule that increases the current deposit insurance assessment rates to a range from 12 to 45 basis points beginning April 1, 2009. Additionally, the FDIC issued an interim final rule that imposed a special 5 basis point special assessment on total assets as of June 30, 2009, which was payable on September 30, 2009 and totaled $499,000. The FDIC has also required banking institutions to pre-pay deposit insurance premiums in order to replenish the liquid assets of the Deposit Insurance Fund. On December 30, 2009, the Bank prepaid $4.7 million of FDIC premiums. Due to the number of failed financial institutions and the fact that the insurance fund is below statutory requirements, additional assessments may be required.

Lack of Consumer Confidence in Financial Institutions May Decrease Our Level of Deposits.

Our level of deposits may be affected by lack of consumer confidence in financial institutions, which have caused fewer depositors to be willing to maintain deposits that are not FDIC-insured accounts. This may cause depositors to withdraw deposits and place them in other institutions or to invest uninsured funds in investments perceived as being more secure, such as securities issued by the U.S. Treasury. These consumer preferences may force us to pay higher interest rates to retain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.

Our Emphasis on Commercial Real Estate Loans and Commercial Business Loans May Continue to Expose us to Increased Lending Risks.

At December 31, 2009, $441.3 million, or 55.0% of our loan portfolio, consisted of commercial real estate loans, including commercial construction loans. Commercial real estate loans constitute a greater percentage of our loan portfolio than any other loan category, including residential mortgage loans, which totaled $244.9 million, or 30.5% of our total loan portfolio, at December 31, 2009. In addition, at December 31, 2009, $62.7 million, or 7.8% of our loan portfolio, consisted of commercial business loans.

We have increased our originations of commercial real estate and commercial business loans in recent years and we intend to continue to emphasize this type of lending. Commercial real estate loans and commercial business loans generally expose a lender to a greater risk of loss than one-to-four family residential loans. Repayment of commercial real estate and commercial business loans generally depends, in large part, on sufficient income from the property or the borrower’s business to cover operating expenses and debt service. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. Changes in economic conditions that are beyond the control of the borrower and lender could affect the value of the security for the loan, the future cash flow of the affected property, or the marketability of a construction project with respect to loans originated for the acquisition and development of property. See “Business—Lending Activities.”

An Inadequate Allowance for Loan Losses Would Negatively Affect Our Results of Operations.

We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to avoid losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. Volatility and deterioration in the broader economy may also increase our risk of credit losses. The determination of an appropriate level of allowance for loan losses is an inherently uncertain process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and charge-offs may exceed current estimates. We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as, including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and industry loan concentrations. If any of our evaluations are incorrect and borrower defaults result in losses exceeding our allowance for loan losses, our results of operations could be significantly and adversely affected. We cannot be certain that our allowance will be adequate to cover probable loan losses inherent in our portfolio.

The Need to Account for Assets at Market Prices May Adversely Affect Our Results of Operations.

We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we carry these assets on our books at their fair value, we may incur losses even if the asset in question presents minimal credit risk. Given the continued disruption in the capital markets, we may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.

Changes in the Value of Goodwill and Intangible Assets Could Reduce Our Earnings.

We are required by U.S. generally accepted accounting principles to test goodwill and other intangible assets for impairment at least annually. Testing for impairment of goodwill and intangible assets involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of December 31, 2009, if our goodwill and intangible assets were fully impaired and we were required to charge-off all of our goodwill, the pro-forma reduction to our stockholders’ equity would be approximately $1.88 per share.

Other-Than-Temporary Impairment (OTTI) Could Reduce Our Earnings.

We evaluate our investment securities for other-than-temporary impairment (OTTI) as required by FASB ASC Topic No. 320, “Investments — Debt and Equity Securities”. When a decline in fair value below cost is deemed to be other-than-temporary, the impairment must be recognized as a charge to earnings to the extent it is related to credit losses. In determining whether or not OTTI exists, management considers several factors, including the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, adverse changes to projected cash flows, credit rating downgrades, and our intentions with regard to selling the securities or whether it is more likely than not that we will be required to sell the securities prior to the anticipated recovery in fair value. The greatest risk of OTTI exists in our investment securities portfolio and in particular with the CDO and non-agency CMO securities that we own. As of December 31, 2009, if these securities were deemed to be OTTI and the entire amount was related to credit losses, the pro forma reduction to our stockholders’ equity would be approximately $1.00 per share.

Our Continuing Concentration of Loans in Our Primary Market Area May Increase Our Risk.

Our success depends primarily on the general economic conditions in the counties in which we conduct business, and in the Jersey shore community in general. Unlike large banks that are more geographically diversified, we provide banking and financial services to customers primarily in Cape May and Atlantic Counties, New Jersey. The local economic conditions in our market area have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. Should the economic downturn limit discretionary spending, many of the seasonal and vacation oriented businesses may suffer. In addition, the gaming industry is a significant economic force in our market and has already suffered a serious decline in revenues due to the economy and increased regional competition. This situation may worsen in the future. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would affect the local economic conditions and could adversely affect our financial condition and results of operations. Additionally, because we have a significant amount of commercial real estate loans, decreases in tenant occupancy also may have a negative effect on the ability of many of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

Future Changes in Interest Rates Could Reduce Our Profits

Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:

the interest income we earn on our interest-earning assets, such as loans and securities; and

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

The potential exists for the Federal Reserve Bank to raise the target Fed Funds rate in 2010. An increase in interest rates will present us with the challenge of managing interest rate risk with a cumulative three year liability sensitive balance sheet. As detailed in “—Net Interest Income Analysis,” a rising interest rate environment indicates that net interest income would decrease over a one-year horizon. This analysis assumes instantaneous and sustained rate shock intervals of 100 and 200 basis points on a static balance sheet. Management will focus on several strategies to negate such effects, such as extending long-term liabilities, increasing core deposit balances, reducing the amount of long-term fixed rate loans in the portfolio, and shortening the average life of investments within the investment portfolio.

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates normally results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their loans in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Alternatively, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable rate loans.

Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2009, the fair value of our available for sale investment securities totaled $152.8 million and the amortized cost of such securities was $162.9 million. Decreases in the fair value of securities available for sale in future periods would have an adverse effect on stockholders’ equity.

We evaluate interest rate sensitivity by estimating the change in Cape Bank’s net portfolio value over a range of interest rate scenarios. Net portfolio value is the discounted present value of expected cash flows from assets and liabilities. At December 31, 2009, in the event of an immediate 100 basis point increase in interest rates, we would experience a 5.8% decrease in net portfolio value and a $1.7 million decrease in net interest income. See “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

If Our Investment in The Federal Home Loan Bank Of New York is Classified as Other-Than-Temporarily Impaired or as Permanently Impaired, Our Earnings and Stockholders’ Equity Could Decrease.

We own common stock of the Federal Home Loan Bank of New York. We hold this stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank of New York’s advance program. The aggregate cost and fair value of our Federal Home Loan Bank common stock as of December 31, 2009 was $10.3 million based on its par value. There is no market for our Federal Home Loan Bank common stock.

Recent published reports indicate that certain member banks of the Federal Home Loan Bank System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of New York, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of New York common stock could be impaired at some time in the future, and if this occurs, it would cause our earnings to decrease by the after-tax amount of the impairment charge.

If the Federal Home Loan Bank of New York Stops Paying Dividends, This Will Negatively Affect Our Earnings.

Certain Federal Home Loan Banks stopped paying dividends in 2008, and are prohibited from paying dividends in the future so long as they fail to meet any of their regulatory capital requirements. We received dividends of $584,000 on our Federal Home Loan Bank of New York stock in 2009. The failure of the Federal Home Loan Bank to pay dividends in the future will cause our earnings to decrease.

Future Legislative or Regulatory Actions Responding to Perceived Financial and Market Problems Could Impair Our Rights Against Borrowers

There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit a lender’s ability to foreclose on mortgage collateral. If proposals such as these, or other proposals limiting our rights as a creditor, are implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor. Should such legislation be implemented Cape Bank could be directly impacted for those loans held directly within the portfolio. Such legislation could also have a major impact on loans underlying and collateralizing mortgage-backed securities and thus indirectly affect Cape by decreasing the value of securities held in the investment portfolio.

A Breach of Information Security Could Negatively Affect Our Earnings.

Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. We cannot be certain all our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Disruptions to our vendors’ systems may arise from events that are wholly or partially beyond our vendors’ control (including, for example, computer viruses or electrical or telecommunications outages). If information security is breached, despite the controls we have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

We Are Subject to Extensive Regulatory Oversight

We and our subsidiaries are subject to extensive regulation and supervision. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in the anti-money laundering area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place meet every aspect of current regulation. Therefore, there is no assurance that in every instance we are in full compliance with these requirements. Our failure to comply with these and other regulatory requirements can lead to, among other remedies, administrative enforcement actions, and legal proceedings. In addition, recently enacted, proposed and future legislation and regulations have had, will continue to have or may have significant impact on the financial services industry. Regulatory or legislative changes could make regulatory compliance more difficult or expensive for us, and could cause us to change or limit some of our products and services, or the way we operate our business.


ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.


ITEM 2.		PROPERTIES

The Company currently conducts business from its main office located at 225 North Main Street, Cape May Court House, New Jersey, 08210 and from its additional 17 branches located throughout Atlantic and Cape May Counties, New Jersey. At December 31, 2009, the aggregate net book value of premises and equipment was $26.4 million. With the exception of the potential remodeling of certain facilities to provide for the efficient use of work space and/or to maintain an appropriate appearance, each property is considered reasonably adequate for current and anticipated needs.


ITEM 3.		LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.


ITEM 4.		RESERVED

PART II


ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) No equity securities were sold during the year ended December 31, 2009 that were not registered under the Securities Act.

Stock Performance Graph

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

We completed our initial public offering on January 31, 2008. In the offering, we sold 7,820,000 shares of our common stock at $10.00 per share to Cape Bank’s depositors, Cape Bank’s tax qualified employee benefit plans and the general public in subscription, community and syndicated offerings. We also issued 547,400 shares of our common stock and contributed $782,000 in cash to The CapeBank Charitable Foundation. In addition, we issued 4,946,121 shares of our common stock to former shareholders of Boardwalk Bancorp as merger consideration. As a result of the transactions, we have 13,313,521 issued and outstanding shares.

Our common stock began trading on the Nasdaq Stock Market under the symbol “CBNJ” on February 1, 2008, and the per share closing price of one share of the Company’s common stock on that date was $10.05. The following graph represents $100 invested in our common stock at the $10.05 per share closing price on February 1, 2008. The graph illustrates the comparison of the cumulative total returns on the common stock of the Company with (a) the cumulative total return on stocks included in the NASDAQ Composite Index; and (b) the cumulative total return on stocks included in the SNL Mid-Atlantic Thrift Index.

There can be no assurance that our stock performance will continue in the future with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock performance.

The following table sets forth the range of high and low bid information for the Company’s common stock as reported on NASDAQ for the period beginning February 1, 2008. Quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions.


	2009				2008
	High		Low		High		Low
First Quarter	$	9.13	$	6.70	$	10.07	$	9.52
Second Quarter	$	9.00	$	6.60	$	10.06	$	9.36
Third Quarter	$	8.95	$	7.25	$	9.93	$	8.91
Fourth Quarter	$	7.28	$	5.79	$	9.25	$	7.71

(b) Not applicable


ITEM 6.		SELECTED FINANCIAL DATA

The following information is derived from the audited consolidated financial statements of Cape Bancorp. For additional information, reference is made to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of Cape Bancorp and related notes included elsewhere in this Annual Report.


	At December 31,
	2009		2008		2007		2006		2005
	(in thousands)
Selected Financial Condition Data:
Total assets	$	1,072,821	$	1,090,735	$	613,811	$	609,764	$	574,524
Cash and cash equivalents		13,513		22,501		15,631		17,492		29,974
Investment securities available for sale, at fair value		152,815		114,655		62,128		62,484		70,330
Investment securities held to maturity		—		48,825		45,140		38,731		25,634
Loans held for sale		398		—		350		766		—
Loans, net		789,473		783,869		459,936		446,378		410,032
Federal Home Loan Bank of New York stock, at cost		10,275		11,602		3,848		5,268		4,109
Bank owned life insurance		27,210		26,446		15,421		14,503		13,998
Deposits		736,587		711,130		465,648		435,829		432,385
Borrowings		203,981		234,484		65,000		99,000		73,530
Total stockholders’ equity		126,548		140,725		72,829		68,943		63,481


	Years ended December 31,
	2009			2008			2007		2006		2005
	(in thousands)
Selected Operating Data:
Interest income	$	54,533		$	58,127		$	36,629	$	34,357	$	28,564
Interest expense		19,028			24,253			17,146		14,875		9,691

Net interest income		35,505			33,874			19,483		19,482		18,873
Provision for loan losses		13,159			9,009			357		312		193

Net interest income after provision for loan losses		22,346			24,865			19,126		19,170		18,680
Non-interest income		932			(10,793	)		3,992		4,438		3,581
Non-interest expense		29,168			64,717			18,391		16,379		15,517

Income (loss) before income tax expense		(5,890	)		(50,645	)		4,727		7,229		6,744
Income tax expense (benefit)		12,011			(8,154	)		1,299		2,228		2,320

Net income (loss)	$	(17,901	)	$	(42,491	)	$	3,428	$	5,001	$	4,424


	At or for the years ended December 31,
	2009			2008			2007			2006			2005
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)		(1.64	%)		(3.86	%)		0.56	%		0.84	%		0.80	%
Return on equity (ratio of net income to average equity)		(12.89	%)		(24.47	%)		4.81	%		7.58	%		7.20	%
Earnings (loss) per share	$	(1.45	)	$	(3.49	)		n/a			n/a			n/a
Average interest rate spread (1)		3.27	%		3.14	%		3.02	%		3.14	%		3.48	%
Net interest margin (2)		3.54	%		3.48	%		3.50	%		3.56	%		3.77	%
Efficiency ratio (3)		69.19	%		167.31	%		78.34	%		68.47	%		69.11	%
Non-interest expense to average total assets		2.67	%		5.87	%		2.99	%		2.74	%		2.81	%
Average interest-earning assets to average interest-bearing liabilities		114.11	%		113.67	%		115.76	%		115.73	%		115.04	%

Asset Quality Ratios:
Non-performing assets to total assets		3.55	%		1.93	%		0.63	%		0.62	%		0.49	%
Non-performing loans to total loans		4.14	%		2.65	%		0.86	%		0.84	%		0.68	%
Allowance for loan losses to non-performing loans		40.04	%		53.39	%		102.85	%		105.20	%		134.52	%
Allowance for loan losses to total loans		1.66	%		1.41	%		0.89	%		0.89	%		0.91	%

Capital Ratios:
Total capital (to risk-weighted assets)		12.71	%		14.25	%		17.33	%		17.59	%		17.54	%
Tier I capital (to risk-weighted assets)		11.45	%		13.00	%		16.34	%		16.59	%		16.53	%
Tier I capial (to average assets)		9.37	%		9.87	%		11.11	%		11.00	%		10.89	%
Equity to assets	��	11.80	%		12.90	%		11.49	%		11.31	%		11.05	%

Other Data:
Number of full service offices		18			18			13			13			13
Full time equivalent employees		201			202			133			132			132


⁽¹⁾		Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.

⁽²⁾		Represents net interest income as a percent of average interest-earning assets.

⁽³⁾		Represents non-interest expense divided by the sum of net interest income and non-interest income. Recalculating the 2008 efficiency ratio excluding the Goodwill Impairment ($31.751 million) and CapeBank Charitable Foundation Contribution ($6.2 million) results in an efficiency ratio of 69.2%


ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Cape Bank was organized in 1923. Over the years, we have expanded primarily through internal growth. On January 31, 2008, we completed our mutual-to-stock conversion and initial public stock offering, and our acquisition of Boardwalk Bancorp and Boardwalk Bank. At December 31, 2009, we had total assets of $1.073 billion. The merger of Cape Savings Bank (now Cape Bank) and Boardwalk Bancorp on January 31, 2008 created the largest community bank headquartered in Atlantic and Cape May Counties, with a total of 18 branches providing complimentary branch coverage. The merger resulted in a well-capitalized community oriented bank with a significant commercial loan presence and an experienced executive management team. For the three years prior to the merger both banks had experienced strong asset quality and financial performance. The severe economic recession has affected the merged financial institution as a whole, as well as the loan portfolios of each of the constituent banks to the merger.

Our principal business is acquiring deposits from individuals and businesses in the communities surrounding our offices and using these deposits to fund loans and other investments. We also offer personal and business checking accounts, commercial mortgage loans, residential mortgage loans, construction loans, home equity loans and lines of credit and other types of commercial and consumer loans. Our customers consist primarily of individuals and small and mid-sized businesses. At December 31, 2009, our retail market area primarily included the area surrounding our 18 offices located in Cape May and Atlantic Counties, New Jersey.

During 2010 Cape Bank will emphasize the following:

Managing our credit underwriting and administration through the economic recovery.

Managing non-performing assets to performing status or disposal.

Managing net interest income in a potentially rising rate environment.

Managing our credit underwriting and administration through the economic recovery:

For 2010, we anticipate a gradual decrease in the amount of problem assets based on trends beginning during the fourth quarter of 2009. This improvement is due, in part, to our disposing of assets collateralizing loans that have gone through foreclosure. During this same period, signs of further credit deterioration have also been decreasing.

Based on our experience during the credit crisis and economic downturn, we have taken steps to improve our credit underwriting and administration. To this end, we have created the executive officer position of Chief Credit Officer and we have hired a person with 35 years of experience in this capacity to fill this position. The Chief Credit Officer will focus on enhancing our credit risk rating system and loan review process. In the meantime, the Bank has restricted extensions of credit to both the hospitality and restaurant industries. The current loan portfolio has high concentrations in both segments which have experienced considerable weakness during the economic downturn.

Loan demand within our market area is expected to remain moderate during 2010, and there are indications that economic deterioration may have leveled off or slightly improved since the fourth quarter of 2009. Home sales prices declined in our market area from 2008 to 2009, but sales prices and volume have begun to show improvement during the third quarter of 2009. Additionally we have been able to sell some of our other real estate owned properties, which may indicate that potential purchasers believe that market values are not likely to decrease further.

Managing non-performing assets to performing status or disposal:

Our non-performing assets began to increase in 2007, and continued to increase throughout 2008 and 2009. The deterioration in our local real estate market began during the first quarter of 2008 and continued to decline through 2009. Residential building permits for Atlantic and Cape May Counties have decreased from $588.5 million in 2006 to $250.2 million in 2008 (2009 housing permit data is not yet available). However, housing data for our market area indicates that sales prices increased 1.1% in the third quarter of 2009 and sales volume exceeded third quarter of 2008 sales by 13.9% and 16.7% in Atlantic and Cape May Counties, respectively. Unemployment has also affected non-performing assets and has increased during each of the past three years from 6.1% to 13.0% in Atlantic County and from 9.0% to 14.6% in Cape May County. These negative economic trends have contributed to a significant increase in non-performing assets from $3.95 million at December 31, 2007 to $43.8 million at December 31, 2009. This increase was affected by the sustained national recession and by the significant increase in our total loans portfolio during the period. The ratio of our allowance for loan losses to non-performing loans decreased from 102.85% in 2007 to 40.03% in 2009; net charge offs to average loans increased from 0.06% in 2007 to 1.37% in 2009; non-accrual/impaired loans increased from $4.0 million in 2007 to $33.2 million in 2009; and delinquent loans increased from $15.7 million at December 31, 2007 to $34.4 million at December 31, 2009. Delinquent loans also increased in number during this same time period.

Management has given significant attention to these assets during the past year, and has developed processes to actively manage delinquencies from their inception at 15 days delinquent to their resolution, either through charge-off or foreclosure or working with borrowers to bring their loans current. Our approach is to identify impaired loans, determine the loss amount if any, and recognize the appropriate loss at that time.

Reducing the level of non-performing assets during the upcoming year will improve our results of operations by converting non earning assets to earning assets and reducing the expense of managing non-performing assets, which will benefit our interest income, net interest margin and net income. While loan demand is expected to remain weak during 2010, there is some evidence that continued economic deterioration may have leveled off or slightly improved during the fourth quarter of 2009 through the beginning of 2010. Our level of non-performing assets has stabilized and we have been able to sell other real estate owned. Moreover, home sales prices and volume have shown improvement since the third quarter of 2009.

Managing net interest income in a potentially rising rate environment:

2010 Outlook

The severe economic downturn, as well as several non-recurring events, has adversely affected Cape Bank’s earnings during the past two years. During 2009 we established a deferred tax asset valuation allowance of $12.6 million. In 2008 we had merger related expenses associated with the acquisition of Boardwalk Bank of $785,000, the expense of establishing the Cape Charitable Foundation of $6.3 million and a goodwill impairment charge of $31.8 million. Earnings have also been negatively affected by higher loan delinquencies, particularly in the commercial loan portfolio, and market deterioration of trust preferred securities primarily issued by bank holding companies. During 2009 we established a loan loss provision of $13.2 million and we had an other-than-temporary-impairment (OTTI) charge against trust preferred securities of $5.1 million. In 2008 we established a loan loss provision of $9.0 million and we had an other-than-temporary-impairment (OTTI) charge against trust preferred securities of $15.6 million. However, our core earnings remain strong as we had a net interest margin of 3.54% for 2009 and 3.42% for 2008, and an efficiency ratio (excluding extraordinary items) less than 70% during 2009 and 2008.

Capital remains strong at Cape Bank and there is no expectation of raising additional capital through government programs or by any other means during 2010.

Our market area has been significantly affected by the severe economic recession which has affected unemployment and real estate values. Unemployment in Atlantic and Cape May County was 13.0% and 14.6% respectively as of November 2009. Home sales prices have declined in both counties from 2008 to 2009, although sales prices and volume began to show improvement during the third quarter of 2009.

During 2010, Cape Bank will be focusing on core banking practices with an emphasis on managing non-performing assets. We intend to adhere to our existing prudent loan underwriting practices, which we believe are appropriate in the current market. Trust preferred securities will not be purchased without board of directors approval. The recognition of goodwill impairment is dependent on many variables, some of which are not directly controllable by Cape Bank. However, with expected decreases in non-performing assets and continued improvement in our net interest margin and efficiency ratio, additional goodwill impairment is not probable.

Income.Our primary source of income is net interest income. Net interest income is the difference between interest income (which is the income that we earn on our loans and investments) and interest expense (which is the interest that we pay on our deposits and borrowings). Changes in levels of market interest rates affect our net interest income. During the past two years the Bank’s yield curve has steepened as rates tied to the prime rate have decreased as the Federal Reserve has decreased the targeted Fed Funds Rate from a high of 5.25% in 2007 to its current low of 0.25%. Mid and long-term rates have remained in a tighter range than short-term rates during the past two years. As the yield curve steepened during the past two years, our net interest margin increased; although we incurred a loss in both 2008 and 2009. This was primarily the result of expenses related to OTTI, goodwill impairment, provision for loan losses and a deferred tax asset valuation allowance. These items and others are discussed in more detail within the Management Discussion and Analysis section of this report.

The Bank’s net interest margin has trended slightly upward from 3.42% in 2007 to 3.48% in 2008, and to 3.54% in 2009. This improvement is the result of the yield on our earning assets declining 100 basis points from 2007 to 2009 and our cost of funds declining 133 basis points during the same time period. During the period from 2007 to 2009 our yield curve steepened as a result of short-term rates dropping consistent with the decline in the Fed Funds rate. Commercial loans tied to the prime rate were affected most significantly during this period of declining short-term interest rates. The yield on our adjustable rate residential mortgage loans decreased by approximately 125 basis points. The cost of funds during the same three year period dropped significantly in conjunction with the decrease in the Fed Funds Rate. Borrowing rates at the FHLB of NY declined during this time and our average FHLB borrowing costs decreased from 4.76% in 2007 to 3.47% in 2009. In addition, certificates of deposit costs decreased from 4.56% in 2007 to 2.66% in 2009.

The historically low interest rate environment, which has been significantly influenced by the target Fed Funds rate of 0.0% to 0.25% set by the Federal Reserve in the fourth quarter of 2008, has benefitted the Bank’s net interest income as our cost of funds decreased more than the decrease in the yield on our assets during the twelve month period ended December 31, 2009. We expect to continue to benefit from the downward repricing of our liabilities during 2010, and we expect our net interest margin to improve in 2010 as the downward repricing of our liabilities more than offsets a downward repricing of assets. However, the full positive impact of the variable yield curve has been mitigated by the significant increase in our non-performing loans and assets, which has reduced our net interest income. We are managing loan repricing for adjustable rate lines of credit by establishing a floor of 6% on most renewals. This initiative began in the second quarter of 2009 and is expected to continue through the second quarter of 2010.

The anticipated increase in market interest rates, driven by the target Fed Funds rate set by the Federal Reserve, would cause compression in the Bank’s net interest margin. The magnitude of this potential change is discussed in more detail in the “Management of Market Risk” herein.

A secondary source of income is non-interest income, which is revenue that we receive from providing other products and services. Most of our non-interest income consists of service charges (primarily service charges on deposit accounts). We also recognize non-interest income/loss from the sale or other-than-temporary-impairment of loans and securities.

Allowance for Loan Losses.The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. In accordance with FAS 5, we establish provisions for loan losses which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider, among other things, past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, external factors such as competition and regulatory, adverse situations that may affect a borrower’s ability to repay a loan and the levels of delinquent loans.

Generally, loans are placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless the loan is considered well-secured and in the process of collection. Loans are also placed on non-accrual status when they are less than 90 days delinquent, if collection of principal or interest in full is in doubt. This determination is normally the result of the review of the borrower’s financial statements or other information that is obtained by the Bank.

All loans that are on non-accrual status are reviewed by management monthly to determine if a specific reserve or charge-off is appropriate. At this point in the delinquency collection efforts the primary consideration is collateral value. When the Bank has a current appraisal, generally less than six months old, and management agrees that the property has not deteriorated in value since the appraisal, then management will analyze the loan in accordance with FASB ASC Topic 310 Receivables. When a current appraisal is not available, the Bank will request one. Upon receipt of the appraisal, we will review the loan in accordance with FASB ASC Topic 310 Receivables. Prior to receipt of an appraisal, management will consider, based on its knowledge of the market and other available information pertinent to the particular loan being reviewed, allocating a specific reserve for that loan. Loans are charged off partially or in full based on upon the results of a completed FASB ASC Topic 310 Receivables analysis.

The amount of the allowance is based on management’s judgment of probable losses, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses and make provisions for loan losses on a quarterly basis.

Expenses.The non-interest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy expenses, depreciation, amortization and maintenance expenses and other miscellaneous expenses, such as advertising, insurance, professional services and printing and supplies expenses.

Our largest non-interest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. As a result of the conversion and stock offering, we will recognize additional annual employee compensation expenses from our employee stock ownership plan, our Equity Incentive Plan and any additional stock-based benefit plans that we may adopt in the future.

In 2007, the FDIC began assessing most insured banks and savings banks deposit insurance premiums ranging from five cents to seven cents for every $100 of deposits. Assessment credits have been provided to institutions that paid high premiums in the past. According to information provided by the FDIC, in 2008 Cape Bank received an assessment credit of approximately $390,000. The amount of the credit that offset our deposit insurance premium expense in 2008 was $213,500 which represented the remaining balance of the credit. The FDIC imposed a special 5 basis point assessment on total assets as of June 30, 2009, which was paid on September 30, 2009 and totaled $499,000.

Anticipated Increase in Non-Interest Expense

As a result of our public offering in 2008, our non-interest expense increased because of the increased costs associated with operating as a public company. These additional expenses consist primarily of accounting and legal fees, expenses of shareholder communications and meetings, and increased compensation expenses associated with our employee stock ownership plan (“ESOP”) and any additional stock-based benefit plans that are approved by our shareholders. On August 25, 2008, our shareholders approved the Cape Bancorp, Inc. 2008 Equity Incentive Plan. The Equity Incentive Plan authorizes up to 1,863,892 shares of Company common stock pursuant to grants of restricted stock awards, incentive stock options, non-qualified stock options and stock appreciation rights; provided, however, that no more than 1,331,352 shares may be issued or delivered in the aggregate pursuant to the exercise of stock options or stock appreciation rights, and no more than 532,540 shares may be issued or delivered pursuant to restricted stock awards. No awards of stock or option grants have been made under the Equity Incentive Plan.

Based on our sale of 7,820,000 shares of our common stock in the stock offering:

•

The ESOP completed its purchase of 1,065,082 shares of common stock on February 26, 2008 with a $10.65 million loan that is expected to be repaid over 25 years, resulting in an average annual pre-tax expense of approximately $425,000 (assuming that the common stock maintains a value of $10.00 per share).

•

The 2008 Equity Incentive Plan authorizes the grants of options to purchase up to 10% of the shares issued in the offering, or 1,331,352 shares, to eligible participants, which would result in compensation expense over the vesting period of the options. Assuming the market price of the common stock is $10.00 per share; the options are granted with an exercise price of $10.00 per share; the dividend yield on the stock is 0%; the expected option life is ten years; the risk free interest rate is 5.03% (based on the seven-year Treasury rate) and the volatility rate on the shares of common stock is 11.31% (based on an index of publicly traded thrift holding companies), the estimated grant-date fair value of the options (and corresponding pre-tax expense to us) using a Black-Scholes option pricing analysis is $4.05 per option granted. Assuming this value is amortized over the five-year vesting period, the corresponding annual pre-tax expense associated with the stock options is approximately $1.5 million.

•

The 2008 Equity Incentive Plan authorizes the award of shares of common stock equal to 4% of the shares issued in the offering (including shares issued to The CapeBank Charitable Foundation and shares issued in the merger), or 532,540 shares, to eligible participants, which would be expensed as the awards vest. Assuming that all shares are awarded under the 2008 Equity Incentive Plan at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with shares awarded under the 2008 Equity Incentive Plan is approximately $1.1 million.

The actual expense that will be recorded for the ESOP will be determined by the market value of our common stock as shares are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term. Accordingly, any increases in our stock price above $10.00 per share and any accelerated repayment of the loan will increase the annual ESOP expense. Similarly, any decrease in our stock price would decrease the annual ESOP expense. Further, the actual expense of the stock awards under the 2008 Equity Incentive Plan will be determined by the fair market value of the common stock on the grant date, which may be greater or less than $10.00 per share, and the actual expense of stock options under the 2008 Equity Incentive Plan will be based on the grant-date fair value of the options, which will be affected by a number of factors, including the market value of our common stock, the term and vesting period of the stock options, our dividend yield and other valuation assumptions contained in the option pricing model that we ultimately use.

Critical Accounting Policies

In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States. Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses.We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.

In evaluating the allowance for loan losses, management considers historical loss factors, the mix of the loan portfolio (types of loans and amounts), geographic and industry concentrations, current national and local economic conditions and other factors related to the collectability of the loan portfolio, including underlying collateral values and estimated future cash flows. All of these estimates are susceptible to significant change. Groups of homogenous loans are evaluated in the aggregate under FASB ASC Topic No. 450 Contingencies, using historical loss factors adjusted for economic conditions and other environmental factors. Other environmental factors include trends in delinquencies and classified loans, loan concentrations by loan category and by property type, seasonality of the portfolio, internal and external analysis of credit quality, and single and total credit exposure. Certain loans that indicate underlying credit or collateral concerns may be evaluated individually for impairment in accordance with FASB ASC Topic No. 310 Receivables. If a loan is impaired and repayment is expected solely from the collateral, the difference between the outstanding balance and the value of the collateral will be charged off. For potentially impaired loans where the source of repayment may include other sources of repayment, the evaluation may factor these potential sources of repayment and indicate the need for a specific reserve for any potential shortfall. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as projected events change.

Management reviews the level of the allowance monthly. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the New Jersey Department of Banking and Insurance, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.See Note 2 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.

Securities Impairment.The Company’s investment portfolio includes 24 securities in pooled trust preferred collateralized debt obligations, 16 of which have been principally issued by bank holding companies, and 8 of which have been principally issued by insurance companies. The portfolio also includes 3 private label (non-agency) collateralized mortgage obligations. These investments may pose a higher risk of future impairment charges by the Company as a result of the current downturn in the U.S. economy and its potential negative effect on the future performance of the bank issuers and underlying mortgage loan collateral. Through December 31, 2009 OTTI has been recorded for 15 of the Company’s CDO securities issued by bank holding companies. These write-downs were a direct result of the impact that the credit crisis has had on the underlying collateral of the securities. Consequently many bank issuers have failed causing them to default on their security obligations while recent stress tests and potential recommendations by the U.S. Government and the banking regulators have resulted in some bank trust preferred issuers electing to defer future payments of interest on such securities. A continuation of issuer defaults and elections to defer payments could adversely affect valuations and result in future impairment charges.

Approximately $6.0 million of the collateralized mortgage obligations classified as available for sale were non-agency securities and had net unrealized losses of $775,000. Of the 3 private label CMO securities, one security represents almost the entire unrealized loss amount. While we have determined these unrealized losses to be temporary, a continued downturn in the financial markets could cause us to reassess our determination. Deteriorating financial conditions may cause delinquencies in the underlying mortgage loan collateral to deteriorate such that we no longer receive monthly payments on our securities, thereby increasing the likelihood of OTTI.

Income Taxes. The Company is subject to the income and other tax laws of the United States and the State of New Jersey. These laws are complex and are subject to different interpretations by the taxpayer and the various taxing authorities. In determining the provisions for income and other taxes, management must make judgments and estimates about the application of these inherently complex laws, related regulations and case law. In the process of preparing the Company provision and tax returns, management attempts to make reasonable interpretations of applicable tax laws. These interpretations are subject to challenge by the taxing authorities upon audit or to reinterpretation based on management’s ongoing assessment of facts and evolving case law.

The Company and its subsidiaries file a consolidated federal income tax return and separate entity state income tax returns. The provision for federal and state income taxes is based on income and expenses, as reported in the consolidated financial statements, rather than amounts reported on the Company’s federal and state income tax returns. When income and expenses are recognized in different periods for tax purposes than for book purposes, applicable deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 as income or expense in the period that includes the enactment date. Deferred federal and state tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2009, a valuation allowance in the amount of approximately $16.0 million had been established against the Company’s deferred tax assets.

On a quarterly basis, management assesses the reasonableness of its effective federal and state tax rate based upon its current best estimate of net income and the applicable taxes expected for the full year.

Business Strategy

Our business strategy is to operate and grow a profitable community-oriented financial institution. We plan to achieve this by:

	•		pursuing new opportunities to increase commercial lending in our primary market area and expanding our existing commercial loan relationships;

	•		continuing to use prudent underwriting standards to maintain the high quality of our loan portfolio;

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continuing to originate residential mortgage loans in our primary market area;

•

building profitable business and consumer relationships by providing superior customer service with an emphasis on increasing transaction deposit accounts; and

•

increasing our non-interest income, through a broader range of products and services.

Pursuing new opportunities to increase commercial lending in our primary market area and expanding our existing commercial loan relationships.We have a diversified loan portfolio which includes commercial real estate and commercial business loans. We have increased this sector of our loan portfolio over the last five years as opportunities have allowed. We have targeted commercial lending opportunities within our market for several reasons, including:

(1)

our primary market area has historically experienced sustained commercial development driven by the gaming industry and the seashore resort communities;

(2)

we believe commercial relationships bring value to both the asset and liability side of our balance sheet via loans and deposits;

(3)

we have attracted and retained local commercial loan officers who have a sound understanding of our market area and long-standing relationships with borrowers; and

(4)

commercial lending provides more flexibility than residential lending in structuring the terms of the loan, including yield and maturity.

While commercial lending has inherently greater risks than residential lending, we minimize this risk through prudent underwriting, requiring significant collateral, monitoring the concentration of commercial credits, annual reviews of customers’ financial statements and maintaining ongoing contacts with borrowers. We will continue to focus on commercial lending during 2010 as the economic recovery continues. During 2009 our commercial loan portfolio decreased as a percentage of the total loan portfolio, however, we intend to focus on commercial lending in 2010 for several reasons:

(1)

the yields available on commercial real estate loans are generally greater than those available on single family residential mortgage loans and commercial loans generate more significant banking relationships than single family mortgage loans;

(2)

our credit concentrations are well dispersed, managed through monitoring, and limited in exposure to any one sector; and

(3)

the key economic forces in our market area, casinos and the seashore resort communities, are sufficiently diverse to limit economic decline across all sectors of our commercial loan portfolio.

At December 31, 2009, we had $441.3 million and $62.7 million of commercial real estate loans (including commercial construction loans) and commercial business loans, representing 55.0% and 7.8% of total loans, respectively. At December 31, 2008, we had $466.0 million and $54.3 million of commercial real estate loans (including commercial construction loans), and commercial business loans represented 58.6% and 6.8% of total loans, respectively. Commercial loans help diversify our loan portfolio and help improve the interest rate sensitivity of our assets. Additionally, the merger with Boardwalk Bancorp significantly increased our commercial loan portfolio. Our maximum loans-to-one borrower limit was $16.4 million at December 31, 2009, although we do not expect to have any lending relationship that would reach this limit.

Use prudent underwriting standards to maintain a high quality loan portfolio. We believe that maintaining high asset quality is a key to long-term financial success. We have sought to grow and diversify our loan portfolio while actively managing non-performing assets. We believe we use prudent underwriting standards and we diligently monitor collection efforts. However, the current severe economic recession has adversely affected many of our borrower customers and has increased our delinquent and non-performing loans. Our non-performing loans increased to 4.14% of total loans at December 31, 2009 from 2.65% of total loans at December 31, 2008. Although we intend to continue our efforts to originate commercial real estate and commercial business loans, we intend to maintain our philosophy of prudent underwriting of such loans.

Continuing to originate residential mortgage loans in our primary market area.We will continue to provide products and services that meet the needs of our residential lending customers in our primary market area. We offer both fixed rate and adjustable rate loans, with a variety of terms to meet our customers’ needs.

Building profitable business and consumer relationships by providing superior customer service with an emphasis on increasing transaction deposit accounts.We are a full-service financial services company offering our customers a broad range of loan and deposit products. We will continue our efforts to increase commercial loan originations and we anticipate serving a greater percentage of the small businesses in our market area. We offer a broad range of services, including internet banking and remote deposit capture, which enables our customers to access banking services through non-traditional delivery mechanisms.

Increasing our non-interest income through a broader range of products and services.Our merger with Boardwalk Bancorp has allowed us to expand our commercial initiatives for both loans and deposits.

Our goal is to be recognized as the leading provider of high quality banking services to small and mid-sized businesses and professionals located in our primary market area of Atlantic and Cape May Counties, New Jersey. We have pursued this objective by assembling a team of bankers who have many years of experience in our market. We believe that the primary transaction account is the key to a strong relationship between a bank and its customers. For consumers, this is the household checking account which is used to pay bills. For businesses, it is one or more operating accounts and related cash management services. The primary transaction account provides us with a low-cost source of funds and enables us to build relationships with our customers. We intend to focus our resources on growing profitable business and consumer relationships by emphasizing the primary transaction account and offering high quality service to support these accounts. The primary transaction account is linked to automated payments in the form of direct debits and direct deposits and, coupled with superior customer service, tends to create the foundation for a long-term relationship between a bank and its customers.

Comparison of Financial Condition at December 31, 2009 and December 31, 2008

The Company’s total assets decreased by $17.9 million, or 1.6%, to $1.073 billion at December 31, 2009 from $1.091 billion at December 31, 2008.

Cash and cash equivalents decreased $9.0 million, or 39.9%, to $13.5 million at December 31, 2009 from $22.5 million at December 31, 2008.

Interest-bearing time deposits increased to $7.4 million at December 30, 2009 from $5.5 million at December 31, 2008, an increase of $1.9 million or 34.6%. The Company invests in time deposits of other banks generally for terms of one year and not to exceed $250,000, which is the amount currently insured by the Federal Deposit Insurance Corporation.

Total loans increased $7.7 million, or 1.0%, to $802.8 million at December 31, 2009 from $795.1 million at December 31, 2008. Net loans increased by $5.6 million, net of an increase in allowance for loan losses of $2.1 million. Delinquent loans increased $1.1 million to $34.4 million or 4.3% of total loans at December 31, 2009 from $33.3 million, or 4.2% of total loans, at December 31, 2008. Total delinquent loans by portfolio at December 31, 2009 were $22.3 million of commercial mortgages, $6.5 million of residential mortgages, $1.5 million of construction loans, $3.2 million of commercial business loans, $938,000 of home equity loans and $3,000 of other consumer loans. Delinquent loan balances by number of days delinquent were: 31 to 59 days — $3.2 million; 60 to 89 days — $2.5 million; and 90 days and greater — $28.7 million.

At December 31, 2009, the Company had $33.2 million in non-performing loans, or 4.14% of total loans, compared to $21.1 million, or 2.65% of total loans, at December 31, 2008. At December 31, 2009, non-performing loans by loan portfolio category were as follows: $25.1 million of commercial mortgage loans; $3.2 million of residential mortgage loans; $1.3 million of construction loans; $3.1 million of commercial business loans; and $482,000 of home equity loans.

At December 31, 2009, commercial non-performing loans had collateral type concentrations of $3.5 million (13 loans or 12%) were secured by residential, duplex and multi-family properties, $3.6 million (9 loans or 12%) were secured by land and building lots, $2.2 million (8 loans or 7%) were secured by retail stores, $4.6 million (10 loans or 15%) were secured by restaurant properties, $2.0 million (2 loans or 7%) were secured by marina properties, $1.8 million (2 loans or 6%) were secured by auto dealerships, $2.9 million ( 6 loans or 10%) were secured by B&B and hotels and $8.9 million (21 loans or 28%) were secured by commercial buildings and equipment. The three largest relationships in this category of non-performing loans are $4.4 million, $2.8 million, and $2.0 million.

We believe we have appropriately charged-off or established adequate loss reserves on problem loans that we have identified. For 2010, we anticipate a gradual decrease in the amount of problem assets based on trends begun during the fourth quarter of 2009. This improvement is due, in part, to our disposing of assets collateralizing loans that have gone through foreclosure. During this same period, signs of further credit deterioration have also been decreasing. We are aggressively managing all loan relationships, and where necessary, we will continue to apply our loan work-out experience to protect our collateral position and actively negotiate with mortgagors to resolve these non-performing loans.

Total investment securities decreased by $10.7 million, or 6.5%, to $152.8 million at December 31, 2009 from $163.5 million at December 31, 2008. At December 31, 2009, all of the Company’s investment securities were classified as available-for-sale (AFS) and coincides with the December 31, 2009 effective date of reclassifying the held-to-maturity (HTM) portion of its portfolio to AFS. HTM securities with a market value of $44.5 million and an amortized cost of $43.0 million were reclassified to AFS. This change in classification provides flexibility and enables the Company to respond more effectively to changes in market value of the investment portfolio as well as enhances its sources of liquidity. The decline in the portfolio is primarily a result of selling FHLMC and FNMA adjustable rate MBS securities with a carrying value of $31.7 million partially offset by purchases of callable U.S. Government and agency obligations and fixed rate corporate bonds both of which have terms to maturity ranging from two to three years. These investment security transactions allowed the Company to harvest gains of $1.2 million in the short-term while shortening the duration of the portfolio and positioning it to capitalize in anticipation of rising interest rates. The Company also experienced additional OTTI related to its CDO portfolio during the year. This sector of the portfolio has been adversely impacted by the continued downturn in the economy which has caused many bank issuers to fail and therefore default on their obligations while others have elected to defer future payments of interest on such securities. At December 31, 2009, these securities had a cost basis of $13.0 million and a fair market value of $1.5 million. The Company also recorded a $5.1 million charge to earnings during the year related to the credit loss portion of impairment.

Total deposits increased by $25.5 million, or 3.6%, to $736.6 million at December 31, 2009, from $711.1 million at December 31, 2008.

Certificates of deposit decreased $19.3 million, or 5.4%, to $336.9 million at December 31, 2009 from $356.2 million at December 31, 2008, and NOW and money market accounts increased $45.7 million, or 21.5%, to $257.9 million at December 31, 2009 from $212.2 million at December 31, 2008. Non-interest bearing deposits decreased $893,000, or 1.4%, to $62.4 million at December 31, 2009 from $63.3 million at December 31, 2008. Savings deposits decreased $125,000 or 0.2% to $79.4 million at December 31, 2009 from $79.5 million at December 31, 2008.

Total borrowings decreased $30.5 million, or 13.0%, to $204.0 million at December 31, 2009 from $234.5 million at December 31, 2008. At December 31, 2009, our borrowings to assets ratio decreased to 19.0% from 21.5% at December 31, 2008. Borrowings to total liabilities decreased to 21.6% at December 31, 2009 from 24.7% at December 31, 2008.

Stockholders’ equity decreased by $14.2 million, or 10.1%, to $126.5 million at December 31, 2009, from $140.7 million at December 31, 2008. The decrease in equity is primarily attributable to the $17.9 million net loss partially offset by a decrease in accumulated other comprehensive loss, net of tax of $3.4 million. This change excludes the effect of the reclassification between retained earnings and accumulated other comprehensive income (loss), pursuant to the FASB guidance regarding the recognition and presentation of other-than-temporary impairment. At December 31, 2009, stockholders’ equity totaled $126.5 million, or 11.8% of total assets, and tangible equity totaled $103.4 million or 9.6% of total assets.

Comparison of Operating Results for the Years Ended December 31, 2009 and 2008

General.The Company recorded a net loss of $17.9 million for the year ended December 31, 2009 compared to a net loss of $42.5 million for the year ended December 31, 2008. The 2009 loss primarily resulted from a $12.0 million tax expense related to the establishment of a deferred tax asset valuation allowance, a $13.2 million provision for loan losses, and an other-than-temporary impairment charge of $5.1 million on our investment securities. The loss for 2008 was primarily the result of a non-cash goodwill impairment charge of $31.8 million, an other-than-temporary impairment charge of $15.6 million on our investment securities, a $9.0 provision for loan losses, our contribution of $3.8 million to The CapeBank Charitable Foundation, net of taxes, and approximately $785,000 of expenses, net of taxes, that resulted from the acquisition of Boardwalk Bancorp and name changes. These expenses were partially offset by a tax benefit of $8.2 million and increased net interest income resulting from the acquisition of Boardwalk Bancorp.

Interest Income.Interest income decreased $3.6 million, or 6.2%, to $54.5 million for the year ended December 31, 2009, from $58.1 million for the year ended December 31, 2008. The decrease for the year resulted primarily from a $1.9 million, or 38.5%, decrease in interest income on taxable investments and a $1.4 million, or 3.0%, decrease on interest income on loans. Average loans for the year ended December 31, 2009, increased $38.1 million, or 5.0% to $806.6 million from $768.5 million for the year ended December 31, 2008. The average yield on the loan portfolio decreased 48 basis points to 5.77% for the year ended December 31, 2009 from 6.25% for the year ended December 31, 2008, resulting from a decline in short-term interest rates, higher levels of non-performing loans, indexed loans repricing at lower rates, and competition for new loan originations in a lower interest rate environment.

The average balance of the investment portfolio decreased $9.3 million, or 4.8%, to $184.6 million for the year ended December 31, 2009 from $193.9 million for the year ended December 31, 2008. The average yield on investments decreased 89 basis points to 4.19% for the year ended December 31, 2009 from 5.08% for the year ended December 31, 2008. The decrease in average balance is primarily a result of the sale of adjustable rate agency MBS securities, which had a carrying value of $31.7 million, during the second and third quarters of 2009. The decline in the average yield reflects a lower interest rate environment which negatively affected both the repricing of our adjustable rate MBS portfolio and U.S. Government and agency obligations where called securities were replaced at substantially lower coupon rates. Additionally, interest income includes $333,000 in charged off interest receivables related to 6 CDO securities which were fully written off.

Interest Expense.Interest expense decreased $5.2 million, or 21.5%, to $19.0 million for the year ended December 31, 2009, from $24.2 million for the year ended December 31, 2008. The decrease in interest expense resulted from the bank lowering interest rates on all interest-bearing deposit products in response to the decline in short-term interest rates that occurred at the end of 2008.

Interest expense on NOW (interest-bearing demand accounts) and money market accounts decreased $2.0 million, or 47.8%, to $2.1 million for the year ended December 31, 2009, from $4.1 million for the year ended December 31, 2008, and interest expense on certificates of deposit decreased $2.7 million, or 21.3%, to $9.9 million for the year ended December 31, 2009, from $12.6 million for the year ended December 31, 2008. The average rate paid on NOW and money market accounts decreased 92 basis points to 0.89% for the year ended December 31, 2009, from 1.81% for the year ended December 31, 2008. The average balance of NOW and money market accounts increased $12.4 million, or 5.5%, to $237.0 million for the year ended December 31, 2009, from $224.6 million for the year ended December 31, 2008. The average rate paid on certificates of deposit decreased 89 basis points to 2.66% for the year ended December 31, 2009, from 3.55% for the year ended December 31, 2008, while the average balance of certificates of deposit increased $18.2 million, or 5.1% to $371.7 million for the year ended December 31, 2009, from $353.5 million for the year ended December 31, 2008. Interest expense on savings accounts decreased $677,000 to $385,000 for the year ended December 31, 2009, from $1.1 million for the year ended December 31, 2008. The average rate paid on savings deposits decreased 81 basis points to 0.48% for the year ended December 31, 2009, from 1.29% for the year ended December 31, 2008, while the average balance of savings accounts decreased $2.1 million, or 2.5% to $80.2 million for the year ended December 31, 2009, from $82.3 million for the year ended December 31, 2008. The average balance of NOW and money market accounts includes indexed priced municipal accounts for the year ended December 31, 2009, with an average balance of $24.4 million and an average rate of 0.43%, compared to an average balance of $20.3 million and an average rate of 1.94% for the year ended December 31, 2008.

Interest expense on borrowings (primarily Federal Home Loan Bank of New York advances) increased $68,000, or 1.0%, to $6.638 million for the year ended December 31, 2009 from $6.657 million for the year ended December 31, 2008. The average balance of borrowings declined $1.9 million, or 1.0%, to $191.3 million for the year ended December 31, 2009, from $193.2 million for the year ended December 31, 2008. The average rate paid on borrowings increased 7 basis points to 3.47% for the year ended December 31, 2009, from 3.40% for the year ended December 31, 2008.

Net Interest Income.Net interest income increased $1.6 million, or 4.8%, to $35.5 million for the year ended December 31, 2009, from $33.9 million for the year ended December 31, 2008. Our net interest margin increased by 6 basis points to 3.54% for the year ended December 31, 2009, from 3.48% for the year ended December 31, 2008. The increase in net interest income resulted from having more rate sensitive liabilities tied to short-term interest rates reprice to lower rates than rate sensitive assets. In particular, significant interest expense savings was realized from all deposit products due to pricing strategies implemented during the year. The ratio of average interest earning assets to average interest bearing liabilities increased to 114.1% during the year ended December 31, 2009, from 113.9% for the year ended December 31, 2008.

Provision for Loan Losses.In accordance with FASB ASC Topic No. 450 Contingencies, we establish provisions for loan losses which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider, among other things, past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, external factors such as competition and regulatory, adverse situations that may affect a borrower’s ability to repay a loan and the levels of delinquent loans.

Generally, loans are placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless the loan is considered well secured and in the process of collection. Loans are also placed on non-accrual status when they are less than 90 days delinquent, if collection of principal or interest in full is in doubt. This determination is normally the result of the review of the borrower’s financial statements or other information that is obtained by the Bank.

All loans that are on non-accrual status are reviewed by management monthly to determine if a specific reserve or charge-off is appropriate. At this point in the delinquency collection efforts, the primary consideration is collateral value. When the Bank has a current appraisal, generally less than six months old, and management agrees that the property has not deteriorated in value since the appraisal, then management will analyze the loan in accordance with FASB ASC Topic No. 310 Receivables. When a current appraisal is not available, the Bank will request one. Upon receipt of the appraisal, we will review the loan in accordance with FASB ASC Topic No. 310 Receivables. Prior to receipt of an appraisal, management will consider, based on its knowledge of the market and other available information pertinent to the particular loan being reviewed, allocating a specific reserve for that loan. Loans are charged off partially or in full based on upon the results of a completed FASB ASC Topic No. 310 Receivables analysis. We also perform a FASB ASC Topic No. 310 Receivables analysis on loans that are not collateralized by real estate.

We recorded a provision for loan losses of $13.2 million for the year ended December 31, 2009 compared to $9.0 million for the year ended December 31, 2008. The increase in the provision for losses over the prior year reflects the continued credit deterioration in our market area. The ratio of the allowance for loan losses to non-performing loans decreased to 40.0% at December 31, 2009, from 53.4% at December 31, 2008. This ratio is negatively affected when a loan is charged-off. For the year ended December 31, 2009, charge-offs were $11.7 million compared to $5.7 million for the year ended December 31, 2008, resulting primarily from increased charge-offs on real estate-related loans. Included in the 2009 charge-offs of $11.7 million were partial charge-offs totaling $6.5 million. The amount of non-performing loans for which the full loss has been charged-off to total loans is 0.0063%. The amount of non-performing loans for which the full loss has been charged-off to total non-performing loans is 13.2%. This 13.2% represents the charge-off rate for non-performing loans for which the full loss has been charged-off. The coverage ratio is already net of loan charge-offs. Loan loss recoveries for the year ended December 31, 2009 were $568,000 compared to $27,000 for the year ended December 31, 2008.

Our allowance for loans losses increased by $2.1 million, or 18.8%, to $13.3 million at December 31, 2009, from $11.2 million at December 31, 2008. The ratio of our allowance for loan loss to total loans increased to 1.66% at December 31, 2008, from 1.41% at December 31, 2008.

Non-Interest Income.Non-interest income increased $11.7 million to $932,000 for the year ended December 31, 2009, from $(10.8) million for the year ended December 31, 2008. The increase resulted from the Bank recognizing an other-than-temporary impairment charge on investment securities totaling $5.1 million for the year ended December 31, 2009 compared to an impairment charge of $15.6 million for the year ended December 31, 2008 of which $14.5 million related to collateralized debt obligations and $1.1 million related to Fannie Mae and Freddie Mac preferred stock. Gains on sales of investment securities totaled $1.2 million for the year ended December 31, 2009 compared to $40,000 for the year ended December 31, 2008 and net gains on sales of loans totaled $130,000 for the 2009 period compared to $36,000 for the 2008 period. Net losses on the sale of other real estate owned totaled $323,000 for the year ended December 31, 2009. In addition, for the year ended December 31, 2008, a $149,000 charge to non-interest income was recognized resulting from the retirement of old equipment and replacement of signage associated with the acquisition of Boardwalk Bank.

Non-Interest Expense.Non-interest expense decreased $35.5 million to $29.2 million for the year ended December 31, 2009 from $64.7 million for the year ended December 31, 2008. The year-to-year decrease resulted primarily from a non-cash goodwill impairment charge totaling $31.8 million for the year ended December 31, 2008 and a $6.3 million expense related to the formation of The CapeBank Charitable Foundation in 2008. For the year ended December 31, 2009, salaries and employee benefits increased $599,000, or 4.2%. This resulted primarily from a $1.3 million charge related to payments made under the employment agreement of the Company’s former President and CEO, partially offset by reduced pension plan costs of $605,000. For the year ended December 31, 2009, FDIC insurance premiums were $1.7 million compared to $525,000 for the year ended December 31, 2008, an increase of $1.2 million, or 229.3%. Loan related expenses increased $1.5 million for the year ended December 31, 2009 resulting from increased expenses related to non-performing loans. In addition, year-to-year, advertising costs declined $219,000, professional services (audit and legal) declined $172,000 and consulting fees declined $242,000.

Income Tax Expense.For the year ended December 31, 2009 income tax expense was $12.0 million, compared to a tax benefit of $8.2 million for the year ended December 31, 2008. Tax expense for 2009 is primarily a result of recording a deferred tax asset valuation allowance of $16.0 million after it was determined that it was “more likely than not” that a portion of the deferred tax assets of the Company will not be realized. The 2008 tax benefit resulted from a pre-tax loss that was partially offset by the disallowance of the $31.8 million goodwill impairment charge.

Comparison of Operating Results for the Years Ended December 31, 2008 and 2007

General.We had a net loss of $42.5 million for the year ended December 31, 2008 compared to net income of $3.4 million for the year ended December 31, 2007. The loss was primarily the result of a non-cash goodwill impairment charge of $31.8 million, an other-than-temporary impairment charge of $15.6 million on our investment securities, a $9.0 million increase in our provision for loan losses, our contribution of $3.8 million to The CapeBank Charitable Foundation, net of taxes, and approximately $785,000 of expenses, net of taxes, associated with the acquisition of Boardwalk Bancorp and name changes. These expenses were partially offset by a tax benefit of $8.2 million and increased net interest income resulting from the acquisition of Boardwalk Bancorp.

Interest Income.Interest income increased $21.5 million, or 58.7%, to $58.1 million for the year ended December 31, 2008, from $36.6 million for the year ended December 31, 2007. The increase for the year resulted primarily from a $16.9 million, or 54.3%, increase in interest income on loans. Average loans for the year ended December 31, 2008, increased $313.2 million, or 68.8% to $768.5 million from $455.2 million for the year ended December 31, 2007. The average yield on the loan portfolio decreased 59 basis points to 6.25% for the year ended December 31, 2008 from 6.84% for the year ended December 31, 2007, resulting from a decline in short-term interest rates, indexed loans repricing at lower rates, and strong competition for new loan originations in a declining interest rate environment. The increase in the average balance of loans was the result of the acquisition of Boardwalk Bancorp during the period.

The average balance of investments and mortgage-backed securities increased $59.7 million, or 107.8%, and $24.1 million, or 44.0%, respectively, to $115.0 million and $78.9 million for the year ended December 31, 2008, from $55.4 million and $54.9 million, respectively, for the year ended December 31, 2007. The average yield on investments increased 46 basis points to 5.06% for the year ended December 31, 2008, from 4.60% for the year ended December 31, 2007. The average yield on mortgage-backed securities increased 3 basis points to 5.11% for the year ended December 31, 2008 from 5.08% for the year ended December 31, 2008. The increase in the average balance and yield on investments and mortgage-backed securities was the result of the acquisition of Boardwalk Bancorp during the period.

Interest Expense.Interest expense increased $7.1 million, or 41.4%, to $24.2 million for the year ended December 31, 2008, from $17.1 million for the year ended December 31, 2007. The increase in interest expense resulted primarily from the acquisition of Boardwalk Bank.

Interest expense on NOW (interest bearing demand accounts) and money market accounts decreased $178,000, or 4.2%, to $4.1 million for the year ended December 31, 2008, from $4.2 million for the year ended December 31, 2007, and interest expense on certificates of deposit increased $4.5 million, or 56.5%, to $12.5 million for the year ended December 31, 2008, from $8.0 million for the year ended December 31, 2007. The average rate paid on certificates of deposit decreased 101 basis points to 3.55% for the year ended December 31, 2008, from 4.56% for the year ended December 31, 2007, while the average balance of certificates of deposit increased $177.6 million, or 100.9% to $353.5 million for the year ended December 31, 2008, from $175.9 million for the year ended December 31, 2007. Similarly, the average rate paid on NOW and money market accounts decreased 83 basis points to 1.81% for the year ended December 31, 2008, from 2.64% for the year ended December 31, 2007. The average balance of NOW and money market accounts increased $64.3 million, or 40.1%, to $224.6 million for the year ended December 31, 2008, from $160.3 million for the year ended December 31, 2007. We decreased rates on maturing certificates of deposit, NOW and money market accounts in response to the decline in short-term interest rates. The average balance of NOW and money market accounts includes indexed priced municipal accounts for the year ended December 31, 2008, with an average balance of $20.3 million and an average rate of 1.94%. These accounts were offered beginning in May 2007, and the year end average balance reflects balances from that date. For the year ended December 31, 2007, the average balance of indexed priced municipal accounts was $16.3 million and had an average rate of 4.62%. The increase in average total deposits was the result of the acquisition of Boardwalk Bancorp.

Interest expense on borrowings (primarily Federal Home Loan Bank of New York advances) increased $3.0 million, or 83.0%, to $6.6 million for the year ended December 31, 2008 from $3.6 million for the year ended December 31, 2007. The average balance of borrowings increased $117.8 million, or 156.4%, to $193.2 million for the year ended December 31, 2008, from $75.4 million for the year ended December 31, 2007. These increases resulted primarily from the addition of $82.3 million in borrowings from the acquisition of Boardwalk Bank and replacement funding for maturing certificates of deposit. The average rate paid on borrowings decreased 136 basis points to 3.40% for the year ended December 31, 2008, from 4.76% for the year ended December 31, 2007, resulting from the decline in short-term interest rates, and a higher proportional balance of overnight funds versus fixed rate advances.

Net Interest Income.Net interest income increased $14.4 million, or 73.9%, to $33.9 million for the year ended December 31, 2008, from $19.5 million for the year ended December 31, 2007. Our net interest rate spread increased by 20 basis points to 3.14% for the year ended December 31, 2008, from 2.94% for the year ended December 31, 2007, and our net interest margin increased by 6 basis points to 3.48% for the year ended December 31, 2008, from 3.42% for the year ended December 31, 2007. The increase in our net interest spread resulted from having more rate-sensitive liabilities than assets tied to short-term interest rates, which decreased during the period. The smaller increase in our net interest margin was due to the decline in the ratio of average interest earning assets to average interest bearing liabilities to 113.9% during the year ended December 31, 2008, from 116.0% for the year ended December 31, 2007.

Provision for Loan Losses.We establish provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider, among other things, past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan, and the levels of delinquent loans. The amount of the allowance is based on management’s judgment of potential losses, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses and make provisions for loan losses on a quarterly basis.

We recorded a provision for loan losses of $9.0 million for the year ended December 31, 2008 compared to $357,000 for the year ended December 31, 2007. The increase in the provision for losses over the prior year reflects management’s analysis of impaired loans as well as the increase in loans outstanding resulting from the acquisition of Boardwalk Bancorp.

Our allowance for loan losses increased by $7.1 million, or 172.7%, to $11.2 million at December 31, 2008, from $4.1 million at December 31, 2007. The ratio of our allowance for loan loss to total loans increased to 1.41% at December 31, 2008, from 0.89% at December 31, 2007. The ratio of the allowance for loan losses to non-performing loans decreased to 53.4% at December 31, 2008, from 102.9% at December 31, 2007, resulting from a higher level of non-performing loans. For the year ended December 31, 2008, charge-offs were $5.7 million compared to $232,000 for the year ended December 31, 2007, resulting primarily from increased charge-offs on real estate-related loans.

Non-Interest Income.Non-interest income decreased $14.8 million to $(10.8) million for the year ended December 31, 2008, from $4.0 million for the year ended December 31, 2007. The decrease resulted from the Bank recognizing an other-than-temporary impairment charge totaling $15.6 million of which $14.5 million related to collateralized debt obligations and $1.1 million related to Fannie Mae and Freddie Mac preferred stock. The decline in non-interest income was partially offset by higher service fee income of $753,000 and an increase in income from BOLI of $412,000. These increases were primarily associated with the acquisition of Boardwalk Bank. The increases were offset by a reduction in net gains on the sale of loans of $179,000. In addition, a $149,000 charge to non-interest income was recognized resulting from the retirement of old equipment and replacement of signage associated with the acquisition of Boardwalk Bank.

Non-Interest Expense.Non-interest expense increased $46.3 million to $64.7 million for the year ended December 31, 2008 from $18.4 million for the year ended December 31, 2007. The year-to-year increase resulted primarily from a non-cash goodwill impairment charge totaling $31.8 million, a $6.3 million expense related to the formation of The CapeBank Charitable Foundation, and increased expenses primarily related to the Boardwalk Bancorp acquisition. These expenses included increased compensation expense of $3.2 million, increased occupancy and equipment expenses of $1.7 million, increased professional services (audit and legal) of $753,000, increased FDIC premiums expense of $470,000, increased data processing expenses of $437,000, increased telecommunications expense of $322,000, increased general advertising costs primarily as a result of Cape Bank’s name change, of $104,000 and Employee Stock Ownership Plan (ESOP) expense of $395,000.

Income Tax Expense.As a result of our pre-tax loss of $50.6 million for the year ended December 31, 2008, we recorded a tax benefit of $8.2 million for the year ended December 31, 2008, compared to tax expense of $1.3 million for the year ended December 31, 2007. The effective tax rate was (16.1)% for the year ended December 31, 2008 compared to 27.5% for the year ended December 31, 2007. The decrease in the effective tax rate was primarily a result of the pre-tax loss partially offset by the disallowance of the goodwill impairment charge of $31.8 million.

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


	For the Years Ended December 31,
	2009								2008								2007
				Interest								Interest								Interest
	Average			Income/		Average			Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield			Balance			Expense		Yield			Balance			Expense		Yield
	(dollars in thousands)
Assets
Interest-earning deposits	$	13,212		$	230		1.74	%	$	10,024		$	275		2.74	%	$	3,950		$	187		4.73	%
Investments		184,578			7,742		4.19	%		193,921			9,854		5.08	%		110,152			5,327		4.84	%
Loans		806,586			46,561		5.77	%		768,458			47,998		6.25	%		455,222			31,115		6.84	%

Total interest- earning assets		1,004,376			54,533		5.43	%		972,403			58,127		5.98	%		569,324			36,629		6.43	%
Noninterest-earning assets		101,894								138,464								50,457
Allowance for loan losses		(12,268	)							(8,955	)							(3,985	)

Total assets	$	1,094,002							$	1,101,912							$	615,796


Liabilities and Stockholders’ Equity
Interest-bearing demand accounts	$	108,665			414		0.38	%	$	106,826			1,030		0.96	%	$	76,310			1,043		1.37	%
Savings accounts		80,248			385		0.48	%		82,309			1,062		1.29	%		79,161			1,290		1.63	%
Money market accounts		128,319			1,705		1.33	%		117,821			3,029		2.57	%		84,020			3,194		3.80	%
Certificates of deposit		371,664			9,886		2.66	%		353,501			12,562		3.55	%		175,924			8,029		4.56	%
Borrowings		191,256			6,638		3.47	%		193,203			6,570		3.40	%		75,359			3,590		4.76	%

Total interest- bearing liabilities		880,152			19,028		2.16	%		853,660			24,253		2.84	%		490,774			17,146		3.49	%
Noninterest-bearing deposits		68,364								68,158								46,061
Other liabilities		6,603								6,417								7,628

Total liabilities		955,119								928,235								544,463
Stockholders’ equity		138,883								173,677								71,333

Total liabilities & stockholders’ equity	$	1,094,002							$	1,101,912							$	615,796

Net interest income				$	35,505							$	33,874							$	19,483

Net interest spread							3.27	%							3.14	%							2.94	%
Net interest margin							3.54	%							3.48	%							3.42	%

Net interest income and margin (tax equivalent basis) (1)				$	36,155		3.60	%				$	34,441		3.54	%				$	19,736		3.47	%


Ratio of average interest-earning assets to average interest-bearing liabilities		114.11	%							113.91	%							116.01	%


(1)		In order to present pre-tax income and resultant yields on tax-exempt investments on a basis comparable to those on taxable investments, a tax equivalent yield adjustment is made to interest income. The tax equilvalent adjustment has been computed using a Federal income tax rate of 35%, and has the effect of increasing interest income by $650,000, $587,000 and $263,000 for the years ended December 31, 2009, 2008 and 2007 respectively. The average yield on investments increased to 4.55% from 4.19% for the year ended December 31, 2009, increased to 5.52% from 5.08% for the year ended December 31, 2008, and increased to 5.09% from 4.84% for the year ended December 31, 2007.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.


	For the Year Ended December 31, 2009									For the Year Ended December 31, 2008
	Compared to December 31, 2008									Compared to December 31, 2007
	Increase (decrease) due to changes in:									Increase (decrease) due to changes in:
	Average			Average			Net			Average		Average			Net
	Volume			Rate			Change			Volume		Rate			Change
	(in thousands)									(in thousands)
Interest-Earning Assets
Interest-earning deposits	$	73		$	(118	)	$	(45	)	$	168	$	(80	)	$	88
Investments		(487	)		(1,625	)		(2,112	)		4,267		260			4,527
Loans		2,256			(3,693	)		(1,437	)		19,663		(2,780	)		16,883

Total interest income		1,842			(5,436	)		(3,594	)		24,098		(2,600	)		21,498


Interest-Bearing Liabilities
Interest-bearing demand accounts		18			(634	)		(616	)		226		(239	)		(13	)
Savings accounts		(26	)		(651	)		(677	)		41		(269	)		(228	)
Money market accounts		248			(1,572	)		(1,324	)		824		(989	)		(165	)
Certificates of deposit		612			(3,288	)		(2,676	)		6,342		(1,809	)		4,533
Borrowings		(72	)		140			68			4,018		(1,038	)		2,980

Total interest expense		780			(6,005	)		(5,225	)		11,451		(4,344	)		7,107

Total net interest income	$	1,062		$	569		$	1,631		$	12,647	$	1,744		$	14,391

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, interest rate risk is a significant risk to our net interest income and earnings. Our assets, consisting primarily of mortgage-related assets, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, we have an Interest Rate Risk Committee of the Board as well as an Asset/Liability Committee, comprised of our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Vice Presidents of Commercial and Residential Lending, Vice President of Retail Funding and our Controller. The Interest Rate Risk Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for recommending to our Board of Directors the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:

	•		originating commercial loans that generally tend to have shorter repricing or reset periods and higher interest rates than residential mortgage loans;

	•		investing in shorter duration investment grade corporate securities and mortgage-backed securities;

	•		originating adjustable rate and short-term consumer loans;

	•		selling a portion of our long-term residential mortgage loans;

	•		obtaining general financing through lower cost deposits and advances from the Federal Home Loan Bank; and

	•		lengthening the terms of borrowings and deposits

Shortening the average maturity of our interest-earning assets by increasing our investments in shorter term loans, as well as loans with variable interest rates, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates.

Net Portfolio Value Analysis.We compute amounts by which the net present value of our interest-earning assets and interest-bearing liabilities (net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Our simulation model uses a discounted cash flow analysis to measure the interest rate sensitivity of net portfolio value. We estimate the economic value of these assets and liabilities under the assumption that interest rates experience an instantaneous and sustained increase of 100 or 200 basis points or decrease of 100 or 200 basis points.

Net Interest Income Analysis.In addition to NPV calculations, we analyze our sensitivity to changes in interest rates through our net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a twelve-month period. We then calculate what the net interest income would be for the same period under the assumption that interest rates experience an instantaneous and sustained increase of 100 or 200 basis points or decrease of 100 or 200 basis points.

The table below sets forth, as of December 31, 2009, our calculation of the estimated changes in our net portfolio value and net interest income that would result from the designated instantaneous and sustained changes in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.


	Net Portfolio Value								Net Interest Income
Changes in			Increase (decrease) in								Increase (decrease) in Estimated
Interest Rates	Estimated NPV		Estimated NPV						Estimated Net		Net Interest Income
(basis points)(1)	(2)		Amount			Percent			Interest Income		Amount			Percent
(dollars in thousands)
+200	$	147,578	$	(19,604	)		-11.73	%	$	34,402	$	(3,493	)		-9.22	%
+100	$	157,577	$	(9,605	)		-5.75	%	$	36,210	$	(1,685	)		-4.45	%
0	$	167,182							$	37,895
-100	$	165,746	$	(1,436	)		-0.86	%	$	38,884	$	989			2.61	%
-200	$	157,901	$	(9,281	)		-5.55	%	$	37,987	$	92			0.24	%


⁽¹⁾		Assumes an instantaneous and sustained uniform change in interest rates at all maturities.

⁽²⁾		NPV is the discounted present value of expected cash flows from interest-earning assets and interest-bearing liabilities.

The table above indicates that at December 31, 2009, in the event of a 100 basis point increase in interest rates, we would experience a 6% decrease in net portfolio value and a $1.7 million decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a 1% decrease in net portfolio value and a $989,000 increase in net interest income.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value and net interest income. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value and net interest income information presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity and Capital Resources

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. We generate funds to meet these needs primarily through our core deposit base and the maturity or repayment of loans and other interest-earning assets, including investments. Proceeds from the maturity, redemption, and return of principal of investment securities totaled $92.5 million during 2009 and were used either for liquidity or to invest in securities of similar quality as our current investment portfolio. We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of New York, borrowings through the discount window at the Federal Reserve Bank of Philadelphia and access to certificates of deposit through brokers. We can also raise cash through the sale of earning assets, such as loans and marketable securities. As of December 31, 2009, the Company’s entire investment portfolio, with a fair market value of $152.8 million, was classified as available-for-sale. Effective December 31, 2009, the Company reclassified its held-to-maturity securities, which had a fair market value of $44.5 million and an amortized cost of $43.0 million, as available-for-sale.

Liquidity risk arises from the possibility that we may not be able to meet our financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, our Board of Directors has established a Liquidity Management Policy and Contingency Funding Plan that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements based on limits approved by our Board of Directors. This policy designates our Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by our Chief Financial Officer and the Treasury Department.

Cape Bank’s long-term liquidity source is a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is sometimes influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. Deposits increased $25.5 million, or 3.6%, during 2009, and comprised 77.8% of total liabilities at December 31, 2009, as compared to 74.9% at December 31, 2008.

Cape Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2009, Cape Bank exceeded all regulatory capital requirements. Cape Bank is considered “well capitalized” under regulatory guidelines. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements” andNote 15 — “Regulatory Matters” of the Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments.As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we originate. In addition, we routinely enter into commitments to sell mortgage loans; such amounts are not significant to our operations. For additional information, seeNote 12 — “Financial Instruments with Off-Balance Sheet Risk and Concentration of Credit Risk” of the Notes to Consolidated Financial Statements.

Contractual Obligations.In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments.

The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2009. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.


	Payments Due by Period
	Less Than		One to Three		Three to Five		More than
Contractual Obligations	One Year		Years		Years		Five Years		Total
	(in thousands)

Borrowings	$	59,950	$	50,000	$	45,000	$	49,031	$	203,981
Operating leases		—		—		—		—		—
Capitalized leases		—		—		—		—		—
Purchase obligations		—		—		—		—		—
Certificates of deposit		279,726		42,870		14,315		—		336,911
Other long-term liabilities		—		—		—		—		—

Total	$	339,676	$	92,870	$	59,315	$	49,031	$	540,892


Commitments to extend credit	$	85,592	$	—	$	—	$	—	$	85,592

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles. Generally accepted accounting principles generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on our performance than the effects of inflation.


ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

For information regarding market risk see Item 7- “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”


ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements are included in Part III, Item 15 of this Form 10-K.


ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.


ITEM 9A.		CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal year (the “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.

(b)

Changes in internal controls

There were no significant changes made in our internal control over financial reporting during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(c)

Management report on internal control over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is a process designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Directors of Cape Bancorp, Inc.; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Cape Bancorp, Inc.’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment we believe that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.

Cape Bancorp’s independent registered public accounting firm that audited the consolidated financial statements has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. This report appears on page F-1.

The Sarbanes-Oxley Act Section 302 Certifications have been filed with the SEC as exhibit 31.1 and exhibit 31.2 to this Annual Report on Form 10-K.


ITEM 9B.		OTHER INFORMATION

Not Applicable.

PART III


ITEM 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning directors and executive officers of Cape Bancorp is incorporated herein by reference from the Proxy Statement, specifically the section captioned “Proposal I—Election of Directors.”


ITEM 11.		EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated herein by reference from the Proxy Statement, specifically the section captioned “Executive Compensation.”


ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning security ownership of certain owners and management is incorporated herein by reference from the Proxy Statement, specifically the section captioned “Voting Securities and Principal Holder Thereof.”


ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE

Information concerning relationships and transactions is incorporated herein by reference from the Proxy Statement, specifically the section captioned “Transactions with Certain Related Persons.”


ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accountant fees and services is incorporated herein by reference from the Proxy Statement, specifically the section captioned “Proposal II-Ratification of Appointment of Auditors.”

PART IV


ITEM 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

Financial Statements

The following documents are filed as part of this Form 10-K.

	(A)		Report of Independent Registered Public Accounting Firm

	(B)		Consolidated Balance Sheets as of December 31, 2009 and 2008

	(C)		Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007

	(D)		Consolidated Statements of Changes in Equity for the years ended December 31, 2009, 2008 and 2007

	(E)		Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

	(F)		Notes to Consolidated Financial Statements.

(a)(2)

Financial Statement Schedules

None.

(a)(3)

Exhibits


	3.1			Articles of Incorporation of Cape Bancorp, Inc.⁽¹⁾
	3.2			Amended and Restated Bylaws of Cape Bancorp, Inc.⁽²⁾
	4			Form of Common Stock Certificate of Cape Bancorp, Inc.⁽¹⁾
	10.1			Form of Employee Stock Ownership Plan⁽¹⁾
	10.2			Employment Agreement for Herbert L. Hornsby Jr.⁽¹⁾
	10.3			Employment Agreement for Robert J. Boyer⁽¹⁾
	10.4			Employment Agreement for Michael D. Devlin⁽¹⁾
	10.5			Employment Agreement for Guy A. Deninger⁽¹⁾
	10.6			Form of Change in Control Agreement⁽¹⁾
	10.7			Form of Director Retirement Plan⁽¹⁾
	10.8			Benefit Equalization Plan⁽¹⁾
	10.9			2008 Equity Incentive Plan⁽³⁾
	14			Code of Ethics⁽⁴⁾
	21			Subsidiaries of Registrant
	23.1			Consent of KPMG LLP
	23.2			Consent of Crowe Horwath LLP
	31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32			Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Incorporated by reference to the Registration Statement on Form S-1 of Cape Bancorp, Inc.. (file no. 333-146178), originally filed with the Securities and Exchange Commission on September 19, 2007.

(2)		Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2008.

(3)		Incorporated by reference to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on July 16, 2008.

(4)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2007 filed with the Securities and Exchange Commission on March 31, 2008.

SIGNATURES

Pursuant to the requirements of Section��13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CAPE BANCORP, INC.
Date: March 16, 2010	By:	/s/ Michael D. Devlin
		Michael D. Devlin
		Chief Executive Officer and President (Duly Authorized Representative)

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


Signatures	Title	Date

/s/ Michael D. Devlin Michael D. Devlin	Chief Executive Officer and President (Principal Executive Officer)	March 16, 2010

/s/ Guy Hackney Guy Hackney	Chief Financial Officer (Principal Financial and Accounting Officer)	March 16, 2010

/s/ James J. Lynch James J. Lynch	Director	March 16, 2010

/s/ Agostino R. Fabietti Agostino R. Fabietti	Director	March 16, 2010

/s/ Robert F. Garrett, III Robert F. Garrett, III	Director	March 16, 2010

/s/ Frank J. Glaser Frank J. Glaser	Director	March 16, 2010

/s/ Louis H Griesbach, Jr. Louis H. Griesbach, Jr.	Director	March 16, 2010

/s/ David C. Ingersoll, Jr. David C. Ingersoll, Jr.	Director	March 16, 2010

/s/ Joanne D. Kay Joanne D. Kay	Director	March 16, 2010

/s/ Matthew J. Reynolds Matthew J. Reynolds	Director	March 16, 2010

/s/ Thomas K. Ritter Thomas K. Ritter	Director	March 16, 2010

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
CAPE BANCORP AND SUBSIDIARIES


Report of Independent Registered Public Accounting Firm			F-1

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2009 and 2008			F-5

Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007			F-6

Consolidated Statements of Changes in Equity for the years ended December 31, 2009, 2008 and 2007			F-7

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007			F-8

Notes to Consolidated Financial Statements			F-9

***

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Cape Bancorp, Inc.:

We have audited the internal control over financial reporting of Cape Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009, and the

F-1

Cape Bancorp, Inc.
March 15, 2010
Page 2 of 2

related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and our report dated March 15, 2010 expressed an unqualified opinion on those consolidated financial statements.

Philadelphia, Pennsylvania
March 15, 2010

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Cape Bancorp, Inc.:

We have audited the accompanying consolidated balance sheet of Cape Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2009, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated financial statements of the Company as of December 31, 2008 and for each of the years in the two-year period ended December 31, 2008 were audited by other auditors whose report thereon dated March 16, 2009, expressed an unqualified opinion on those financial statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for other-than-temporary impairments of debt securities due to the adoption of FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (included in FASB ASC Topic 320,Investments — Debt and Equity Securities),as of April 1, 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Philadelphia, Pennsylvania
March 15, 2010

F-3

Report of Independent Registered Public Accounting Firm

Cape Bancorp, Inc.
Cape May Court House, New Jersey

We have audited the accompanying consolidated statement of condition of Cape Bancorp, Inc. as of December 31, 2008, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

Crowe Horwath LLP

Livingston, New Jersey
March 16, 2009

F-4

CAPE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	December 31,
	2009			2008
	(in thousands)
ASSETS
Cash & due from financial institutions	$	9,573		$	10,117
Interest-bearing bank balances		3,940			12,384

Cash and cash equivalents		13,513			22,501
Interest-bearing time deposits		7,451			5,534
Investment securities available for sale, at fair value (amortized cost of $162,935 and $123,831 respectively)		152,815			114,655
Investment securities held to maturity (fair value of $0 and $49,938 respectively)		—			48,825
Loans held for sale		398			—
Loans, net of allowance of $13,311 and $11,240 respectively		789,473			783,869
Accrued interest receivable		4,630			4,736
Premises and equipment, net		26,383			27,342
Other real estate owned		4,817			798
Federal Home Loan Bank (FHLB) stock, at cost		10,275			11,602
Prepaid FDIC insurance premium		4,377			—
Deferred income taxes		3,956			17,247
Bank owned life insurance (BOLI)		27,210			26,446
Goodwill		22,575			22,575
Intangible assets, net		585			786
Assets held for sale		1,828			2,026
Other assets		2,535			1,793

Total assets	$	1,072,821		$	1,090,735


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing deposits	$	62,365		$	63,258
Interest-bearing deposits		674,222			647,872
Borrowings		203,981			234,484
Advances from borrowers for taxes and insurance		542			585
Accrued interest payable		807			778
Other liabilities		4,356			3,033

Total liabilities		946,273			950,010


Stockholders’ Equity
Common stock, $.01 par value: authorized 100,000,000 shares; issued and outstanding 13,313,521 shares		133			133
Additional paid-in capital		126,695			126,801
Unearned ESOP shares		(9,806	)		(10,232	)
Accumulated other comprehensive loss, net		(6,645	)		(6,022	)
Retained earnings		16,171			30,045

Total stockholders’ equity		126,548			140,725

Total liabilities & stockholders’ equity	$	1,072,821		$	1,090,735

See accompanying notes to consolidated financial statements.

F-5

CAPE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


	Years ended December 31,
	2009			2008			2007
	(dollars in thousands, except share data)
Interest income:
Interest on loans	$	46,561		$	47,998		$	31,114
Interest and dividends on investments
Taxable		2,961			4,811			2,123
Tax-exempt		1,359			1,290			610
Interest on mortgage-backed securities		3,652			4,028			2,782

Total interest income		54,533			58,127			36,629

Interest expense:
Interest on deposits		12,390			17,683			13,556
Interest on borrowings		6,638			6,570			3,590

Total interest expense		19,028			24,253			17,146

Net interest income before provision for loan losses		35,505			33,874			19,483
Provision for loan losses		13,159			9,009			357

Net interest income after provision for loan losses		22,346			24,865			19,126

Non-interest income:
Service fees		3,011			3,202			2,449
Net gains on sale of loans		130			36			299
Net income from BOLI		1,041			1,005			593
Net rental income		318			342			348
Gain on sales of investment securities available for sale, net		1,195			40			—
Loss on disposal of other assets		(7	)		(158	)		(7	)
Other		377			380			310
Gross other-than-temporary impairment losses		(7,538	)		(15,640	)		—
Less: Portion of loss recognized in other comprehensive income		2,405			—			—

Net other-than-temporary impairment losses		(5,133	)		(15,640	)		—

Total non-interest income (expense)		932			(10,793	)		3,992

Non-interest expense:
Salaries and employee benefits		14,950			14,351			11,108
Occupancy and equipment		3,480			3,618			1,949
Federal insurance premiums		1,729			525			53
Data processing		1,246			1,370			933
Charitable Foundation contribution		—			6,256			—
Loan related expenses		1,766			280			73
Advertising		358			577			473
Telecommunications		852			870			548
Professional services		816			988			235
Goodwill impairment		—			31,751			—
OREO expenses		628			4			—
Other operating		3,343			4,127			3,019

Total non-interest expense		29,168			64,717			18,391

Income (loss) before income taxes		(5,890	)		(50,645	)		4,727

Income tax expense (benefit)		12,011			(8,154	)		1,299

Net income (loss)	$	(17,901	)	$	(42,491	)	$	3,428


Earnings (loss) per share (see Note 16):
Basic	$	(1.45	)	$	(3.49	)		n/a
Diluted	$	(1.45	)	$	(3.49	)		n/a

Weighted average number of shares outstanding:
Basic		12,312,714			12,280,494			n/a
Diluted		12,312,714			12,280,494			n/a

See accompanying notes to consolidated financial statements.

F-6

CAPE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years ended December 31, 2009, 2008 and 2007


												Accumulated
						Unearned						Other			Total
	Common		Paid-In			ESOP			Retained			Comprehensive			Stockholders’
	Stock		Capital			Shares			Earnings			Income (Loss)			Equity
	(in thousands)

Balance, December 31, 2006	$	—	$	—		$	—		$	69,107		$	(164	)	$	68,943

Net income		—		—			—			3,429			—			3,429

Net unrealized gains, net of reclassification adjustments and taxes		—		—			—			—			457			457

Total comprehensive income		—		—			—									3,886


Balance, December 31, 2007		—		—			—			72,536			293			72,829

Net loss		—		—			—			(42,491	)		—			(42,491	)

Net unrealized losses, net of reclassification adjustments and taxes		—		—			—			—			(6,315	)		(6,315	)

Total comprehensive loss		—		—			—									(48,806	)

Conversion from mutual to stock company and simultaneous acquisition of Boardwalk Bancorp		133		126,832			(10,658	)		—			—			116,307

ESOP shares earned		—		(31	)		426			—			—			395


Balance, December 31, 2008		133		126,801			(10,232	)		30,045			(6,022	)		140,725

Net loss		—		—			—			(17,901	)					(17,901	)

Net unrealized gains, net of reclassification adjustments and taxes		—		—			—			—			3,404			3,404

Total comprehensive loss		—		—			—			—						(14,497	)

Cumulative effect adjustment to reclassify non-credit component of previously recorded other-than-temporary impairment		—		—			—			4,027			(4,027	)		—

ESOP shares earned		—		(106	)		426			—			—			320


Balance, December 31, 2009	$	133	$	126,695		$	(9,806	)	$	16,171		$	(6,645	)	$	126,548

See accompanying notes to consolidated financial statements.

F-7

CAPE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years ended December 31,
	2009			2008			2007
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	(17,901	)	$	(42,491	)	$	3,428
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		13,159			9,009			357
Net gain on the sale of loans		(130	)		(36	)		(299	)
Net (gain) loss on the sale of other real estate owned		323			(1	)		—
Impairment of goodwill		—			31,751			—
Loss on impairment of securities		5,133			15,640			—
Net gain on sale of investments		(1,195	)		(40	)		—
Loss on disposal of property and equipment		—			158			—
Write-down of assets held for sale		198			241			—
Earnings on BOLI		(1,041	)		(1,006	)		(593	)
Origination of loans held for sale		(10,971	)		(1,794	)		(22,671	)
Proceeds from sale of loans		10,573			2,144			23,087
Depreciation and amortization		1,850			1,327			881
ESOP compensation expense		320			395			—
Stock issuance for charitable contribution		—			5,474			—
Deferred income taxes		11,537			(8,372	)		(1,241	)
Changes in assets and liabilities that (used) provided cash:
Accrued interest receivable		106			785			(146	)
Other assets		(4,400	)		3,457			437
Accrued interest payable		29			(146	)		(31	)
Other liabilities		1,323			(5,074	)		2,901

Net cash provided by operating activities		8,913			11,421			6,110

Cash flows from investing activities
Proceeds from sales of AFS securities		31,708			2,535			—
Proceeds from calls, maturities, and principal repayments of HTM securities		8,643			6,723			8,065
Proceeds from calls, maturities, and principal repayments of AFS securities		83,884			67,649			42,891
Purchases of HTM securities		(2,998	)		(7,940	)		(14,461	)
Purchases of AFS securities		(108,976	)		(57,186	)		(41,862	)
Redemption (purchase) of Federal Home Loan Bank stock		1,327			(3,925	)		1,420
Purchase of BOLI policy		—			—			(325	)
Proceeds from sale of other real estate owned		2,299			169			—
(Increase) decrease in interest-bearing time deposits		(1,917	)		(1,869	)		—
Increase in loans, net		(26,448	)		(20,481	)		(13,617	)
Purchase of property and equipment, net		(544	)		(1,918	)		(3,337	)
Acquisition of Boardwalk Bancorp		—			(46,839	)		—

Net cash used in investing activities		(13,022	)		(63,082	)		(21,226	)

Cash flows from financing activities
Net increase (decrease) in deposits		25,614			(74,084	)		29,819
Increase (decrease) in advances from borrowers for taxes and insurance		(43	)		(65	)		(28	)
Borrowings		75,450			123,300			45,000
Payments on borrowings		(105,900	)		(36,212	)		(79,000	)
Net proceeds from stock issuance in conversion		—			39,871			—
Deferred stock issuance and acquisition costs		—			—			(1,915	)
Proceeds from stock subscriptions		—			—			21,500

Net cash provided by (used in) financing activities		(4,879	)		52,810			15,376

Net increase (decrease) in cash and cash equivalents		(8,988	)		1,149			260
Cash and cash equivalents at beginning of year		22,501			21,352			21,092

Cash and cash equivalents at end of year	$	13,513		$	22,501		$	21,352

Supplementary disclosure of cash flow information:
Cash paid during period for:
Interest	$	18,999		$	23,875		$	17,177
Income taxes, net of refunds	$	17		$	1,209		$	1,418
Supplementary disclosure of non-cash financing and investing activities:
Fair value of held to maturity securities reclassified to available for sale	$	44,523		$	—		$	—
Transfers from loans to other real estate owned	$	7,087		$	966		$	—
Stock subscriptions applied to equity	$	—		$	21,500		$	—
Issuance of stock to charitable foundation	$	—		$	5,474		$	—
Issuance of stock for acquisition of Boardwalk Bancorp	$	—		$	49,461		$	—

See accompanying notes to consolidated financial statements.

F-8

AUDITED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION

On January 31, 2008, Cape Bancorp (“Company”) completed its initial public stock offering in connection with the mutual to stock conversion of Cape Bank and the simultaneous acquisition by Cape Bancorp of Boardwalk Bancorp, Inc. (“Boardwalk Bancorp”), Linwood, New Jersey and its wholly-owned New Jersey-chartered bank subsidiary, Boardwalk Bank (“Boardwalk”).

In the offering, the Company sold 7,820,000 shares of its common stock at $10.00 per share to depositors, Cape Bank’s tax qualified employee benefit plans and the general public in subscription, community and syndicated offerings. The Company also issued 547,400 shares of its common stock and contributed $782,000 in cash to The CapeBank Charitable Foundation. Cape Bancorp loaned $10,658,253 to the Bank’s employee stock ownership plan (ESOP) and the ESOP used these funds to acquire 1,065,082 shares of common stock at an average price of $10.01 per share.

As a result of the transactions, Cape Bancorp has 13,313,521 issued and outstanding shares of common stock.

In the acquisition of Boardwalk Bancorp, Cape Bancorp issued merger consideration of approximately $99.0 million, consisting of 4,946,121 shares of Cape Bancorp common stock and approximately $49.5 million in cash. With the acquisition of Boardwalk Bank, Cape Bank now operates 18 full service branches in Cape May and Atlantic Counties, New Jersey.

Cape Bank is a New Jersey-chartered stock savings bank. The Bank provides a complete line of business and personal banking products through its eighteen full service branch offices located throughout Atlantic and Cape May counties in southern New Jersey.

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”).

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. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements as of the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.

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.

F-9

AUDITED FINANCIAL STATEMENTS

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 reserve of $668,000 as of December 31, 2009 is 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. The consolidated financial statements have been adjusted to reflect the Company’s reclassification of interest-bearing bank balances with original maturities of less than 3 months from interest bearing time deposits to interest-bearing bank balances for 2008 and 2007. These reclassifications had no effect on net income.

Investment Securities:The Bank classifies investment securities as either held to maturity or available for sale. Investment securities held to maturity are carried at cost, adjusted for amortization of premium and accretion of discount over the term of the related investments using the interest method. 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. Effective December 31, 2009, all held to maturity securities were reclassified as available for sale. The Bank holds a number of securities in its portfolio that may be particularly susceptible to changes in fair value in the near term as a result of market volatility. 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, must recognize the other-than-temporary impairment in earnings. For a debt security with a fair value below the amortized cost at the measurement date where it is more likely than not that an entity will not sell the security before the recovery of its cost basis, but an entity does not expect to recover the entire cost basis of the security, the security is considered other-than-temporarily impaired. The related other-than-temporary impairment loss on the debt security will be recognized in earnings to the extent of the credit losses with the remaining impairment loss recognized in accumulated other comprehensive income. In estimating other-than-temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, cash flow, stress testing analysis on securities when applicable, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

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

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

Recognition of interest income is discontinued when, in the opinion of management, the collectability of such interest becomes doubtful. A commercial loan is classified as non-accrual when the loan is 90 days or more delinquent. 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. 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.

F-10

AUDITED FINANCIAL STATEMENTS

The allowance for loan losses is maintained at an amount management deems adequate 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 and estimated collateral values. In the opinion of management, the allowance is adequate to absorb probable loan losses. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary based on changes in economic conditions or any of the other factors used in management’s determination. 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.

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, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Premises and Equipment:Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 15 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 (FHLB) Stock:The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock 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.

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). 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.

F-11

AUDITED FINANCIAL STATEMENTS

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. As of December 31, 2009, 85,206 shares have been allocated to eligible participants in the Cape Bank Employee Stock Ownership Plan. As shares of common stock acquired by the ESOP are committed to be released to each employee, we report compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.

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 related to uncertain tax positions in interest expense and penalties in non-interest expense, to the extent accrued.

Earnings Per Share: Basic earnings 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.

F-12

AUDITED FINANCIAL STATEMENTS

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 as follows:


	Before Tax			Tax Benefit			Net of Tax
	Amount			(Expense)			Amount
December 31, 2009
Unrealized holding gains arising during the period	$	3,625		$	(1,233	)	$	2,392
Non-credit related unrealized loss on other-than-temporarily impaired CDOs		(2,405	)		818			(1,587	)
Reclassification adjustment for gain on sale of AFS securities		(1,195	)		406			(789	)
Reclassification adjustment for credit related OTTI included in net income		5,133			(1,745	)		3,388

Other comprehensive income, net	$	5,158		$	(1,754	)	$	3,404


December 31, 2008
Unrealized holding losses arising during the period	$	(25,247	)	$	8,722		$	(16,525	)
Reclassification adjustment for gain on sale of AFS securities		(40	)		14			(26	)
Reclassification adjustment for net losses realized in net income		15,640			(5,404	)		10,236

Other comprehensive loss, net	$	(9,647	)	$	3,332		$	(6,315	)


December 31, 2007
Unrealized holding gains arising during the period	$	711		$	(254	)	$	457
Reclassification adjustment for net losses realized in net income		—			—			—

Other comprehensive income, net	$	711		$	(254	)	$	457

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.

F-13

AUDITED FINANCIAL STATEMENTS

Effect of Newly Issued Accounting Standards: New FASB authoritative accounting guidance, Accounting Standards Update (“ASU”) No. 2009-5, “Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value” provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The new authoritative accounting guidance under FASB ASC Topic 820 is effective for interim and annual periods beginning after August 2009 and did not have a material impact on the Company’s financial condition or results of operations.

In June 2009, FASB issued FASB ASC Topic 105, “Generally Accepted Accounting Principles.” FASB ASC Topic 105 established the FASB Accounting Standards Codification (the “Codification”) to become the single source of authoritative GAAP recognized by FASB to be applied by nongovernmental entities, with the exception of guidance issued by the SEC and its staff. All guidance contained in the Codification carries an equal level of authority. The provisions of FASB ASC Topic 105 are effective for interim and annual periods ending after September 15, 2009. As the Codification did not change GAAP, the adoption of FASB ASC Topic 105 had no impact on the Company’s financial condition or results of operations.

New authoritative accounting guidance, FASB ASU No. 2009-17, “Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation purposes. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The new guidance is effective for fiscal years beginning after November 15, 2009. The adoption of FASB ASU No. 2009-17 is not expected to have a material impact on the Company’s financial condition or results of operations.

New authoritative accounting guidance, FASB ASU No. 2009-16, “Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets” makes several significant amendments to FASB ASC Topic 860, “Transfers and servicing” including the removal of the concept of a qualifying special-purpose entity. The new guidance also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. The new authoritative accounting guidance is effective for fiscal years beginning after November 15, 2009. Management does not expect the adoption of FASB ASU No. 2009-16 to have a material impact on the Company’s financial condition or results of operations.

In June 2009, the FASB issued new authoritative accounting guidance under FASB ASC Topic 855, “Subsequent Events.” This new guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. FASB ASC Topic 855 was effective for interim or annual financial periods ending after June 15, 2009. The adoption of FASB ASC Topic 855 did not have a material impact on the Company’s financial condition or results of operations.

In April 2009, FASB issued new authoritative accounting guidance under FASB ASC Topic 820. “Fair Value Measurements and Disclosures.” Effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, the new guidance under FASB ASC Topic 820 provides guidelines for making fair value measurements more consistent with the other principles presented in FASB ASC Topic 820 when the volume and level of activity for assets or liabilities have significantly decreased. The new guidance under FASB ASC Topic 820 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. The adoption of FASB ASC Topic 820 did not have a material impact on our financial condition or results of operations.

F-14

AUDITED FINANCIAL STATEMENTS

In April 2009, FASB issued new authoritative accounting guidance under FASB ASC Topic 320, “Investments—Debt and Equity Securities” regarding the recognition and presentation of other-than-temporary impairments, which modified the requirement in existing accounting guidance to demonstrate the intent and ability to hold an investment security for a period of time sufficient to allow for any anticipated recovery in fair value. When the fair value of a debt security has declined below the amortized cost at the measurement date, and 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, must recognize the other-than-temporary impairment 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. This standard is effective for interim and annual periods ending after June 15, 2009. As a result of this standard the Company recorded a cumulative effect adjustment net of tax of $4.1 million to retained earnings for the non-credit portion of OTTI previously recognized as well as recognized a charge to earnings for credit losses incurred in the period of adoption.

In April 2009, FASB issued new authoritative accounting guidance under FASB ASC Topic 825, “Financial Instruments.” Effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, the new guidance under FASB ASC Topic 825 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The new guidance under FASB ASC Topic 825 only relates to disclosures and therefore did not have an impact on our financial condition or results of operations. We adopted the new guidance under FASB ASC Topic 825 on June 30, 2009.

F-15

AUDITED FINANCIAL STATEMENTS

NOTE 3 — 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 are as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(in thousands)
December 31, 2009
Investment securities available for sale
Debt securities
U.S. Government and agency obligations	$	46,004	$	96	$	(128	)	$	45,972
Municipal bonds		33,901		953		(473	)		34,381
Collateralized debt obligations		13,038		58		(11,640	)		1,456
Corporate bonds		10,851		195		—			11,046

Total debt securities	$	103,794	$	1,302	$	(12,241	)	$	92,855


Mortgage-backed securities
GNMA pass-through certificates	$	677	$	16	$	—		$	693
FHLMC pass-through certificates		5,338		175		—			5,513
FNMA pass-through certificates		26,612		1,001		(25	)		27,588
Collateralized mortgage obligations		26,514		567		(915	)		26,166

Total mortgage-backed securities	$	59,141	$	1,759	$	(940	)	$	59,960


Total securities available for sale	$	162,935	$	3,061	$	(13,181	)	$	152,815

F-16

AUDITED FINANCIAL STATEMENTS


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(in thousands)
December 31, 2008
Investment securities available for sale
Debt securities
U.S. Government and agency obligations	$	31,296	$	480	$	(10	)	$	31,766
Municipal bonds		11,024		26		(336	)		10,714
Collateralized debt obligations		11,832		—		(8,799	)		3,033
Corporate bonds		4,975		—		(197	)		4,778

Total debt securities	$	59,127	$	506	$	(9,342	)	$	50,291


Mortgage-backed securities
GNMA pass-through certificates	$	773	$	2	$	(12	)	$	763
FHLMC pass-through certificates		20,449		352		(31	)		20,770
FNMA pass-through certificates		33,465		472		(539	)		33,398
Collateralized mortgage obligations		10,017		31		(615	)		9,433

Total mortgage-backed securities	$	64,704	$	857	$	(1,197	)	$	64,364


Total securities available for sale	$	123,831	$	1,363	$	(10,539	)	$	114,655


Investment securities held to maturity
Municipal bonds	$	24,582	$	604	$	(32	)	$	25,154
Mortgage-backed securities
GNMA pass-through certificates		17		1		—			18
FHLMC pass-through certificates		2,670		45		—			2,715
FNMA pass-through certificates		10,897		323		(17	)		11,203
Collateralized mortgage obligations		9,922		199		(10	)		10,111
Grantor Trust (money market fund)		737		—		—			737


Total securities held to maturity	$	48,825	$	1,172	$	(59	)	$	49,938

Effective December 31, 2009 the Company reclassified the Held-to-Maturity (HTM) portion of its investment portfolio, which had a market value of $44.5 million and an amortized cost of $43.0 million, to Available-for-Sale (AFS). This change in classification provides flexibility and enables the Company to respond more effectively to changes in market value of the investment portfolio as well as enhances its sources of liquidity.

F-17

AUDITED FINANCIAL STATEMENTS

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2009.


	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
	(in thousands)
U.S. Government and agency obligations	$	16,877	$	(128	)	$	—	$	—		$	16,877	$	(128	)
Corporate and municipal bonds		578		(8	)		3,988		(465	)		4,566		(473	)
Collateralized debt obligations		90		(3,329	)		1,308		(8,311	)		1,398		(11,640	)
Mortgage-backed securities		7,496		(116	)		2,718		(824	)		10,214		(940	)


Total temporarily impaired investment securities	$	25,041	$	(3,581	)	$	8,014	$	(9,600	)	$	33,055	$	(13,181	)

The table below indicates the length of time individual securities, both held to maturity and available for sale, have been in a continuous unrealized loss position at December 31, 2008.


	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
	(in thousands)
U.S. Government and agency obligations	$	2,507	$	(10	)	$	—	$	—		$	2,507	$	(10	)
Corporate and municipal bonds		12,145		(416	)		3,426		(149	)		15,571		(565	)
Collateralized debt obligations		1,505		(8,799	)		—		—			1,505		(8,799	)
Mortgage-backed securities		13,423		(1,196	)		2,287		(28	)		15,710		(1,224	)


Total temporarily impaired investment securities	$	29,580	$	(10,421	)	$	5,713	$	(177	)	$	35,293	$	(10,598	)

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 December 31, 2009, the Company’s investment securities portfolio consisted of 349 securities, 55 of which were in an unrealized loss position. The total unrealized loss on the Company’s investment securities portfolio related primarily to the collateralized debt obligation securities, which are discussed in detail below, and mortgage-backed securities (MBS). The unrealized loss in the MBS portfolio is primarily comprised of one security, a non-agency collateralized mortgage obligation. The monthly payments on this security are current, it is over-collateralized and it is protected by several subordinate classes. The remaining 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, municipal obligations and corporate bonds which had unrealized losses that were caused by changing credit spreads in the market as a result of the ongoing credit crisis. Because the Company has no intention to sell these securities, nor is it more likely than not that we will be required to sell these securities, the Company does not consider those investments to be OTTI.

F-18

AUDITED FINANCIAL STATEMENTS

As of December 31, 2009, the book value of our pooled trust preferred collateralized debt obligations totaled $13.0 million with an estimated fair value of $1.5 million and is comprised of 24 securities. Of those, 16 have been principally issued by bank holding companies (PreTSL deals, MM Comm 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 December 31, 2009, 16 of our securities had no excess subordination and 8 of our securities had excess subordination which ranged from 7.4% to 14.3% 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. As deferrals and defaults of underlying issuers continue to occur, the excess subordination is reduced or eliminated, increasing the risk of the security experiencing principal or interest shortfalls. Conversely, subordination can be increased as collateral transitions from non-performing to performing.

The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of December 31, 2009:

Pooled Trust Preferred Collateralized Debt Obligations
(dollars in thousands)


																	Amount of
																	Deferrals			Excess
																	and			Subordination
															Current		Defaults			as a % of
	Number										Credit			Moody’s/	Number of		as a % of			Current
	of			Book		Fair		Unrealized			Related			Fitch	Performing		Current			Performing
Deal	Securities		Class	Value		Value		Loss			Loss			Ratings	Issuers		Collateral			Collateral
PreTSL II		2	Mezzanine	$	582	$	17	$	(565	)	$	(422	)	Ca/CC		27		31.10	%		0.00	%
PreTSL VI		1	Mezzanine		52		6		(46	)		(5	)	Caa1/CCC		3		68.71	%		0.00	%
PreTSL XIX		2	Mezzanine		2,739		48		(2,691	)		(815	)	Ca/C		60		16.42	%		0.00	%
PreTSL XX		1	Mezzanine		67		13		(54	)		(1,685	)	NR/C		54		26.23	%		0.00	%
PreTSL XXI		1	Mezzanine		—		13		13			(1,736	)	NR/C		57		26.27	%		0.00	%
PreTSL XXII		1	Mezzanine		277		18		(259	)		(2,320	)	NR/C		74		24.48	%		0.00	%
PreTSL XXIII		1	Mezzanine		416		3		(413	)		(29	)	NR/CC		105		19.49	%		0.00	%
PreTSL XXIV		3	Mezzanine		210		20		(190	)		(2,364	)	Ca/C		69		29.44	%		0.00	%
PreTSL XXV		2	Mezzanine		—		22		22			(2,948	)	NR/C		53		30.96	%		0.00	%
I-PreTSL I		2	Mezzanine		1,827		299		(1,528	)		—		NR/BB		16		17.36	%		7.38	%
I-PreTSL II		2	Mezzanine		2,706		447		(2,259	)		—		NR/BB		29		4.81	%		14.32	%
I-PreTSL III		3	Mezzanine		2,693		448		(2,245	)		—		B2/BB		24		11.16	%		8.49	%
I-PreTSL IV		1	Mezzanine		437		75		(362	)		—		Ba2/B		31		4.16	%		8.30	%
MM Comm I		1	Mezzanine		1,032		20		(1,012	)		(554	)	Ca/CCC		9		45.74	%		0.00	%
Alesco VI		1	Mezzanine		—		7		7			(615	)	Ca/CC		49		31.39	%		0.00	%

Total		24		$	13,038	$	1,456	$	(11,582	)	$	(13,493	)

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.

On a quarterly basis we evaluate our investment securities for other-than-temporary impairment. 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. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary with the exception of 15 bank issued pooled trust preferred CDO securities. The Company’s estimate of projected cash flows it expected to receive was less than the securities’ carrying value resulting in a net credit impairment charge to earnings for the year ending December 31, 2009 of $5.1 million. As a result of adopting certain provisions of FASB ASC Topic No. 320 (formerly FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”), we were required to record a cumulative effect adjustment to reclassify the portion of previously recorded other-than-temporary impairment charges that were not related to credit losses from retained earnings to accumulated other comprehensive income. Impairment charges related to these securities were recorded during 2008 and the first quarter of 2009 in the amount of $14.5 million and $1.5 million, respectively. We reclassified $6.1 million, $4.0 million net of tax, of these previously recorded OTTI charges from retained earnings to accumulated other comprehensive income as a cumulative effect adjustment. We recorded an additional $3.6 million of OTTI during the remainder of 2009.

F-19

AUDITED FINANCIAL STATEMENTS

Our CDOs are beneficial interests in securitized financial assets within the scope of FASB ASC Topic No. 325, “Investments — Other”, and are therefore evaluated for OTTI using management’s estimate of future cash flows. If these estimated cash flows determine that it is probable an adverse change in cash flows has occurred, then OTTI would be recognized in accordance with FASB ASC Topic No. 320. The Company uses a third party model (“model”) to assist in calculating the present value of current estimated cash flows to the previous estimate. The present value of the expected cash flows is calculated based on the contractual terms of the security, and is discounted at a rate equal to the effective interest rate implicit in the security at the date of acquisition. The model also takes into account individual defaults and deferrals that have already occurred by any participating issuer within the pool of entities that make up the security’s underlying collateral. With regard to expected defaults and deferrals, the model can be run using several different scenarios. In general, these assumptions involve significantly higher than average deferral rates in the near term (5% annually in 2010) and return to the historical level (0.25% annually) of bank defaults beginning in 2011. Regarding the I-PreTSL deals, management has determined that the base case scenario which uses the historical default rate of 0.25% annually is appropriate given the relative lack of defaults and deferrals experienced by the insurance company issuers when compared to the bank issuers of the PreTSL deals. The model assumes there will not be any recoveries of defaulted issuers while a recovery rate of 15% of deferring issuers is used in both the PreTSL and I-PreTSL deals.

The amortized cost and fair value of debt securities and mortgage-backed securities available for sale at December 31, 2009, 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.


	Available for Sale
	Amortized Cost		Fair Value
	(in thousands)

Due within one year or less	$	8,964	$	9,018
Due after one year but within five years		59,707		60,341
Due after five years but within ten years		11,364		11,671
Due after ten years		23,759		11,825
Mortgage-backed securities		59,141		59,960


Total investment securities	$	162,935	$	152,815

Gross realized gains on sales of investment securities during 2009 were $1.2 million, compared to $114,000 during 2008. The Company also realized gross losses of $74,000 during 2008 from the sales of securities. Proceeds were $31.7 million in 2009 related to sales of FHLMC and FNMA adjustable rate MBS securities, and $2.5 million in 2008 from the sales of a U.S. Government agency obligation, a municipal bond, and FHLMC and FNMA preferred stock.

F-20

AUDITED FINANCIAL STATEMENTS

As of December 31, 2009, the fair value of all securities available for sale that were pledged to secure public fund deposits, short-term borrowings, repurchase agreements, and for other purposes required by law, was $57.5 million. At December 31, 2008 the corresponding amount was $38.5 million.

NOTE 4 — LOANS RECEIVABLE

Loans receivable consist of the following:


	December 31,
	2009		2008
	(in thousands)

Commercial mortgage	$	412,475	$	411,809
Residential mortgage		244,897		226,963
Construction		28,839		54,187
Home equity loans and lines of credit		52,806		46,850
Commercial business loans		62,685		54,319
Other consumer loans		1,284		1,388

Loans receivable, gross		802,986		795,516

Less:
Allowance for loan losses		13,311		11,240
Deferred loan fees		202		407

Loans receivable, net	$	789,473	$	783,869

Activity in the allowance for loan losses is as follows:


	2009			2008			2007
	(in thousands)

Balance at beginning of year	$	11,240		$	4,121		$	4,009
Allowance from acquired entity		—			3,791			—
Provisions charged to operations		13,159			9,009			357
Reserve on loan commitments reclassified as other liabilities		—			—			(56	)
Charge-offs		(11,656	)		(5,708	)		(232	)
Recoveries		568			27			43

Balance at end of year	$	13,311		$	11,240		$	4,121

F-21

AUDITED FINANCIAL STATEMENTS

Individually impaired loans were as follows:


	2009		2008
	(in thousands)

Period-end loans with no allocated allowance for loan losses	$	26,020	$	24,998
Period-end loans with allocated allowance for loan losses		7,228		—

Total	$	33,248	$	24,998

Amount of the allowance for loan losses allocated	$	3,016	$	—


	2009		2008
	(in thousands)

Average of individually impaired loans during year	$	31,833	$	18,603
Interest income recognized during impairment		49		10
Cash basis interest income recognized		—		2

As of December 31, 2009 and 2008, non-performing loans had a principal balance of approximately $33.2 million and $21.1 million respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to approximately $1,254,000 and $754,000 at December 31, 2009 and 2008, respectively. The amount of interest income that would have been earned on non-accrual loans was $4,589,000, $1,951,000 and $417,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year end are as follows:


	2009		2008
	(in thousands)

Mortgage loan portfolios serviced for FNMA	$	4,414	$	6,209

Custodial escrow balances maintained in connection with serviced loans were $18,000 and $38,000 at December 31, 2009 and 2008, respectively.

The Bank had a policy of offering a 100 basis point interest rate discount to its employees (including officers) for loans on their primary residence. This discount was not available to outside directors. Effective December 31, 2008, this policy was discontinued. Loans to principal officers, directors, and their affiliates were as follows:


	2009			2008
	(in thousands)

Beginning balance	$	9,355		$	6,729
New loans/advances		5,550			1,369
Loans from acquired entity		—			2,050
Effect of changes in composition of related parties		(42	)		(379	)
Repayments		(5,840	)		(414	)

Ending balance	$	9,023		$	9,355

F-22

AUDITED FINANCIAL STATEMENTS

NOTE 5 — FAIR VALUE

FASB ASC Topic No. 820, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Collateralized debt obligation securities which are issued by financial institutions and insurance companies were historically priced using Level 2 inputs, the decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely. The once active market has become comparatively inactive. As such, these investments are now priced using Level 3 inputs.

The Company obtained the pricing for these securities from an independent third party who prepared the valuations using a market valuation approach. Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies, are utilized in determining individual security valuations. Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

F-23

AUDITED FINANCIAL STATEMENTS

Assets and Liabilities Measured on a Recurring Basis

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


	Fair Value Measurements						Fair Value Measurements
	at December 31, 2009						at December 31, 2008
	Quoted						Quoted
	Prices						Prices
	in Active		Significant		Significant		in Active		Significant		Significant
	Markets for		Other		Other		Markets for		Other		Other
	Identical		Observable		Observable		Identical		Observable		Observable
	Assets		Inputs		Inputs		Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)
	(in thousands)						(in thousands)
Available for sale securities:
U.S. Government and agency obligations and municipal bonds	$	—	$	80,353	$	—	$	—	$	42,480	$	—
Corporate bonds and mortgage-backed securities	$	—	$	71,006	$	—	$	—	$	69,142	$	—
Collateralized debt obligations	$	—	$	—	$	1,456	$	—	$	—	$	3,033

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2009 and 2008:


	Fair Value Measurements
	Using Significant
	Unobservable Inputs
	(Level 3)
	CDO Securities
	Available for Sale
	(in thousands)
	2009			2008
Beginning balance	$	3,033		$	—
Accretion of discount		238			65
Payments received		(2	)		(113	)
Increase in amortized cost (1)		6,103			—
Unrealized holding loss		(2,783	)		(8,799	)
Other-than-temporary impairment included in earnings		(5,133	)		(14,463	)
Transfers in and/or out of Level 3		—			26,343


Ending balance	$	1,456		$	3,033


(1)		Increase is due to FASB guidance regarding the recognition and presentation of other-than-temporary impairments.

F-24

AUDITED FINANCIAL STATEMENTS

Assets and Liabilities Measured on a Non-Recurring Basis

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


	Fair Value Measurements						Fair Value Measurements
	at December 31, 2009						at December 31, 2008
	Quoted						Quoted
	Prices						Prices
	in Active		Significant		Significant		in Active		Significant		Significant
	Markets for		Other		Other		Markets for		Other		Other
	Identical		Observable		Unobservable		Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		(Level 1)		(Level 2)		(Level 3)
	(in thousands)						(in thousands)
Assets:
Impaired loans	$	—	$	33,248	$	—	$	—	$	24,998	$	—
Loans held for sale		—		398		—		—		—		—
Other real estate owned		—		4,817		—		—		798		—
Assets held for sale		—		1,828		—		—		2,026		—
Goodwill		—		—		22,575		—		—		22,575
Other intangibles		—		—		585		—		—		786

Other real estate owned properties are recorded at the lower of cost or estimated fair market value, less the estimated cost to sell, at the date of foreclosure. Fair market value is estimated by using professional real estate appraisals.

The following disclosure of estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

F-25

AUDITED FINANCIAL STATEMENTS


	At December 31, 2009				At December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)

Assets
Cash and cash equivalents	$	13,513	$	13,513	$	22,501	$	22,501
Interest-bearing time deposits		7,451		7,539		5,534		5,534
Investment securities		152,815		152,815		163,480		164,593
Loans held for sale		398		398		—		—
Loans receivable		789,473		788,421		783,869		799,064
FHLB Stock		10,275		10,275		11,602		11,602
Bank owned life insurance		27,210		27,210		26,446		26,446
Accrued interest receivable		4,630		4,630		4,736		4,736

Liabilities
Savings deposits	$	79,368	$	79,368	$	79,494	$	79,494
NOW, checking and MMDA deposits		320,308		320,308		275,443		275,443
Certificates of deposit		336,911		340,084		356,193		360,717
Borrowings		203,981		199,718		234,484		232,090
Accrued interest payable		807		807		778		778

The carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, and accrued interest receivable and payable.

Investment securities — The fair value is determined as previously described.

Loans held for sale — The fair value is equal to the carrying value since the time from when a loan is closed and settled is generally not more than two weeks.

Loans — The fair values of all loans are estimated by discounting the estimated future cash flows using the Company’s interest rates currently offered for loans with similar terms to borrowers of similar credit quality which is not an exit price under FASB ASC Topic No. 820, “Fair Value Measurements and Disclosures”. The carrying value and fair value of loans include the allowance for loan losses.

FHLB stock — Ownership in equity securities of FHLB of New York is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.

Deposits — The fair value of deposits with no stated maturity, such as money market deposit accounts, checking accounts and savings accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Company for deposits of similar size, type and maturity.

Borrowings — The fair value of borrowings, which includes Federal Home Loan Bank of New York advances and securities sold under agreement to repurchase, is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered for borrowings of similar maturity and terms.

The Company’s unused loan commitments, standby letters of credit and undisbursed loans have no carrying amount and have been estimated to have no realizable fair value. Historically, a majority of the unused loan commitments have not been drawn upon. See Note 12, “Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk” of Notes to Consolidated Financial Statements, for additional information.

F-26

AUDITED FINANCIAL STATEMENTS

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2009 and 2008. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date; and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

NOTE 6 — OTHER REAL ESTATE OWNED

At December 31, 2009, other real estate owned totaled $4.8 million and consisted of three residential properties and seven commercial properties. At December 31, 2008, other real estate owned totaled $798,000 and consisted of residential property under development. Other real estate owned is presented net of an allowance for losses, if any. At December 31, 2009 and 2008 there was no allowance for losses on foreclosed real estate.

Net expenses applicable to other real estate owned were $946,000 and $3,000 for the years ended December 31, 2009 and 2008, respectively. Included in net expenses were net losses on sales of other real estate owned of $323,000 and net gains of $1,000 for the years ended December 31, 2009 and 2008, respectively. There was no activity for the 2007 period.

NOTE 7 — PREMISES AND EQUIPMENT

Premises and equipment, summarized by major classification, are as follows:


	Estimated
	Useful Lives		2009			2008
			(in thousands)
Land, buildings, and improvements	15 - 39 years		$	30,451		$	30,441
Furniture and equipment	3 - 7 years			9,977			10,223
Construction-in-progress		—		388			132

Total				40,816			40,796
Accumulated depreciation				(14,433	)		(13,454	)

Premises and equipment, net			$	26,383		$	27,342

Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was approximately $1,503,000, $1,608,000, and $856,000, respectively. In December 2008, the amount of $2,026,000, representing a combination of buildings, furniture and equipment was transferred from Premises and Equipment to Assets Held for Sale at the lower of cost or market, less costs to sell.

F-27

AUDITED FINANCIAL STATEMENTS

NOTE 8 — GOODWILL AND INTANGIBLE ASSETS

The change in the balance for goodwill during the year is as follows:


	2009		2008
	(in thousands)

Beginning balance	$	22,575	$	—
Acquired goodwill		—		54,478
Impairment		—		(31,751	)
Other, net		—		(152	)


Ending balance	$	22,575	$	22,575

FASB ASC Topic No. 350-20, “Goodwill” requires a company to perform an impairment test on goodwill annually, or more frequently if events or changes in circumstance indicate that the asset might be impaired, by computing the fair value of such goodwill to its recorded or carrying amount. If the carrying amount of goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess.

The Company tested goodwill for impairment during the third quarter of 2009. This test involved estimating the fair value of the Company using financial data and market prices as of September 30, 2009 and utilizing four valuation methodologies including the comparable transactions approach, the control premium approach, the public market peers approach, and the discounted cash flow approach. The results of this test indicated that goodwill was not impaired. The Company continues to evaluate goodwill on a quarterly basis.

Due to credit deterioration in the Company’s loan and securities portfolio, the Company determined that it was appropriate to test for goodwill impairment during the fourth quarter of 2008. The company used a three step valuation approach of the Company. These three measurements included the comparable transaction approach including applications of various metrics from bank sale transactions for institutions comparable to the Company; the control premium approach including application of a market-derived multiple of tangible book value; and the discounted cash flow approach, including estimations of the present value of future cash flows.

Once it is determined that the fair value is materially less than the carrying value, FASB ASC Topic No. 350-20 requires a company to calculate the implied fair value of goodwill and compare it to the carrying amount of goodwill. At December 31, 2008, the amount of excess of the carrying amount of goodwill over the implied amount of goodwill is the amount of the impairment loss, which was calculated at $31.8 million by management.

Acquired intangible assets at year end are as follows:


	2009				2008
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
	(in thousands)				(in thousands)
Amortized intangible assets:
Core deposit intangibles	$	565	$	165	$	565	$	86
Other customer relationship intangibles		485		300		485		178


Total	$	1,050	$	465	$	1,050	$	264

The aggregate amortization expense for the years ended December 31, 2009 and 2008 was $201,000 and $264,000, respectively. There was no amortization expense for the year ending December 31, 2007.

F-28

AUDITED FINANCIAL STATEMENTS

The estimated amortization expense for each of the next five years and thereafter is as follows:


	(in thousands)

2010	$	140
2011	$	110
2012	$	98
2013	$	43
2014	$	32
Thereafter	$	162

NOTE 9 — DEPOSITS

Deposits are as follows:


	2009		2008
	(in thousands)

Savings accounts	$	79,368	$	79,494
NOW accounts and money market funds		257,943		212,185
Non-interest bearing checking		62,365		63,258
Certificates of deposit of less than $100,000		201,303		229,533
Certificates of deposit of $100,000 or more		135,608		126,660

	$	736,587	$	711,130

Interest expense by deposit type was as follows:


	2009		2008		2007
	(in thousands)

Savings accounts	$	385	$	1,062	$	1,290
NOW accounts and money market funds		2,119		4,059		4,237
Certificates of deposit		9,886		12,562		8,029

	$	12,390	$	17,683	$	13,556

F-29

AUDITED FINANCIAL STATEMENTS

Certificates of deposit were scheduled to mature contractually within the following periods:


	(in thousands)

2010	$	279,726
2011		28,980
2012		13,890
2013		10,561
2014		3,654
Thereafter		100

	$	336,911

Deposits held at the Bank by related parties, which include officers, directors, and companies in which directors of the Board have a significant ownership interest, approximated $3,374,000 and $2,970,000 at December 31, 2009 and 2008, respectively.

NOTE 10 — BORROWINGS

At December 31, 2009, the Bank had available borrowing capacity under a continuing borrowing agreement with the Federal Home Loan Bank of New York (FHLB) to borrow up to 100% of the book value of qualified 1 to 4 family loans secured by residential properties and various commercial loans secured by commercial real estate subject to FHLB approval. At December 31, 2009, $11,500,000 of these advances were callable on various dates compared to $18,500,000 at December 31, 2008. Interest rates ranged from 0.32% to 5.31% at December 31, 2009, and from 0.44% to 5.31% at December 31, 2008.

Outstanding borrowings mature as follows:


	2009
	FHLB		Repurchase
	Borrowings		Agreements		Total
2010	$	59,950	$	—	$	59,950
2011		25,000		—		25,000
2012		25,000		—		25,000
2013		20,000		—		20,000
2014		25,000		—		25,000
Thereafter		11,541		37,490		49,031

Principal due	$	166,491	$	37,490	$	203,981

At December 31, 2009 and 2008, the Bank had qualified 1 to 4 family loans and commercial loans of approximately $193,828,000 and $240,914,000, respectively, which served as collateral to cover outstanding advances on the Federal Home Loan Bank of New York borrowings.

Securities sold under agreement to repurchase totaled $37,490,000 at December 31, 2009 are fixed rate and are collateralized by securities with a carrying amount of $42,971,000. At maturity, the securities underlying the agreement are returned to the Company. At December 31, 2009, repurchase agreements totaling $27,500,000 were callable on various dates at par by the repurchase agreement counter-party. At December 31, 2008, securities sold under agreements to repurchase totaled $37,363,000 and were collateralized by securities with a carrying value of $36,139,000 and cash of $4,732,000.

F-30

AUDITED FINANCIAL STATEMENTS

Additional information regarding FHLB Borrowings and securities sold under agreements to repurchase is as follows:


	2009									2008
	FHLB			Repurchase						FHLB			Repurchase
	Borrowings			Agreements			Total			Borrowings			Agreements			Total
	(dollars in thousands)									(dollars in thousands)

Average daily balance during the year	$	153,582		$	37,674		$	191,256		$	156,653		$	36,550		$	193,203
Average interest rate during the year		3.27	%		4.30	%		3.47	%		3.18	%		4.34	%		3.40	%
Maximum month-end balance during the year	$	193,897		$	37,778		$	231,675		$	197,121		$	37,363		$	234,484
Weighted average interest rate at year-end		3.09	%		4.32	%		3.32	%		2.28	%		4.32	%		2.60	%

NOTE 11 — INCOME TAXES

Income tax expense (benefit) was as follows:


	2009			2008			2007
	(in thousands)
Current expense:
Federal	$	464		$	440		$	2,369
State		10			23			171

Total current		474			463			2,540

Deferred (benefit):
Federal		(3,176	)		(7,333	)		(958	)
State		(801	)		(1,249	)		(283	)

Total deferred		(3,977	)		(8,582	)		(1,241	)


Change in valuation allowance		15,514			(35	)		—


Income tax expense (benefit)	$	12,011		$	(8,154	)	$	1,299

F-31

AUDITED FINANCIAL STATEMENTS

Effective tax rate differs from the federal statutory rate of 34% applied to income before income taxes due to the following:


	2009			2008			2007

Tax statutory rate		34.0	%		(34.0	%)		34.0	%
Adjustments resulting from:
Goodwill impairment		—			21.3			—
State tax benefit, net of federal income tax expense		8.9			(1.6	)		(1.6	)
Tax-exempt income		7.8			(0.9	)		(11.3	)
Income on bank owned life insurance		8.7			(0.7	)		(12.5	)
Increase in valuation reserve		(263.4	)		—			—
Other		0.1			(0.2	)		18.9


Effective tax rate		(203.9	%)		(16.1	%)		27.5	%

Year-end deferred tax assets and liabilities were due to the following:


	2009			2008
	(in thousands)
Deferred tax assets:
Other than temporary impairment	$	4,533		$	4,917
Allowance for loan losses		4,949			4,043
Charitable foundation contribution carryforward		2,457			2,527
Purchase accounting adjustments		1,816			1,660
Non-accrual loan interest income		1,819			1,013
Deferred compensation		584			667
Net operating losses		534			913
Net unrealized loss on available for sale securities		3,496			3,155
Capital loss carryforward		—			233
AMT credit carryforward		557			231
Other		357			156
Valuation allowance		(15,747	)		(233	)

		5,355			19,282


Deferred tax liabilities:
Depreciation		(860	)		(837	)
Deferred loan fees		(533	)		(667	)
Pension		—			(175	)
Net unrealized gain on available for sale securities		—			—
Other		(6	)		(356	)

		(1,399	)		(2,035	)


Net deferred tax asset	$	3,956		$	17,247

As a result of adopting certain provisions of FASB ASC Topic No. 320 (formerly FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”) in April 2009, we were required to record a cumulative effect adjustment to reclassify the portion of previously recorded other-than-temporary impairment charges that were not related to credit losses from retained earnings to accumulated other comprehensive income. The tax effect of this adjustment, a $2.1 million deferred tax asset related to previously recorded OTTI, was reclassified as a deferred tax asset on net unrealized losses on available for sale securities.

F-32

AUDITED FINANCIAL STATEMENTS

During the third quarter of 2009, the Company established a valuation allowance of approximately $16.0 million against a portion of its deferred tax assets after concluding that it was more likely than not that a portion of the deferred tax asset would not be realized. A valuation allowance was not deemed necessary for the deferred tax asset related to the unrealized investment losses as the realization of this component of the deferred tax asset is not dependent on future taxable income. In evaluating the ability to recover our deferred tax assets, we consider all available positive and negative evidence regarding the ultimate realizability of our deferred tax assets including past operating results and our forecast of future taxable income. This determination was based largely on the negative evidence of a cumulative loss in the most recent three year period ended December 31, 2009, caused primarily by the significant loan loss provisions and OTTI charges made during recent periods. In addition, general uncertainty surrounding the future economic and business conditions have increased the likelihood of volatility in our future earnings.

The Company has approximately $8.6 million of state net operating losses that will expire in 2015 and 2029. Additionally, the Company has approximately $557,000 of AMT tax credits to offset against regular taxable income. The deferred tax assets related to these items are subject to a valuation allowance as noted above.

Pursuant to FASB ASC Topic No. 740, “Income Taxes” the Company is not required to provide deferred taxes on its tax loan loss reserve as of the base year. The amount of this reserve on which no deferred taxes have been provided is $7,878,000 for 2009 and 2008. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if any portion of this tax reserve is subsequently used for purposes other than to absorb loan losses. The related amount of deferred tax liability is approximately $3,146,000 for 2009 and 2008.

The following is a roll-forward of the Bank’s FASB ASC Topic No. 740 unrecognized tax benefits:


	2009		2008
	(in thousands)

Balance at January 1	$	353	$	—
Additions based on tax positions related to the current year		—		353
Additions for tax positions of prior years		—		—
Reductions for tax positions of prior years		—		—
Reductions due to the statute of limitations		—		—
Settlements		—		—


Balance at December 31	$	353	$	353

Of this total, $353,000 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Bank does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

The total amount of interest and penalties recorded in the income statement for the year ended December 31, 2009 and 2008 was $52,000 and $0 and the amount accrued for interest and penalties at December 31, 2009 and 2008 was $52,000 and $0, respectively.

The Bank is subject to U.S. federal income tax as well as income tax of the state of New Jersey. The Bank is no longer subject to examination by the Internal Revenue Service for years before 2006 and by the state of New Jersey for years before 2005.

F-33

AUDITED FINANCIAL STATEMENTS

NOTE 12 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets.

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

At December 31, 2009 and 2008, the Bank had outstanding commitments (substantially all of which expire within one year) to originate residential mortgage loans, construction loans, commercial real estate and consumer loans. These commitments were comprised of fixed and variable rate loans.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support contracts entered into by customers. Most guarantees extend for one year. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank defines the fair value of these letters of credit as the fees paid by the customer or similar fees collected on similar instruments.

The Bank amortizes the fees collected over the life of the instrument. The Bank generally obtains collateral, such as real estate or liens on customer assets for these types of commitments. The Bank’s potential liability would be reduced by proceeds obtained in liquidation of the collateral held.

The Bank had the following off-balance sheet financial instruments whose contract amounts represent credit risk:


	At December 31, 2009				At December 31, 2008
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
	(in thousands)
Commitments to make loans	$	10,915	$	1,236	$	9,333	$	1,428
Unused lines of credit	$	—	$	56,323	$	—	$	57,429
Construction loans in process	$	2,786	$	7,403	$	2,920	$	18,899
Standby letters of credit	$	—	$	6,929	$	—	$	10,778

Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 4.375% to 14.00% and maturities ranging from one to thirty years.

The Bank provides loans primarily in Atlantic and Cape May counties, New Jersey, to borrowers that share similar attributes. A substantial portion of the Bank’s debtors’ ability to honor their contracts is dependent upon the economic conditions of these regions of New Jersey.

NOTE 13 — BENEFIT PLANS

The Bank participates in a multi-employer defined benefit plan. Contributions to this plan by the Bank during the years ended December 31, 2009, 2008 and 2007 were $164,000, $817,000, and $1,051,000 respectively. Total compensation expense recorded under this plan during the years ended December 31, 2009, 2008 and 2007, was approximately $476,000, $975,000, and $1,177,000, respectively. During 2007, the plan was amended to freeze participation to new employees effective January 1, 2008. The plan was further amended to freeze benefits as of December 31, 2008 for all employees eligible to participate prior to January 1, 2008.

F-34

AUDITED FINANCIAL STATEMENTS

The Bank maintains a 401(k) plan for employees, a tax-qualified defined contribution plan, for all employees of the Bank who have satisfied the 401(k) plan’s eligibility requirements. Prior to January 1, 2008, the Bank made matching contributions to the accounts of plan participants in an amount equal to 100% of the participants’ contributions, up to 6% of their salary. The Bank charged approximately $304,000, $324,000, and $312,000 to employer contributions for the 401(k) plan for the years ended December 31, 2009, 2008 and 2007, respectively. Effective January 1, 2008, the Bank has amended the matching contribution formula so that matching contributions will be equal to 100% of the participants’ contributions on up to 3% of the participants’ salary contributed to the plan and 50% of the participants’ contributions on the next 2% of salary contributed by the participants, with a maximum potential matching contribution of 4%.

On January 1, 2008, the Bank adopted an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed $10.7 million from the Company and used the funds to purchase 1,065,082 shares of the Company. The loan has an interest rate that is determined January 1^st of each year and is based on the prime rate as published inThe Wall Street Journal on the first business day of the calendar year. The interest rate for 2009 and 2008 was 6.00% and 3.25% respectively, and has an amortization schedule of 25 years. The loan is secured by the shares. Shares purchased are held by the trustee in a loan suspense account and are released from the suspense account on a pro rata basis as the loan is repaid by the Bank over a period not to exceed 25 years. The trustee allocates shares to participants based on compensation as described in the Cape Bank Employee Stock Ownership Plan, in the year of allocation. Employees are eligible to participate in the ESOP after attainment of age 21 and completion of one year of service.

Contributions to the ESOP were $10.7 million in 2008. The Company has not declared a dividend and as a result, no dividend income was recorded for the years ended December 31, 2009 and 2008. The Company recorded compensation expense of $320,000 and $395,000 for the ESOP for the years ended December 31, 2009 and 2008, respectively.

Shares held by the ESOP were as follows:


	2009		2008
	(dollars in thousands)
Allocated to participants		85,206		42,603
Distributed to participants		—		—
Unearned shares		979,876		1,022,479

Total ESOP shares		1,065,082		1,065,082


Fair value of unearned shares	$	6,585	$	9,458

The Bank maintains an amended and restated director retirement plan for its directors, represented by individual agreements with the directors. In accordance with each director’s retirement agreement, the director is entitled to a normal retirement benefit upon termination of service on or after the director’s normal retirement age, equal to 2.5% times the director’s years of service with Cape Bank (not to exceed a benefit equal to 50%) of the average of the greatest fees earned by a director during any five consecutive calendar years. This benefit is payable to the director in equal monthly installments for a period of 10 years or the director’s lifetime, whichever is greater. In December 2008, the individual agreements were amended to comply with the final regulations issued under Section 409A of the Internal Revenue Code and to freeze future benefit accruals as of October 31, 2008. In accordance with these amendments, the agreements were modified to require a specified dollar amount to be paid to the director in January 2009, in complete satisfaction of all rights under the director retirement plan. Accordingly, in January 2009, the director’s received $8,604 from the plan. In addition, the individual agreements were also modified to specify the total benefit that would be paid to each director and to specify that the total benefit would be paid in 120 monthly installments upon the occurrence of retirement, death or a change in control. The director could elect a lump sum benefit in the event of death or a change in control if such election was made prior to December 31, 2008.

Expense for these plans related to both active and retired participants totaled $52,000, $216,000, and $2,385,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The total compensation liability for these plans was $1,135,000 and $1,218,000 at December 31, 2009 and 2008, respectively. On January 4, 2008, $4,596,000 related to the phantom restricted stock and phantom stock option plans was disbursed. In addition, $127,000 in payments were made to retired directors.

F-35

AUDITED FINANCIAL STATEMENTS

NOTE 14 — COMMITMENTS AND CONTINGENCIES

Leases: Lessor — the Bank leases portions of three of its buildings to various lessees under noncancelable operating leases with the following minimum future rentals due:


	(in thousands)

Due in one year or less	$	132
Due after one year		11

	$	143

Lessees are also responsible for their proportionate share of common area maintenance expenses. These leases convert to a month-to-month tenancy agreement after completion of the original lease term.

Lessee — A subsidiary, Cape Delaware Investment Company, whose office is in the state of Delaware, leases its office space under a cancelable lease agreement. In addition, in 2008, the Bank leased office space in New Jersey for two loan production offices. Rent expense for the years ended December 31, 2009, 2008 and 2007, approximated $9,000, $58,000, and $26,000, respectively.

From time to time, the Bank may be a defendant in legal proceedings arising out of the normal course of business. In management’s opinion, the financial position and results of operations of the Bank would not be affected materially by the outcome of such legal proceedings.

NOTE 15 — REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).

As of December 31, 2009 and 2008, Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

F-36

AUDITED FINANCIAL STATEMENTS

The actual capital amounts, ratios and minimum regulatory guidelines for Cape Bank are as follows:


						Per Regulatory Guidelines
	Actual					Minimum					“Well Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
December 31, 2009
Risk based capital ratios:
Tier I	$	98,256		11.45	%	$	34,325		4.00	%	$	51,488		6.00	%
Total capital	$	109,013		12.71	%	$	68,616		8.00	%	$	85,769		10.00	%
Leverage ratio	$	98,256		9.37	%	$	41,945		4.00	%	$	52,431		5.00	%

December 31, 2008
Risk based capital ratios:
Tier I	$	108,922		13.00	%	$	33,514		4.00	%	$	50,272		6.00	%
Total capital	$	119,403		14.25	%	$	67,033		8.00	%	$	83,792		10.00	%
Leverage ratio	$	108,922		9.87	%	$	44,143		4.00	%	$	55,178		5.00	%

Management believes that under the current and proposed regulations, the Company and the Bank will continue to meet its minimum capital requirements in the foreseeable future.

Regulatory capital levels reported above differ for both Cape Bancorp and Cape Bank from their total capital respectively, computed in accordance with accounting principles general accepted in the United States (GAAP), as follows:


	2009			2008
	(in thousands)

Total capital, computed in accordance with GAAP	$	114,772		$	128,950
Accumulated other comprehensive (gain) loss		6,645			6,022
Intangible assets		(1	)		(2	)
Disallowed goodwill and other disallowed intangible assets		(23,160	)		(23,361	)
Deferred tax assets excluded		—			(2,687	)

Tier I (tangible) capital		98,256			108,922
Allowance for loan losses		10,757			10,481

Total capital	$	109,013		$	119,403

Liquidation Account — As required by current regulations, a liquidation account in the amount of $71.1 million was established in conjunction with Cape Bank’s mutual to stock conversion in 2008.

As a result, each eligible account holder and supplemental eligible account holder will be entitled to a proportionate share of this account in the unlikely event of a complete liquidation of the Bank, and only in such event. This share will be reduced if the eligible account holder’s or supplemental eligible account holder’s deposit balance falls below the amounts on the date of record and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after the completion of Cape Bank’s conversion in the related deposit balance. Cape Bank may not declare, pay a dividend on, or repurchase any of its capital stock of the Bank, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.

F-37

AUDITED FINANCIAL STATEMENTS

NOTE 16 — EARNINGS PER SHARE

Earnings Per Common Share: Basic earnings 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. Earnings per share for the year ended December 31, 2008 is calculated on earnings since the date of conversion on January 31, 2008.

The following is a reconciliation of the calculation of the basic earnings per share for the period January 1, 2009 through December 31, 2009 and the period January 31, 2008 through December 31, 2008. There were no potentially dilutive common shares at or for the periods ended December 31, 2009 and 2008.


	Year ended December 31,
	2009			2008
	(in thousands, except share data)

Net loss	$	(17,901	)	$	(42,491	)
Less: Net income from January 1, 2008 to January 31, 2008		—			(402	)

Net loss post conversion for earnings per share	$	(17,901	)	$	(42,893	)


Weighted average shares outstanding		12,312,714			12,280,494
Basic earnings (loss) per share	$	(1.45	)	$	(3.49	)
Diluted weighted average shares outstanding		12,312,714			12,280,494
Diluted basic earnings (loss) per share	$	(1.45	)	$	(3.49	)

F-38

AUDITED FINANCIAL STATEMENTS

NOTE 17 — ACQUISITION OF BOARDWALK BANCORP

On January 31, 2008, Cape Bancorp, Inc. acquired Boardwalk Bancorp, Inc, as previously discussed in Note 1. As a result of the acquisition, Cape Bancorp expects to further solidify its market share in the southern New Jersey market, expand its customer base to enhance deposit fee income and provide an opportunity to market additional products and services to new customers, including expansion of services to commercial loan customers.

Under the terms of the merger agreement, the shareholders of Boardwalk Bancorp received total merger consideration of approximately $99.0 million, consisting of 4,946,121 shares of Cape Bancorp common stock and approximately $49.5 million in cash. Based on the total elections made by Boardwalk Bancorp shareholders, Boardwalk Bancorp shareholders who properly elected to receive Cape Bancorp, Inc. common stock received 2.3 Cape Bancorp shares for each share of Boardwalk Bancorp common stock, and Boardwalk Bancorp shareholders who properly elected to receive cash received $23.00 in cash for each share of Boardwalk Bancorp common stock. The purchase price resulted in approximately $54.5 million in goodwill, and $1.0 million in core deposit and customer relationship intangible, none of which is deductible for tax purposes. The intangible asset(s) are amortized over 7-10 years, using an accelerated method. Goodwill is not amortized but instead evaluated periodically for impairment.

Boardwalk Bancorp shareholders holding approximately 350,000 shares that did not make proper elections or did not participate in the election received a combination of 0.347775 shares of the Company’s common stock and $19.5245 in cash for each share of Boardwalk Bancorp common stock. The Company paid cash in lieu of fractional shares at a rate of $10 per share.

Net assets acquired are shown in the table below (in thousands):


Securities available for sale	$	92,949
Loans, net		314,471
Goodwill		54,523
Core deposit and other intangibles		1,050
Other assets		40,027

Total assets acquired	$	503,020


Deposits	$	(320,520	)
Borrowings		(82,729	)
Other liabilities		(848	)

Total liabilities assumed	$	(404,097	)


Net assets acquired	$	98,923

F-39

AUDITED FINANCIAL STATEMENTS

Boardwalk Bancorp Inc.’s results of operations have been reflected in Cape Bancorp’s consolidated statements of income beginning as of the acquisition date. Pro forma condensed consolidated income statements for the years ended December 31, 2008 and 2007 are shown as if the merger occurred as of January 1, 2008:


	Years ended December 31,
	2008			2007
	(in thousands)

Interest and dividend income	$	60,517		$	65,388
Interest expense		25,612			33,045

Net interest income		34,905			32,343
Provision for loan losses		9,009			877

Net interest income after provision for loan losses		25,896			31,466
Non-interest income		(10,672	)		3,982
Non-interest expense		67,291			30,319

Income (loss) before income taxes		(52,067	)		5,129
Income tax expense (benefit)		(8,360	)		1,288

Net income (loss)	$	(43,707	)	$	3,841

Basic EPS	$	(3.56	)		N/A

Non-interest expense for the year ended December 31, 2008 includes a $31.8 million non-cash goodwill impairment charge and a $6.3 million expense for a contribution to the charitable foundation established and funded in connection with the stock conversion. Non-interest income for the year ended December 31, 2008 includes a $15.6 million charge for other-than-temporary impairment on investment securities. Non-interest income for the year ended December 31, 2007 includes a $1.5 million charge for other-than-temporary impairment on investment securities.

F-40

AUDITED FINANCIAL STATEMENTS

NOTE 18 — CAPE BANCORP (PARENT COMPANY)

The Parent Company’s condensed balance sheets at December 31, 2009 and 2008 and the related condensed statements of income and cash flows for the years ended December 31, 2009 and 2008 follow:

Condensed Balance Sheets


	December 31,
	2009			2008
	(in thousands)

ASSETS
Non-interest bearing balances with bank subsidiary	$	1,782		$	1,427
Loans due from bank subsidiary		10,116			10,410
Investment in bank subsidiary		114,772			128,950
Other assets		69			71

Total assets	$	126,739		$	140,858


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses	$	191		$	133

Total liabilities		191			133


Stockholders’ Equity
Common stock		133			133
Additional paid in capital		126,695			126,801
Unearned ESOP shares		(9,806	)		(10,232	)
Accumulated other comprehensive loss		(6,645	)		(6,022	)
Retained earnings		16,171			30,045

Total stockholders’ equity		126,548			140,725

Total liabilities and stockholders’ equity	$	126,739		$	140,858

F-41

AUDITED FINANCIAL STATEMENTS

Condensed Statements of Income


	Years ended December 31,
	2009			2008
	(in thousands)
Income:
Interest income from bank subsidiary	$	338		$	611

Total income		338			611


Expense:
Interest expense		—			28
Legal expense		207			249
Investor relations expense		68			99
Audit and consulting fees		8			51
Subscriptions and publications		68			29
Other non-interest expenses		13			15

Total expense		364			471


Income (loss) before income taxes and equity in undistributed net income (loss) of subsidiaries		(26	)		140
Income tax expense (benefit)		(27	)		64

Income before equity in undistributed net income (loss) of subsidiaries		1			76
Equity in undistributed loss of bank subsidiary		(17,902	)		(42,567	)

Net loss	$	(17,901	)	$	(42,491	)

Condensed Statements of Cash Flows


	Years ended December 31,
	2009			2008
	(in thousands)
Cash flows from operating activities:
Net loss	$	(17,901	)	$	(42,491	)
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed loss of bank subsidiary		17,902			42,567
Change in other assets and other liabilities, net		60			61

Net cash provided by operating activities		61			137


Cash flows from investing activities:
Capital contribution to bank subsidiary		—			(115,034	)
Loan to ESOP to finance purchase of shares		—			(10,658	)
Repayment of ESOP loan		294			248

Net cash provided by (used in) investing activities		294			(125,444	)


Cash flows from financing activities:
Issuance of common stock related to initial public offering		—			126,734

Net cash provided by financing activities		—			126,734


Net increase in cash and cash equivalents		355			1,427
Cash and cash equivalents at beginning of year		1,427			—


Cash and cash equivalents at end of year	$	1,782		$	1,427

Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Cape Bank. See “—Federal Banking Regulation—Prompt Corrective Action”.

F-42

AUDITED FINANCIAL STATEMENTS

NOTE 19 — SELECTED QUARTERLY DATA (UNAUDITED)


	Year Ended December 31,											Year Ended December 31,
	2009											2008
	Fourth		Third			Second			First			Fourth			Third			Second		First
	Quarter		Quarter			Quarter			Quarter			Quarter			Quarter			Quarter		Quarter
	(in thousands)											(in thousands)

Interest income	$	13,189	$	13,409		$	13,992		$	13,943		$	14,471		$	15,154		$	15,048	$	13,454
Interest expense		4,260		4,487			5,074			5,207			5,664			6,084			6,288		6,217

Net interest income		8,929		8,922			8,918			8,736			8,807			9,070			8,760		7,237
Provision for loan losses		785		9,765			1,864			745			6,860			1,308			558		283

Net interest income (expense) after provision for loan losses		8,144		(843	)		7,054			7,991			1,947			7,762			8,202		6,954
Non-interest income		908		888			(431	)		(433	)		(11,997	)		(870	)		975		1,099
Non-interest expense		7,822		6,609			6,653			8,084			38,251			6,722			7,470		12,274

Income (loss) before income taxes		1,230		(6,564	)		(30	)		(526	)		(48,301	)		170			1,707		(4,221	)
Income tax expense (benefit)		—		12,571			(133	)		(427	)		(6,125	)		(424	)		370		(1,975	)

Net income (loss)	$	1,230	$	(19,135	)	$	103		$	(99	)	$	(42,176	)	$	594		$	1,337	$	(2,246	)


	Year Ended December 31,
	2007
	Fourth			Third		Second		First
	Quarter			Quarter		Quarter		Quarter
	(in thousands)

Interest income	$	9,307		$	9,231	$	9,117	$	8,974
Interest expense		4,318			4,306		4,320		4,202

Net interest income		4,989			4,925		4,797		4,772
Provision for loan losses		123			78		78		78

Net interest income after provision for loan losses		4,866			4,847		4,719		4,694
Non-interest income		972			970		1,005		1,045
Non-interest expense		6,072			3,914		4,204		4,201

Income (loss) before income taxes		(234	)		1,903		1,520		1,538
Income tax expense (benefit)		(268	)		562		540		465

Net income	$	34		$	1,341	$	980	$	1,073

The decrease in non-interest income in the fourth quarter 2008 results from the Bank recognizing an other-than-temporary impairment charge of $13.2 million compared to $2.2 million in the third quarter 2008. The increase in non-interest expense in the fourth quarter 2008 resulted from a non-cash goodwill impairment charge in the amount of $31.8 million.

The increase in non-interest expense in the fourth quarter of 2007 was the result of an additional $1.8 million accrual related to amendments to the phantom stock plans which were ultimately paid out in January 2008.

F-43

EXHIBIT INDEX


Exhibit No.		Description

	3.1	Articles of Incorporation of Cape Bancorp, Inc.⁽¹⁾

	3.2	Amended and Restated Bylaws of Cape Bancorp, Inc.⁽²⁾

	4	Form of Common Stock Certificate of Cape Bancorp, Inc.⁽¹⁾

	10.1	Form of Employee Stock Ownership Plan⁽¹⁾

	10.2	Employment Agreement for Herbert L. Hornsby Jr.⁽¹⁾

	10.3	Employment Agreement for Robert J. Boyer⁽¹⁾

	10.4	Employment Agreement for Michael D. Devlin⁽¹⁾

	10.5	Employment Agreement for Guy A. Deninger⁽¹⁾

	10.6	Form of Change in Control Agreement⁽¹⁾

	10.7	Form of Director Retirement Plan⁽¹⁾

	10.8	Benefit Equalization Plan⁽¹⁾

	10.9	2008 Equity Incentive Plan⁽³⁾

	14	Code of Ethics⁽⁴⁾

	21	Subsidiaries of Registrant

	23.1	Consent of KPMG LLP

	23.2	Consent of Crowe Horwath LLP

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Incorporated by reference to the Registration Statement on Form S-1 of Cape Bancorp, Inc.. (file no. 333-146178), originally filed with the Securities and Exchange Commission on September 19, 2007.

(2)		Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2008.

(3)		Incorporated by reference to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on July 16, 2008.

(4)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2007 filed with the Securities and Exchange Commission on March 31, 2008.

Positive
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Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Cape Bancorp Inactive 10-K2009 FY Annual report

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