Cape Bancorp 10Q 2010 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2010


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 (State or other jurisdiction of incorporation or organization)		26-1294270 (I.R.S. Employer Identification Number)

225 North Main Street, Cape May Court House, New Jersey (Address of Principal Executive Offices)		08210 Zip Code

(609) 465-5600
(Registrant’s telephone number)

N/A
(Former name or former address, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YESþ NOo

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. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller Reporting Companyo
		(Do not check if smaller reporting company)

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

As of November 2, 2010 there were 13,313,521 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

CAPE BANCORP, INC.
FORM 10-Q

Index


	Page

Part I. Financial Information

Item 1. Financial Statements		3

Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		3

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and September 30, 2009 (unaudited)		4

Consolidated Statements of Changes in Stockholders’ Equity for the Twelve Months Ended December 31, 2009 and Nine Months Ended September 30, 2010 (unaudited)		5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and September 30, 2009 (unaudited)		6

Notes to Consolidated Financial Statements (unaudited)		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3. Quantitative and Qualitative Disclosures About Market Risk		42

Item 4. Controls and Procedures		44

Part II. Other Information

Item 1. Legal Proceedings		44

Item 1A. Risk Factors		44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44

Item 3. Defaults upon Senior Securities		44

Item 4. (Reserved)		44

Item 5. Other Information		44

Item 6. Exhibits		45

Signature Page		46

Exhibit 31.1
Exhibit 31.2
Exhibit 32


Item 1.		Financial Statements

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	(unaudited)
	September 30,			December 31,
	2010			2009
	(in thousands)
ASSETS
Cash & due from financial institutions	$	13,442		$	9,573
Interest-bearing bank balances		4,853			3,940

Cash and cash equivalents		18,295			13,513
Interest-bearing time deposits		9,566			7,451
Investment securities available for sale, at fair value (amortized cost of $163,038 and $162,935 respectively)		158,106			152,815
Loans held for sale		4,408			398
Loans, net of allowance of $12,621 and $13,311 respectively		758,145			789,473
Accrued interest receivable		4,050			4,630
Premises and equipment, net		25,456			26,383
Other real estate owned		4,184			4,817
Federal Home Loan Bank (FHLB) stock, at cost		8,392			10,275
Prepaid FDIC insurance premium		3,489			4,377
Deferred income taxes		5,522			3,956
Bank owned life insurance (BOLI)		27,970			27,210
Goodwill		22,575			22,575
Intangible assets, net		479			585
Assets held for sale		494			1,828
Other assets		3,087			2,535

Total assets	$	1,054,218		$	1,072,821


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing deposits	$	72,915		$	62,365
Interest-bearing deposits		679,180			674,222
Borrowings		162,335			203,981
Advances from borrowers for taxes and insurance		557			542
Accrued interest payable		710			807
Other liabilities		5,111			4,356

Total liabilities		920,808			946,273


Stockholders’ Equity
Common stock, $.01 par value: authorized 100,000,000 shares; issued 13,324,521 shares		133			133
Additional paid-in capital		126,753			126,695
Treasury stock at cost - 11,000 shares		(85	)		—
Unearned ESOP shares		(9,486	)		(9,806	)
Accumulated other comprehensive loss, net		(3,255	)		(6,645	)
Retained earnings		19,350			16,171

Total stockholders’ equity		133,410			126,548

Total liabilities & stockholders’ equity	$	1,054,218		$	1,072,821

See accompanying notes to unaudited consolidated financial statements.

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(unaudited)


	For the three months						For the nine months
	ended September 30,						ended September 30,
	2010			2009			2010			2009
	(dollars in thousands, except share data)
Interest income:
Interest on loans	$	11,220		$	11,667		$	34,259		$	35,068
Interest and dividends on investments
Taxable		555			585			1,035			2,272
Tax-exempt		304			338			940			1,024
Interest on mortgage-backed securities		576			819			1,815			2,980

Total interest income		12,655			13,409			38,049			41,344

Interest expense:
Interest on deposits		2,105			2,823			6,777			9,808
Interest on borrowings		1,453			1,664			4,485			4,960

Total interest expense		3,558			4,487			11,262			14,768

Net interest income before provision for loan losses		9,097			8,922			26,787			26,576
Provision for loan losses		2,700			9,765			4,652			12,374

Net interest income (expense) after provision for loan losses		6,397			(843	)		22,135			14,202

Non-interest income:
Service fees		926			775			2,543			2,278
Net gains on sale of loans		59			38			99			101
Net income from BOLI		254			256			760			768
Net rental income		58			86			173			258
Gain (loss) on sale of investment securities held for sale, net		343			595			310			1,195
Net gain (loss) on sale of OREO		7			(122	)		255			(377	)
Other		81			59			250			642
Gross other-than-temporary impairment losses		(1,857	)		(5,952	)		(4,881	)		(6,354	)
Less: Portion of loss recognized in other comprehensive income		1,517			5,153			1,456			1,513

Net other-than-temporary impairment losses		(340	)		(799	)		(3,425	)		(4,841	)

Total non-interest income		1,388			888			965			24

Non-interest expense:
Salaries and employee benefits		3,082			3,316			10,474			11,748
Occupancy and equipment		865			874			2,806			2,549
Federal insurance premiums		320			300			952			1,401
Data processing		324			323			1,006			903
Loan related expenses		735			434			1,522			692
Advertising		86			47			283			262
Telecommunications		273			226			746			633
Professional services		199			217			522			661
OREO expenses		196			92			633			197
Other operating		819			780			2,467			2,300

Total non-interest expense		6,899			6,609			21,411			21,346

Income (loss) before income taxes		886			(6,564	)		1,689			(7,120	)
Income tax expense (benefit)		(959	)		12,571			(1,490	)		12,011

Net income (loss)	$	1,845		$	(19,135	)	$	3,179		$	(19,131	)


Earnings (loss) per share (see Note 10):
Basic	$	0.15		$	(1.55	)	$	0.26		$	(1.55	)
Diluted	$	0.15		$	(1.55	)	$	0.26		$	(1.55	)

Weighted average number of shares outstanding:
Basic		12,358,140			12,317,638			12,348,861			12,307,455
Diluted		12,368,865			12,317,638			12,359,770			12,307,455

See accompanying notes to unaudited consolidated financial statements.

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Year ended December 31, 2009 and nine months ended September 30, 2010
(unaudited)


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

Balance, December 31, 2008	$	133	$	126,801		$	—		$	(10,232	)	$	(6,022	)	$	30,045		$	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	)		(6,645	)		16,171			126,548

Net income		—		—			—			—			—			3,179			3,179

Stock option compensation expense		—		144			—			—			—			—			144

Restricted stock compensation expense		—		4			—			—			—			—			4

Net unrealized gains, net of reclassification adjustments and taxes		—		—			—			—			3,390			—			3,390

Total comprehensive income		—		—			—			—			—			—			6,717

Common stock repurchased — 11,000 shares		—		—			(85	)		—			—			—			(85	)

ESOP shares earned		—		(90	)		—			320			—			—			230


Balance, September 30, 2010	$	133	$	126,753		$	(85	)	$	(9,486	)	$	(3,255	)	$	19,350		$	133,410

See accompanying notes to unaudited consolidated financial statements.

CAPE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine months ended September 30,
	2010			2009
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	3,179		$	(19,131	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		4,652			12,374
Net gain on the sale of loans		(99	)		(101	)
Net (gain) loss on the sale of other real estate owned		(255	)		377
Write-down of other real estate owned		335			152
Loss on impairment of securities		3,425			4,841
Net gain on sale of investments		(310	)		(1,195	)
Earnings on BOLI		(760	)		(768	)
Origination of loans held for sale		(13,719	)		(9,165	)
Proceeds from sales of loans		9,710			8,303
Depreciation and amortization		1,477			1,380
ESOP and stock-based compensation expense		378			251
Deferred income taxes		(3,366	)		11,997
Changes in assets and liabilities that (used) provided cash:
Accrued interest receivable		580			4
Other assets		1,670			(1,914	)
Accrued interest payable		(97	)		16
Other liabilities		755			1,216

Net cash provided by operating activities		7,555			8,637

Cash flows from investing activities
Proceeds from sales of AFS securities		6,574			31,708
Proceeds from calls, maturities, and principal repayments of HTM securities		—			6,768
Proceeds from calls, maturities, and principal repayments of AFS securities		88,120			62,503
Purchases of HTM securities		—			(2,998	)
Purchases of AFS securities		(97,827	)		(90,002	)
Redemption of Federal Home Loan Bank stock		1,882			2,698
Proceeds from sale of other real estate owned		4,220			1,351
Increase in interest-bearing time deposits		(2,115	)		(2,774	)
(Increase) decrease in loans, net		22,733			(20,273	)
Repurchase of common stock		(85	)		—
Purchase of property and equipment, net		(164	)		(416	)

Net cash provided by (used in) investing activities		23,338			(11,435	)

Cash flows from financing activities
Net increase in deposits		15,525			52,418
Increase (decrease) in advances from borrowers for taxes and insurance		14			(22	)
Increase in long-term borrowings		5,000			45,000
Repayments of long-term borrowings		(30,000	)		(14,000	)
Net change in short-term borrowings		(16,650	)		(91,900	)

Net cash provided by (used in) financing activities		(26,111	)		(8,504	)

Net increase (decrease) in cash and cash equivalents		4,782			(11,302	)
Cash and cash equivalents at beginning of period		13,513			22,501

Cash and cash equivalents at end of period	$	18,295		$	11,199

Supplementary disclosure of cash flow information:
Cash paid during period for:
Interest	$	11,359		$	14,752
Income taxes, net of refunds	$	1,465		$	3
Supplementary disclosure of non-cash financing and investing activities:
Transfers from loans to other real estate owned	$	3,667		$	1,674

See accompanying notes to unaudited consolidated financial statements.

Notes to Financial Statements (Unaudited)

NOTE 1 — ORGANIZATION

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

Cape Bank (“Bank”) is a New Jersey-chartered stock savings bank. The Bank provides a complete line of business and personal banking products through its eighteen full service branch offices located throughout Atlantic and Cape May counties in southern New Jersey. The Bank has received regulatory approval for the closing of a branch in Cape May County, effective December 3, 2010. In addition, the Bank has requested regulatory approval to close a second branch in Cape May County, effective February 4, 2011.

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

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

The consolidated financial statements include the accounts of Cape Bancorp, Inc. and its subsidiaries, all of which are wholly-owned. Significant intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current year presentations. The consolidated financial statements, as of and for the periods ended September 30, 2010 and 2009, have not been audited by the Company’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements through the date of the filing of the consolidated financial statements with the SEC.

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

Cash and Cash Equivalents:For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, overnight deposits, federal funds sold and interest-bearing bank balances. The Federal Reserve Bank required reserves of $634,000 as of September 30, 2010, and $668,000 as of December 31, 2009, are included in these balances.

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

Investment Securities:Effective December 31, 2009, all held to maturity securities were reclassified as available for sale. Investment securities classified as available for sale are carried at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of equity, net of related income tax effects. Gains and losses on sales of investment securities are recognized upon realization utilizing the specific identification method.

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

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

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

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

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

The allowance for loan losses is maintained at an amount management deems 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, estimated collateral values, changes in loan policies and procedures, changes in loan volume, delinquency and troubled asset trends, loan management and personnel, internal and external loan review, total credit exposure of the individual or entity, and external factors including competition, legal, regulatory and seasonal factors. In the opinion of management, the allowance is 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. Included in the allowance for loan losses at September 30, 2010 was an impairment reserve for troubled debt restructurings (TDRs) in the amount of $402,000.

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 of New York (FHLB) Stock:The Bank is a member of the FHLB of New York. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. 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 is recognized in the period identified. The goodwill assessment for 2010 will be performed in the fourth quarter.

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

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

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

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

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

Employee Stock Ownership Plan (ESOP):The cost of shares issued to the ESOP, but not yet earned is shown as a reduction of equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts and the shares become outstanding for earnings per share computations. As of September 30, 2010, 85,206 shares have been allocated to eligible participants in the Cape Bank Employee Stock Ownership Plan.

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

Income Taxes:Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The principal types of accounts resulting in differences between assets and liabilities for financial statement and tax purposes are the allowance for loan losses, deferred compensation, deferred loan fees, charitable contributions, depreciation and other-than-temporary impairment charges. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against net deferred tax assets when management has concluded that it is not more likely than not that a portion or all will be realized.

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

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

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

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


	Before Tax			Tax Benefit			Net of Tax
	Amount			(Expense)			Amount
	(in thousands)
Three months ended September 30, 2010
Unrealized holding gains arising during the period	$	2,397		$	(814	)	$	1,583
Non-credit related unrealized loss on other-than-temporarily impaired CDOs		(1,517	)		516			(1,001	)
Reclassification adjustment for gain on sale of securities		(343	)		116			(227	)
Reclassification adjustment for credit related OTTI included in net income		340			(116	)		224

Other comprehensive income, net	$	877		$	(298	)	$	579


Three months ended September 30, 2009
Unrealized holding gains arising during the period	$	6,069		$	(2,064	)	$	4,005
Non-credit related unrealized loss on other-than-temporarily impaired CDOs		(5,153	)		1,752			(3,401	)
Reclassification adjustment for loss on sale of securities		(595	)		202			(393	)
Reclassification adjustment for credit related OTTI included in net income		799			(272	)		527

Other comprehensive income, net	$	1,120		$	(382	)	$	738


	Before Tax			Tax Benefit			Net of Tax
	Amount			(Expense)			Amount
	(in thousands)
Nine months ended September 30, 2010
Unrealized holding gains arising during the period	$	3,529		$	(1,233	)	$	2,296
Non-credit related unrealized loss on other-than-temporarily impaired CDOs		(1,456	)		495			(961	)
Reclassification adjustment for gain on sale of securities		(310	)		105			(205	)
Reclassification adjustment for credit related OTTI included in net income		3,425			(1,165	)		2,260

Other comprehensive income, net	$	5,188		$	(1,798	)	$	3,390


Nine months ended September 30, 2009
Unrealized holding losses arising during the period	$	2,164		$	(735	)	$	(1,429	)
Non-credit related unrealized loss on other-than-temporarily impaired CDOs		(1,513	)		514			(999	)
Reclassification adjustment for loss on sale of securities		(1,195	)		406			(789	)
Reclassification adjustment for credit related OTTI included in net income		4,841			(1,646	)		3,195

Other comprehensive income, net	$	4,297		$	(1,461	)	$	2,836

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

Effect of Newly Issued Accounting Standards:In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires reporting entities to make new disclosures about recurring and nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances and settlements, on a gross basis, in the reconciliation of Level 3 fair value measurements. ASU 2010-06 also requires disclosure of fair value measurements by “class” instead of by “major category” as well as any changes in valuation techniques used during the reporting period. For disclosures of Level 1 and Level 2 activity, fair value measurements by “class” and changes in valuation techniques, ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with disclosures for previous comparative periods prior to adoption not required. The adoption of this portion of ASU 2010-06 on January 1, 2010 did not have a material impact on the Company’s financial condition or results of operations. For the reconciliation of Level 3 fair value measurements, ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this portion of ASU 2010-06 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. 2009-17, “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 on January 1, 2010 did not 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. The adoption of FASB ASU No. 2009-16 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 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, an entity that intends to sell a security or is more likely than not to sell the security before the recovery of the security’s cost basis, the entity must recognize the other-than-temporary impairment 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 July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which will require the Company to provide a greater level of disaggregated information about the credit quality of the Company’s loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”). This ASU will also require the Company to disclose additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. The provisions of this ASU are effective for the Company’s reporting period ending December 31, 2010. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption will have no impact on the Company’s statements of income and condition.

NOTE 3 — INVESTMENT SECURITIES

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(in thousands)
September 30, 2010
Investment securities available for sale
Debt securities
U.S. Government and agency obligations	$	61,486	$	198	$	—		$	61,684
Municipal bonds		27,260		886		(210	)		27,936
Collateralized debt obligations		9,704		27		(8,174	)		1,557
Corporate bonds		10,641		253		(6	)		10,888

Total debt securities	$	109,091	$	1,364	$	(8,390	)	$	102,065


Mortgage-backed securities
GNMA pass-through certificates	$	2,341	$	60	$	—		$	2,401
FHLMC pass-through certificates		3,598		155		—			3,753
FNMA pass-through certificates		21,026		1,139		—			22,165
Collateralized mortgage obligations		26,982		796		(56	)		27,722

Total mortgage-backed securities	$	53,947	$	2,150	$	(56	)	$	56,041


Total securities available for sale	$	163,038	$	3,514	$	(8,446	)	$	158,106


			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

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.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2010.


	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
	(in thousands)
U.S. Government and agency obligations	$	—	$	—		$	—	$	—		$	—	$	—
Municipal bonds		—		—			3,988		(210	)		3,988		(210	)
Corporate bonds		1,942		(6	)		—		—			1,942		(6	)
Collateralized debt obligations		—		—			1,117		(8,174	)		1,117		(8,174	)
Mortgage-backed securities		52		(0	)		3,471		(56	)		3,523		(56	)


Total temporarily impaired investment securities	$	1,994	$	(6	)	$	8,576	$	(8,440	)	$	10,570	$	(8,446	)

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	)
Municipal bonds		578		(8	)		3,988		(465	)		4,566		(473	)
Corporate bonds		—		—			—		—			—		—
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	)

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

At September 30, 2010, the Company’s investment securities portfolio consisted of 332 securities, 31 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 with unrealized losses consist of investments that are backed by the U.S. Government or U.S. sponsored agencies which the government has affirmed its commitment to support, and municipal obligations which had unrealized losses that were caused by changing credit spreads in the market as a result of the 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 the securities, the Company does not consider these investments to be OTTI.

As of September 30, 2010, the book value of our pooled trust preferred collateralized debt obligations totaled $9.7 million with an estimated fair value of $1.6 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 September 30, 2010, 16 of our securities had no excess subordination and 8 of our securities had excess subordination which ranged from 2.2% 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. It is a static measure of credit enhancement, but does not incorporate structural elements of the CDO. Management utilizes excess subordination as a measure to identify which tranches are at a greater risk for a future break in cash flows. However, a current subordination deficit or “zero excess subordination” does not indicate the tranche will not ultimately receive all principal and interest due. For example, this measure does not consider the potential for recovery of issuers that are currently deferring payments. Some issuers have elected to defer payments, which contractually they are permitted to do for a period of up to 5 years, even though going concern issues may not exist. This supports management’s position that a deferral is not necessarily indicative of a default or that a default is imminent. On average, deferring issuers within our CDO portfolio comprise approximately 60% of the total dollar value related to issuer defaults and deferrals. As such, our assumptions used in the calculation of discounted cash flows anticipate a 15% recovery rate on deferring issuers as compared to no recovery of issuers that have defaulted. The recovery rate assumption represents management’s best estimate based on current facts and circumstances. In addition, due to projected discounted cash flows that do not support the receipt of interest, the Company is not accruing interest on any of the bank issued CDO securities. Accordingly, these securities are considered non-performing assets.

The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of September 30, 2010:

Pooled Trust Preferred Collateralized Debt Obligations
(dollars in thousands)


															Actual
															Deferrals			Excess
															and			Subordination
													Current		Defaults			as a % of
												Moody’s/	Number of		as a % of			Current
		Book		Fair		Unrealized			Realized			Fitch	Performing		Current			Performing
Deal	Class	Value		Value		Loss			Loss			Ratings	Issuers		Collateral			Collateral
PreTSL II	Mezzanine	$	407	$	14	$	(393	)	$	(635	)	Ca/C		23		37.70	%		0.00	%
PreTSL VI	Mezzanine		42		5		(37	)		(16	)	Caa1/D		2		81.00	%		0.00	%
PreTSL XIX	Mezzanine		1,161		36		(1,125	)		(614	)	Ca/C		52		24.60	%		0.00	%
I-PreTSL I	Mezzanine		1,831		250		(1,581	)		—		NR/BB		16		17.40	%		8.70	%
I-PreTSL II	Mezzanine		2,713		375		(2,338	)		—		NR/BB		29		4.90	%		14.33	%
I-PreTSL III	Mezzanine		2,699		375		(2,324	)		—		B2/BB		24		11.20	%		10.19	%
I-PreTSL IV	Mezzanine		438		62		(376	)		—		Ba2/CCC		29		11.60	%		2.24	%
MM Comm I	Mezzanine		413		440		27			(1,153	)	NR/C		7		72.36	%		0.00	%

Total		$	9,704	$	1,557	$	(8,147	)	$	(2,418	)

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

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 16 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 three months and nine months ended September 30, 2010 of $340,000 and $3.4 million, respectively. 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 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. 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.

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 Company performs an ongoing analysis of these securities utilizing both readily available market data and analytical models obtained from the third party. On a quarterly basis we evaluate the underlying collateral of each pooled trust preferred security in our portfolio to determine the appropriate default/deferral assumptions to use in our calculation of discounted cash flows. This process entails obtaining each security’s issuer list which include the most recent financial and credit quality metrics. We then identify issuers that have metrics that are similar to those that have defaulted or are deferring payments. As part of our evaluation we consider such measures as liquidity, capital adequacy, profitability, and credit quality and analyze ratios such as ROAA, net interest margin, tier 1 risk based capital, tangible equity to tangible assets, texas ratio, reserves to loans and non-performing loans to loans. Our evaluation also takes into consideration current economic indicators as well as recent default/deferral trends of underlying issuers. Management then develops a projected default/deferral rate for each security based on this analysis. This rate is then applied to the cash flow model developed by the third party to calculate the present value of discounted cash flows for each security. The model assumptions relative to expected recoveries of defaulted issuers and deferring issuers were discussed earlier in this Note. Furthermore, we perform back-testing by comparing actual default/deferral rates to previous projections. The results are used to refine future projections on a continuous basis. Lastly, we continually evaluate the securities for the potential of future impairment by reviewing the FDIC failed bank list and deferral announcements made by the underlying issuers of each CDO security in our portfolio.

In general, CDOs are callable within five to ten years of issuance with a quarterly call frequency. Due to current market conditions, the cost to refinance or issue capital at a lower rate than what is currently outstanding, and the limited history of CDOs, prepayments are difficult to predict. The model assumes that prepayments will be limited to those issuers that are acquired by large banks with low financing costs. A 1% annual prepayment assumption has been used in the model and is indicative of management’s belief that consolidation in the banking industry will occur over the next several years as market conditions begin to improve. Additionally, commencing with a date ten years from the issuance date, the Trustee can solicit bids in an auction format for the purchase of all the outstanding collateral securities. The highest bid will be accepted that is at least equal to the sum of the outstanding liabilities at par plus accrued and unpaid interest. However, given the uncertain future of the CDO market, credit quality issues with the underlying issuers, and a decline in market value, the model assumes that a successful call auction is highly unlikely. Therefore, the model expects that the securities will extend through their full 30-year maturity.

The amortized cost and fair value of debt securities and mortgage-backed securities available for sale at September 30, 2010, 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		Fair
	Cost		Value
	(in thousands)

Due within one year or less	$	9,134	$	9,189
Due after one year but within five years		65,886		66,651
Due after five years but within ten years		13,554		13,868
Due after ten years		20,517		12,357
Mortgage-backed securities		53,947		56,041


Total investment securities	$	163,038	$	158,106

The following table presents a summary of the cumulative credit related OTTI charges recognized as components of earnings for CDO securities still held by the Company at September 30, 2010 (in thousands):


	Three			Nine
	Months			Months
	Ended			Ended
	September 30, 2010
Beginning balance of cumulative credit losses on CDO securities (1)	$	(16,578	)	$	(13,493	)
Additional credit losses for which other than temporary impairment was previously recognized		(340	)		(3,425	)

Ending balance of cumulative credit losses on CDO securities, September 30, 2010	$	(16,918	)	$	(16,918	)


(1)		On April 1, 2009, we recognized a cumulative effect adjustment based upon FASB guidance regarding the recognition and presentation of other-than-temporary impairment and determined that $9.9 million of previously recorded OTTI write-downs represented credit losses.

NOTE 4 — LOANS RECEIVABLE

Loans receivable consist of the following:


	September 30,		December 31,
	2010		2009
	(in thousands)

Commercial mortgage	$	406,047	$	416,575
Residential mortgage		238,429		244,897
Construction		22,678		28,839
Home equity loans and lines of credit		48,375		48,706
Commercial business loans		54,378		62,685
Other consumer loans		1,014		1,284

Loans receivable, gross		770,921		802,986

Less:
Allowance for loan losses		12,621		13,311
Deferred loan fees		155		202

Loans receivable, net	$	758,145	$	789,473

Activity in the allowance for loan losses is as follows:


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
	(in thousands)						(in thousands)

Balance at beginning of period	$	11,916		$	12,081		$	13,311		$	11,240
Provisions charged to operations		2,700			9,765			4,652			12,374
Adjustment for passage of time on certain impaired loans (1)		(10	)		—			(13	)		—
Charge-offs		(2,002	)		(8,077	)		(5,839	)		(10,246	)
Recoveries		17			9			510			410

Balance at end of period	$	12,621		$	13,778		$	12,621		$	13,778


(1)		Certain impaired loans have a valuation allowance determined by discounting expected cash flows at the respective loan’s effective interest rate. At September 30, 2010, the impairment reserve on troubled debt restructurings (TDRs) was $402,000.

Individually impaired loans, which includes loans delinquent greater than 90 days, loans less than 90 days delinquent but not accruing and troubled debt restructured loans, were as follows:


	September 30,		December 31,
	2010		2009
	(in thousands)
Period-end impaired loans with no allocated allowance for loan losses	$	44,072	$	26,020
Period-end impaired loans with allocated allowance for loan losses		7,088		7,228

Total	$	51,160	$	33,248

Amount of the allowance for loan losses allocated	$	2,470	$	3,016


	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
	(in thousands)				(in thousands)

Average of individually impaired loans during the period	$	43,503	$	31,682	$	37,714	$	29,512
Interest income recognized during impairment	$	284	$	8	$	467	$	37
Cash basis interest income recognized	$	—	$	8	$	147	$	38

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, is 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.

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 September 30, 2010						at December 31, 2009
	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)
Investment securities available for sale:
U.S. Government and agency obligations	$	—	$	61,684	$	—	$	—	$	45,972	$	—
Municipal bonds		—		27,936		—		—		34,381		—
Collateralized debt obligations		—		—		1,557		—		—		1,456
Corporate bonds		—		10,888		—		—		11,046		—
Mortgage-backed securities		—		56,041		—		—		59,960		—

Total securities available for sale	$	—	$	156,549	$	1,557	$	—	$	151,359	$	1,456

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 nine months ended September 30, 2010 and September 30, 2009:


	Fair Value Measurements
	Using Significant
	Unobservable Inputs
	(Level 3)
	CDO Securities
	Available for Sale
	Nine months ended September 30,
	2010			2009
	(in thousands)

Beginning balance	$	1,456		$	3,033
Accretion of discount		91			183
Payments received		—			(2	)
Increase in amortized cost (1)		—			6,103
Unrealized holding gain (loss)		3,435			(2,885	)
Other-than-temporary impairment included in earnings		(3,425	)		(4,841	)


Ending balance	$	1,557		$	1,591


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

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 September 30, 2010						at December 31, 2009
	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 (1):
Commercial mortgage	$	—	$	35,873	$	—	$	—	$	25,132	$	—
Residential mortgage		—		4,769		—		—		3,251		—
Construction		—		3,917		—		—		1,298		—
Home equity loans		—		795		—		—		482		—
Commercial business loans		—		5,806		—		—		3,085		—

Total impaired loans	$	—	$	51,160	$	—	$	—	$	33,248	$	—

Other real estate owned:
Commercial	$	—	$	3,108	$	—	$	—	$	3,532	$	—
Residential mortgage		—		1,076		—		—		1,285		—

Total other real estate owned	$	—	$	4,184	$	—	$	—	$	4,817	$	—

Loans held for sale	$	—	$	4,408	$	—	$	—	$	398	$	—
Assets held for sale	$	—	$	494	$	—	$	—	$	1,828	$	—
Goodwill	$	—	$	—	$	22,575	$	—	$	—	$	22,575
Other intangibles	$	—	$	—	$	479	$	—	$	—	$	585


(1)		Includes loans delinquent 90 days, loans less than 90 days delinquent but not accruing and troubled debt restructured loans.

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 independent appraisals or listing agreements.

The following disclosure of estimated fair value amounts has been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily 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.


	At September 30, 2010				At December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)				(in thousands)
Assets
Cash and cash equivalents	$	18,295	$	18,295	$	13,513	$	13,513
Interest-bearing time deposits		9,566		9,643		7,451		7,539
Investment securities		158,106		158,106		152,815		152,815
Loans held for sale		4,408		4,408		398		398
Loans receivable		758,145		768,469		789,473		788,421
FHLB Stock		8,392		8,392		10,275		10,275
Bank owned life insurance		27,970		27,970		27,210		27,210
Accrued interest receivable		4,050		4,050		4,630		4,630

Liabilities
Savings deposits	$	83,803	$	83,803	$	79,368	$	79,368
NOW, checking and MMDA deposits		346,342		346,342		320,308		320,308
Certificates of deposit		321,950		325,921		336,911		340,084
Borrowings		162,335		169,646		203,981		199,718
Accrued interest payable		710		710		807		807

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

Interest-bearing time deposits — The fair value is determined by discounting the estimated future cash flow using the interest rate of a recently purchased interest-bearing time deposit.

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.

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2010 and December 31, 2009. 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 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

NOTE 6 — OTHER REAL ESTATE OWNED

For the three months ended September 30, 2010, the Company sold one commercial OREO property and two residential OREO properties with an aggregate carrying value totaling $801,000. The Company recorded net gains on the sale of OREO of $7,000 in the third quarter of 2010 compared to net losses of $122,000 recorded in the third quarter of 2009. For the nine months ended September 30, 2010, the Company sold five commercial OREO properties and three residential OREO properties with an aggregate carrying value totaling $4.0 million. Net gains on the sale of OREO totaled $255,000 for the nine months ended September 30, 2010 compared to net losses on OREO sales of $377,000 for the nine months ended September 30, 2009. Also, during the current quarter, the Company added two commercial and two residential properties to OREO with aggregate carrying values of $1.5 million and $160,000, respectively.

Net expenses applicable to OREO were $182,000 for the three month period ending September 30, 2010, which included a provision for losses on OREO of $109,000 and net gains on the sale of OREO of $7,000. For the three months ended September 30, 2009, net expenses applicable to OREO of $214,000 included net losses on the sale of OREO of $122,000 and a provision for losses on OREO totaling $84,000. For the nine months ended September 30, 2010 and 2009, net expenses applicable to OREO totaled $370,000 and $574,000, respectively, which included provisions for losses on the sale of OREO of $335,000 for the nine months ended September 30, 2010, and $152,000 for the nine months ended September 30, 2009. As of the date of this filing, the Company has agreements of sale for five OREO properties with an aggregate carrying value totaling $1.3 million.

NOTE 7— DEPOSITS

Deposits are as follows:


	September 30,		December 31,
	2010		2009
	(in thousands)

Savings accounts	$	83,803	$	79,368
NOW accounts and money market funds		273,427		257,943
Non-interest bearing checking		72,915		62,365
Certificates of deposit of less than $100,000		182,063		201,303
Certificates of deposit of $100,000 or more		139,887		135,608

	$	752,095	$	736,587

NOTE 8 — INCOME TAXES

Income tax benefit for the nine months ended September 30, 2010 was primarily impacted by the release of a $1.7 million valuation allowance. The release of the valuation allowance was due to estimated taxable income through September 30, 2010 and the anticipated implementation of a business planning strategy which would result in the recognition of a capital gain. These items allowed for additional deferred tax assets to be realizable.


	Three months ended September 30,						Nine months ended September 30,
Income taxes	2010			2009			2010			2009
	(in thousands)						(in thousands)

Pre-tax income (loss)	$	886		$	(6,564	)	$	1,689		$	(7,120	)
Income tax expense (benefit)	$	(959	)	$	12,571		$	(1,490	)	$	12,011

For more information about our income taxes, read Note 11, “Income Taxes,” in our2009 Annual Report to Shareholders.

NOTE 9 — STOCK BENEFIT PLAN

The Company has an Equity Incentive Plan under which incentive and non-qualified stock options, stock appreciation rights (SARs), and restricted stock awards (RSAs) may be granted periodically to certain employees and directors. Generally, options are granted with an exercise price equal to fair market value at the date of grant and expire in 10 years from the date of grant. Generally, stock options granted vest over a five-year period commencing on the first anniversary of the date of grant. Under the plan, 1,331,352 stock options are available to be issued.

Under the fair value method of accounting for stock options, the fair value for all stock options granted under the Equity Incentive Plan is measured on the date of grant using the Black-Scholes option pricing model with market assumptions. This amount is amortized as salaries and employee benefits on a straight-line basis over the vesting period. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which, if changed, can significantly affect fair value estimates.

On June 15, 2010, the Company issued 730,000 incentive stock options to certain employees at a price of $7.27 per share. On July 1, 2010, 23,600 non-qualified stock options were issued to directors at a price of $7.68 per share. The following table presents the weighted average per share fair value of options granted and the assumptions used, based on the Black-Scholes option pricing methodology:


Assumption	September 30, 2010
Expected average risk-free interest rate		2.46	%
Expected average life (in years)		6.5
Expected volatility		41.64	%
Expected dividend yield		0.00	%

Stock option activity for the nine months ended September 30, 2010 was as follows:


							Weighted
			Weighted				Average
			Average		Aggregate		Remaining
	Number of		Exercise		Intrinsic		Contractual
	Options		Price		Value		Life
Outstanding at January 1		—	$	—
Granted		753,600		7.28
Forfeited		—		—

Outstanding at September 30		753,600	$	7.28		—	9.7 years

Exercisable at September 30		—	$	—	$	—		—

The expected average risk-free rate is based on the U.S. Treasury yield curve on the day of grant. The expected average life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and expected option exercise activity. Expected volatility is based on historical volatilities of the Company’s common stock as well as the historical volatility of the stocks of the Company’s peer banks. The expected dividend yield is based on the expected dividend yield over the life of the option and the Company’s historical information.

On July 1, 2010, the Company issued 11,000 restricted stock awards to directors at a price of $7.68 per share. The restricted stock awards will vest in five equal annual installments, with the first installment becoming exercisable on the first anniversary of the date of grant, or July 1, 2011. Restricted stock activity for the nine months ended September 30, 2010 was as follows:


	Restricted		Weighted Average
	Common		Fair Value at
	Shares		Grant Date
Outstanding at January 1		—	$	—
Granted		11,000		7.68
Forfeited		—		—

Outstanding at September 30		11,000	$	7.68

At September 30, 2010, unrecognized compensation costs on unvested stock options and restricted stock awards was $2.4 million which will be amortized on a straight-line basis over the remaining vesting period. Stock-based compensation expense and related tax effects recognized in connection with unvested for the three and nine months ended September 30, 2010 was as follows:


	Three		Nine
	Months		Months
	Ended		Ended
(in thousands)	September 30, 2010
Compensation expense:
Common stock options	$	124	$	144
Restricted common stock		4		4

Total compensation expense		128		148
Tax benefit		3		3

Net income effect	$	125	$	145

At September 30, 2010, 753,600 options were outstanding, leaving 577,752 options available to be issued. As of September 30, 2010, based on the option agreements, there were no vested or exercisable options.

NOTE 10 — 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.

The following is the calculation of basic earnings per share for the three and nine months ended September 30, 2010 and September 30, 2009. In 2010, options to purchase 753,600 shares were antidilutive, and accordingly, were excluded in determining diluted earnings per common share. Restricted stock was dilutive and is included in the earnings per share calculation. There were no options outstanding in 2009.


	Three months ended September 30,					Nine months ended September 30,
	2010		2009			2010		2009
	(in thousands, except share data)

Net income (loss)	$	1,845	$	(19,135	)	$	3,179	$	(19,131	)


Weighted average shares outstanding		12,358,140		12,317,638			12,348,861		12,307,455
Basic earnings (loss) per share	$	0.15	$	(1.55	)	$	0.26	$	(1.55	)
Diluted weighted average shares outstanding		12,368,865		12,317,638			12,359,770		12,307,455
Diluted earnings (loss) per share	$	0.15	$	(1.55	)	$	0.26	$	(1.55	)


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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.

Overview

Cape Bancorp is a Maryland corporation that was incorporated on September 14, 2007 for the purpose of becoming the holding company of Cape Bank (formerly Cape Savings Bank) in connection with Cape Bank’s mutual-to-stock conversion, Cape Bancorp’s initial public offering and simultaneous acquisition of Boardwalk Bancorp, Inc. (“Boardwalk Bancorp”), Linwood, New Jersey and its wholly-owned New Jersey chartered bank subsidiary, Boardwalk Bank. The Company disclosed that the stockholders of Boardwalk Bancorp, Inc. and the depositors of Cape Savings Bank approved the merger by the requisite vote required by state law and federal law. 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.

The merger of Cape Bank and Boardwalk Bank 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 Bank has received regulatory approval for the closing of a branch in Cape May County, effective December 3, 2010. In addition, the Bank has requested regulatory approval to close a second branch in Cape May County, effective February 4, 2011.) The merger resulted in a well-capitalized community oriented bank with a significant commercial loan presence. 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.

At September 30, 2010, the Company had total assets of $1.054 billion compared to $1.073 billion at December 31, 2009. For the three months ended September 30, 2010 and 2009, the Company had total revenues of $14.0 million and $14.3 million, respectively. Net income for the three months ended September 30, 2010 totaled $1.8 million compared to a net loss of $19.1 million for the three months ended September 30, 2009. For the nine month periods ended September 30, 2010 and 2009, total revenues were $39.0 million and $41.4 million, respectively. Net income for the nine months ended September 30, 2010 totaled $3.2 million, compared to a net loss of $19.1 million for the nine months ended September 30, 2009.

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 located at 225 North Main Street, Cape May Court House, New Jersey 08210, and 17 branch offices located in Atlantic and Cape May Counties, New Jersey. (The Bank has received regulatory approval for the closing of a branch in Cape May County, effective December 3, 2010. In addition, the Bank has requested regulatory approval to close a second branch in Cape May County, effective February 4, 2011.) 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 September 30, 2010, 92.8% of our loan portfolio was secured by real estate and over 61.3% of our portfolio was commercial related loans. We also maintain an investment portfolio. At September 30, 2010, the Company had total assets of $1.054 billion, total deposits of $752.1 million and total stockholders’ equity of $133.4 million.

We offer banking services to individuals and businesses predominantly located in our primary market area which, as of September 30, 2010, consisted of 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 throughout 2010 in the local and national economies has significantly increased our level of non-performing loans and assets and loan foreclosure activity from historical levels. Non-performing loans as a percentage of total loans increased to 4.27% at September 30, 2010 from 4.14% at December 31, 2009. In addition, non-performing assets (non-performing loans, other real estate owned and non-accruing investment securities) as a percentage of total assets increased slightly to 3.57% at September 30, 2010 from 3.55% at December 31, 2009. Loan charge-offs were $2.0 million for the three months ended September 30, 2010 compared to $8.1 million for the three months ended September 30, 2009. For the nine months ended September 30, 2010, loan charge-offs totaled $5.8 million compared to $10.2 million for the nine months ended September 30, 2009. The ratio of our allowance for loan losses to total loans decreased slightly to 1.64% at September 30, 2010, from 1.66% at December 31, 2009 as a result of the $5.8 million of charged-off loans during the current period, of which $2.0 million were fully reserved for as of December 31, 2009. While our total loan portfolio decreased from $802.8 million at December 31, 2009 to $770.8 million at September 30, 2010, 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. Additionally, total deposits increased $15.5 million from $736.6 million at December 31, 2009 to $752.1 at September 30, 2010. Non-interest bearing deposits increased $10.6 million primarily caused by a seasonal increase in commercial non-interesting bearing deposits of $9.0 million. In addition, savings deposits increased $4.4 million.

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 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. At September 30, 2010, our retail market area primarily included the area surrounding our 18 offices located in Cape May and Atlantic Counties, New Jersey.

During the remainder of 2010 Cape Bank will continue to 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 and interest rate risk in an uncertain rate environment.

Managing our credit underwriting and administration through the economic recovery:

Based on our experience during the credit crisis and economic downturn, we have taken steps to improve our credit underwriting and administration. Changes in the Commercial Loan and Credit Departments were significant during the most recent quarter. Both the new Chief Lending Officer (CLO) and Chief Credit Officer (CCO) had the opportunity to introduce their new approaches and credit culture. The CLO has undertaken a review of all credit files to update and reanalyze the credits to achieve an “audit ready” credit file. The CCO has taken over the active management of all credits that are rated “Special Mention” or “Substandard.” In the past, Relationship Managers (RMs) were responsible for loans that were delinquent from 16 days to 90 days. Once the loan reached a non-performing status it was moved to Work Outs. Work Out involvement is now based on risk rating.

The change in the risk rating system has also led to some new considerations of troubled credits. Performing loans with a solid history of payment would not have been adversely classified in the past. Under the new approach, global cash flow analysis dictates loan classification (with some adjustment made for collateral value) resulting in more “Classified” loans. As a result, there are “performing non-performers” in the Substandard category that had not been so designated in the past.

The CLO has introduced a rigorous program of external credit training and has actively mentored RMs. The training has inculcated the cash flow approach to the credit culture and created a more uniform approach to credit presentations.

In the meantime, the Bank has continued to restrict 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 weak during the balance of 2010, and there are indications that economic deterioration may have leveled off or slightly improved during the first half of 2010. Home sales prices have declined in both counties we operate in from 2008 to 2009, sales volume showed improvement year-over-year for the first half of 2010, and median sale prices improved during 2010 in both Atlantic and Cape May Counties from the first quarter to the second quarter. Additionally, we have been able to sell some of our other real estate owned properties.

Managing non-performing assets to performing status or disposal:

Our non-performing assets began to increase in 2007, and continued to increase through 2009, but have declined during the first nine months of 2010. Although total dollars of non-performing assets have declined during 2010, the percentage of non-performing assets to total assets has increased from 3.55% at December 31, 2009 to 3.57% at September 30, 2010, a result of a decline in total assets. The deterioration in our local real estate market began during the first quarter of 2008 and continued to decline through 2009, although recently has seen home prices increasing. The expiration of the federal government tax credit for new home buyers during the second quarter of 2010 may have influenced this favorable home price behavior. Residential building permits for Atlantic and Cape May Counties have decreased more than 50% from 2007 to 2009. Unemployment has also affected non-performing assets and, as of March 2010, was 13.6% and 16.3% in Atlantic and Cape May Counties, respectively. As of August 2010, unemployment in Atlantic and Cape May Counties was 11.5% and 7.3%, respectively. These rates were favorably influenced by the summer season and were significantly higher than August of 2009. These negative economic trends have contributed to a significant increase in the ratio of non-performing assets to total assets from 0.63% at December 31, 2007 to 3.55% at December 31, 2009. As of September 30, 2010, the ratio of non-performing assets to total assets increased to 3.57%. The ratio of our allowance for loan losses to non-performing loans decreased from 40.04% as of December 31, 2009 to 38.32% as of September 30, 2010; net charge-offs to average loans decreased from 1.37% for the year ended December 31, 2009 to 0.90% for the nine months ended September 30, 2010; non-performing loans decreased to $32.9 million from $33.2 million at December 31, 2009; and delinquent loans increased to $41.0 million at September 30, 2010 from $34.4 million at December 31, 2009. Delinquent loans also increased in number during this same time period and represented 5.32% of total gross loans at September 30, 2010 compared to 4.29% at December 31, 2009.

Management has given significant attention to these assets over 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 2010 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 for the remainder of 2010, there is some evidence that continued economic deterioration may have leveled off or slightly improved through the beginning of 2010. Our level of non-performing assets has stabilized and we have been able to sell other real estate owned.

Managing net interest income and interest rate risk in a potentially rising rate environment:

The Federal Reserve Board is unlikely to raise the target Fed Funds rate during the remainder of 2010. The potential of an increase in interest rates is more likely during 2011 and will present us with the challenge of managing interest rate risk with a cumulative one 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. During the third quarter of 2010 the Bank purchased a five year, $5 million fixed rate borrowing at 1.93% from the Federal Home Loan Bank of New York, and sold $3.5 million of investment securities, recognizing a gain of $343,000.

2010 Overview

Capital remains strong at Cape Bank, and we do not anticipate 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 Counties was 13.6% and 16.3% respectively as of March 2010. As of August unemployment in Atlantic and Cape May Counties was 11.5% and 7.3% respectively. These rates were favorably influenced by the summer season and were significantly higher than August of 2009. Home sales prices have declined in both counties from 2008 to 2009, sales volume showed improvement year-over-year for the first half of 2010, and median sale prices improved during 2010 in both Atlantic and Cape May counties from the first quarter to the second quarter. Seasonal businesses enjoyed a very good season as a result of favorable weather conditions. Local lodging facilities based on the barrier islands appear to have had a strong season with little indication of discounting needed to keep hotels fully occupied. Seasonal merchants have indicated a better season in 2010 than in 2009, however not as strong as anticipated considering the increase in tourism.

During the past two and a half 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, we recorded net income of $3.2 million for the nine month period ended September 30, 2010. The losses incurred in 2008 and 2009 were 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 later in this report.

The Bank’s net interest margin has trended upward from 3.42% in 2007 to 3.48% in 2008, to 3.54% in 2009 and is 3.65% for the nine month period ended September 30, 2010. This improvement is the result of our cost of funds declining 175 basis points offset in part by the yield on our earning assets declining 124 basis points from 2007 to September 30, 2010. During the period from 2007 to September 30, 2010 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 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 3.68% for the nine month period ended September 30, 2010. In addition, average certificates of deposit costs decreased from 4.56% in 2007 to 1.81% for the nine month period ended September 30, 2010.

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 benefited 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 and also during the nine month period ended September 30, 2010. We expect to see a more moderate continuation of the downward repricing of our liabilities during the remainder of 2010, and we expect our net interest margin to remain stable for the balance of 2010. 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 re-pricing for adjustable rate lines of credit by establishing a floor on most renewals.

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 Item 3—Quantitative and Qualitative Disclosures About Market Risk.

For the remainder of 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.

The recognition of goodwill impairment is dependent on many variables, some of which are not directly controllable by Cape Bank. However, with non-performing assets expected to remain stable and continued earnings, additional goodwill impairment is not probable.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

At September 30, 2010, the Company’s total assets were $1.054 billion compared to $1.073 billion at December 31, 2009.

Cash and cash equivalents increased $4.8 million, or 35.4%, to $18.3 million at September 30, 2010 from $13.5 million at December 31, 2009. The majority of this increase is attributable to a higher cash balance at the Federal Reserve Bank due to a large cash letter on the last day of the quarter.

Interest-bearing deposits increased to $9.6 million at September 30, 2010 from $7.5 million at December 31, 2009, an increase of $2.1 million or 28.4%. The Company invests in time deposits of other banks generally for terms of one year to five years and not to exceed $250,000, which is the amount currently insured by the Federal Deposit Insurance Corporation.

Total loans decreased to $770.8 million at September 30, 2010 from $802.8 million at December 31, 2009, a decrease of $32.0 million or 4.0%. Net loans decreased $31.4 million, net of a decrease in the allowance for loan losses of $690,000. Delinquent loans increased $6.6 million to $41.0 million or 5.32% of total gross loans at September 30, 2010 from $34.4 million, or 4.29% of total gross loans at December 31, 2009. Total delinquent loans by portfolio at September 30, 2010 were $33.2 million of commercial mortgage and commercial business loans, $6.5 million of residential mortgage loans and $1.3 million of consumer loans. At September 30, 2010, delinquent loan balances by number of days delinquent were: 31 to 59 days — $4.0 million; 60 to 89 days — $4.9 million; and 90 days and greater — $32.1 million.

At September 30, 2010, the Company had $32.9 million in non-performing loans or 4.27% of total gross loans, a decrease of $300,000 from $33.2 million, or 4.14% of total gross loans at December 31, 2009. At September 30, 2010, non-performing loans by loan portfolio category were as follows: $27.6 million of commercial loans, $4.6 million of residential mortgage loans, and $795,000 of consumer loans. Of these stated delinquencies, the Company had $2.8 million of loans that were 90 days or more delinquent and still accruing (11 residential mortgage loans for $2.4 million and 4 consumer loans for $432,000). These loans are well secured and we anticipate no losses will be incurred.

At September 30, 2010, commercial non-performing loans had collateral type concentrations of $4.2 million (20 loans or 15.3%) secured by residential, duplex and multi-family properties, $3.6 million (10 loans or 13.1%) secured by land and building lots, $1.6 million (5 loans or 5.9%) secured by retail stores, $4.1 million (10 loans or 15.0%) secured by restaurant properties, $646,000 (2 loans or 2.3%) secured by marina properties, $706,000 (4 loans or 2.6%) secured by B&B and hotels and $12.6 million (28 loans or 45.8%) secured by commercial buildings and equipment. The three largest commercial non-performing loans are $4.2 million, $2.7 million, and $2.5 million.

To the best of our knowledge, we have provided for all losses that are both probable and reasonably estimable at September 30, 2010 and December 31, 2009. For the remainder of 2010 and through the early part of 2011, we anticipate problem assets to remain at or near current levels, moving to disposition through the slow foreclosure process. 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 increased $5.3 million, or 3.5%, to $158.1 million at September 30, 2010 from $152.8 million at December 31, 2009. At September 30, 2010 and December 31, 2009 all of the Company’s investment securities were classified as available-for-sale (AFS). The increase in the portfolio consists primarily of a $15.7 million increase in U.S. Government and agency obligations partially offset by decreases in municipal bonds of $6.4 million, mortgage-backed securities of $3.9 million, and corporate bonds of $158,000. Proceeds from the sales and maturities of corporate bond and municipal bond securities as well as principal repayments from mortgage-backed securities were used to purchase callable, short duration U.S. Government and agency obligations. Investing in securities with these qualities enables the Company to shorten the duration of the portfolio while positioning it to capitalize in anticipation of rising interest rates. The Company also experienced additional OTTI related to its CDO portfolio during the current quarter. This segment 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 September 30, 2010, these securities had a cost basis of $9.7 million and a fair market value of $1.6 million. For the nine month period ended September 30, 2010 the Company recorded a $3.4 million charge to earnings related to the credit loss portion of impairment.

At September 30, 2010, other real estate owned (OREO) totaled $4.2 million, net of an allowance for losses of $155,000, and consisted of four residential properties and ten commercial properties. At December 31, 2009, OREO totaled $4.8 million and consisted of three residential and seven commercial properties. At December 31, 2009, there was no allowance for losses on OREO. For the nine months ended September 30, 2010, the Company sold five commercial OREO properties and three residential OREO properties with an aggregate carrying value totaling $4.0 million. Also, during the current quarter, the Company added two commercial and two residential properties to OREO with aggregate carrying values of $1.3 million and $160,000, respectively. As of the date of this filing, the Company has agreements of sale for five OREO properties with an aggregate carrying value totaling $1.3 million.

Assets held for sale totaled $494,000 at September 30, 2010.

At September 30, 2010, the Bank’s total deposits increased to $752.1 million from $736.6 million at December 31, 2009, an increase of $15.5 million or 2.1%. At September 30, 2010, NOW and money market accounts totaled $273.4 million, an increase of $15.5 million, or 6.0%, from $257.9 million at December 31, 2009. Savings accounts increased $4.4 million, or 5.6%, to $83.8 million at September 30, 2010 from $79.4 million at December 31, 2009. Non-interest bearing deposits increased $10.5 million, or 16.9%, to $72.9 million at September 30, 2010 from $62.4 million at December 31, 2009. Certificates of deposit decreased $14.9 million, or 4.4%, to $322.0 million at September 30, 2010 from $336.9 million at December 31, 2009.

Borrowings decreased $41.7 million, or 20.4%, to $162.3 million at September 30, 2010 from $204.0 million at December 31, 2009. Funding sources originating primarily from an increase in deposits and a decline in loan balances were used to pay down borrowings. At September 30, 2010 the Company’s borrowings to assets ratio decreased to 15.4% from 19.0% at December 31, 2009. Borrowings to total liabilities decreased to 17.6% at September 30, 2010 from 21.6% at December 31, 2009.

At September 30, 2010, the Company’s total equity increased to $133.4 million from $126.5 million at December 31, 2009, an increase of $6.9 million, or 5.4%. The increase in equity is primarily attributable to the net income of $3.2 million and a decrease in accumulated other comprehensive loss, net of tax of $3.4 million. This decrease in accumulated other comprehensive loss is primarily a result of the recognition of the credit related OTTI charge of $2.3 million, net of tax, on the CDO portion of the investment portfolio. At September 30, 2010, stockholders’ equity totaled $133.4 million or 12.65% of period end assets, and tangible equity totaled $110.4 million or 10.70% of period end tangible assets.

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. Yields and rates have been annualized.


	For the Three Months Ended September 30,
	2010								2009
				Interest								Interest
	Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield			Balance			Expense		Yield
	(dollars in thousands)

Assets
Interest-earning deposits	$	15,470		$	40		1.03	%	$	10,107		$	61		2.36	%
Investments		171,632			1,395		3.18	%		184,235			1,681		3.57	%
Loans		783,044			11,220		5.68	%		809,878			11,667		5.72	%

Total interest-earning assets		970,146			12,655		5.18	%		1,004,220			13,409		5.30	%
Noninterest-earning assets		104,568								105,390
Allowance for loan losses		(12,462	)							(12,259	)

Total assets	$	1,062,252							$	1,097,351


Liabilities and Stockholders’ Equity
Interest-bearing demand accounts	$	112,075			98		0.35	%	$	111,591			105		0.37	%
Savings accounts		83,830			79		0.37	%		81,138			91		0.44	%
Money market accounts		161,795			457		1.12	%		127,436			406		1.26	%
Certificates of deposit		335,050			1,471		1.74	%		370,273			2,221		2.38	%
Borrowings		154,669			1,453		3.73	%		181,785			1,664		3.63	%

Total interest-bearing liabilities		847,419			3,558		1.67	%		872,223			4,487		2.04	%
Noninterest-bearing deposits		72,778								73,492
Other liabilities		9,409								6,860

Total liabilities		929,606								952,575
Stockholders’ equity		132,646								144,776

Total liabilities & stockholders’ equity	$	1,062,252							$	1,097,351


Net interest income				$	9,097							$	8,922

Net interest spread							3.51	%							3.26	%
Net interest margin							3.72	%							3.52	%
Net interest income and margin (tax equivalent basis) (1)				$	9,247		3.78	%				$	9,070		3.58	%

Ratio of average interest-earning assets to average interest-bearing liabilities		114.48	%							115.13	%


(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 $150,000, and $148,000 for the three month period ended September 30, 2010 and 2009, respectively. The average yield on investments increased to 3.57% from 3.18% for the three month period ended September 30, 2010 and increased to 3.94% from 3.57% for the three month period ended September 30, 2009.


	For the Nine Months Ended September 30,
	2010								2009
				Interest								Interest
	Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield			Balance			Expense		Yield
	(dollars in thousands)

Assets
Interest-earning deposits	$	13,806		$	119		1.15	%	$	13,688		$	186		1.79	%
Investments		173,844			3,671		2.78	%		188,259			6,090		4.27	%
Loans		792,580			34,259		5.78	%		806,676			35,068		5.81	%

Total interest-earning assets		980,230			38,049		5.19	%		1,008,623			41,344		5.48	%
Noninterest-earning assets		102,131								105,065
Allowance for loan losses		(12,702	)							(12,063	)

Total assets	$	1,069,659							$	1,101,625


Liabilities and Stockholders’ Equity
Interest-bearing demand accounts	$	111,488			301		0.36	%	$	106,610			308		0.39	%
Savings accounts		81,633			256		0.42	%		80,231			295		0.49	%
Money market accounts		153,205			1,416		1.24	%		124,952			1,257		1.34	%
Certificates of deposit		355,323			4,804		1.81	%		377,598			7,948		2.81	%
Borrowings		162,749			4,485		3.68	%		193,914			4,960		3.42	%

Total interest-bearing liabilities		864,398			11,262		1.74	%		883,305			14,768		2.24	%
Noninterest-bearing deposits		65,135								68,321
Other liabilities		9,161								6,984

Total liabilities		938,694								958,610
Stockholders’ equity		130,965								143,015

Total liabilities & stockholders’ equity	$	1,069,659							$	1,101,625


Net interest income				$	26,787							$	26,576

Net interest spread							3.45	%							3.24	%
Net interest margin							3.65	%							3.52	%
Net interest income and margin (tax equivalent basis) (1)				$	27,248		3.72	%				$	27,064		3.59	%

Ratio of average interest-earning assets to average interest-bearing liabilities		113.40	%							114.19	%


(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 $461,000, and $488,000 for the nine month period ended September 30, 2010 and 2009, respectively. The average yield on investments increased to 3.18% from 2.78% for the nine month period ended September 30, 2010 and increased to 4.67% from 4.27% for the nine month period ended September 30, 2009.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The average rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The average volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net change 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 Three Months Ended September 30, 2010
	Compared to September 30, 2009
	Increase (decrease) due to changes in:
	Average			Average			Net
	Volume			Rate			Change
	(in thousands)
Interest-Earning Assets
Interest-earning deposits	$	23		$	(44	)	$	(21	)
Investments		(118	)		(168	)		(286	)
Loans		(384	)		(63	)		(447	)

Total interest income		(479	)		(275	)		(754	)


Interest-Bearing Liabilities
Interest-bearing demand accounts		—			(7	)		(7	)
Savings accounts		3			(15	)		(12	)
Money market accounts		101			(50	)		51
Certificates of deposit		(196	)		(554	)		(750	)
Borrowings		(254	)		43			(211	)

Total interest expense		(347	)		(583	)		(930	)


Total net interest income	$	(132	)	$	308		$	175


	For the Nine Months Ended September 30, 2010
	Compared to September 30, 2009
	Increase (decrease) due to changes in:
	Average			Average			Net
	Volume			Rate			Change
	(in thousands)
Interest-Earning Assets
Interest-earning deposits	$	2		$	(69	)	$	(67	)
Investments		(447	)		(1,972	)		(2,419	)
Loans		(610	)		(199	)		(809	)

Total interest income		(1,055	)		(2,240	)		(3,295	)


Interest-Bearing Liabilities
Interest-bearing demand accounts		14			(21	)		(7	)
Savings accounts		5			(44	)		(39	)
Money market accounts		267			(108	)		159
Certificates of deposit		(445	)		(2,699	)		(3,144	)
Borrowings		(839	)		364			(475	)

Total interest expense		(998	)		(2,508	)		(3,506	)


Total net interest income	$	(57	)	$	268		$	211

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2010 and 2009

General.Net income for the three months ended September 30, 2010 was $1.8 million, or $.15 per share, compared to a net loss of $19.1 million, or $1.55 per share for the three months ended September 30, 2009. The nine months ended September 30, 2010 reflected net income of $3.2 million, or $.26 per share, compared to a net loss of $19.1 million for the nine months ended September 30, 2009. Net income for the nine months ended September 30, 2010 benefited from a $1.5 million adjustment made to the deferred tax valuation allowance to more accurately reflect the realizability of the deferred tax asset. The following is a summary of certain significant pre-tax income and expense events that occurred during the third quarter of 2010: an OTTI charge related to the CDO investment portfolio of $340,000; net gains on the sale of investment securities of $343,000; a provision for loan losses of $2.7 million; loan related expenses of $735,000 and OREO expenses totaling $196,000. The three months ended September 30, 2009 included an OTTI charge related to the CDO investment portfolio of $799,000, a provision for loan losses of $9.8 million, net gains on the sale of investment securities of $595,000, net losses on OREO sales of $122,000, loan related expenses in the amount of $434,000, and OREO expenses totaling $92,000. The nine months ended September 30, 2010 included an OTTI charge of $3.4 million, a provision for loan losses of $4.7 million, net gains on the sale of investment securities of $310,000, net gains on the sale of OREO of $255,000, loan related expenses of $1.5 million and OREO expenses totaling $633,000 which included a $335,000 write-down of OREO properties. The nine months ended September 30, 2009 reflected an OTTI charge totaling $4.8 million, a provision for loan losses of $12.4 million, a $1.3 million charge related to payments made under the employment agreement of the Company’s former President and CEO, gains on the sales of investment securities of $1.2 million, BOLI benefit proceeds of $460,000, net losses on OREO sales of $377,000, and a $375,000 compensation pay-out to the current President and CEO. In addition, both the three and nine months ended September 30, 2009 included income tax expense of $12.6 million primarily related to the establishment of a $16.0 million deferred tax asset valuation allowance.

Interest Income.Interest income decreased $754,000, or 4.6%, to $12.7 million for the three months ended September 30, 2010, from $13.4 million for the three months ended September 30, 2009. This decrease is primarily the result of a decline in the average balance of loans and a decrease in both the average balance and yield of the investment portfolio. The average loan balance decreased $26.9 million, or 3.3%, to $783.0 million for the three month period ended September 30, 2010 from $809.9 million for the three month period ended September 30, 2009. Due to the economic downturn, loan demand has not been sufficient to offset monthly principal reductions, pay-offs, charge-offs and the transfer of loans to OREO resulting in the decline in average loan balances. The average yield on the investment portfolio declined from 3.57% for the three months ended September 30, 2009 to 3.18% for the three months ended September 30, 2010. The decline in yield is largely due to the implementation of a strategy to shorten the duration of the investment portfolio. Interest income was negatively impacted by this strategy in the short-term because $30.5 million in longer duration, higher yielding mortgage-backed securities were sold in June and August of 2009 and partially replaced with callable, short-term U.S. Government and agency obligations, which have yields that are below the portfolio average. Other contributing factors include interest rates on adjustable mortgage-backed securities repricing down, and callable U.S. Government and agency obligations being called and replaced at lower coupon rates. The average balance of investment securities decreased $12.6 million, or 6.8% to $171.6 million for the three months ended September 30, 2010, compared to $184.2 million for the three months ended September 30, 2009. The decrease in the average balance of investment securities is a result of the sale of $30.5 million in mortgage-backed securities as discussed previously.

For the nine months ended September 30, 2010, interest income decreased $3.3 million, or 8.0% to $38.0 million from $41.3 million for the nine months ended September 30, 2009. Similar to the three month comparison discussed in the preceding paragraph, the nine month decrease is largely attributed to a decline in average loans and a decrease in both the average balance and yield of the investment portfolio. The average loan balance decreased $14.1 million, or 1.7%, to $792.6 million for the three month period ended September 30, 2010 from $806.7 million for the three month period ended September 30, 2009. The yield on the investment portfolio declined from 4.27% for the nine months ended September 30, 2009 to 2.78% for the nine months ended September 30, 2010. In addition to the factors outlined in the preceding paragraph, the decrease in the nine months ended September 30, 2010 investment portfolio yield was adversely affected by the first quarter 2010 write-off of $590,000 in accrued interest receivable related to bank issued CDO securities. The average balance of investments for the nine months ended September 30, 2010 was $173.8 million, a decrease of $14.5 million, or 7.7% from $188.3 million for the nine months ended September 30, 2009.

Interest Expense.Interest expense decreased $929,000, or 20.7%, to $3.6 million for the three months ended September 30, 2010, from $4.5 million for the three months ended September 30, 2009, resulting from a decline in interest expense on certificates of deposit of $750,000, or 33.8%, to $1.5 million for the three months ended September 30, 2010 from $2.2 million for the three months ended September 30, 2009. This decline of interest expense is primarily the result of a reduction in interest rates paid on certificates of deposit where the cost of these deposits declined from 2.38% for the three months ended September 30, 2009 to 1.74% for the three months ended September 30, 2010 due to lower market interest rates. Interest expense on borrowings (Federal Home Loan Bank of New York advances) was $1.5 million for the three months ended September 30, 2010 compared to $1.7 million for the three months ended September 30, 2009. While average borrowings for the three month period ended September 30, 2010 declined to $154.7 million from $181.8 million for the three month period ended September 30, 2009, the cost of borrowings increased to 3.73% for the 2010 period from 3.63% for the three month period ended September 30, 2009. This resulted from a higher average of lower cost overnight borrowings for the three month period ended September 30, 2009 thereby driving down the cost of borrowings for that period. The interest rate on these overnight advances ranged from 0.36% to 0.52% during the three month period ended September 30, 2009.

For the nine months ended September 30, 2010, interest expense decreased $3.5 million, or 23.7%, to $11.3 million from $14.8 million for the nine months ended September 30, 2009. The primary factor contributing to this decrease was a reduction of interest expense on certificates of deposit of $3.1 million, or 39.6%, from $7.9 million for the nine months ended September 30, 2009 to $4.8 million for the nine months ended September 30, 2010. Interest rates paid on certificates of deposit declined to 1.81% for the nine months ended September 30, 2010 from 2.81% for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, interest expense on borrowings declined $475,000 from the same period in the prior year. While average borrowings for the nine month period ended September 30, 2010 declined to $162.7 million from $193.9 million for the nine month period ended September 30, 2009, the cost of borrowings increased to 3.68% for the 2010 period from 3.42% for the nine month period ended September 30, 2009. Similar to the three month change discussed previously, the increase resulted from a higher average of lower cost overnight borrowings for the nine month period ended September 30, 2009, which had the effect of driving down the cost of borrowings for that period.

Net Interest Income.Net interest income increased $175,000, or 2.0%, to $9.1 million for the three months ended September 30, 2010, from $8.9 million for the three months ended September 30, 2009. The net interest margin increased to 3.72% for the three months ended September 30, 2010 compared to 3.52% for the three months ended September 30, 2009. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 114.48% during the three months ended September 30, 2010, from 115.13% for the three months ended September 30, 2009. For the nine months ended September 30, 2010, net interest income increased $211,000, or 0.8%, to $26.8 million for the three months ended September 30, 2010, from $26.6 million for the nine months ended September 30, 2009. The net interest margin was 3.65% for the nine months ended September 30, 2010 compared to 3.52% for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, the ratio of average interest-earning assets to average interest-bearing liabilities declined to 113.40% from 114.19% for the same period in 2009.

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 regulation, 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 review the loan in accordance with FASB ASC Topic No. 310 Receivables. Prior to receipt of an appraisal, management considers, 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 upon the results of a completed FASB ASC Topic No. 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.

We recorded a provision for loan losses of $2.7 million for the three months ended September 30, 2010 compared to $9.8 million for the three months ended September 30, 2009. For the nine months ended September 30, 2010, the provision for loan losses was $4.7 million compared to $12.4 million for the nine months ended September 30, 2009. The ratio of the allowance for loan losses to non-performing loans (coverage ratio) decreased to 38.32% at September 30, 2010, from 40.04% at December 31, 2009. When there is a charge-off on a loan, this ratio is negatively affected. For the three months ended September 30, 2010, charge-offs were $2.0 million compared to $8.1 for the three months ended September 30, 2009. Charge-offs for the nine months ended September 30, 2010 totaled $5.8 million compared to $10.2 million for the nine months ended September 30, 2009. The three and nine months ended September 30, 2009 included $6.6 million in charge-offs of two credit relationships. Included in the 2010 charge-offs of $5.8 million were partial charge-offs totaling $1.9 million. The amount of non-performing loans for which the full loss has been charged-off to total loans is 0.51%. The amount of non-performing loans for which the full loss has been charged-off to total non-performing loans is 11.8% which 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 three months ended September 30, 2010 were $17,000 compared to $9,000 for the three months ended September 30, 2009. For the nine months ended September 30, 2010, loan loss recoveries were $510,000 compared to $410,000 for the nine months ended September 30, 2009.

Our allowance for loans losses decreased $690,000, or 5.2%, to $12.6 million at September 30, 2010, from $13.3 million at December 31, 2009. The ratio of our allowance for loan losses to total loans decreased to 1.64% at September 30, 2010, from 1.66% at December 31, 2009. This decline in the ratio for allowance for loan losses was primarily the result of the loan loss allowance account balance declining from $13.3 million at December 31, 2009 to $12.6 million at September 30, 2010. This decline in the loan loss allowance account balance was the result of $5.8 million of charged-off loans, of which 2 loans represented $1.8 million and were 100% reserved for as of December 31, 2009. The quarterly loan loss allowance methodology did not require additional provisions to the loan loss allowance account for the $1.8 million of charge-offs that were fully reserved. Certain impaired loans (troubled debt restructurings) have a valuation allowance determined by discounting expected cash flows at the respective loan’s effective interest rate. Included in the allowance for loan losses at September 30, 2010 was an impairment reserve for TDRs in the amount of $402,000.

Non-Interest Income.Non-interest income totaled $1.4 million for the three months ended September 30, 2010 compared to $888,000 for the three months ended September 30, 2009. The increase in non-interest income resulted from the Company recognizing an OTTI charge to non-interest income on CDOs totaling $340,000 for the three months ended September 30, 2010 compared to a similar charge of $799,000 for the three months ended September 30, 2009. In addition, for the three months ended September 30, 2010, the Company recorded net gains from the sale of OREO of $7,000 compared to net losses on OREO sales of $122,000 for the three months ended September 30, 2009 and gains on the sale of investment securities were $343,000 for the three months ended September 30, 2010 compared to $595,000 for the three months ended September 30, 2009.

For the nine months ended September 30, 2010, non-interest income totaled $965,000 compared to $24,000 for the nine months ended September 30, 2009. The increase in non-interest income resulted from the Company recognizing an OTTI charge on CDOs totaling $3.4 million for the nine months ended September 30, 2010 compared to a similar charge of $4.8 million for the nine months ended September 30, 2009. The Company recorded $255,000 of net gains on OREO sales for the nine months ended September 30, 2010 compared to net losses on OREO sales totaling $377,000 for the nine months ended September 30, 2009. Net gains on sales of investments totaled $310,000 for the nine months ended September 30, 2010 compared to net gains on sales of investments of $1.2 million for the nine months ended September 30, 2009. In addition, the nine month period ended September 30, 2009 included $460,000 from BOLI benefit proceeds.

Non-Interest Expense.Non-interest expense increased $300,000 or 4.4%, to $6.9 million for the three months ended September 30, 2010 from $6.6 million for the three months ended September 30, 2009. Increases in loan related expense ($301,000) and OREO expenses ($104,000) were partially offset by a reduction in salaries and benefits ($234,000). The increase in loan related expenses resulted from increased legal fees and insurance expense. The decrease in salaries and benefits is primarily attributable to management’s decision to reverse $450,000 of previously accrued compensation expense, as targeted income results were not achieved. This decrease was partially offset by an increase in benefit related plans.

For the nine months ended September 30, 2010, non-interest expenses increased $65,000, or 0.3%, to $21.4 million from $21.3 million for the nine months ended September 30, 2009. Lower salaries and benefits costs of $1.3 million resulted primarily from an expense of $1.3 million in the first quarter 2009 related to payments made pursuant to the Company’s employment agreement with its former President and CEO. In addition, Federal deposit insurance premiums declined $449,000 as the first quarter 2009 included increased premiums related to special deposit insurance assessments. Partially offsetting these reductions were increased expenses on foreclosed real estate of $436,000 (primarily related to legal and operating expenses as well as an increase in the establishment of an allowance for losses on OREO), increased loan related expenses of $830,000, and an increase in other operating expenses of $167,000 primarily resulting from executive search fees.

Income Tax Expense (Benefit).For the three months ended September 30, 2010, the Company had a tax benefit of $959,000. The three months ended September 30, 2009 reflected a tax benefit of $133,000 which resulted from a pre-tax loss. An income tax benefit of $1.5 million was recognized for the nine months ended September 30, 2010. The benefit recognized in both the three and nine month periods of 2010 resulted primarily from a reduction in the valuation allowance due to a change in the amount of net deferred tax assets determined to be more likely than not to be realized. The nine months ended September 30, 2009 reflected a tax benefit of $560,000 that resulted from a pre-tax loss.

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 $88.1 million through September 30, 2010 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 September 30, 2010, the Company’s entire investment portfolio, with a fair market value of $158.1 million, was classified 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 $15.5 million, or 2.1%, during the first nine months of 2010, and comprised 81.7% of total liabilities at September 30, 2010, as compared to 77.8% at December 31, 2009.

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 September 30, 2010, the Company and Bank meet all capital adequacy requirements to which it is subject.

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 September 30, 2010 and December 31, 2009, the 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.

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)
September 30, 2010
Risk based capital ratios:
Tier I	$	101,970		12.32	%	$	33,107		4.00	%	$	49,661		6.00	%
Total capital	$	112,345		13.57	%	$	66,231		8.00	%	$	82,789		10.00	%
Leverage ratio	$	101,970		9.81	%	$	41,578		4.00	%	$	51,972		5.00	%

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	%

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 inNote 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, estimated future cash flows, changes in loan policies and procedures, changes in loan volume, delinquency and troubled asset trends, loan management and personnel, internal and external loan review, total credit exposure of the individual or entity, and external factors including competition, legal, regulatory and seasonal factors. All of these estimates are susceptible to significant change. Groups of homogeneous 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 assesses the allowance for loan losses and makes provisions for loan losses on a quarterly basis. 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 charge-off will reduce the allowance for loan losses and may 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 September 30, 2010, OTTI has been recorded for all 16 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 pressure from banking regulators to preserve capital 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. In addition, due to projected discounted cash flows that do not support the receipt of interest on the CDO securities, the Company is not accruing interest on any of the bank issued CDO securities.

Approximately $6.2 million of the collateralized mortgage obligations classified as available for sale were non-agency securities and had net unrealized gains of $96,000. Of the 3 non-agency CMO securities, only one security has an unrealized loss. While we have determined this unrealized loss 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 September 30, 2010, the Company has a valuation allowance in the amount of approximately $14.0 million against its 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.

Effect of Newly Issued Accounting Standards.In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires reporting entities to make new disclosures about recurring and nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances and settlements, on a gross basis, in the reconciliation of Level 3 fair value measurements. ASU 2010-06 also requires disclosure of fair value measurements by “class” instead of by “major category” as well as any changes in valuation techniques used during the reporting period. For disclosures of Level 1 and Level 2 activity, fair value measurements by “class” and changes in valuation techniques, ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with disclosures for previous comparative periods prior to adoption not required. The adoption of this portion of ASU 2010-06 on January 1, 2010 did not have a material impact on the Company’s financial condition or results of operations. For the reconciliation of Level 3 fair value measurements, ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this portion of ASU 2010-06 is not expected to have a material impact on the Company’s financial condition or results of operations.


Item 3.		Quantitative and Qualitative Disclosures About 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;

•

re-pricing existing deposits to current market rates;

•

obtaining funds through lower cost deposits and advances from the Federal Home Loan Bank;

•

lengthening the terms of borrowings and deposits; and

•

reclassifying our investment securities portfolio as available-for-sale.

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 Interest Income Analysis.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 September 30, 2010, our calculation of the estimated changes in our 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 Interest Income
Change in	Estimated		Increase (Decrease) in
Interest Rates	Net Interest		Estimated Net Interest Income
(basis points)(1)	Income		Amount			Percent
	(dollars in thousands)

+200	$	33,661	$	(2,370	)		-6.58	%
+100		35,122		(909	)		-2.52	%
0		36,031		—			—
-100		36,154		123			0.34	%
-200		35,891		(140	)		-0.39	%


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

The table above indicates that at September 30, 2010, in the event of a 100 basis point increase in interest rates, we would experience a $909,000 decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a $123,000 increase in net interest income.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in 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 interest income information presented assumes 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 assumes 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.


Item 4.		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 September 30, 2010 (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 changes made in our internal control over financial reporting during the Company’s third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II — Other Information


Item 1.		Legal Proceedings

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.


Item 1A.		Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2009, as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q 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.

A wide range of regulatory initiatives directed at the financial services industry have been proposed in recent months. One of those initiatives, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new rules. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact the Company’s business. However, compliance with these new laws and regulations will result in additional costs, which may adversely impact the Company’s results of operations, financial condition or liquidity, any of which may impact the market price of the Company’s common stock. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.


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

(a) There were no sales of unregistered securities during the period covered by this Report.

(b) Not applicable.


Item 3.		Defaults Upon Senior Securities

Not applicable.


Item 4.		Reserved


Item 5.		Other Information

Not applicable


Item 6.		Exhibits

The following exhibits are either filed as part of this report or are incorporated herein by reference:


	3.1			Articles of Incorporation of Cape Bancorp, Inc. *

	3.2			Amended and Restated Bylaws of Cape Bancorp, Inc. * *

	4			Form of Common Stock Certificate of Cape Bancorp, Inc. *

	10.1			Form of Employee Stock Ownership Plan *

	10.2			Form of Change in Control Agreement *

	10.3			Amended and Restated Phantom Incentive Stock Option Plan *

	10.4			Amended and Restated Phantom Restricted Stock Plan *

	10.5			Form of Director Retirement Plan *

	10.6			Benefit Equalization Plan *

	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


*		Filed as exhibits to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission (Registration No. 333-146178).

**		Filed as an exhibit to the Company’s Current Report Form 8-K with the Securities and Exchange Commission on July 18, 2008.

SIGNATURES

Pursuant to the requirements 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: November 2, 2010	/s/ Michael D. Devlin
	Michael D. Devlin
	President and Chief Executive Officer


Date: November 2, 2010	/s/ Guy Hackney
	Guy Hackney
	Senior Vice President and Chief Financial Officer

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Cape Bancorp Inactive 10-Q2010 Q3 Quarterly report

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