Forward Looking Statements
When used in this Form 10-Q, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in our market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution you not to place undue reliance on any such forward-looking statements, which only speak as of the date made. The Company wishes to advise you 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.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview
Cape Bank was organized in 1923. Over the years, we have expanded primarily through internal growth. On January 31, 2008, we completed our mutual-to-stock conversion and initial public stock offering, and our acquisition of Boardwalk Bancorp and Boardwalk Bank. At June 30, 2009, the Company had total assets of $1.111 billion.
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 June 30, 2009, our retail market area primarily included the area surrounding our 18 offices located in Cape May and Atlantic Counties, New Jersey.
Comparison of Financial Condition at June 30, 2009 and December 31, 2008 At June 30, 2009, the Company's total assets increased to $1.111 billion from $1.091 billion at December 31, 2008, an increase of $19.9 million or 1.82%. Cash and cash equivalents increased $5.3 million, or 52.48%, to $15.4 million at June 30, 2009 from $10.1 million at December 31, 2008.
Interest-earning deposits in other financial institutions decreased to $6.4 million at June 30, 2009 from $17.9 million at December 31, 2008, a decrease of $11.5 million or 64.3%. During the period, these funds were used to purchase higher yielding investments.
Total net loans increased to $800.3 million at June 30, 2009 from $783.9 million at December 31, 2008, an increase of $16.4 million or 2.1%. Delinquent loans increased $3.0 million to $36.3 million or 4.5% of total loans at June 30, 2009 from $33.3 million, or 4.2% of total loans at December 31, 2008. Total delinquent loans by portfolio at June 30, 2009 were $29.2 million of commercial loans, $6.1 million of mortgage loans and $1.0 million of consumer loans. Delinquent loan balances by number of days delinquent were: 31 to 59 days - $3.5 million; 60 to 89 days - $3.2 million; and 90 days and greater - $29.7 million.
At June 30, 2009, the Company had $29.7 million in non-performing loans or 3.65% of total gross loans, an increase from $21.1 million or 2.65% at December 31, 2008. Total non-performing loans by portfolio were $25.4 million of commercial loans, $3.8 million of residential loans and $467,000 of consumer loans. Commercial non-performing loans had collateral type concentrations of 26% in restaurant related loans, 18% in residential, duplex and multi-family related loans, 15% in land and building lot related loans, 11% in B&B and hotel related loans, 10% in commercial building and equipment related loans, 8% in marina related loans, 7% in auto dealership related loans and 5% in retail store related loans. The three largest relationships in this category of non-performing loans are $2.8 million, $2.5 million, and $2.1 million. We believe we have appropriately charged-off or established adequate loss reserves on problem loans that we have identified. However, we believe that non-performing and delinquent loans will continue to increase as the current recession persists. We are aggressively managing all loan relationships, and where necessary, we will apply our loan work-out experience to protect our collateral position and actively negotiate with borrowers to resolve these non-performing loans.
Total investment securities increased to $170.9 million at June 30, 2009 ($123.7 million classified as available-for-sale or 72.4%) from $163.5 million at December 31, 2008, an increase of $7.4 million or 4.5%. As discussed previously, interest earning deposits in other financial institutions were used to invest in higher yielding securities to maximize interest income. Conversely, during the six month period ended June 30, 2009, the collateralized debt obligation portion of the investment portfolio declined in value by $1.1 million. At June 30, 2009, the cost basis of such securities was $14.0 million with a fair market value of $2.0 million. The market value of this sector of the investment portfolio has been adversely affected by the prolonged existence of an illiquid market as well as several securities which are currently deferring interest payments. For the three months and six months ended June 30, 2009, the Company recognized OTTI charges of $2.5 million and $4.0 million, respectively.

At June 30, 2009, the Bank's total deposits increased to $744.6 million from $711.1 million at December 31, 2008, an increase of $33.5 million or 4.7%. Certificates of deposit increased $2.9 million, or 0.8%, to $359.1 million at June 30, 2009 from $356.2 million at December 31, 2008. NOW and money market accounts increased $19.5 million, or 9.2%, to $231.7 million at June 30, 2009 from $212.2 million at December 31, 2008. Savings accounts increased $1.1 million, or 1.4%, to $80.6 million at June 30, 2009 from $79.5 million at December 31, 2008. Non-interest bearing deposits increased $9.9 million, or 15.6%, to $73.2 million at June 30, 2009 from $63.3 million at December 31, 2008. Total non-certificate deposit balances increased $30.5 million, or 8.6%, to $385.4 million at June 30, 2009 from $354.9 million at December 31, 2008. Borrowings decreased $17.5 million, or 7.5%, to $217.0 million at June 30, 2009 from $234.5 million at December 31, 2008. The decline in borrowings was partially attributable to the use of brokered deposits in the amount of $12.8 million as of June 30, 2009 as a less expensive alternative funding source. At June 30, 2009, the Company's borrowings to assets ratio decreased to 19.5% from 21.5% at December 31, 2008. Borrowings to total liabilities decreased to 22.4% at June 30, 2009 from 24.7% at December 31, 2008.
At June 30, 2009, the Company's total equity increased to $143.0 million from $140.7 million at December 31, 2008, an increase of $2.3 million, or 1.6%. The increase in equity is attributable to a $2.1 million increase in accumulated other comprehensive loss, net of tax. This change excludes the effect of the reclassification between Retained Earnings and OCI, pursuant to the adoption of FSP FAS 115-2. Stockholders' equity totaled $143.0 million or 12.87% of period end assets, and tangible equity totaled $119.7 million or 11.01% 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 June 30,
                                             2009                                           2008
                                            Interest                                       Interest
                             Average         Income/        Average         Average         Income/        Average
                             Balance         Expense         Yield          Balance         Expense         Yield
                                                            (dollars in thousands)

Assets
Interest-earning
deposits                   $    15,989      $      52           1.29 %    $    12,235      $      89           2.93 %
Investments                    192,063          2,166           4.46 %        209,926          2,642           5.06 %
Loans                          808,545         11,774           5.84 %        801,739         12,317           6.18 %

Total interest-earning
assets                       1,016,597         13,992           5.52 %      1,023,900         15,048           5.91 %
Noninterest-earning
assets                         105,256                                        143,923
Allowance for loan
losses                         (12,579 )                                       (8,298 )

Total assets               $ 1,109,274                                    $ 1,159,525


Liabilities and
Stockholders' Equity
Interest-bearing demand
accounts                   $   104,075             95           0.37 %    $   106,815            217           0.82 %
Savings accounts                80,078             87           0.44 %         83,038            258           1.25 %
Money market accounts          130,250            424           1.31 %        120,621            776           2.59 %
Certificates of deposit        381,616          2,768           2.91 %        384,067          3,315           3.47 %
Borrowings                     195,052          1,700           3.50 %        203,513          1,722           3.40 %

Total interest-bearing
liabilities                    891,071          5,074           2.28 %        898,054          6,288           2.82 %
Noninterest-bearing
deposits                        67,527                                         68,184
Other liabilities                7,857                                          6,007

Total liabilities              966,455                                        972,245
Stockholders' equity           142,819                                        187,280

Total liabilities &
stockholders' equity       $ 1,109,274                                    $ 1,159,525


Net interest income                         $   8,918                                      $   8,760

Net interest spread                                             3.24 %                                         3.09 %
Net interest margin                                             3.52 %                                         3.44 %
Net interest income and
margin (tax equivalent
basis) (1)                                  $   9,073           3.58 %                     $   8,905           3.50 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                     114.09 %                                       114.01 %

(1) In order to present pre-tax income and resultant yields on tax-exempt investments on a basis comparable to those on taxable investments, a tax equivalent yield adjustment is made to interest income. The tax equilvalent adjustment has been computed using a Federal income tax rate of 34%, and has the effect of increasing interest income by $155,000, and $145,000 for the three month period ended June 30, 2009 and 2008, respectively. The average yield on investments increased to 4.85% from 4.46% for the three month period ended June 30, 2009 and increased to 5.41% from 5.06% for the three month period ended June 30, 2008.

                                                      For the Six Months Ended June 30,
                                             2009                                           2008
                                            Interest                                       Interest
                             Average         Income/        Average         Average         Income/        Average
                             Balance         Expense         Yield          Balance         Expense         Yield
                                                            (dollars in thousands)

Assets
Interest-earning
deposits                   $    15,508      $     119           1.53 %    $     9,682      $     163           3.39 %
Investments                    189,579          4,415           4.63 %        194,833          4,974           5.13 %
Loans                          804,380         23,401           5.87 %        740,071         23,365           6.35 %

Total interest-earning
assets                       1,009,467         27,935           5.58 %        944,586         28,502           6.07 %
Noninterest-earning
assets                         106,293                                        130,641
Allowance for loan
losses                         (11,963 )                                       (7,507 )

Total assets               $ 1,103,797                                    $ 1,067,720


Liabilities and
Stockholders' Equity
Interest-bearing demand
accounts                   $   104,079            202           0.39 %    $   107,337            526           0.99 %
Savings accounts                79,771            204           0.52 %         82,161            571           1.40 %
Money market accounts          123,689            852           1.39 %        115,359          1,680           2.93 %
Certificates of deposit        381,319          5,727           3.03 %        354,931          6,576           3.73 %
Borrowings                     200,079          3,296           3.32 %        172,863          3,152           3.67 %

Total interest-bearing
liabilities                    888,937         10,281           2.33 %        832,651         12,505           3.02 %
Noninterest-bearing
deposits                        65,694                                         61,839
Other liabilities                7,047                                          5,344

Total liabilities              961,678                                        899,834
Stockholders' equity           142,119                                        167,886

Total liabilities &
stockholders' equity       $ 1,103,797                                    $ 1,067,720


Net interest income                         $  17,654                                      $  15,997

Net interest spread                                             3.25 %                                         3.05 %
Net interest margin                                             3.53 %                                         3.41 %
Net interest income and
margin (tax equivalent
basis) (1)                                  $  17,965           3.59 %                     $  16,256           3.46 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                     113.56 %                                       113.44 %

(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 34%, and has the effect of increasing interest income by $311,000, and $259,000 for the six month period ended June 30, 2009 and 2008, respectively. The average yield on investments increased to 5.03% from 4.63% for the six month period ended June 30, 2009 and increased to 5.52% from 5.13% for the six month period ended June 30, 2008.

Rate/Volume Analysis
The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The 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 June 30, 2009
                                                 Compared to June 30, 2008
                                           Increase (decrease) due to changes in:
                                     Average            Average                Net
                                      Volume              Rate                Change
                                                       (in thousands)

 Interest-Earning Assets
 Interest-earning deposits          $       21       $          (58 )     $          (37 )
 Investments                              (236 )               (240 )               (476 )
 Loans                                     104                 (647 )               (543 )

 Total interest income                    (111 )               (945 )             (1,056 )


 Interest-Bearing Liabilities
 Interest-bearing demand accounts           (5 )               (117 )               (122 )
 Savings accounts                           (9 )               (162 )               (171 )
 Money market accounts                      58                 (410 )               (352 )
 Certificates of deposit                   (21 )               (526 )               (547 )
 Borrowings                                (75 )                 53                  (22 )

 Total interest expense                    (52 )             (1,162 )             (1,214 )


 Total net interest income          $      (59 )     $          217       $          158




                                           For the Six Months Ended June 30, 2009
                                                  Compared to June 30, 2008
                                           Increase (decrease) due to changes in:
                                         Average            Average             Net
                                         Volume              Rate             Change
                                                       (in thousands)

    Interest-Earning Assets
    Interest-earning deposits          $        69       $        (114 )     $     (45 )
    Investments                               (130 )              (429 )          (559 )
    Loans                                    1,872              (1,835 )            37

    Total interest income                    1,811              (2,378 )          (567 )


    Interest-Bearing Liabilities
    Interest-bearing demand accounts           (16 )              (308 )          (324 )
    Savings accounts                           (17 )              (351 )          (368 )
    Money market accounts                      112                (939 )          (827 )
    Certificates of deposit                    451              (1,300 )          (849 )
    Borrowings                                 454                (310 )           144

    Total interest expense                     984              (3,208 )        (2,224 )


    Total net interest income          $       827       $         830       $   1,657

Comparison of Operating Results for the Three and Six Months Ended June 30, 2009 and 2008
General. The net income for the three months ended June 30, 2009 was $103,000 compared to net income of $1.3 million for the same period in 2008. The six months ended June 30, 2009 reflected net income of $4,000 compared to a net loss of $910,000 reported for the six months ended June 30, 2008. The following is a recap of certain material pre-tax income and expense events that occurred during the second quarter of 2009: recognition of FHLB first quarter dividend income not previously accrued of $142,000; BOLI benefit proceeds of $460,000; gains on sales of investments of $600,000; compensation pay-out expense of $375,000; loan loss provision of $1.9 million; and an OTTI charge related to the CDO investment portfolio of $2.5 million. The six months ended June 30, 2009 reflected an other-than-temporary impairment charge on CDOs totaling $4.0 million, loan loss provision of $2.6 million, a $1.3 million charge related to the employment agreement of the Company's former President and CEO, gains on sales of investments of $600,000, BOLI benefit proceeds of $460,000, and a $375,000 compensation pay-out to the current President and CEO. The net loss for the six months ended June 30, 2008 resulted, in part, from the Company's contribution of $3.8 million, net of taxes, to The CapeBank Charitable Foundation, and approximately $235,000 of expenses, net of taxes, associated with the Bank's name change and costs associated with the acquisition of Boardwalk Bank during the period.
Interest Income. Interest income decreased $1.0 million, or 7.1%, to $14.0 million for the three months ended June 30, 2009, from $15.0 million for the three months ended June 30, 2008. This decrease is primarily the result of decreases in yields on the loan and investment portfolios. The average yield on the loan portfolio declined from 6.18% for the three months ended June 30, 2008 to 5.84% for the three months ended June 30, 2009. The decrease in the average yield reflected a lower interest rate environment and to a lesser extent an increase in non-accrual loans from $25.7 million at June 30, 2008 to $29.7 million at June 30, 2009. Average loans for the three month period ended June 30, 2009 were $808.5 million compared to $801.7 million for the three month period ended June 30, 2008 an increase of $6.8 million, or 0.9%. The average yield on the investment portfolio declined from 5.06% for the three months ended June 30, 2008 to 4.46% for the three months ended June 30, 2009. The decline in the average yield was primarily a result of falling market interest rates which negatively impacted both the repricing of our adjustable rate MBS portfolio and U.S. Government and agency obligations where called securities were replaced at lower coupon rates as well as the charge-off of $176,000 in interest receivables related to three CDO securities which were fully written off. The average balance of investments decreased $17.8 million, or 8.5% to $192.1 million for the three months ended June 30, 2009, compared to $209.9 million for the three months ended June 30, 2008. This decrease is mainly attributed to the significant decline in market value of the CDO portfolio, which was $18.3 million at June 30, 2008 compared to $2.0 million at June 30, 2009. For the six months ended June 30, 2009, interest income decreased $567,000 or 2.0% to $27.9 million from $28.5 million for the six months ended June 30, 2008. This decrease is primarily the result of decreases in yields on the loan and investment portfolios. The yield on the loan portfolio declined from 6.35% for the six months ended June 30, 2008 to 5.87% for the six months ended June 30, 2009 while the yield on the investment portfolio declined from 5.13% to 4.63% over the same two periods. The same factors discussed above that contributed to the declines in the average yields for loans and investments for the three month comparison also impacted the decreases experienced from the six months ended June 30, 2008 to the six months ended June 30, 2009. For the six months ended June 30, 2009, average loans increased $64.3 million, or 8.7%, to $804.4 million from $740.1 million for the six months ended June 30, 2008. The increase in average loans primarily resulted from the six months ended June 30, 2008 balance including only five months of post-merger Boardwalk Bank loan balances. The average balance of investments for the six month period ended June 30, 2009 was $189.6 million compared to $194.8 million a decrease of $5.2 million, or 2.7%. Interest Expense. Interest expense decreased $1.2 million, or 19.3%, to $5.1 million for the three months ended June 30, 2009, from $6.3 million for the three months ended June 30, 2008. For the six months ended June 30, 2009, interest expense declined $2.2 million, or 17.8%.
Interest expense on NOW (interest bearing demand accounts) and money market accounts decreased $474,000, or 47.7%, to $519,000 for the three months ended June 30, 2009, from $993,000 for the three months ended June 30, 2008, and interest expense on certificates of deposit decreased $547,000, or 16.5%, to $2.8 million for the three months ended June 30, 2009, from $3.3 million for the three months ended June 30, 2008. This decline of interest expense is primarily the result of a reduction in interest rates paid on all categories of interest bearing deposit accounts as general economic market conditions pushed interest rates down nationally. The most significant decline of interest rates paid on deposits was within the certificate of deposits portfolio where the costs of these deposit decline from 3.47% for the three months ended June 30, 2008 to 2.91% for the three months ended June 30, 2009. The next most significant decline of cost of funds was within the money market deposits which had a 128 basis point decline of their cost of funds, dropping from 2.59% for the three month period ended June 30, 2008 to 1.31% for the three month period ended June 30, 2009. The slight change in the average balance of these interest bearing deposit accounts had little influence on the change of the interest expense related to these accounts.

Interest expense on NOW (interest bearing demand accounts) and money market accounts decreased $1.1 million, or 50.0%, to $1.1 million for the six months ended June 30, 2009, from $2.2 million for the six months ended June 30, 2008, and interest expense on certificates of deposit decreased $849,000, or 12.9%, to $5.7 million for the six months ended June 30, 2009, from $6.6 million for the six months ended June 30, 2008. This decline of interest expense is primarily the result of a reduction in interest rates paid on all categories of interest bearing deposit accounts as general economic market conditions pushed interest rates down nationally. The most significant impact of declining interest rates paid on deposits was within the certificate of deposits portfolio where the costs of these deposits declined from 3.73% for the six months ended June 30, 2008 to 3.03% for the six months ended June 30, 2009. The next most significant . . .