Summary of CAPE BANCORP, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own, 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.

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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 September 30, 2009, the Company had total assets of $1.067 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 September 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 September 30, 2009 and December 31, 2008 At September 30, 2009, the Company's total assets decreased to $1.067 billion from $1.091 billion at December 31, 2008, a decrease of $23.5 million or 2.15%. Cash and cash equivalents decreased $241,000, or 2.4%, to $9.9 million at September 30, 2009 from $10.1 million at December 31, 2008. Interest-earning deposits in other financial institutions decreased to $9.6 million at September 30, 2009 from $17.9 million at December 31, 2008, a decrease of $8.3 million or 46.3%. During the period, these funds were used to invest in higher yielding assets.
Total net loans increased to $789.6 million at September 30, 2009 from $783.9 million at December 31, 2008, an increase of $5.7 million or 0.7%. Delinquent loans increased $3.8 million to $37.1 million or 4.6 % of total loans at September 30, 2009 from $33.3 million, or 4.2% of total loans at December 31, 2008. Total delinquent loans by portfolio at September 30, 2009 were $30.1 million of commercial loans, $5.5 million of mortgage loans and $1.5 million of consumer loans. Delinquent loan balances by number of days delinquent were: 31 to 59 days - $2.3 million; 60 to 89 days - $3.8 million; and 90 days and greater
- $31.0 million. At September 30, 2009, the Company had $34.5 million in non-performing loans or 4.29% of total gross loans, an increase from $21.1 million or 2.65% at December 31, 2008. Total non-performing loans by portfolio were $31.8 million of commercial loans, $2.4 million of residential loans and $195,000 of consumer loans. Additionally, the Company had $1.8 million of loans that were 90 days or more delinquent and still accruing (9 residential mortgage loans for $1.6 million and 1 consumer loan for $250,000). These loans are both well secured and in the process of collection. Of the commercial non-performing loans $4.8 million (17 loans or 15%) were secured by residential, duplex and multi-family related loans, $3.7 million (9 loans or 12%) were secured by land and building lot related loans, $1.3 million (5 loans or 4%) were secured by retail store related loans, $6.3 million (12 loans or 20%) were secured by restaurant related loans, $2.1 million (2 loans or 6%) were secured by marina related loans, $1.7 million (2 loans or 6%) were secured by auto dealership related loans, $2.9 million ( 6 loans or 9%) were secured by B&B and hotel related loans and $9.0 million (19 loans or 28%) were secured by commercial building and equipment related loans. The three largest relationships in this category of non-performing loans are $4.5 million, $2.8 million, and $2.4 million.

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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 may 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 decreased to $156.5 million at September 30, 2009 from $163.5 million at December 31, 2008, a decrease of $7.0 million or 4.3%. The investment portfolio is comprised primarily of securities classified as available-for-sale, which decreased to $111.5 million, or 71.3% of the portfolio at September 30, 2009 from $114.7 million, or 70.1% of the investment portfolio, at December 31, 2008. 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 nine month period ended September 30, 2009, the collateralized debt obligation portion of the investment portfolio declined in value by $1.4 million. At September 30, 2009, the cost basis of such securities was $13.3 million with a fair market value of $1.6 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 nine months ended September 30, 2009, the Company recognized OTTI charges of $799,000 and $4.8 million, respectively.
At September 30, 2009, the Bank's total deposits increased to $763.4 million from $711.1 million at December 31, 2008, an increase of $52.3 million or 7.4%. Certificates of deposit increased $8.5 million, or 2.4%, to $364.7 million at September 30, 2009 from $356.2 million at December 31, 2008. NOW and money market accounts increased $31.8 million, or 15.0%, to $244.0 million at September 30, 2009 from $212.2 million at December 31, 2008. Savings accounts increased $2.2 million, or 2.7%, to $81.7 million at September 30, 2009 from $79.5 million at December 31, 2008. Non-interest bearing deposits increased $9.7 million, or 15.4%, to $73.0 million at September 30, 2009 from $63.3 million at December 31, 2008. Total non-certificate deposit balances increased $43.8 million, or 12.3%, to $398.7 million at September 30, 2009 from $354.9 million at December 31, 2008.
Borrowings decreased $61.0 million, or 26.0%, to $173.5 million at September 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 $31.3 million as of September 30, 2009 as a less expensive alternative funding source. At September 30, 2009, the Company's borrowings to assets ratio decreased to 16.3% from 21.5% at December 31, 2008. Borrowings to total liabilities decreased to 18.4% at September 30, 2009 from 24.7% at December 31, 2008.
At September 30, 2009, the Company's total equity decreased to $124.7 million from $140.7 million at December 31, 2008, a decrease of $16.0 million, or 11.4%. The decrease in equity is attributable to the $19.1 million net loss partially offset by a decrease in accumulated other comprehensive loss, net of tax of $2.8 million. This change excludes the effect of the reclassification between retained earnings and accumulated other comprehensive income (loss), pursuant to the FASB guidance regarding the recognition and presentation of other-than-temporary impairment. Stockholders' equity totaled $124.7 million or 11.68% of period end assets, and tangible equity totaled $101.5 million or 9.72% of period end tangible assets.

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The following table sets 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,
                                             2009                                           2008
                                            Interest                                       Interest
                             Average         Income/        Average         Average         Income/        Average
                             Balance         Expense         Yield          Balance         Expense         Yield
                                                            (dollars in thousands)

Assets
Interest-earning
deposits                   $    10,107      $      61           2.36 %    $     7,689      $      53           2.74 %
Investments                    184,235          1,681           3.57 %        201,637          2,578           5.09 %
Loans                          809,878         11,667           5.72 %        789,943         12,523           6.31 %

Total interest-earning
assets                       1,004,220         13,409           5.30 %        999,269         15,154           6.03 %
Noninterest-earning
assets                         105,390                                        146,135
Allowance for loan
losses                         (12,259 )                                       (8,855 )

Total assets               $ 1,097,351                                    $ 1,136,549


Liabilities and
Stockholders' Equity
Interest-bearing demand
accounts                   $   111,591            105           0.37 %    $   109,780            296           1.07 %
Savings accounts                81,138             91           0.44 %         83,574            273           1.30 %
Money market accounts          127,436            406           1.26 %        126,621            782           2.46 %
Certificates of deposit        370,273          2,221           2.38 %        345,384          2,935           3.38 %
Borrowings                     181,785          1,664           3.63 %        205,655          1,798           3.48 %

Total interest-bearing
liabilities                    872,223          4,487           2.04 %        871,014          6,084           2.78 %
Noninterest-bearing
deposits                        73,492                                         75,890
Other liabilities                6,860                                          6,896

Total liabilities              952,575                                        953,800
Stockholders' equity           144,776                                        182,749

Total liabilities &
stockholders' equity       $ 1,097,351                                    $ 1,136,549


Net interest income                         $   8,922                                      $   9,070

Net interest spread                                             3.26 %                                         3.25 %
Net interest margin                                             3.52 %                                         3.61 %
Net interest income and
margin (tax equivalent
basis) (1)                                  $   9,070           3.58 %                     $   9,224           3.66 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                     115.13 %                                       114.72 %

(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 equivalent adjustment has been computed using a Federal income tax rate of 35%, and has the effect of increasing interest income by $148,000, and $154,000 for the three month period ended September 30, 2009 and 2008, respectively. The average yield on investments increased to 3.94% from 3.57% for the three month period ended September 30, 2009 and increased to 5.41% from 5.09% for the three month period ended September 30, 2008.

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

Assets
Interest-earning
deposits                   $    13,688      $     186           1.79 %    $     9,029      $     216           3.20 %
Investments                    188,259          6,090           4.27 %        197,535          7,552           5.11 %
Loans                          806,676         35,068           5.81 %        758,193         35,888           6.32 %

Total interest-earning
assets                       1,008,623         41,344           5.48 %        964,757         43,656           6.04 %
Noninterest-earning
assets                         105,065                                        135,843
Allowance for loan
losses                         (12,063 )                                       (7,960 )

Total assets               $ 1,101,625                                    $ 1,092,640


Liabilities and
Stockholders' Equity
Interest-bearing demand
accounts                   $   106,610            308           0.39 %    $   105,894            822           1.04 %
Savings accounts                80,231            295           0.49 %         82,661            845           1.37 %
Money market accounts          124,952          1,257           1.34 %        119,309          2,462           2.76 %
Certificates of deposit        377,598          7,948           2.81 %        352,717          9,510           3.60 %
Borrowings                     193,914          4,960           3.42 %        184,233          4,950           3.59 %

Total interest-bearing
liabilities                    883,305         14,768           2.24 %        844,814         18,589           2.94 %
Noninterest-bearing
deposits                        68,321                                         68,922
Other liabilities                6,984                                          5,866

Total liabilities              958,610                                        919,602
Stockholders' equity           143,015                                        173,038

Total liabilities &
stockholders' equity       $ 1,101,625                                    $ 1,092,640


Net interest income                         $  26,576                                      $  25,067

Net interest spread                                             3.24 %                                         3.10 %
Net interest margin                                             3.52 %                                         3.47 %
Net interest income and
margin (tax equivalent
basis) (1)                                  $  27,064           3.59 %                     $  25,479           3.53 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                     114.19 %                                       114.20 %

(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 equivalent adjustment has been computed using a Federal income tax rate of 35%, and has the effect of increasing interest income by $488,000, and $433,000 for the nine month period ended September 30, 2009 and 2008, respectively. The average yield on investments increased to 4.67% from 4.27% for the nine month period ended September 30, 2009 and increased to 5.52% from 5.11% for the nine month period ended September 30, 2008.

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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 September 30, 2009
                                                              Compared to September 30, 2008
                                                          Increase (decrease) due to changes in:
                                                    Average             Average                 Net
                                                    Volume               Rate                 Change
                                                                      (in thousands)
Interest-Earning Assets
Interest-earning deposits                         $        15       $            (7 )     $             8
Investments                                              (208 )                (689 )                (897 )
Loans                                                     310                (1,166 )                (856 )

Total interest income                                     117                (1,862 )              (1,745 )


Interest-Bearing Liabilities
Interest-bearing demand accounts                            5                  (196 )                (191 )
Savings accounts                                           (8 )                (174 )                (182 )
Money market accounts                                       5                  (381 )                (376 )
Certificates of deposit                                   200                  (914 )                (714 )
Borrowings                                               (215 )                  81                  (134 )

Total interest expense                                    (13 )              (1,584 )              (1,597 )


Total net interest income                         $       130       $          (278 )     $          (148 )

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                                                       For the Nine Months Ended September 30, 2009
                                                              Compared to September 30, 2008
                                                          Increase (decrease) due to changes in:
                                                     Average             Average                Net
                                                     Volume                Rate                Change
                                                                      (in thousands)
Interest-Earning Assets
Interest-earning deposits                         $          85       $         (115 )     $          (30 )
Investments                                                (348 )             (1,114 )             (1,462 )
Loans                                                     2,151               (2,971 )               (820 )

Total interest income                                     1,888               (4,200 )             (2,312 )


Interest-Bearing Liabilities
Interest-bearing demand accounts                              6                 (520 )               (514 )
Savings accounts                                            (24 )               (526 )               (550 )
Money market accounts                                       110               (1,315 )             (1,205 )
Certificates of deposit                                     626               (2,188 )             (1,562 )
Borrowings                                                  244                 (234 )                 10

Total interest expense                                      962               (4,783 )             (3,821 )


Total net interest income                         $         926       $          583       $        1,509

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2009 and 2008
General. The three months ended September 30, 2009 reflected a net loss of $19.1 million compared to net income of $593,000 for the same period in 2008. The nine months ended September 30, 2009 reflected a net loss of $19.1 million compared to a net loss of $317,000 reported for the nine months ended September 30, 2008. The following is a recap of certain significant pre-tax income and expense events that occurred during the third quarter of 2009: gains on sales of investments of $595,000; loan loss provision of $9.8 million; an OTTI charge related to the CDO investment portfolio of $799,000. The nine months ended September 30, 2009 reflected an other-than-temporary impairment charge on CDOs totaling $4.8 million, loan loss provisions 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 sales of investments of $1.2 million, BOLI benefit proceeds of $460,000, 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 valuation allowance related to the deferred tax asset. The net loss for the nine months ended September 30, 2008 resulted, in part, from the Company's contribution of $3.8 million, net of taxes, to The CapeBank Charitable Foundation, approximately $785,000 of expenses, net of taxes, associated with the Bank's name change and costs associated with the acquisition of Boardwalk Bank, and OTTI charges of $2.4 million on investment securities. These expenses were partially offset by a tax benefit of $2.0 million and increased net income resulting from the acquisition of Boardwalk Bank.
Interest Income. Interest income decreased $1.7 million, or 11.5%, to $13.4 million for the three months ended September 30, 2009, from $15.1 million for the three months ended September 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 6.31% for the three months ended September 30, 2008 to 5.72% for the three months ended September 30, 2009. The decrease in the average yield reflected a lower interest rate environment and to a lesser extent an increase in non-performing loans from $22.3 million at September 30, 2008 to $36.3 million at September 30, 2009. Average loans for the three month period ended September 30, 2009 were $809.9 million compared to $789.9 million for the three month period ended September 30, 2008 an increase of $20.0 million, or 2.5%. The average yield on the investment portfolio declined from 5.09% for the three months ended September 30, 2008 to 3.57% for the three months ended September 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 $157,000 in interest receivables related to three CDO securities which were fully written off. The average balance of investment securities decreased $17.4 million, or 8.6% to $184.2 million for the three months ended September 30, 2009, compared to $201.6 million for the three months ended September 30, 2008. This decrease is mainly attributed to the sale of $14.1 million of securities in June, 2009 and of $16.9 million in August, 2009.

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For the nine months ended September 30, 2009, interest income decreased $2.3 million or 5.3% to $41.3 million from $43.6 million for the nine months ended September 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 6.32% for the nine months ended September 30, 2008 to 5.81% for the nine months ended September 30, 2009 while the yield on the investment portfolio declined from 5.11% to 4.27% 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 nine months ended September 30, 2008 to the nine months ended September 30, 2009. For the nine months ended September 30, 2009, average loans increased $48.5 million, or 6.4%, to $806.7 million from $758.2 million for the nine months ended September 30, 2008. The increase in average . . .