This section presents a review of Lakeland Bancorp, Inc.'s consolidated results of operations and financial condition. You should read this section in conjunction with the selected consolidated financial data that is presented on the preceding page as well as the accompanying financial statements and notes to financial statements. As used in the following discussion, the term "Company" refers to Lakeland Bancorp, Inc. and "Lakeland" refers to the Company's wholly owned banking subsidiary-Lakeland Bank. The Newton Trust Company (Newton) was merged into Lakeland on November 4, 2005. Newton Financial Corporation ("NFC"), the parent company of Newton, was merged into the Company on July 1, 2004.

Statements Regarding Forward-Looking Information

The information disclosed in this document includes various forward-looking statements that are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to credit quality (including delinquency trends and the allowance for loan and lease losses), corporate objectives, and other financial and business matters. The words "anticipates," "projects," "intends," "estimates," "expects," "believes," "plans," "may," "will," "should," "could," and other similar expressions are intended to identify such forward-looking statements. The Company cautions that these forward-looking statements are necessarily speculative and speak only as of the date made, and are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from such forward-looking statements.

In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company's actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company's markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry, government intervention in the U.S. financial system, passage by the U.S. Congress of legislation which unilaterally amends the terms of the U.S. Department of the Treasury's preferred stock investment in the Company, changes in levels of market interest rates, pricing pressures on loan and deposit products, credit risks of the Company's lending and leasing activities, customers' acceptance of the Company's products and services and competition.

The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company's actual results to be materially different than those described in the Company's periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.

Significant Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company and Lakeland conform with accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, Lakeland Investment Corp., and Lakeland NJ Investment Corp. All intercompany balances and transactions have been eliminated.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates implicit in these financial statements are as follows.

The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan and lease losses, the valuation of the Company's security portfolio, the Company's deferred

tax asset and the analysis of goodwill impairment. The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of historical loss rates, by category, applied to current loan and lease totals. However, actual losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans and leases, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Loan principal considered to be uncollectible by management is charged against the allowance for loan and lease losses. The allowance is an amount that management believes will be adequate to absorb losses on existing loans and leases that may become uncollectible based upon an evaluation of known and inherent risks in the loan and lease portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the loan and lease portfolio, overall portfolio quality, specific problem loans and leases, and current economic conditions which may affect the borrowers' ability to pay. The evaluation also details historical losses by loan and lease category, the resulting loss rates for which are projected at current loan and lease total amounts. Loss estimates for specified problem loans and leases are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods.

The Company accounts for impaired loans and leases in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." Impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

The Company's available-for-sale securities portfolio is recorded at fair value. Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements". We also adopted Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FAS 157-3 which provided additional guidance on valuation and disclosures. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.

When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company's results of operations and financial condition.

The Company accounts for income taxes under the liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse.

Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan and lease losses, core deposit intangible, deferred loan fees, deferred compensation and securities available for sale.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes (FIN 48)," to account for any tax positions that may be uncertain. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Additional information regarding the Company's uncertain tax positions is set forth in Note 9 to the Notes to the audited Consolidated Financial Statements contained herein.

The Company accounts for goodwill and other identifiable intangible assets in accordance with SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company tests goodwill for impairment annually at the reporting unit level. The Company has determined that it has one reporting unit, Community Banking. The Company analyzes goodwill using various market valuation methodologies including an analysis of the Company's enterprise value and a comparison of pricing multiples in recent acquisitions of similar companies and applying these multiples to the Company. The Company has tested the goodwill as of December 31, 2008 and has determined that it is not impaired.

Financial Overview

The year ended December 31, 2008 represented a year of continued growth for the Company. As discussed in this management's discussion and analysis:

• Total loans and leases increased by $149.5 million or 8% from 2007 to 2008.

• Total assets increased to $2.64 billion, a 5% increase from 2007.

• Lakeland's net interest margin increased to 3.79%, up 38 basis points from 2007.

• The Company received preliminary approval to issue up to $59.0 million in nonvoting senior preferred stock plus a warrant to purchase 949,571 shares of common stock to the U.S. Treasury Department under the TARP Capital Purchase Program. The Company received $59.0 million upon the closing of the transaction on February 6, 2009.

Net income for 2008 was $15.2 million or $0.64 per diluted share compared to net income of $18.0 million and $0.77 per diluted share in 2007. For 2008, Return on Average Assets was 0.59% and Return on Average Equity was 6.99%. For 2007, Return on Average Assets was 0.76% and Return on Average Equity was 8.81%.

In 2008, the Company recorded a provision for loan and lease losses of $23.7 million compared to $6.0 million in 2007. The higher loan loss provision includes a $17.8 million provision for the leasing division. During 2008, the Company was informed by two leasing originators that they could no longer fulfill all of their obligations under contractual recourse provisions. In 2007, the Company recognized a $1.8 million gain on equity securities in its investment portfolio resulting from the acquisition of a financial institution in which the Company owned stock compared to gains of $53,000 in 2008.

In 2006, net income was $17.0 million and $0.73 per diluted share. Return on Average Assets was 0.76% and Return on Average Equity was 8.85%.

Net interest income

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. The Company's net interest income is determined by: (i) the volume of interest-earning

assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities. Net interest income increases when the Company can use noninterest-bearing deposits to fund or support interest-earning assets.

Net interest income for 2008 on a tax-equivalent basis was $89.9 million, representing an increase of $16.5 million, or 23%, from the $73.4 million earned in 2007. The increase in net interest income primarily resulted from an 80 basis point decrease in the cost of interest-bearing liabilities, a $222.0 million increase in average interest-earning assets and a more favorable mix of earning assets.

Net interest income for 2007 on a tax-equivalent basis was $73.4 million, representing an increase of $4.6 million, or 7%, from the $68.7 million earned in 2006. The increase in net interest income resulted from an increase in earning assets of $122.1 million and a 41 basis point increase in the yield on earning assets partially offset by a 45 basis point increase in the cost of funds and a $108.3 million increase in interest-bearing liabilities. Also contributing to the increase in net interest income was an increase in income earned on free funds (interest-earning assets funded by noninterest bearing liabilities) resulting from the increase in yield on interest-earning assets.

Interest income and expense volume/rate analysis. The following table shows the impact that changes in average balances of the Company's assets and liabilities and changes in average interest rates have had on the Company's net interest income over the past three years. This information is presented on a tax equivalent basis assuming a 35% tax rate. If a change in interest income or expense is attributable to a change in volume and a change in rate, the amount of the change is allocated proportionately.

                INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS

                      (tax equivalent basis, in thousands)



                                                    2008 vs. 2007                             2007 vs. 2006
                                          Increase (Decrease)                       Increase (Decrease)
                                           Due to Change in:          Total          Due to Change in:          Total
                                          Volume         Rate         Change        Volume          Rate        Change
Interest Income
Loans and leases                        $   17,158       ($6,783 )   $ 10,375     $    19,761     $  2,369     $ 22,130
Taxable investment securities                 (698 )        (258 )       (956 )        (7,353 )      1,907       (5,446 )
Tax-exempt investment securities              (890 )         (88 )       (978 )        (1,115 )         41       (1,074 )
Federal funds sold                            (304 )        (920 )     (1,224 )           586           (2 )        584

Total interest income                       15,266        (8,049 )      7,217          11,879        4,315       16,194

Interest Expense
Savings deposits                              (241 )      (1,746 )     (1,987 )          (110 )      1,578        1,468
Interest-bearing transaction accounts        1,801        (9,629 )     (7,828 )         1,127        1,923        3,050
Time deposits                                1,095        (4,251 )     (3,156 )         2,653        3,557        6,210
Borrowings                                   5,391        (1,712 )      3,679             643          175          818

Total interest expense                       8,046       (17,338 )     (9,292 )         4,313        7,233       11,546

NET INTEREST INCOME
(TAX EQUIVALENT BASIS)                  $    7,220     $   9,289     $ 16,509     $     7,566     $ (2,918 )   $  4,648

The following table reflects the components of the Company's net interest income, setting forth for the years presented, (1) average assets, liabilities and stockholders' equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company's net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company's net interest margin. Rates are computed on a tax equivalent basis assuming a 35% tax rate.

               CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS



                                                      2008                                       2007                                       2006
                                                                    Average                                    Average                                    Average
                                                       Interest      rates                        Interest      rates                        Interest      rates
                                        Average         Income/     earned/        Average         Income/     earned/        Average         Income/     earned/
                                        Balance         Expense      paid          Balance         Expense      paid          Balance         Expense      paid
                                                                                        (dollars in thousands)
Assets
Interest-earning assets:
Loans and leases(A)                   $ 1,969,581      $ 127,414       6.47 %      1,708,467        117,039       6.85 %    $ 1,419,272      $  94,909       6.69 %
Taxable investment securities             310,651         13,713       4.41 %        326,376         14,669       4.49 %        485,607         20,115       4.14 %
Tax-exempt securities                      66,266          3,677       5.55 %         82,294          4,655       5.66 %        102,003          5,729       5.62 %
Federal funds sold(B)                      25,832            420       1.63 %         33,208          1,644       4.95 %         21,379          1,060       4.96 %

Total interest-earning assets           2,372,330        145,224       6.12 %      2,150,345        138,007       6.42 %      2,028,261        121,813       6.01 %
Noninterest earning assets:
Allowance for loan and lease
losses                                    (17,840 )                                  (14,018 )                                  (13,007 )
Other assets                              224,129                                    224,608                                    218,901

TOTAL ASSETS                          $ 2,578,619                                $ 2,360,935                                $ 2,234,155

Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Savings accounts                      $   310,565      $   3,828       1.23 %        324,573          5,815       1.79 %    $   332,821      $   4,347       1.31 %
Interest-bearing transaction
accounts                                  805,515         14,058       1.75 %        749,093         21,886       2.92 %        708,224         18,836       2.66 %
Time deposits                             561,069         21,417       3.82 %        538,376         24,573       4.56 %        474,693         18,363       3.87 %
Borrowings                                368,233         16,055       4.36 %        229,095         12,376       5.40 %        217,148         11,558       5.32 %

Total interest-bearing liabilities      2,045,382         55,358       2.71 %      1,841,137         64,650       3.51 %      1,732,886         53,104       3.06 %

Noninterest-bearing liabilities:
Demand deposits                           300,950                                    300,156                                    296,853
Other liabilities                          15,356                                     15,515                                     12,684
Stockholders' equity                      216,931                                    204,127                                    191,732

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY                  $ 2,578,619                                $ 2,360,935                                $ 2,234,155

Net interest income/spread                                89,866       3.42 %                        73,357       2.91 %                        68,709       2.94 %
Tax equivalent basis adjustment                            1,287                                      1,629                                      2,005

NET INTEREST INCOME                                    $  88,579                                  $  71,728                                  $  66,704

Net interest margin(C)                                                 3.79 %                                     3.41 %                                     3.39 %

(A) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.

(B) Includes interest-bearing cash accounts.

(C) Net interest income divided by interest-earning assets.

Total interest income on a tax equivalent basis increased from $138.0 million in 2007 to $145.2 million in 2008, an increase of $7.2 million due to a $222.0 million increase in average interest-earning assets. Loans and leases as a percent of average interest-earning assets increased to 83% in 2008 compared to 79% in 2007. Investment securities as a percent of average interest-earning assets decreased to 16% in 2008 from 19% in 2007. Loans and leases typically earn a higher rate than investment securities.

Total interest income on a tax equivalent basis increased from $121.8 million in 2006 to $138.0 million in 2007, an increase of $16.2 million due to a $122.1 million increase in average interest-earning assets along with an increase in the yield on interest-earning assets. The change in mix also contributed to the increase in interest income. Loans as a percent of interest-earning assets increased to 79% in 2007 compared to 70% in 2006. Investment securities as a percent of interest-earning assets decreased to 19% in 2007 from 29% in 2006.

Total interest expense decreased from $64.7 million in 2007 to $55.4 million in 2008, a decrease of $9.3 million, or 14%. Average interest-bearing liabilities increased $204.2 million, but the cost of those liabilities decreased from 3.51% in 2007 to 2.71% in 2008. The decrease in liability yields reflects a decrease in short term interest rates, as the Federal Reserve Bank lowered the federal funds target rate from 4.25% at year end 2007 to a range of 0% to 0.25% at the end of 2008. Lakeland lowered its deposit rates to reflect this lower interest rate environment.

Total interest expense increased from $53.1 million in 2006 to $64.7 million in 2007 primarily as a result of an increase in average rates paid on interest-bearing liabilities from 3.06% in 2006 to 3.51% in 2007. Also impacting interest expense was an increase in total interest-bearing liabilities of $108.3 million or 6% from 2006 with the majority of the increase in average time deposits which increased $63.7 million or 13%. The cost of time deposits increased 69 basis points to 4.56% in 2007 resulting from a certificate of deposit promotion that Lakeland used to fund loan growth. Time deposits as a percent of interest-bearing liabilities increased from 27% in 2006 to 29% in 2007.

Net Interest Margin

Net interest margin is calculated by dividing net interest income on a fully taxable equivalent basis by average interest-earning assets. The Company's net interest margin was 3.79%, 3.41% and 3.39% for 2008, 2007 and 2006, respectively. The increase in the net interest margin from 2007 to 2008 reflects the decrease in short term interest rates and a shift in earning assets from the lower yielding investment portfolio to the higher yielding loan and lease portfolio. The increase in the net interest margin from 2006 to 2007 resulted from the shift in interest-earning assets from lower yielding investments to higher yielding loans.

Provision for Loan and Lease Losses

In determining the provision for loan and lease losses, management considers national and local economic conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and leases and net charge-offs and the results of independent third party loan and lease review. The provision for loan and lease losses at $23.7 million in 2008 increased from $6.0 million in 2007 due to management's evaluation of the loan and lease portfolio and reflected higher levels of nonperforming loans and leases and charge-offs in 2008 compared to 2007. As mentioned in the Financial Overview above, the 2008 provision included $17.8 million for the Company's leasing portfolio. For more information, see Financial Condition-Risk Elements below. Net charge-offs increased from $4.7 million in 2007 to $13.4 million in 2008, including $11.1 million in net charge-offs of leases. Net charge-offs as a percent of average loans and leases outstanding increased from 0.28% in 2007 to 0.68% in 2008.

The provision for loan and lease losses at $6.0 million in 2007 increased from $1.7 million in 2006 due to management's evaluation of the loan and lease portfolio and reflected higher levels of nonperforming loans and leases and charge-offs in 2007 compared to 2006. Net charge-offs increased from $1.4 million in 2006 to $4.7 million in 2007, including a $3.1 million charge-off of a single commercial and industrial loan. Net charge-offs as a percent of average loans and leases outstanding increased from 0.10% in 2006 to 0.28% in 2007.

Noninterest Income

Noninterest income decreased from $18.6 million in 2007 to $17.6 million in 2008, primarily as a result of a decrease in gains on the sale of investment securities from $1.8 million in 2007 to $53,000 in 2008. The decrease was partially offset by an increase in bank owned life insurance income of $436,000 . . .