You should read this section in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. All weighted average, actual share and per share information set forth in this Quarterly Report on Form 10-Q has been adjusted retroactively for the effects of stock dividends.

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. Treasury Department'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 its subsidiaries 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 securities portfolio, the analysis of goodwill impairment and the Company's deferred tax assets. 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 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.

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 portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the loan 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 category, the resulting loss rates for which are projected at current loan 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.

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, deferred loan fees, deferred compensation and securities available for sale.

The Company evaluates tax positions that may be uncertain. FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes (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 Financial Statements of the Company's Form 10-K for the year ended December 31, 2008.

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.

Net Income

Net income for the first quarter of 2009 was $3.2 million, compared to $5.5 million for the same period in 2008, a decrease of $2.4 million or 43%. Diluted earnings per share were $0.11 for the first quarter of 2009, a $0.13 or 54% decrease over what was reported for the same period last year. Return on Average Assets was 0.48% and Return on Average Common Equity was 5.76% for the first quarter of 2009.

First quarter net income in 2009 declined compared to the same period in 2008 due to a $5.1 million increase in the provision for loan and lease losses. This will be discussed in further detail below.

Net Interest Income

Net interest income on a tax equivalent basis for the first quarter of 2009 was $23.2 million, a $2.4 million or 11% increase from the $20.8 million earned in the first quarter of 2008. The increase in net interest income primarily resulted from a decrease in the cost of interest bearing liabilities. The components of net interest income will be discussed in greater detail below.

The following table reflects the components of the Company's net interest income, setting forth for the periods 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 using a tax rate of 35%.

                                       For the three months ended,                 For the three months ended,
                                             March 31, 2009                               March 31, 2008
                                                                   Average                                   Average
                                                     Interest       rates                       Interest      rates
                                  Average             Income/      earned/      Average          Income/     earned/
                                  Balance             Expense       paid        Balance          Expense      paid
Assets                                                          (dollars in thousands)
Interest-earning assets:
Loans and leases (A)           $    2,029,214           $30,142      6.02%      $1,893,631        $31,650      6.72%
Taxable investment
securities                            341,081             3,419      4.01%         320,777          3,597      4.49%
Tax-exempt securities                  64,910               875      5.39%          77,059          1,086      5.64%
Federal funds sold (B)                 40,102                26      0.26%          19,727            160      3.24%
Total interest-earning
assets                              2,475,307            34,462      5.64%       2,311,194         36,493      6.35%

Noninterest-earning assets:
Allowance for loan and
lease losses                          (24,297 )                                    (14,863 )
Other assets                          222,307                                      234,792
TOTAL ASSETS                   $    2,673,317                                   $2,531,123

Liabilities and
Stockholders' Equity
Interest-bearing
liabilities:
Savings accounts               $      295,147       $       532      0.73%    $    317,024      $   1,264      1.60%
Interest-bearing
transaction accounts                  851,828             2,393      1.14%         792,477          4,202      2.13%
Time deposits                         617,558             4,834      3.13%         579,877          6,316      4.36%
Borrowings                            341,727             3,505      4.10%         326,514          3,881      4.75%
Total interest-bearing
liabilities                         2,106,260            11,264      2.15%       2,015,892         15,663      3.11%
Noninterest-bearing
liabilities:
Demand deposits                       294,443                                      286,695
Other liabilities                      15,693                                       15,633
Stockholders' equity                  256,921                                      212,903
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY           $    2,673,317                                   $2,531,123
Net interest income/spread                               23,198      3.48%                         20,830      3.24%
Tax equivalent basis
adjustment                                                  306                                       380
NET INTEREST INCOME                                 $    22,892                                 $  20,450
Net interest margin (C)                                              3.80%                                     3.62%

Interest income on a tax equivalent basis decreased from $36.5 million in the first quarter of 2008 to $34.5 million in 2009, a decrease of $2.0 million or 6%. The decrease in interest income was due to a 71 basis point decrease in average rates earned on interest earning assets. Average loans and investment securities increased by $135.6 million and $8.2 million, respectively.

Total interest expense decreased from $15.7 million in the first quarter of 2008 to $11.3 million in the first quarter of 2009, a decrease of $4.4 million, or 28%. Average interest-bearing liabilities increased $90.4 million, but the cost of those liabilities decreased from 3.11% in 2008 to 2.15% in 2009. The decrease in liability yields reflects the decrease in short term interest rates, as the Federal Reserve Bank lowered the federal funds target rate from 2.25% at the end of the first quarter of 2008 to a range between 0% and .25% at the end of the first quarter of 2009. Lakeland lowered its deposit rates to reflect the lower interest rate environment. Average deposits increased from $1.98 billion in the first quarter of 2008 to $2.06 billion in the first quarter of 2009, an increase of $82.9 million, or 4 %. Average borrowings increased from $326.5 million in 2008 to $341.7

million in 2009 to fund loan growth. The average rate paid on these borrowings declined 65 basis points due to the declining rate environment. In the first quarter of 2009, the Company received $59.0 million in proceeds from the issuance of preferred stock and a warrant to the U. S. Treasury Department. These funds were invested in loans and investment securities.

Provision for Loan and Lease Losses

In determining the provision for loan and lease losses, management considers historical loan loss experience, changes in composition and volume of the portfolio, the level and composition of non-performing loans and leases, the adequacy of the allowance for loan and lease losses, and prevailing economic conditions.

The provision for loan and lease losses increased to $6.4 million for the first quarter of 2009 from $1.3 million for the same period last year as a result of management's evaluation of the adequacy of the allowance for loan and lease losses. During the first quarter of 2009, the Company charged off loans of $6.5 million and recovered $680,000 in previously charged off loans compared to $587,000 and $91,000, respectively, during the same period in 2008. The higher provision for loan and lease losses in the first quarter of 2009 compared to the first quarter of 2008 reflects a higher level of non-performing loans and leases and net charge-offs. The provision in the first quarter of 2009 included $5.8 million for the Company's leases compared to $433,000 for the same period last year. For more information regarding the determination of the provision, see "Risk Elements" under "Financial Condition."

Noninterest Income

Noninterest income increased $330,000, or 7%, from the first quarter of 2008 to the first quarter of 2009. This increase was primarily due to an increase in gain on sales of investment securities of $876,000 partially offset by a $499,000 decrease in other income. The majority of the decrease in other income can be attributed to a $452,000 decrease in gain on sales of leases. Commissions and fees decreased from $952,000 in the first quarter of 2008 to $823,000 in the first quarter of 2009 due to a decrease in loan fees.

Noninterest Expense

Noninterest expense increased from $15.3 million in the first quarter of 2008 to $16.8 million in the first quarter of 2009, an increase of $1.4 million or 9%. Salaries and employee benefits expense increased $179,000 or 2% to $8.6 million in the first quarter of 2009. Net occupancy expense increased by $236,000 or 14% to $1.9 million in the first quarter of 2009 from the first quarter of 2008 due primarily to expenses incurred in two new branch offices. Marketing expense increased from $458,000 in the first quarter of 2008 to $557,000 in the first quarter of 2009 as a result of deposit promotions and new branch openings. Stationery, supplies and postage decreased from $464,000 in the first quarter of 2008 to $420,000 in the first quarter of 2009 due to a reduction in mailings. FDIC expense increased from $300,000 in the first quarter of 2008 to $900,000 in 2009 as a result of increased assessment rates. Other expenses increased by $377,000 or 15% to $2.9 million in the first quarter of 2009 primarily due to an increase in collection fees of $454,000 compared to the first quarter of 2008. The Company's efficiency ratio was 60.0% in the first quarter of 2009, compared to 59.2% for the same period last year. The efficiency ratio expresses the relationship between noninterest expense (excluding other real estate expense and core deposit amortization) to total tax-equivalent revenue (excluding gains (losses) on sales of securities).

Income Taxes

The Company's effective tax rate decreased from 34.8% in the first quarter of 2008 to 33.0% in the first quarter of 2009 because the Company's pre-tax income decreased $3.8 million or 44% from the first quarter of 2008 to the first quarter of 2009. Tax-exempt income as a percent of pre-tax income increased, resulting in a decline in the effective tax rate.

The Company's total assets increased $33.4 million or 1% from $2.64 billion at December 31, 2008, to $2.68 billion at March 31, 2009. Total deposits decreased from $2.06 billion on December 31, 2008 to $2.04 billion on March 31, 2009, a

decrease of $21.0 million or 1%. Long-term debt remained the same at $210.9 million from December 31, 2008 to March 31, 2009.

Loans and Leases

Gross loans and leases remained the same at $2.03 billion from December 31, 2008 to March 31, 2009. Within the loan portfolio, mortgages increased $21.0 million from December 31, 2008 to March 31, 2009. Commercial loans increased $12.9 million in the first three months of 2009. Leases declined from $311.5 million on December 31, 2008 to $276.2 million on March 31, 2009. For more information on the loan portfolio, see Note 7 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Risk Elements

The following schedule sets forth certain information regarding the Company's
non-accrual, past due and renegotiated loans and leases and other real estate
owned on the dates presented:



                                                       March 31,    December 31,    March 31,
(in thousands)                                              2009            2008         2008

Non-performing loans and leases:
Non-accrual loans and leases                             $23,764         $16,544      $10,853
Renegotiated loans and leases                                  -               -            -

TOTAL NON-PERFORMING LOANS AND LEASES                     23,764          16,544       10,853
Other real estate and other repossessed assets             3,517           3,997          185

TOTAL NON-PERFORMING ASSETS                              $27,281         $20,541      $11,038


Loans and leases past due 90 days or more and
still accruing                                            $3,052            $825       $1,167

Non-performing assets increased from $20.5 million on December 31, 2008, or 0.78% of total assets, to $27.3 million, or 1.02% of total assets, on March 31, 2009. Non-performing assets included $15.0 million related to leases. Loans and leases past due ninety days or more and still accruing at March 31, 2009 increased $2.2 million to $3.1 million from $825,000 on December 31, 2008. Loans and leases past due 90 days or more and still accruing are those loans and leases that are both well-secured and in process of collection.

On March 31, 2009, the Company had $21.8 million in impaired loans and leases (consisting primarily of non-accrual loans and leases) compared to $14.1 million at year-end 2008. For more information on these loans and leases see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans and leases is measured using the present value of future cash flows on certain impaired loans and leases and is based on the fair value of the underlying collateral for the remaining loans and leases. Based on such evaluation, $6.5 million has been allocated as a portion of the allowance for loan and lease losses for impairment at March 31, 2009. At March 31, 2009, the Company also had $37.7 million in loans and leases that were rated substandard that were not classified as non-performing or impaired.

There were no loans and leases at March 31, 2009, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans and leases being included as non-accrual, past due or renegotiated at a future date.

The following table sets forth for the periods presented, the historical relationships among the allowance for loan and lease losses, the provision for loan losses, the amount of loans and leases charged-off and the amount of loan recoveries:

                                        Three months                Year        Three months
                                               ended               ended               ended
                                           March 31,        December 31,           March 31,
(dollars in thousands)                          2009                2008                2008


Balance of the allowance at the
beginning of the year                        $25,053             $14,689             $14,689

Loans and leases charged off:
Commercial                                       202                 593                 280
Leases                                         5,964              11,211                   -
Home Equity and consumer                         365               2,044                 307
Real estate-mortgage                               -                 123                   -

Total loans charged off                        6,531              13,971                 587


Recoveries:
Commercial                                        15                  79                  20
Leases                                           617                 150                   0
Home Equity and consumer                          48                 376                  71
Real estate-mortgage                               -                   -                   -

Total Recoveries                                 680                 605                  91

Net charge-offs:                               5,851              13,366                 496
Provision for loan and lease
losses                                         6,376              23,730               1,267

Ending balance                               $25,578             $25,053             $15,460


Ratio of annualized net
charge-offs to average loans and
leases outstanding                             1.17%               0.68%               0.10%
Ratio of allowance at end of
. . .