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 inter-company 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. In the second quarter of 2009, the Company reclassified leases as held for sale and recorded them at estimated fair value based on sale price indications from potential buyers and on prior lease sales adjusted for differences in collateral and other characteristics.

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 the realizability of its deferred tax assets by examining its earnings history and projected future earnings and by assessing whether it is more likely than not that carryforwards would not be realized. Because the majority of the Company's deferred tax assets have no expiration date, because of the Company's earnings history, and because of the projections of future earnings, the Company's management believes that it is more like than not that all of the Company's deferred tax assets will be realized.

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 or when circumstances indicate a potential for impairment 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 tested the goodwill as of December 31, 2008 and determined that it is not impaired. There were no triggering events in second quarter 2009 that would cause the Company to do an interim valuation.

Net Income (Loss)

Net loss for the second quarter of 2009 was ($12.7) million, compared to net income of $2.9 million for the same period in 2008, a decrease of $15.6 million. Loss per share was ($0.58) for the second quarter of 2009, compared to diluted earnings of $0.12 per share for the same period last year.

The second quarter 2009 results were negatively impacted by a loan and lease loss provision of $34.1 million compared to a provision of $8.2 million in the second quarter of 2008. The increased loan loss provision resulted from several factors including continued charge-offs in the Company's leasing portfolio, increases in non-performing loans in its commercial portfolio, and the Company's decision to reduce the exposure in its leasing portfolio by designating lease pools for future sales. In prior quarters, the Company disclosed that two of its leasing originators could no longer fulfill all of their obligations under contractual recourse provisions. The collateral underlying these leases were primarily transportation and construction use vehicles. During the second quarter of 2009, the Company evaluated the trends in the economy that could further impact its leasing portfolio and subsequently entered into agreements to sell pools of leases having a combined balance of $35.9 million for $26.9 million. These sales included all the remaining leases acquired by one of the originators that had not been able to fulfill its contractual obligations to Lakeland. As a result of this sale, we recorded a mark-to-market adjustment of $9.1 million in leases upon the determination that the leases were held for sale purposes and recorded a loss on the sale of other repossessed assets of $400,000. Lakeland also identified other pools of leases (including the remaining lease originator discussed above) as held for sale and recorded an additional mark-to-market adjustment of $12.5 million based on sale price indications from potential buyers and based on the sales prices of prior lease pools sold adjusted for differing characteristics. Lakeland also recorded a loss of $661,000 on other repossessed assets associated with those pools of leases. This will be discussed in more detail below.

Net Interest Income

Net interest income on a tax equivalent basis for the second quarter of 2009 was $22.8 million which was consistent with the net interest income earned in the second quarter of 2008. 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,
                                              June 30, 2009                           June 30, 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)               $2,020,379           $29,156     5.79%   $1,960,988       $31,739     6.51%
Taxable investment securities         379,588             3,372     3.55%      309,834         3,441     4.44%
Tax-exempt securities                  68,669               914     5.32%       69,689           971     5.57%
Federal funds sold (B)                 48,118                31     0.26%       10,117            65     2.57%
Total interest-earning assets       2,516,754            33,473     5.33%    2,350,628        36,216     6.19%

Noninterest-earning assets:
Allowance for loan and lease
losses                                (24,963 )                                (15,889 )
Other assets                          220,630                                  226,090
TOTAL ASSETS                       $2,712,421                               $2,560,829

Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Savings accounts                     $305,406              $433     0.57%     $324,155          $932     1.16%
Interest-bearing transaction
accounts                              830,526             2,152     1.04%      764,338         2,837     1.49%
Time deposits                         641,993             4,564     2.84%      539,975         5,400     4.00%
Borrowings                            332,327             3,521     4.24%      393,753         4,171     4.24%
Total interest-bearing
liabilities                         2,110,252            10,670     2.03%    2,022,221        13,340     2.64%
Noninterest-bearing
liabilities:
Demand deposits                       309,548                                  304,372
Other liabilities                      17,020                                   16,749
Stockholders' equity                  275,601                                  217,487
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY               $2,712,421                               $2,560,829
Net interest income/spread                               22,803     3.30%                     22,876     3.55%
Tax equivalent basis
adjustment                                                  320                                  340
NET INTEREST INCOME                                     $22,483                              $22,536
Net interest margin (C)                                             3.63%                                3.91%

Interest income on a tax equivalent basis decreased from $36.2 million in the second quarter of 2008 to $33.5 million in 2009, a decrease of $2.7 million or 8%. The decrease in interest income was due to a 86 basis point decrease in the average yield earned on interest earning assets. Interest lost on non-accrual loans of $813,000 for the second quarter of 2009 contributed to the decline in yield on earning assets as well as a general decline in rates. A change in mix in earning assets from loans to investment securities also contributed to the decline in yield. Loans as a percent of interest earning assets declined from 83.4% in the second quarter of 2008 to 80.3% in the second quarter of 2009. Investments including securities and federal funds sold increased from 16.5% of interest earnings assets in the second quarter of 2008 to 19.7% in the second quarter of 2009. Loans typically earn higher yields than investment securities.

Total interest expense decreased from $13.3 million in the second quarter of 2008 to $10.7 million in the second quarter of 2009, a decrease of $2.7 million, or 20%. Average interest-bearing liabilities increased $88.0 million, but the cost of those liabilities decreased from 2.64% in 2008 to 2.03% 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 2.00% at the end of the second quarter of 2008 to a range between 0% and 0.25% at the end of 2008. Lakeland lowered its deposit rates to reflect the lower interest rate environment. Average deposits increased from $1.93 billion in the second quarter of 2008 to $2.09 billion in the second quarter of 2009, an increase of $154.6 million, or 8%. Average borrowings decreased from $393.8 million in 2008 to $332.3 million in 2009 due to increased liquidity as a result of several factors including increased deposits and the receipt of $59.0 million in proceeds from the issuance of

preferred stock to the U.S. Department of the Treasury in the first quarter of 2009. The average rate paid on these borrowings remained the same.

Provision for Loan and Lease Losses

In determining the provision for loan and lease losses, management considers historical loan and lease 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.

In the second quarter of 2009, a $34.1 million provision for loan and lease losses was recorded compared to an $8.2 million provision for the same period last year. The Company requires a reserve on all its loans and leases based on the financial strength of the borrower, collateral adequacy, delinquency history and other factors discussed under "Risk Elements" below. The reserve for leases is more specifically assessed based on the borrower's payment history, financial strength of the borrower determined through financial information provided or credit scoring criteria, value of the underlying assets and in the case of recourse transactions, the financial strength of the originator (servicer). In the second quarter of 2009, because of continued economic challenges, accelerated deterioration of collateral values due to the supply of transportation and construction vehicles exceeding demand and the resulting affect on delinquencies, the Company increased the reserve percentages on its leases to the highest risk level on its evaluation matrix. Due to continued overcapacity of the collateral impacting resale values, the Company continued to adjust the collateral value of the underlying assets which had the effect of increasing charge-offs. Because of the increase in the calculated reserves, because of the charge-offs recorded in second quarter and due to the Company's decision to sell pools of leases that represented increased risk to the Company, the Company's provision for lease losses was $28.4 million. The remainder of the provision for loan and lease losses was allocated to commercial loans. The commercial provision was needed because of the increase in the non-performing commercial loans discussed below in Risk Elements.

During the second quarter of 2009, the Company recorded $21.6 million in mark-to-market adjustments on lease pools held for sale. Exclusive of the mark to market adjustments discussed above, in the second quarter of 2009, the Company charged off loans of $14.1 million (including $12.5 million in leases) and recovered $390,000 in previously charged off loans and leases compared to $3.6 million and $150,000, respectively, during the same period in 2008. For more information regarding the determination of the provision, see "Risk Elements" under "Financial Condition."

Noninterest Income

Noninterest income decreased $370,000 or 8% from the second quarter of 2008 to the second quarter of 2009. Included in noninterest income for the second quarter of 2009 was a $532,000 loss on investment securities as the company recorded an other-than-temporary impairment loss on an equity security in its investment portfolio. For more information, please see Note 6 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. Service charges on deposit accounts totaling $2.7 million decreased by $123,000, or 4% in the second quarter of 2009, compared to the same period last year, primarily due to reduced overdraft fees. Income on bank owned life insurance at $818,000 increased by $480,000, as the company received an insurance benefit on a bank owned life insurance policy for insurance proceeds received on the death of a former employee. Leasing income decreased $121,000 as a result of management's determination to reduce activity in the leasing division.

Noninterest Expense

Noninterest expense for the second quarter of 2009 was $20.3 million compared to $14.4 million in 2008. Salary and benefit expense increased by $1.0 million or 14% to $8.7 million due to the addition of two new branch offices, new lending and sales officers, and normal salary increases. Net occupancy expense increased 12% to $1.6 million primarily due to the opening of two new branch offices subsequent to the second quarter of 2008. Marketing expense for the second quarter of 2009 increased $240,000 to $784,000 as a result of deposit promotions and the opening of two new branches. FDIC expense increased by $2.1 million to $2.4 million due to increased assessments, including $1.2 million from an industry wide special assessment. Collection expense increased $220,000 to $377,000 in the second quarter of 2009 due to leasing related costs. Other repossessed asset expense increased by $1.2 million to $1.3 million due to the write down of leasing assets and the loss on sale of leasing equipment. Other expenses increased by $832,000 or 35% to $3.2 million in the second quarter of 2009, primarily due to a $704,000 pretax payout to the beneficiary of the bank owned life insurance proceeds previously mentioned. The Company's efficiency ratio was 68.44% in the second quarter of 2009, compared to 51.89% for the same period last year. The efficiency ratio expresses the relationship between noninterest expense (excluding other repossessed asset expense and

core deposit amortization) to total tax-equivalent revenue (excluding gains (losses) on sales of securities). The efficiency ratio increased due primarily to the increase in FDIC insurance expense and leasing related expenses.

Net Income (Loss)

Net loss for the first half of 2009 was ($9.5) million, compared to net income of $8.4 million for the same period in 2008. Loss per share was ($0.46) for the first half of 2009, compared to diluted earnings per share of $0.36 in the first half of 2008. The decline in net income related to the increase in the provision for loan and lease losses from $9.4 million in the first half of 2008 to $40.5 million in the first half of 2009.

Net Interest Income

Net interest income on a tax equivalent basis for the first half of 2009 was $46.0 million, a $2.3 million or 5% increase from the $43.7 million earned in the first half of 2008. The increase in net interest income resulted primarily 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%.

               CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS


. . .