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 US GAAP. 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.

Fair values of financial instruments 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 and third quarters of 2009, the Company reclassified certain 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 likely than not that all of the Company's deferred tax assets will be realized.

The Company evaluates tax positions that may be uncertain using 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 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 the third quarter of 2009 that would cause the Company to do an interim valuation.

Net Income

Net income for the third quarter of 2009 was $2.0 million, compared to net income of $5.9 million for the same period in 2008, a decrease of $3.8 million. Net income available to common shareholders was $1.1 million compared to $5.9 million for the same period last year. Diluted earnings per share was $0.05 for the third quarter of 2009, compared to diluted earnings of $0.25 per share for the same period last year.

The third quarter 2009 results were impacted by a loan and lease loss provision of $4.7 million, compared to a provision of $3.3 million for the same period last year. Of the total provision recorded in the third quarter of 2009, $1.3 million was allocated to leasing. Also impacting third quarter 2009 results were $709,000 in losses on leasing related assets and $1.2 million in FDIC expense compared to $330,000 for the same period last year.

In the third quarter of 2009, the Company continued to reduce its exposure in the leasing business. Total leases, including leases held for sale, at September 30, 2009 were $139.0 million, a $54.6 million, or 28%, decline from the $193.6 million at June 30, 2009. Leases held for sale were $8.9 million at September 30, 2009, down from $39.2 million at June 30, 2009. The reduction in total leases includes the sales in the third quarter of approximately $27.9 million of leases, and other lease related transactions, which resulted in a loss on sale and disposition of leases of $1.0 million offset by $301,000 in gains on sales of other repossessed assets. At September 30, 2009, leases represent 7% of total loans and leases compared to 15% at year end 2008. This will be discussed in more detail below.

Net Interest Income

Net interest income on a tax equivalent basis for the third quarter of 2009 was $23.3 million, which was $106,000 below the $23.4 million net interest income earned in the third quarter of 2008. The net interest margin declined from 3.92% in the third quarter of 2008 to 3.62% in the third quarter of 2009 as a result of a decline in rates and a shift in interest-earning assets from loans and leases to the investment portfolio primarily as a result of the reduction in leasing assets. 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,
                                              September 30, 2009                         September 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)                 $  1,982,700      $  28,633      5.73 %    $  2,002,869      $  32,336      6.42 %
Taxable investment securities             456,735          3,775      3.31 %         301,042          3,331      4.43 %
Tax-exempt securities                      64,733            846      5.23 %          58,846            811      5.51 %
Federal funds sold (B)                     49,964             32      0.26 %          14,718             68      1.85 %

Total interest-earning assets           2,554,132         33,286      5.18 %       2,377,475         36,546      6.12 %
Noninterest-earning assets:
Allowance for loan and lease
losses                                    (26,419 )                                  (20,198 )
Other assets                              243,645                                    217,506

TOTAL ASSETS                         $  2,771,358                               $  2,574,783


Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Savings accounts                     $    306,449      $     336      0.43 %    $    308,840      $     879      1.13 %
Interest-bearing transaction
accounts                                  928,082          2,222      0.95 %         816,474          3,438      1.68 %
Time deposits                             600,638          4,003      2.67 %         519,949          4,656      3.58 %
Borrowings                                327,607          3,407      4.16 %         391,567          4,149      4.24 %

Total interest-bearing liabilities      2,162,776          9,968      1.84 %       2,036,830         13,122      2.57 %

Noninterest-bearing liabilities:
Demand deposits                           322,337                                    306,480
Other liabilities                          18,957                                     13,705
Stockholders' equity                      267,288                                    217,768

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY                 $  2,771,358                               $  2,574,783

Net interest income/spread                                23,318      3.33 %                         23,424      3.55 %
Tax equivalent basis adjustment                              296                                        284

NET INTEREST INCOME                                    $  23,022                                  $  23,140

Net interest margin (C)                                               3.62 %                                     3.92 %

(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.

Although total interest-earning assets increased $176.7 million or 7% from the third quarter of 2008 to the third quarter of 2009, interest income on a tax equivalent basis decreased $3.3 million or 9% from the third quarter of 2008 to the third quarter of 2009. The decrease in interest income was due to a 94 basis point decrease in the average yield earned on interest earning assets. This decrease reflects the declining interest rate environment along with a lower percentage of earning assets being deployed in loans and leases, as the size of the lease portfolio continues to decrease. Loans and leases as a percent of interest earning assets declined from 84% in the third quarter of 2008 to 78% in the third quarter of 2009. Investments including securities and federal funds sold increased from 16% of interest earnings assets in the third quarter of 2008 to 22% in the third quarter of 2009. Loans typically earn higher yields than investment securities.

Total interest expense decreased from $13.1 million in the third quarter of 2008 to $10.0 million in the third quarter of 2009, a decrease of $3.2 million, or 24%. Average interest-bearing liabilities increased $125.9 million, but the cost of those liabilities decreased from 2.57% in 2008 to 1.84% in 2009. The decrease in yield was due to the declining rate environment. Average interest-bearing deposits increased from $1.65 billion in the third quarter of 2008 to $1.84 billion in the third quarter of 2009, an increase of $189.9 million, or 12%. Average borrowings decreased from $391.6 million in 2008 to $327.6 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.

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 third quarter of 2009, a $4.7 million provision for loan and lease losses was recorded compared to a $3.3 million provision for the same period last year. The Company requires a reserve on 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). As discussed in Note 7 above, in the second and third quarters of 2009, the Company classified certain leases as held for sale as part of a plan to reduce the overall exposure in its leasing portfolio. In the third quarter, management classified $2.4 million of leases held for sale, recorded a mark-to-market adjustment of $542,000 and subsequently sold these leases. The provision for leasing losses was $1.3 million in the third quarter of 2009. The commercial loan provision was $2.6 million because of the increase in the non-performing commercial loans discussed below in Risk Elements.

During the third quarter of 2009, the Company charged off loans of $5.6 million (including $2.8 million in leases) and recovered $667,000 in previously charged off loans and leases compared to $3.5 million and $219,000, 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 $664,000 or 16% to $3.6 million from the third quarter of 2008 to the third quarter of 2009. Included in noninterest income for the third quarter of 2009 was a $709,000 loss on sale or disposition of leasing related assets, compared to a gain of $109,000 for the same period last year. The loss on sale or disposition of leasing related assets included $792,000 in losses on leases held for sale and a mark-to-market loss of $236,000 on leases held for sale offset by $301,000 in gains on sales of other repossessed assets. Commissions and fees increased by $198,000 or 23% to $1.0 million in the third quarter of 2009 compared to $847,000 for third quarter of 2008 due to increased loan fees and investment services income. Other income at $126,000 increased $65,000 from $61,000 in the third quarter of 2008 due to gains on sales of mortgages.

Noninterest Expense

Noninterest expense for the third quarter of 2009 was $17.1 million compared to $14.9 million in 2008, a 14% increase. Salary and benefit expense increased by $263,000 or 3% to $8.5 million due to increased staffing levels and normal salary increases. Net occupancy expense and furniture and equipment increased 6% to $1.6 million and $1.2 million, respectively, due primarily to the opening of two new branch offices subsequent to the third quarter of 2008. FDIC expense increased by $901,000 to $1.2 million due to increased assessments. Collection expense increased $325,000 to $405,000 in the third quarter of 2009 due to leasing related costs. Other real estate and other repossessed asset expense totaled $133,000 for the quarter as real estate taxes were paid on property in process of foreclosure. Other expenses increased by $338,000 or 15% to $2.6 million in the third quarter of 2009, primarily due to an increase in legal fees and appraisal fees. The Company's efficiency ratio was 62% in the third quarter of 2009, compared to 53% 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 nine months of 2009 was $7.5 million, compared to net income of $14.3 million for the same period in 2008. Net loss available to common shareholders was $9.8 million for the first nine months of 2009 compared to net income of $14.3 million for the same period last year. Diluted loss per share was ($0.42) for the first nine months of 2009, compared to diluted earnings per share of $0.61 in the first nine months of 2008. The decline in net income related to the increase in the provision for loan and lease losses from $12.7 million in the first nine months of 2008 to $45.2 million in the first nine months of 2009.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2009 was $69.3 million, a $2.2 million or 3% increase from the $67.1 million earned in the first nine months 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



                                          For the nine months ended,                 For the nine months ended,
                                              September 30, 2009                         September 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 (A)                            $  2,010,594      $  87,931      5.85 %    $  1,952,680      $  95,725      6.55 %
Taxable investment securities             392,892         10,566      3.59 %         310,516         10,369      4.45 %
Tax-exempt securities                      66,103          2,635      5.32 %          68,496          2,868      5.58 %
Federal funds sold (B)                     46,097             89      0.26 %          14,854            293      2.63 %

Total interest-earning assets           2,515,686        101,221      5.38 %       2,346,546        109,255      6.22 %
Noninterest-earning assets:
Allowance for loan and lease
losses                                    (25,234 )                                  (16,995 )
Other assets                              228,751                                    226,098

TOTAL ASSETS                         $  2,719,203                               $  2,555,649


Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Savings accounts                     $    302,376      $   1,300      0.57 %    $    316,644      $   3,075      1.30 %
Interest-bearing transaction
. . .