Edgar Filing: LAKELAND BANCORP INC

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 33-27312

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)


New Jersey		22-2953275
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


250 Oak Ridge Road, Oak Ridge, New Jersey		07438
(Address of principal executive offices)		(Zip Code)

(973) 697-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 31, 2007 there were 23,253,671 outstanding shares of Common Stock, no par value.

LAKELAND BANCORP, INC.

Form 10-Q Index


		PAGE
	Part I Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets - September 30, 2007 (unaudited) and December 31, 2006	1

	Consolidated Income Statements - Unaudited Three Months and Nine Months Ended September 30, 2007 and 2006	2

	Consolidated Statements of Changes in Stockholders’ Equity - Nine months ended September 30, 2007 and 2006 (unaudited)	3

	Consolidated Statements of Cash Flows - Unaudited Nine Months ended September 30, 2007 and 2006	4

	Notes to Consolidated Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

	Part II Other Information

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits	23

Signatures		24

	The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and other information relating to registrants that file electronically at the address: http://www.sec.gov.

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	September 30, 2007 (unaudited)			December 31, 2006
	(dollars in thousands)
ASSETS
Cash	$	40,313		$	47,888
Federal funds sold and Interest-bearing deposits due from banks		56,654			32,076

Total cash and cash equivalents		96,967			79,964

Investment securities available for sale		265,050			280,509
Investment securities held to maturity; fair value of $128,212 in 2007 and $140,564 in 2006		129,650			142,838
Loans, net of deferred costs		1,787,244			1,591,644
Less: allowance for loan and lease losses		14,696			13,454

Net loans		1,772,548			1,578,190
Premises and equipment—net		30,803			32,072
Accrued interest receivable		8,532			8,509
Goodwill		87,111			87,111
Other identifiable intangible assets		4,050			4,942
Bank owned life insurance		37,763			36,774
Other assets		13,242			12,664

TOTAL ASSETS	$	2,445,716		$	2,263,573


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing	$	306,671		$	303,558
Savings and interest-bearing transaction accounts		1,084,398			1,054,190
Time deposits under $100 thousand		358,086			293,308
Time deposits $100 thousand and over		222,156			209,571

Total deposits		1,971,311			1,860,627
Federal funds purchased and securities sold under agreements to repurchase		54,151			41,061
Long-term debt		120,855			91,710
Subordinated debentures		77,322			56,703
Other liabilities		13,631			13,972

TOTAL LIABILITIES		2,237,270			2,064,073

Commitments and contingencies
Stockholders’ equity:
Common stock, no par value; authorized shares, 40,000,000; issued shares, 24,741,636 at September 30, 2007 and December 31, 2006; outstanding shares, 23,251,053 at September 30, 2007 and 23,160,188 at December 31, 2006		258,260			242,661
Accumulated deficit		(25,532	)		(17,526	)
Treasury stock, at cost, 1,490,583 shares in 2007 and 1,581,448 shares in 2006		(20,546	)		(22,565	)
Accumulated other comprehensive loss		(3,736	)		(3,070	)

TOTAL STOCKHOLDERS’ EQUITY		208,446			199,500

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,445,716		$	2,263,573

See accompanying notes to consolidated financial statements

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED INCOME STATEMENTS


	For the three months ended September 30,				For the nine months ended September 30,
	2007		2006		2007			2006
	(In thousands, except per share data)				(In thousands, except per share data)
INTEREST INCOME
Loans and fees	$	30,219	$	24,629	$	85,896		$	68,477
Federal funds sold and interest-bearing deposits with banks		571		304		1,251			538
Taxable investment securities		3,756		4,928		10,924			15,723
Tax-exempt investment securities		742		928		2,284			2,936

TOTAL INTEREST INCOME		35,288		30,789		100,355			87,674

INTEREST EXPENSE
Deposits		13,589		10,837		38,649			28,967
Federal funds purchased and securities sold under agreements to repurchase		664		1,407		1,834			3,691
Long-term debt		2,842		1,915		7,045			5,117

TOTAL INTEREST EXPENSE		17,095		14,159		47,528			37,775

NET INTEREST INCOME		18,193		16,630		52,827			49,899
Provision for loan and lease losses		789		337		2,062			988

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		17,404		16,293		50,765			48,911
NONINTEREST INCOME
Service charges on deposit accounts		2,696		2,732		7,846			7,996
Commissions and fees		771		1,048		2,335			2,862
Gains on investment securities		0		271		1,769			349
Income on bank owned life insurance		331		311		973			918
Other income		248		210		1,205			1,248

TOTAL NONINTEREST INCOME		4,046		4,572		14,128			13,373

NONINTEREST EXPENSE
Salaries and employee benefits		8,123		7,617		24,378			22,922
Net occupancy expense		1,493		1,323		4,369			4,047
Furniture and equipment		1,222		1,222		3,580			3,507
Stationery, supplies and postage		383		416		1,232			1,231
Marketing expense		456		363		1,411			1,197
Core deposit intangible amortization		298		297		893			898
Other expenses		2,357		2,141		7,231			6,787

TOTAL NONINTEREST EXPENSE		14,332		13,379		43,094			40,589

Income before provision for income taxes		7,118		7,486		21,799			21,695
Provision for income taxes		2,319		2,379		7,106			6,841

NET INCOME	$	4,799	$	5,107	$	14,693		$	14,854


PER SHARE OF COMMON STOCK
Basic earnings	$	0.21	$	0.22	$	0.63		$	0.64

Diluted earnings	$	0.21	$	0.22	$	0.63		$	0.64

Dividends	$	0.10	$	0.09	$	0.29		$	0.27


UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	For the three months ended September 30,				For the nine months ended September 30,
	2007		2006		2007			2006
	(in thousands)				(in thousands)
NET INCOME	$	4,799	$	5,107	$	14,693		$	14,854


OTHER COMPREHENSIVE INCOME NET OF TAX:
Unrealized securities gains (losses) arising during period		1,414		4,246		504			(510	)
Less: reclassification for gains included in net income		0		184		1,203			237
Change in pension liability, net		11		0		33			(198	)

Other Comprehensive Income (Loss)		1,425		4,062		(666	)		(945	)

TOTAL COMPREHENSIVE INCOME	$	6,224	$	9,169	$	14,027		$	13,909

See accompanying notes to consolidated financial statements

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months ended September 30, 2007


	Common stock				Accumulated deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total
	Number of Shares	Amount			Accumulated deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total
	(dollars in thousands)
BALANCE DECEMBER 31, 2006	23,563,463	$	242,661		$	(17,526	)	$	(22,565	)	$	(3,070	)	$	199,500
Cumulative adjustment for adoption of FIN 48						509									509

BALANCE JANUARY 1, 2007 as revised	23,563,463	$	242,661		$	(17,017	)	$	(22,565	)	$	(3,070	)	$	200,009
Net Income, first nine months 2007						14,693									14,693
Other comprehensive loss net of tax												(666	)		(666	)
Stock based compensation			111												111
Issuance of stock for restricted stock awards			(597	)					597						—
Exercise of stock options, net of excess tax benefits			(398	)					875						477
Issuance of stock to dividend reinvestment plan			(94	)		(464	)		558						—
Repurchase of stock in resission offer									(11	)					(11	)
Stock dividend	1,178,173		16,577			(16,577	)								—
Cash dividends						(6,167	)								(6,167	)

BALANCE September 30, 2007 (UNAUDITED)	24,741,636	$	258,260		$	(25,532	)	$	(20,546	)	$	(3,736	)	$	208,446

Nine Months ended September 30, 2006


	Common stock				Accumulated deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total
	Number of Shares	Amount			Accumulated deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total
	(dollars in thousands)
BALANCE DECEMBER 31, 2005	22,442,337	$	226,322		$	(9,514	)	$	(20,176	)	$	(4,851	)	$	191,781
Net Income, first nine months of 2006						14,854									14,854
Other comprehensive loss net of tax												(945	)		(945	)
Exercise of stock options			(175	)					635						460
Stock dividend	1,122,117		16,472			(16,472	)								—
Cash dividends						(6,315	)								(6,315	)
Purchase of treasury stock									(3,144	)					(3,144	)

BALANCE September 30, 2006 (UNAUDITED)	23,564,454	$	242,619		$	(17,447	)	$	(22,685	)	$	(5,796	)	$	196,691

See accompanying notes to consolidated financial statements

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS-(UNAUDITED)


	For the nine months ended September 30,
	2007			2006
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	14,693		$	14,854
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs		250			504
Depreciation and amortization		3,602			3,542
Provision for loan and lease losses		2,062			988
Gain on securities		(1,769	)		(349	)
Gain on sale of branch		(319	)		(361	)
Share-based compensation		111			—
(Increase) decrease in other assets		(1,241	)		642
Increase in other liabilities		217			360

NET CASH PROVIDED BY OPERATING ACTIVITIES		17,606			20,180

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from repayments on and maturity of securities:
Available for sale		47,955			65,444
Held to maturity		25,220			27,456
Proceeds from sales of securities:
Available for sale		2,438			84,170
Held to maturity		—			—
Purchase of securities:
Available for sale		(34,425	)		(23,977	)
Held to maturity		(12,209	)		(12,095	)
Net increase in loans		(196,297	)		(191,052	)
Disbursement from sale of branch, net		—			(7,326	)
Proceeds from the sale of branch premises and equipment		948			34
Capital expenditures		(2,070	)		(2,867	)

NET CASH USED IN INVESTING ACTIVITIES		(168,440	)		(60,213	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		110,684			60,052
Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		13,090			(52,736	)
Repayments of long-term debt		(40,855	)		(3,350	)
Issuance of long-term debt		70,000			50,140
Issuance of subordinated debentures		20,619			—
Purchase of treasury stock		(11	)		(3,144	)
Exercise of stock options		389			406
Excess tax benefits		88			54
Dividends paid		(6,167	)		(6,315	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		167,837			45,107

Net increase in cash and cash equivalents		17,003			5,074
Cash and cash equivalents, beginning of year		79,964			52,815

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	96,967		$	57,889

See accompanying notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Note 1. Significant Accounting Policies

Basis of Presentation.

This quarterly report presents the consolidated financial statements of Lakeland Bancorp, Inc. (the Company) and its subsidiary, Lakeland Bank (Lakeland).

The Company’s financial statements reflect all adjustments and disclosures which management believes are necessary for a fair presentation of interim results. The results of operations for the quarter presented do not necessarily indicate the results that the Company will achieve for all of 2007. You should read these interim financial statements in conjunction with the consolidated financial statements and accompanying notes that are presented in the Lakeland Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2006 (the 10-K).

The financial information in this quarterly report has been prepared in accordance with the Company’s customary accounting practices; these financial statements have not been audited. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

All weighted average, actual shares and per share information set forth in this quarterly report on Form 10-Q have been adjusted retroactively for the effects of stock dividends including the stock dividend declared on October 16, 2007, payable on November 16, 2007 to shareholders of record on October 31, 2007.

Note 2. Stock-Based Compensation

The Company established the 2000 Equity Compensation Program which authorizes the granting of incentive stock options and supplemental stock options to employees of the Company, including those employees serving as officers and directors of the Company. The plan authorized options to purchase up to 2,257,368 shares of common stock of the Company. All of the Company’s stock option grants expire 10 years from the date of grant, thirty days after termination of service other than for cause, or one year after death or disability of the grantee. The Company has no option awards with market or performance conditions attached to them. The Company’s stock option program allows for the grant of restricted shares, as well as stock option grants. The Company generally issues shares for option exercises from its treasury stock.

On December 13, 2006, the Company granted 37,829 shares of restricted stock at a market value of $13.95 per share. These shares vest over a four year period. The Company has assumed an estimated forfeiture rate of 6% on the restricted stock based on historical experience. None of the restricted shares are vested at this time. As of September 30, 2007, there was unrecognized compensation cost of $401,000 related to unvested restricted stock; that cost is expected to be recognized over a weighted average period of less than four years.

In August 2007, the Company granted options to purchase 26,250 shares to a new non-employee director of the Company at an exercise price of $11.43 per share. The director’s options vest in five equal installments beginning on the date of grant and continuing on the next four anniversaries of the date of grant. The Company estimated the fair value of the option grant using a Black-Sholes option pricing model using the following assumptions: The risk-free interest rate was 4.63%; the expected dividend yield 2.50%; the expected volatility was 25.32% and the expected life was six years. The fair value of the option granted was estimated to be $2.88. The expected compensation expense to be recorded over the vesting period will be $76,000. No stock options were granted during the first nine months of 2006.

Compensation expense in the first nine months of 2007 for share based compensation was $111,000 compared to no share based compensation expense for the same period in 2006. Pre-tax income for the first nine months of 2007 was reduced by $111,000 and net income was reduced by $77,000 for the compensation expense related to share based compensation.

Option activity under the Company’s stock option plans as of September 30, 2007 is as follows:


	Number of shares		Weighted average exercise price		Weighted average remaining contractual term ( in years)	Aggregate intrinsic value
Outstanding, January 1, 2007	1,197,630		$	12.45
Granted	26,250			11.43
Exercised	(58,728	)		6.62
Forfeited	(6,174	)		14.45

Outstanding, September 30, 2007	1,158,978		$	12.71	5.71	$	1,338,364

Options exercisable at September 30, 2007	1,137,978		$	12.72	5.71	$	1,306,764

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2007 and the exercise price, multiplied by the number of in the money options).

Stock options outstanding were 1,158,978 and 1,207,262 at September 30, 2007 and 2006, respectively. The aggregate intrinsic value of options exercised during the first nine months ended September 30, 2007 and 2006 was $331,000 and $319,000, respectively. Exercise of stock options during the first nine months of 2007 and 2006 resulted in cash receipts of $389,000 and $460,000, respectively.

Information regarding the Company’s restricted stock (all unvested) and changes during the nine months ended September 30, 2007 is as follows:


	Number of shares		Weighted average price
Outstanding, January 1, 2007	37,829		$	13.95
Forfeited	(565	)		13.95

Outstanding, September 30, 2007	37,264		$	13.95

Note 3. Comprehensive Income

The components of other comprehensive income (loss) are as follows:


	September 30, 2007									September 30, 2006
For the quarter ended:	Before tax amount			Tax Benefit (Expense)			Net of tax amount			Before tax amount			Tax Benefit (Expense)			Net of tax amount
	(dollars in thousands)									(dollars in thousands)
Net unrealized losses on available for sale securities
Net unrealized holding gains arising during period	$	2,223		$	(809	)	$	1,414		$	6,651		$	(2,405	)	$	4,246
Less reclassification adjustment for net gains arising during the period		0			0			0			271			(87	)		184

Net unrealized gains	$	2,223		$	(809	)	$	1,414		$	6,380		$	(2,318	)	$	4,062
Change in minimum pension liability		17			(6	)		11			—			—			—

Other comprehensive income, net	$	2,240		$	(815	)	$	1,425		$	6,380		$	(2,318	)	$	4,062


For the nine months ended:	Before tax amount			Tax Benefit (Expense)			Net of tax amount			Before tax amount			Tax Benefit (Expense)			Net of tax amount
	(dollars in thousands)									(dollars in thousands)
Net unrealized losses on available for sale securities
Net unrealized holding gains (losses) arising during period	$	704		$	(200	)	$	504		$	(865	)	$	355		$	(510	)
Less reclassification adjustment for net gains arising during the period		1,769			(566	)		1,203			349			(112	)		237

Net unrealized losses	$	(1,065	)	$	366		$	(699	)	$	(1,214	)	$	467		$	(747	)
Change in minimum pension liability		50			(17	)		33			(304	)		106			(198	)

Other comprehensive loss, net	$	(1,015	)	$	349		$	(666	)	$	(1,518	)	$	573		$	(945	)

Note 4. Statement of Cash Flow Information.


	For the nine months ended September 30,
	2007		2006
	(in thousands)
Supplemental schedule of noncash investing and financing activities:
Cash paid during the period for income taxes	$	6,033	$	6,369
Cash paid during the period for interest		47,080		37,200

Note 5. Earnings Per Share.

Basic earnings per share for a particular period of time is calculated by dividing net income by the weighted average number of common shares outstanding during that period.

Diluted earnings per share is calculated by dividing net income by the weighted average number of outstanding common shares and common share equivalents. The Company’s only outstanding “common share equivalents” are options to purchase its common stock.

All weighted average, actual shares and per share information set forth in this quarterly report on Form 10-Q have

been adjusted retroactively for the effects of stock dividends including the stock dividend declared on October 16, 2007, payable on November 16, 2007 to shareholders of record on October 31, 2007. The following schedule shows the Company’s earnings per share for the periods presented:


(In thousands except per share data)	For the three months ended September 30,				For the nine months ended September 30,
(In thousands except per share data)	2007		2006		2007		2006
Income applicable to common stock	$	4,799	$	5,107	$	14,693	$	14,854

Weighted average number of common shares outstanding—basic		23,205		23,113		23,177		23,147
Share-based plans		90		155		98		156

Weighted average number of common shares and common share equivalents—diluted		23,295		23,268		23,275		23,303

Basic earnings per share	$	0.21	$	0.22	$	0.63	$	0.64

Diluted earnings per share	$	0.21	$	0.22	$	0.63	$	0.64

Options to purchase 902,205 shares of common stock at a weighted average price of $14.11 per share were outstanding and were not included in the computation of diluted earnings per share for the three months or for the nine months ended September 30, 2007 because the option price was greater than the average market price. Options to purchase 563,207 shares of common stock at a weighted average price of $14.66 per share were outstanding and were not included in the computations of diluted earnings per share for the three months or for the nine months ended September 30, 2006.

Note 6. Investment Securities


AVAILABLE FOR SALE	September 30, 2007									December 31, 2006
*(in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government agencies	$	42,310	$	66	$	(495	)	$	41,881	$	43,346	$	0	$	(967	)	$	42,379
Mortgage-backed securities		169,203		144		(3,880	)		165,467		179,734		7		(5,365	)		174,376
Obligations of states and political subdivisions		25,366		118		(114	)		25,370		29,183		166		(139	)		29,210
Other debt securities		12,557		—		(1,253	)		11,304		13,128		35		(644	)		12,519
Other equity securities		20,714		707		(393	)		21,028		19,153		3,007		(135	)		22,025

	$	270,150	$	1,035	$	(6,135	)	$	265,050	$	284,544	$	3,215	$	(7,250	)	$	280,509


HELD TO MATURITY	September 30, 2007									December 31, 2006
*(in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government agencies	$	31,485	$	1	$	(255	)	$	31,231	$	39,256	$	0	$	(808	)	$	38,448
Mortgage-backed securities		41,416		24		(787	)		40,653		44,993		7		(1,008	)		43,992
Obligations of states and political subdivisions		55,150		98		(458	)		54,790		56,983		125		(550	)		56,558
Other		1,599		—		(61	)		1,538		1,606		—		(40	)		1,566

	$	129,650	$	123	$	(1,561	)	$	128,212	$	142,838	$	132	$	(2,406	)	$	140,564


	September 30, 2007
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	8,897	$	8,909	$	18,712	$	18,638
Due after one year through five years		39,927		39,615		37,647		37,250
Due after five years through ten years		24,728		23,568		24,957		24,778
Due after ten years		6,681		6,463		6,918		6,893

		80,233		78,555		88,234		87,559
Mortgage-backed securities		169,203		165,467		41,416		40,653
Other investments		20,714		21,028		—		—

Total securities	$	270,150	$	265,050	$	129,650	$	128,212

Note 7. Loans.


	September 30, 2007		December 31, 2006
	(in thousands)
Commercial	$	773,080	$	714,496
Leases		309,159		196,518
Real estate-construction		88,769		87,562
Real estate-mortgage		294,370		272,102
Installment		315,816		315,038

Total loans		1,781,194		1,585,716

Plus: deferred costs		6,050		5,928

Loans net of deferred costs	$	1,787,244	$	1,591,644

The Company follows Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (known as “SFAS No. 114”), and Statement of Financial Accounting Standards 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 following table shows the Company’s recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 as of September 30, 2007 and 2006, and the average recorded investment in impaired loans during the nine months preceding those dates:


Date	Investment		Valuation Allowance		Average Recorded Investment (over preceding nine months)
September 30, 2007	$	8.4 million	$	2.6 million	$	5.8 million
September 30, 2006	$	4.0 million	$	1.0 million	$	3.6 million

Interest received on impaired loans may be recorded as interest income. However, if management is not reasonably certain that an impaired loan will be repaid in full, or if a specific time frame to resolve full collection cannot yet be reasonably determined, all payments received are recorded as reductions of principal. The Company recognized interest on impaired loans of $154,000 in the first nine months of 2007. Interest that would have accrued had the loans performed under original terms would have been $541,000 for the first nine months of 2007.

Note 8. Employee Benefit Plans

The components of net periodic pension cost for the Newton defined pension plan are as follows:


	For the three months ended September 30,						For the nine months ended September 30,
	2007			2006			2007			2006
	(in thousands)						(in thousands)
Interest cost	$	24		$	24		$	75		$	72
Expected return on plan assets		(21	)		(22	)		(64	)		(66	)
Amortization of prior service cost		—			—			—			—
Amortization of unrecognized net actuarial loss		8			7			23			21

Net periodic benefit expense	$	11		$	9		$	34		$	27

Note 9. Directors’ Retirement Plan

The components of net periodic plan costs for the directors’ retirement plan are as follows:


	For the three months ended September 30,				For the nine months ended September 30,
	2007		2006		2007		2006
	(in thousands)				(in thousands)
Service cost	$	5	$	6	$	14	$	18
Interest cost		13		12		40		35
Amortization of prior service cost		9		11		27		35

Net periodic benefit expense	$	27	$	29	$	81	$	88

The Company made contributions of $47,000 to the plan in the nine months ended September 30, 2007 and does not expect to make any more contributions in 2007.

On December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans.” At that time, the Company recorded an other comprehensive loss of $194,000 for the Directors’ Retirement Plan and included it in the other comprehensive income for 2006 rather than as an adjustment to the ending balance of accumulated other comprehensive income as SFAS No. 158 requires. The Company believes that this adjustment is not material and intends to correct this error when filing its 2007 Form 10-K.

Note 10. Income Taxes

The Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” As required by FIN 48, which clarifies SFAS No. 109, “Accounting for Income Taxes,” the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of FIN 48, the Company recognized a decrease of approximately $509,000 in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007, balance of retained earnings.

The amount of unrecognized tax benefits as of January 1, 2007, was $367,000, all of which, if ultimately recognized, would reduce the Company’s annual effective tax rate. There have been no material changes in unrecognized tax benefits since January 1, 2007.

The Company is subject to U.S. federal income tax law as well as income tax of various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few significant exceptions, the Company is no longer subject to U.S. federal or state and local examinations by tax authorities for the years before 2002.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company had accrued approximately $138,000 for the payment of interest and penalties at January 1, 2007. Subsequent changes to accrued interest and penalties have not been significant.

Note 11. Subordinated Debentures

On May 16, 2007, the Company issued $20.6 million of junior subordinated debentures due August 31, 2037 to Lakeland Bancorp Capital Trust IV, a Delaware business trust. The distribution rate on these securities is 6.61% for 5 years and floats at LIBOR plus 152 basis points thereafter. The debentures are the sole asset of the Trust. The Trust issued 20,000 shares of trust preferred securities, $1,000 face value, for total proceeds of $20.0 million. The Company’s obligations under the debentures and related documents, taken together, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the Trust’s obligations under the preferred securities. The preferred securities are callable by the Company on or after August 1, 2012, or earlier if the deduction of related interest for federal income taxes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2037.

Note 12. Stockholders’ Equity

On August 16, 2007, the Company announced a stock repurchase program for the purchase of up to 525,000 shares of the Company’s common stock over the next 12 months. The Company has not purchased any shares of it common stock under this program.

Note 13. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force on Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,”(“EITF 06-4”) which requires employers that enter into endorsement split-dollar life insurance arrangements that provide an employee with a postretirement benefit to recognize a liability for the future benefits promised based on the substantive agreement made with the employee. Whether the accrual is based on a death benefit or on the future cost of maintaining the insurance would depend on what the employer has effectively agreed to provide during the employee’s retirement. The purchase of an endorsement-type life insurance policy does not qualify as a settlement of the liability.

The consensus in EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company intends to adopt EITF 06-4 effective January 1, 2008. The Company is currently evaluating the impact this guidance will have on the Company’s financial position and results of operations.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force in Issue 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (“EITF 06-5”). EITF 06-5 is effective for the fiscal years beginning after December 15, 2006. EITF 06-5 pertains to companies with life insurance policies, including Bank-Owned Life Insurance, and further defines the amount that could be realized under an insurance contract that should be booked as an asset on a company’s balance sheet. The Company adopted this EITF effective January 1, 2007 and it did not have a material impact on the Company’s financial position and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Company is currently evaluating the impact the adoption of SFAS No. 157 will have on its consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 but earlier adoption is permitted provided the entity also elects to apply the provisions of SFAS No. 157 during the same time period. The Company is currently evaluating the impact the adoption of SFAS No. 159 will have on its consolidated financial statements. The Company did not elect early adoption of SFAS No. 159.

PART I — ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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, 2006. All weighted average, actual shares and per share information set forth in this Quarterly Report on Form 10-Q has been adjusted retroactively for the effects of stock dividends, including the stock dividend declared on October 16, 2007, payable on November 16, 2007 to shareholders of record on October 31, 2007.

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 factors disclosed by the Company 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: pricing pressures on loan and deposit products; competition; changes in economic conditions nationally, regionally and in the Company’s markets; the extent and timing of actions of the Federal Reserve Board; changes in levels of market interest rates;

clients’ acceptance of the Company’s products and services; credit risks of lending activities; changes in the conditions of the capital markets in general and in the capital markets for financial institutions in particular and the impact of the war in Iraq or elsewhere on such markets; and the extent and timing of legislative and regulatory actions and reforms.

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 analysis of goodwill impairment and the Company’s deferred tax asset. 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, 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 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 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 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.

Interest income is accrued as earned on a simple interest basis. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. When a loan is placed on such non-accrual status, all accumulated accrued interest receivable is reversed out of current period income. Commercial loans 90 days or more past due and still accruing interest must have both principal and accruing interest adequately secured and must be in the process of collection. Residential mortgage loans are placed on non-accrual status at the time when foreclosure proceedings are commenced except where there exists sufficient collateral to cover the defaulted principal and interest payments, and management’s knowledge of the specific circumstances warrant continued accrual. Consumer loans are generally charged off when principal and interest payments are four months in arrears unless the obligations are well secured and in the process of collection. Interest thereafter on such charged-off consumer loans is taken into income when received only after full recovery of principal.

The Company accounts for impaired loans 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 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.

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 10 in this Report.

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 has tested its goodwill as of December 31, 2006 and determined that it is not impaired.

Results of Operations

(Third Quarter 2007 Compared to Third Quarter 2006)

Net Income

Net income for the third quarter of 2007 was $4.8 million, compared to $5.1 million for the same period in 2006, a decrease of $310,000 or 6%. Diluted earnings per share were $0.21 for the third quarter of 2007, a $0.01 or 5% decrease over what was reported for the same period last year. Return on Average Assets was 0.79% and Return on Average Equity was 9.30% for the third quarter of 2007.

The factors that influenced third quarter net income in 2007 compared to the same period in 2006 included a $1.6 million increase in net interest income resulting from strong loan growth offset by decreases in gains on investment securities and an increase in the provision for loan and lease losses. These factors will be discussed in further detail below.

Net Interest Income

Net interest income on a tax equivalent basis for the third quarter of 2007 was $18.6 million, representing a $1.5 million or 9% increase from the $17.1 million earned in the third quarter of 2006. The increase in net interest income primarily resulted from a more favorable mix of earning 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, September 30, 2007							For the three months ended, September 30, 2006
	Average Balance			Interest Income/ Expense		Average rates earned/ paid		Average Balance			Interest Income/ Expense		Average rates earned/ paid
	(dollars in thousands)
Assets
Interest-earning assets:
Loans (A)	$	1,741,187		$	30,219	6.89	%	$	1,445,461		$	24,629	6.76	%
Taxable investment securities		327,050			3,756	4.59	%		474,902			4,928	4.15	%
Tax-exempt securities		80,652			1,142	5.66	%		101,549			1,428	5.62	%
Federal funds sold (B)		44,620			571	5.12	%		23,614			304	5.15	%

Total interest-earning assets		2,193,509			35,688	6.46	%		2,045,526			31,289	6.08	%
Noninterest-earning assets:
Allowance for loan and lease losses		(14,161	)						(13,078	)
Other assets		224,867							217,581

TOTAL ASSETS	$	2,404,215						$	2,250,029


Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	325,514		$	1,519	1.85	%	$	332,328		$	1,177	1.41	%
Interest-bearing transaction accounts		751,895			5,738	3.03	%		702,359			4,936	2.79	%
Time deposits		544,471			6,332	4.65	%		470,299			4,724	4.02	%
Borrowings		253,564			3,506	5.53	%		240,469			3,322	5.53	%

Total interest-bearing liabilities		1,875,444			17,095	3.63	%		1,745,455			14,159	3.23	%

Noninterest-bearing liabilities:
Demand deposits		308,250							300,916
Other liabilities		15,786							12,448
Stockholders’ equity		204,735							191,210

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,404,215						$	2,250,029

Net interest income/spread					18,593	2.83	%					17,130	2.85	%
Tax equivalent basis adjustment					400							500

NET INTEREST INCOME				$	18,193						$	16,630

Net interest margin (C)						3.36	%						3.32	%

(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.

Interest income on a tax equivalent basis increased from $31.3 million in the third quarter of 2006 to $35.7 million in 2007, an increase of $4.4 million or 14%. The increase in interest income was due to an increase in average interest-earning assets of $148.0 million or 7% and to a 38 basis point increase in the yield on interest-earning assets. The yield on interest-earning assets increased from 6.08% in the third quarter of 2006 to 6.46% in the third quarter of 2007 because of a change in mix in interest-earning assets. Loans as a percent of interest-earning assets increased from 71% in the third quarter of 2006 to 79% in 2007 while investment securities as a percent of interest-earning assets decreased from 28% in the third quarter of 2006 to 19% in the third quarter of 2007.

Total interest expense increased from $14.2 million in the third quarter of 2006 to $17.1 million in the third quarter of 2007, an increase of $2.9 million, or 21%. Average interest-bearing liabilities increased $130.0 million, and the cost of funds increased 40 basis points to 3.63% due to a change in the mix of interest-bearing liabilities. Liabilities shifted from lower cost core deposits to higher cost time deposits. Average savings accounts as a percent of interest-bearing liabilities

decreased from 19% in the third quarter of 2006 to 17% in the third quarter of 2007. Time deposits as a percent of total interest-bearing liabilities increased from 27% to 29% during the same time period resulting from a certificate of deposit promotion during the third quarter of 2007. Also impacting the cost of funds was the issuance of $20.6 million in trust preferred subordinated debentures at a rate of 6.61% completed in May 2007.

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, the adequacy of the allowance for loan and lease losses, and prevailing economic conditions.

The provision for loan losses increased to $789,000 for the third quarter of 2007 from $337,000 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 third quarter of 2007, the Company charged off loans of $161,000 and recovered $98,000 in previously charged off loans compared to $575,000 and $238,000, respectively, during the same period in 2006. The higher provision reflects a higher level of non-performing loans in the third quarter of 2007 compared to third quarter 2006. For more information regarding the determination of the provision, see “Risk Elements” under “Financial Condition.”

Noninterest Income

Noninterest income decreased $526,000 from the third quarter of 2006 to the third quarter of 2007. In the third quarter of 2006, the Company recognized $271,000 in gains on sales of securities compared to no gains or losses on sales of securities during the third quarter of 2007. Commissions and fees decreased from $1.0 million in the third quarter of 2006 to $771,000 in the third quarter of 2007 due to a decrease in fees received on loans and a decrease in investment services brokerage income. Other income increased from $210,000 in the third of quarter 2006 to $248,000 in 2007 primarily as a result of increased fees from brokered lease transactions.

Noninterest Expense

Noninterest expense increased from $13.4 million in the third quarter of 2006 to $14.3 million in the third quarter of 2007, an increase of $1.0 million or 7%. Salaries and employee benefits increased $506,000 from $7.6 million in the third quarter 2006 to $8.1 million in 2007 as a result of expense related to new branches (two in the second quarter of 2007 and two in the fourth quarter of 2006), increased leasing commission expense due to higher originations and normal salary and benefit increases. Net occupancy expense increased from the third quarter of 2006 to the third quarter of 2007 by $170,000 primarily as a result of expenses related to new branches that were opened. Marketing expense increased from $363,000 in the third quarter of 2006 to $456,000 in the third quarter of 2007 as a result of the branch openings and deposit promotions. Stationery, supplies and postage decreased from $416,000 in the third quarter of 2006 to $383,000 in the third quarter of 2007 as a result of less postage expense this quarter related to new branch openings. Other expenses increased from $2.1 million in the third quarter of 2006 to $2.4 million in the third quarter of 2007 resulting from increased legal expenses, telecommunications expense and other miscellaneous expense related to the new branch openings.

(First Nine Months of 2007 Compared to First Nine Months of 2006)

Net Income

Net income for the first nine months of 2007 was $14.7 million, compared to $14.9 million for the same period in 2006, a decrease of $161,000 or 1%. Diluted earnings per share were $0.63 for the first nine months of 2007, a $0.01 or 2% decrease over what was reported for the same period last year. Return on Average Assets was 0.85% and Return on Average Equity was 9.71% for the first nine months of 2007. Net income for the first nine months of 2007 included a $2.9 million increase in net interest income, a $1.4 million increase in gains on securities offset by a $1.1 million increase in the provision for loan and lease losses. These items will be discussed in further detail below.

Net Interest Income

Net interest income on a tax equivalent basis for the first nine months of 2007 was $54.1 million, representing a $2.6 million or 5% increase from the $51.5 million earned in the first nine months of 2006. The increase in net interest income primarily resulted from an increase in interest earned on free funds (interest-bearing assets funded by noninterest-bearing liabilities) resulting from an increase in the yield on earning assets. The components of net interest income will be discussed in greater detail below.

CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS


	For the nine months ended, September 30, 2007							For the nine months ended, September 30, 2006
	Average Balance			Interest Income/ Expense		Average rates earned/ paid		Average Balance			Interest Income/ Expense		Average rates earned/ paid
	(dollars in thousands)
Assets
Interest-earning assets:
Loans (A)	$	1,670,292		$	85,896	6.88	%	$	1,379,925		$	68,477	6.63	%
Taxable investment securities		326,718			10,924	4.46	%		510,354			15,723	4.11	%
Tax-exempt securities		82,806			3,514	5.66	%		107,434			4,517	5.61	%
Federal funds sold (B)		32,537			1,251	5.13	%		14,553			538	4.93	%

Total interest-earning assets		2,112,353			101,585	6.43	%		2,012,266			89,255	5.93	%

Noninterest-earning assets:
Allowance for loan and lease losses		(13,847	)						(12,983	)
Other assets		224,222							217,254

TOTAL ASSETS	$	2,322,728						$	2,216,537


Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	327,986		$	4,322	1.76	%	$	335,895		$	3,062	1.22	%
Interest-bearing transaction accounts		737,682			16,549	3.00	%		700,912			13,380	2.55	%
Time deposits		523,212			17,778	4.53	%		457,942			12,525	3.65	%
Borrowings		216,768			8,879	5.46	%		223,145			8,808	5.26	%

Total interest-bearing liabilities		1,805,648			47,528	3.51	%		1,717,894			37,775	2.94	%

Noninterest-bearing liabilities:
Demand deposits		299,300							296,382
Other liabilities		15,375							12,141
Stockholders’ equity		202,405							190,120

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,322,728						$	2,216,537

Net interest income/spread					54,057	2.91	%					51,480	2.99	%
Tax equivalent basis adjustment					1,230							1,581

NET INTEREST INCOME				$	52,827						$	49,899

Net interest margin (C)						3.42	%						3.42	%

(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.

Interest income on a tax equivalent basis increased from $89.3 million in the first nine months of 2006 to $101.6 million in 2007, an increase of $12.3 million or 14%. The increase in interest income was due to an increase in average interest-earning assets of $100.1 million or 5% and to a 50 basis point increase in the yield on interest-earning assets. The yield on interest-earning assets increased from 5.93% in first nine months of 2006 to 6.43% in first nine months of 2007 as a result of the increasing rate environment and because of a change in mix in interest-earning assets similar to the change in mix described above in the comparison of the results of operations between third quarter 2007 and third quarter 2006.

Total interest expense increased from $37.8 million in the first nine months of 2006 to $47.5 million in the first nine months of 2007, an increase of $9.8 million, or 26%. Average interest-bearing liabilities increased $87.8 million, and the cost of funds increased 57 basis points to 3.51% due to the increasing rate environment and a change in the mix of interest-bearing liabilities similar to the change in mix described above in the comparison of the results of operations between third quarter 2007 and third quarter 2006.

Provision for Loan and Lease Losses

The provision for loan losses increased to $2.1 million for the first nine months of 2007 from $1.0 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 nine months of 2007, the Company charged off loans of $1.3 million and recovered $492,000 in previously charged off loans compared to $2.2 million and $1.1 million, respectively, during the same period in 2006. The higher provision reflects a higher level of non-performing loans in the first nine months of 2007 compared to the first nine months of 2006. For more information regarding the determination of the provision, see “Risk Elements” under “Financial Condition.”

Noninterest Income

Noninterest income increased $755,000 or 6% from the first nine months of 2006 to the first nine months of 2007. There were $1.8 million in gains on investment securities in the first nine months of 2007 compared to $349,000 of gains in the first nine months of 2006. In the second quarter of 2007, the Company recognized a gain on equity securities in its investment portfolio resulting from an acquisition of a financial institution in which the Company owned stock. Commissions and fees decreased from $2.9 million in the first nine months of 2006 to $2.3 million in the first nine months of 2007 due to a decrease in fees received on loans and a decrease in investment services brokerage income. Other income included $315,000 in gains from a sale of a property in 2007 and $362,000 in gains from the sale of a branch office in 2006.

Noninterest Expense

Noninterest expense increased from $40.6 million in the first nine months of 2006 to $43.1 million in the first nine months of 2007, an increase of $2.5 million or 6%. Salaries and employee benefits increased $1.5 million from $22.9 million in the first nine months of 2006 to $24.4 million in 2007 as a result of branch openings, increases in commissions paid in the leasing division and normal salary and benefit increases. Net occupancy expense, marketing expense and other expenses increased from the first nine months of 2006 to the first nine months of 2007 as a result of the same factors discussed in the comparison of the results of operations between the third quarter of 2007 compared to the third quarter of 2006.

Financial Condition

The Company’s total assets increased $182.1 million or 8% from $2.26 billion at December 31, 2006, to $2.45 billion at September 30, 2007. Total deposits increased from $1.86 billion on December 31, 2006 to $1.97 billion on September 30, 2007, an increase of $110.7 million or 6%. Additionally, customer repurchase agreements increased $13.1 million or 32% from December 31, 2006 to September 30, 2007.

Loans

Gross loans increased from $1.59 billion on December 31, 2006 to $1.78 billion on September 30, 2007, an increase of $195.5 million, or 12%. 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 other real estate owned on the dates presented:


(in thousands)	September 30, 2007		December 31, 2006		September 30, 2006
Non-performing loans:
Non-accrual loans	$	8,784	$	4,437	$	3,782
Renegotiated loans		—		—		—

TOTAL NON-PERFORMING LOANS		8,784		4,437		3,782
Other real estate owned		—		—		—

TOTAL NON-PERFORMING ASSETS	$	8,784	$	4,437	$	3,782

Loans past due 90 days or more and still accruing	$	252	$	876	$	442

Non-accrual loans increased from $4.4 million on December 31, 2006, or 0.20% of total assets, to $8.8 million, or 0.36% of total assets, on September 30, 2007. The majority of the increase in non-performing loans relates to the addition of two customer relationships to non-accrual loans during that time period. Loans past due ninety days or more and still accruing at September 30, 2007 decreased $624,000 to $252,000 from $876,000 on December 31, 2006. Loans past due 90 days or more and still accruing are those loans that are both well-secured and in process of collection.

On September 30, 2007, the Company had $8.4 million in impaired loans (consisting primarily of non-accrual loans) compared to $4.1 million at year-end 2006. For more information on these loans see Note 7 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans is measured using the present value of future cash flows on certain impaired loans and is based on the fair value of the underlying collateral for the remaining loans. Based on such evaluation, $2.6 million has been allocated to the allowance for loan and lease losses for impairment at September 30, 2007. At September 30, 2007, the Company also had $5.8 million in loans that were rated substandard that were not classified as non-performing or impaired.

There were no loans at September 30, 2007, 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 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 charged-off and the amount of loan recoveries:


(dollars in thousands)	Nine months ended September 30, 2007			Year ended December 31, 2006			Nine months ended September 30, 2006
Balance of the allowance at the beginning of the year	$	13,454		$	13,173		$	13,173

Loans charged off:
Commercial		112			1,207			1,153
Leases		364			90			—
Home Equity and consumer		836			1,493			1,049
Real estate—mortgage		—			—			—

Total loans charged off		1,312			2,790			2,202

Recoveries:
Commercial		206			728			631
Leases		2			83			82
Home Equity and consumer		284			531			395
Real estate—mortgage		—			3			—

Total Recoveries		492			1,345			1,108

Net charge-offs:		820			1,445			1,094
Provision for loan and lease losses		2,062			1,726			988

Ending balance	$	14,696		$	13,454		$	13,067


Ratio of annualized net charge-offs to average loans outstanding		0.07	%		0.10	%		0.11	%
Ratio of allowance at end of period as a percentage of period end total loans		0.83	%		0.85	%		0.87	%

The ratio of the allowance for loan and lease losses to loans outstanding reflects management’s evaluation of the underlying credit risk inherent in the loan portfolio. The determination of the adequacy of the allowance for loan and lease losses and periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management and the Board of Directors. The evaluation process is undertaken on a quarterly basis.

Methodology employed for assessing the adequacy of the allowance for loan and lease losses consists of the following criteria:

•

The establishment of reserve amounts for all specifically identified classified loans that have been designated as requiring attention by the Company or its external loan review consultant.

•

The establishment of reserves for pools of homogeneous types of loans not subject to specific review, including 1 – 4 family residential mortgages and consumer loans.

•

The establishment of reserve amounts for the non-classified loans in each portfolio based upon the historical average loss experience of these portfolios and management’s evaluation of key factors.

Consideration is given to the results of ongoing credit quality monitoring processes, the adequacy and expertise of the Company’s lending staff, underwriting policies, loss histories, delinquency trends, and the cyclical nature of economic and business conditions. Since many of the Company’s loans depend on the sufficiency of collateral as a secondary means of repayment, any adverse trend in the real estate markets could affect underlying values available to protect the Company against loss.

Based upon the process employed and giving recognition to all accompanying factors related to the loan portfolio, management considers the allowance for loan and lease losses to be adequate at September 30, 2007. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment security portfolio, see Note 6 in the Notes to Consolidated Financial Statements contained in this Form 10-Q. Total investment securities decreased from $423.3 million on December 31, 2006 to $394.7 million on September 30, 2007, a decrease of $28.6 million, or 7% which included maturities of securities used to fund loan growth.

Deposits

Total deposits increased from $1.86 billion on December 31, 2006 to $1.97 billion on September 30, 2007, an increase of $110.7 million, or 6%. The change in deposits was primarily due to an increase in time deposits under $100,000 which increased from $293.3 million on December 31, 2006 to $358.1 million on September 30, 2007, an increase of $64.8 million or 22% as a result of a deposit promotion conducted in the third quarter of 2007. Time deposits $100,000 and over increased $12.6 million to $222.2 million.

Liquidity

Cash and cash equivalents, totaling $97.0 million on September 30, 2007, increased $17.0 million from December 31, 2006. Operating activities, principally the result of the Company’s net income, provided $17.6 million in net cash. Investing activities used $168.4 million in net cash, primarily reflecting the use of funds for loan originations. Financing activities provided $167.8 million in net cash, reflecting an increase in deposits of $110.7 million and increases of federal funds purchased and long-term debt supplemented by the issuance of $20.0 million in trust preferred securities. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. At September 30, 2007, the Company had outstanding loan origination commitments of $416.4 million. These commitments include $344.1 million that mature within one year; $28.0 million that mature after one but within three years; $1.0 million that mature after three but within five years and $43.3 million that mature after five years. The Company also had $8.5 million in letters of credit outstanding at September 30, 2007. This included $6.2 million that are maturing within one year and $2.3 million that mature after one but within three years. Time deposits issued in amounts of $100,000 or more maturing within one year total $194.6 million.

Capital Resources

Stockholders’ equity increased from $199.5 million on December 31, 2006 to $208.4 million on September 30, 2007. Book value per common share increased to $8.97 on September 30, 2007 from $8.61 on December 31, 2006. The increase in stockholders’ equity from December 31, 2006 to September 30, 2007 was primarily due to net income offset by dividends and an increase in accumulated other comprehensive loss. Also contributing to the increase in stockholder’s equity was a cumulative adjustment for adoption of FIN 48, “Accounting for Uncertainty in Income Taxes,” of $509,000. For more information, please see Note 10 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material effect on the Company or Lakeland’s financial statements. Management believes, as of September 30, 2007, that the Company and Lakeland meet all capital adequacy requirements to which they are subject.

The capital ratios for the Company and Lakeland at September 30, 2007, and the minimum regulatory guidelines for such capital ratios for qualification as a well-capitalized institution are as follows:


Capital Ratios:	Tier 1 Capital to Total Average Assets Ratio September 30, 2007		Tier 1 Capital to Risk-Weighted Assets Ratio September 30, 2007		Total Capital to Risk-Weighted Assets Ratio September 30, 2007
The Company	8.25	%	10.49	%	11.53	%
Lakeland Bank	7.76	%	9.86	%	10.67	%
“Well capitalized” institution under FDIC Regulations	5.00	%	6.00	%	10.00	%

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company manages interest rate risk and market risk by identifying and quantifying interest rate risk exposures using simulation analysis, economic value at risk models and gap analysis. At September 30, 2007, the cumulative one-year gap was $(287.8) million or (11.8%) of total assets.

The Company uses net interest income simulation because the Company’s Asset/Liability Management Committee believes that the interest rate sensitivity modeling more accurately reflects the effects and exposure to changes in interest rates. Net interest income simulation considers the relative sensitivities of the balance sheet including the effects of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest simulation is designed to address the probability of interest rate changes and the behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance-sheet items. The Company’s Market Value of Portfolio Equity at September 30, 2007 was $292.3 million.

Based on its simulation models, the Company estimates that for a 200 basis point rate shock increase, the Company’s Market Value of Portfolio Equity would decline (13.1%) and would increase 5.0% for a 200 basis point rate shock decrease. The simulation model also shows that for a 200 basis point rate increase, the Company’s projected net interest income for the next 12 months would decrease (3.0%), and would increase 2.9% for a 200 basis point rate decrease. The information provided for net interest income over the next 12 months assumes that changes in interest rates of plus 200 basis points and minus 200 basis points change gradually in equal increments over the following 12 month period. The above information is based on significant estimates and assumptions and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. For more information regarding the Company’s market risk and assumptions used in the Company’s simulation models, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 4.

Controls and Procedures

(a) Disclosure controls and procedures. As of the end of the Company’s most recently completed fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) covered by this report, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal controls over financial reporting. There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION


Item 1. Legal Proceedings

For legal proceedings, please see the description under “Legal Proceedings” in the First Quarter 2007 Form 10-Q.

Item 1A. Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors.” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		Not Applicable

Item 3. Defaults Upon Senior Securities		Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders.		Not Applicable

Item 5. Other Information		Not Applicable

Item 6. Exhibits


31.1		Certification by Roger Bosma pursuant to Section 302 of the Sarbanes Oxley Act.

31.2		Certification by Joseph F. Hurley pursuant to Section 302 of the Sarbanes Oxley Act.

32.1		Certification by Roger Bosma and Joseph F. Hurley pursuant to Section 906 of the Sarbanes Oxley Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lakeland Bancorp, Inc.

(Registrant)

/s/ Roger Bosma

Roger Bosma

President and Chief Executive Officer

/s/ Joseph F. Hurley

Joseph F. Hurley

Executive Vice President and Chief Financial Officer

November 8, 2007

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