Edgar Filing: LAKELAND BANCORP INC

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(MARK ONE)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011.

¨	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: 000-17820

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.)
		(I.R.S. Employer Identification No.)

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

Registrant’s telephone number, including area code: (973) 697-2000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, no par value		NASDAQ

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer ¨		Smaller Reporting Company ¨

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

As of June 30, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $217,000,000, based on the closing sale price as reported on the NASDAQ Global Select Market.

The number of shares outstanding of the registrant’s common stock, as of February 1, 2012, was 25,633,818.

DOCUMENTS INCORPORATED BY REFERENCE:

Lakeland Bancorp, Inc’s. Proxy Statement for its 2012 Annual Meeting of Shareholders (Part III).

LAKELAND BANCORP, INC.

Form 10-K Index


PART I
		PAGE

Item 1.	Business		1
Item 1A.	Risk Factors		13
Item 1B.	Unresolved Staff Comments		19
Item 2.	Properties		19
Item 3.	Legal Proceedings		20
Item 3A.	Executive Officers of the Registrant		21
Item 4.	Mine Safety Disclosures		21

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		22
Item 6.	Selected Financial Data		24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 8.	Financial Statements and Supplementary Data		47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		94
Item 9A.	Controls and Procedures		94
Item 9B.	Other Information		97

PART III

Item 10.	Directors, Executive Officers and Corporate Governance		98
Item 11.	Executive Compensation		98
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		98
Item 13.	Certain Relationships and Related Transactions, and Director Independence		98
Item 14.	Principal Accountant Fees and Services		98

PART IV

Item 15.	Exhibits and Financial Statement Schedules		99
Signatures			S-1

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PART I

ITEM 1—Business

GENERAL

Lakeland Bancorp, Inc. (the “Company” or “Lakeland Bancorp”) is a bank holding company headquartered in Oak Ridge, New Jersey. The Company was organized in March of 1989 and commenced operations on May 19, 1989, upon the consummation of the acquisition of all of the outstanding stock of Lakeland Bank, formerly named Lakeland State Bank (“Lakeland” or the “Bank”). Through Lakeland, the Company operates 47 banking offices, located in Morris, Passaic, Sussex, Warren, Essex and Bergen counties in New Jersey. Lakeland offers a full range of lending services, including commercial loans and leases, real estate and consumer loans to small and medium-sized businesses, professionals and individuals located in its markets.

Over the last decade, the Company has shown substantial growth through a combination of organic growth and acquisitions. Since 1998, Lakeland has opened eighteen new branch offices and the Company has also acquired four community banks with an aggregate asset total of approximately $780 million. All of the acquired banks have been merged into Lakeland and their holding companies, if applicable, have been merged into the Company.

At December 31, 2011, the Company had total consolidated assets of $2.8 billion, total consolidated deposits of $2.2 billion, total consolidated loans, net of the allowance for loan and lease losses, of $2.0 billion and total consolidated stockholders’ equity of $259.8 million.

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Forward-Looking Statements”). Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such Forward-Looking Statements. Certain factors which could materially affect such results and the future performance of the Company are described in Item 1A—Risk Factors of this Annual Report on Form 10-K.

Unless otherwise indicated, all weighted average, actual shares and per share information contained in this Annual Report on Form 10-K have been adjusted retroactively for the effect of stock dividends, including the Company’s 5% stock dividend which was distributed on February 16, 2011.

Commercial Bank Services

Through Lakeland, the Company offers a broad range of lending, depository, and related financial services to individuals and small to medium sized businesses located primarily in northern New Jersey. In the lending area, these services include short and medium term loans, lines of credit, letters of credit, inventory and accounts receivable financing, real estate construction loans, mortgage loans and merchant credit card services. In addition to commercial real estate loans, Lakeland makes commercial and industrial loans, which are not always secured by real estate. These types of loans can diversify the Company’s exposure in a depressed real estate market. Lakeland’s equipment leasing division provides a solution to small and medium sized companies who prefer to lease equipment over other financial alternatives. During 2011, the Company continued its strategy of lessening its exposure in the leasing area by reducing the size of its lease portfolio. Lakeland’s asset based loan department provides commercial borrowers with another lending alternative.

Depository products include demand deposits, as well as savings, money market and time accounts. The Company also offers wire transfer, internet banking and night depository services to the business community. In addition, Lakeland offers cash management services, such as remote capture of deposits and overnight sweep repurchase agreements.

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Consumer Banking

Lakeland also offers a broad range of consumer banking services, including checking accounts, savings accounts, NOW accounts, money market accounts, certificates of deposit, internet banking, secured and unsecured loans, consumer installment loans, mortgage loans, and safe deposit services.

Other Services

Investment and advisory services for individuals and businesses are also available.

Competition

Lakeland faces considerable competition in its market areas for deposits and loans from other depository institutions. Many of Lakeland’s depository institution competitors have substantially greater resources, broader geographic markets, and higher lending limits than Lakeland and are also able to provide more services and make greater use of media advertising. In recent years, intense market demands, economic pressures, increased customer awareness of products and services, and the availability of electronic services have forced banking institutions to diversify their services and become more cost-effective.

Lakeland also competes with credit unions, brokerage firms, insurance companies, money market mutual funds, consumer finance companies, mortgage companies and other financial companies, some of which are not subject to the same degree of regulation and restrictions as Lakeland in attracting deposits and making loans. Interest rates on deposit accounts, convenience of facilities, products and services, and marketing are all significant factors in the competition for deposits. Competition for loans comes from other commercial banks, savings institutions, insurance companies, consumer finance companies, credit unions, mortgage banking firms and other institutional lenders. Lakeland primarily competes for loan originations through its structuring of loan transactions and the overall quality of service. Competition is affected by the availability of lendable funds, general and local economic conditions, interest rates, and other factors that are not readily predictable.

The Company expects that competition will continue in the future.

Concentration

The Company is not dependent for deposits or exposed by loan concentrations to a single customer or a small group of customers the loss of any one or more of which would have a material adverse effect upon the financial condition of the Company.

Employees

At December 31, 2011, the Company had 527 full-time equivalent employees. None of these employees is covered by a collective bargaining agreement. The Company considers relations with its employees to be good.

SUPERVISION AND REGULATION

General

The Company is a registered bank holding company under the federal Bank Holding Company Act of 1956, as amended (the “Holding Company Act”), and is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Holding Company Act. The Company is subject to examination by the Federal Reserve Board.

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Lakeland is a state chartered banking association subject to supervision and examination by the Department of Banking and Insurance of the State of New Jersey (the “Department”) and the Federal Deposit Insurance Corporation (the “FDIC”). The regulations of the State of New Jersey and FDIC govern most aspects of Lakeland’s business, including reserves against deposits, loans, investments, mergers and acquisitions, borrowings, dividends, and location of branch offices. Lakeland is subject to certain restrictions imposed by law on, among other things, (i) the maximum amount of obligations of any one person or entity which may be outstanding at any one time, (ii) investments in stock or other securities of the Company or any subsidiary of the Company, and (iii) the taking of such stock or securities as collateral for loans to any borrower.

The Holding Company Act

The Holding Company Act limits the activities which may be engaged in by the Company and its subsidiaries to those of banking, the ownership and acquisition of assets and securities of banking organizations, and the management of banking organizations, and to certain non-banking activities which the Federal Reserve Board finds, by order or regulation, to be so closely related to banking or managing or controlling a bank as to be a proper incident thereto. The Federal Reserve Board is empowered to differentiate between activities by a bank holding company or a subsidiary thereof and activities commenced by acquisition of a going concern.

With respect to non-banking activities, the Federal Reserve Board has by regulation determined that several non-banking activities are closely related to banking within the meaning of the Holding Company Act and thus may be performed by bank holding companies. Although the Company’s management periodically reviews other avenues of business opportunities that are included in that regulation, the Company has no present plans to engage in any of these activities other than providing investment brokerage services.

With respect to the acquisition of banking organizations, the Company is required to obtain the prior approval of the Federal Reserve Board before it may, by merger, purchase or otherwise, directly or indirectly acquire all or substantially all of the assets of any bank or bank holding company, if, after such acquisition, it will own or control more than 5% of the voting shares of such bank or bank holding company.

Regulation of Bank Subsidiaries

There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.

Commitments to Affiliated Institutions

The policy of the Federal Reserve Board provides that a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support such subsidiary banks in circumstances in which it might not do so absent such policy.

Interstate Banking

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies to acquire banks in states other than their home state, regardless of applicable state law. New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorize de novo branching into the state. However, under federal law, federal savings banks, which meet certain conditions, may branch de novo into a state, regardless of state law. The Dodd-Frank

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Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) removes the restrictions on interstate branching contained in the Riegle-Neal Act, and allows national banks and state banks to establish branches in any state if, under the laws of the state in which the branch is to be located, a state bank chartered by that state would be permitted to establish the branch.

Gramm-Leach Bliley Act of 1999

The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization Act”) became effective in early 2000. The Modernization Act:

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allows bank holding companies meeting management, capital, and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than previously was permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; if a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals;

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allows insurers and other financial services companies to acquire banks;

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removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and

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establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

The Modernization Act also modified other financial laws, including laws related to financial privacy and community reinvestment.

The USA PATRIOT Act

In response to the events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), was signed into law on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act encourages information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:

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All financial institutions must establish anti-money laundering programs that include, at a minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.

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The Secretary of the Department of the Treasury, in conjunction with other bank regulators, was authorized to issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened.

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Financial institutions that establish, maintain, administer, or manage private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) are required to establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.

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Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks.

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Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

The United States Treasury Department has issued a number of implementing regulations which address various requirements of the USA PATRIOT Act and are applicable to financial institutions such as Lakeland. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers.

Sarbanes-Oxley Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “SOA”) was signed into law. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”).

The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

The SOA addresses, among other matters:

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audit committees for all reporting companies;

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certification of financial statements by the chief executive officer and the chief financial officer;

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the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

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a prohibition on insider trading during pension plan black out periods;

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disclosure of off-balance sheet transactions;

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a prohibition on personal loans to directors and officers (other than loans made by an insured depository institution (as defined in the Federal Deposit Insurance Act), if the loan is subject to the insider lending restrictions of section 22(h) of the Federal Reserve Act);

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expedited filing requirements for Form 4’s;

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disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;

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“real time” filing of periodic reports;

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the formation of a public accounting oversight board;

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auditor independence; and

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various increased criminal penalties for violations of the securities laws.

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The SEC has enacted various rules to implement various provisions of the SOA with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.

Regulation W

Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks in the same manner and to the same extent as if they were members of the Federal Reserve System. The Federal Reserve Board has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. The Company is considered to be an affiliate of Lakeland. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:

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to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and

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to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates.

In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:

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a loan or extension of credit to an affiliate;

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a purchase of, or an investment in, securities issued by an affiliate;

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a purchase of assets from an affiliate, with some exceptions;

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the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and

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the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

In addition, under Regulation W:

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a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;

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covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and

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with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by certain types of collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a state bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific

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lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC, in connection with its examination of a state non-member bank, to assess the bank’s record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the bank. Under the FDIC’s CRA evaluation system, the FDIC focuses on three tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.

Securities and Exchange Commission

The common stock of the Company is registered with the SEC under the Exchange Act. As a result, the Company and its officers, directors, and major stockholders are obligated to file certain reports with the SEC. The Company is subject to proxy and tender offer rules promulgated pursuant to the Exchange Act. You may read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, such as the Company.

The Company maintains a website at http://www.lakelandbank.com. The Company makes available on its website the proxy statements and reports on Forms 8-K, 10-K and 10-Q that it files with the SEC as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Additionally, the Company has adopted and posted on its website a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. The Company intends to disclose any amendments to or waivers of the Code of Ethics on its website.

Effect of Government Monetary Policies

The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve Board have had, and will likely continue to have, an important impact on the operating results of commercial banks through the Board’s power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The Federal Reserve Board has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate of borrowings of banks and the reserve requirements against bank deposits. It is not possible to predict the nature and impact of future changes in monetary fiscal policies.

Dividend Restrictions

The Company is a legal entity separate and distinct from Lakeland. Virtually all of the revenue of the Company available for payment of dividends on its capital stock will result from amounts paid to the Company by Lakeland. All such dividends are subject to various limitations imposed by federal and state laws and by regulations and policies adopted by federal and state regulatory agencies. Under state law, a bank may not pay dividends unless, following the dividend payment, the capital stock of the bank would be unimpaired and either (a) the bank will have a surplus of not less than 50% of its capital stock, or, if not, (b) the payment of the dividend will not reduce the surplus of the bank.

As the Company has redeemed all of the shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A that was issued to the U.S. Department of the Treasury under the Capital Purchase Program, it is no longer subject to the dividend restrictions applicable to participants in the Capital Purchase Program.

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If, in the opinion of the FDIC, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which could include the payment of dividends), the FDIC may require, after notice and hearing, that such bank cease and desist from such practice or, as a result of an unrelated practice, require the bank to limit dividends in the future. The Federal Reserve Board has similar authority with respect to bank holding companies. In addition, the Federal Reserve Board and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Regulatory pressures to reclassify and charge off loans and to establish additional loan loss reserves can have the effect of reducing current operating earnings and thus impacting an institution’s ability to pay dividends. Further, as described herein, the regulatory authorities have established guidelines with respect to the maintenance of appropriate levels of capital by a bank or bank holding company under their jurisdiction. Compliance with the standards set forth in these policy statements and guidelines could limit the amount of dividends which the Company and Lakeland may pay. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), banking institutions which are deemed to be “undercapitalized” will, in most instances, be prohibited from paying dividends. See “FDICIA.”

Capital Adequacy Guidelines

The Federal Reserve Board has adopted risk-based capital guidelines. These guidelines establish minimum levels of capital and require capital adequacy to be measured in part upon the degree of risk associated with certain assets. Under these guidelines all banks and bank holding companies must have a core or Tier 1 capital to risk-weighted assets ratio of at least 4% and a total capital to risk-weighted assets ratio of at least 8%. At December 31, 2011, the Company’s Tier 1 capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio were 11.23% and 13.39%, respectively.

In addition, the Federal Reserve Board and the FDIC have approved leverage ratio guidelines (Tier 1 capital to average quarterly assets, less goodwill) for bank holding companies such as the Company. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The Company’s leverage ratio was 8.33% at December 31, 2011.

Under FDICIA, federal banking agencies have established certain additional minimum levels of capital. See “FDICIA.”

FDICIA

Enacted in December 1991, FDICIA substantially revised the bank regulatory provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among other things, FDICIA requires federal banking agencies to broaden the scope of regulatory corrective action taken with respect to banks that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. Under FDICIA, federal banking agencies were required to establish minimum levels of capital (including both a leverage limit and a risk-based capital requirement) and specify for each capital measure the levels at which depository institutions will be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.”

Under regulations adopted under these provisions, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized it must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage ratio of at least 4% (or in some cases 3%). Under the regulations, an institution will be deemed to be undercapitalized if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a Tier 1 leverage ratio of less than 4% (or in some cases 3%). An institution will be deemed to be significantly undercapitalized if it has a total risk-based capital ratio that is less than 6%, a

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Tier 1 risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3% and will be deemed to be critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2%. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating or is deemed to be in an unsafe or unsound condition or to be engaging in unsafe or unsound practices. As of December 31, 2011, the Company and Lakeland met all regulatory requirements for classification as well capitalized under the regulatory framework.

Additional Regulation of Capital

The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies and regulations to which they apply. Actions of the Committee have no direct effect on banks in participating countries. In 2004, the Basel Committee published a new capital accord (“Basel II”) to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk – an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures. The Company is not required to comply with the advanced approaches of Basel II.

In 2009, the United States Treasury Department issued a policy statement (the “Treasury Policy Statement”) entitled “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms,” which contemplates changes to the existing regulatory capital regime involving substantial revisions to major parts of the Basel I and Basel II capital frameworks and affecting all regulated banking organizations. The Treasury Policy Statement calls for, among other things, higher and stronger capital requirements for all banking firms, with changes to the regulatory capital framework to be phased in over a period of several years.

On December 17, 2009, the Basel Committee issued a set of proposals (the “2009 Capital Proposals”) that would significantly revise the definitions of Tier 1 capital and Tier 2 capital. Among other things, the 2009 Capital Proposals would re-emphasize that common equity is the predominant component of Tier 1 capital. Concurrently with the release of the 2009 Capital Proposals, the Basel Committee also released a set of proposals related to liquidity risk exposure (the “2009 Liquidity Proposals”). The 2009 Liquidity Proposals include the implementation of (i) a “liquidity coverage ratio” or LCR, designed to ensure that a bank maintains an adequate level of unencumbered, high-quality assets sufficient to meet the bank’s liquidity needs over a 30-day time horizon under an acute liquidity stress scenario and (ii) a “net stable funding ratio” or NSFR, designed to promote more medium and long-term funding of the assets and activities of banks over a one-year time horizon.

The Dodd-Frank Act includes certain provisions, often referred to as the “Collins Amendment,” concerning the capital requirements of the United States banking regulators. These provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the Collins Amendment, trust preferred securities issued by a company, such as Lakeland Bancorp, with total consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital. The banking regulators must develop regulations setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect for depository institutions under the prompt corrective action regulations. The banking regulators also must seek to make capital standards countercyclical so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction. See “The Dodd-Frank Act.”

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In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including Lakeland.

For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:

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A minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital conservation buffer, by 2019 after a phase-in period.

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A minimum ratio of Tier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period.

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A minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer, reaching 10.5% by 2019 after a phase -in period.

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An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice.

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Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.

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Deduction from common equity of deferred tax assets that depend on future profitability to be realized.

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Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities.

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For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator. A trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required.

The Basel III provisions on liquidity include complex criteria establishing the LCR and NSFR. Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks.

Federal Deposit Insurance and Premiums

Substantially all of the deposits of Lakeland are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. As a result of the Dodd-Frank Act, the basic federal deposit insurance limit was permanently increased from at least $100,000 to at least $250,000. In addition, on November 9, 2010 and January 18, 2011, the FDIC (as mandated by Section 343 of the Dodd-Frank Act) adopted rules providing for unlimited deposit insurance for traditional noninterest-bearing transaction accounts and IOLTA accounts beginning December 31, 2010 until December 31, 2012. This coverage, which applies to all insured deposit institutions, does not charge any additional FDIC assessment to the institution. Furthermore, this unlimited coverage is separate from, and in addition to, the coverage provided to depositors with respect to other accounts held at an insured institution.

On May 22, 2009, the Board of Directors of the FDIC adopted a final rule imposing a special assessment on the entire banking industry. The special assessment was calculated as five basis points times each insured depository institution’s assets minus Tier I capital, as reported in the report of condition as of June 30, 2009 and

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would not exceed ten times the institution’s assessment base for the second quarter of 2009 risk-based assessment. This special assessment, which totaled $1.2 million, was remitted by the Company on September 30, 2009.

On November 12, 2009, the FDIC adopted the final rule which required insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. On December 30, 2009, the Company remitted an FDIC prepayment in the amount of $18.0 million. An institution’s prepaid assessment was based on the total base assessment rate that the institution paid for the third quarter of 2009, adjusted quarterly by an estimated annual growth rate of 5% through the end of 2012, plus, for 2011 and 2012, an increase in the total base assessment rate on September 30, 2009 by an annualized three basis points. Any prepaid assessment in excess of the amounts that are subsequently determined to be actually due to the FDIC by June 30, 2013, will be returned to the institution at that time.

In November 2010, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. These new assessment rates began in the second quarter of 2011 and were paid at the end of September 2011. Since the new base is larger than the current base, the FDIC’s rule lowered the total base assessment rates to between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. As a result of this change in the methodology of calculating FDIC assessments, the Company paid $2.8 million in FDIC assessments in 2011, compared to $3.8 million in 2010.

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset.

In addition to deposit insurance assessments, the FDIC is required to continue to collect from institutions payments for the servicing of obligations of the Financing Corporation (“FICO”) that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. Lakeland paid a FICO premium of approximately $200,000 in 2011 and expects to pay a similar or slightly lower premium in 2012.

The Dodd-Frank Act

The Dodd-Frank Act, which was signed into law on July 21, 2010, will continue to have a broad impact on the financial services industry as a result of significant regulatory and compliance changes, including, among other things, (i) enhanced resolution authority over troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years.

The following is a summary of certain provisions of the Dodd-Frank Act:

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Minimum Capital Requirements. The Dodd-Frank Act requires new capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of

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hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the Collins Amendment, trust preferred securities issued by a bank holding company such as Lakeland Bancorp (with total consolidated assets between $500 million and $15 billion) before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital. On June 14, 2011, the federal banking agencies published a final rule regarding minimum leverage and risk-based capital requirements for banks and bank holding companies consistent with the requirements of the Dodd-Frank Act. The Dodd-Frank Act also requires banking regulators to seek to make capital standards countercyclical, so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction.

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Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. In December 2010, the FDIC increased the designated reserve ratio to 2.0 percent.

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Shareholder Votes. The Dodd-Frank Act requires publicly traded companies like Lakeland Bancorp to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments in certain circumstances. The Dodd-Frank Act also authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials.

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Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained. These requirements became effective during 2011.

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Transactions with Insiders. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors. These requirements became effective during 2011.

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Enhanced Lending Limits. The Dodd-Frank Act strengthened the previous limits on a depository institution’s credit exposure to one borrower which limited a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

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Compensation Practices. The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or compensation that gives rise to excessive risk or could lead to a material financial loss to such firm. In June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which sets forth three key principles concerning incentive compensation arrangements:

•

such arrangements should provide employees incentives that balance risk and financial results in a manner that does not encourage employees to expose the financial institution to imprudent risks;

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•

such arrangements should be compatible with effective controls and risk management; and

•

such arrangements should be supported by strong corporate governance with effective and active oversight by the financial institution’s board of directors.

Together, the Dodd-Frank Act and the recent guidance from the bank regulatory agencies on compensation may impact the Company’s compensation practices.

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The Consumer Financial Protection Bureau (“Bureau”). The Dodd-Frank Act created the Bureau within the Federal Reserve. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Institutions with $10 billion or less in assets, such as the Bank, will continue to be examined for compliance with the consumer laws by their primary bank regulators.

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De Novo Banking. The Dodd-Frank Act allows de novo interstate branching by banks.

Many aspects of the Dodd-Frank Act still remain subject to rulemaking by various regulatory agencies and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending on our competitors’ responses. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future.

Proposed Legislation

From time to time proposals are made in the United States Congress, the New Jersey Legislature, and before various bank regulatory authorities, which would alter the powers of, and place restrictions on, different types of banking organizations. It is impossible to predict the impact, if any, of potential legislative trends on the business of the Company and its subsidiaries.

In accordance with federal law providing for deregulation of interest on all deposits, banks and thrift organizations are now unrestricted by law or regulation from paying interest at any rate on most time deposits. It is not clear whether deregulation and other pending changes in certain aspects of the banking industry will result in further increases in the cost of funds in relation to prevailing lending rates.

ITEM 1A—Risk Factors.

Our business, financial condition, operating results and cash flows can be affected by a number of factors, including, but not limited to, those set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

Recently enacted legislation, particularly the Dodd-Frank Act, could materially and adversely affect us by increasing compliance costs, heightening our risk of noncompliance with applicable regulations, and changing the competitive landscape in the banking industry.

From time to time, the U.S. Congress and state legislatures consider changing laws and enact new laws to further regulate the financial services industry. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, was signed into law. The Dodd-Frank Act has resulted

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in sweeping changes in the regulation of financial institutions. As discussed in the section herein entitled “Business-Supervision and Regulation,” the Dodd-Frank Act contains numerous provisions that affect all banks and bank holding companies. Many of the provisions in the Dodd-Frank Act remain subject to regulatory rule-making and implementation, the effects of which are not yet known. Although we cannot predict the specific impact and long-term effects that the Dodd-Frank Act and the regulations promulgated thereunder will have on us and our prospects, our target markets and the financial industry more generally, we believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to impose additional administrative and regulatory burdens that will obligate us to incur additional expenses and will adversely affect our margins and profitability. For example, the elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending on our competitors’ responses. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future. More stringent consumer protection regulations could materially and adversely affect our profitability. We will also have a heightened risk of noncompliance with all of the additional regulations. Finally, the impact of some of these new regulations is not known and may affect our ability to compete long-term with larger competitors.

The Federal Reserve’s repeal of the prohibition against payment of interest on demand deposits may increase competition for such deposits and ultimately increase interest expense.

A major portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. Our interest-earning assets include outstanding loans extended to our customers and securities held in our investment portfolio. We fund assets using deposits and other borrowings.

On July 14, 2011, the Federal Reserve issued final rules to repeal Regulation Q, which had prohibited the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. The final rules implement Section 627 of the Dodd-Frank Act, which repealed Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. As a result, banks and thrifts are now permitted to offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden under Regulation Q. The repeal of Regulation Q may cause increased competition from other financial institutions for these deposits. If we decide to pay interest on demand accounts, we would expect our interest expense to increase.

The Company and the Bank may be subject to more stringent capital and liquidity requirements.

The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies such as Lakeland Bancorp by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier I capital. These restrictions will limit our future capital strategies. Under the Dodd-Frank Act, our currently outstanding trust preferred securities will continue to count as Tier I capital, but we will be unable to issue replacement or additional trust preferred securities which would count as Tier I capital.

On December 20, 2011, the Federal Reserve announced its intention to implement substantially all of the Basel III rules which would generally be applicable to institutions with greater than $50 billion in assets. Banking regulators could implement additional changes to the capital adequacy standards applicable to financial institutions with $50 billion or less in assets, such as the Company and Lakeland in light of Basel III.

Future increases in minimum capital requirements could adversely affect our net income. Furthermore, our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

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Recent negative developments in the financial services industry and U.S. and global credit markets may adversely impact our operations and results.

The general economic downturn during the past few years, including a decline in the value of the collateral supporting loans, has resulted in the deterioration of loan portfolio performances at many institutions. The competition for our deposits has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies, like ours, have been negatively affected by the current condition of the financial markets, as has our ability, if needed, to raise capital or borrow in the debt markets compared to prior years. While economic growth may have resumed recently, the rate of this growth has been very slow and unemployment remains at a high level. As a result, recent legislation, such as the Dodd-Frank Act, will require new regulations regarding lending and funding practices and liquidity standards, and financial institution regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement actions. Negative developments in the financial services industry and the impact of new legislation, including The Dodd-Frank Act, in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance.

The downgrade of the U.S. credit rating and Europe’s debt crisis could have a material adverse effect on our business, financial condition and liquidity.

Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+ on August 5, 2011. A further downgrade or a downgrade by other rating agencies could have a material adverse impact on financial markets and economic conditions in the United States and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition and results of operations. Many of our investment securities are issued by and some of our loans are made to U.S. government agencies and U.S. government sponsored entities.

In addition, the possibility that certain European Union (“EU”) member states will default on their debt obligations have negatively impacted economic conditions and global markets. The continued uncertainty over the outcome of international and the EU’s financial support programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global markets. The negative impact on economic conditions and global markets could also have a material adverse effect on our liquidity, financial condition and results of operations.

A decrease in our ability to borrow funds could adversely affect our liquidity.

Our ability to obtain funding from the Federal Home Loan Bank or through our overnight federal funds lines with other banks could be negatively affected if we experienced a substantial deterioration in our financial condition or if such funding became restricted due to a further deterioration in the financial markets. While we have a contingency funds management plan to address such a situation if it were to occur (such plan includes deposit promotions, the sale of securities and the curtailment of loan growth, if necessary), a significant decrease in our ability to borrow funds could adversely affect our liquidity.

We are subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

We are unable to predict actual fluctuations of market interest rates. Rate fluctuations are influenced by many factors, including:

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inflation or deflation

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excess growth or recession;

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a rise or fall in unemployment;

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•

tightening or expansion of the money supply;

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domestic and international disorder; and

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instability in domestic and foreign financial markets.

Both increases and decreases in the interest rate environment may reduce our profits. We expect that we will continue to realize income from the difference or “spread” between the interest we earn on loans, securities and other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities. Our net interest spreads are affected by the differences between the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities. Our interest-earning assets may not reprice as slowly or rapidly as our interest-bearing liabilities. Changes in market interest rates could materially and adversely affect our net interest spread, asset quality, levels of prepayments, cash flows, the market value of our securities portfolio, loan and deposit growth, costs and yields on loans and deposits and our overall profitability.

The Company may incur impairment to goodwill.

We review our goodwill at least annually. Significant negative industry or economic trends, including the lack of recovery in the market place of our common stock price, reduced estimates of future cash flows or disruptions to our businesses, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in a competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in an impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations and our stock price.

The extensive regulation and supervision to which we are subject impose substantial restrictions on our business.

The Company, Lakeland and certain non-bank subsidiaries are subject to extensive regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole. Such laws are not designed to protect our shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Lakeland is also subject to a number of laws which, among other things, govern its lending practices and require the Bank to establish and maintain comprehensive programs relating to anti-money laundering and customer identification. The United States Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations.

Current levels of volatility in the capital markets are unprecedented and may adversely impact our operations and results.

The capital markets have been experiencing unprecedented volatility for the past several years. Such negative developments and disruptions have resulted in uncertainty in the financial markets and a general economic downturn. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to prior years. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our business, financial condition and results of operations or our ability to access capital.

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Lakeland’s ability to pay dividends is subject to regulatory limitations which, to the extent that our holding company requires such dividends in the future, may affect our holding company’s ability to pay its obligations and pay dividends to shareholders.

As a bank holding company, the Company is a separate legal entity from Lakeland and its subsidiaries, and we do not have significant operations of our own. We currently depend on Lakeland’s cash and liquidity to pay our operating expenses and dividends to shareholders. The availability of dividends from Lakeland is limited by various statutes and regulations. The inability of the Company to receive dividends from Lakeland could adversely affect our financial condition, results of operations, cash flows and prospects and the Company’s ability to pay dividends.

Our allowance for loan and lease losses may not be adequate to cover actual losses.

Like all commercial banks, Lakeland maintains an allowance for loan and lease losses to provide for loan and lease defaults and non-performance. If our allowance for loan and lease losses is not adequate to cover actual loan and lease losses, we may be required to significantly increase future provisions for loan and lease losses, which could materially and adversely affect our operating results. In 2011, we recorded a provision for loan and lease losses of $18.8 million, compared to $19.3 million in 2010. Our allowance for loan and lease losses is determined by analyzing historical loan and lease losses, current trends in delinquencies and charge-offs, plans for problem loan and lease resolution, the opinions of our regulators, changes in the size and composition of the loan and lease portfolio and industry information. We also consider the possible effects of economic events, which are difficult to predict. The amount of future losses is affected by changes in economic, operating and other conditions, including changes in interest rates, many of which are beyond our control. These losses may exceed our current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and the allowance for loan and lease losses. While we believe that our allowance for loan and lease losses in relation to our current loan portfolio is adequate to cover current losses, we cannot assure you that we will not need to increase our allowance for loan and lease losses or that regulators will not require us to increase this allowance. Future increases in our allowance for loan and lease losses could materially and adversely affect our earnings and profitability.

We are subject to various lending and other economic risks that could adversely affect our results of operations and financial condition.

Economic, political and market conditions, trends in industry and finance, legislative and regulatory changes, changes in governmental monetary and fiscal policies and inflation affect our business. These factors are beyond our control. A further deterioration in economic conditions, particularly in New Jersey, could have the following consequences, any of which could materially adversely affect our business:

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loan and lease delinquencies may increase;

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problem assets and foreclosures may increase;

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demand for our products and services may decrease; and

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collateral for loans made by us may decline in value, in turn reducing the borrowing ability of our customers.

Further deterioration in the real estate market, particularly in New Jersey, could adversely affect our business. As real estate values in New Jersey decline, our ability to recover on defaulted loans by selling the underlying real estate is reduced, which increases the possibility that we may suffer losses on defaulted loans.

We may suffer losses in our loan portfolio despite our underwriting practices.

We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans that we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan and lease losses.

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We face strong competition from other financial institutions, financial service companies and other organizations offering services similar to the services that we provide.

Many competitors offer the types of loans and banking services that we offer. These competitors include other state and national banks, savings associations, regional banks and other community banks. We also face competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. Many of our competitors have greater financial resources than we do, which may enable them to offer a broader range of services and products, and to advertise more extensively, than we do. Our inability to compete effectively would adversely affect our business.

Declines in value may adversely impact our investment portfolio.

As of December 31, 2011, the Company had approximately $471.9 million and $71.7 million in available for sale and held to maturity investment securities, respectively. We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough it could affect the ability of Lakeland to upstream dividends to us, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could also negatively impact our regulatory capital ratios.

Concern of customers over deposit insurance may cause a decrease in deposits.

With recent increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with their bank is fully insured. Decreases in deposits may adversely affect our funding costs and net income.

Further increases in FDIC premiums could have a material adverse effect on our future earnings.

The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. In light of current economic conditions, the FDIC has increased its assessment rates and imposed special assessments. See “Business-Supervision and Regulation-Federal Deposit Insurance and Premiums.”

In addition, The Dodd-Frank Act amended the Federal Deposit Insurance Act by changing the base against which an insured depository institution’s deposit insurance assessment is calculated. These amendments require the appropriate assessment base to be calculated as the institution’s average consolidated total assets minus average tangible equity, rather than the institution’s deposits. The FDIC’s implementing regulation for these amendments became effective for the quarter beginning April 1, 2011 and was reflected in invoices for assessments due September 30, 2011. These developments have caused, and may cause in the future, an increase to our assessments. The FDIC may be required to make additional increases to the assessment rates and levy additional special assessments on us in the future, which could have a material adverse effect on our future earnings.

A breach of information security could negatively affect our operations, earnings and reputation.

Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. We cannot be certain all our systems are entirely free from vulnerability to attack, despite safeguards we have instituted including independent third party testing. In

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addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Disruptions to our vendors’ systems may arise from events that are wholly or partially beyond our vendors’ control (including, for example, computer viruses or electrical or telecommunications outages). The occurrence of system failures or security breaches, despite the controls we have instituted, could result in damage to our reputation, increased regulatory scrutiny and financial loss or costs to us.

Any unforeseen transition issues that arise in connection with upgrades to our computer hardware and software systems could adversely affect our business.

In the normal course of business, we upgrade certain hardware and software systems critical to our core banking operations and financial reporting. While we expect these changes to go smoothly, no assurances can be given that unforeseen issues will not arise. Depending on the nature of those issues, if any, and the time and resources necessary to correct or resolve them, our business could be adversely affected.

If we do not successfully integrate any banks that we may acquire in the future, the combined company may be adversely affected.

If we make acquisitions in the future, we will need to integrate the acquired entities into our existing business and systems. We may experience difficulties in accomplishing this integration or in effectively managing the combined company after any future acquisition. Any actual cost savings or revenue enhancements that we may anticipate from a future acquisition will depend on future expense levels and operating results, the timing of certain events and general industry, regulatory and business conditions. Many of these events will be beyond our control, and we cannot assure you that if we make any acquisitions in the future, we will be successful in integrating those businesses into our own.

ITEM 1B—Unresolved Staff Comments

Not Applicable.

ITEM 2—Properties

The Company’s principal office is located at 250 Oak Ridge Road, Oak Ridge, New Jersey 07438. It also maintains an operations center in Branchville, New Jersey.

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The Company operates 47 banking locations in Passaic, Morris, Sussex, Bergen, Essex and Warren Counties, New Jersey. The following chart provides information about the Company’s leased banking locations:


Location		Lease Expiration Date
Bristol Glen		October 31, 2012
Caldwell		September 30, 2024
Carlstadt		July 15, 2016
Cedar Crest		August 19, 2016
Hackensack		March 31, 2013
Hampton		September 30, 2019
Little Falls		November 30, 2015
Madison Avenue		April 30, 2017
North Haledon		June 30, 2017
Park Ridge		December 31, 2014
Pompton Plains		March 31, 2015
Ringwood		February 28, 2013
Rochelle Park		January 12, 2019
Sussex/Wantage		June 19, 2017
Vernon		September 30, 2016
Wantage		October 31, 2016
Wayne		May 31, 2028
Wharton		July 31, 2015
Woodland Commons		August 31, 2016
West Caldwell		March 31, 2029

All other offices of the Company and Lakeland are owned and are unencumbered.

Additionally, the Company is constructing two new facilities, and has entered into lease agreements for both of them. A training and operations center is under construction in Milton, NJ, and is expected to be completed by mid-2012. The Bank purchased an assignment of an existing lease for this facility which expires on February 28, 2016 and contains five (5) five-year options to renew at the Bank’s discretion at fixed base rent amounts. To the extent that the Bank exercises all of the options, the lease will expire on February 28, 2041. The other site under construction is a new branch location in Sparta, NJ, which is expected to be completed in late 2012. The initial term of the lease for this facility expires on August 31, 2032. This lease contains two (2) ten-year renewal options.

ITEM 3—Legal Proceedings

During the fourth quarter of 2011, the Company and the International Association of Machinists and Aerospace Workers (the “plaintiff”) settled a complaint that had been filed by the plaintiff in February 2010, in the Circuit Court of Maryland for Prince George’s County, in connection with certain equipment leases plaintiff entered into with a vendor and lease broker not affiliated with the Company. Under the settlement agreement, which included a confidentiality provision, the Company provided a quitclaim assignment of its interests in the leases to the plaintiff in consideration of a lump sum payment by the plaintiff to the Company.

There are no pending legal proceedings involving the Company or Lakeland other than those arising in the normal course of business. Management does not anticipate that the potential liability, if any, arising out of such legal proceedings will have a material effect on the financial condition or results of operations of the Company and Lakeland on a consolidated basis.

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ITEM 3A—Executive Officers of the Registrant

The following table sets forth the name and age of each executive officer of the Company. Each officer is appointed by the Company’s Board of Directors. Unless otherwise indicated, the persons named below have held the position indicated for more than the past five years.


Name and Age	Officer of the Company Since		Position with the Company, its Subsidiary Banks, and Business Experience
Thomas J. Shara Age 54		2008	President and CEO, Lakeland Bancorp, Inc. and Lakeland Bank (April 2, 2008 – Present); President and Chief Credit Officer (May 2007 – April 1, 2008) and Executive Vice President and Senior Commercial Banking Officer (February 2006 – May 2007), TD Banknorth, N.A.’s Mid-Atlantic Division; Executive Vice President and Senior Loan Officer, Hudson United Bancorp and Hudson United Bank (prior years to February 2006)

Robert A. Vandenbergh Age 60		1999	Senior Executive Vice President and Chief Operating Officer of the Company (October 2008 – Present); Senior Executive Vice President and Chief Lending Officer of the Company (December 2006 – October 2008); Executive Vice President and Chief Lending Officer of the Company (October 1999 – December 2006)

Joseph F. Hurley Age 61		1999	Executive Vice President and Chief Financial Officer of the Company (November 1999 – Present)

Jeffrey J. Buonforte Age 60		1999	Executive Vice President and Senior Government Banking/Business Services Officer of the Company (June 2009 – Present); Executive Vice President and Chief Retail Officer of the Company (November 1999 – June 2009)

Louis E. Luddecke Age 65		1999	Executive Vice President and Chief Operations Officer of the Company (October 1999 – Present)

David S. Yanagisawa Age 60		2008	Executive Vice President and Chief Lending Officer of the Company (November 2008 – Present); Senior Vice President, TD Banknorth, N.A. (February 2006 – November 2008); Hudson United Bank, Senior Vice President (1997 – February 2006)

James R. Noonan Age 60		2003	Executive Vice President and Chief Credit Officer of the Company (December 2003 – Present)

Ronald E. Schwarz Age 56		2009	Executive Vice President and Chief Retail Officer of the Company (June 2009 – Present); Executive Vice President and Market Executive of Sovereign Bank (June 2006 – June 2009); Senior Vice President and Director of Retail Banking of Independence Community Bank (June 1999 – June 2006)

Timothy J. Matteson, Esq. Age 42		2008	Senior Vice President and General Counsel of the Company (September 2008 – Present); Assistant General Counsel, Israel Discount Bank (November 2007 – September 2008); Senior Attorney and Senior Vice President, TD Banknorth, N.A. (February 2006 – May 2007); General Counsel and Senior Vice President, Hudson United Bancorp and Hudson United Bank (January 2005 – February 2006)

ITEM 4—MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5—MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Shares of the common stock of Lakeland Bancorp, Inc. have been traded under the symbol “LBAI” on the NASDAQ Global Select Market (or the NASDAQ National Market) since February 22, 2000 and in the over the counter market prior to that date. As of December 31, 2011, there were 3,357 shareholders of record of the common stock. The following table sets forth the range of the high and low daily closing prices of the common stock as provided by NASDAQ and dividends declared for the periods presented. All information is adjusted for the Company’s 5% stock dividend distributed on February 16, 2011.


	High		Low		Dividends Declared
Year ended December 31, 2011
First Quarter	$	11.00	$	9.37	$	0.057
Second Quarter		11.50		9.15		0.060
Third Quarter		10.96		7.25		0.060
Fourth Quarter		9.76		7.25		0.060

	High		Low		Dividends Declared
Year ended December 31, 2010
First Quarter	$	8.87	$	5.63	$	0.048
Second Quarter		10.72		8.11		0.048
Third Quarter		9.00		7.29		0.048
Fourth Quarter		11.10		7.73		0.057

Dividends on the Company’s common stock are within the discretion of the Board of Directors of the Company and are dependent upon various factors, including the future earnings and financial condition of the Company and Lakeland and bank regulatory policies.

The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay. Accordingly, dividends should generally only be paid out of current earnings, as defined.

The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of New Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock unless, following the payment of such dividends, the capital stock of the bank will be unimpaired and the bank will have a surplus of not less than 50% of its capital stock, or, if not, the payment of such dividend will not reduce the surplus of the bank. Under this limitation, approximately $224.3 million was available for the payment of dividends from Lakeland to the Company as of December 31, 2011.

Capital guidelines and other regulatory requirements may further limit the Company’s and Lakeland’s ability to pay dividends. See “Item 1—Business—Supervision and Regulation—Dividend Restrictions.”

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Performance Graph

The following chart compares the Company’s cumulative total shareholder return (on a dividend reinvested basis) over the past five years with the NASDAQ Market Index and the Peer Group Index. The Peer Group Index is the Zacks (formerly Morningstar) Regional Northeast Banks Index, which consists of 195 Regional Northeast Banks.

LOGO


	Period Ending
Company/Market/Peer Group	12/31/2006		12/31/2007		12/31/2008		12/31/2009		12/31/2010		12/31/2011
Lakeland Bancorp, Inc.	$	100.00	$	84.27	$	84.55	$	49.88	$	87.64	$	74.04
NASDAQ Market Index		100.00		110.66		66.41		96.54		114.06		113.16
Zacks Regional Northeast Banks		100.00		92.40		64.70		61.51		72.35		67.73

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ITEM 6—

Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

The following should be read in conjunction with Management’s Discussion and Analysis and Results of Operations and the Company’s consolidated financial statements included in item 7 and 8 of this report. The selective financial data set forth below has been derived from the Company’s audited consolidated financial statements.


	2011			2010			2009			2008			2007
	(in thousands except per share data)
Years Ended December 31
Interest income	$	117,524		$	125,649		$	133,822		$	143,937		$	136,378
Interest expense		20,111			25,895			40,443			55,358			64,650

Net interest income		97,413			99,754			93,379			88,579			71,728
Provision for loan and lease losses		18,816			19,281			51,615			23,730			5,976
Noninterest income excluding gains/losses on investment securities		16,888			17,654			15,952			17,558			16,858
Gains on sales of investment securities		1,229			1,742			3,845			53			1,769
Other than temporary impairment losses on equity securities		0			(128	)		(940	)		—			—
Noninterest expenses		68,151			70,405			73,794			60,071			58,190

Income (loss) before income taxes (benefit)		28,563			29,336			(13,173	)		22,389			26,189
Income tax provision (benefit)		8,712			10,125			(7,777	)		7,224			8,201

Net income (loss)		19,851			19,211			(5,396	)		15,165			17,988
Dividends on preferred stock and accretion		2,167			3,987			3,194			—			—

Net income (loss) available to common shareholders	$	17,684		$	15,224		$	(8,590	)	$	15,165		$	17,988


Per-Share Data(1)
Weighted average shares outstanding:
Basic		25,307			25,097			24,856			24,638			24,346
Diluted		25,411			25,128			24,856			24,726			24,449
Earnings (loss) per share:
Basic	$	0.69		$	0.60			($0.35	)	$	0.61		$	0.74
Diluted	$	0.69		$	0.60			($0.35	)	$	0.61		$	0.74
Cash dividend per common share	$	0.24		$	0.20		$	0.29		$	0.38		$	0.36
Book value per common share	$	9.44		$	8.82		$	8.46		$	8.88		$	8.66
Tangible book value per common share	$	6.03		$	5.35		$	4.92		$	5.27		$	4.94

At December 31
Investment securities available for sale	$	471,944		$	487,107		$	375,530		$	282,174		$	273,247
Investment securities held to maturity		71,700			66,573			81,821			110,114			129,360
Loans and leases, net of deferred costs		2,041,575			2,014,617			2,017,035			2,034,831			1,886,535
Goodwill and other identifiable intangible assets		87,111			87,689			88,751			89,812			90,874
Total assets		2,825,950			2,792,674			2,723,968			2,642,625			2,513,771
Total deposits		2,249,653			2,195,889			2,157,187			2,056,133			1,987,405
Total core deposits		1,890,101			1,783,040			1,691,447			1,445,101			1,383,234
Borrowings		232,322			272,322			223,222			288,222			249,077
Total stockholders’ equity		259,783			260,709			267,986			220,941			211,599

Performance ratios
Return on Average Assets(2)		0.71	%		0.69	%		NM			0.59	%		0.76	%
Return on Average Common Equity(2)		8.53	%		8.70	%		NM			6.99	%		8.81	%
Return on Average Equity(2)		7.79	%		7.13	%		NM			6.99	%		8.81	%
Efficiency ratio(3)		56.87	%		56.40	%		62.06	%		54.72	%		63.17	%
Net Interest Margin (tax equivalent basis)		3.85	%		3.95	%		3.74	%		3.79	%		3.41	%
Loans to Deposits		90.75	%		91.74	%		93.50	%		98.96	%		94.92	%

Capital ratios
Common Equity to Asset ratio		8.54	%		7.99	%		7.78	%		8.36	%		8.42	%
Tangible common equity to tangible assets		5.63	%		5.01	%		4.68	%		5.14	%		4.98	%
Equity to Asset ratio		9.19	%		9.34	%		9.84	%		8.36	%		8.42	%
Tier 1 leverage ratio		8.33	%		9.21	%		9.44	%		8.08	%		8.11	%
Tier 1 risk-based capital ratio		11.23	%		12.43	%		12.65	%		10.24	%		10.08	%
Total risk-based capital ratio		13.39	%		13.68	%		13.90	%		11.52	%		11.08	%

(1)	Restated for 5% stock dividends in 2011 and 2007.

(2)	Ratios for 2009 are not meaningful (NM) and therefore not presented.

(3)

A non-GAAP ratio which represents non-interest expense, excluding other real estate expense, other repossessed asset expense, long-term debt prepayment fee, provision for unfunded lending commitments and core deposit amortization, as a percentage of total revenue (calculated on a tax equivalent basis), excluding gains (losses) on securities. Total revenue represents net interest income (calculated on a tax equivalent basis) plus non-interest income.

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ITEM 7—

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section presents a review of Lakeland Bancorp, Inc.’s consolidated results of operations and financial condition. You should read this section in conjunction with the selected consolidated financial data that is presented on the preceding page as well as the accompanying consolidated financial statements and notes to financial statements. As used in the following discussion, the term “Company” refers to Lakeland Bancorp, Inc. and “Lakeland” refers to the Company’s wholly owned banking subsidiary—Lakeland Bank.

Statements Regarding Forward-Looking Information

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

In addition to the risk factors disclosed elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: changes in the financial services industry and the U.S. and global capital markets, changes in economic conditions nationally, regionally and in the Company’s markets, the nature and timing of actions of the Federal Reserve Board and other regulators, the nature and timing of legislation affecting the financial services industry including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, government intervention in the U.S. financial system, 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.

Critical Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company and Lakeland conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and predominant practices within the banking industry. 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. For additional accounting policies and detail, refer to Note 1 to the consolidated financial statements included in item 8 of this report.

Allowance for loan and lease losses. The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Loan principal considered to be uncollectible by management is charged against the allowance for loan and lease losses. The allowance is an amount that management believes will be adequate to absorb losses on existing loans and leases that may become uncollectible based upon an evaluation of known and inherent risks in the loan and lease portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the loan and lease portfolio,

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overall portfolio quality, specific problem loans and leases, and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also analyzes historical losses by loan and lease category, and considers the resulting loss rates when determining the reserves on current loan and lease total amounts. Loss estimates for specified problem loans and leases are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods.

Loans and leases are considered impaired when, based on current information and events, it is probable that Lakeland will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is measured based on the present value of expected 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. Most of Lakeland’s impaired loans are collateral-dependent. Lakeland groups impaired commercial loans under $250,000 into a homogeneous pool and collectively evaluates them. Interest received on impaired loans and leases may be recorded as interest income. However, if management is not reasonably certain that an impaired loan and lease 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.

Fair value measurements and fair value of financial instruments. 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.

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.

Income taxes. 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 allowance for loan and lease losses, core deposit intangible, deferred loan costs, deferred compensation and valuation reserves on leases held for sale.

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 Notes to the audited Consolidated Financial Statements contained herein.

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Goodwill and other identifiable intangible assets. The Company reviews goodwill for impairment annually as of November 30 or when circumstances indicate a potential for impairment at the reporting unit level. U.S. GAAP requires at least an annual review of the fair value of a reporting unit that has goodwill in order to determine if it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If this qualitative test determines it is unlikely (less than 50% probability) the carrying value of the Reporting Unit is less than its fair value, then the company does not have to perform a Step One impairment test. If the probability is greater than 50%, a Step One goodwill impairment test is required. The Step One test compares the fair value of each reporting unit to the carrying value of its net assets, including goodwill. The Company has determined that it has one reporting unit, Community Banking.

The Company performed a qualitative analysis to determine whether “the weight of evidence, the significance of all identified events and circumstances” indicated a greater than 50% likelihood existed that the carrying value of the Reporting Unit exceeded its fair value and if a Step One Test would be required. The Company identified nine qualitative assessments that are relative to the banking industry and to the Company. These factors included macroeconomic factors, banking industry conditions, banking merger and acquisition trends, Lakeland’s historical performance, the Company’s stock price, the expected performance of Lakeland, the change of control premium of the Company versus its peers and other miscellaneous factors. After reviewing and weighting these factors, the Company, as well as a third party adviser, determined as of November 30, 2011 that there was a less than 50% probability that the fair value of the Company was less than its carrying amount. Therefore, no Step One test was required.

Financial Overview

The year ended December 31, 2011 represented a year of continued growth for the Company. As discussed in this management’s discussion and analysis:

•

Net income available to common shareholders increased $2.5 million or 16% to $17.7 million in 2011.

•

Total loans, net of leases, increased $67.3 million, or 3%, from 2010 to 2011.

•

Core deposits increased $107.1 million, or 6%, to $1.89 billion at year end 2011 and represented 84% of total deposits at December 31, 2011 compared to 81% at December 31, 2010.

•

Total noninterest-bearing deposits of $449.6 million increased $65.7 million, or 17%, from 2010.

•

Dividends on preferred stock and accretion declined from $4.0 million in 2010 to $2.2 million in 2011 reflecting repayments to the U.S. Department of the Treasury to repurchase preferred stock under the CPP. These repayments consisted of a $20.0 million repayment in August of 2010 and a $20.0 million repayment in March of 2011. The remaining shares of preferred stock issued to the Treasury were redeemed on February 8, 2012. On February 29, 2012, the Company repurchased the outstanding common stock warrant issued to the Treasury under the CPP for $2.8 million. For more information, please see Note 7 to the consolidated financial statements included in this report.

•

The Company’s effective tax rate was 30.5% in 2011, compared to 34.5% in 2010. The decrease in the effective tax rate was driven by increased tax benefits attributable to the real estate investment trust (“REIT”) subsidiary established in December 2010.

•

While non-performing assets of $50.2 million on December 31, 2011 increased $5.6 million from December 31, 2010, non-performing assets decreased $7.5 million from September 30, 2011 to December 31, 2011 due to the favorable resolution of several non-performing loans.

Net income for 2011 was $19.9 million compared to net income of $19.2 million in 2010. Net income available to common shareholders in 2011 was $17.7 million or $0.69 per diluted share compared to $15.2 million or $0.60 per diluted share in 2010.

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Net interest income

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. The Company’s net interest income is determined by: (i) the volume of interest-earning assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities. Net interest income increases when the Company can use noninterest- bearing deposits to fund or support interest-earning assets.

Net interest income for 2011 on a tax-equivalent basis was $98.5 million, representing a decrease of $2.3 million, or 2%, from the $100.8 million earned in 2010. The decrease in net interest income primarily resulted from a 34 basis point decrease in the yield on interest-earning assets, which was partially offset by a 25 basis point decline in the cost of interest-bearing liabilities. The net interest spread as a result declined nine basis points to 3.67%. Although the net interest spread declined, the decline was mitigated by an increase in income earned on free funds (interest-earning assets funded by non-interest bearing liabilities) resulting from an increase in average non-interest bearing deposits of $62.7 million. The components of net interest income will be discussed in greater detail below.

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

INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS

(tax equivalent basis, in thousands)


	2011 vs. 2010									2010 vs. 2009
	Increase (Decrease) Due to Change in:						Total Change			Increase (Decrease) Due to Change in:						Total Change
	Volume			Rate			Total Change			Volume			Rate			Total Change
Interest Income
Loans and leases	$	140		$	(7,139	)	$	(6,999	)	$	(738	)	$	(4,801	)	$	(5,539	)
Taxable investment securities		639			(1,691	)		(1,052	)		936			(3,353	)		(2,417	)
Tax-exempt investment securities		340			(346	)		(6	)		(118	)		(235	)		(353	)
Federal funds sold		(40	)		(30	)		(70	)		21			(9	)		12

Total interest income		1,079			(9,206	)		(8,127	)		101			(8,398	)		(8,297	)

Interest Expense
Savings deposits		26			(180	)		(154	)		73			(1,022	)		(949	)
Interest-bearing transaction accounts		49			(2,276	)		(2,227	)		2,642			(3,960	)		(1,318	)
Time deposits		(750	)		(1,186	)		(1,936	)		(3,041	)		(6,290	)		(9,331	)
Borrowings		(226	)		(1,241	)		(1,467	)		(2,011	)		(939	)		(2,950	)

Total interest expense		(901	)		(4,883	)		(5,784	)		(2,337	)		(12,211	)		(14,548	)

NET INTEREST INCOME (TAX EQUIVALENT BASIS)	$	1,980		$	(4,323	)	$	(2,343	)	$	2,438		$	3,813		$	6,251

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

CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS


	2011								2010								2009
	Average Balance			Interest Income/ Expense		Average rates earned/ paid			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 and leases(A)	$	1,997,652		$	104,585		5.24	%	$	1,995,158		$	111,584		5.59	%	$	2,007,881		$	117,123		5.83	%
Taxable investment securities		460,413			10,882		2.36	%		438,653			11,934		2.72	%		413,740			14,351		3.47	%
Tax-exempt securities		70,437			3,086		4.38	%		63,093			3,092		4.90	%		65,377			3,445		5.27	%
Federal funds sold(B)		31,939			51		0.16	%		53,178			121		0.23	%		43,008			109		0.25	%

Total interest-earning assets		2,560,441			118,604		4.63	%		2,550,082			126,731		4.97	%		2,530,006			135,028		5.34	%
Noninterest earning assets:
Allowance for loan and lease losses		(29,064	)							(27,459	)							(25,027	)
Other assets		251,452								254,346								232,196

TOTAL ASSETS	$	2,782,829							$	2,776,969							$	2,737,175

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	330,646		$	454		0.14	%	$	317,620		$	608		0.19	%	$	304,084		$	1,557		0.51	%
Interest-bearing transaction accounts		1,088,678			5,774		0.53	%		1,082,026			8,001		0.74	%		914,695			9,319		1.02	%
Time deposits		400,442			4,650		1.16	%		456,692			6,586		1.44	%		589,499			15,917		2.70	%
Borrowings		272,744			9,233		3.39	%		278,754			10,700		3.84	%		329,862			13,650		4.14	%

Total interest-bearing liabilities		2,092,510			20,111		0.96	%		2,135,092			25,895		1.21	%		2,138,140			40,443		1.89	%

Noninterest-bearing liabilities:
Demand deposits		422,568								359,915								315,193
Other liabilities		12,776								12,702								16,515
Stockholders’ equity		254,975								269,260								267,327

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,782,829							$	2,776,969							$	2,737,175

Net interest income/spread					98,493		3.67	%					100,836		3.76	%					94,585		3.45	%
Tax equivalent basis adjustment					1,080								1,082								1,206

NET INTEREST INCOME				$	97,413							$	99,754							$	93,379

Net interest margin(C)							3.85	%							3.95	%							3.74	%

(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 on a tax equivalent basis divided by interest-earning assets.

Interest income on a tax equivalent basis decreased from $126.7 million in 2010 to $118.6 million in 2011, a decrease of $8.1 million, or 6%. The decrease in interest income was due to a 34 basis point decrease in the average yield on interest-earning assets, as a result of loans being refinanced at lower rates and lower yields on new loans and investments. The yield on average loans and leases at 5.24% in 2011 was 35 basis points lower than 2010. The yield on average taxable and tax-exempt investment securities decreased by 36 basis points to 2.36% and 52 basis points to 4.38%, respectively, in 2011.

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Interest income on a tax equivalent basis decreased from $135.0 million in 2009 to $126.7 million in 2010, a decrease of $8.3 million, or 6%. The decrease in interest income was due primarily to a 37 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 decreased by $53.3 million from the end of 2009. The yield on average loans and leases at 5.59% in 2010 was 24 basis points lower than 2009. The yield on average taxable investment securities decreased by 75 basis points to 2.72% in 2010.

Total interest expense decreased from $25.9 million in 2010 to $20.1 million in 2011, a decrease of $5.8 million, or 22%. Average interest-bearing liabilities decreased $42.6 million and the cost of those liabilities decreased from 1.21% in 2010 to 0.96% in 2011. The decrease in yield was due primarily to the continuing low rate environment and a $56.3 million reduction in higher yielding time deposits as customers preferred to keep their deposits in short-term transaction accounts. The decrease in time deposits was offset by increases in savings accounts, interest-bearing transaction accounts, and non-interest bearing deposits of $13.0 million, $6.7 million, and $62.7 million, respectively.

Total interest expense decreased from $40.4 million in 2009 to $25.9 million in 2010, a decrease of $14.5 million, or 36%. Average interest-bearing liabilities decreased $3.0 million and the cost of those liabilities decreased from 1.89% in 2009 to 1.21% in 2010. The decrease in yield was due to the low rate environment and a change in deposit mix. Average interest-bearing deposits increased from $1.81 billion in 2009 to $1.86 billion in 2010, an increase of $48.1 million, or 3%. Within this category, average time deposits decreased $132.8 million, while average savings accounts and interest-bearing transaction accounts increased $180.9 million. Average borrowings decreased from $329.9 million in 2009 to $278.8 million in 2010 as a result of several factors including growth in deposits, which outpaced loan and lease growth and because of prepayments of long-term debt since the third quarter of 2009.

Net Interest Margin

Net interest margin is calculated by dividing net interest income on a fully taxable equivalent basis by average interest-earning assets. The Company’s net interest margin was 3.85%, 3.95% and 3.74% for 2011, 2010 and 2009, respectively. The decrease in net interest margin from 2010 to 2011 was primarily a result of the decrease in yield on interest-earning assets. The increase in net interest margin from 2009 to 2010 was primarily a result of the decrease in cost of interest-bearing liabilities. The net interest margins for 2011, 2010 and 2009 would have been 3.94%, 4.02% and 3.81%, respectively, had all of the non-accrual loans performed in accordance with their terms.

Provision for Loan and Lease Losses

In determining the provision for loan and lease losses, management considers national and local economic conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and leases and net charge-offs and the results of independent third party loan and lease review.

The provision for loan and lease losses decreased from $19.3 million in 2010 to $18.8 million in 2011. Net charge-offs increased from $17.5 million or 0.88% of average loans and leases in 2010 to $17.7 million or 0.89% of average loans and leases in 2011.

The provision for loan and lease losses decreased from $51.6 million in 2009 to $19.3 million in 2010. The 2009 loan and lease loss provision resulted from continued charge-offs in Lakeland’s leasing portfolio, increases in non-performing loans in its commercial portfolio and the Company’s decision to reduce the exposure in its leasing portfolio by designating certain lease pools as held for sale. The Company’s decision to sell designated

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lease pools resulted in mark-to-market adjustments totaling $22.1 million as well as additional net charge-offs in the leasing portfolio of $23.0 million in 2009. The charge-offs in 2009 resulted from a continued deterioration in economic conditions and in the underlying collateral value of the leases. Net charge-offs declined from $51.1 million or 2.55% of average loans and leases in 2009 to $17.5 million or 0.88% of average loans and leases in 2010.

Noninterest Income

Noninterest income was $18.1 million in 2011 compared to $19.3 million earned in 2010. The decrease in this category is primarily due to a reduction in gains on leasing related assets and investment securities. In 2011, gains on investment securities totaled $1.2 million, which was a $513,000 reduction from the same period in 2010 and gains on leasing related assets at $974,000 in 2011 were $606,000 lower than in 2010. Additionally, there was $128,000 in other-than-temporary impairment losses taken on the Company’s equity securities portfolio in 2010 compared to no losses in 2011. Other income at $526,000 in 2011 was $221,000 lower than 2010 due primarily to a reduction in gains on loans sold. Income on bank owned life insurance in 2011 totaling $1.4 million was $93,000 lower than the same period in 2010 due primarily to decreases in rates on the underlying policies. Commissions and fees at $3.7 million in 2011 were $170,000 greater than the same period in 2010 due primarily to an increase in investment commission income. Noninterest income represented 16% of total revenue in 2011. (Total revenue is defined as net interest income plus noninterest income.)

Noninterest income was $19.3 million in 2010 compared to $18.9 million earned in 2009. The increase in this category is primarily due to gains on leasing related assets totaling $1.6 million compared to losses of $1.1 million in 2009. Offsetting the impact of gains on leasing related assets was a reduction in gains on sales of investment securities which totaled $1.7 million in 2010 compared to $3.8 million in 2009. Additionally, there were $128,000 in other-than-temporary impairment losses taken on the Company’s equity securities portfolio in 2010 compared to $940,000 in 2009. Service charges on deposit accounts decreased $640,000 to $10.3 million due primarily to reduced overdraft fees collected. Commissions and fees decreased $176,000 or 5% to $3.5 million in 2010, primarily as a result of decreased loan fees and investment services income. Other income at $747,000 increased $210,000 from 2009 primarily due to gains on loans sold. Income on bank owned life insurance decreased by $414,000 to $1.5 million in 2010. Included in bank owned life insurance for 2009 was $485,000 in proceeds received on a life insurance policy. Noninterest income represented 16% of total revenue in 2010.

Noninterest Expense

Noninterest expense totaling $68.2 million decreased $2.3 million in 2011 compared to 2010. Long term debt prepayment fees in 2011 were $800,000 compared to $1.8 million for the same period in 2010 because the Company prepaid less long term debt in 2011 than in 2010. FDIC insurance expense at $2.8 million was $974,000 lower than the same period in 2010 as a result of changes made by the FDIC in the method of calculating assessment rates. Collection expense at $343,000 decreased $249,000, which reflects lower leasing related collection costs. Stationery, supplies and postage at $1.4 million and marketing expense at $2.4 million decreased $240,000 and $291,000, respectively, in 2011, primarily as a result of costs incurred for the Company’s new brand identity project in 2010. During the third quarter of 2011 the Company completed its core deposit intangible amortization, which resulted in a $485,000 decrease in that category. Other real estate and repossessed asset expense at $780,000 increased $297,000 as a result of increased expenses related to other real estate properties.

Noninterest expense was $70.4 million in 2010, compared to $73.8 million in 2009, a decrease of 5%. Included in noninterest expense for 2010 was a $1.8 million prepayment fee on long-term debt, while noninterest expense in 2009 included a $3.1 million prepayment fee on long term debt, a $1.2 million industry-wide special FDIC assessment and a $704,000 expense incurred relating to the pretax payout on a life insurance benefit. Salary and benefit expense increased by $1.6 million, or 5%, to $36.1 million, due primarily to normal salary

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increases and increases in hospital and medical benefit expenses. Collection expense at $592,000 and other real estate and repossessed asset expense at $483,000 decreased $960,000, or 62%, and $519,000, or 52%, respectively, due to decreased leasing related expenses. Legal expense at $1.7 million increased $695,000 compared to 2009 as a result of increased workout expenses related to non-performing loans and leases. Other expenses decreased by $916,000, or 9%, to $8.9 million, primarily due to the previously mentioned $704,000 pretax payout to the beneficiary of bank owned life insurance proceeds in 2009.

The efficiency ratio, a non-GAAP measure, expresses the relationship between noninterest expense (excluding other real estate and other repossessed asset expense, long-term debt repayment fees, provision for unfunded lending commitments and core deposit amortization) to total tax-equivalent revenue (excluding gains (losses) on securities). In 2011, the Company’s efficiency ratio on a tax equivalent basis was 56.9% compared to 56.4% in 2010 as a result of a decline in revenue, partially offset by continued management of expenses. The efficiency ratio was 62.1% in 2009.


	For the year ended December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Calculation of efficiency ratio (a non-GAAP measure)
Total non-interest expense	$	68,151		$	70,405		$	73,794		$	60,071		$	58,190
Less:
Amortization of core deposit intangibles		(577	)		(1,062	)		(1,062	)		(1,062	)		(1,180	)
Other real estate owned and other repossessed asset expense		(780	)		(483	)		(1,002	)		(155	)		(10	)
Long-term debt prepayment fee		(800	)		(1,835	)		(3,075	)		—			—
Provision for unfunded lending commitments		(375	)		(195	)		(58	)		(76	)		(7	)

Non-interest expense, as adjusted	$	65,619		$	66,830		$	68,597		$	58,778		$	56,993

Net interest income	$	97,413		$	99,754		$	93,379		$	88,579		$	71,728
Noninterest income		18,117			19,268			18,857			17,611			18,627

Total revenue		115,530			119,022			112,236			106,190			90,355
Plus: Tax-equivalent adjustment on municipal securities		1,080			1,082			1,206			1,287			1,629
Less: (gains) losses on investment securities		(1,229	)		(1,614	)		(2,905	)		(53	)		(1,769	)

Total revenue, as adjusted	$	115,381		$	118,490		$	110,537		$	107,424		$	90,215

Efficiency ratio		56.87	%		56.40	%		62.06	%		54.72	%		63.17	%

Income Taxes

The Company’s effective income tax rate was 30.5%, 34.5% and 59.0%, in the years ended December 31, 2011, 2010 and 2009, respectively. The Company’s lower effective tax rate of 30.5% in 2011 was driven by increased tax benefits attributable to the real estate investment trust (“REIT”) subsidiary established in December 2010. The Company’s effective tax rate of 59.0% in 2009 is due to its net loss and the impact that tax advantaged income had on the tax benefit of the loss. The tax advantaged income includes tax-exempt securities income and income on bank owned life insurance policies.

Financial Condition

Total assets increased from $2.79 billion on December 31, 2010 to $2.83 billion on December 31, 2011, an increase of $33.3 million, or 1%. Total assets at year-end 2010 increased $68.7 million or 3% from year-end 2009.

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Loans and Leases

Lakeland primarily serves Northern New Jersey and the surrounding areas. Its leasing division serves a broader market with a focus on the Northeast. All of its borrowers are U.S. residents or entities.

Gross loans and leases, including leases held for sale, which totaled $2.04 billion as of December 31, 2011, increased $29.0 million compared to 2010. The increase in gross loans and leases is due primarily to increases in commercial loans secured by real estate and commercial and industrial loans, which was partially offset by a decrease in leases. Commercial loans secured by real estate increased from $970.2 million in 2010 to $1.01 billion in 2011, an increase of $42.7 million, or 4%. Commercial and industrial loans increased from $194.3 million in 2010 to $209.9 million in 2011, an increase of $15.7 million, or 8%. Real estate construction loans, which include commercial construction loans, at $79.1 million increased $8.4 million or 12%. Leases, including leases held for sale, totaling $28.9 million as of December 31, 2011 decreased $38.3 million or 57% compared to 2010. The Company continues to execute its strategy of reducing riskier leases while focusing on growth within the local market area. Total loans and leases at $2.01 billion as of December, 31 2010 decreased $1.8 million, or less than 1% compared to December 31, 2009 due to a $53.3 million or 44% decline in leases.

The following table sets forth the classification of Lakeland’s gross loans and leases by major category as of December 31 for each of the last five years:


	December 31,
	2011		2010		2009		2008		2007
	(in thousands)
Commercial, secured by real estate	$	1,012,982	$	970,240	$	914,223	$	815,237	$	702,886
Commercial, industrial and other		209,915		194,259		172,744		143,383		118,735
Leases		28,879		65,640		113,160		311,463		355,644
Leases held for sale		—		1,517		7,314		—		—
Real estate—residential mortgage		406,222		403,561		382,750		342,660		314,393
Real estate—construction		79,138		70,775		108,338		102,219		79,111
Home equity and consumer		304,190		306,322		315,598		315,704		310,359

		2,041,326		2,012,314		2,014,127		2,030,666		1,881,128
Plus deferred costs		249		2,303		2,908		4,165		5,407

Loans and leases net of deferred costs	$	2,041,575	$	2,014,617	$	2,017,035	$	2,034,831	$	1,886,535

At December 31, 2011, there were no concentrations of loans or leases exceeding 10% of total loans and leases outstanding other than loans that are secured by real estate. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other related conditions.

The following table sets forth maturities and sensitivity to changes in interest rates in commercial loans in the Company’s loan portfolio at December 31, 2011:


	Within one year		After one but within five years		After five years		Total
	(in thousands)
Commercial, secured by real estate	$	89,310	$	205,706	$	717,966	$	1,012,982
Commercial, industrial and other		99,825		79,796		30,294		209,915
Real estate—construction		31,160		7,609		40,369		79,138

Total	$	220,295	$	293,111	$	788,629	$	1,302,035

Predetermined rates	$	37,840	$	192,741	$	63,029	$	293,610
Floating or adjustable rates		182,455		100,370		725,600		1,008,425

Total	$	220,295	$	293,111	$	788,629	$	1,302,035

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Risk Elements

Commercial loans and leases are placed on a non-accrual status with all accrued interest and unpaid interest reversed if (a) because of the deterioration in the financial position of the borrower they are maintained on a cash basis (which means payments are applied when and as received rather than on a regularly scheduled basis), (b) payment in full of interest or principal is not expected, or (c) principal and interest have been in default for a period of 90 days or more unless the obligation is both well-secured and in process of collection. Residential mortgage loans are placed on non-accrual status at the time principal and interest have been in default for a period of 90 days or more, 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. As a general rule, a non-accrual asset may be restored to accrual status when none of its principal or interest is due and unpaid, satisfactory payments have been received for a sustained period (usually six months), or when it otherwise becomes well-secured and in the process of collection.

The following schedule sets forth certain information regarding Lakeland’s non-accrual (including troubled debt restructurings that are on non-accrual) and past due loans and leases and other real estate owned and other repossessed assets as of December 31, for each of the last five years:


	At December 31,
(dollars in thousands)	2011			2010			2009			2008			2007
Commercial, secured by real estate	$	16,578		$	12,905		$	20,811		$	2,642		$	4,406
Commercial, industrial, and other		4,608			1,702			2,047			839			520
Leases, including leases held for sale		575			6,277			3,511			8,463			724
Real estate—residential mortgage		11,610			12,834			5,465			1,475			384
Real estate-construction		12,393			6,321			4,987			2,392			3,687
Home equity and consumer		3,252			2,930			1,890			733			448

Total non-accrual loans and leases		49,016			42,969			38,711			16,544			10,169
Other real estate and other repossessed assets		1,182			1,592			1,864			3,997			175

TOTAL NON-PERFORMING ASSETS	$	50,198		$	44,561		$	40,575		$	20,541		$	10,344

Non-performing assets as a percent of total assets		1.78	%		1.60	%		1.49	%		0.78	%		0.41	%

Loans and leases past due 90 days or more and still accruing	$	1,367		$	1,218		$	1,437		$	825		$	667

Troubled debt restructurings, still accruing	$	8,856		$	9,073		$	3,432		$	—		$	—

Non-accrual loans and leases increased to $49.0 million on December 31, 2011 from $43.0 million at December 31, 2010. The change in non-accrual loans and leases from 2010 to 2011 included an increase in commercial loans secured by real estate, commercial and industrial loans and commercial real estate construction loans of $3.7 million, $2.9 million and $6.1 million, respectively, which was partially offset by a decline in leasing non-accruals of $5.7 million. Commercial loan non-accruals included four loan relationships between $500,000 and $1.0 million totaling $2.8 million, and nine loan relationships exceeding $1.0 million totaling $22.8 million. The largest of the commercial loan non-accrual loans was $5.9 million. All non-accrual loans and leases are in various stages of litigation, foreclosure, or workout. Non-accrual loans included $4.6 million and $3.6 million in troubled debt restructurings for the years ended December 31, 2011 and 2010, respectively.

At December 31, 2011, Lakeland had $8.9 million in loans that were restructured and still accruing. Restructured loans are those loans where Lakeland has granted concessions to the borrower in payment terms in rate and/or in maturity as a result of the financial condition of the borrower.

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For 2011, the gross interest income that would have been recorded, had the loans and leases classified at year-end as non-accrual been performing in conformance with their original terms, is approximately $2.9 million. The amount of interest income actually recorded on those loans and leases for 2011 was $539,000. The resultant loss of $2.4 million for 2011 compares with prior year losses of $1.8 million for 2010 and $1.9 million for 2009.

As of December 31, 2011, Lakeland had impaired loans and leases totaling $43.1 million (consisting primarily of non-accrual and restructured loans and leases), compared to $30.0 million at December 31, 2010. The valuation allowance of these loans and leases is based on the fair value of the underlying collateral. Based upon such evaluation, $805,000 has been allocated to the allowance for loan and lease losses for impairment at December 31, 2011 compared to $1.1 million at December 31, 2010. At December 31, 2011, Lakeland also had $41.7 million in loans and leases that were rated substandard that were not classified as non-performing or impaired compared to $47.0 million at December 31, 2010.

There were no additional loans or leases at December 31, 2011, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers that would indicate a strong possibility of the borrowers not complying with the present terms and conditions of repayment and which may result in such loans or leases being included as non-accrual, past due or renegotiated at a future date.

The following table sets forth for each of the five years ended December 31, 2011, the historical relationships among the amount of loans and leases outstanding, the allowance for loan and lease losses, the provision for loan and lease losses, the amount of loans and leases charged off and the amount of loan and lease recoveries:


	December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Balance of the allowance at the beginning of the year	$	27,331		$	25,563		$	25,053		$	14,689		$	13,454

Loans and leases charged off:
Commercial, secured by real estate(1)		5,352			7,510			2,524			95			199
Commercial, industrial and other		5,249			3,298			2,632			379			3,302
Leases		2,858			4,307			22,972			11,211			425
Leases held for sale		—			—			22,122			—			—
Real estate—residential mortgage		1,772			397			433			123			—
Real estate-construction		3,636			1,756			200			119			100
Home equity and consumer		3,010			2,250			2,499			2,044			1,341

Total loans and leases charged off		21,877			19,518			53,382			13,971			5,367

Recoveries:
Commercial, secured by real estate(1)		2,084			134			135			24			130
Commercial, industrial and other		439			62			134			17			79
Leases		1,206			1,391			1,777			150			2
Real estate—residential mortgage		32			7			—			—			—
Real estate-construction		67			—			—			38			—
Home equity and consumer		318			411			231			376			415

Total Recoveries		4,146			2,005			2,277			605			626

Net charge-offs:		17,731			17,513			51,105			13,366			4,741
Provision for loan and lease losses charged to operations		18,816			19,281			51,615			23,730			5,976

Ending balance	$	28,416		$	27,331		$	25,563		$	25,053		$	14,689

Ratio of net charge-offs to average loans and leases outstanding:
Including charge down of leases held for sale		0.89	%		0.88	%		2.55	%		0.68	%		0.28	%
Excluding charge down of leases held for sale		0.89	%		0.88	%		1.44	%		0.68	%		0.28	%
Ratio of allowance at end of year as a percentage of year-end total loans and leases		1.39	%		1.36	%		1.27	%		1.23	%		0.78	%

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The ratio of the allowance for loan and lease losses to loans and leases 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 the 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 consists of the following criteria:

•

The establishment of reserve amounts for all specifically identified classified loans and leases that have been designated as requiring attention by the Company or the Company’s external loan review consultants.

•

The establishment of reserves for pools of homogeneous types of loans and leases not subject to specific review, including impaired commercial loans under $250,000, leases, 1 – 4 family residential mortgages, and consumer loans.

•

The establishment of reserve amounts for the non-classified loans and leases in each portfolio based upon the historical average loss experience for 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 source of repayment, any adverse trend in the real estate markets could affect underlying values available to protect the Company from loss.

A loan is reviewed for charge-off when it is placed on non-accrual status with a resulting charge-off if the loan is not secured by collateral having sufficient liquidation value to repay the loan and all accrued interest and the loan is not in the process of collection. Charge-offs are recommended by the Chief Credit Officer and approved by the Board on a monthly basis.

While non-performing loans and leases increased from $43.0 million on December 31, 2010 to $49.0 million on December 31, 2011, the allowance for loan and lease losses was 1.39% of total loans and leases on December 31, 2011 compared to 1.36% of total loans and leases on December 31, 2010. The increase in non-accrual loans, as discussed above, was in commercial loans secured by real estate, commercial and industrial loans and real estate construction loans. Non-accrual leases declined from 2010 to 2011 by $5.7 million due to the favorable resolution of several non-performing leases. Management believes, based on appraisals and estimated selling costs, that the majority of these loans are well secured and reserves on these loans are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan and lease portfolio, management considers the allowance for loan and lease losses to be adequate at December 31, 2011. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

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The following table shows how the allowance for loan and lease losses is allocated among the various types of loans and leases that the Company has outstanding. This allocation is based on management’s specific review of the credit risk of the outstanding loans and leases in each category as well as historical trends.


	At December 31,
	2011					2010					2009					2008					2007
	Allowance		% of Loans in Each Category			Allowance		% of Loans in Each Category			Allowance		% of Loans in Each Category			Allowance		% of Loans in Each Category			Allowance		% of Loans in Each Category
	(in thousands)
Commercial, secured by real estate(1)	$	16,618		49.6	%	$	11,366		48.2	%	$	9,285		45.4	%	$	8,954		40.2	%	$	8,048		37.4	%
Commercial, Industrial and other(1)		3,477		10.3	%		5,113		9.7	%		4,647		8.6	%		—		7.1	%		—		6.3	%
Leases		688		1.4	%		3,477		3.3	%		4,308		6.0	%		11,212		15.3	%		2,310		18.9	%
Real estate—residential mortgage		3,077		19.9	%		2,628		20.1	%		1,286		19.0	%		626		16.9	%		272		16.7	%
Real estate—construction		1,424		3.9	%		2,176		3.5	%		3,198		5.4	%		2,054		5.0	%		1,680		4.2	%
Home equity and consumer		3,132		14.9	%		2,571		15.2	%		2,839		15.6	%		2,207		15.5	%		2,379		16.5	%

	$	28,416		100.0	%	$	27,331		100.0	%	$	25,563		100.0	%	$	25,053		100.0	%	$	14,689		100.0	%

(1)	Data related to the allocation of the allowance for loan and lease losses between commercial loan categories was not available prior to 2009.

Investment Securities

The Company has classified its investment securities into the available for sale and held to maturity categories based on its intent and ability to hold the securities to maturity. The Company has no investment securities classified as trading securities.

The following table sets forth the carrying value of the Company’s investment securities, both available for sale and held to maturity, as of December 31 for each of the last three years. Investment securities available for sale are stated at fair value while securities held for maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts.


	December 31,
	2011		2010		2009
	(in thousands)
U.S. Treasury and U.S. government agencies	$	52,608	$	112,293	$	86,475
Obligations of states and political subdivisions		76,528		66,784		62,414
Mortgage-backed securities		370,101		326,626		272,665
Equity securities		23,132		24,536		20,898
Other debt securities		21,275		23,441		14,899

	$	543,644	$	553,680	$	457,351

The Company does not own any collateralized debt obligations, pooled trust preferred securities or preferred stock with the Federal National Mortgage Association or the Federal Home Loan Mortgage Association.

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The following table sets forth the maturity distribution and weighted average yields (calculated on the basis of the stated yields to maturity, considering applicable premium or discount), on a fully taxable equivalent basis, of investment securities available for sale as of December 31, 2011, at fair value:


Available for sale	Within one year			Over one but within five years			Over five but within ten years			After ten years			Total
	(dollars in thousands)
U.S. government agencies
Amount	$	5,002		$	26,587		$	12,014		$	—		$	43,603
Yield		0.32	%		0.97	%		1.54	%		—	%		1.05	%
Obligations of states and political subdivisions
Amount		1,895			11,330			19,783			2,960			35,968
Yield		3.42	%		3.26	%		3.75	%		3.77	%		3.58	%
Mortgage-backed securities
Amount		—			1,172			33,105			315,247			349,524
Yield		—	%		3.07	%		2.45	%		2.24	%		2.26	%
Other debt securities
Amount		8,588			9,770			—			1,359			19,717
Yield		1.37	%		2.22	%		—	%		1.37	%		1.79	%
Other equity securities
Amount		23,132			—			—			—			23,132
Yield		1.79	%		—	%		—	%		—	%		1.79	%

Total securities
Amount	$	38,617		$	48,859		$	64,902		$	319,566		$	471,944
Yield		1.59	%		1.80	%		2.68	%		2.25	%		2.21	%

The following table sets forth the maturity distribution and weighted average yields (calculated on the basis of the stated yields to maturity, considering applicable premium or discount), on a fully taxable equivalent basis, of investment securities held to maturity as of December 31, 2011, at amortized cost:


Held to maturity	Within one year			Over one but within five years			Over five but within ten years			After ten years			Total
	(dollars in thousands)
U.S. government agencies
Amount	$	3,999		$	—		$	5,006		$	—		$	9,005
Yield		4.26	%		—	%		1.98	%		—	%		2.99	%
Obligations of states and political subdivisions
Amount		14,534			15,211			8,254			2,560			40,559
Yield		2.17	%		5.16	%		4.90	%		6.46	%		4.12	%
Mortgage-backed securities
Amount		—			140			3,370			17,067			20,577
Yield		—	%		3.75	%		4.52	%		3.63	%		3.78	%
Other debt securities
Amount		—			504			1,055			—			1,559
Yield		—	%		5.04	%		5.64	%		—	%		5.45	%

Total securities
Amount	$	18,533		$	15,855		$	17,685		$	19,627		$	71,700
Yield		2.62	%		5.14	%		4.05	%		4.00	%		3.91	%

Other Assets

Other assets decreased from $35.6 million at December 31, 2010 to $28.4 million at December 31, 2011 due primarily to a decrease in net deferred taxes of $2.8 million and the prepaid FDIC assessment of $2.6 million.

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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. Based upon the majority of the Company’s deferred tax assets having no expiration date, the Company’s earnings history, and 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 as of December 31, 2011 will be realized.

Deposits

Total deposits increased from $2.20 billion on December 31, 2010 to $2.25 billion on December 31, 2011, a $53.8 million, or 2%, increase. Savings and interest-bearing transaction accounts increased from $1.40 billion to $1.44 billion, an increase of $41.4 million, or 3%. Total core deposits, which are defined as noninterest-bearing deposits and savings and interest-bearing transaction accounts, increased from $1.78 billion on December 31, 2010 to $1.89 billion on December 31, 2011, an increase of $107.1 million, or 6%. Core deposits represent 84% of total deposits at December 31, 2011 compared to 81% at the end of 2010. Total time deposits decreased from $412.8 million on December 31, 2010 to $359.6 million on December 31, 2011, a decrease of $53.3 million, or 13%. Time deposits have decreased as a result of the continuing low rate environment where depositors prefer to keep their deposits in liquid transaction accounts versus long-term accounts.

Total deposits increased from $2.16 billion on December 31, 2009 to $2.20 billion on December 31, 2010, an increase of $38.7 million, or 2%.

The average amount of deposits and the average rates paid on deposits for the years indicated are summarized in the following table:


	Year Ended December 31, 2011					Year Ended December 31, 2010					Year Ended December 31, 2009
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	422,568		—	%	$	359,915		—	%	$	315,193		—	%
Interest-bearing transaction accounts		1,088,678		0.53	%		1,082,026		0.74	%		914,695		1.02	%
Savings		330,646		0.14	%		317,620		0.19	%		304,084		0.51	%
Time deposits		400,442		1.16	%		456,692		1.44	%		589,499		2.70	%

Total	$	2,242,334		0.49	%	$	2,216,253		0.69	%	$	2,123,471		1.26	%

As of December 31, 2011, the aggregate amount of outstanding time deposits issued in amounts of $100,000 or more, broken down by time remaining to maturity, was as follows (in thousands):


Maturity
Within 3 months	$	49,126
Over 3 through 6 months		23,293
Over 6 through 12 months		35,169
Over 12 months		40,167

Total	$	147,755

Liquidity

“Liquidity” measures whether an entity has sufficient cash flow to meet its financial obligations and commitments on a timely basis. The Company is liquid when its subsidiary bank has the cash available to meet the borrowing and cash withdrawal requirements of customers and the Company can pay for current and planned expenditures and satisfy its debt obligations.

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Lakeland funds loan demand and operation expenses from several sources:

•

Net income. Cash provided by operating activities was $49.9 million in 2011 compared to $56.0 million and $22.5 million in 2010 and 2009, respectively.

•

Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In 2011, Lakeland generated $53.8 million in deposit growth.

•

Sales of securities and overnight funds. At year-end 2011, the Company had $471.9 million in securities designated “available for sale.”

•

Repayments on loans and leases can also be a source of liquidity to fund further loan growth.

•

Overnight credit lines. As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had no overnight borrowings from the FHLB on December 31, 2011. Lakeland also has overnight federal funds lines available for it to borrow up to $162.0 million. Lakeland had borrowings against these lines of $28.0 million at December 31, 2011. Lakeland may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of December 31, 2011.

•

Other borrowings. Lakeland can also generate funds by utilizing long-term debt or securities sold under agreements to repurchase that would be collateralized by security or mortgage collateral. At times the market values of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a “margin call” which requires the Company to pledge additional collateral to meet that margin call. For more information regarding the Company’s borrowings, see Note 6 to the consolidated financial statements.

Management and the Board monitor the Company’s liquidity through the asset/liability committee, which monitors the Company’s compliance with certain regulatory ratios and other various liquidity guidelines.

The Company’s management believes that its current level of liquidity is sufficient to meet its current and anticipated operational needs, including current loan commitments, deposit maturities and other obligations. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from anticipated results due to a variety of factors, including uncertainties relating to general economic conditions; unanticipated decreases in deposits; changes in or failure to comply with governmental regulations; and uncertainties relating to the analysis of the Company’s assessment of rate sensitive assets and rate sensitive liabilities and the extent to which market factors indicate that a financial institution such as Lakeland should match such assets and liabilities.

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The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2011. Interest on subordinated debentures and other borrowings is calculated based on current contractual interest rates.


			Payment due period
(dollars in thousands)	Total		Within one year		After one but within three years		After three but within five years		After five years
Minimum annual rentals or noncancellable operating leases	$	20,349	$	2,058	$	4,073	$	3,354	$	10,864
Benefit plan commitments		4,943		185		370		300		4,088
Remaining contractual maturities of time deposits		359,552		253,823		89,897		14,927		905
Subordinated debentures		77,322		—		—		—		77,322
Loan commitments		436,761		364,585		40,947		1,285		29,944
Other borrowings		155,000		60,000		20,000		30,000		45,000
Interest on other borrowings*		115,697		8,021		15,875		12,919		78,882
Series A Preferred Stock		19,000		—		—		—		19,000
Interest on Series A Preferred Stock		10,569		950		2,565		3,420		3,634
Standby letters of credit		9,043		7,398		1,428		137		80

Total	$	1,208,236	$	697,020	$	175,155	$	66,342	$	269,719

*	Includes interest on other borrowings and subordinated debentures at a weighted rate of 4.41%.

Interest Rate Risk

Closely related to the concept of liquidity is the concept of interest rate sensitivity (i.e., the extent to which assets and liabilities are sensitive to changes in interest rates). As a financial institution, the Company’s potential interest rate volatility is a primary component of its market risk. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Based upon the Company’s nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Company does not own any trading assets and does not have any off balance sheet hedging transactions in place, such as interest rate swaps and caps.

The Company’s net income is largely dependent on net interest income. Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. For example, when interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates could adversely affect net interest income. Conversely, when interest-earning assets reprice more quickly than interest-bearing liabilities, an increase in market rates could increase net interest income.

The Company’s Board of Directors has adopted an Asset/Liability Policy designed to stabilize net interest income and preserve capital over a broad range of interest rate movements. This policy outlines guidelines and ratios dealing with, among others, liquidity, volatile liability dependence, investment portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap analysis ratio. Key quantitative measurements include the percentage change of net interest income in various interest rate scenarios (net interest income at risk) and changes in the market value of equity in various rate environments (net portfolio value at risk). The Company’s performance as compared to the Asset/Liability Policy is monitored by its Board of Directors. In addition, to effectively administer the Asset/Liability Policy and to monitor exposure to fluctuations in interest rates, the Company maintains an Asset/Liability Committee (the “ALCO”), consisting of the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Lending Officer, Chief Retail Officer, Chief Credit Officer, certain other senior officers and certain directors. This committee meets quarterly to review the Company’s financial results and to develop strategies to implement the Asset/Liability Policy and to respond to market conditions.

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The Company monitors and controls interest rate risk through a variety of techniques, including use of an interest rate risk management model. With the interest rate risk management model, the Company projects future net interest income, and then estimates the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. The Company also uses the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios.

Interest rate sensitivity modeling is done at a specific point in time and involves a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount 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 income 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. Changes in estimates and assumptions made for interest rate sensitivity modeling could have a significant impact on projected results and conclusions. These assumptions could include prepayment rates, sensitivity of non-maturity deposits and other similar assumptions. Therefore, if our assumptions should change, this technique may not accurately reflect the impact of general interest rate movements on the Company’s net interest income or net portfolio value.

The starting point (or “base case”) for the following table is an estimate of the following year’s net interest income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at year-end levels. The net interest income estimated for 2012 (the base case) is $95.8 million. The information provided for net interest income assumes that changes in interest rates change gradually in equal increments (“rate ramp”) over the twelve month period.


	Changes in interest rates
Rate Ramp	+200 bp			+100 bp			-100 bp			-200 bp
Asset/Liability Policy Limit		-5.0	%								-5.0	%
December 31, 2011		-4.0	%		-1.6	%		-2.2	%		-2.8	%
December 31, 2010		-3.3	%		-1.5	%		-1.9	%		-2.6	%

The base case for the following table is an estimate of the Company’s net portfolio value for the periods presented using current discount rates, and assuming the Company’s interest-sensitive assets and liabilities remain at year-end levels. The net portfolio value at December 31, 2011 (the base case) was $331.5 million. The information provided for the net portfolio value assumes fluctuations or “rate shocks” for changes in interest rates as shown in the table below. Rate shocks assume that current interest rates change immediately.


	Changes in interest rates
Rate Shock	+200 bp			+100 bp			-100 bp			-200 bp
Asset/Liability Policy Limit		-25.0	%								-25.0	%
December 31, 2011		-7.2	%		-0.7	%		-6.4	%		-12.9	%
December 31, 2010		-7.9	%		-2.0	%		-2.5	%		-8.6	%

The information set forth in the above tables is based on significant estimates and assumptions, and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

The information in the above tables represent the policy scenario that the ALCO reviews on a quarterly basis. There are also other scenarios run that the ALCO examines that vary depending on the economic environment. These scenarios include a yield curve flattening scenario and scenarios that show more dramatic changes in rates. The committee uses the appropriate scenarios, depending on the economic environment, in its interest rate management decisions.

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Capital Resources

Stockholders’ equity decreased from $260.7 million on December 31, 2010 to $259.8 million on December 31, 2011. The decrease in stockholders’ equity from December 31, 2010 to December 31, 2011 was primarily due to redemption of preferred stock from the U.S Treasury Department totaling $20.0 million and the payment of dividends on common and preferred stock of $6.3 million. Partially offsetting these items was net income of $19.9 million and other comprehensive income of $4.5 million in 2011. For more information on the redemption of preferred stock, please see Note 7 in Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.

Book value per common share (total common stockholders’ equity divided by the number of shares outstanding) increased from $8.82 on December 31, 2010 to $9.44 on December 31, 2011 primarily as a result of net income. Book value per common share was $8.46 on December 31, 2009. Tangible book value per share increased from $5.35 on December 31, 2010 to $6.03 on December 31, 2011. For more information see “Non-GAAP Financial Measures.”

The FDIC’s risk-based capital policy statement imposes a minimum capital standard on insured banks. The minimum ratio of risk-based capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the total capital is to be comprised of common stock equity and qualifying perpetual preferred stock, less goodwill (“Tier I capital”). The remainder (“Tier II capital”) may consist of mandatory convertible debt securities, qualifying subordinated debt, other preferred stock and a portion of the allowance for loan and lease losses. The Federal Reserve Board has adopted a similar risk-based capital guideline for the Company which is computed on a consolidated basis.

In addition, the bank regulators have adopted minimum leverage ratio guidelines (Tier I capital to average quarterly assets, less goodwill) for financial institutions. These guidelines provide for a minimum leverage ratio of 3% for financial institutions that meet certain specified criteria, including that they have the highest regulatory rating. All other holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points.

The following table reflects capital ratios of the Company and Lakeland as of December 31, 2011 and 2010:


	Tier 1 Capital to Total Average Assets Ratio December 31,						Tier 1 Capital to Risk-Weighted Assets Ratio December 31,						Total Capital to Risk-Weighted Assets Ratio December 31,
	2011			2010			2011			2010			2011			2010
Capital Ratios:
The Company		8.33	%		9.21	%		11.23	%		12.43	%		13.39	%		13.68	%
Lakeland Bank		8.40	%		8.71	%		11.33	%		11.75	%		12.59	%		13.00	%
“Well capitalized” institution under FDIC Regulations		5.00	%		5.00	%		6.00	%		6.00	%		10.00	%		10.00	%

-43-

Non-GAAP Financial Measures

Reported amounts are presented in accordance with U.S. GAAP. The Company’s management believes that the supplemental non-GAAP information, which consists of measurements and ratios based on tangible equity and tangible assets, is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.


	December 31,
(dollars in thousands, except per share amounts)	2011			2010			2009			2008			2007
Calculation of tangible book value per common share
Total common stockholders’ equity at end of period—GAAP	$	241,303		$	223,235		$	211,963		$	220,941		$	211,599
Less:
Goodwill		87,111			87,111			87,111			87,111			87,111
Other identifiable intangible assets, net		—			578			1,640			2,701			3,763

Total tangible common stockholders’ equity at end of period—Non-GAAP	$	154,192		$	135,546		$	123,212		$	131,129		$	120,725

Shares outstanding at end of period(1)		25,558			25,322			25,066			24,871			24,445

Book value per share—GAAP(1)	$	9.44		$	8.82		$	8.46		$	8.88		$	8.66

Tangible book value per share—Non-GAAP(1)	$	6.03		$	5.35		$	4.92		$	5.27		$	4.94


Calculation of tangible common equity to tangible assets
Total tangible common stockholders’ equity at end of period—Non-GAAP	$	154,192		$	135,546		$	123,212		$	131,129		$	120,725

Total assets at end of period	$	2,825,950		$	2,792,674		$	2,723,968		$	2,642,625		$	2,513,771
Less:
Goodwill		87,111			87,111			87,111			87,111			87,111
Other identifiable intangible assets, net		—			578			1,640			2,701			3,763

Total tangible assets at end of period—Non-GAAP	$	2,738,839		$	2,704,985		$	2,635,217		$	2,552,813		$	2,422,897

Common equity to assets—GAAP		8.54	%		7.99	%		7.78	%		8.36	%		8.42	%

Tangible common equity to tangible assets—Non-GAAP		5.63	%		5.01	%		4.68	%		5.14	%		4.98	%

(1)	Adjusted for 5% stock dividend payable on February 16, 2011 to shareholders of record January 31, 2011.

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	For the years ended December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Calculation of return on average tangible common equity
Net income (loss)—GAAP	$	19,851		$	19,211		$	(5,396	)	$	15,165		$	17,988

Total average common stockholders’ equity	$	232,711		$	220,796		$	217,062		$	216,931		$	204,127
Less:
Average goodwill		87,111			87,111			87,111			87,111			87,111
Average other identifiable intangible assets, net		166			1,120			2,182			3,247			4,359

Total average tangible common stockholders’ equity—Non GAAP	$	145,434		$	132,565		$	127,769		$	126,573		$	112,657

Return on average common stockholders’ equity—GAAP		8.53	%		8.70	%		-2.49	%		6.99	%		8.81	%

Return on average tangible common stockholders’ equity—Non-GAAP		13.65	%		14.49	%		-4.22	%		11.98	%		15.97	%

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that modifies Step One of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step Two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This guidance was effective for interim and annual reporting periods beginning on or after December 15, 2010 and did not have a significant impact on the Company’s financial statements.

In April 2011, the FASB issued accounting guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The purpose of this guidance is to eliminate diversity in practice and provide greater comparability between companies’ financial statements. This guidance is effective for interim and annual reporting periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. Adoption of this guidance did not have a significant impact on the Company’s financial statements.

In May 2011, the FASB and the International Accounting Standards Board (the “IASB”) issued new accounting guidance on fair value measurement and disclosure requirements. This guidance is the result of work by the FASB and IASB to develop common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). As a result, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective during interim and annual periods beginning after December 15, 2011. The guidance is to be applied prospectively, and early application by public entities is not permitted. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

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facilitate convergence of U.S. GAAP and IFRS. Under the new guidance, the components of net income and the components of other comprehensive income can be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present components of other comprehensive income as part of the changes in stockholders’ equity. This amendment will be applied prospectively and the amendments are effective for fiscal years and interim periods beginning after December 15, 2011. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements. In December 2011, the FASB deferred certain aspects of this guidance related to the requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income.

In September 2011, the FASB issued accounting guidance related to the annual testing of goodwill for impairment. Under the new guidance, an entity has the option to first determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If, however, the entity concludes otherwise, then it is required to perform the first step of the two-step impairment test and then perform the second test, if required. This amendment is effective for annual and interim goodwill impairment tests performed for the fiscal years beginning after December 15, 2011. The Company adopted this guidance for its goodwill review as of November 30, 2011. Adoption did not have a significant impact on the Company’s financial statements.

Effects of Inflation

The impact of inflation, as it affects banks, differs substantially from the impact on non-financial institutions. Banks have assets which are primarily monetary in nature and which tend to move with inflation. This is especially true for banks with a high percentage of rate sensitive interest-earning assets and interest-bearing liabilities. A bank can further reduce the impact of inflation with proper management of its rate sensitivity gap. This gap represents the difference between interest rate sensitive assets and interest rate sensitive liabilities. Lakeland attempts to structure its assets and liabilities and manages its gap to protect against substantial changes in interest rate scenarios, in order to minimize the potential effects of inflation.

ITEM 7A—

Quantitative and Qualitative Disclosures About Market Risk

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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ITEM 8—Financial Statements and Supplementary Data

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	December 31,
	2011			2010
	(dollars in thousands)
ASSETS
Cash	$	60,688		$	26,063
Interest-bearing deposits due from banks		11,870			23,215

Total cash and cash equivalents		72,558			49,278
Investment securities, available for sale		471,944			487,107
Investment securities, held to maturity, at amortized cost with fair value of $74,274 in 2011 and $68,815 in 2010		71,700			66,573
Leases held for sale		—			1,517
Loans, net of deferred costs		2,041,575			2,013,100
Less: allowance for loan and lease losses		28,416			27,331

Net loans		2,013,159			1,987,286
Premises and equipment—net		27,917			27,554
Accrued interest receivable		8,369			8,849
Goodwill		87,111			87,111
Bank owned life insurance		44,760			43,284
Other assets		28,432			35,632

TOTAL ASSETS	$	2,825,950		$	2,792,674

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Deposits:
Noninterest bearing	$	449,560		$	383,877
Savings and interest-bearing transaction accounts		1,440,541			1,399,163
Time deposits under $100 thousand		211,797			241,911
Time deposits $100 thousand and over		147,755			170,938

Total deposits		2,249,653			2,195,889
Federal funds purchased and securities sold under agreements to repurchase		72,131			52,123
Other borrowings		155,000			195,000
Subordinated debentures		77,322			77,322
Other liabilities		12,061			11,631

TOTAL LIABILITIES		2,566,167			2,531,965

STOCKHOLDERS’ EQUITY
Preferred stock, Series A, no par value, $1,000 liquidation value, authorized 1,000,000 shares; issued 19,000 shares at December 31, 2011 and 39,000 at December 31, 2010		18,480			37,474
Common stock, no par value; authorized 40,000,000 shares; issued shares, 25,976,648 at December 31,2011 and 25,977,592 at December 31, 2010; outstanding shares, 25,558,229 at December 31, 2011 and 25,321,824 at December 31, 2010		270,044			271,595
Accumulated Deficit		(26,061	)		(38,004	)
Treasury stock, at cost, 418,419 shares in 2011 and 655,768 shares in 2010		(5,551	)		(8,683	)
Accumulated other comprehensive gain (loss)		2,871			(1,673	)

TOTAL STOCKHOLDERS’ EQUITY		259,783			260,709

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,825,950		$	2,792,674

The accompanying notes are an integral part of these statements.

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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2011		2010			2009
	(dollars in thousands, except per share data)
INTEREST INCOME
Loans, leases and fees	$	104,585	$	111,584		$	117,123
Federal funds sold and interest-bearing deposits with banks		51		121			109
Taxable investment securities		10,882		11,934			14,351
Tax-exempt investment securities		2,006		2,010			2,239

TOTAL INTEREST INCOME		117,524		125,649			133,822

INTEREST EXPENSE
Deposits		10,878		15,195			26,793
Federal funds purchased and securities sold under agreements to repurchase		88		127			139
Other borrowings		9,145		10,573			13,511

TOTAL INTEREST EXPENSE		20,111		25,895			40,443

NET INTEREST INCOME		97,413		99,754			93,379
Provision for loan and lease losses		18,816		19,281			51,615

NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES		78,597		80,473			41,764
NONINTEREST INCOME
Service charges on deposit accounts		10,262		10,278			10,918
Commissions and fees		3,703		3,533			3,709
Gains on sales and calls of investment securities, net		1,229		1,742			3,845
Other-than-temporary impairment loss on securities		—		(128	)		(940	)
Income on bank owned life insurance		1,423		1,516			1,930
Gains (losses) on leasing related assets, net		974		1,580			(1,142	)
Other income		526		747			537

TOTAL NONINTEREST INCOME		18,117		19,268			18,857

NONINTEREST EXPENSE
Salaries and employee benefits		36,500		36,086			34,505
Net occupancy expense		6,885		6,735			6,637
Furniture and equipment		4,726		4,867			5,038
Stationery, supplies and postage		1,396		1,636			1,605
Marketing expense		2,409		2,700			2,633
Core deposit intangible amortization		577		1,062			1,062
FDIC insurance expense		2,790		3,764			5,819
Collection expense		343		592			1,552
Legal expense		1,692		1,698			1,003
Other real estate and repossessed asset expense		780		483			1,002
Long-term debt prepayment fee		800		1,835			3,075
Other expenses		9,253		8,947			9,863

TOTAL NONINTEREST EXPENSE		68,151		70,405			73,794

Income (loss) before provision (benefit) for income taxes		28,563		29,336			(13,173	)
Provision (benefit) for income taxes		8,712		10,125			(7,777	)

NET INCOME (LOSS)	$	19,851	$	19,211		($	5,396	)

Dividends on Preferred Stock and Accretion	$	2,167	$	3,987		$	3,194

Net Income (Loss) Available to Common Stockholders	$	17,684	$	15,224		($	8,590	)

PER SHARE OF COMMON STOCK:
Basic earnings (loss)	$	0.69	$	0.60		$	(0.35	)

Diluted earnings (loss)	$	0.69	$	0.60		$	(0.35	)

Cash dividends	$	0.24	$	0.20		$	0.29

The accompanying notes are an integral part of these statements.

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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the years ended December 31, 2011, 2010 and 2009


	Common stock						Series A Preferred Stock			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total
	Number of Shares			Amount			Series A Preferred Stock			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss			Total
	(dollars in thousands)
BALANCE DECEMBER 31, 2008		24,740,564			257,051						(19,246	)		(14,496	)		(2,368	)		220,941

Comprehensive income 2009:
Net Loss											(5,396	)								(5,396	)
Other comprehensive income, net of tax																	1,711			1,711

Total comprehensive loss																				(3,685	)

Preferred stock issued, net of costs								58,837												58,837
Common stock warrant					3,345			(3,345	)											—
Preferred dividends											(2,663	)								(2,663	)
Accretion of discount on preferred stock								531			(531	)								—
Stock based compensation					443															443
Issuance of stock for restricted stock awards					(199	)								199						—
Issuance of stock to dividend reinvestment and stock purchase plan					(1,032	)					(1,256	)		2,323						35
Exercise of stock options, net of excess tax benefits					(87	)								34						(53	)
Cash dividends, common stock											(5,869	)								(5,869	)

BALANCE DECEMBER 31, 2009		24,740,564			259,521			56,023			(34,961	)		(11,940	)		(657	)		267,986

Comprehensive income 2010:
Net Income											19,211									19,211
Other comprehensive loss, net of tax																	(1,016	)		(1,016	)

Total comprehensive income																				18,195

Preferred dividends											(2,536	)								(2,536	)
Accretion of discount								1,451			(1,451	)								—
Stock based compensation					538															538
Redemption of preferred stock								(20,000	)											(20,000	)
Stock dividend		1,237,028			13,224						(13,224	)								—
Issuance of restricted stock awards					(476	)								476						—
Issuance of stock to dividend reinvestment and stock purchase plan					(516	)					(864	)		1,437						57
Exercise of stock options, net of excess tax benefits					(696	)								1,344						648
Cash dividends, common stock											(4,179	)								(4,179	)

BALANCE DECEMBER 31, 2010		25,977,592		$	271,595		$	37,474		$	(38,004	)	$	(8,683	)	$	(1,673	)	$	260,709

Comprehensive income 2011:
Net Income											19,851									19,851
Other comprehensive income, net of tax																	4,544			4,544

*Total comprehensive income*																				24,395

Preferred dividends											(1,161	)								(1,161	)
Accretion of discount								1,006			(1,006	)								—
Stock based compensation					627															627
Redemption of preferred stock								(20,000	)											(20,000	)
Adjustment for stock dividend		(944	)		(309	)					309									—
Issuance of restricted stock awards					(1,262	)								1,262						—
Issuance of stock to dividend reinvestment and stock purchase plan					(520	)					(1,009	)		1,714						185
Exercise of stock options, net of excess tax benefits					(87	)								156						69
Cash dividends, common stock											(5,041	)								(5,041	)

BALANCE DECEMBER 31, 2011		25,976,648		$	270,044		$	18,480		$	(26,061	)	$	(5,551	)	$	2,871		$	259,783

The accompanying notes are an integral part of these consolidated financial statements.

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Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2011			2010			2009
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	19,851		$	19,211		$	(5,396	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs		6,519			4,404			4,160
Depreciation and amortization		2,904			3,061			3,306
Amortization of intangible assets		577			1,062			1,062
Provision for loan and lease losses		18,816			19,281			51,615
Stock based compensation		627			538			443
Gains on securities, net		(1,229	)		(1,742	)		(3,845	)
Other-than-temporary impairment loss on securities		—			128			940
(Gains) losses on leases		(1,026	)		(772	)		1,631
Writedown of other repossessed assets		230			—			782
(Gains) losses on other real estate and other repossessed assets		115			(808	)		(230	)
Gain on sale of premises and equipment		(167	)		(48	)		—
Deferred tax provision (benefit)		172			547			(2,725	)
Decrease (increase) in other assets		2,162			11,105			(26,247	)
Increase (decrease) in other liabilities		379			23			(2,957	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		49,930			55,990			22,539

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from repayments on and maturity of securities:
Available for sale		161,241			160,581			147,300
Held to maturity		21,587			26,054			41,890
Proceeds from sales of securities:
Available for sale		92,409			76,048			153,763
Purchase of securities:
Available for sale		(234,230	)		(352,011	)		(391,948	)
Held to maturity		(26,834	)		(10,939	)		(13,742	)
Purchase of bank owned life insurance		—			—			(1,304	)
Proceeds from sales of leases		16,433			1,077			53,407
Net increase in loans and leases		(64,403	)		(19,057	)		(94,874	)
Proceeds from dispositions of premises and equipment		325			288			3
Capital expenditures		(3,425	)		(1,659	)		(3,026	)
Proceeds from sales of other real estate and other repossessed assets		2,548			4,133			6,853

NET CASH USED IN INVESTING ACTIVITIES		(34,349	)		(115,485	)		(101,678	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		53,764			38,702			101,054
Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		20,008			(11,549	)		1,309
Proceeds from other borrowings		45,000			80,000			—
Repayments of other borrowings		(85,000	)		(30,900	)		(65,000	)
Issuance of stock to Dividend Reinvestment and Stock Purchase Plan		185			57			35
Proceeds on issuance of preferred stock, net		—			—			58,837
Redemption of preferred stock		(20,000	)		(20,000	)		—
Exercise of stock options		72			627			(55	)
Excess tax benefits		(3	)		21			2
Dividends paid on preferred stock		(1,286	)		(2,669	)		(2,287	)
Dividends paid on common stock		(5,041	)		(4,179	)		(5,869	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		7,699			50,110			88,026

Net increase (decrease) in cash and cash equivalents		23,280			(9,385	)		8,887
Cash and cash equivalents, beginning of year		49,278			58,663			49,776

CASH AND CASH EQUIVALENTS, END OF YEAR	$	72,558		$	49,278		$	58,663

The accompanying notes are an integral part of these statements.

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Lakeland Bancorp, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF ACCOUNTING POLICIES

Lakeland Bancorp, Inc. (the Company) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Lakeland Bank (Lakeland). Lakeland operates under a state bank charter and provides full banking services and, as a state bank, is subject to regulation by the New Jersey Department of Banking and Insurance. Lakeland generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Northern New Jersey. Lakeland also provides securities brokerage services, including mutual funds and variable annuities.

Lakeland operates as a commercial bank offering a wide variety of commercial loans and leases and, to a lesser degree, consumer credits. Its primary strategic aim is to establish a reputation and market presence as the “small and middle market business bank” in its principal markets. Lakeland funds its loans primarily by offering time, savings and money market, and demand deposit accounts to both commercial enterprises and individuals. Additionally, it originates residential mortgage loans, and services such loans which are owned by other investors. Lakeland also has a leasing division which provides equipment lease financing primarily to small and medium sized business clients and an asset based lending department which specializes in utilizing particular assets to fund the working capital needs of borrowers.

The Company and Lakeland are subject to regulations of certain state and federal agencies and, accordingly, are periodically examined by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, Lakeland’s business is particularly susceptible to being affected by state and federal legislation and regulations.

Basis of Financial Statement Presentation

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

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

The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan and lease losses, the valuation of the Company’s investment securities portfolio, the realizability of the Company’s deferred tax asset and the analysis of goodwill and intangible impairment.

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

The Company’s operating segments are components of its enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is its Chief Executive

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Officer. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of Lakeland to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. The situation is also similar for consumer and residential mortgage lending. All significant operating decisions are based upon analysis of the Company as one operating segment or unit. Accordingly, the Company has determined that it has one operating segment and thus one reporting segment.

Investment Securities

Investment securities are classified in one of three categories: held to maturity, trading, or available for sale. Investments in debt securities, for which management has both the ability and intent to hold to maturity, are carried at cost, adjusted for the amortization of premiums and accretion of discounts computed by the effective interest method. Investments in debt and equity securities, which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk, liquidity requirements, or other factors, are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are reported as other comprehensive income (loss) and excluded from the determination of net income. The Company does not engage in securities trading. Gains or losses on disposition of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method. Losses are recorded through the statement of operations when the impairment is considered other-than-temporary, even if a decision to sell has not been made.

The Company evaluates the portfolio for impairment each quarter. In estimating other-than-temporary losses, the Company considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and whether the Company is more likely than not to sell the security before recovery of its cost basis. If a security has been impaired for more than twelve months, and the impairment is deemed other than temporary and material, a write down will occur in that quarter. If a loss is deemed to be other-than-temporary, it is recognized as a realized loss in the income statement with the security assigned a new cost basis.

If the Company intends to sell an impaired security, the Company records an other-than-temporary loss in an amount equal to the entire difference between the fair value and amortized cost. If a security is determined to be other-than-temporarily impaired, but the Company does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

Loans and Leases and Allowance for Loan and Lease Losses

Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal and are net of unearned discount, unearned loan fees and an allowance for loan and lease losses.

Interest income is accrued as earned on a simple interest basis. All unamortized fees and costs related to the loan are amortized over the life of the loan using the interest method. Accrual of interest is discontinued on a loan or lease when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that collection of interest and principal is doubtful. When a loan or lease is placed on such non-accrual status, all accumulated accrued interest receivable is reversed out of current period income.

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period of 90 days or more unless the obligation is both well-secured and in process of collection. Residential mortgage loans are placed on non-accrual status at the time principal and interest have been in default for a period of 90 days or more, 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. As a general rule, a non-accrual asset may be restored to accrual status when none of its principal or interest is due and unpaid, satisfactory payments have been received for a sustained period (usually six months), or when it otherwise becomes well-secured and in the process of collection.

Loans are classified as troubled debt restructured loans in cases where borrowers experience financial difficulties but are current on their payments and the Company makes certain concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate for a new loan with similar risk. Nonetheless, restructured loans are classified as impaired loans.

Once an obligation has been restructured because of credit problems, it continues to be considered restructured until paid in full or if all of the following conditions are met: (1) the financial problems of the borrower have been cured; (2) the obligation is returned to a market rate and term; and (3) there has been performance for the longer of the next annual reporting period or six consecutive months.

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

The determination of the adequacy of the allowance for loan and lease losses and the 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.

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Methodology employed for assessing the adequacy of the allowance consists of the following criteria:

•

A loan is reviewed for charge-off when it is placed on non-accrual status with a resulting charge-off if the loan is not secured by collateral having sufficient liquidation value to repay the loan and all outstanding interest owed, and the loan is not in the process of collection. Charge-offs are recommended by the Chief Credit Officer and approved by the Board on a monthly basis.

The Company transfers leases to held for sale status when it identifies leases that it intends to sell. At that time, the specific leases are written down to the lower of cost or market value by recording a charge to the allowance for loan and lease losses. Market indications are derived from sale price indications from potential buyers and based on recent sale prices of prior lease pools adjusted for differences in types of collateral and other characteristics. Subsequent declines in fair market value are recorded as a loss on leasing related assets in the statement of operations.

Bank Premises and Equipment

Bank premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the terms of the related leases.

Other Real Estate Owned and Other Repossessed Assets

Other real estate owned (OREO) and other repossessed assets, representing property acquired through foreclosure (or deed-in-lieu-of-foreclosure), are carried at fair value less estimated disposal costs of the acquired property. Costs relating to holding the assets are charged to expense. An allowance for OREO or other repossessed assets is established, through charges to expense, to maintain properties at the lower of cost or fair value less estimated costs to sell. Operating results of OREO and other repossessed assets, including rental income and operating expenses, are included in other expenses.

Mortgage Servicing

The Company performs various servicing functions on loans owned by others. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received for these services. At December 31, 2011 and 2010, Lakeland was servicing approximately $30.3 million and $30.8 million, respectively, of loans for others.

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The Company originates mortgages under a definitive plan to sell or securitize those loans and service the loans owned by the investor. Upon the transfer of the mortgage loans in a sale or a securitization, the Company records the servicing assets retained. The Company records mortgage servicing rights and the loans based on relative fair values at the date of origination and evaluated for impairment at each reporting period.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on sales of loans are specifically identified and accounted for in accordance with U.S. GAAP which requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitization of a mortgage loan held for sale, based upon its ability and intent to sell or hold these investments. No mortgage loans were identified as held for sale as of December 31, 2011 and 2010.

Restrictions On Cash And Due From Banks

Lakeland is required to maintain reserves against customer demand deposits by keeping cash on hand or balances with the Federal Reserve Bank of New York in a noninterest bearing account. The amounts of those reserves at December 31, 2011 and 2010 were approximately $325,000 and $454,000, respectively.

Earnings Per Share

Earnings per share is calculated on the basis of the weighted average number of common shares outstanding during the year. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Unless otherwise indicated, all weighted average, actual shares or per share information in the financial statements have been adjusted retroactively for the effect of stock dividends.

Employee Benefit Plans

The Company has certain employee benefit plans covering substantially all employees. The Company accrues such costs as incurred.

U.S. GAAP requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations are recognized as a component of Accumulated Other Comprehensive Income, net of tax effects, until they are amortized as a component of net periodic benefit cost.

Stock-Based Compensation

The Company’s shareholders approved the 2009 Equity Compensation Program, which authorizes the granting of incentive stock options, supplemental stock options, restricted shares and restricted stock units to employees of the Company, including those employees serving as officers and directors of the Company. The plan authorizes the issuance of up to 2.1 million shares in connection with options and awards granted under the 2009 program. The Company’s stock option grants under this plan expire 10 years from the date of grant, ninety days after termination of service other than for cause, or one year after death or disability of the grantee. The Company currently has no option or restricted stock awards with market or performance conditions attached to them.

The Company established the 2000 Equity Compensation Program which authorizes the granting of incentive stock options, supplemental stock options and restricted stock to employees of the Company, which includes those employees serving as officers and directors of the Company. The plan authorized 2,370,237 shares

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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 or restricted stock awards with market or performance conditions attached to them. The Company generally issues shares for option exercises from its treasury stock using the cost method. No further awards will be granted from the 2000 program.

Statement Of Cash Flows

Cash and cash equivalents are defined as cash on hand, cash items in the process of collection, amounts due from banks and federal funds sold with an original maturity of three months or less. The following shows supplemental non-cash investing and financing activities for the periods presented:


	2011		2010		2009
	(in thousands)
Transfer of loans and leases receivable to other real estate owned and other repossessed assets	$	2,482	$	3,052	$	5,271
Cash paid for income taxes		8,874		6,460		2,434
Cash paid for interest		20,366		26,508		42,448
Transfer of leases receivable to leases held for sale at fair value		—		—		67,945
Transfer of leases from held for sale to held for investment		1,517		1,888		—

Comprehensive Income

The Company reports comprehensive income in addition to net income (loss) from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income (loss).

Year ended December 31, 2011

Before
tax amount

Tax Benefit
(Expense)

Net of tax
amount

(dollars in thousands)

Unrealized gains on available for sale securities

Unrealized holding gains arising during period

8,600

(3,155

)

5,445

Less reclassification adjustment for net gains realized in net income

1,229

(430

)

799

Net unrealized gains on available for sale securities

7,371

(2,725

)

4,646

Change in pension liabilities

(176

)

(102

)

Other comprehensive income, net

7,195

(2,651

)

4,544


	Year ended December 31, 2010
	Before tax amount			Tax Benefit (Expense)			Net of tax amount
	(dollars in thousands)
Unrealized losses on available for sale securities
Unrealized holding losses arising during period	$	(139	)	$	75		$	(64	)
Less reclassification adjustment for net gains realized in net income		1,614			(565	)		1,049

Net unrealized losses on available for sale securities		(1,753	)		640			(1,113	)
Change in pension liabilities		161			(64	)		97

Other comprehensive loss, net	$	(1,592	)	$	576		$	(1,016	)

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	Year ended December 31, 2009
	Before tax amount		Tax Expense			Net of tax amount
	(dollars in thousands)
Unrealized gains on available for sale securities
Unrealized holding gains arising during period	$	5,229	$	(1,919	)	$	3,310
Less reclassification adjustment for net gains realized in net income (loss)		2,905		(1,017	)		1,888

Net unrealized gains on available for sale securities		2,324		(902	)		1,422
Change in pension liabilities		486		(197	)		289

Other comprehensive income, net	$	2,810	$	(1,099	)	$	1,711

Goodwill and Other Identifiable Intangible Assets

Goodwill and core deposit intangibles resulting from prior acquisitions totaled $87.1 million and $7.9 million, respectively, at the time of acquisition. Total goodwill was $87.1 million at December 31, 2011 and 2010. In the third quarter of 2011 the Company completed its core deposit intangible amortization. Core deposit intangibles were $578,000 at December 31, 2010 which was amortized in 2011. Core deposit amortization was $1.1 million for both 2010 and 2009.

The Company reviews goodwill for impairment annually as of November 30 or when circumstances indicate a potential for impairment at the reporting unit level. U.S. GAAP requires at least an annual review of the fair value of a Reporting Unit that has goodwill in order to determine if it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If this qualitative test determines it is unlikely (less than 50% probability) the carrying value of the Reporting Unit is less than its fair value, then the company does not have to perform a Step One impairment test. If the probability is greater than 50%, a Step One goodwill impairment test is required. The Step One test compares the fair value of each reporting unit to the carrying value of its net assets, including goodwill. If the fair value is less than carrying value, the Step Two test is required. The Company has determined that it has one reporting unit, Community Banking.

Bank Owned Life Insurance

The Company invests in bank owned life insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is owner and beneficiary of the policies. At December 31, 2011 and 2010, the Company had $44.8 million and $43.3 million, respectively, in BOLI. Income earned on BOLI was $1.4 million, $1.5 million and $1.9 million for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease in income earned on BOLI in 2011 compared to 2010 was due to a decrease in the yield on the underlying policies. Income earned on BOLI in 2009 included $485,000 in proceeds from insurance policy payouts.

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Income Taxes

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 allowance for loan and lease losses, core deposit intangibles, deferred loan fees and deferred compensation.

Variable Interest Entities

Management has determined that Lakeland Bancorp Capital Trust I, Lakeland Bancorp Capital Trust II, Lakeland Bancorp Capital Trust III and Lakeland Bancorp Capital Trust IV (collectively, “the Trusts”) qualify as variable interest entities. The Trusts issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts hold, as their sole asset, subordinated debentures issued by the Company.

The Company’s maximum exposure to the Trusts is $75 million which is the Company’s liability to the Trusts and includes the Company’s investment in the Trusts.

The Federal Reserve has issued guidance on the regulatory capital treatment for the trust preferred securities issued by the Trusts. The rule retains the current maximum percentage of total capital permitted for trust preferred securities at 25%, but enacts other changes to the rules governing trust preferred securities that affect their use as part of the collection of entities known as “restricted core capital elements.” The rule allows bank holding companies to continue to count trust preferred securities as Tier 1 Capital at March 31, 2011. The Company’s capital ratios continue to be categorized as “well-capitalized” under the regulatory framework for prompt corrective action. Under the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, any new issuance of trust preferred securities by the Company would not be eligible as regulatory capital.

New Accounting Pronouncements

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(“IFRS”). As a result, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective during interim and annual periods beginning after December 15, 2011. The guidance is to be applied prospectively, and early application by public entities is not permitted. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements.

In June 2011, the FASB issued accounting guidance updating the requirements regarding the presentation of comprehensive income to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS. Under the new guidance, the components of net income and the components of other comprehensive income can be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present components of other comprehensive income as part of the changes in stockholders’ equity. This amendment will be applied prospectively and the amendments are effective for fiscal years and interim periods beginning after December 15, 2011. Adoption of the guidance is not expected to have a significant impact on the Company’s financial statements. In December 2011, the FASB deferred certain aspects of this guidance related to the requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income.

In September 2011, the FASB issued accounting guidance related to the annual testing of goodwill for impairment. Under the new guidance, an entity has the option to first determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If, however, the entity concludes otherwise, then it is required to perform the first step of the two-step impairment test and then perform the second test, if required. This amendment is effective for annual and interim goodwill impairment tests performed for the fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company adopted this guidance for its goodwill review as of November 30, 2011. Adoption did not have a significant impact on the Company’s financial statements.

NOTE 2—INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and the fair value of the Company’s available for sale and held to maturity securities are as follows:


	December 31, 2011									December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)									(in thousands)
AVAILABLE FOR SALE
U.S. government agencies	$	43,463	$	140	$	—		$	43,603	$	107,870	$	294	$	(867	)	$	107,297
Mortgage-backed securities		344,938		5,014		(428	)		349,524		306,882		2,536		(3,566	)		305,852
Obligations of states and political subdivisions		34,102		1,875		(9	)		35,968		27,567		357		(375	)		27,549
Other debt securities		20,965		72		(1,320	)		19,717		22,582		102		(811	)		21,873
Equity securities		22,876		306		(50	)		23,132		23,979		559		(2	)		24,536

	$	466,344	$	7,407	$	(1,807	)	$	471,944	$	488,880	$	3,848	$	(5,621	)	$	487,107

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	December 31, 2011									December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)									(in thousands)
HELD TO MATURITY
U.S. government agencies	$	9,005	$	134	$	—		$	9,139	$	4,996	$	229	$	—		$	5,225
Mortgage-backed securities		20,577		1,148		(1	)		21,724		20,774		1,105		—			21,879
Obligations of states and political subdivisions		40,559		1,305		(9	)		41,855		39,235		956		(84	)		40,107
Other debt securities		1,559		72		(75	)		1,556		1,568		40		(4	)		1,604

	$	71,700	$	2,659	$	(85	)	$	74,274	$	66,573	$	2,330	$	(88	)	$	68,815

The following table lists contractual maturities of investment securities classified as available for sale and held to maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	December 31, 2011
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	15,418	$	15,485	$	18,533	$	18,640
Due after one year through five years		47,864		47,687		15,715		16,313
Due after five years through ten years		30,493		31,797		14,315		14,950
Due after ten years		4,755		4,319		2,560		2,647

		98,530		99,288		51,123		52,550
Mortgage-backed securities		344,938		349,524		20,577		21,724
Equity securities		22,876		23,132		—		—

Total securities	$	466,344	$	471,944	$	71,700	$	74,274

The following table shows proceeds from sales of securities, gross gains and gross losses on sales and calls of securities for the periods indicated:


	Years ended December 31,
	2011			2010			2009
	(in thousands)
Sale proceeds	$	92,409		$	76,048		$	153,763
Gross gains		1,285			1,752			4,506
Gross losses		(56	)		(10	)		(661	)

Securities with a carrying value of approximately $343.7 million and $340.6 million at December 31, 2011 and 2010, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.

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The following table indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010:


	Less than 12 months				12 months or longer				Number of securities		Total
December 31, 2011	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Number of securities		Fair value		Unrealized Losses
	(dollars in thousands)
AVAILABLE FOR SALE
U.S. government agencies	$	—	$	—	$	—	$	—		0	$	—	$	—
Mortgage-backed securities		81,067		398		9,201		30		23		90,268		428
Obligations of states and political subdivisions		2,171		9		20		—		5		2,191		9
Other debt securities		467		12		5,645		1,308		4		6,112		1,320
Equity securities		5,043		50		—		—		4		5,043		50

	$	88,748	$	469	$	14,866	$	1,338		36	$	103,614	$	1,807

HELD TO MATURITY
Mortgage-backed securities	$	1,513	$	1	$	—	$	—		1	$	1,513	$	1
Obligations of states and political subdivisions		790		2		395		7		4		1,185		9
Other debt securities		957		75		—		—		2		957		75

	$	3,260	$	78	$	395	$	7		7	$	3,655	$	85


	Less than 12 months				12 months or longer				Number of securities		Total
December 31, 2010	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Number of securities		Fair value		Unrealized Losses
	(dollars in thousands)
AVAILABLE FOR SALE
U.S. government agencies	$	60,037	$	867	$	—	$	—		13	$	60,037	$	867
Mortgage-backed securities		143,693		3,535		5,323		31		36		149,016		3,566
Obligations of states and political subdivisions		11,404		374		40		1		27		11,444		375
Other debt securities		4,962		38		6,182		773		4		11,144		811
Equity securities		—		—		1		2		1		1		2

	$	220,096	$	4,814	$	11,546	$	807		81	$	231,642	$	5,621

HELD TO MATURITY
Obligations of states and political subdivisions	$	2,699	$	76	$	415	$	8		8	$	3,114	$	84
Other debt securities		529		4		—		—		1		529		4

	$	3,228	$	80	$	415	$	8		9	$	3,643	$	88

Management has evaluated the securities in the above table and has concluded that, with the exception of the equity securities discussed below, none of the securities with unrealized losses has impairments that are other-than-temporary. Fair value below cost is solely due to interest rate movements and is deemed temporary.

Investment securities, including the mortgage backed securities and corporate securities, are evaluated on a periodic basis to determine if factors are identified that would require further analysis. In evaluating the Company’s securities, management considers the following items:

•

The credit ratings of the underlying issuer and if any changes in the credit rating have occurred;

•

The results of discounted cash flow analyses;

•

The Company’s ability and intent to hold the securities, including an evaluation of the need to sell the security to meet certain liquidity measures, or whether the Company has sufficient levels of cash to hold the identified security in order to recover the entire amortized cost of the security;

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•

The length of time the security’s fair value has been less than amortized cost; and

•

Adverse conditions related to the security or its issuer, if the issuer has failed to make scheduled payments or other factors.

In 2011 the Company recorded no other-than-temporary impairment charges on investments in its equity securities portfolio, compared to $128,000 in 2010.

As of December 31, 2011, equity securities included $12.8 million in investment funds that do not have a quoted market price but use net asset value per share or its equivalent to measure fair value.

The funds include $2.9 million in funds that are primarily invested in community development loans that are guaranteed by the Small Business Administration (SBA). Because the funds are primarily guaranteed by the federal government there are minimal changes in market value between accounting periods. These funds can be redeemed within 60 days notice at the net asset value less unpaid management fees with the approval of the fund manager. As of December 31, 2011, the net amortized cost equaled the market value of the investment. There are no unfunded commitments related to this investment.

The funds also include $9.9 million in funds that are invested in government guaranteed loans, mortgage-backed securities, small business loans and other instruments supporting affordable housing and economic development. The Company may redeem these funds at the net asset value calculated at the end of the current business day less any unpaid management fees. As of December 31, 2011, the amortized cost of these securities was $9.7 million and the fair value was $9.9 million. There are no restrictions on redemptions for the holdings in these investments other than the notice required by the fund manager. There are no unfunded commitments related to this investment.

NOTE 3—LOANS AND LEASES

The following sets forth the composition of Lakeland’s loan and lease portfolio for the years ended December 31, 2011 and 2010:


	December 31,
	2011		2010
	(in thousands)
Commercial, secured by real estate	$	1,012,982	$	970,240
Commerical, industrial and other		209,915		194,259
Leases		28,879		65,640
Leases held for sale		—		1,517
Real estate-residential mortgage		406,222		403,561
Real estate-construction		79,138		70,775
Home equity and consumer		304,190		306,322

Total loans and leases		2,041,326		2,012,314
Plus deferred costs		249		2,303

Loans and leases, net of deferred costs	$	2,041,575	$	2,014,617

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Non-accrual and Past Due Loans

The following schedule sets forth certain information regarding the Company’s non-accrual loans and leases, its other real estate owned and other repossessed assets, and accruing troubled debt restructurings:


	At December 31,
(in thousands)	2011		2010
Commercial, secured by real estate	$	16,578	$	12,905
Commercial, industrial and other		4,608		1,702
Leases, including leases held for sale		575		6,277
Real estate—residential mortgage		11,610		12,834
Real estate—construction		12,393		6,321
Home equity and consumer		3,252		2,930

Total non-accrual loans and leases		49,016		42,969
Other real estate and other repossessed assets		1,182		1,592

TOTAL NON-PERFORMING ASSETS	$	50,198	$	44,561

Troubled debt restructurings, still accruing	$	8,856	$	9,073

Non-accrual loans included $4.6 million and $3.6 million of troubled debt restructurings for the years ended December 31, 2011 and 2010, respectively.

An age analysis of past due loans, segregated by class of loans as of December 31, 2011 and 2010 is as follows:

December 31, 2011

30-59 Days
Past Due

60-89 Days
Past Due

Greater
Than 89
Days

Total
Past Due

Current

Total Loans
and Leases

Recorded
Investment greater
than 89 Days and
still accruing

(in thousands)

Commercial, secured by real estate

3,638

1,731

16,578

21,947

991,035

1,012,982

—

Commercial, industrial and other

512

4,608

5,169

204,746

209,915

—

Leases, including leases held for sale

397

164

575

1,136

27,743

28,879

—

Real estate—residential mortgage

3,059

1,235

12,818

17,112

389,110

406,222

1,208

Real estate—construction

—

12,393

66,745

79,138

—

Home equity and consumer

2,350

448

3,411

6,209

297,981

304,190

159

9,956

3,627

50,383

63,966

1,977,360

2,041,326

1,367

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December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days		Total Past Due		Current		Total Loans and Leases		Recorded Investment greater than 89 Days and still accruing
	(in thousands)
Commercial, secured by real estate	$	4,387	$	2,856	$	13,557	$	20,800	$	949,440	$	970,240	$	651
Commercial, industrial and other		175		83		1,703		1,961		192,298		194,259		2
Leases, including leases held for sale		20,919		427		6,293		27,639		39,518		67,157		16
Real estate—residential mortgage		4,867		1,574		13,176		19,617		383,944		403,561		343
Real estate—construction		450		—		6,321		6,771		64,004		70,775		—
Home equity and consumer		3,459		842		3,137		7,438		298,884		306,322		206

	$	34,257	$	5,782	$	44,187	$	84,226	$	1,928,088	$	2,012,314	$	1,218

Impaired Loans

Impaired loans for the year ended December 31, 2011 and 2010, are as follows:

December 31, 2011

Recorded
Investment in
Impaired loans

Contractual
Unpaid
Principal
Balance

Specific
Allowance

Interest
Income
Recognized

Average
Investment in
Impaired loans

(in thousands)

Loans without specific allowance:

Commercial, secured by real estate

19,648

24,922

—

332

14,792

Commercial, industrial and other

4,074

8,155

—

3,445

Leases, including leases held for sale

—

Real estate-residential mortgage

415

—

542

Real estate-construction

12,400

16,353

—

11,231

Home equity and consumer

400

485

—

Loans with specific allowance:

Commercial, secured by real estate

3,920

6,421

392

6,209

Commercial, industrial and other

534

647

172

—

768

Leases, including leases held for sale

—

Real estate-residential mortgage

561

570

332

Real estate-construction

244

518

—

333

Home equity and consumer

949

963

142

800

Total:

Commercial, secured by real estate

23,568

31,343

392

350

21,001

Commercial, industrial and other

4,608

8,802

172

—

4,213

Leases, including leases held for sale

—

Real estate—residential mortgage

976

985

874

Real estate-construction

12,644

16,871

11,564

Home equity and consumer

1,349

1,448

142

814

43,145

59,449

805

447

38,466

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December 31, 2010	Recorded Investment in Impaired loans		Contractual Unpaid Principal Balance		Specific Allowance		Interest Income Recognized		Average Investment in Impaired loans
	(in thousands)
Loans without specific allowance:
Commercial, secured by real estate	$	14,176	$	19,083	$	—	$	206	$	11,551
Commercial, industrial and other		513		530		—		—		375
Leases, including leases held for sale		—		—		—		—		—
Real estate-residential mortgage		969		969		—		30		776
Real estate-construction		7,302		8,330		—		9		3,195
Home equity and consumer		—		—		—		—		123

Loans with specific allowance:
Commercial, secured by real estate		3,992		5,191		403		6		11,180
Commercial, industrial and other		1,243		1,400		511		2		2,485
Leases, including leases held for sale		91		91		49		—		114
Real estate-residential mortgage		397		397		60		6		347
Real estate-construction		69		309		7		—		1,005
Home equity and consumer		1,249		1,249		103		41		529
Total:
Commercial, secured by real estate	$	18,168	$	24,274	$	403	$	212	$	22,731
Commercial, industrial and other		1,756		1,930		511		2		2,860
Leases, including leases held for sale		91		91		49		—		114
Real estate—residential mortgage		1,366		1,366		60		36		1,123
Real estate—construction		7,371		8,639		7		9		4,200
Home equity and consumer		1,249		1,249		103		41		652

	$	30,001	$	37,549	$	1,133	$	300	$	31,680

The balance of impaired loans and leases was $31.4 million at December 31, 2009. The allowance for loan and lease losses associated with impaired loans and leases was $3.7 million at December 31, 2009. At December 31, 2009, the Company had $14.6 million in impaired loans and leases for which there was no related allowance for loan losses. The average recorded investment in impaired loans and leases was $25.2 million during 2009, and the income recognized, primarily on the cash basis, on impaired loans and leases was $55,000 during 2009. Interest which would have been accrued on impaired loans and leases during 2011, 2010 and 2009 was $2.9 million, $2.2 million and $2.0 million, respectively.

Credit Quality Indicators

The class of loan and leases are determined by internal risk rating. Management closely and continually monitors the quality of its loans and leases and assesses the quantitative and qualitative risks arising from the credit quality of its loans and leases. It is the policy of Lakeland to require that a Credit Risk Rating be assigned to all commercial loans and loan commitments. The Credit Risk Rating System has been developed by management to provide a methodology to be used by Loan Officers, department heads and Senior Management in identifying various levels of credit risk that exist within Lakeland’s loan portfolios. The risk rating system assists Senior Management in evaluating Lakeland’s loan portfolio, analyzing trends, and determining the proper level of required reserves to be recommended to the Board. In assigning risk ratings, management considers, among other things, a borrower’s debt service coverage, earnings strength, loan to value ratios, industry conditions and economic conditions. Management categorizes loans and commitments into a one (1) to nine (9) numerical structure with rating 1 being the strongest rating and rating 9 being the weakest. Ratings 1 through 5W are considered ‘Pass’ ratings.

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The following table shows the Company’s commercial loan portfolio as of December 31, 2011 and 2010, by the risk ratings discussed above (in thousands):

December 31, 2011

Commercial,
secured by
real estate

Commercial,
Industrial
and other

Real estate-
construction

Risk Rating

—

11,323

—

26,085

17,658

11,175

301,490

48,835

14,185

575,061

95,040

36,088

5W—Watch

31,648

9,346

198

6—Other Assets Especially Mentioned

30,666

11,708

2,315

7—Substandard

47,861

16,005

14,866

8—Doubtful

171

—

311

9—Loss

—

Total

1,012,982

209,915

79,138


December 31, 2010	Commercial, secured by real estate		Commercial, Industrial and other		Real estate- construction
Risk Rating	Commercial, secured by real estate		Commercial, Industrial and other		Real estate- construction
1	$	—	$	9	$	—
2		—		4,454		—
3		30,704		14,279		—
4		280,478		41,018		10,317
5		495,798		102,217		35,627
5W—Watch		61,383		14,925		1,908
6—Other Assets Especially Mentioned		48,382		6,593		17,361
7—Substandard		53,291		10,205		5,562
8—Doubtful		204		559		—
9—Loss		—		—		—

Total	$	970,240	$	194,259	$	70,775

This table does not include consumer or residential loans or leases because they are evaluated on their performing status.

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Allowance for Loan and Lease Losses

The following table details activity in the allowance for loan and lease losses by portfolio segment and the related recorded investment in loans and leases for the year ended December 31, 2011 and 2010:

12/31/2011

Commercial,
secured by
real estate

Commercial,
industrial
and other

Leases

Real estate-
residential
mortgage

Real estate-
Construction

Home
equity and
consumer

Total

(in thousands)

Allowance for Loan and Lease Losses:

Beginning Balance

11,366

5,113

3,477

2,628

2,176

2,571

27,331

Charge-offs

5,352

5,249

2,858

1,772

3,636

3,010

21,877

Recoveries

2,084

439

1,206

318

4,146

Provision

8,520

3,174

(1,137

)

2,189

2,817

3,253

18,816

Ending Balance

16,618

3,477

688

3,077

1,424

3,132

28,416

Ending Balance: Individually evaluated for impairment

392

172

—

142

805

Ending Balance: Collectively evaluated for impairment

16,226

3,305

688

3,002

1,400

2,990

27,611

Ending Balance

16,618

3,477

688

3,077

1,424

3,132

28,416

Loans and Leases:

Ending Balance: Individually evaluated for impairment

23,568

4,608

—

976

12,644

1,349

43,145

Ending Balance: Collectively evaluated for impairment

989,414

205,307

28,879

405,246

66,494

302,841

1,998,181

Ending Balance(1)

1,012,982

209,915

28,879

406,222

79,138

304,190

2,041,326

(1)	Excludes leases held for sale and deferred costs

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12/31/2010	Commercial, secured by real estate		Commercial, industrial and other		Leases		Real estate- residential mortgage		Real estate- Construction		Home equity and consumer		Total
	(in thousands)
Allowance for Loan and Lease Losses:
Beginning Balance	$	9,285	$	4,647	$	4,308	$	1,286	$	3,198	$	2,839	$	25,563
Charge-offs		7,510		3,298		4,307		397		1,756		2,250	$	19,518
Recoveries		134		62		1,391		7		—		411	$	2,005
Provision		9,457		3,702		2,085		1,732		734		1,571	$	19,281

Ending Balance	$	11,366	$	5,113	$	3,477	$	2,628	$	2,176	$	2,571	$	27,331

Ending Balance: Individually evaluated for impairment	$	403	$	511	$	49	$	60	$	7	$	103	$	1,133
Ending Balance: Collectively evaluated for impairment		10,963		4,602		3,428		2,568		2,169		2,468	$	26,198

Ending Balance	$	11,366	$	5,113	$	3,477	$	2,628	$	2,176	$	2,571	$	27,331

Loans and Leases:
Ending Balance: Individually evaluated for impairment	$	18,168	$	1,756	$	91	$	1,366	$	7,371	$	1,249	$	30,001
Ending Balance: Collectively evaluated for impairment		952,072		192,503		65,549		402,195		63,404		305,073	$	1,980,796

Ending Balance(1)	$	970,240	$	194,259	$	65,640	$	403,561	$	70,775	$	306,322	$	2,010,797

(1)	Excludes leases held for sale and deferred costs

Changes in the allowance for loan and lease losses are as follows for the year ended December 31, 2009.


	2009
	(in thousands)
Balance at beginning of year	$	25,053
Provision for loan and lease losses		51,615
Loans and leases charged off		(53,382	)
Recoveries		2,277

Balance at end of year	$	25,563

Troubled Debt Restructurings

Troubled debt restructurings are those loans where significant concessions have been made due to borrowers’ financial difficulties. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate, a moratorium of principal payments and/or an extension of the maturity date at a stated interest rate lower than the current market rate of a new loan with similar risk. The Company considers the potential losses on these loans as well as the remainder of its impaired loans when considering the adequacy of the allowance for loan losses.

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The following table summarizes, as of December 31, 2011, loans that have been restructured in 2011:


	For the year ended December 31, 2011
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial, secured by real estate		14	$	5,414	$	5,021
Commercial, industrial and other		1		63		37
Leases		—		—		—
Real estate—residential mortgage		2		476		475
Real estate—construction		—		—		—
Home equity and consumer		5		901		885

		22	$	6,854	$	6,418

The following table summarizes as of December 31, 2011, loans that were restructured within the last 12 months that have subsequently defaulted:


	Number of Contracts		Recorded Investment
	(Dollars in thousands)
Defaulted Troubled Debt Restructurings:
Commercial, secured by real estate		4	$	1,550
Commercial, industrial and other		—		—
Leases		—		—
Real estate—residential mortgage		1		173
Real estate—construction		—		—
Home equity and consumer		1		400

		6	$	2,123

Related Party Loans

Lakeland has entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons on similar terms, including interest rates and collateral, as those prevailing for comparable transactions with other borrowers not related to Lakeland. At December 31, 2011, loans to these related parties amounted to $27.6 million. There were new loans of $9.0 million to related parties and repayments of $11.9 million from related parties in 2011.

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Leases Held for Sale

Lakeland had no leases held for sale on December 31, 2011 compared to leases held for sale with a fair market value of $1.5 million as of December 31, 2010. During the first quarter of 2011, management reclassified $1.5 million of leases held for sale to held for investment because management’s intent regarding these leases had changed. During the year ended December 31, 2009, Lakeland sold lease pools with a carrying value of $54.2 million for $53.4 million and recorded a loss on sales of leases of $792,000. During 2010, the Company sold leases with a carrying value of $1.1 million for $1.0 million and recorded a loss of $61,000. The following table shows the components of gains on leasing related assets for the periods presented:


	For the years ended
	December 31,
(in thousands)	2011			2010			2009
Gains (losses) on sales of leases	$	143		$	(61	)	$	(792	)
Mark-to-market adjustment on held for sale leases		—			—			(1,431	)
Realized gains on paid off leases		883			833			592
Gains on sales of other repossessed assets		(52	)		808			230

Total gains (losses) on leasing related assets	$	974		$	1,580		$	(1,401	)

Gains (losses) on held for sale leasing assets are included in gain (loss) on leasing related assets along with other miscellaneous leasing income typically recorded in Lakeland’s leasing business.

Future minimum lease payments of lease receivables (including leases held for sale) are as follows (in thousands):


2012	$	15,154
2013		7,063
2014		3,923
2015		2,113
2016		612
thereafter		14

	$	28,879

Other Real Estate and Other Repossessed Assets

At December 31, 2011, the Company had other repossessed assets and other real estate owned of $236,000 and $946,000, respectively. At December 31, 2010, the Company had other repossessed assets and other real estate owned of $558,000 and $1.0 million, respectively. For the years ended December 31, 2011, 2010 and 2009, the Company had writedowns of $230,000, $0 and $782,000, respectively, on other real estate and other repossessed assets which are included in other real estate and repossessed asset expense in the Statement of Operations.

NOTE 4—PREMISES AND EQUIPMENT


	Estimated useful lives	December 31,
	Estimated useful lives	2011		2010
		(in thousands)
Land	Indefinite	$	5,418	$	5,418
Buildings and building improvements	10 to 50 years		32,393		31,018
Leasehold improvements	10 to 25 years		2,390		2,409
Furniture, fixtures and equipment	2 to 30 years		28,912		29,370

			69,113		68,215
Less accumulated depreciation and amortization			41,196		40,661

		$	27,917		27,554

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NOTE 5—DEPOSITS

At December 31, 2011, the schedule of maturities of certificates of deposit is as follows (in thousands):


Year
2012	$	253,823
2013		66,395
2014		23,502
2015		13,706
2016		1,221
Thereafter		905

	$	359,552

NOTE 6—DEBT

Lines of Credit

As a member of the Federal Home Loan Bank of New York (FHLB), Lakeland has the ability to borrow overnight based on the market value of collateral pledged. As of December 31, 2011 and 2010, there were no overnight borrowings from the FHLB. As of December 31, 2011, the Company also had overnight federal funds lines available for it to borrow up to $162.0 million. The Company had borrowed $28.0 and $5.5 million against these lines as of December 31, 2011 and 2010, respectively. The Company may also borrow from the discount window of the Federal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with the Federal Reserve Bank of New York as of December 31, 2011 or 2010.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Short-term borrowings at December 31, 2011 and 2010 consisted of short-term securities sold under agreements to repurchase and federal funds purchased. Securities underlying the agreements were under Lakeland’s control. The following tables summarize information relating to securities sold under agreements to repurchase and federal funds purchased for the years presented. For purposes of the tables, the average amount outstanding was calculated based on a daily average.


	2011			2010			2009
	(dollars in thousands)
Federal funds purchased:
Balance at December 31	$	28,000		$	5,500		$	14,075
Interest rate at December 31		0.32	%		0.50	%		0.50	%
Maximum amount outstanding at any month-end during the year	$	35,750		$	20,900		$	42,400
Average amount outstanding during the year	$	6,674		$	3,190		$	4,447
Weighted average interest rate during the year		0.41	%		0.46	%		0.55	%


	2011			2010			2009
	(dollars in thousands)
Securities sold under agreements to repurchase:
Balance at December 31	$	44,131		$	46,623		$	49,597
Interest rate at December 31		0.09	%		0.14	%		0.27	%
Maximum amount outstanding at any month-end during the year	$	60,818		$	81,873		$	55,101
Average amount outstanding during the year	$	52,566		$	59,584		$	45,439
Weighted average interest rate during the year		0.12	%		0.19	%		0.25	%

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Other Borrowings

FHLB Debt

At December 31, 2011, advances from the FHLB totaling $95.0 million will mature within one month to six years and are reported as other borrowings. These advances are collateralized by certain securities and first mortgage loans. The advances had a weighted average interest rate of 1.63%. In the third quarter of 2011, the Company prepaid $20.0 million of its FHLB debt that had a weighted rate of 4.10% and incurred a prepayment penalty of $800,000.

FHLB debt matures as follows (in thousands):


2012	$	60,000
2013		—
2014		10,000
2015		—
2016		—
Thereafter		25,000

	$	95,000

Long-term Securities Sold Under Agreements to Repurchase

At December 31, 2011, the Company had $60.0 million in long-term securities sold under agreements to repurchase. These securities were able to be called starting in 2009. These advances are collateralized by certain securities. The advances had a weighted average interest rate of 3.86%. These borrowings have rates that can reset quarterly. These long-term securities sold under agreements to repurchase mature as follows (in thousands):


2012	$	—
2013		—
2014		10,000
2015		20,000
2016		10,000
Thereafter		20,000

	$	60,000

Subordinated Debentures

In May 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.

In December 2003, the Company issued $25.8 million of junior subordinated debentures due January 7, 2034 to Lakeland Bancorp Capital Trust III, a Delaware business trust. The distribution rate on these securities is 7.535% for 10 years and floats at LIBOR plus 285 basis points thereafter. The debentures are the sole asset of the

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Trust. The Trust issued 25,000 shares of trust preferred securities, $1,000 face value, for total proceeds of $25.0 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 January 7, 2009, 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 2034.

In June 2003, the Company issued $10.3 million of junior subordinated debentures due July 7, 2033 to Lakeland Bancorp Capital Trust I, a Delaware business trust. The distribution rate on these securities was 6.20% for 7 years and floats at LIBOR plus 310 basis points thereafter. The debentures are the sole asset of the Trust. The Trust issued 10,000 shares of trust preferred securities, $1,000 face value, for total proceeds of $10.0 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 July 7, 2010, 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 2033.

In June 2003, the Company also issued $20.6 million of junior subordinated debentures due June 30, 2033 to Lakeland Bancorp Capital Trust II, a Delaware business trust. The distribution rate on these securities was 5.71% for 5 years and floats at LIBOR plus 310 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 June 30, 2008, 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 2033.

NOTE 7—STOCKHOLDERS’ EQUITY

On January 14, 2011, the Company’s Board of Directors authorized a 5% stock dividend which was distributed on February 16, 2011, to holders of record as of January 31, 2011.

On February 6, 2009, under the Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP), the Company issued 59,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A preferred stock”) to the U.S. Department of the Treasury (the U.S. Treasury) for a purchase price of $59.0 million. The Series A preferred stock has a 5% annual dividend rate for the first five years and a 9% annual dividend thereafter if the Series A preferred stock are not redeemed by the Company. The Company may redeem the Series A preferred stock with the consent of the Treasury Department in conjunction with the Company’s primary regulator at any time.

In conjunction with the issuance of our Series A preferred stock, the Company also issued a warrant to purchase 997,049 shares of the Company’s common stock to the U.S. Treasury. The warrant has a 10-year term and is immediately exercisable at an exercise price, subject to anti-dilution adjustments, of $8.88 per share.

The proceeds from the U.S. Treasury are allocated to the Series A preferred stock and the warrant based on their relative fair values. The fair value of the Series A preferred stock was determined through a discounted future cash flow model. The Company calculated the fair value of the Series A preferred stock by using a 14% discount rate and discounting the cash flows over a 10 year period. A Black-Scholes pricing model was used to calculate the fair value of the warrant. The Black-Scholes model used the following assumptions, a dividend yield of 5.12%, volatility of 32% and a risk-free interest rate of 3.05%.

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A $3.3 million discount was being amortized over a five year period using a level yield method. The effective yield on the amortization of the Series A preferred stock is approximately 6.36%. In determining net income (loss) available to common shareholders, the periodic amortization and the cash dividend on the Series A preferred stock are subtracted from net income (loss).

On August 4, 2010, the Company redeemed 20,000 shares of its Series A preferred stock. The Company paid to the Treasury $20.2 million, which included $20.0 million of principal and $219,000 in accrued and unpaid dividends, on August 4, 2010. As a result of the early payment, the Company also accelerated the accretion of $898,000 of the preferred stock discount. The warrant previously issued to the Treasury to purchase 997,049 shares of common stock at an exercise price of $8.88, subject to anti-dilution adjustments, remained outstanding.

On March 16, 2011, the Company redeemed 20,000 shares of Series A Preferred Stock. The Company paid to the Treasury $20.1 million, which included $20.0 million of principal and $86,000 in accrued and unpaid dividends, on March 16, 2011. As a result of the early payment, the Company also accelerated the accretion of $745,000 of the preferred stock discount. The above mentioned warrant issued to the U.S. Treasury remained outstanding.

On February 8, 2012, the Company redeemed its remaining 19,000 shares of its Series A Preferred Stock. The Company paid to the Treasury $19.2 million, which included $19.0 million of principal and $219,000 in accrued and unpaid dividends, on February 8, 2012. As a result of the early payment, the Company also accelerated the accretion of $501,000 of the preferred stock discount.

On February 29, 2012, the Company repurchased the outstanding common stock warrant for the purchase of 997,049 shares of its common stock, for $2.8 million, completing the Company’s participation in the Treasury’s CPP. Upon repurchase, the common stock warrant had a carrying value of $3.3 million. The repurchase price of $2.8 million was recorded as a reduction to common stock on the statement of changes in stockholders’ equity.

NOTE 8—SHAREHOLDER PROTECTION RIGHTS PLAN

The Company adopted a Shareholder Rights Plan (the “Rights Plan”) in 2001 to protect shareholders from attempts to acquire control of the Company at an inadequate price. Under the Rights Plan, the Company distributed a dividend of one right to purchase a unit of common stock on each outstanding common share of the Company. The rights were not exercisable or transferable, and no separate certificates evidencing such rights were to be distributed, unless certain events occur. The rights expired on September 4, 2011.

The Rights Plan was not adopted in response to any specific effort to acquire control of the Company. The issuance of rights had no dilutive effect, did not affect the Company’s reported earnings per share, and was not taxable to the Company or its shareholders.

NOTE 9—INCOME TAXES

The components of income taxes are as follows:


	Years Ended December 31,
	2011		2010		2009
	(in thousands)
Current tax provision (benefit)	$	8,540	$	9,578	$	(5,052	)
Deferred tax provision (benefit)		172		547		(2,725	)

Total provision (benefit) for income taxes	$	8,712	$	10,125	$	(7,777	)

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The income tax provision reconciled to the income taxes that would have been computed at the statutory federal rate of 35% is as follows:


	Years Ended December 31,
	2011			2010			2009
	(in thousands)
Federal income tax (benefit), at statutory rates	$	9,999		$	10,270		$	(4,609	)
Increase (deduction) in taxes resulting from:
Non-taxable interest income		(1,387	)		(1,407	)		(1,612	)
State income tax, net of federal income tax effect		246			1,387			(1,156	)
Other, net		(146	)		(125	)		(400	)

Provision (benefit) for income taxes	$	8,712		$	10,125		$	(7,777	)

The net deferred tax asset consisted of the following:


	December 31,
	2011		2010
	(in thousands)
Deferred tax assets:
Allowance for loan and lease losses	$	12,023	$	11,426
Valuation reserves on leases held for sale		—		598
Valuation reserves for land held for sale and other real estate		679		679
Non-accrued interest		657		839
Deferred compensation		1,288		1,266
Other than temporary impairment loss on investment securities		374		374
Unfunded pension benefits		308		234
Unrealized loss on securities available for sale		—		633
Other, net		691		502

Deferred tax assets		16,020		16,551

Deferred tax liabilities:
Core deposit intangible from acquired companies		58		296
Deferred loan costs		1,336		1,336
Prepaid expenses		332		337
Depreciation and amortization		706		242
Deferred gain on securities		194		194
Fair market value adjustments		—		25
Unrealized gains on securities available for sale		2,093		—
Other		575		572

Deferred tax liabilities		5,294		3,002

Net deferred tax assets, included in other assets	$	10,726	$	13,549

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A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:


(in thousands)	2011			2010
Balance at January 1	$	474		$	694
Additions for tax positions of prior years		39			51
Reductions for tax positions resulting from lapse of statute of limitations		(195	)		(135	)
Settlements		(66	)		(136	)

Balance at December 31	$	252		$	474

The amount of unrecognized tax benefits as of December 31, 2011 and 2010, was $241,000 and $398,000, respectively, all of which, if ultimately recognized, would reduce the Company’s annual effective tax rate.

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 examinations by tax authorities for the years before 2007 or to state and local examinations by tax authorities for the years before 2006.

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 $43,000 and $112,000 for the payment of interest and penalties at December 31, 2011 and 2010, respectively.

NOTE 10—EARNINGS PER SHARE

The Company uses the two class method to compute earnings per common share. Participating securities include non-vested restricted stock. The following tables present the computation of basic and diluted earnings per share for the periods presented.

Year ended December 31, 2011

Income
(numerator)

Shares
(denominator)

Per share
amount

(in thousands, except per share amounts)

Basic earnings per share

Net income available to common shareholders

17,684

25,307

0.70

Less: earnings allocated to participating securities

130

0.01

Net income available to common shareholders

17,554

25,307

0.69

Effect of dilutive securities

Stock options and restricted stock

—

104

—

Diluted earnings per share

Net income available to common shareholders plus assumed conversions

17,554

25,411

0.69

Options to purchase 569,978 shares of common stock and 18,946 shares of restricted stock at a weighted average of $13.20 and $12.10 per share, respectively, were not included in the computation of diluted earnings per share because the option and warrant exercise price and the grant date price were greater than the average market price during the period.

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	Year ended December 31, 2010
	Income (numerator)		Shares (denominator)		Per share amount
	(in thousands, except per share amounts)
Basic earnings per share
Net income available to common shareholders	$	15,224		25,097	$	0.61
Less: earnings allocated to participating securities		80				0.01

Net income available to common shareholders	$	15,144		25,097	$	0.60
Effect of dilutive securities
Stock options, restricted stock and a warrant		—		31		—

Diluted earnings per share
Net income available to common shareholders plus assumed conversions	$	15,144		25,128	$	0.60

Options to purchase 702,167 shares of common stock, a warrant to purchase 997,049 shares of common stock and 44,761 shares of restricted stock at a weighted average of $12.97, $8.88 and $11.99 per share, respectively, were not included in the computation of diluted earnings per share because the option and warrant exercise price and the grant date price were greater than the average market price during the period.


	Year ended December 31, 2009
	Income (numerator)			Shares (denominator)		Per share amount
	(in thousands, except per share amounts)
Basic loss per share
Net loss available to common shareholders	$	(8,590	)		24,856	$	(0.35	)
Effect of dilutive securities
Stock options, restricted stock and a warrant		—			—		—

Diluted loss per share
Net loss available to common shareholders plus assumed conversions	$	(8,590	)		24,856	$	(0.35	)

Options to purchase 856,246 shares of common stock, a warrant to purchase 997,049 shares of common stock and 101,735 shares of restricted stock at a weighted average of $11.79, $8.88 and $11.40 per share, respectively, were not included in the computation of diluted earnings per share because of the net loss recorded. The two step-method was not used in the computation of earnings per share because of the net loss recorded.

NOTE 11—EMPLOYEE BENEFIT PLANS

Profit Sharing Plan

The Company has a profit sharing plan for all its eligible employees. The Company’s annual contribution to the plan is determined by its Board of Directors. Annual contributions are allocated to participants on a point basis with accumulated benefits payable at retirement, or, at the discretion of the plan committee, upon termination of employment. Contributions made by the Company were approximately $675,000 for 2011 and $600,000 for 2010. There were no contributions to the profit sharing plan in 2009.

Salary Continuation Agreements

The National Bank of Sussex County (NBSC) entered into a salary continuation agreement during 1996 with its former Chief Executive Officer (CEO) and its President which entitle them to certain payments upon their retirement. As part of the merger of the Company and NBSC’s parent (High Point Financial Corp.) in July 1999, Lakeland placed in trusts amounts equal to the present value of the amounts that would be owed to them in their retirement. These amounts were $722,000 for the CEO and $381,000 for the President. The Company has no further obligation to pay additional amounts pursuant to these agreements.

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Former CEO Retirement Benefits

Metropolitan State Bank entered into an agreement in January 1997 with its former CEO, which provides for an annual retirement benefit of $35,000 for a fifteen year period. In February 1999, the Company entered into an additional agreement with this CEO. Such agreement provides for an additional retirement benefit of $35,000 per annum for a fifteen year period. During 2011, 2010 and 2009, $5,000, $7,000 and $8,000, respectively, was charged to operations related to these obligations.

Retirement Savings Plans (401K plans)

Beginning in January 2002, the Company began contributing to its 401(k) plan. All eligible employees can contribute a portion of their annual salary with the Company matching up to 50% of the employee’s contributions. The Company’s contributions in 2011, 2010 and 2009 totaled $596,000, $575,000 and $558,000, respectively.

Pension Plan

Newton Trust Company had a defined benefit pension plan (the Plan) that was frozen prior to the acquisition by the Company. All participants of the Plan ceased accruing benefits as of that date.

The investment policy and strategy of the Plan and its advisors includes target portfolio allocations of approximately 55% in equities, 35% in debt securities, 5% in commodities and 5% in cash. Based on historical performance, the Plan assumes that the long term equity securities have earned a rate of return of approximately 10% and fixed income securities have earned a return of between 1% and 5%.

The assets of the Plan consist of cash and cash equivalents and investments in mutual funds that are actively traded. All of the mutual funds are classified as Level 1 securities meaning that their market values are unadjusted quoted prices in active markets.

The following table shows the fair value and the portfolio allocations of the assets in the Plan by type of investment as of December 31, 2011 (dollars in thousands):


	Market Value		Percent of Assets
Cash and cash equivalents	$	180		12	%
Fixed Income Mutual funds		485		33	%
U.S. Large-Cap funds		304		20	%
US Mid-and Small-Cap funds		99		7	%
US Balanced funds		143		10	%
International funds		238		16	%
Commodity funds		35		2	%

	$	1,484		100	%

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The accumulated benefit obligation as of December 31 is as follows:


(in thousands)	2011			2010
Accumulated postretirement benefit obligation	$	1,970		$	1,831
Interest Cost		97			96
Actuarial loss		282			81
Estimated benefit payments		(149	)		(38	)

Total accumulated postretirement benefit obligation		2,200			1,970

Fair value of plan assets beginning of period		1,490			1,235
Return on plan assets		(17	)		133
Benefits paid		(149	)		(38	)
Contribution		160			160

Fair value of plan assets at end of year		1,484			1,490
Funded status		(716	)		(480	)
Unrecognized net actuarial loss		—			—

Liability	$	(716	)	$	(480	)

Accumulated benefit obligation	$	2,200		$	1,970

The components of net periodic pension cost are as follows:


(in thousands)	2011			2010			2009
Amortization of actuarial loss	$	47		$	54		$	71
Interest cost on APBO		97			96			94
Expected return on plan assets		(89	)		(79	)		(49	)

Net periodic postretirement cost	$	55		$	71		$	116

The benefits expected to be paid in each of the next five years and the aggregate for the five fiscal years thereafter are as follows (in thousands):


2012	$	42
2013		68
2014		77
2015		78
2016		89
2017 – 2021		578

The assumptions used to determine the pension obligation and the net periodic pension cost were as follows:


	2011			2010
Discounted rate		4.00	%		5.00	%
Expected return on plan assets		5.00	%		5.75	%
Rate of compensation		0.00	%		0.00	%

Deferred Compensation Arrangements

High Point Financial Corp. had established deferred compensation arrangements for certain directors and executives of High Point Financial Corp. and NBSC. The deferred compensation plans differ, but generally provide for annual payments for ten to fifteen years following retirement. The Company’s liabilities under these arrangements are being accrued from the commencement of the plans over the participants’ remaining periods of

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service. The Company intends to fund its obligations under the deferred compensation arrangements with the increase in cash surrender value of life insurance policies that it has purchased on the respective participants. The deferred compensation plans do not hold any assets. For the years ended December 31, 2011, 2010 and 2009 there were no charges related to this plan. As of December 31, 2011 and 2010, the accrued liability for these plans was $249,000 and $223,000, respectively.

Supplemental Executive Retirement Plans

In 2003, the Company entered into a supplemental executive retirement plan (SERP) agreement with its former CEO that provides annual retirement benefits of $150,000 a year for a 15 year period when the former CEO reached the age of 65. Our former CEO retired and is receiving annual retirement benefits pursuant to the plan. In 2008, the Company entered into a SERP agreement with its current CEO that provides annual retirement benefits of $150,000 for a 15 year period when the CEO reaches the age of 65. In November 2008, the Company entered into a SERP with its Senior Executive Vice President and Chief Operating Officer that provides annual retirement benefits of $90,000 a year for a 10 year period upon his reaching the age of 65. The Company intends to fund its obligations under the deferred compensation arrangements with the increase in cash surrender value of bank owned life insurance policies. In 2011, 2010 and 2009, the Company recorded compensation expense of $233,000, $229,000 and $230,000, respectively, for these plans.

NOTE 12—DIRECTORS RETIREMENT PLAN

The Company provides a plan that any director who became a member of the Board of Directors prior to 2009 who completes five years of service may retire and continue to be paid for a period of ten years at a rate ranging from $5,000 through $17,500 per annum, depending upon years of credited service. This plan is unfunded. The following tables present the status of the plan and the components of net periodic plan cost for the years then ended. The measurement date for the accumulated benefit obligation is December 31 of the years presented.


	December 31,
	2011			2010
	(in thousands)
Accrued plan cost included in other liabilities	$	1,027		$	1,054

Amount not recognized as component of net postretirement benefit cost
Recognized in accumulated other comprehensive income
Net actuarial (gain) loss	($	12	)	$	2
Unrecognized prior service cost		—			—

Amounts not recognized as a component of net postretirement benefit cost (benefit)	($	12	)	$	2


	Years ended December 31,
	2011		2010		2009
	(in thousands)
Net periodic plan cost included the following components:
Service cost	$	24	$	27	$	27
Interest cost		48		59		50
Amortization of prior service cost		23		30		43

	$	95	$	116	$	120

A discount rate of 4.00% and 5.00% was assumed in the plan valuation for 2011 and 2010, respectively. As the benefit amount is not dependent upon compensation levels, a rate of increase in compensation assumption was not utilized in the plan valuation.

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The director’s retirement plan holds no plan assets. The benefits expected to be paid in each of the next five years and in aggregate for the five years thereafter are as follows (in thousands):


2012	$	88
2013		88
2014		70
2015		80
2016		80
2017 – 2021		233

The Company expects its contribution to the director’s retirement plan to be $88,000 in 2012.

The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic benefit cost in 2012 is $26,000.

NOTE 13—STOCK-BASED COMPENSATION

Employee Stock Option Plans

On May 21, 2009, the Company’s shareholders approved the 2009 Equity Compensation Program, which authorizes the granting of incentive stock options, supplemental stock options, restricted shares and restricted stock units to employees of the Company, including those employees serving as officers and directors of the Company. The plan authorizes the issuance of 2.1 million shares in connection with options and awards granted under the 2009 program.

The Company established the 2000 Equity Compensation Program which authorizes the granting of incentive stock options, supplemental stock options and restricted stock to employees of the Company which includes those employees serving as officers and directors of the Company. The plan authorized 2,370,237 shares of common stock of the Company. No further awards will be granted from the 2000 program.

During 2010, the Company granted options to purchase 26,250 shares to a new non-employee director of the Company at an exercise price of $8.64 per share under the 2009 program. The director’s options are exercisable in five equal installments beginning on the date of grant and continuing on the next four anniversaries of the date of grant. As of December 31, 2011 and 2010, 201,614 and 236,790 options granted to directors were outstanding, respectively.

As of December 31, 2011 and 2010, outstanding options to purchase common stock granted to key employees were 368,364 and 465,820, respectively.

In addition to the 2009 and 2000 Equity Compensation programs, the Company has assumed the outstanding options granted under Newton Financial Corp.’s 1999 Stock Option Plan (the Newton Plan). As of December 31, 2011 and 2010, 0 and 18,511 options, respectively, were outstanding under the Newton Plan. All of the options in the Newton plan had expired by December 31, 2011.

On January 14, 2009, the Company granted 15,174 shares of restricted stock at a market value of $8.82 per share under the 2000 program. These shares vest over a four year period. Compensation expense on these shares is expected to be approximately $26,000 per year for the next four years. In 2010, the Company granted 36,357 shares of restricted stock at a fair value of $6.84 per share under the 2009 program. These shares vest over a five year period. Compensation expense on these shares is expected to be approximately $50,000 per year for the next five years. In 2011, the Company granted 95,345 shares of restricted stock at a fair value of $9.87 per share under the Company’s 2009 equity compensation program. These shares vest over a five year period. Compensation expense on these shares is expected to average approximately $188,000 per year for the next five years.

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Excess tax benefits of stock based compensation was ($3,000), $21,000, and $2,000 for the years 2011, 2010 and 2009, respectively.

For the year ended December 31, 2010, the Company estimated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:


	2010
Risk-free interest rates		2.32	%
Expected dividend yield		2.20	%
Expected volatility		47.00	%
Expected lives (years)		6.00
Weighted average fair value of options granted	$	3.31

There were no stock options granted in 2011 or 2009.

A summary of the status of the Company’s option plans as of December 31, 2011 and the changes during the year ending on that date is represented below.

Number
of shares

Weighted
average
exercise
price

Weighted
average
remaining
contractual
term
(in years)

Aggregate
Intrinsic
Value

Outstanding, beginning of year

721,123

12.77

158,349

Granted

—

Exercised

(20,023

)

5.82

Expired

(115,407

)

11.78

Forfeited

(15,715

)

13.52

Outstanding, end of year

569,978

13.20

2.91

Options exercisable at year-end

548,978

13.34

3.09

A summary of the Company’s non-vested options under the Company’s option plans as of December 31, 2011 and changes for the year then ended is presented below.


Non-vested Options	Shares			Weighted- Average Grant-date Fair Value
Non-vested, January 1, 2011		37,012		$	3.20
Granted		—			0.00
Vested		(16,012	)		3.09

Non-vested, December 31, 2011		21,000		$	3.28

As of December 31, 2011, there was $46,000 of unrecognized compensation expense related to unvested stock options under the 2009 and 2000 Equity Compensation Programs. Compensation expense recognized for stock options was $43,000, $60,000, and $32,000 for 2011, 2010, and 2009, respectively.

The aggregate intrinsic values of options exercised in 2011, 2010 and 2009 were $78,000, $232,000 and $5,000, respectively. Exercise of stock options during 2011, 2010 and 2009 resulted in cash receipts of $72,000, $662,000 and $15,000, respectively. The total fair value of options that vested in 2011, 2010 and 2009 were $50,000, $50,000 and $32,000, respectively.

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Information regarding the Company’s restricted stock for the year ended December 31, 2011 is as follows:


	Number of shares			Weighted average price
Outstanding, January 1, 2011		101,314		$	9.62
Granted		95,345			9.87
Vested		(30,569	)		11.51
Forfeited		(1,545	)		9.61

Outstanding, December 31, 2011		164,545		$	9.41

The total fair value of the restricted stock vested during the year ended December 31, 2011 was approximately $352,000. Compensation expense recognized for restricted stock was $584,000, $478,000 and $411,000 in 2011, 2010 and 2009, respectively. There was approximately $1.1 million in unrecognized compensation expense related to restricted stock grants as of December 31, 2011.

NOTE 14—COMMITMENTS AND CONTINGENCIES

Lease Obligations

Rent expense under long-term operating leases amounted to approximately $1.9 million, $1.9 million and $2.0 million for the years ended December 31, 2011, 2010 and 2009, respectively, including rent expense to related parties of $325,000 in 2011, $295,000 in 2010, and $300,000, in 2009. At December 31, 2011, the minimum commitments, which include rental, real estate tax and other related amounts, under all noncancellable leases with remaining terms of more than one year and expiring through 2032 are as follows(in thousands):


Year
2012	$	2,058
2013		2,080
2014		1,993
2015		1,838
2016		1,516
Thereafter		10,864

	$	20,349

Litigation

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NOTE 15—FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Lakeland is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement Lakeland has in particular classes of financial instruments.

Lakeland’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. Lakeland uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Lakeland generally requires collateral or other security to support financial instruments with credit risk. The approximate contract amounts are as follows:


	December 31,
	2011		2010
	(in thousands)
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit	$	436,761	$	407,164
Standby letters of credit and financial guarantees written		9,043		8,873

At December 31, 2011 and 2010 there were $91,000 and $0, respectively, in commitments to lend additional funds to borrowers whose terms have been modified in troubled debt restructurings.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Lakeland evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Lakeland upon extension of credit, is based on management’s credit evaluation.

Standby letters of credit are conditional commitments issued by Lakeland to guarantee the payment by or performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Lakeland holds deposit accounts, residential or commercial real estate, accounts receivable, inventory and equipment as collateral to support those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 2011 and 2010 varies based on management’s credit evaluation.

Lakeland issues financial and performance letters of credit. Financial letters of credit require Lakeland to make payment if the customer fails to make payment, as defined in the agreements. Performance letters of credit require Lakeland to make payments if the customer fails to perform certain non-financial contractual obligations. Lakeland defines the initial fair value of these letters of credit as the fees received from the customer. Lakeland records these fees as a liability when issuing the letters of credit and amortizes the fee over the life of the letter of credit.

The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2011 is $9.0 million and they expire through 2024. Lakeland’s exposure under these letters of credit would be reduced by actual performance, subsequent termination by the beneficiaries and by any proceeds that Lakeland obtained in liquidating the collateral for the loans, which varies depending on the customer.

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As of December 31, 2011, Lakeland had $436.8 million in loan and lease commitments, with $364.6 million maturing within one year, $41.0 million maturing after one year but within three years, $1.3 million maturing after three years but within five years, and $29.9 million maturing after five years. As of December 31, 2011, Lakeland had $9.0 million in standby letters of credit, with $7.4 million maturing within one year, $1.4 million maturing after one year but within three years, $137,000 maturing after three years but within five years, and $80,000 maturing after five years.

Lakeland grants loans primarily to customers in its immediately adjacent suburban counties which include Bergen, Morris, Passaic, Sussex, Warren and Essex counties in Northern New Jersey and surrounding areas. Certain of Lakeland’s consumer loans and lease customers are more diversified nationally. Although Lakeland has a diversified loan portfolio, a large portion of its loans are secured by commercial or residential real property. Although Lakeland has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the economy. Commercial and standby letters of credit were granted primarily to commercial borrowers.

NOTE 16—FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS

U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest level priority to unobservable inputs (level 3 measurements).

The following describes the three levels of fair value hierarchy:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – quoted prices for similar assets or liabilities in active markets; or quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability.

Level 3 – unobservable inputs for the asset or liability that reflect the Company’s own assumptions about assumptions that market participants would use in the pricing of the asset or liability and that are consequently not based on market activity but upon particular valuation techniques.

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The following table sets forth the Company’s financial assets that were accounted for at fair values for the periods presented by level within the fair value hierarchy. The Company had no liabilities accounted for at fair value as of December 31, 2011 and 2010. During the year ended December 31, 2011, the Company did not make any transfers between recurring level 1 fair value measurements and recurring level 2 financial measurements. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


	(Level 1)		(Level 2)		(Level 3)		Total Fair Value
	(in thousands)
December 31, 2011
Assets:
Investment securities, available for sale
US government agencies	$	—	$	43,603	$	—	$	43,603
Mortgage backed securities		—		349,524		—		349,524
Obligations of states and political subdivisions		—		35,968		—		35,968
Corporate debt securities		—		19,717		—		19,717
Equity securities		1,732		21,400		—		23,132

Total securities available for sale	$	1,732	$	470,212	$	—	$	471,944

December 31, 2010
Assets:
Investment securities, available for sale
US government agencies	$	—	$	107,297	$	—	$	107,297
Mortgage backed securities		—		305,852		—	$	305,852
Obligations of states and political subdivisions		—		27,549		—	$	27,549
Corporate debt securities		—		21,873		—	$	21,873
Equity securities		2,090		22,446		—	$	24,536

Total securities available for sale	$	2,090	$	485,017	$	—	$	487,107

The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

(Level 1)

(Level 2)

(Level 3)

Total
Fair Value

(in thousands)

December 31, 2011

Assets:

Impaired Loans and Leases

—

43,145

Other real estate owned and other repossessed assets

—

1,182


	(Level 1)		(Level 2)		(Level 3)		Total Fair Value
	(in thousands)
December 31, 2010
Assets:
Impaired Loans and Leases	$	—	$	—	$	30,001	$	30,001
Other real estate owned and other repossessed assets		—		—		1,592		1,592

Impaired loans and leases are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Because most of Lakeland’s impaired loans are collateral-dependent, fair value is measured based on the value of the collateral securing these loans and leases and is classified at a level 3 in the

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fair value hierarchy. Collateral may be real estate, accounts receivable, inventory, equipment and/or other business assets. The value of the real estate is assessed based on appraisals by qualified third party licensed appraisers. The value of the equipment may be determined by an appraiser, if significant, inquiry through a recognized valuation resource, or by the value on the borrower’s financial statements. Field examiner reviews on business assets may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans and leases are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Other real estate owned (OREO) and other repossessed assets, representing property acquired through foreclosure, is carried at fair value less estimated disposal costs of the acquired property.

Changes in the assumptions or methodologies used to determine fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.

Fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the fair values, and recorded book balances at December 31, 2011 and 2010 are outlined below.

The net loan portfolio at December 31, 2011 and 2010 has been valued using a present value discounted cash flow where market prices were not available. The discount rate used in these calculations is the current market rate adjusted for credit risk. The carrying value of accrued interest approximates fair value.

The fair values of demand deposits (i.e. interest (checking) and non-interest bearing demand accounts, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts of variable rate accounts approximate their fair values at the reporting date. For fixed maturity certificates of deposit, fair value was estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

The fair value of securities sold under agreements to repurchase and long-term debt are based upon discounted value of contractual cash flows. The Company estimates the discount rate using the rates currently offered for similar borrowing arrangements.

The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

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The carrying values and fair values of the Company’s financial instruments are as follows:


	December 31,
	2011				2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	72,558	$	72,558	$	49,278	$	49,278
Investment securities available for sale		471,944		471,944		487,107		487,107
Investment securities held to maturity		71,700		74,274		66,573		68,815
Loans, including leases held for sale		2,041,575		2,055,448		2,014,617		2,008,192

Financial Liabilities:
Deposits		2,249,653		2,252,509		2,195,889		2,199,018
Federal funds purchased and securities sold under agreements to repurchase		72,131		72,131		52,123		52,123
Other borrowings		155,000		165,821		195,000		209,631
Subordinated debentures		77,322		77,973		77,322		78,707
Commitments:
Standby letters of credit		—		71		—		78

NOTE 17—REGULATORY MATTERS

The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay. Accordingly, dividends should generally only be paid out of current earnings, as defined.

The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of New Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock unless, following the payment of such dividends, the capital stock of Lakeland will be unimpaired, and: (1) Lakeland will have a surplus, as defined, of not less than 50% of its capital stock, or, if not, (2) the payment of such dividend will not reduce the surplus, as defined, of Lakeland. Under these limitations, approximately $224.3 million was available for payment of dividends from Lakeland to the Company as of December 31, 2011.

The Company and Lakeland are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possible additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Lakeland’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s and Lakeland’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Lakeland’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Company and Lakeland to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2011, that the Company and Lakeland met all capital adequacy requirements to which they are subject.

As of December 31, 2011, the most recent notification from the Federal Reserve Bank of New York and the FDIC categorized the Company and Lakeland as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and Lakeland must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions’ category.

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As of December 31, 2011 and 2010, the Company and Lakeland have the following capital ratios:

Actual

For capital
adequacy purposes

To be well capitalized
under prompt corrective
action provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

As of December 31, 2011

Total capital
(to risk-weighted assets)

Company

270,058

13.39

³$161,308

³8.00

N/A

Lakeland

253,070

12.59

160,862

8.00

$201,078

10.00

Tier 1 capital
(to risk-weighted assets)

Company

226,401

11.23

³$ 80,653

³4.00

N/A

Lakeland

227,882

11.33

80,431

4.00

$120,647

6.00

Tier 1 capital
(to average assets)

Company

226,401

8.33

³$108,741

³4.00

N/A

Lakeland

227,882

8.40

108,529

4.00

$135,661

5.00

Actual

For capital
adequacy purposes

To be well capitalized
under prompt corrective
action provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

As of December 31, 2010

Total capital
(to risk-weighted assets)

Company

274,841

13.68

³$160,718

³8.00

N/A

Lakeland

260,490

13.00

160,287

8.00

$200,360

10.00

Tier 1 capital
(to risk-weighted assets)

Company

249,694

12.43

³$ 80,359

³4.00

N/A

Lakeland

235,409

11.75

80,144

4.00

$120,216

6.00

Tier 1 capital
(to average assets)

Company

249,694

9.21

³$108,435

³4.00

N/A

Lakeland

235,409

8.71

108,111

4.00

$135,138

5.00

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NOTE 18—QUARTERLY FINANCIAL DATA (UNAUDITED)

The following represents summarized quarterly financial data of the Company, which in the opinion of management reflected all adjustments, consisting only of nonrecurring adjustments, necessary for a fair presentation of the Company’s results of operations.


	Quarter ended
	March 31, 2011		June 30, 2011		September 30, 2011		December 31, 2011
	(in thousands, except per share amounts)
Total interest income	$	29,889	$	29,600	$	29,288	$	28,747
Total interest expense		5,305		5,179		4,937		4,690

Net interest income		24,584		24,421		24,351		24,057
Provision for loan and lease losses		4,927		5,406		4,058		4,425
Noninterest income		4,230		4,266		4,310		4,082
Gains on investment securities, net		—		444		785		—
Noninterest expense		17,026		16,732		18,040		16,353

Income before taxes		6,861		6,993		7,348		7,361
Income taxes		2,090		2,135		2,242		2,245

Net income	$	4,771	$	4,858	$	5,106	$	5,116

Dividends on Preferred Stock and Accretion	$	1,286	$	294	$	293	$	294

Net Income Available to Common Stockholders	$	3,485	$	4,564	$	4,813	$	4,822

Earnings per share of common stock(1)
Basic	$	0.13	$	0.18	$	0.19	$	0.19
Diluted	$	0.13	$	0.18	$	0.19	$	0.19

	Quarter ended
	March 31, 2010		June 30, 2010		September 30, 2010		December 31, 2010
	(in thousands, except per share amounts)
Total interest income	$	31,783	$	31,595	$	31,314	$	30,957
Total interest expense		7,196		6,666		6,324		5,709

Net interest income		24,587		24,929		24,990		25,248
Provision for loan and lease losses		4,879		5,001		4,857		4,544
Noninterest income		4,108		4,553		4,408		4,585
Gains on investment securities, net		1		—		1,681		60
Other-than-temporary impairment losses		—		—		—		(128	)
Noninterest expense		16,780		17,107		18,951		17,567

Income before taxes		7,037		7,374		7,271		7,654
Income taxes		2,471		2,621		2,399		2,634

Net income	$	4,566	$	4,753	$	4,872	$	5,020

Dividends on Preferred Stock and Accretion	$	898	$	904	$	1,589	$	596

Net Income Available to Common Stockholders	$	3,668	$	3,849	$	3,283	$	4,424

Earnings per share of common stock(1)
Basic	$	0.15	$	0.15	$	0.13	$	0.17
Diluted	$	0.15	$	0.15	$	0.13	$	0.17

(1)	Adjusted for 5% stock dividend payable on February 16, 2011 to shareholders of record January 31, 2011.

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NOTE 19—CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY:

CONDENSED BALANCE SHEETS


	December 31,
	2011		2010
	(in thousands)
ASSETS
Cash and due from banks	$	10,625	$	9,811
Investment securities available for sale		2,037		2,393
Investment in subsidiaries		319,687		322,991
Land held for sale		877		877
Other assets		4,838		3,160

TOTAL ASSETS	$	338,064	$	339,232

LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	959	$	1,201
Subordinated debentures		77,322		77,322
Preferred stock		18,480		37,474
Common stockholders’ equity		241,303		223,235

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	338,064	$	339,232

CONDENSED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2011			2010			2009
	(in thousands)
INCOME
Dividends from subsidiaries	$	31,845		$	30,335		$	2,165
Other-than-temporary impairment losses on securities		—			(128	)		(940	)
Other income		227			176			184

TOTAL INCOME		32,072			30,383			1,409

EXPENSE
Interest on subordinated debentures		4,443			4,604			4,849
Noninterest expenses		1,634			1,395			1,266

TOTAL EXPENSE		6,077			5,999			6,115

Income (loss) before benefit for income taxes		25,995			24,384			(4,706	)
Income taxes benefit		(1,960	)		(2,038	)		(2,399	)

Income (loss) before equity in undistributed income of subsidiaries		27,955			26,422			(2,307	)
Equity in undistributed loss of subsidiaries		(8,104	)		(7,211	)		(3,089	)

NET INCOME (LOSS)	$	19,851		$	19,211		($	5,396	)

Interest on preferred stock and discount accretion		2,167			3,987			3,194

Net Income (Loss) Available to Common Shareholders	$	17,684		$	15,224		($	8,590	)

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CONDENSED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2011			2010			2009
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	19,851		$	19,211		$	(5,396	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Share based compensation		627			538			443
Loss on securities		—			128			940
(Increase) decrease in other assets		(1,660	)		3,196			(2,136	)
Increase (decrease) in other liabilities		3			(45	)		—
Equity in undistributed loss of subsidiaries		8,104			7,211			3,089

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		26,925			30,239			(3,060	)


CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities		(38	)		(35	)		(33	)
Contribution to subsidiary		—			—			(50,000	)

NET CASH USED IN INVESTING ACTIVITIES		(38	)		(35	)		(50,033	)


CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid on common and preferred stock		(6,327	)		(6,847	)		(8,156	)
Issuance of stock to the dividend reinvestment and stock purchase plan		185			57			35
Proceeds on issuance of preferred stock, net of costs		—			—			55,492
Redemption of preferred stock		(20,000	)		(20,000	)		—
Common stock warrants issued		—			—			3,345
Excess tax benefits		(3	)		(5	)		2
Exercise of stock options		72			653			(55	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(26,073	)		(26,142	)		50,663

Net increase (decrease) in cash and cash equivalents		814			4,062			(2,430	)
Cash and cash equivalents, beginning of year		9,811			5,749			8,179

CASH AND CASH EQUIVALENTS, END OF YEAR	$	10,625		$	9,811		$	5,749

-92-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Lakeland Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Lakeland Bancorp, Inc. (a New Jersey corporation) and its subsidiaries (collectively, the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lakeland Bancorp, Inc. and its subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lakeland Bancorp, Inc. and its subsidiaries internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2012 expressed an unqualified opinion on internal control over financial reporting.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

March 15, 2012

-93-

ITEM 9—Changes

in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable

ITEM 9A—Controls

and Procedures

Disclosure Controls

As of the end of the period covered by this Annual Report on Form 10-K, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) pursuant to Securities Exchange Act Rule 15d-15(b).

Based on their evaluation as of December 31, 2011, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective in ensuring that the information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and are operating in an effective manner and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

The management of Lakeland Bancorp, Inc. and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the board of directors of the Company; and

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or because of declines in the degree of compliance with policies or procedures.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.

-94-

As of December 31, 2011, based on management’s assessment, the Company’s internal control over financial reporting was effective.

Our independent registered public accounting firm, Grant Thornton LLP, audited our internal control over financial reporting as of December 31, 2011. Their report, dated March 15, 2012, expressed an unqualified opinion on our internal control over financial reporting.

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 quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

-95-

Report Of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Lakeland Bancorp, Inc.

We have audited Lakeland Bancorp, Inc. (a New Jersey Corporation) and its subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011, and our report dated March 15, 2012 expressed an unqualified opinion.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

March 15, 2012

-96-

ITEM 9B—Other Information

None.

-97-

PART III

ITEM 10—Directors, Executive Officers and Corporate Governance