Lakeland Bancorp (LBAI) 10-Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2005

OR

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

For the transition period from            to            

Commission file number 33-27312

LAKELAND BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(973) 697-2000

(Registrant’s telephone number, including area code)

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of July 31, 2005 there were 21,430,624 outstanding shares of Common Stock, no par value.

LAKELAND BANCORP, INC.

Form 10-Q Index

		PAGE
	Part I Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheets - June 30, 2005 (unaudited) and December 31, 2004	1
	Consolidated Income Statements - Unaudited Three Months and Six Months Ended June 30, 2005 and 2004	2
	Consolidated Statements of Changes in Stockholders’ Equity - Six months ended June 30, 2005 (unaudited) and 12 months ended December 31, 2004	3
	Consolidated Statements of Cash Flows - Unaudited Six Months Ended June 30, 2005 and 2004	4
	Notes to Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
	Part II Other Information
Item 1.	Legal Proceedings	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
Signatures		25

The Securities and Exchange Commission maintains a web site which contains reports, proxy and information statements and

other information relating to registrants that file electronically at the address: http:/ / www.sec.gov.

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	June 30, 2005 (unaudited)			December 31, 2004
	(dollars in thousands)
ASSETS
Cash	$	51,972		$	47,981
Interest-bearing deposits due from banks		27,818			7,365
Total cash and cash equivalents		79,790			55,346
Investment securities available for sale		490,913			582,106
Investment securities held to maturity; fair value of $146,958 in 2005 and $162,926 in 2004		147,484			162,922
Loans, net of deferred fees		1,216,395			1,176,005
Less: allowance for loan and lease losses		16,542			16,638
Net loans		1,199,853			1,159,367
Premises and equipment - net		31,626			31,749
Accrued interest receivable		7,525			8,002
Goodwill and other identifiable intangible assets		93,973			94,119
Bank owned life insurance		34,836			34,240
Other assets		13,244			13,170
TOTAL ASSETS	$	2,099,244		$	2,141,021
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing	$	313,648		$	319,359
Savings and interest-bearing transaction accounts		986,384			1,041,621
Time deposits under $100 thousand		281,325			269,820
Time deposits $100 thousand and over		108,623			96,004
Total deposits		1,689,980			1,726,804
Federal funds purchased and securities sold under agreements to repurchase		103,083			110,830
Long-term debt		45,056			42,288
Subordinated debentures		56,703			56,703
Other liabilities		10,566			9,848
TOTAL LIABILITIES		1,905,388			1,946,473
Commitments and contingencies
Stockholders’ equity:
Common stock, no par value; authorized shares, 40,000,000; issued shares, 22,443,298 at June 30, 2005 and December 31, 2004; outstanding shares, 21,430,624 at June 30, 2005 and 21,714,968 at December 31, 2004		226,188			208,933
Accumulated deficit		(15,855	)		(3,847	)
Treasury stock, at cost, 1,012,674 shares in 2005 and 728,330 shares in 2004		(15,307	)		(10,878	)
Accumulated other comprehensive income (loss)		(1,170	)		340
TOTAL STOCKHOLDERS’ EQUITY		193,856			194,548
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,099,244		$	2,141,021

See accompanying notes to consolidated financial statements

1

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED INCOME STATEMENTS

	For the three months ended June 30,					For the six months ended June 30,
	2005		2004			2005			2004
	(In thousands, except per share data)					(In thousands, except per share data)
INTEREST INCOME
Loans and fees	$	18,424	$	12,812		$	35,973		$	25,481
Federal funds sold and interest-bearing deposits with banks		89		38			220			48
Taxable investment securities		5,686		4,728			11,735			9,741
Tax-exempt investment securities		865		735			1,776			1,499
TOTAL INTEREST INCOME		25,064		18,313			49,704			36,769
INTEREST EXPENSE
Deposits		5,368		3,274			10,449			6,661
Federal funds purchased and securities sold under agreements to repurchase		851		56			1,386			167
Long-term debt		1,418		1,387			2,835			2,787
TOTAL INTEREST EXPENSE		7,637		4,717			14,670			9,615
NET INTEREST INCOME		17,427		13,596			35,034			27,154
Provision for loan and lease losses		327		875			1,110			1,750
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		17,100		12,721			33,924			25,404
NONINTEREST INCOME
Service charges on deposit accounts		2,357		1,839			4,241			3,703
Commissions and fees		731		729			1,466			1,358
Gains on the sales of investment securities		100		413			128			416
Income on bank owned life insurance		305		251			602			530
Leasing income		159		12			660			55
Other income		72		84			156			142
TOTAL NONINTEREST INCOME		3,724		3,328			7,253			6,204
NONINTEREST EXPENSE
Salaries and employee benefits		7,142		5,562			14,247			11,109
Net occupancy expense		1,212		1,004			2,759			2,025
Furniture and equipment		1,115		907			2,210			1,752
Stationery, supplies and postage		476		341			906			689
Legal fees		224		505			447			989
Marketing expense		534		376			875			691
Core deposit intangible amortization		303		102			606			204
Other expenses		2,227		1,781			4,854			3,430
TOTAL NONINTEREST EXPENSE		13,233		10,578			26,904			20,889
Income before provision for income taxes		7,591		5,471			14,273			10,719
Provision for income taxes		2,454		1,753			4,568			3,432
NET INCOME	$	5,137	$	3,718		$	9,705		$	7,287
EARNINGS PER SHARE
Basic	$	0.24	$	0.22		$	0.45		$	0.43
Diluted	$	0.24	$	0.22		$	0.45		$	0.43
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	For the three months ended June 30,					For the six months ended June 30,
	2005		2004			2005			2004
	(in thousands)					(in thousands)
NET INCOME	$	5,137	$	3,718		$	9,705		$	7,287
OTHER COMPREHENSIVE INCOME NET OF TAX:
Unrealized securities gains (losses) arising during period		3,420		(9,525	)		(1,427	)		(4,875	)
Less: reclassification for gains included in net income		65		268			83			270
Other Comprehensive Income (Loss)		3,355		(9,793	)		(1,510	)		(5,145	)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	8,492	$	(6,075	)	$	8,195		$	2,142

See accompanying notes to consolidated financial statements

2

Lakeland Bancorp, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Common stock				Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
	Number of Shares	Amount
	(dollars in thousands)
BALANCE DECEMBER 31, 2003	16,483,551	$	131,116		$	(12,980	)	$	(7,283	)	$	98		$	110,951
Net Income, 2004	—		—			16,495			—			—			16,495
Other comprehensive income, net of tax	—		—			—			—			242			242
Exercise of stock options	—		264			—			818			—			1,082
Shares issued for the purchase of Newton Financial Corp.	4,891,019		77,553												77,553
Cash dividends	—		—			(7,362	)		—			—			(7,362	)
Purchase of treasury stock	—		—			—			(4,413	)		—			(4,413	)
BALANCE DECEMBER 31, 2004	21,374,570	$	208,933		$	(3,847	)	$	(10,878	)	$	340		$	194,548
Net Income, first six months 2005	—		—			9,705			—			—			9,705
Other comprehensive loss, net of tax	—		—			—			—			(1,510	)		(1,510	)
Exercise of stock options	—		(326	)		—			766			—			440
Stock Dividend	1,068,728		17,581			(17,581	)
Cash dividends	—		—			(4,132	)		—			—			(4,132	)
Purchase of treasury stock	—		—			—			(5,195	)		—			(5,195	)
BALANCE JUNE 30, 2005 (UNAUDITED)	22,443,298	$	226,188		$	(15,855	)	$	(15,307	)	$	(1,170	)	$	193,856

See accompanying notes to consolidated financial statements

3

Lakeland Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS-(UNAUDITED)

	For the six months ended June 30,
	2005			2004
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	9,705		$	7,287
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums, discounts and deferred loan fees and costs		1,262			2,005
Depreciation and amortization		2,354			1,561
Provision for loan and lease losses		1,110			1,750
Gain on sales and calls of securities		(128	)		(416	)
Loss on disposition of equipment		—			40
Deferred income taxes		—			1,334
Increase in other assets		192			1,244
Increase (decrease) in other liabilities		718			(1,872	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		15,213			12,933
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from repayments on and maturity of securities:
Available for sale		73,564			80,885
Held for maturity		18,308			9,234
Proceeds from sales of securities:
Available for sale		46,366			—
Held for maturity		715			—
Purchase of securities:
Available for sale		(31,686	)		(56,273	)
Held for maturity		(3,808	)		(28,404	)
Net increase in loans		(41,913	)		(41,433	)
Capital expenditures		(1,625	)		(1,520	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		59,921			(37,511	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		(36,824	)		91,076
Decrease in federal funds purchased and securities sold under agreements to repurchase		(7,747	)		(32,129	)
Advances (repayments) of long-term debt		2,768			(1,000	)
Purchase of treasury stock		(5,195	)		(180	)
Exercise of stock options		440			601
Dividends paid		(4,132	)		(3,195	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(50,690	)		55,173
Net increase in cash and cash equivalents		24,444			30,595
Cash and cash equivalents, beginning of year		55,346			46,084
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	79,790		$	76,679

See accompanying notes to consolidated financial statements

4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Note 1. Significant Accounting Policies

Basis of Presentation.

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

The Company’s financial statements reflect all adjustments and disclosures which management believes are necessary for a fair presentation of interim results. The results of operations for the quarter and six months presented do not necessarily indicate the results that the Company will achieve for all of 2005. You should read these interim financial statements in conjunction with the consolidated financial statements and accompanying notes that are presented in the Lakeland Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2004.

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

Stock-Based Compensation

The Company follows the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied.

At June 30, 2005, the Company had stock-based employee compensation plans, which are more fully described in the Company’s Annual Report on Form 10-K. The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock-based employee compensation costs are not reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

In December 2004, the Company granted options to purchase 158,162 shares of common stock to key employees at an exercise price of $16.39. Included in this grant were 61,561 options which were subject to shareholder approval of an increase in authorized shares. Such shareholder approval was received at the Company’s annual meeting on May 10, 2005.

On May 13, 2005, the Company accelerated the vesting of 460,774 stock options, representing all unvested stock options on such date which had exercise prices in excess of the market value of the Company’s common stock on May 13, 2005. The Company’s decision to accelerate the vesting of these options was part of a review by the Board of Directors of the Company’s incentive compensation program and upcoming changes in the accounting for stock options. The acceleration of the stock options had the effect of reducing pro forma earnings by $1.8 million, and pro forma earnings per share by $0.08 for the quarter and the six months ended June 30, 2005.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts).

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	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2005		2004		2005		2004
Net income, as reported	$	5,137	$	3,718	$	9,705	$	7,287
Deduct: Stock-based compensation costs determined under fair value based method for all awards		1,984		197		2,176		394
Pro forma net income	$	3,153	$	3,521	$	7,529	$	6,893
Earnings per share:
Basic, as reported	$	0.24	$	0.22	$	0.45	$	0.43
Basic, pro forma	$	0.15	$	0.21	$	0.35	$	0.41
Diluted, as reported	$	0.24	$	0.22	$	0.45	$	0.43
Diluted, pro forma	$	0.14	$	0.21	$	0.34	$	0.41

Stock Options outstanding were 1,046,049 and 820,669 at June 30, 2005 and 2004, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2004: dividend rate of 2%, expected volatility of 35%, risk-free interest rate of 3.98% and expected lives of 7 years. The Company granted no stock options during the first half of 2005.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to employee stock options only be disclosed in the footnotes to the financial statements. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) is effective for public companies as of the beginning of the first fiscal year that begins after June 15, 2005. All public companies that used the fair-value-based method for either recognition or disclosure under SFAS No. 123 will apply SFAS No. 123(R) using a modified method of prospective application. Under this transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The impact of this new standard, if it had been in effect, on the net earnings and related per share amounts for the quarters ended June 30, 2005 and 2004 is disclosed in the table above.

On March 29, 2005, the SEC released Staff Accounting Bulletin 107, “Share Based Payments” (SAB 107). The interpretations in SAB 107 express views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 107 provides interpretive guidance related to the interaction between Statement 123(R) and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company is evaluating the impact that the implementation of SAB 107 and SFAS No. 123 (R) will have on future option grants.

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Note 2. Statement of Cash Flow Information.

	For the six months ended June 30,
	2005		2004
	(in thousands)
Supplemental schedule of noncash investing and financing activities:
Cash paid during the period for income taxes	$	3,553	$	4,290
Cash paid during the period for interest		14,270		9,674

Note 3. Earnings Per Share.

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

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

All weighted average, actual shares and per share information set forth in this quarterly report on Form 10-Q has been adjusted retroactively for the effects of stock dividends including the stock dividend declared on June 15, 2005, payable on August 16, 2005 to shareholders of record on July 29, 2005. The following schedule shows the Company’s earnings per share for the periods presented:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands except per share data)	2005		2004		2005		2004
Income applicable to common stock	$	5,137	$	3,718	$	9,705	$	7,287
Weighted average number of common shares outstanding - basic		21,572		16,804		21,636		16,779
Stock options		154		185		165		198
Weighted average number of common shares and common share equivalents - diluted		21,726		16,989		21,801		16,977
Basic earnings per share	$	0.24	$	0.22	$	0.45	$	0.43
Diluted earnings per share	$	0.24	$	0.22	$	0.45	$	0.43

Options to purchase 682,055 shares of common stock at a weighted average price of $15.59 per share were outstanding and were not included in the computation of diluted earnings per share in second quarter 2005 because the option price was greater than the average market price. Options to purchase 392,282 shares of common stock at a weighted average price of $16.30 per share were outstanding and were not included in the year-to-date 2005 computation of diluted earnings per share because the option price was greater than the average market price. Options to purchase 132,052 shares of common stock at a weighted average price of $16.96 per share were outstanding and were not included in the computations of diluted earnings per share in second quarter 2004 and year-to-date 2004 because the option price was greater than the average market prices.

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Note 4. Investment Securities

AVAILABLE FOR SALE

	June 30, 2005									December 31, 2004
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and U.S. government agencies	$	138,594	$	20	$	(2,028	)	$	136,586	$	156,250	$	46	$	(1,867	)	$	154,429
Mortgage-backed securities		286,915		100		(3,008	)		284,007		342,022		831		(2,383	)		340,470
Obligations of states and political subdivisions		39,748		995		(22	)		40,721		44,418		1,513		(10	)		45,921
Other debt securities		9,086		11		(99	)		8,998		22,891		53		(10	)		22,934
Other equity securities		18,412		2,256		(67	)		20,601		16,013		2,354		(15	)		18,352
	$	492,755	$	3,382	$	(5,224	)	$	490,913	$	581,594	$	4,797	$	(4,285	)	$	582,106

HELD TO MATURITY

	June 30, 2005									December 31, 2004
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and U.S. government agencies	$	35,539	$	4	$	(272	)	$	35,271	$	39,949	$	41	$	(144	)	$	39,846
Mortgage-backed securities		56,143		122		(336	)		55,929		62,680		276		(287	)		62,669
Obligations of states and political subdivisions		52,173		162		(261	)		52,074		55,102		305		(178	)		55,229
Other		3,629		55		—			3,684		5,191		4		(13	)		5,182
	$	147,484	$	343	$	(869	)	$	146,958	$	162,922	$	626	$	(622	)	$	162,926

	June 30, 2005
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
			(in thousands)
Due in one year or less	$	9,095	$	9,108	$	12,429	$	12,453
Due after one year through five years		106,565		105,819		36,324		36,029
Due after five years through ten years		58,294		58,018		28,960		28,854
Due after ten years		13,474		13,360		13,628		13,693
		187,428		186,305		91,341		91,029
Mortgage-backed securities		286,915		284,007		56,143		55,929
Other investments		18,412		20,601		—		—
Total securities	$	492,755	$	490,913	$	147,484	$	146,958

In the first half of 2005 the Company sold $715,000 of held to maturity securities because over 85% of the original principal acquired on these securities had been paid by the sale date. The Company recorded a gain of $23,000 on the sale of these securities.

FSP 115-1 will replace the guidance in paragraphs 10–18 of EITF Issue 03-1 (which had been deferred by FSP EITF 03-1-1, “Effective Date of Paragraphs 10–20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments’”) with references to existing other-than-temporary impairment guidance, such as Statement 115, Accounting for Certain Investments in Debt and Equity Securities, Staff Accounting Bulletin 59, Accounting

8

for Noncurrent Marketable Equity Securities, and Opinion 18, The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is considered other than temporary, even if a decision to sell has not been made.

FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The FASB approved the proposed FSP subject to a vote on the final draft. The Company will evaluate the impact that FSP 115-1 will have on its financial statements when the final FSP is issued.

Note 5. Loans.

	June 30, 2005		December 31, 2004
	(in thousands)
Commercial	$	612,505	$	602,062
Real estate-construction		66,253		62,687
Real estate-mortgage		239,673		223,936
Installment		300,880		289,920
Total loans		1,219,311		1,178,605
Less: deferred fees		2,916		2,600
Loans net of deferred fees		1,216,395		1,176,005

The Company follows Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (known as “SFAS No. 114”), and Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosures.” Impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

The following table shows the Company’s recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 as of June 30, 2005 and 2004, and the average recorded investment in impaired loans during the three months preceding those dates:

Date	Investment	Valuation Allowance	Average Recorded Investment (over preceding three months)
June 30, 2005	$10.9 million	$4.5 million	$11.4 million
June 30, 2004	$15.1 million	$6.8 million	$15.5 million

Interest received on impaired loans may be recorded as interest income. However, if management is not reasonably certain that an impaired loan will be repaid in full, or if a specific timeframe to resolve full collection cannot yet be reasonably determined, all payments received are recorded as reductions of principal. The Company recognized interest on impaired loans of $124,000 in the first six months of 2005. Interest that would have accrued had the loans performed under original terms would have been $526,000 for the first six months of 2005.

9

Note 6. Postretirement Health Care Benefits

The components of net periodic postretirement benefit cost are as follows:

	For the three months ended June 30,						For the six months ended June 30,
	2005			2004			2005			2004
	(in thousands)						(in thousands)
Service cost	$	15		$	17		$	30		$	33
Interest cost		10			9			20			18
Expected return on plan assets		—			—			—			—
Amortization of prior service cost		(2	)		(2	)		(4	)		(4	)
Amortization of unrecognized net actuarial loss		12			12			24			24
Amortization of transition obligation		1			1			2			3
Net periodic benefit expense	$	36		$	37		$	72		$	74

The Company currently expects to contribute approximately $20,000 to our post retirement benefit plan in 2005. The Company made contributions of $10,000 to the plan in the six months ended June 30, 2005.

Note 7. Directors’ Retirement Plan

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

	For the three months ended June 30,				For the six months ended June 30,
	2005		2004		2005		2004
	(in thousands)				(in thousands)
Service cost	$	5	$	2	$	10	$	3
Interest cost		12		9		24		18
Amortization of prior service cost		12		8		24		16
Net periodic benefit expense	$	29	$	19	$	58	$	37

The Company made contributions of $37,000 to the plan in the six months ended June 30, 2005 and does not expect to make any more contributions in 2005.

Note 8. Acquisitions

On July 1, 2004, the Company completed the acquisition of Newton Financial Corp. (“NFC”) pursuant to which NFC was merged into the Company. NFC shareholders had the right to elect stock and/or cash in the merger subject to certain allocation provisions. NFC shareholders who received stock received 4.5 shares (4.725 restated*) of the Company’s stock for each of their NFC shares. NFC shareholders who received cash received $72.08 per share. Under the terms of the merger, 1,086,922 shares of NFC stock were exchanged for a total issuance of 4,891,119 shares (5,135,674 restated*) of Lakeland Bancorp stock. The remaining 270,526 shares of NFC stock were exchanged for a total of $19.5 million. NFC stock options of 13,591 were exchanged for Company stock options of 61,160 (64,218 restated*) and were fully vested at the time of the merger. As a result of the acquisition, the Company recorded $67.0 million in goodwill and other intangible assets. In 2005, an unasserted legal claim was identified related to loan payments previously made to Newton prior to Lakeland’s acquisition. The unasserted legal claim of approximately $460,000 was recorded in goodwill during the first quarter of 2005. The transaction was accounted for under the purchase method of accounting. The results of operations include Newton’s results of operations from July 1, 2004 forward.

* Restated for the 5% stock dividend payable August 16, 2005 to shareholders of record July 29, 2005.

The following represents the unaudited pro forma financial information of Lakeland Bancorp as if the acquisition occurred on the first date of the period indicated. The pro forma financial information should be read in conjunction with the related historical information and is not necessarily indicative of the results that would have been attained had the transaction actually taken place on that date.

10

	For the six months ended June 30, 2004
	(in thousands)
Interest income	$	44,276
Interest expense		11,098
Net interest income		33,178
Provision for loan losses		2,186
Non-interest income		6,870
Non-interest expense		25,663
Net Income	$	8,384

In second quarter 2005, the Board of Directors of Lakeland Bancorp voted to merge Lakeland and Newton in November 2005. The Company expects to close three branches (two of Newton and one of Lakeland) after the merger; the deposits and loans of these branches will be moved to nearby locations.

Note 9. Commitments and Contingencies

Litigation

As the Company has disclosed in its periodic reports filed with the SEC, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “10-K”), the Company is involved in legal proceedings concerning four separate portfolios of predominately commercial leases which Lakeland purchased from Commercial Money Center, Inc. (“CMC”). CMC obtained surety bonds from three surety companies to guarantee each lessee’s performance. Relying on these bonds, the Company and other investors purchased the leases and CMC’s right to payment under the various surety bonds. CMC (and a related entity, Commercial Servicing Corp. (“CSC”)) eventually stopped forwarding to the Company the required amounts.

On July 20, 2005, Lakeland entered into a settlement agreement with RLI Insurance Company and one remaining party in Lakeland’s claims related to the CMC matter. Pursuant to the settlement agreements Lakeland was paid an aggregate of $3,315,000 and the parties executed mutual releases. As a result of the settlements, Lakeland’s nonperforming assets were reduced by $6.4 million and no additional loan loss provision will be required. The charged-off portion of the lease portfolio was fully reserved for as of June 30, 2005.

Reference is made to the 10-K for a description of a case captioned Ronnie Clayton dba Clayton Trucking, et al v. Ronald Fisher, et al.

From time to time, the Company and its subsidiaries are defendants in legal proceedings relating to their respective businesses. While the ultimate outcome of the above mentioned matter cannot be determined at this time, management does not believe that the outcome of any pending legal proceeding will materially affect the consolidated financial position of the Company, but could possibly be material to the results of operations of any one period.

Note 10. Common Stock

On June 15, 2005, the Board of Directors declared a 5% stock dividend, payable on August 16, 2005 to shareholders of record on July 29, 2005. On June 10, 2005, the Company completed purchasing the shares purchasable under the 2004 stock buyback plan. On June 16, 2005, the Company announced a stock buyback plan for the purchase of up to 787,500 shares over the following year. As of June 30, 2005, the Company had purchased 83,708 shares under this plan.

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PART I — ITEM 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

You should read this section in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. All weighted average, actual shares and per share information set forth in this quarterly report on Form 10-Q has been adjusted retroactively for the effects of stock dividends including the stock dividend declared on June 15, 2005, payable on August 16, 2005 to shareholders of record on July 29, 2005.

Statements Regarding Forward Looking Information

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

In addition to the factors disclosed by the Company elsewhere in this document, the following factors, among others, could cause the Company’s actual results to differ materially and adversely from such forward-looking statements: pricing pressures on loan and deposit products; competition; changes in economic conditions nationally, regionally and in the Company’s markets; the extent and timing of actions of the Federal Reserve Board; changes in levels of market interest rates; clients’ acceptance of the Company’s products and services; credit risks of lending activities and competitive factors; changes in the conditions of the capital markets in general and in the capital markets for financial institutions in particular and the impact of the war in Iraq on such markets; the ability of the Company to fully integrate Newton into the Company’s overall business and plans; and the extent and timing of legislative and regulatory actions and reforms.

The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company’s actual results to be materially different than those described in the Company’s periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.

Significant Accounting Policies, Judgments and Estimates

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

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

The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan and lease losses, the analysis of goodwill impairment and the Company’s deferred tax asset. The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of historical loss rates, by category, applied to current loan totals. However, actual losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages.

The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense.

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

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

The Company accounts for impaired loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures.” Impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

The Company accounts for income taxes under the liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan and lease losses, deferred loan fees, deferred compensation and securities available for sale.

The Company accounts for goodwill and other identifiable intangible assets in accordance with SFAS No. 142, “Goodwill and Intangible Assets.” SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company has tested its goodwill as of December 31, 2004 and determined that it is not impaired.

Results of Operations

(Second Quarter 2005 Compared to Second Quarter 2004)

Net Income

Net income for the second quarter of 2005 was $5.1 million, compared to $3.7 million for the same period in 2004, an increase of $1.4 million or 38%. Diluted earnings per share were $0.24 in second quarter 2005, a $0.02 or 9% increase over what was reported for the same period last year. Return on Average Assets was 0.97% and Return on Average Equity was 10.73% for the second quarter 2005.

Net Interest Income

Net interest income on a tax equivalent basis for second quarter 2005 was $17.9 million, representing a $3.9 million or 28% increase from the $14.0 million earned in 2004. The increase in net interest income results from an increase in the volume of interest earning assets of $420.6 million. The net interest margin declined from 3.80% in second quarter of 2004 to 3.77% in 2005 because the yield on interest earning assets did not increase as much as the cost of interest bearing liabilities. The components of net interest income will be discussed in greater detail below.

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

CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS

	For the three months ended, June 30, 2005							For the three months ended, June 30, 2004
	Average Balance			Interest Income/ Expense		Average rates earned/ paid		Average Balance			Interest Income/ Expense		Average rates earned/ paid
	(dollars in thousands)
Assets
Interest-earning assets:
Loans (A)	$	1,200,439		$	18,424	6.16	%	$	872,408		$	12,812	5.91	%
Taxable investment securities		596,078			5,686	3.82	%		512,778			4,728	3.69	%
Tax-exempt securities		93,209			1,331	5.71	%		77,931			1,131	5.81	%
Federal funds sold (B)		13,637			89	2.61	%		19,626			38	0.77	%
Total interest-earning assets		1,903,363			25,530	5.38	%		1,482,743			18,709	5.07	%
Noninterest-earning assets:
Allowance for loan and lease losses		(16,876	)						(17,247	)
Other assets		228,747							144,147
TOTAL ASSETS	$	2,115,234						$	1,609,643
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings accounts	$	351,297		$	473	0.54	%	$	296,045		$	393	0.53	%
Interest-bearing transaction accounts		657,618			2,453	1.50	%		546,902			1,452	1.07	%
Time deposits		393,751			2,442	2.48	%		278,248			1,429	2.05	%
Borrowings		205,135			2,269	4.42	%		112,654			1,443	5.12	%
Total interest-bearing liabilities		1,607,801			7,637	1.90	%		1,233,849			4,717	1.53	%
Noninterest-bearing liabilities:
Demand deposits		304,304							256,457
Other liabilities		11,022							6,723
Stockholders' equity		192,107							112,614
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,115,234						$	1,609,643
Net interest income/spread					17,893	3.47	%					13,992	3.53	%
Tax equivalent basis adjustment					466							396
NET INTEREST INCOME				$	17,427						$	13,596
Net interest margin (C)						3.77	%						3.80	%

(A) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.

(B) Includes interest-bearing cash accounts.

(C) Net interest income divided by interest-earning assets.

Interest income on a tax equivalent basis increased from $18.7 million in second quarter 2004 to $25.5 million in 2005, an increase of $6.8 million or 36%. The increase in interest income was due to an increase in average earning assets of $420.6 million or 28% from $1.48 billion in second quarter 2004 to $1.90 billion in second quarter 2005. The increase in earning assets included $279.2 million in earning assets acquired in the purchase of Newton. The yield on earning assets increased from 5.07% in second quarter 2004 to 5.38% in second quarter 2005 as a result of the increasing rate environment and because of a change in mix in earning assets. Loans as a percent of earning assets increased from 59% in second quarter 2004 to 63% in 2005 while investment securities as a percent of earning assets decreased from 40% in second quarter 2004 to 36% in second quarter 2005.

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Total interest expense increased from $4.7 million in second quarter 2004 to $7.6 million in second quarter 2005, an increase of $2.9 million. Average interest bearing liabilities increased $374.0 million (including $211.7 million from the Newton acquisition), and the cost of funds increased 37 basis points to 1.90% due to the increasing rate environment and due to a change in the mix of interest bearing liabilities. Total borrowings increased from $112.7 million, or 9% of interest bearing liabilities, in second quarter 2004 to $205.1 million, or 13% of interest bearing liabilities, in second quarter 2005. The Company borrowed term repurchase agreements and Federal Home Loan Bank debt to fund loan growth. These borrowings typically pay a higher rate than the Company’s deposits. Time deposits as a percent of total interest bearing liabilities increased from 23% to 24% during the same time period. Time deposits generally pay a higher rate than core deposits.

Provision for Loan and Lease Losses

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

The provision for loan losses decreased to $327,000 for the second quarter of 2005 compared to $875,000 for the same period last year as a result of management’s evaluation of the adequacy of the allowance for loan and lease losses. The lower provision reflects lower net charge-offs during second quarter 2005 and an improvement in asset quality. During the second quarter of 2005, the Company charged off loans of $635,000 and recovered $379,000 in previously charged off loans compared to $868,000 and $124,000, respectively, during the same period in 2004. For more information regarding the determination of the provision, see “Risk Elements” under “Financial Condition.”

Noninterest Income

Noninterest income increased $396,000 or 12% from second quarter 2004 to second quarter 2005, including $400,000 from the newly acquired Newton branches. Service charges on deposit accounts increased $518,000 or 28% from second quarter 2004 to second quarter 2005 as a result of fee income received from implementing a new overdraft protection product. Gains on sales of investment securities decreased from $413,000 in second quarter 2004 to $100,000 in 2005. Income on bank owned life insurance increased $54,000 or 22% from 2004 as a result of bank owned life insurance acquired in the Newton acquisition. Leasing income increased from $12,000 in second quarter 2004 to $159,000 in 2005 primarily as a result of broker fees received related to our leasing operations.

Noninterest Expense

Noninterest expense increased from $10.6 million in the second quarter of 2004 to $13.2 million in 2005, an increase of $2.6 million or 25%.Salaries and employee benefits increased $1.6 million from $5.6 million in the second quarter 2004 to $7.1 million in 2005 as a result of additional salaries incurred from the 119 additional employees from the Newton acquisition in the beginning of third quarter 2004, and normal salary and benefit increases. Net occupancy expense and furniture and equipment expense increased from second quarter 2004 to second quarter 2005 by $208,000 and $208,000, respectively, primarily as a result of costs related to the ten branches and administration building acquired in the Newton acquisition. Equipment expense included costs of depreciation and service contracts related to an upgraded computer system installed in fourth quarter 2004 to accommodate the growing organization. Legal fees decreased from $505,000 in the second quarter of 2004 to $224,000 in the second quarter of 2005 resulting from a decline in litigation costs related to the purchased lease pools previously discussed in Note 9. Marketing expense increased from $376,000 in second quarter 2004 to $534,000 in 2005 resulting from expenses related to cable advertising and the Newton acquisition. Core deposit intangible amortization increased from $102,000 in second quarter 2004 to $303,000 in second quarter 2005 as a result of the Newton acquisition. Other expenses increased from $1.8 million in second quarter 2004 to $2.2 million in second quarter 2005, an increase of $446,000. The increase in other expenses includes expenses incurred by the Newton offices and increased telephone expense.

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(First Six Months of 2005 Compared to First Six Months of 2004)

Net Income

Net income for the first half of 2005 was $9.7 million, compared to $7.3 million for the same period in 2004, an increase of $2.4 million or 33%. Diluted earnings per share increased from $0.43 per share in 2004 to $0.45 per share in 2005. Return on Average Assets was 0.92% and Return on Average Equity was 10.15% for the first six months of 2005.

Net Interest Income

Net interest income on a tax equivalent basis for the first six months of 2005 was $36.0 million, representing an $8.0 million or 29% increase from the $28.0 million earned in 2004. The increase in net interest income results from an increase in the volume of interest earning assets of $436.4 million. The net interest margin declined from 3.83% in the first six months of 2004 to 3.81% in 2005. The components of net interest income will be discussed in greater detail below.

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

16

CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS

	For the six months ended, June 30, 2005							For the six months ended, June 30, 2004
	Average Balance			Interest Income/ Expense		Average rates earned/ paid		Average Balance			Interest Income/ Expense		Average rates earned/ paid
	(dollars in thousands)
Assets
Interest-earning assets:
Loans (A)	$	1,186,434		$	35,973	6.11	%	$	861,393		$	25,481	5.95	%
Taxable investment securities		609,817			11,735	3.85	%		513,010			9,741	3.80	%
Tax-exempt securities		95,245			2,732	5.74	%		78,907			2,307	5.85	%
Federal funds sold (B)		13,200			220	3.33	%		14,955			48	0.64	%
Total interest-earning assets		1,904,696			50,660	5.35	%		1,468,265			37,577	5.14	%
Noninterest-earning assets:
Allowance for loan and lease losses		(16,809	)						(17,224	)
Other assets		236,959							144,613
TOTAL ASSETS	$	2,124,846						$	1,595,654
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Savings accounts	$	353,905		$	937	0.53	%	$	293,194		$	778	0.53	%
Interest-bearing transaction accounts		675,506			4,866	1.45	%		529,103			2,829	1.08	%
Time deposits		390,752			4,646	2.38	%		281,783			3,054	2.17	%
Borrowings		196,098			4,221	4.30	%		121,940			2,954	4.85	%
Total interest-bearing liabilities		1,616,261			14,670	1.82	%		1,226,020			9,615	1.57	%
Noninterest-bearing liabilities:
Demand deposits		305,024							249,460
Other liabilities		10,754							7,489
Stockholders’ equity		192,807							112,685
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,124,846						$	1,595,654
Net interest income/spread					35,990	3.53	%					27,962	3.57	%
Tax equivalent basis adjustment					956							808
NET INTEREST INCOME				$	35,034						$	27,154
Net interest margin (C)						3.81	%						3.83	%

(A) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.

(B) Includes interest-bearing cash accounts.

(C) Net interest income divided by interest-earning assets.

Interest income on a tax equivalent basis increased from $37.6 million in the first half of 2004 to $50.7 million in 2005, an increase of $13.1 million or 35%. The increase in interest income was due to an increase in average earning assets of $436.4 million or 30% from $1.47 billion in the first six months of 2004 to $1.90 billion in the first six months of 2005. The increase in earning assets included $276.6 million in earning assets acquired in the purchase of Newton. The yield on earning assets increased from 5.14% in the first six months of 2004 to 5.35% in the first six months of 2005 as a result of the increasing rate environment and because of a change in mix in earning assets similar to the change in mix described above in the comparison of the results of operations between second quarter 2005 and 2004.

Total interest expense increased from $9.6 million in the first half of 2004 to $14.7 million in 2005, an increase of $5.1 million. Average interest bearing liabilities increased $390.2 million (including $214.0 million from the Newton acquisition), and the cost of funds increased 25 basis points to 1.82% due to the increasing rate environment and to a change in the mix of interest bearing liabilities. Savings and interest-bearing transaction accounts as a percent of interest-bearing liabilities declined while time deposits and borrowings as a percent of interest-bearing liabilities increased.

Provision for Loan and Lease Losses

The provision for loan losses decreased to $1.1 million for the first six months of 2005 compared to $1.7 million for the same period last year as a result of management’s evaluation of the adequacy of the allowance for loan and lease losses. During the first six months of 2005, the Company charged off loans of $1.8 million and recovered $582,000 in previously charged off loans compared to $1.6 million and $252,000, respectively, during the same period in 2004. For more information regarding the determination of the provision, see “Risk Elements” under “Financial Condition.”

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Noninterest Income

Noninterest income increased $1.0 million or 17% from the first half of 2004 to 2005, including $695,000 from the newly acquired Newton branches. Service charges on deposit accounts increased $538,000 or 15% from the first six months of 2004 to the first six months of 2005 resulting from fee income from the overdraft protection program. Commissions and fees increased $108,000 or 8% to $1.5 million from the first six months of 2004 to the first six months of 2005, primarily due to increased loan fees collected and fee income collected at the Newton branches. Increases in income on bank owned life insurance, leasing income and other income resulted from the same factors noted in the comparison of non-interest income between second quarter 2005 and second quarter 2004.

Noninterest Expense

Noninterest expense increased from $20.9 million in the first six months of 2004 to $26.9 million in 2005, an increase of $6.0 million or 29%.The same factors noted in the comparison of second quarter 2005 interest expenses to those of second quarter 2004 contributed to the increase in non-interest expenses from the first half of 2004 to 2005.

Financial Condition

The Company’s total assets decreased $41.8 million or 2% from $2.141 billion at December 31, 2004, to $2.099 billion at June 30, 2005. Assets decreased as proceeds from maturities and sales of investment securities were used to pay down federal funds purchased and declines in deposits. Total deposits decreased from $1.727 billion on December 31, 2004 to $1.690 billion on June 30, 2005, a decrease of $36.8 million or 2%.

Loans

Gross loans increased from $1.179 billion on December 31, 2004 to $1.219 billion on June 30, 2005, an increase of $40.7 million, or 3%. For more information on the loan portfolio, see Note 5 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Risk Elements

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

(in thousands)	June 30, 2005		December 31, 2004		June 30, 2004
Non-performing loans:
Non-accrual loans	$	11,690	$	13,017	$	15,748
Renegotiated loans		—		—		—
TOTAL NON-PERFORMING LOANS		11,690		13,017		15,748
Other real estate owned		650		650		—
TOTAL NON-PERFORMING ASSETS	$	12,340	$	13,667	$	15,748
Loans past due 90 days or more and still accruing	$	169	$	2,347	$	408

Non-accrual loans decreased from $13.0 million on December 31, 2004 to $11.7 million, or 0.56% of total assets, on June 30, 2005. Of the overall total of loans on non-accrual, $6.4 million or 0.30% of total assets represent the purchased leases that were placed on a non-accrual status in 2002. On July 20, 2005, Lakeland settled with the remaining parties in Lakeland’s claim on the purchased leases. Pursuant to the settlement agreements, Lakeland was paid $3.3 million. As a result

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of the settlements, Lakeland’s non-performing assets will be reduced by $6.4 million, and no additional loan loss provision will be required. For more information see Note 9—Commitments and Contingencies in this Quarterly Report on Form 10-Q. Loans past due ninety days or more and still accruing at June 30, 2005 decreased $2.2 million to $169,000. Loans past due 90 days or more and still accruing are those loans that are both well-secured and in process of collection.

On June 30, 2005, the Company had $10.9 million in impaired loans (including $10.6 million in non-accrual loans) compared to $12.2 million at year-end 2004. For more information on these loans see Note 5 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The impairment of the loans is measured using the present value of future cash flows on certain impaired loans and is based on the fair value of the underlying collateral for the remaining loans. Based on such evaluation, $4.5 million has been allocated to the allowance for loan and lease losses for impairment at June 30, 2005. Impaired loans and the valuation allowance on impaired loans will decline by $6.4 million and by $3.2 million, respectively, resulting from the settlement of the purchased leases discussed above. At June 30, 2005, the Company also had $6.9 million in loans that were rated substandard and not classified as non-performing or impaired.

There were no loans at June 30, 2005, other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans being included as non-accrual, past due or renegotiated at a future date.

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

	June 30, 2005			December 31, 2004			June 30, 2004
(dollars in thousands)
Balance of the allowance at the beginning of the year	$	16,638		$	16,899		$	16,899
Loans charged off:
Commercial		960			4,964			711
Home Equity and consumer		828			1,718			861
Real estate—mortgage		—			—			—
Total loans charged off		1,788			6,682			1,572
Recoveries:
Commercial		384			145			77
Home Equity and consumer		197			363			175
Real estate—mortgage		1			10			—
Total Recoveries		582			518			252
Net charge-offs:		1,206			6,164			1,320
Addition related to acquisition of Newton		—			2,301			—
Provision for loan and lease losses charged to operations		1,110			3,602			1,750
Ending balance	$	16,542		$	16,638		$	17,329
Ratio of annualized net charge-offs to average loans outstanding		0.20	%		0.62	%		0.31	%
Ratio of allowance at end of period as a percentage of period end total loans		1.36	%		1.41	%		1.94	%

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

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

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

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

• The establishment of reserve amounts for the non-criticized loans in each portfolio based upon the historical average loss experience of these portfolios.

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

Based upon the process employed and giving recognition to all accompanying factors related to the loan portfolio, management considers the allowance for loan and lease losses to be adequate at June 30, 2005. The preceding statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Investment Securities

For detailed information on the composition and maturity distribution of the Company’s investment security portfolio, see Note 4 in the Notes to Consolidated Financial Statements contained in this Form 10-Q. Total investment securities decreased from $745.0 million on December 31, 2004 to $638.4 million on June 30, 2005, a decrease of $106.6 million, or 14% which included sales and maturities of securities used to pay down the Company’s federal funds purchased and securities sold under agreements to repurchase, to fund loan growth and to fund a decline in the Company’s municipal deposits. Investment securities available for sale decreased from $582.1 million on December 31, 2004 to $490.9 million on June 30, 2005, a decrease of $91.2 million, or 16%. Investment securities held to maturity decreased from $162.9 million on December 31, 2004 to $147.5 million on June 30, 2005, a decrease of $15.4 million, or 9%.

Deposits

Total deposits decreased from $1.727 billion on December 31, 2004 to $1.690 billion on June 30, 2005, a decrease of $36.8 million, or 2%. Savings and interest bearing transaction accounts decreased from $1.042 billion on December 31, 2004 to $986.4 million on June 30, 2005, a decrease of $55.2 million resulting from a fluctuation in municipal deposits. Total core deposits, which consist of non-interest bearing deposits and savings and interest bearing transaction accounts, decreased by $60.9 million or 4% to $1.300 billion. Core deposits are 77% of total deposits compared to 79% at year-end. Time deposits under $100,000 increased $11.5 million to $281.3 million, while time deposits $100,000 and over increased $12.6 million to $108.6 million. The increase in time deposits resulted from a special certificate of deposit promotion and from increases in municipal certificates of deposits.

Liquidity

Cash and cash equivalents, totaling $79.8 million on June 30, 2005, increased $24.4 million as a result of an increase in interest bearing deposits due from banks. Operating activities, principally the result of the Company’s net income, provided $15.2 million in net cash. Investing activities provided $59.9 million in net cash, primarily reflecting the maturity, repayments and sales of securities exceeding the purchase of securities and the origination of loans. Financing activities used $50.7 million in net cash, reflecting paydowns of federal funds purchased and long-term debt and a decrease in deposits. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. At June 30, 2005, the Company had outstanding loan origination commitments of $328.3 million. These commitments include $288.5 million

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that mature within one year; $16.9 million that mature after one but within three years; $2.4 million that mature after three but within five years and $20.5 million that mature after five years. The Company also had $12.0 million in letters of credit outstanding at June 30, 2005. This included $11.6 million that are maturing within one year and $421,000 that mature after one but within three years. Time deposits issued in amounts of $100,000 or more maturing within one year total $86.6 million.

Capital Resources

Stockholders’ equity decreased from $194.5 million on December 31, 2004 to $193.9 million on June 30, 2005. Book value per common share increased to $9.05 on June 30, 2005 from $8.96 on December 31, 2004. The decrease in stockholders’ equity from December 31, 2004 to June 30, 2005 was primarily due to an increase in treasury stock from $10.9 million on December 31, 2004 to $15.3 million on June 30, 2005, resulting from purchasing shares under the Company’s stock buyback program. Also contributing to a decline in equity is the decline in accumulated other comprehensive income (loss) from $340,000 on December 31, 2004 to ($1.2) million on June 30, 2005 resulting from a decline in the market value of the Company’s available for sale portfolio. Also contributing to the change in stockholders equity was net income, which was partially offset by dividends paid to shareholders.

The Company, Lakeland and Newton are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material effect on the Company or its subsidiaries’ financial statements. Management believes, as of June 30, 2005, that the Company, Lakeland and Newton meet all capital adequacy requirements to which they are subject.

The capital ratios for the Company, Lakeland and Newton at June 30, 2005, and the minimum regulatory guidelines for such capital ratios for qualification as a well-capitalized institution are as follows:

	Tier 1 Capital to Total Average Assets Ratio June 30, 2005		Tier 1 Capital to Risk-Weighted Assets Ratio June 30, 2005		Total Capital to Risk-Weighted Assets Ratio June 30, 2005
Capital Ratios:
The Company	7.70	%	12.12	%	13.37	%
Lakeland Bank	6.16	%	9.91	%	11.16	%
Newton Trust Company	11.25	%	15.89	%	16.77	%
“Well capitalized” institution under FDIC Regulations	5.00	%	6.00	%	10.00	%

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company manages interest rate risk and market risk by identifying and quantifying interest rate risk exposures using simulation analysis, economic value at risk models and gap analysis. At June 30, 2005, the cumulative one-year gap was ($56.8) million or (2.7%) of total assets compared to a ($61.4) million or (2.9%) of assets at December 31, 2004.

The Company uses net interest income simulation because the Company’s Asset/Liability Management Committee believes that the interest rate sensitivity modeling more accurately reflects the effects and exposure to changes in interest rates. Net interest income simulation considers the relative sensitivities of the balance sheet including the effects of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest simulation is designed to address the probability of interest rate changes and the behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance-sheet items. The Company’s Market Value of Portfolio Equity at June 30, 2005 was $326.2 million.

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Based on its simulation models, the Company estimates that for a 200 basis point rate shock increase, the Company’s Market Value of Portfolio Equity would decline (8.3%) and would decline (4.0%) for a 200 basis point rate shock decrease. The simulation model also shows that for a 200 basis point rate shock increase, the Company’s projected net interest income for the next 12 months would decrease (2.3%), and would decline (2.1%) for a 200 basis point rate shock decrease. The above information is based on significant estimates and assumptions and constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. For more information regarding the Company’s market risk and assumptions used in the Company’s simulation models, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4. Controls and Procedures

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

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

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

As the Company has disclosed in its periodic reports filed with the SEC, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “10-K”), the Company is involved in legal proceedings concerning four separate portfolios of predominately commercial leases which Lakeland purchased from Commercial Money Center, Inc. (“CMC”). CMC obtained surety bonds from three surety companies to guarantee each lessee’s performance. Relying on these bonds, the Company and other investors purchased the leases and CMC’s right to payment under the various surety bonds. CMC (and a related entity, Commercial Servicing Corp. (“CSC”)) eventually stopped forwarding to the Company the required amounts.

On July 20, 2005, Lakeland entered into a settlement agreement with RLI Insurance Company and one remaining party in Lakeland’s claims related to the CMC matter. Pursuant to the settlement agreements Lakeland was paid an aggregate of $3,315,000 and the parties executed mutual releases. As a result of the settlements, Lakeland’s nonperforming assets were reduced by $6.4 million and no additional loan loss provision will be required. The charged-off portion of the lease portfolio was fully reserved for as of June 30, 2005.

Reference is made to the 10-K for a description of a case captioned Ronnie Clayton dba Clayton Trucking, et al v. Ronald Fisher, et al.

From time to time, the Company and its subsidiaries are defendants in legal proceedings relating to their respective businesses. While the ultimate outcome of the above mentioned matter cannot be determined at this time, management does not believe that the outcome of any pending legal proceeding will materially affect the consolidated financial position of the Company, but could possibly be material to the results of operations of any one period.

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

In January 2004, the Company’s Board of Directors authorized a stock buyback plan for the purchase of up to 262,500 shares of the Company’s currently issued and outstanding common stock in 2004. Purchases under the stock buyback program may be made in the open market or in privately negotiated transactions. On July 15, 2004, the amount of shares purchasable in the stock buyback plan was increased to 525,000 to be purchased over the following year. On June 10, 2005, the Company completed purchasing the shares purchasable under the 2004 stock buyback plan. On June 16, 2005, the Company announced a stock buyback plan for the purchase of up to 787,500 shares over the following year. As of June 30, 2005, the Company had purchased 83,708 shares under this plan.

Information concerning the 2005 stock repurchases is set forth below.

Period	(a) Total number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month 4: April 1 through 30, 2005	63,000	$	14.19	63,000	105,198
Month 5: May 1 through 31, 2005	66,150	$	15.00	66,150	39,048
Month 6: June 1 through 30, 2005	122,756	$	14.19	122,756	703,791

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Item 3. Defaults Upon Senior Securities        Not Applicable

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

The following table shows the persons who were elected to the board of directors at the Company’s Annual Meeting of Shareholders held May 10, 2005. Also shown are their terms of office and the results of voting for each respective director.

Name	Term	Shares for:	Authority Withheld
Robert B. Nicholson, III	3 years	16,668,145	696,420
Roger Bosma	3 years	16,724,334	640,232
Mark J. Fredericks	3 years	16,623,999	740,566
George H. Guptill, Jr.	3 years	16,662,042	702,524
Janeth D. Hendershot	3 years	16,696,795	667,770
Robert E. McCracken	2 years	16,690,026	674,540
Paul G. Viall	2 years	16,658,031	706,534

The second proposal, to adopt Lakeland Bancorp, Inc.’s Amended and Restated 2000 Equity Compensation Program, was approved. The vote was as follows:

For:	Against:	Abstain:	Broker Non-Vote
11,636,001	1,290,356	585,577	3,852,031

The third proposal, to amend Lakeland Bancorp, Inc.’s Certificate of Incorporation to limit the personal liability of officers for monetary damages under the circumstances permitted by law and to clarify that the Company may pay expenses incurred by an officer in advance of a final disposition of a legal proceeding as permitted by New Jersey law, was approved. The vote was as follows:

For:	Against:	Abstain:
16,569,638	573,601	221,325

There were no Broker Non-Votes on the third proposal.

Item 5. Other Information        Not Applicable

Item 6. Exhibits

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

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

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

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SIGNATURES

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

Lakeland Bancorp, Inc.

(Registrant)

/s/ Roger Bosma

Roger Bosma

President and Chief Executive Officer

/s/ Joseph F. Hurley

Joseph F. Hurley

Executive Vice President and

Chief Financial Officer

August 8, 2005

Date

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