Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's financial statements and accompanying notes.

Forward-Looking Statements

This Form 10-Q and the documents incorporated by reference contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act and Section 21E of the Securities Exchange Act of 1934, which we refer to as the Exchange Act, with respect to the proposed merger with Republic First and the financial condition, liquidity, results of operations, future performance and business of Metro. These forward-looking statements are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond our control). The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements.

While we believe our plans, objectives, goals, expectations, anticipations, estimates and intentions as reflected in these forward-looking statements are reasonable, we can give no assurance that any of them will be achieved. You should understand that various factors, in addition to those discussed elsewhere in this Form 10-Q, in the Company's Form 10-K and Prospectus Supplement filed with the SEC on September 24, 2009, and incorporated by reference in this Form 10-Q, could affect our future results and could cause results to differ materially from those expressed in these forward-looking statements, including:

· whether the transactions contemplated by the merger agreement with Republic First will be approved by the applicable federal, state and local regulatory authorities and, if approved, whether the other closing conditions to the proposed merger will be satisfied;

· our ability to complete the proposed merger with Republic First and the merger of Republic First Bank with and into Metro Bank, to integrate successfully Republic First's assets, liabilities, customers, systems and management personnel into our operations, and to realize expected cost savings and revenue enhancements within expected timeframes or at all;

· the possibility that expected Republic First merger-related charges will be materially greater than forecasted or that final purchase price allocations based on fair value of the acquired assets and liabilities at the effective date of the merger and related adjustments to yield and/or amortization of the acquired assets and liabilities will be materially different from those forecasted;

· adverse changes in our or Republic First's loan portfolios and the resulting credit risk-related losses and expenses;

· the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System;

· the FDIC deposit fund is continually being used due to increased bank failures and existing financial institutions have higher premiums assessed in replenishing the fund;

· general economic or business conditions, either nationally, regionally or in the communities in which either we do or Republic First does business, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and loan performance or a reduced demand for credit;

· continued levels of loan quality and volume origination;

· the adequacy of loan loss reserves;

· the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance);

· the willingness of customers to substitute competitors' products and services for our products and services and vice versa, based on price, quality, relationship or otherwise;

· unanticipated regulatory or judicial proceedings and liabilities and other costs;

· interest rate, market and monetary fluctuations;

· the timely development of competitive new products and services by us and the acceptance of such products and services by customers;

· changes in consumer spending and saving habits relative to the financial services we provide;

· the loss of certain key officers;

· continued relationships with major customers;

· our ability to continue to grow our business internally and through acquisition and successful integration of new or acquired entities while controlling costs;

· compliance with laws and regulatory requirements of federal, state and local agencies;

· the ability to hedge certain risks economically;

· effect of terrorist attacks and threats of actual war;

· deposit flows;

· changes in accounting principles, policies and guidelines;

· rapidly changing technology;

· other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services; and

· our success at managing the risks involved in the foregoing.

Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. The foregoing list of important factors is not exclusive and you are cautioned not to place undue reliance on these factors or any of our forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us except as required by applicable law.

EXECUTIVE SUMMARY

On September 30, 2009, the Company completed a common stock offering of 6.25 million shares, at $12.00 per share, for new capital proceeds of approximately $70.7 million (net of expenses). Subsequent to the end of the quarter, the underwriters of the offering exercised a 10% over-allotment option and Metro Bancorp issued an additional 625,000 common shares for net proceeds of approximately $7.1 million. This successful capital offering occurred just one quarter after a successful conversion of our entire information technology system from TD Bank, N.A. ("TD") to our new service provider, Fiserv Solutions, Inc. ("Fiserv"). The conversion included the transition of data processing, item processing and many other ancillary services. At the same time of the conversion, the Company rebranded to Metro Bancorp, Inc. and its subsidiary bank, Commerce Bank/Harrisburg, changed its name to Metro Bank.

The Company recorded a net loss of $490,000, or $(0.08) per share, for the third quarter versus net income of $3.4 million, or $0.52 per fully-diluted share, for the same period one year ago. Impacting the third quarter results were the following:

· One-time charges associated with the transition of data processing, item processing and technology network services as well as the Company's rebranding totaled approximately $1.8 million during the third quarter. The Company also incurred a higher level of salary and benefits, data processing and telecommunication costs related to additional personnel and information technology infrastructure to perform certain services in-house which were previously performed by TD. These higher expenses were partially offset by the recognition of the remaining $2.75 million of the total $6.0 million fee Metro received from TD. This fee was to partially defray the total costs of transition and rebranding.

· The Company made a total provision for loan losses of $3.7 million for the third quarter vs. $1.7 million for the third quarter of 2008.

· Net interest margin on a fully taxable basis for the three months ended September 30, 2009 was 3.92% compared to 4.11% for the same period in 2008. Average interest earning assets for the quarter were the same as the third quarter of 2008; however, the level of interest income earned was offset by a decrease in the yield on those earning assets as a result of a 175 basis point reduction in short-term market interest rates by the Federal Reserve Bank over the past twelve months.

Total revenues for the three months ended September 30, 2009 were $25.5 million, down $485,000, or 2%, from the same period in 2008. Total revenues for the nine months ended September 30, 2009 were $74.3 million, down $1.9 million, or 2%, from the same period in 2008. Net loss for the nine months ended September 30, 2009 was $1.0 million, or ($0.16) per share compared to net income of $10.1 million, or $1.55 per fully diluted share recorded during the first nine months of 2008.

The decrease in net income and net income per share was a direct result of the increase in noninterest expenses associated with the transition of data processing, item processing and technology network services to a new provider and the costs associated with a rebranding of the Company as well as higher provisions to the Bank's allowance for loan losses.

For the first nine months of 2009, total net loans increased by $33.6 million, or 2%, from $1.42 billion at December 31, 2008 to $1.46 billion at September 30, 2009. Over the past twelve months, total net loans excluding loans held for sale, grew by $87.5 million, or 6%, from $1.37 billion to $1.46 billion. This growth was represented across most loan categories, reflecting a continuing commitment to the credit needs of our customers and our market footprint. Our loan to deposit ratio, which includes loans held for sale, was 85% at September 30, 2009 compared to 90% at December 31, 2008.

Total deposits increased $103.0 million, or 6%, from $1.63 billion at December 31, 2008 to $1.74 billion at September 30, 2009. During the same period, core deposits grew by $96.8 million, or 6%, as well. Over the past twelve months, our total consumer core deposits increased by $158.9 million, or 24%. Total borrowings decreased by $241.5 million from $379.5 million at December 31, 2008 to $138.1 million at September 30, 2009, primarily as a result of our common stock offering, continued deposit growth and principal paydowns on investment securities. Of the total borrowings at September 30, 2009, $83.7 million were short-term and $54.4 million were considered long-term.

Nonperforming assets and loans past due 90 days at September 30, 2009 totaled $32.0 million, or 1.53%, of total assets, as compared to $27.9 million, or 1.30% of total assets, at December 31, 2008 and $12.2 million, or 0.57%, of total assets one year ago. The Company's third quarter provision for loan losses totaled $3.7 million, as compared to $1.7 million recorded in the third quarter of 2008. The increase in the provision for loan losses over the prior year is a result of the Company's gross loan growth (excluding loans held for sale) of $88.2 million over the past twelve months as well as the increase in the level of nonperforming loans from September 30, 2008 to September 30, 2009. The allowance for loan losses totaled $14.6 million as of September 30, 2009, an increase of $730,000, or 5%, over the total allowance at September 30, 2008 and compared to $16.7 million at December 31, 2008. The allowance represented 0.99% and 1.00% of gross loans outstanding at September 30, 2009 and 2008, respectively and compared to 1.16% of gross loans at December 31, 2008.

Total net charge-offs for the third quarter were $8.4 million vs. $22,000 for the third quarter of 2008. Total net charge-offs for the first nine months of 2009 were $12.7 million compared to $929,000 for the first nine months of 2008. Approximately $6.0 million, or 71%, of total charge-offs for the third quarter of 2009 were associated with only five different relationships. And

approximately $10.1 million, or 79%, of total loan charge-offs year-to-date 2009 were associated with a total of seven different relationships.

The financial highlights for the first nine months of 2009 compared to the same period in 2008 are summarized below:

                                                      September 30,       September 30,
(in millions, except per share amounts)                   2009                2008            % Change

Total assets                                         $       2,086.5     $       2,125.3             (2 ) %
Total loans (net)                                            1,456.6             1,369.1              6
Total deposits                                               1,737.0             1,689.8              3

Total revenues                                       $          74.3     $          76.2             (2 ) %
Total noninterest expenses                                      66.1                57.3             15
Net income (loss)                                               (1.0 )              10.1           (110 )

Diluted net income (loss) per share                  $         (0.16 )   $          1.55           (110 )%

We expect to continue the pattern of expanding our footprint not only with the aforementioned acquisition of Republic First but also by branching into contiguous areas of our new and existing markets, and by filling gaps between existing store locations. Accordingly, we anticipate notable balance sheet and revenue growth as a result of the expansion. Additionally, we expect to incur direct acquisition expenses as we consummate the merger with Republic First including expenses to combine the operations of the two companies. We also anticipate that the recent core system conversion will result in increased levels of expense in future periods than in previous periods. Operating results for the remainder of 2009 and the years that follow could also be heavily impacted by the overall state of the local and global economy.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our accounting policies are fundamental to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. Our accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements described in the Company's annual report on Form 10-K for the year ended December 31, 2008. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. These principles require our management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments to its assumptions and estimates when facts and circumstances dictate. We evaluate our estimates and assumptions on an ongoing basis and predicate those estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management believes the following critical accounting policies encompass the more significant assumptions and estimates used in preparation of our consolidated financial statements.

Allowance for Loan Losses. The allowance for loan losses represents the amount available for estimated losses existing in the loan portfolio. While the allowance for loan losses is maintained at a level believed to be adequate by management for estimated losses in the loan portfolio, the determination of the allowance is inherently subjective, as it involves significant estimates by management, all of which may be susceptible to significant change.

While management uses available information to make such evaluations, future adjustments to the allowance and the provision for loan losses may be necessary if economic conditions or loan credit quality differ substantially from the estimates and assumptions used in making the

evaluations. The use of different assumptions could materially impact the level of the allowance for loan losses and, therefore, the provision for loan losses to be charged against earnings. Such changes could impact future financial results.

We perform monthly, systematic reviews of our loan portfolios to identify potential losses and assess the overall probability of collection. These reviews include an analysis of historical default and loss experience, which results in the identification and quantification of loss factors. These loss factors are used in determining the appropriate level of allowance necessary to cover the estimated probable losses in various loan categories. Management judgment involving the estimates of loss factors can be impacted by many variables, such as the number of years of actual default and loss history included in the evaluation.

The methodology used to determine the appropriate level of the allowance for loan losses and related provisions differs for commercial and consumer loans and involves other overall evaluations. In addition, significant estimates are involved in the determination of the appropriate level of allowance related to impaired loans. The portion of the allowance related to impaired loans is based on either (1) discounted cash flows using the loan's effective interest rate,
(2) the fair value of the collateral for collateral-dependent loans, or (3) the observable market price of the impaired loan. Each of these variables involves judgment and the use of estimates. In addition to calculating and the testing of loss factors, we periodically evaluate qualitative factors which include:

· changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off and recovery practices not considered elsewhere in estimating credit losses;

· changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans;

· changes in the nature and volume of the portfolio and the terms of loans;

· changes in the value of underlying collateral for collateral-dependent loans;

· changes in the quality of the institution's loan review system;

· changes in the experience, ability and depth of lending management and other relevant staff;

· the existence and effect of any concentrations of credit and changes in the level of such concentrations;

· changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; and

· the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution's existing portfolio.

Management judgment is involved at many levels of these evaluations.

An integral aspect of our risk management process is allocating the allowance for loan losses to various components of the loan portfolio based upon an analysis of risk characteristics, demonstrated losses, industry and other segmentations and other more judgmental factors.

Stock-Based Compensation. Effective January 1, 2006, the Company adopted Share-Based Payment guidance using the modified prospective method. The guidance requires compensation costs related to share-based payment transactions to be recognized in the income statement (with limited exceptions) based on the grant-date fair value of the stock-based compensation issued.

Compensation costs are recognized over the period that an employee provides service in exchange for the award. The grant-date fair value and ultimately the amount of compensation expense recognized is dependent upon certain assumptions we make such as the expected term the options will remain outstanding, the volatility and dividend yield of our company stock and risk free interest rate. This critical Accounting policy is more fully described in Note 14 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Other than Temporary Impairment of Investment Securities. We perform periodic reviews of the fair value of the securities in the Company's investment portfolio and evaluate individual securities for declines in fair value that may be other than temporary. If declines are deemed other than temporary, an impairment loss is recognized against earnings and the security is written down to its current fair value.

Effective April 1, 2009, the Company adopted the provisions to fair value measurement guidance regarding Recognition and Presentation of Other-Than-Temporary Impairments. This critical Accounting policy is more fully described in Note 9 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-Q for the period ended September 30, 2009.

Fair Value Measurements. Effective January 1, 2008, the Company adopted fair value measurements guidance, which defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles and expands disclosures about fair value measurements. The Company is required to disclose the fair value of financial assets and liabilities that are measured at fair value within a fair value hierarchy. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). These disclosures appear in Note 8 of the Notes to Consolidated Financial Statements described in this interim report on Form 10-Q for the period ended September 30, 2009. Judgment is involved not only with deriving the estimated fair values but also with classifying the particular assets recorded at fair value in the fair value hierarchy. Estimating the fair value of impaired loans or the value of collateral securing foreclosed assets requires the use of significant unobservable inputs (level 3 measurements). At September 30, 2009, the fair value of assets based on level 3 measurements constituted 3% of the total assets measured at fair value. The fair value of collateral securing impaired loans or constituting foreclosed assets is generally determined based upon independent third party appraisals of the properties, recent offers, or prices on comparable properties in the proximate vicinity. Such estimates can differ significantly from the amounts the Company would ultimately realize from the loan or disposition of underlying collateral.

The Company's available for sale investment security portfolio constitutes 97% of the total assets measured at fair value and is primarily classified as a level 2 fair value measurement (quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability). Management utilizes third party service providers to aid in the determination of the fair value of the portfolio. If quoted market prices are not available, fair values are generally based on quoted market prices of comparable instruments. Securities that are debenture bonds and pass through mortgage backed investments that are not quoted on an exchange, but are traded in active markets, were obtained from matrix pricing on similar securities.

RESULTS OF OPERATIONS

Average Balances and Average Interest Rates

Interest-earning assets averaged $1.94 billion for the third quarter of 2009, the same as for the

third quarter in 2008. For the quarter ended September 30, total loans receivable including loans held for sale, averaged $1.48 billion in 2009 and $1.37 billion in 2008, respectively. For the same two quarters, total securities averaged $460.5 million and $568.7 million, respectively. The decrease is a result of principal repayments, sales and calls which more than offset purchases during the same period. These cash flows were used to fund loan growth and to reduce the level of borrowed funds rather than redeploy the cash flows back into investment securities at a reduced net interest spread given the overall low interest rate environment.

The average balance of total deposits increased $135.0 million, or 8%, for the third quarter of 2009 compared to the third quarter of 2008. Total interest-bearing deposits averaged $1.41 billion, compared to $1.31 billion for the third quarter one year ago and average noninterest bearing deposits increased by $33.9 million, or 12%. Short-term borrowings, which consists of overnight advances from the Federal Home Loan Bank, securities sold under agreements to repurchase and overnight federal funds lines of credit, averaged $140.0 million for the third quarter of 2009 versus $268.2 million for the same quarter of 2008.

The fully-taxable equivalent yield on interest-earning assets for the third quarter of 2009 was 5.07%, a decrease of 75 basis points ("bps") from the comparable period in 2008. This decrease resulted from lower yields on our loan and securities portfolios during the third quarter of 2009 as compared to the same period in 2008. Floating rate loans represent approximately 41% of our total loans receivable portfolio. The majority of these loans are tied to the New York prime lending rate which decreased 200 bps during the first quarter of 2008 and subsequently decreased another 200 bps throughout the remainder of 2008, following similar decreases in the overnight federal funds rate by the Federal Open Market Committee. Approximately $98.9 million, or 24%, of our investment securities have a floating interest rate and provide a yield that consists of a fixed spread tied to the one month London Interbank Offered Rate ("LIBOR") interest rate. The average one month LIBOR interest rate decreased approximately 235 bps over the past twelve months from an average rate of 2.62% during the third quarter 2008 compared to a rate of 0.27% for the third quarter of 2009. The Company experienced a decline in yield in the investment portfolio primarily due to the call of seven agency debentures totaling $41.5 million with a weighted average yield of 5.46%.

As a result of the extremely low level of current general market interest rates, including the one-month LIBOR and the New York prime lending rate, we expect the yields we receive on our interest-earning assets will continue to be lower throughout the remainder of 2009.

The average rate paid on our total interest-bearing liabilities for the third quarter of 2009 was 1.38%, compared to 2.00% for the third quarter of 2008. Our deposit cost of funds decreased 43 bps from 1.42% in the third quarter of 2008 to 0.99% for the third quarter of 2009. The average cost of short-term borrowings decreased from 2.18% to 0.63% during the same period. The aggregate average cost of all funding sources for the Company was 1.15% for the third quarter of 2009, compared to 1.71% for the same quarter of the prior year. The decrease in the Company's deposit cost of funds is primarily related to the . . .