Metro Bancorp 10Q 2010 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ X ]

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

For the quarterly period ended

September 30, 2010

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

For the transition period from				to
Commission File Number:	000-50961

METRO BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania		25-1834776
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

3801 Paxton Street, Harrisburg, PA		17111
(Address of principal executive offices)		(Zip Code)

800-653-6104

(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 Exchange Act 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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer			Accelerated filer	X
Non-accelerated filer			Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

Indicate the number of shares outstanding of each of the issuer's classes of common stock,

as of the latest practicable date:

13,688,646 Common shares outstanding at 10/31/2010

METRO BANCORP, INC.

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited)
	September 30, 2010 and December 31, 2009	3

	Consolidated Statements of Operations (Unaudited)
	Three months and nine months ended September 30, 2010 and September 30, 2009	4

	Consolidated Statements of Stockholders' Equity (Unaudited)
	Nine months ended September 30, 2010 and September 30, 2009	5

	Consolidated Statements of Cash Flows (Unaudited)
	Nine months ended September 30, 2010 and September 30, 2009	6

	Notes to the Interim Consolidated Financial Statements (Unaudited)	7

Item 2.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	49

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	(Removed and Reserved)	51

Item 5.	Other Information	51

Item 6.	Exhibits	52

	Signatures

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

Metro Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

	(in thousands, except share and per share amounts)	September 30, 2010		December 31, 2009
Assets	Cash and cash equivalents	$	43,299	$	40,264
	Securities, available for sale at fair value		409,067		388,836
	Securities, held to maturity at cost
	(fair value 2010: $230,607; 2009: $119,926)		226,863		117,815
	Loans, held for sale		18,867		12,712
	Loans receivable, net of allowance for loan losses
	(allowance 2010: $21,169; 2009: $14,391)		1,374,743		1,429,392
	Restricted investments in bank stock		21,695		21,630
	Premises and equipment, net		90,451		93,780
	Other assets		47,036		43,330
	Total assets	$	2,232,021	$	2,147,759
Liabilities	Deposits:
	Noninterest-bearing	$	341,029	$	319,850
	Interest-bearing		1,587,655		1,494,883
	Total deposits		1,928,684		1,814,733
	Short-term borrowings and repurchase agreements		14,600		51,075
	Long-term debt		54,400		54,400
	Other liabilities		24,541		27,529
	Total liabilities		2,022,225		1,947,737
Stockholders’ Equity	Preferred stock – Series A noncumulative; $10.00 par value; 1,000,000 shares authorized; 40,000 shares issued and outstanding		400		400
	Common stock – $1.00 par value; 25,000,000 shares authorized; issued and outstanding – 2010: 13,650,356; 2009: 13,448,447		13,650		13,448
	Surplus		150,296		147,340
	Retained earnings		43,851		49,705
	Accumulated other comprehensive income (loss)		1,599		(10,871	)
	Total stockholders’ equity		209,796		200,022
	Total liabilities and stockholders’ equity	$	2,232,021	$	2,147,759

See accompanying notes.

Metro Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

		Three Months Ended						Nine Months Ended
	(in thousands,	September 30,						September 30,
	except per share amounts)	2010			2009			2010			2009
Interest	Loans receivable, including fees:
Income	Taxable	$	17,712		$	18,548		$	52,838		$	56,334
	Tax-exempt		1,206			1,108			3,506			3,147
	Securities:
	Taxable		5,320			4,638			16,370			15,031
	Tax-exempt		-			16			14			49
	Federal funds sold		10			-			11			-
	Total interest income		24,248			24,310			72,739			74,561
Interest	Deposits		3,271			4,314			10,296			13,038
Expense	Short-term borrowings		55			226			242			976
	Long-term debt		935			1,091			2,797			3,516
	Total interest expense		4,261			5,631			13,335			17,530
	Net interest income		19,987			18,679			59,404			57,031
	Provision for loan losses		13,400			3,725			18,400			10,625
	Net interest income after provision for loan losses		6,587			14,954			41,004			46,406
Noninterest	Service charges, fees and other operating income		6,791			6,052			19,666		��	17,740
Income	Gains on sales of loans (net)		778			238			1,105			294
	Total fees and other income		7,569			6,290			20,771			18,034
	Other-than-temporary impairment losses		(1,908	)		(6,819	)		(1,463	)		(4,912	)
	Portion recognized in other comprehensive income (before taxes)		1,862			5,867			501			2,587
	Net impairment loss on investment securities		(46	)		(952	)		(962	)		(2,325	)
	Gains on sales/calls of securities (net)		117			1,515			1,036			1,570
	Total noninterest income		7,640			6,853			20,845			17,279
Noninterest	Salaries and employee benefits		10,466			10,643			31,097			31,941
Expenses	Occupancy		2,040			1,928			6,476			5,959
	Furniture and equipment		1,407			1,300			3,955			3,416
	Advertising and marketing		698			830			2,140			1,875
	Data processing		3,334			2,537			9,870			6,739
	Postage and supplies		193			617			663			1,565
	Regulatory assessments and related fees		1,191			830			3,405			3,256
	Telephone		815			1,424			2,610			2,987
	Loan expense		395			405			1,177			1,151
	Foreclosed real estate		420			94			1,369			289
	Core system conversion/branding (net)		-			(911	)		-			(523	)
	Merger/acquisition		-			250			17			655
	Consulting fees		965			161			2,667			342
	Other		2,235			2,691			7,109			6,412
	Total noninterest expenses		24,159			22,799			72,555			66,064
	Loss before taxes		(9,932	)		(992	)		(10,706	)		(2,379	)
	Benefit for federal income taxes		(3,772	)		(502	)		(4,912	)		(1,371	)
	Net loss	$	(6,160	)	$	(490	)	$	(5,794	)	$	(1,008	)
	Net Loss per Common Share:
	Basic	$	(0.46	)	$	( 0.08	)	$	(0.43	)	$	( 0.16	)
	Diluted		(0.46	)		( 0.08	)		(0.43	)		( 0.16	)
	Average Common and Common Equivalent Shares Outstanding:
	Basic		13,581			6,591			13,520			6,520
	Diluted		13,581			6,591			13,520			6,520

See accompanying notes.

Metro Bancorp, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Unaudited)

(in thousands, except share amounts)	Preferred Stock		Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance: January 1, 2009	$	400	$	6,446	$	73,221	$	51,683		$	(17,280	)	$	114,470
Comprehensive income (loss):
Net loss		-		-		-		(1,008	)		-			(1,008	)
Other comprehensive income		-		-		-		-			9,001			9,001
Total comprehensive income														7,993
Dividends declared on preferred stock		-		-		-		(60	)		-			(60	)
Common stock of 44,179 shares issued under stock option plans, including tax benefit of $51		-		45		605		-			-			650
Common stock of 370 shares issued under employee stock purchase plan		-		-		7		-			-			7
Proceeds from issuance of 52,664 shares of common stock in connection with dividend reinvestment and stock purchase plan		-		53		824		-			-			877
Common stock share-based awards		-		-		1,060		-			-			1,060
Proceeds from issuance of 6,250,000 shares of common stock in connection with stock offering		-		6,250		64,475		-			-			70,725
Balance: September 30, 2009	$	400	$	12,794	$	140,192	$	50,615		$	(8,279	)	$	195,722

(in thousands, except share amounts)	Preferred Stock		Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance: January 1, 2010	$	400	$	13,448	$	147,340	$	49,705		$	(10,871	)	$	200,022
Comprehensive income (loss):
Net loss		-		-		-		(5,794	)		-			(5,794	)
Other comprehensive income		-		-		-		-			12,470			12,470
Total comprehensive income														6,676
Dividends declared on preferred stock		-		-		-		(60	)		-			(60	)
Common stock of 11,378 shares issued under stock option plans, including tax benefit of $25		-		12		91		-			-			103
Common stock of 180 shares issued under employee stock purchase plan		-		-		2		-			-			2
Proceeds from issuance of 190,351 shares of common stock in connection with dividend reinvestment and stock purchase plan		-		190		1,981		-			-			2,171
Common stock share-based awards		-		-		882		-			-			882
Balance: September 30, 2010	$	400	$	13,650	$	150,296	$	43,851		$	1,599		$	209,796

See accompanying notes.

Metro Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

		Nine Months Ending September 30,
	(in thousands)	2010			2009
Operating Activities	Net loss	$	(5,794	)	$	(1,008	)
	Adjustments to reconcile net loss to net cash provided (used) by operating activities:
	Provision for loan losses		18,400			10,625
	Provision for depreciation and amortization		4,710			3,760
	Deferred income (benefit) taxes		(3,948	)		2,047
	Amortization of securities premiums and accretion of discounts, net		68			387
	Gains on sales/calls of securities (net)		(1,036	)		(1,570	)
	Net other-than-temporary impairment losses on investment securities		962			2,325
	Proceeds from sales and transfers of SBA loans originated for sale		19,809			-
	Proceeds from sales of other loans originated for sale		41,494			129,633
	Loans originated for sale		(65,333	)		(101,474	)
	Gains on sales of loans originated for sale		(1,105	)		(294	)
	Loss on write down on foreclosed real estate		814			47
	Gains on sales of foreclosed real estate		(14	)		(16	)
	Loss on disposal of equipment		89			839
	Stock-based compensation		882			1,060
	Amortization of deferred loan origination fees and costs		1,371			1,606
	Increase in other assets		(7,299	)		(54,545	)
	(Decrease) increase in other liabilities		(4,008	)		3,215
	Net cash provided (used) by operating activities		62			(3,363	)
Investing Activities	Securities held to maturity:
	Proceeds from principal repayments, calls and maturities		35,870			52,424
	Proceeds from sales		-			3,425
	Purchases		(144,919	)		-
	Securities available for sale:
	Proceeds from principal repayments, calls and maturities		131,135			80,489
	Proceeds from sales		239,989			47,010
	Purchases		(372,200	)		(70,218	)
	Proceeds from sales of loans receivable		-			5,639
	Proceeds from sales of foreclosed real estate		2,509			652
	Net decrease (increase) in loans receivable		32,436			(51,393	)
	Net purchase of restricted investment in bank stock		(65	)		-
	Proceeds from sale of premises and equipment		25			18
	Purchases of premises and equipment		(1,497	)		(11,125	)
	Net cash (used) provided by investing activities		(76,717	)		56,921
Financing Activities	Net increase in demand, interest checking, money market, and savings deposits		126,286			63,693
	Net (decrease) increase in time deposits		(12,335	)		39,283
	Net decrease in short-term borrowings		(36,475	)		(216,475	)
	Repayment of long-term borrowings		-			(25,000	)
	Proceeds from common stock options exercised		78			599
	Proceeds from dividend reinvestment and common stock purchase plan		2,171			877
	Proceeds from issuance of common stock in connection with stock offering		-			70,725
	Tax benefit on exercise of stock options		25			51
	Cash dividends on preferred stock		(60	)		(60	)
	Net cash provided (used) by financing activities		79,690			(66,307	)
	Increase (decrease) in cash and cash equivalents		3,035			(12,749	)
	Cash and cash equivalents at beginning of year		40,264			49,511
	Cash and cash equivalents at end of period	$	43,299		$	36,762
Supplementary cash flow information:
Transfer of loans to foreclosed assets		$	2,442		$	7,132

See accompanying notes.

METRO BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidated Financial Statements

The consolidated balance sheet at December 31, 2009 has been derived from audited financial statements and the consolidated interim financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements were prepared in accordance with GAAP for interim financial statements and with instructions for Form 10-Q and Regulation S-X Section 210.10-01. Further information on the Company’s accounting policies are available in Note 1 (Significant Account ing Policies) of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented. Such adjustments are of a normal, recurring nature.

These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements. The results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The consolidated financial statements include the accounts of Metro Bancorp, Inc. (the Company) and its consolidated subsidiaries including Metro Bank (Metro or the Bank). All material intercompany transactions have been eliminated. Certain amounts from the prior year have been reclassified to conform to the 2010 presentation. Such reclassifications had no impact on the Company’s stockholders’ equity or net income.

Use of Estimates

The financial statements are prepared in conformity with GAAP. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and require disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impaired loans, the valuation of deferred tax assets, the valuation of securities available for sale, and the determination of other-than-temporary impairment (OTTI) on the Bank’s investment securities portfolio.

During the third quarter of 2010, as part of the quantitative analysis of the adequacy of the allowance for loan losses, management adjusted its projection of probable loan losses based upon a much shorter and more recent period of actual historical losses. This was done as a result of the much higher level of loan charge-offs experienced by the Company over the past two years compared to previous years. Given the continued state of the economy and its impact on borrowers and on loan collateral values, management feels this is currently a better predictor of probable additional loan losses until such time that the economy, borrower repayment ability and loan collateral values show sustained signs of improvement. The change in this estimate resulted in an additional $3.6 million of provision. The impact to the net loss after taxes was an additional loss of $2.4 million and a decrease of $0.17 to earnings per share.

Note 2. STOCK-BASED COMPENSATION

The fair value of each stock option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted-average assumptions for options granted during the nine months ended September 30, 2010 and 2009, respectively: risk-free interest rates of 3.2% and 2.3%; volatility factors of the expected market price of the Company's common stock of .45 and .29; weighted-average expected lives of the options of 7.5 years for both September 30, 2010 and for September 30, 2009; and no cash dividends. Using these assumptions, the weighted-average fair value of options granted for the nine months ended September 30, 2010 and 2009 was $6.47 and $6.06 per option, respectively. In the first nine months of 2010, the Company granted 188,400 options to purchase shares of the Compa ny’s stock at exercise prices ranging from $12.28 per share to $13.20 per share.

The Company recorded stock-based compensation expense of approximately $882,000 and $1.1 million during the nine months ended September 30, 2010 and September 30, 2009, respectively. In accordance with Financial Accounting Standards Board (FASB) guidance on stock-based payments, during the first quarter of 2010 the Company reversed $200,000 of expense (that had been recorded in prior periods) as a result of the reconcilement of projected option forfeitures to actual option forfeitures for all stock options granted during the first quarter of 2006.

Note 3. NEW ACCOUNTING STANDARDS

In January 2010, the FASB issued additional guidance to improve the disclosures for fair value measurements. The guidance requires new disclosures that report separately the amounts of significant transfers into and out of Level 1 and Level 2 fair value measurements and that describe the reasons for the transfers. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance also provides clarity to existing disclosures regarding the level of disaggregation and input and valuation techniques. This update, with the exception of the Level 3 requirements, was effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance has not ha d a material impact on our consolidated financial statements. The Level 3 requirements have a delayed effective date for interim and annual reporting periods beginning after December 15, 2010. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In July 2010, the FASB updated guidance to provide greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Entities will be required to provide the following disclosures on a disaggregated basis: 1) the nature of credit risk inherent in the entity’s portfolio of financing receivables, 2) how the risk is analyzed and assessed in arriving at the allowance for credit losses and 3) the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

Note 4. COMMITMENTS AND CONTINGENCIES

The Company is subject to certain routine legal proceedings and claims arising in the ordinary course of business. It is management’s opinion that the ultimate resolution of these claims will not have a material adverse effect on the Company’s financial position and results of operations.

In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and unadvanced loan commitments. At September 30, 2010, the Company had $350.8 million in unused commitments. Management does not anticipate any material losses as a result of these transactions.

On November 10, 2008, Metro announced it had entered into a service agreement with Fiserv Solutions, Inc. (Fiserv). The agreement, effective November 7, 2008, is for a period of seven years, subject to automatic renewal for additional terms of two years unless either party gives the other written notice of non-renewal at least 180 days prior to the expiration date of the term. Future obligation for support, license fees and processing services of $41.7 million is expected over the next six years. The various services include: core system hosting, item processing, deposit and loan processing, electronic banking, data warehousing and other banking functions.

Future Facilities

The Company owns a parcel of land at the corner of Carlisle Road and Alta Vista Road in Dover Township, York County, Pennsylvania. The Company plans to construct a full-service store on this property to be opened in the future.

The Company has entered into a land lease for the premises located at 2121 Lincoln Highway East, East Lampeter Township, Lancaster County, Pennsylvania. The Company plans to construct a full-service store on this property to be opened in the future.

The Company has purchased land at 105 N. George Street, York City, York County, Pennsylvania. The Company plans to open a store on this property in the future.

Note 5. OTHER COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income. The only other comprehensive income items that the Company presently has are net unrealized gains on securities available for sale and unrealized losses for noncredit-related impairment losses. The federal income taxes allocated to the net unrealized gains are presented in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2010			2009			2010			2009
Unrealized holding gains arising during the period	$	1,924		$	4,344		$	12,084		$	9,970
Reclassification adjustment on securities		4,918			(57	)		6,561			1,291
Noncredit related other-than-temporary impairment gains on securities not expected to be sold		1,862			5,867			501			2,587
Subtotal		8,704			10,154			19,146			13,848
Income tax impact		(2,959	)		(3,554	)		(6,676	)		(4,847	)
Other comprehensive income, net of tax impact	$	5,745		$	6,600		$	12,470		$	9,001

During the three months ended September 30, 2010, the Company reclassified $4.9 million of a loss through other comprehensive income. Of the $4.9 million, a $117,000 gain was realized at the time of investment sales and recorded into income. A credit loss on impaired securities of $46,000 was realized through a charge to income. The remaining reclassification adjustment of $4.9 million, relates to the change in unrealized loss at June 30, 2010 to the date those securities were sold during the third quarter 2010. Comparatively during the three months ended September 30, 2009, the Company reclassified $57,000 of other comprehensive income. Of the $57,000 adjustment, $1.5 million was realized at the time of investment sales and recorded into income. A credit loss on impaired securities of $952,000 was realized throug h a charge to income. The remaining reclassification adjustment relates to the change in other comprehensive income from June 30, 2010 to the time of sale on those securities sold during the third quarter 2010.

For the nine months ended September 30, 2010, the Company reclassified $6.6 million of a loss through other comprehensive income. Of the $6.6 million, a $1.0 million gain was realized at the time of investment sales and recorded into income. A credit loss on impaired securities of $962,000 was realized through a charge to income. The remaining reclassification adjustment of $6.6 million, relates to the change in unrealized loss during the period on those securities sold throughout the year. Comparatively during the nine months ended September 30, 2009, the Company reclassified $1.3 million loss through other comprehensive income. Of the $1.3 million adjustment, $1.6 million was realized at the time of investment sales and recorded into income. A credit loss on impaired securities of $2.3 mill ion was realized through a charge to income. The remaining reclassification adjustment relates to the change in other comprehensive income on those securities sold throughout the period.

Note 6. GUARANTEES

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, when issued, letters of credit have expiration dates within two years. The credit risk associated with letters of credit is essentially the same as that of traditional loan facilities. The Company generally requires collateral and/or personal guarantees to support these commitments. The Company had $33.5 million and $34.5 million of standby letters of credit at September 30, 2010 and December 31, 2009, respectively. Management believes that the proceeds obtained through a liquidation of collateral, the enforcement of guarantees and normal collection act ivities against the borrower would be sufficient to cover the potential amount of future payment required under the corresponding letters of credit. There was no current amount of the liability at September 30, 2010 and December 31, 2009 for guarantees under standby letters of credit issued.

Note 7. FAIR VALUE DISCLOSURE

The Company uses its best judgment in estimating the fair value of its financial instruments; however, there are inherent weaknesses in any estimation technique due to assumptions that are susceptible to significant change. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported a t each period-end.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs with the highest priority given to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements):

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: 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;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets that were measured at fair value on a recurring basis at September 30, 2010 by level within the fair value hierarchy:

			Fair Value Measurements at Reporting Date Using
Description	September 30, 2010		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)			(Level 1)		(Level 2)		(Level 3)
Securities available for sale	$	409,067	$	-	$	409,067	$	-

For financial assets measured at fair value on a recurring basis at December 31, 2009, the fair value measurements by level within the fair value hierarchy were as follows:

			Fair Value Measurements at Reporting Date Using
Description	December 31, 2009		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)			(Level 1)		(Level 2)		(Level 3)
Securities available for sale	$	388,836	$	-	$	388,836	$	-

As of September 30, 2010 and December 31, 2009, the Company did not have any liabilities that were measured at fair value on a recurring basis.

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy at September 30, 2010 were as follows:

			Fair Value Measurements at Reporting Date Using
Description	September 30, 2010		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)			(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	7,188	$	-	$	-	$	7,188
Foreclosed assets		4,892		-		-		4,892
Total	$	12,080	$	-	$	-	$	12,080

For financial assets measured at fair value on a nonrecurring basis at December 31, 2009, the fair value measurements by level within the fair value hierarchy were as follows:

			Fair Value Measurements at Reporting Date Using
Description	December 31, 2009		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)			(Level 1)		(Level 2)		(Level 3)
Security held to maturity	$	4,010	$	-	$	4,010	$	-
Impaired loans		383		-		-		383
Foreclosed assets		718		-		-		718
Total	$	5,111	$	-	$	4,010	$	1,101

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following valuation techniques were used to estimate the fair values of the Company’s financial instruments at September 30, 2010 and at December 31, 2009:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Securities

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Loans Held for Sale (Carried at Lower of Cost or Fair Value)

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did not write down any loans held for sale during the nine months ended September 30, 2010 or the year ended December 31, 2009.

Loans Receivable (Carried at Cost)

The fair value of loans, excluding impaired loans with specific loan allowances, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value)

Impaired loans are those that the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows. At September 30, 2010, the fair value of two related impaired loans with reserve allocations and their associated relationship totaled $7.2 million, net of a valuation allowance of $1.8 million. At December 31, 2009, the fair value of impaired loans with reserve allocations and their associated loan relationships totaled $383,000, net of a valuation allowance of $900,000. The Bank’s impaired loans are more fully discussed in the Loan and Asset Quality section of this Form 10-Q.

Restricted Investments in Bank Stock (Carried at Cost)

The carrying amount of restricted investments in bank stock approximates fair value, and considers the limited marketability of such securities. The restricted investments in bank stock consisted of Federal Home Loan Bank (FHLB) stock and Atlantic Central Bankers Bank (ACBB) at September 30, 2010 and FHLB stock at December 31, 2009.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Foreclosed Assets (Carried at Lower of Cost or Fair Value)

Fair value of real estate acquired through foreclosure was based on independent third party appraisals of the properties, recent offers, or prices on comparable properties. These values were determined based on the sales prices of similar properties in the proximate vicinity. The carrying values of foreclosed assets, with valuation allowances recorded subsequent to initial foreclosure, was $4.9 million and $718,000 at September 30, 2010 and December 31, 2009, respectively which are net of valuation allowances of $364,000 and $194,000 that were established in 2010 and 2009, respectively.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings (Carried at Cost)

The carrying amounts of short-term borrowings approximate their fair values.

Long-Term Debt (Carried at Cost)

The fair value of the $25 million FHLB convertible select borrowing advance was estimated using discounted cash flow analysis, based on a quoted price for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. The price obtained from this active market represents a fair value that is deemed to represent the transfer price if the liability were assumed by a third party. Other long-term debt was estimated using discounted cash flow analysis, based on quoted prices from a third party broker for new debt with similar characteristics, terms and remaining maturity. The price for the other long-term debt was obtained in an inactive market where these types of instruments are not traded regularly.

Off-Balance Sheet Financial Instruments (Disclosed at Cost)

Fair values for the Bank’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

The estimated fair values of the Company’s financial instruments were as follows at September 30, 2010 and December 31, 2009:

	September 30, 2010				December 31, 2009
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	43,299	$	43,299	$	40,264	$	40,264
Securities		635,930		639,674		506,651		508,762
Loans, net (including loans held for sale)		1,393,610		1,389,017		1,442,104		1,424,648
Restricted investments in bank stock		21,695		21,695		21,630		21,630
Accrued interest receivable		7,040		7,040		7,010		7,010
Financial liabilities:
Deposits	$	1,928,684	$	1,932,702	$	1,814,733	$	1,818,045
Long-term debt		54,400		36,637		54,400		42,786
Short-term borrowings		14,600		14,600		51,075		51,075
Accrued interest payable		764		764		930		930
Off-balance sheet instruments:
Standby letters of credit	$	-	$	-	$	-	$	-
Commitments to extend credit		-		-		-		-

Note 8. SECURITIES

The amortized cost and fair value of securities are summarized in the following tables:

	September 30, 2010
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale:
U.S. Government agency securities	$	17,500	$	77	$	-		$	17,577
Residential mortgage-backed securities		18,241		1,106		-			19,347
Agency collateralized mortgage obligations		312,348		5,070		(28	)		317,390
Private-label collateralized mortgage obligations		58,556		60		(3,863	)		54,753
Total	$	406,645	$	6,313	$	(3,891	)	$	409,067
Held to Maturity:
U.S. Government agency securities	$	134,995	$	152	$	(231	)	$	134,916
Residential mortgage-backed securities		44,860		2,861		-			47,721
Agency collateralized mortgage obligations		33,866		1,095		-			34,961
Private-label collateralized mortgage obligations		3,142		-		(50	)		3,092
Corporate debt securities		10,000		-		(83	)		9,917
Total	$	226,863	$	4,108	$	(364	)	$	230,607

	December 31, 2009
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale:
U.S. Government agency securities	$	55,004	$	69	$	(315	)	$	54,758
Residential mortgage-backed securities		80,916		1,419		(1,748	)		80,587
Agency collateralized mortgage obligations		149,233		1,694		(799	)		150,128
Private-label collateralized mortgage obligations		120,407		-		(17,044	)		103,363
Total	$	405,560	$	3,182	$	(19,906	)	$	388,836
Held to Maturity:
U.S. Government agency securities	$	25,000	$	-	$	(458	)	$	24,542
Residential mortgage-backed securities		54,822		2,287		-			57,109
Agency collateralized mortgage obligations		30,362		844		-			31,206
Private-label collateralized mortgage obligations		4,010		-		(602	)		3,408
Corporate debt securities		1,997		37		-			2,034
Municipal securities		1,624		3		-			1,627
Total	$	117,815	$	3,171	$	(1,060	)	$	119,926

The amortized cost and fair value of debt securities at September 30, 2010 by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.

	Available for Sale				Held to Maturity
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	-	$	-	$	-	$	-
Due after one year through five years		-		-		10,000		9,917
Due after five years through ten years		-		-		44,995		45,147
Due after ten years		17,500		17,577		90,000		89,769
		17,500		17,577		144,995		144,833
Residential mortgage-backed securities		18,241		19,347		44,860		47,721
Agency collateralized mortgage obligations		312,348		317,390		33,866		34,961
Private-label collateralized mortgage obligations		58,556		54,753		3,142		3,092
Total	$	406,645	$	409,067	$	226,863	$	230,607

During the third quarter of 2010, the Company sold 18 securities, including 12 agency mortgage-backed securities, four private-label mortgage-backed securities, and two agency callable debentures with a combined fair market value of $195.7 million. All of the securities had been classified as available for sale and the Company realized a total pretax net gain of $117,000.

The Company sold 45 mortgage-backed securities with a fair market value of $48.6 million during the third quarter of 2009. Of this total, 31 securities had been classified as available for sale with a carrying value of $44.3 million. The Company realized proceeds of $45.7 million for a pretax net gain of $1.5 million. The securities sold in the third quarter of 2009 also included 14 mortgage-backed securities with a fair market value of $2.9 million and a carrying value of $2.8 million that had been classified as held to maturity and were sold due to their small remaining size. In every case, the current face had fallen below 15% of the original purchase amount. A pretax net gain of $147,000 was recognized in the third quarter of 2009 on the sale of securities classified as held to maturity.

During the first nine months of 2010, the Company sold a total of 33 securities with a fair market value of $240.0 million. All of the securities had been classified as available for sale and the Company realized a pretax net gain of $1.0 million. The securities sold included 15 private-label collateralized mortgage obligations (CMOs) with a fair market value of $38.9 million; ten agency CMOs with a fair market value of $121.9 million; six agency mortgage-backed securities with a fair market value of $58.2 million; and two agency debentures with a fair market value of $21.0 million.

The Company sold a total of 65 mortgage-backed securities with a fair market value of $49.7 million during the first nine months of 2009. Of this total, 42 securities had been classified as available for sale with a carrying value of $44.8 million. The Company realized proceeds of $46.3 million for a pretax net gain of $1.5 million. The securities sold also included 22 mortgage-backed securities with a fair market value of $3.4 million and a carrying value of $3.2 million that had been classified as held to maturity. As mentioned above, they were sold due to their small remaining size and in every case, the current face had fallen below 15% of the original purchase amount. A pretax net gain of $171,000 was recognized on the sale of securities classified as held to maturity.

The Company does not maintain a trading portfolio and there were no transfers of securities between the available for sale and held to maturity portfolios. The Company uses the specific identification method to record security sales.

The following table summarizes the Company’s gains and losses on the sales or calls of debt securities and credit losses recognized for the other-than-temporary impairment (OTTI) of investments:

(in thousands)	Gross Realized Gains		Gross Realized (Losses)			Other-Than-Temporary Impairment (Credit Losses)			Net Gains (Losses)
Three Months Ended:
September 30, 2010	$	4,006	$	(3,889	)	$	(46	)	$	71
September 30, 2009		1,527		(12	)		(952	)		563

Nine Months Ended:
September 30, 2010	$	4,925	$	(3,889	)	$	(962	)	$	74
September 30, 2009		1,582		(12	)		(2,325	)		(755	)

The following table shows the fair value and gross unrealized losses associated with the Company’s investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	September 30, 2010
	Less than 12 months					12 months or more					Total
(in thousands)	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Available for Sale: Agency collateralized mortgage obligations	$	-	$	-		$	16,238	$	(28	)	$	16,238	$	(28	)
Private-label collateralized mortgage obligations		-		-			51,725		(3,863	)		51,725		(3,863	)
Total	$	-	$	-		$	67,963	$	(3,891	)	$	67,963	$	(3,891	)
Held to Maturity: U.S. Government agency securities	$	89,769	$	(231	)	$	-	$	-		$	89,769	$	(231	)
Private-label collateralized mortgage obligations		-		-			3,092		(50	)		3,092		(50	)
Corporate debt securities		9,917		(83	)		-		-			9,917		(83	)
Total	$	99,686	$	(314	)	$	3,092	$	(50	)	$	102,778	$	(364	)


	December 31, 2009
	Less than 12 months					12 months or more					Total
(in thousands)	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Available for Sale: U.S. Government agency securities	$	29,685	$	(315	)	$	-	$	-		$	29,685	$	(315	)
Residential mortgage-backed securities		47,654		(1,748	)		-		-			47,654		(1,748	)
Agency collateralized mortgage obligations		43,641		(352	)		45,057		(447	)		88,698		(799	)
Private-label collateralized mortgage obligations		8,233		(652	)		95,130		(16,392	)		103,363		(17,044	)
Total	$	129,213	$	(3,067	)	$	140,187	$	(16,839	)	$	269,400	$	(19,906	)
Held to Maturity: U.S. Government agency securities	$	24,542	$	(458	)	$	-	$	-		$	24,542	$	(458	)
Private-label collateralized mortgage obligations		-		-			3,408		(602	)		3,408		(602	)
Total	$	24,542	$	(458	)	$	3,408	$	(602	)	$	27,950	$	(1,060	)

The Company’s investment securities portfolio consists primarily of U.S. Government agency securities, U.S. Government sponsored agency mortgage-backed obligations, U.S. Government agency CMOs and private-label CMOs. The securities of the U.S. Government sponsored agencies, the U.S. Government mortgage-backed obligations and the U.S. Government agency CMOs have little credit risk because their principal and interest payments are backed by an agency of the U.S. Government. Private-label CMOs are not backed by the full faith and credit of the U.S. Government nor are their principal and interest payments guaranteed. Historically, most private-label CMOs have carried a AAA bond rating on the underlying issuer; however, the subprime mortgage problems, rising foreclosures and the general decline in the residential housing market in the U.S. in recent years have led to several ratings downgrades and subsequent OTTI of many private-label CMOs.

In determining fair market values for its portfolio holdings, the Company relies upon a third-party provider. Under the current guidance, these values are considered Level 2 inputs, based upon matrix pricing and observed data from similar assets. They do not reflect the Level 3 inputs that would be derived from internal analysis or judgment. While street bids provide definitive fair market values, they do so only when the bidders believe there is a legitimate transaction occurring. Otherwise, the street will “bid” using Level 2 matrix pricing. The Bank does not manage a trading portfolio, and is not typically a seller from either its available-for-sale or held-to-maturity portfolios. Therefore, the street bids will converge with matrix pricing, will add no value, and will potentially damage our reputation when legitimate bi ds are wanted. Absent direct quotes, or Level 1 inputs, the Bank must rely upon an independent, third party to provide consistently reasonable valuations. The Bank cannot replicate the overview of the investment community which sees the entire marketplace and can provide greater guidance on values of similar assets. In short, these Level 2 inputs provide the best, most consistent pricing and the Company expects to continue to rely upon and report their valuations. The Bank has no investment securities with price indications based on Level 1 or on Level 3 inputs and, as such, there have been no transfers among the three categories.

The unrealized losses in the Company’s investment portfolio at September 30, 2010 were associated with two distinct types of securities. The first type includes four callable agency debentures, three government agency-backed CMOs and one corporate bond. Management believes that the losses on these investments will not be realized and notes the contractual cash flows of the CMOs are guaranteed by an agency of the U.S. Government. Additionally, the sole corporate bond is a shorter-term holding in an investment grade company. Accordingly, it is expected that these securities would not be settled at a price less than the amortized cost of the Company’s investment. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, and it is also unlikely that the Bank will be required to sell the securities before a full recovery is made, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2010.

The second type of security in the Company’s investment portfolio with unrealized losses at September 30, 2010 was private-label CMOs. As of September 30, 2010, the Company owned 14 private-label CMOs in a loss position with a total carrying value of $54.9 million. Management performs no less than quarterly assessments of these securities for OTTI and to determine what, if any, portion of the impairment may be credit related. As part of this process, management asserts that (a) we do not have the intent to sell the securities and (b) it is more likely than not we will not be required to sell the securities before recovery of the Bank’s cost basis. This assertion is based, in part, upon the most recent liquidity analysis prepared for the Bank’s Asset/Liability Committee (ALCO) which indicates if the Bank has sufficient excess funds to consider the potential purchase of investment securities and sufficient unused borrowing capacity available to meet any potential outflows. Furthermore, the Bank knows of no contractual or regulatory obligations that would require these bonds to be sold.

Next, in order to bifurcate the impairment into its components, the Bank uses the Bloomberg analytical service to analyze each individual security. The Bank looks at the overall bond ratings as well as specific, underlying characteristics such as pool factor, weighted-average coupon, weighted-average maturity, weighted-average life, loan to value, delinquencies, credit score, prepayment speeds, geographic concentration, etc. Using reported data for prepayment speeds, default rates, loss severity rates and lag times, the Bank analyzes each bond under a variety of scenarios. As the results may vary depending upon the historic time period analyzed, the Bank uses this information for the purpose of managing the investment portfolio and its inherent risk. However, the Bank reports it findings based upon the three month data points for Const ant Prepayment Rate (CPR) speed, default rate and loss severity as it believes this time point best captures both current and historic trends. For management purposes, the Bank also analyzes each bond using an assumed, projected default rate based upon each pool’s most recent level of 90-day delinquencies, bankruptcies and foreclosed real estate. This projected analysis also assumes loss severity percentages subjectively assigned to each pool based upon credit ratings.

When the analysis shows a bond to have no projected loss, there is considered to be no credit-related loss. When the analysis shows a bond to have a projected loss, a cash flow projection is created, including the projected loss, for the duration of the bond. This projection is then used to calculate the present value of the cash flows expected to be collected and compared to the amortized cost basis. The difference between these two figures is recognized as the amount of impairment due to credit loss. The difference between the total impairment and this credit loss portion is determined to be the amount related to all other factors. The amount of impairment related to credit loss is to be recognized in current earnings while the amount of impairment related to all other factors is to be recognized in other comprehensive income.

Using this method, the Bank determined that, over time, nine of its private-label CMOs have had losses attributable to credit. This was due to a number of factors including the securities’ credit ratings and rising trends for delinquencies, bankruptcies and foreclosures on the underlying collateral. Of the nine, four no longer indicated a loss of cash flows as of September 30, 2010. The Bank previously recognized a loss attributable to credit on another three of the securities, however, as of September 30, 2010, the present value of the cash flows for these three securities was greater than the carrying value, and therefore no further write-downs were required. For the remaining two securities, total losses attributable to credit issues during the quarter ending September 30, 2010 were $46,000. Total life-to-date losses attributa ble to credit issues on all nine securities were $2.7 million. There has been no recapture of the previous write-downs. The noncredit losses in other comprehensive income on the nine private-label CMOs considered to have credit impairment totaled $2.9 million at September 30, 2010. This compares to cumulative noncredit loss in other comprehensive income on those same private-label CMOs of $8.7 million at December 31, 2009.

The table below rolls forward the cumulative life to date credit losses for the quarter ended September 30, 2010 which have been recognized in earnings for the private-label CMOs previously mentioned.

	Private-label CMOs
(in thousands)	Available for Sale			Held to Maturity		Total
Cumulative OTTI credit losses at July 1, 2010	$	3,254		$	3	$	3,257
Additions for which OTTI was not previously recognized		-			-		-
Additional increases for OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		46			-		46
Reduction due to credit impaired security sold		(638	)		-		(638	)
Cumulative OTTI credit losses recognized for securities still held at September 30, 2010	$	2,662		$	3	$	2,665

During the third quarter of 2010, the Bank sold four private-label CMOs, three of which had previously been in an unrealized loss position but had subsequently recovered to their adjusted cost basis. None of the three securities was recognized in the table of OTTI credit losses above, all were classified as available for sale, and the three had a total carrying value of $7.5 million. The Company realized proceeds of $7.5 million.

The fourth private-label CMO sold had been in an unrealized loss position but had not recovered its cost basis and was sold at a loss. This security was recognized in the table above as, during the first quarter of 2010, the Company recognized a credit-related loss of $638,000. The bond was classified as available for sale and had a total carrying value, after the first quarter 2010 credit-related OTTI write-down, of $13.6 million. The Company realized proceeds of $9.7 million for a pretax loss of $3.9 million.

As with prior period sales of private-label CMOs, all were sold as part of the Company’s effort to reduce mortgage-related credit risk in its portfolio. Previous to this quarter, all bonds had been sold only after they recovered to their adjusted cost basis. In the third quarter of 2010, however, the one bond remained in a loss position and was sold because management felt that future potential losses had materially increased from the previous quarter and were significantly greater than the actual loss realized. Analysis showed that an absolute loss of principal was probable and potentially large; therefore the decision was made to sell the bond.

In conjunction with ALCO and the Board of Directors, a larger sale program was developed and executed in the latter half of the third quarter. In addition to the single, largest private-label CMO discussed above with a carrying value of $13.6 million, the sale program included two agency debentures with a carrying value of $20.0 million; three variable-rate agency mortgage-backed securities with a carrying value of $22.8 million; and nine fixed rate agency mortgage-backed securities with a carrying value of $131.6 million. In total, this program sold 15 bonds with a combined carrying value of $188.0 million, a fair market value of $188.1 million, and a gain of $116,000. The weighted average yield on the pieces sold was 3.22%. The proceeds from the sale were reinvested in a mix of callable agency debentures and agency CMOs with a weight ed average yield of 3.11%.

Including all sales during the third quarter of 2010, the Company sold 18 bonds, including 12 agency mortgage-backed obligations, four private-label CMOs and two agency callable debentures. The bonds had a combined fair market value of $195.7 million and the Company realized total pretax gains of $117,000.

The following table rolls forward the cumulative life to date credit losses during the nine months ended September 30, 2010 which have been recognized in earnings for the private-label CMOs previously mentioned.

	Private-label CMOs
(in thousands)	Available for Sale			Held to Maturity		Total
Cumulative OTTI credit losses at January 1, 2010	$	2,338		$	3	$	2,341
Additions for which OTTI was not previously recognized		675			-		675
Additional increases for OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		287			-		287
Reduction due to credit impaired security sold		(638	)		-		(638	)
Cumulative OTTI credit losses recognized for securities still held at September 30, 2010	$	2,662		$	3	$	2,665

The table below rolls forward the cumulative life to date credit losses for the quarter and nine months ended September 30, 2009 which were recognized in earnings for the private-label CMOs previously mentioned.

	Private-label CMOs
(in thousands)	Three months ended September 30, 2009		Nine months ended September 30, 2009
Available for Sale:
Beginning balance	$	1,373	$	-
Cumulative OTTI credit losses		-		-
Additions for which OTTI was not previously recognized		-		2,325
Additional increases for OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		952		-
Cumulative OTTI credit losses recognized for securities still held at September 30, 2009	$	2,325	$	2,325

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

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 operations. 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 financial condition, liquidity, results of operations, future performance and business of Metro Bancorp, Inc. 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 in tentions 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 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:

·	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 Federal Deposit Insurance Corporation (FDIC) deposit fund is continually being used due to increased bank failures and existing financial institutions are being assessed higher premiums in order to replenish the fund;

·	the impact of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act and other changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance);

·	general economic or business conditions, either nationally, regionally or in the communities in which we do 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 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

The Company recorded a net loss of $6.2 million, or ($0.46) per fully-diluted share, for the third quarter of 2010 compared to a net loss of $490,000, or $(0.08) per share for the same period one year ago. A net loss of $5.8 million, or ($0.43) per fully-diluted share for the nine months ended September 30, 2010 was recorded versus a net loss of $1.0 million, or $(0.16) per share the nine months ended September 30, 2009.

The net losses for the three months and the nine months ended September 30, 2010 were a direct result of a $13.4 million provision for loan losses during the 3rd quarter of 2010. The Company made this elevated provision to support the current value of nonperforming loans and also as a result of a change in its quantitative analysis of its loan loss allowance. See further discussion in the Provision for Loan Losses section of this Form 10-Q.

Total revenues for the three months ended September 30, 2010 were $27.6 million, up $2.1 million, or 8%, over the same period in 2009. Total revenues for the nine months ended September 30, 2010 were $80.2 million, up $5.9 million, or 8%, over the same period in 2009.

The net interest margin on a fully tax-equivalent basis for the three months ended September 30, 2010 was 3.98% compared to 3.92% for the same period in 2009. Average interest-earning assets for the third quarter of 2010 were $2.04 billion versus $1.94 billion for the third quarter of 2009. The net interest margin on a fully tax-equivalent basis for the nine months ended September 30, 2010 was 3.99% compared to 3.94% for the same period in 2009. Average interest-earning assets for the first nine months of 2010 were $2.03 billion versus $1.98 billion for the same period of 2009.

Noninterest expenses totaled $24.2 million for the third quarter of September 2010, up $1.4 million, or 6%, compared to $22.8 million during the same period of 2009. For the nine months ended September 30, 2010 total noninterest expenses were $72.6 million versus $66.1 million for the nine months ended September 30, 2009, a $6.5 million, or 10% increase. Total noninterest expenses for the third quarter and the first nine months ended September 30, 2009 included one time costs associated with the Company’s core computer system conversion and rebranding efforts. These expenses were partially offset by the recognition of $2.75 million and $6.0 million, respectively, of fees paid to Metro Bank by TD Bank (TD) to partially defray these costs. Excluding the net impact of these expenses and the offsetting fee, total noninterest expenses for the third quarter and the first nine months of 2010 were up only $449,000, or 2%, and $6.0 million, or 9%, over the same periods in 2009, respectively.

For the first nine months of 2010, total net loans decreased by $54.6 million from $1.43 billion at December 31, 2009 to $1.37 billion at September 30, 2010, a 4% decrease. Our loan to deposit ratio, which excludes loans held for sale, was 72% at September 30, 2010 compared to 80% at December 31, 2009. Loans held for sale for the first nine months of 2010 increased by $6.2 million, or 48%, from $12.7 million at December 31, 2009 to $18.9 million at September 30, 2010.

Nonperforming assets at September 30, 2010 totaled $63.2 million, or 2.83%, of total assets, as compared to $45.6 million, or 2.12%, of total assets, at December 31, 2009 and $32.0 million, or 1.53%, of total assets one year ago. Total nonperforming assets decreased during the quarter by $7.4 million, or 11%, and our nonperforming loan coverage increased to 38% at September 30, 2010 from 26% the previous quarter. Also, loans 30-89 days past due as a percentage of total loans decreased to 0.65% at September 30, 2010; down from 0.73% at June 30, 2010 and down 46% from 1.20% of total loans one year ago.

Despite the decrease in nonperforming assets during the third quarter of 2010, the Company’s third quarter provision for loan losses was $9.7 million higher than the $3.7 million recorded in the third quarter of 2009. The allowance for loan losses totaled $21.2 million as of September 30, 2010, an increase of $6.6 million, or 45%, over the total allowance at September 30, 2009 and an increase of $6.8 million over the $14.4 million recorded at December 31, 2009. This was primarily the result of management’s refinement to the quantitative analysis portion of its determination of the level of the allowance for loan losses to account for current appraisal values on collateral associated with both performing and nonperforming loans as well as the continued state of the overall economy. See the Provision for Loan Losses section o f this Management’s Discussion and Analysis for further discussion. The allowance represented 1.52% and 0.99% of gross loans outstanding at September 30, 2010 and 2009, respectively and compared to 1.00% of gross loans at December 31, 2009. More detailed discussion of nonperforming assets is provided in the Loan and Asset Quality section of this Form 10-Q.

Net charge-offs for the three months ended September 30, 2010 were $8.4 million, the same as the third quarter of 2009. There were two relationships which were previously included in nonaccrual as of June 30, 2010 and events occurring during the third quarter of 2010 necessitated they be charged down by $5.5 million. These two relationships accounted for 66% of net charge-offs in the third quarter of 2010. Net charge-offs for the first nine months of 2010 totaled $11.6 million compared to $12.7 million for the same period last year.

Total deposits increased $114.0 million, or 6%, from $1.81 billion at December 31, 2009 to $1.93 billion at September 30, 2010. Over the past twelve months, our total deposits increased by $191.7 million, or 11% and total core deposits increased by $163.7 million, or 10%.

Stockholders’ equity increased by $14.1 million, or 7%, over the past 12 months to $209.8 million. Total stockholders’ equity increased by $9.8 million, or 5%, from December 31, 2009. Metro Bancorp continues to maintain strong capital ratios. The Company’s consolidated leverage ratio as of September 30, 2010 was 10.76% and its total risk-based capital ratio was 15.25%.

A summary of financial highlights for the first nine months of 2010 compared to the same period in 2009 is summarized below:

	Quarter Ended									Nine Months Ended
(in millions, except per share data)	9/30/10			9/30/09			% Change			9/30/10			9/30/09			% Change
Total assets	$	2,232.0		$	2,086.5			7	%
Total loans (net)		1,374.7			1,456.6			(6	)
Total deposits		1,928.7			1,737.0			11
Total stockholders’ equity		209.8			195.7			7

Total revenues	$	27.6		$	25.5			8	%	$	80.2		$	74.3			8	%
Total noninterest expenses		24.2			22.8						72.6			66.1
Net loss		(6.2	)		(0.5	)					(5.8	)		(1.0	)

Diluted net loss per share	$	(0.46	)	$	(0.08	)				$	(0.43	)	$	(0.16	)

Our growth plan includes continued de novo expansion in our existing Central Pennsylvania footprint as well as expanding in Bucks, Chester and Montgomery counties in the Metro Philadelphia area. We expect this expansion and our continued focus on community banking despite this difficult economy to produce continued future balance sheet and revenue growth. However, operating results for the remainder of 2010 and the years that follow could potentially 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, 2009. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). These principles require our management to make estimates and assumptions about future events that affect the amounts reported in our cons olidated 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 probable 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 probable 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 default and loss history included in the evaluation. During the third quarter of 2010, as part of the quantitative analysis of the adequacy of the allowance for loan losses, management adjusted its projection of probable loan losses based upon a much shorter and more recent p eriod of actual historical losses. This was done as a result of the much higher level of loan charge-offs experienced by the Company over the past two years compared to previous years. Given the continued state of the economy and its impact on borrowers and on loan collateral values, management feels this is a better predictor of probable loan losses until such time that the economy, borrower repayment ability and loan collateral values show sustained signs of improvement. Please see more detailed discussions in the Provision for Loan Losses and the Allowance for Loan Losses sections of this Form 10-Q.

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 the 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;

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 our 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; and

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 our 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, 2009.

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, the loss is bifurcated and the amount of loss attributable to credit is recognized in earnings and the security is written down. The amount of loss attributable to all other factors is recorded in other comprehensive income.

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 8 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-Q for the period ended September 30, 2010.

Fair Value Measurements. The Company is required to disclose the fair value of its financial instruments 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 7 of the Notes to Consolidated Financial Statements described in this interim report on Form 10-Q for the period ended Sept ember 30, 2010. 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, 2010, 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 entire investment portfolio constitutes 97% of the Company’s assets measured at fair value. All securities are measured using Level 2 inputs. (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 a third party service provider 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 $2.04 billion for the third quarter of 2010, compared to $1.94 billion for the third quarter in 2009. For the quarter ended September 30, 2010, total loans receivable including loans held for sale, averaged $1.44 billion in 2010 compared to $1.48 billion for the same quarter in 2009. Due to the continued weakness in the global and local economies, the Bank continues to remain cautious and deliberate in its level of new loan originations as compared to the level of originations in previous years. For the same two quarters, total securities, including restricted investments in bank stock, averaged $571.2 million and $462.2 million, respectively. The increase is a result of new security purchases partially offset by principal repayments, sales and calls.

The average balance of total deposits increased $140.7 million, or 8%, for the third quarter of 2010 compared to the third quarter of 2009. These funds were primarily used to purchase investment securities as well as to reduce the level of borrowed funds. Total interest-bearing deposits averaged $1.53 billion for the third quarter of 2010, compared to $1.41 billion for the third quarter one year ago and average noninterest-bearing deposits increased by $20.4 million, or 7%, to $331.9 million. Short-term borrowings, which consist of overnight advances from the Federal Home Loan Bank (FHLB), averaged $34.3 million for the third quarter of 2010 versus $140.0 million for the same quarter of 2009.

The fully tax-equivalent yield on interest-earning assets for the third quarter of 2010 was 4.80%, a decrease of 27 basis points (bps) from the comparable period in 2009. This decrease resulted from lower yields on the Company’s loan and securities portfolios during the third quarter of 2010 as compared to the same period in 2009. Floating rate loans represent approximately 46% of our total loans receivable portfolio. As of September 30, 2010, approximately $28.6 million, or 5%, of the Company’s investment securities had a floating interest rate and provide a yield that consists of a fixed spread tied to the one-month London Interbank Offered Rate (LIBOR). The average one-month LIBOR rate increased 2 bps over the past 12 months from an average of 0.27% during the third quarter of 2009 to an average of 0.29% during the third quarter of 2010.

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 at their current low levels throughout the remainder of 2010.

Also contributing to the lower yield on interest-earning assets in 2010 was a shift in the mix of such assets as previously mentioned. Average loans outstanding including loans held for sale as a percentage of total earning assets were 70% for the third quarter of 2010 as compared to 76% for the same period one year ago.

The average rate paid on our total interest-bearing liabilities for the third quarter of 2010 was 1.04%, compared to 1.38% for the third quarter of 2009. Our deposit cost of funds decreased 29 bps from 0.99% in the third quarter of 2009 to 0.70% for the third quarter of 2010. The average rate paid on deposits decreased across all categories during the third quarter of 2010 compared to third quarter of 2009. The average cost of short-term borrowings was 0.63% for both the third quarter of 2010 and 2009. The aggregate average cost of all funding sources for the Company was 0.83% for the third quarter of 2010, compared to 1.15% for the same quarter of the prior year. The decrease in the Company’s deposit cost of funds is primarily related to the lower level of general market interest rates present during the third quarter as co mpared to the same period in 2009. At September 30, 2010, $575.0 million, or 30%, of our total deposits were those of local municipalities, school districts, not-for-profit organizations or corporate cash management customers, where the interest rates paid are indexed to either the 91-day Treasury bill, the overnight federal funds rate, the 30-day LIBOR interest rate or an internally managed index rate. This level represents the typical seasonal peak in these deposit product types. The average interest rate of the 91-day Treasury bill decreased from 0.17% in the third quarter of 2009 to 0.15% in the third quarter of 2010 and this decrease contributed to the reduction in the average interest rate the Bank paid on these deposits. The deposit category with the largest impact on our cost of funds has been time deposits. As time certificates of deposits (CDs) that were originated in past years at much higher interest rates have matured over the past twelve months, these funds have been either renewed i nto new CDs with much lower interest rates or shifted by our customers to their checking and/or savings accounts. As a result, our average rate paid on time deposits, including both retail and public, decreased by 81 bps from 2.87% for the third quarter of 2009 to 2.06% for the third quarter of 2010.

Interest-earning assets averaged $2.03 billion for the first nine months of 2010, compared to $1.98 billion for the same period in 2009. For the same two periods, total loans receivable including loans held for sale, averaged $1.44 billion in 2010 and $1.49 billion in 2009. Total securities, including restricted investments in bank stock, averaged $579.2 million and $488.6 million for the first nine months of 2010 and 2009, respectively.

The overall net growth in interest-earning assets was funded by an increase in the average balance of total deposits and an increase in average stockholders’ equity. Total average deposits, including noninterest-bearing funds, increased by $169.9 million, or 10%, for the first nine months of 2010 over the same period of 2009 from $1.67 billion to $1.84 billion. Average stockholders’ equity increased $84.1 million from September 30, 2009 to September 30, 2010, primarily as the result of a stock offering which occurred late in the third quarter of 2009. Deposit growth and the increase in stockholders’ equity in excess of that used to fund earning assets was used to reduce the level of short-term borrowings. Short-term borrowings averaged $53.9 million and $217.6 million in the first nine months of 2010 and 2009, respect ively.

The fully tax-equivalent yield on interest-earning assets for the first nine months of 2010 was 4.87%, a decrease of 26 bps versus the comparable period in 2009. This decrease resulted from lower yields on the majority of our loan and securities portfolios during the first nine months of 2010 as compared to the same period in 2009, again, as a result of the lower level of general market interest rates present during 2010 versus the same period in 2009 combined with a shift in the mix of interest-earning assets.

The average rate paid on interest-bearing liabilities for the first nine months of 2010 was 1.10%, compared to 1.41% for the first nine months of 2009. Our deposit cost of funds decreased from 1.04% in the first nine months of 2009 to 0.75% for the same period in 2010. The aggregate cost of all funding sources was 0.88% for the first nine months of 2010, compared to 1.19% for the same period in 2009.

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income and interest expense. Interest income is generated from interest earned on loans, investment securities and other interest-earning assets. Interest expense is paid on deposits and borrowed funds. Changes in net interest income and net interest margin result from the interaction between the volume and composition of interest-earning assets, related yields and associated funding costs. Net interest income is our primary source of earnings. There are several factors that affect net interest income, including:

the volume, pricing mix and maturity of earning assets and interest-bearing liabilities;

market interest rate fluctuations; and

asset quality.

Net interest income, on a fully tax-equivalent basis, for the third quarter of 2010 increased by $1.3 million, or 7%, over the same period in 2009. This increase resulted from an increase in the level of interest-earning assets combined with a reduction in interest rates paid on deposits and long-term debt, partially offset by a decrease in the yield on earning assets, as discussed in the previous section of this Form 10-Q. Interest income, on a tax-equivalent basis, on interest-earning assets totaled $24.9 million for both the third quarter of 2010 and 2009. Interest income on loans receivable including loans held for sale, on a tax-equivalent basis, decreased by $714,000, or 4%, from the third quarter of 2009. This was the combined result of a decrease in rate as well as a lower level of loans receivable outstanding. Also impacting l oan interest income for the third quarter of 2010 was the reversal of $132,000 of accrued interest income associated with loans which were reclassified to nonaccrual status during the quarter. Interest income on the investment securities portfolio on a tax-equivalent basis increased by $657,000, or 14%, for the third quarter of 2010 as compared to the same period last year. The average balance of the investment portfolio in the third quarter of 2010 increased $109.0 million over the third quarter of 2009, which offset the 31 bps drop in average yield earned on the securities portfolio in the third quarter of 2010 versus the same period last year. The drop in average yield resulted from the combination of the overall low level of interest rates on new securities purchases as well as the move away from higher credit risk, private-label collateralized mortgage obligations (CMOs) and into lower-yielding agency CMOs with less extension risk and significantly lower credit risk. During the third quarter of 2010, ca sh flows from the securities portfolio were reinvested back into the portfolio.

Interest expense for the third quarter decreased $1.3 million, or 24%, from $5.6 million in 2009 to $4.3 million in 2010. Interest expense on deposits decreased by $1.0 million, or 24%, from the third quarter of 2009 while interest expense on short-term borrowings decreased by $171,000, or 76%, for the same period. Interest expense on long-term debt decreased by $156,000, or 14%, as a result of the maturity of a $25 million two-year borrowing with a rate of 4.49% from the Federal Home Loan Bank (FHLB) which matured in September 2009.

Net interest income, on a fully tax-equivalent basis, for the first nine months of 2010 increased by $2.5 million, or 4%, over the same period in 2009. Interest income on interest-earning assets totaled $74.6 million for the first nine months of 2010 a decrease of $1.7 million, or 2%, compared to the same period in 2009. Interest income on loans receivable, including loans held for sale on a tax equivalent basis, decreased by $3.0 million, or 5%, from the first nine months of 2009 and interest income on investment securities increased by $1.3 million, or 9%, compared to the same period last year. The decrease in interest income earned was the result of a shift in the mix of interest-earning assets as well as a decrease in the yield on those earning assets due to the continued low interest rate environment that has existed over the past two years. Also impacting loan interest income for the first nine months of 2010 was the reversal of $628,000 of accrued interest income associated with loans which were reclassified to nonaccrual status during the first nine months of the year as well as the impact of lower interest rates associated with our new fixed rate loans generated over the past twelve months. Total interest expense for the first nine months decreased $4.2 million, or 24%, from $17.5 million in 2009 to $13.3 million in 2010. Interest expense on deposits decreased by $2.7 million, or 21%, for the first nine months of 2010 versus the first nine months of 2009. Interest expense on short-term borrowings decreased by $734,000, or 75%, for the first nine months of 2010 compared to the same period in 2009. Interest expense on long-term debt totaled $2.8 million for the first nine months of 2010, as compared to $3.5 million for the first nine months of 2009. The decrease in interest expense on long-term debt was a result of the maturity of the previously mentioned convertible select borrowing from the FHLB which matured in September 2009. Overall, the decreases in interest income and interest expense directly relate to the lower level of general market interest rates present in the first nine months of 2010 compared to the first nine months of 2009.

Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 3.76% during the third quarter of 2010 compared to 3.69% during the same period in the previous year. Our net interest rate spread on a fully tax-equivalent basis was 3.77% during the first nine months of 2010 versus 3.72% during the same period of 2009. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest- earning assets. The fully tax-equivalent net interest margin increased 6 bps, from 3.92% for the third quarter of 2009 to 3.98% for the third quarter of 2010, as a result of the decrease in the cost of funding sources which offset the decreased yield on interest-earning assets as previously discussed. For the first nine months of 2010 and 2009, the fully tax-equivalent net interest margin was 3.99% and 3.94%, respectively.

Provision for Loan Losses

Management undertakes a rigorous and consistently applied process in order to evaluate the allowance for loan losses and to determine the level of provision for loan losses, as previously stated in the Application of Critical Accounting Policies. We recorded a provision of $13.4 million to the allowance for loan losses for the third quarter of 2010 as compared to $2.6 million for the previous quarter and compared to $3.7 million for the third quarter of 2009. During the third quarter, management refined the quantitative analysis portion of its determination of the level of the allowance for loan losses to account for current appraisal values on collateral associated with both performing and nonperforming loans as well as the continued state of the overall economy. This refinement resulted in an additional provision for the quarter of $ 3.6 million to the general reserve portion of the allowance for loan losses. The balance of the provision was the result of the level of net charge-offs incurred during the quarter as well as for specific allocations made on nonperforming loans. The loan loss provision for the first nine months was $18.4 million and $10.6 million for 2010 and 2009, respectively. Nonperforming assets at September 30, 2010 totaled $63.2 million, or 2.83%, of total assets, down $7.4 million, or 11%, from $70.6 million, or 3.22%, of total assets at June 30, 2010 and as compared to $32.0 million, or 1.53%, of total assets at September 30, 2009. See the Loan and Asset Quality and the Allowance for Loan Losses sections in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion regarding nonperforming loans and our methodology for determining the provision for loan losses.

Total net loan charge-offs for the third quarter of 2010 were $8.4 million, or 2.35% (annualized), of average loans outstanding, the same amount as total net charge-offs of $8.4 million, or 2.29% (annualized), of average loans outstanding, for the same period in 2009. Of the $8.4 million net loan charge-offs, $3.9 million, or 47%, was associated with commercial real estate loans and $3.6 million, or 43%, was associated with commercial business loans. This continuing trend in charge-offs supports management’s decision to refine the quantitative analysis portion of the allowance for loan losses.

Approximately $7.9 million, or 94%, of total net charge-offs for the third quarter of 2010 were associated with a total of seven different relationships for which the Bank, upon determining the current value of the underlying collateral during the quarter, charged down the loans to their current fair value. There was a $193,000 prior period specific allocation made for one of the relationships and no other prior period specific allocations on the other loans because the Bank’s collateral analysis on file at the time supported the book balances of the loans or the borrower demonstrated the ability to repay. See the latter part of the Loan and Asset Quality section of this Form 10-Q for further detail of the Bank’s procedures for appraisals and analysis.

Net charge-offs for the first nine months of 2010 were $11.6 million, or 1.09% (annualized), of average loans outstanding, compared to net charge-offs of $12.7 million, or 1.17% (annualized), of average loans outstanding for the same period in 2009. Approximately $10.7 million, or 92%, of total net charge-offs year-to-date were associated with a total of 15 different relationships. Of the $11.6 million net loan charge-offs in the first nine months of the year approximately $5.2 million, or 45%, was associated with commercial real estate loans and $5.1 million, or 44%, was associated with commercial business loans.

The allowance for loan losses as a percentage of period-end gross loans outstanding was 1.52% at September 30, 2010 as compared to 1.00% at December 31, 2009 and to 0.99% at September 30, 2009.

Noninterest Income

Noninterest income for the third quarter of 2010 increased by $787,000, or 11%, over the same period in 2009. Service charges, fees and other operating income, comprised primarily of deposit service charges and fees, totaled $6.8 million, for the third quarter of 2010, an increase of $739,000 or 12%, over the third quarter of 2009. This increase was primarily due to an increased volume of check card/automatic teller machine (ATM) transactions. Gains on the sales of loans totaled $778,000 for the third quarter of 2010 as compared to gains on such sales of $238,000 for the same period one year ago. Metro Bank generated a much higher volume of Small Business Administration (SBA) loans during the first two quarters of 2010 compared to 2009. These loans were sold in the second quarter of 2010 and the gains were recognized during the t hird quarter at the end of a 90-day warranty period. The sales of the SBA loans during the second quarter of 2010 resulted in a $549,000 gain in the third quarter of 2010.

During the third quarter of 2010, the Company recorded gains of $117,000 on sales of investment securities compared to gains of $1.5 million during third quarter of 2009. The primary driver of the year-over-year decrease in net gains on sales/calls of securities has been a change in the portfolio management strategy. During 2009, management focused on reducing the number of securities held in the portfolio by selling a significant number of odd lots and MBS/CMO tails. While these pieces still had value, and gains were realized, the burden of administrating so many small pieces was unproductive. In 2010, the focus shifted towards culling out, when possible, some of the higher credit risk bonds, including private-label CMOs. In certain cases, gains that could have been recognized on the income statement were instead used to offset losses , thereby improving the overall quality of the portfolio. The Company recognized a $46,000 charge for credit related other-than-temporary impairment on two private-label CMOs in the third quarter of 2010 compared to a $952,000 charge in the same quarter of 2009 on three private-label CMOs. Further detailed discussion of the impairment charge can be found in Note 8 of this Form 10-Q.

Noninterest income for the first nine months of 2010 increased by $3.6 million, or 21%, over the same period in 2009. Service charges, fees and other operating income increased 11%, from $17.7 million for the first nine months of 2009 to $19.7 million in the first nine months of 2010. The increase in service charges and fees is primarily attributable to a higher level of fee income associated with check card and ATM transactions.

The 2010 net gain on the sale of loans is comprised of $1.1 million of gains on the sale of residential and SBA loans compared to a net gain of $294,000 for the same period in 2009. Impacting the net gain on sale of loans for the first nine months of 2009 was a $627,000 loss recorded on the sale of a majority of the Bank’s student loan portfolio. In addition, Metro recognized $493,000 more in SBA income on the sale of loans year-over-year. Metro more aggressively began to grow the SBA portfolio in 2010 with the intention to sell the loans on the secondary market. Metro was able to recognize the income for second quarter SBA loan sales during the third quarter of 2010.

Included in noninterest income for the first nine months of 2010 was a $962,000 charge for other-than-temporary impairment on private-label CMOs in the Bank’s investment portfolio compared to a $2.3 million charge for the first nine months of 2009. In the first nine months of 2010 this charge was offset by $1.0 million of gains on sales/calls of securities compared to a $1.6 million gain in the first nine months of 2009. Excluding the net impact of the investment related items and the loss recorded due to the sale of the Bank’s student loan portfolio in 2009, noninterest income for the first nine months of 2010 was $20.8 million compared to $18.7 million for the same period in 2009, a $2.1 million, or 11%, increase.

Noninterest Expenses

Third Quarter 2010 Compared to Third Quarter 2009

For the third quarter of 2010, noninterest expenses increased by $1.4 million, or 6%, over the same period in 2009. The increase was primarily a result of higher costs associated with the transition of certain services, primarily data processing, item processing and call center customer service, away from TD in June 2009. Total noninterest expenses for the third quarter of 2009 were offset by the recognition of a $2.75 million fee paid to Metro Bank by TD Bank to partially defray the costs of transition and rebranding. In addition, expenses associated with foreclosed assets and problem loans, regulatory fees and outside consulting fees for services related to regulatory compliance efforts contributed to the increase in 2010 over the third quarter of 2009. These higher expenses were partially offset by lower salary and benefits costs an d advertising and marketing expenses as well as lower costs for postage, supplies and telephone services. A comparison of noninterest expenses for certain categories for the three months ended September 30, 2010 and September 30, 2009 is presented in the following paragraphs.

Salary and employee benefits expenses, which represent the largest component of noninterest expenses, decreased by $177,000, or 2%, for the third quarter of 2010 from the third quarter of 2009. The decrease in salary and benefits expense in the third quarter 2010 compared to the third quarter 2009 relates to a lower level of total employees, primarily through attrition, in order to create efficiencies as well as fewer resources needed and less overtime required compared to 2009 when the Company was undergoing the core system conversion and rebranding process.

Occupancy expenses totaled $2.0 million for the third quarter of 2010, an increase of $112,000, or 6%, over the third quarter of 2009. The increase in occupancy is primarily related to the increase in electric utility costs which increased for 24 of our facilities during 2010 due to rate hikes by one of the primary local electrical providers. Such costs will continue to be higher throughout the remainder of 2010 over levels experienced in 2009.

Furniture and equipment expenses increased 8%, or $107,000, over the third quarter of 2009. The increase in furniture and equipment costs was related to depreciation on equipment for the new information technology infrastructure installed during the second quarter of 2009 to perform certain services in-house which were previously provided by TD as well as the transition of data processing and item processing services from TD to Fiserv Solutions, Inc. (Fiserv).

Advertising and marketing expenses totaled $698,000 for the three months ending September 30, 2010, a decrease of $132,000, or 16%, compared to the same period in 2009. Advertising and marketing expenses for the third quarter of 2010 represent a normal level of marketing activity and were lower than the same period in 2009 due to a large marketing effort in the second half of last year to promote our name and brand change which occurred in June 2009.

Data processing expenses increased by $797,000, or 31%, in the third quarter of 2010 over the three months ended September 30, 2009. The increase was due to costs related to the infrastructure which supports services being performed in-house as well as the higher level of data processing and item processing costs with the Bank’s replacement vendor (Fiserv) versus the expenses incurred with the previous vendor (TD Bank). Customer loan and deposit statement rendering services were outsourced in July of 2009, which eliminated approximately $215,000 of postage expense per quarter since it was included in the data processing costs from Fiserv. This accounts for approximately 9% of the increase in data processing expenses in the third quarter 2010 over the third quarter 2009. In addition to the increase in infrastructure costs, ATM and check card transaction volume is higher in 2010 which resulted in higher processing expenses for the quarter compared to third quarter 2009.

Postage and supplies expense decreased $424,000, or 69%, during the third quarter of 2010 compared to the same period in 2009. This decrease is primarily a result of a portion of postage and supplies expense being included in data processing expense as mentioned in the previous paragraph. This accounted for approximately 35% of the decrease from the third quarter of 2010 to the same period in 2009.

Regulatory assessments and related fees totaled $1.2 million for the third quarter of 2010 and were $361,000, or 44%, higher than the third quarter of 2009. The Bank, like all financial institutions whose deposits are guaranteed by the Deposit Insurance Fund (DIF), pays a quarterly premium for such deposit insurance coverage. During the third quarter of 2010, the Bank incurred higher FDIC insurance premiums for its regular assessment than in the third quarter of 2009 due to increased deposit levels over the past twelve months combined with a higher premium rate.

Telephone expense was $815,000 for the three months ended September 30, 2010. This was a decrease of $609,000, or 43%, compared to the same period of 2009. The higher expense in 2009 was a result of greater levels of call center support staff utilized to assist customers and handle the increased call volume experienced following the Company’s conversion of systems from TD to Fiserv and rebranding.

Foreclosed real estate expenses of $420,000 increased by $326,000 during the third quarter of 2010 compared to the same quarter in 2009. During the third quarter of 2010, the Bank wrote down the balance of four foreclosed assets by a total of $282,000. The Bank has also seen an increase in delinquent taxes due on foreclosed assets over the amount expensed in the quarter ending September 2009, a direct result of the higher level of nonperforming assets in 2010 compared to 2009.

Consulting fees of $965,000 increased by $804,000 during the third quarter of 2010 compared to the same quarter in 2009. The increase is a result of consultants hired to assist the Bank in developing and implementing a system of procedures and controls designed to ensure full compliance with the Bank Secrecy Act and Office of Foreign Assets Control. It is anticipated that the level of consulting services needed for the fourth quarter of 2010 will be the same or slightly lower than the level incurred during the third quarter.

During the third quarter of 2009, Metro received a fee of $2.75 million from TD to partially defray the costs of transition and rebranding. As a result there was a net credit amount of $911,000 for that period compared to no conversion or rebranding expenses or credit received in 2010. Excluding the impact of this net credit in 2009, total noninterest expenses for the third quarter of 2010 were up only $449,000, or 2%, over the same period in 2009.

Other noninterest expenses decreased by $456,000, or 17%, for the three-month period ended September 30, 2010, compared to the same period in 2009. This was primarily the result of lower noncredit related losses than in the third quarter of 2009.

Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009

For the first nine months of 2010, noninterest expenses increased by $6.5 million, or 10%, over the same period in 2009. Total noninterest expenses for the first nine months of 2009 were offset by the recognition of $6.0 million of fees paid to Metro Bank by TD to partially defray the costs of transition and rebranding. Excluding the net impact of these expenses and the offsetting fee, total noninterest expenses for the nine months ended September 30, 2010 were $6.0 million, or 9%, over the same period last year. A detail of noninterest expenses for certain categories is presented in the following paragraphs.

Salary expenses and employee benefits decreased by $844,000, or 3%, for the first nine months of 2010 compared to the first nine months of 2009. As mentioned above, the decrease in salary and benefits expense in 2010 compared to the first nine months of 2009 directly relates to the additional resources required in 2009 to facilitate the conversion and rebranding processes. The reduction in conversion related resources is partially offset by an increase in operations and technology staff levels to maintain the infrastructure that was built during conversion. The Company also experienced a reduction in employee health care claims during the first nine months of 2010 versus the first nine months of 2009. Another decrease in benefits expense relates to the reversal of $200,000 of expense during the first quarter of 2010 (that had been recorded in prior periods) as a result of the reconcilement of projected option forfeitures to actual option forfeitures for all stock options granted during the first quarter of 2006.

Occupancy expenses totaled $6.5 million for the first nine months of 2010, an increase of $517,000, or 9%, over the first nine months of 2009, primarily as a result of higher electric utility rates for several of our stores as well as an inordinate amount of snow removal expenses in the first quarter of 2010 as a result of unusually severe weather.

Furniture and equipment expenses increased 16%, or $539,000, over the first nine months of 2009. The increase was primarily related to increased depreciation and new maintenance agreements on new systems and signage due to the transition of services from TD to Fiserv and the name change of the Bank, events both completed in June of 2009.

Advertising and marketing expenses totaled $2.1 million for the nine months ending September 30, 2010, an increase of $265,000, or 14%, over the same period in 2009. This is due to a lower level of advertising in the first half of 2009 in anticipation of the Company’s rebranding which occurred late in the second quarter and early in the third quarter of 2009. The 2010 expense level represents normal marketing activity for the Company.

Data processing expenses totaled $9.9 million, an increase of $3.1 million, or 46%, for the first nine months of 2010 over the nine months ended September 30, 2009. The increase was due to costs related to the infrastructure which supports services now being performed in-house as well as the higher level of data processing and item processing costs with the Bank’s replacement vendor (Fiserv) versus the expenses incurred with the previous vendor (TD). In addition, expenses of approximately $645,000 previously reported under postage and supplies relating to statement rendering costs are now included in total data processing for 2010 as part of Fiserv processing costs.

Postage and supplies decreased $902,000, or 58%, for the first nine months of 2010 compared to the same period in 2009 primarily as a result of outsourcing customer statement rendering services in July of 2009 as part of the transition of operational services from TD to Fiserv as discussed above.

Telephone expenses totaled $2.6 million for the first nine months of 2010, a decrease of $377,000, or 13%, compared to the first nine months of 2009. The reduction is primarily due to datalines being reconfigured to a new service provider post conversion. The higher expense in 2009 was a result of greater levels of call center support staff utilized to assist customers and handle the increased call volume experienced following the Company’s conversion of systems from TD and rebranding.

Foreclosed real estate expenses of $1.4 million increased by $1.1 million during the first nine months of 2010 compared to the same period in 2009. This was primarily the result of the write-down of one particular foreclosed asset by $243,000 in the first quarter of 2010 and 16 other properties totaling $571,000 during the first nine months of 2010 compared to $47,000 in write-downs during the first nine months of 2009.

Included in noninterest expenses for the first nine months of 2009 was a net one-time credit totaling $523,000 related to the transition of all services from TD and rebranding costs associated with changing the Company’s and the Bank’s name. In the first nine months of 2009 there were approximately $5.5 million of one-time expenses associated with transition and rebranding which were offset by the recognition of the $6.0 million fee due to Metro Bank from TD. This fee was to partially defray the total costs incurred by Metro for the transition and rebranding. There were no such expenses or credits in 2010.

Also included in noninterest expense for the first nine months of 2009 were $655,000 of expenses related to an anticipated merger compared to $17,000 of similar costs incurred during the first nine months of 2010. The planned merger was later terminated as discussed in the Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2010.

Consulting fees of $2.7 million were $2.3 million higher during the first nine months of 2010 compared to the same period one year ago. The increase is a result of consultants hired to assist the Bank in developing and implementing a system of procedures and controls designed to ensure full compliance with the Bank Secrecy Act and Office of Foreign Assets Control.

Other noninterest expenses increased by $697,000, or 11%, for the nine-month period ending September 30, 2010, compared to the same period in 2009. The primary reasons for this increase were higher costs related to a cancelled potential branch site, higher Pennsylvania shares taxes, increased coin processing costs associated with our Magic Money Machines as well as higher legal fees as a result of legal proceedings as discussed in Part II, Item 1 of this Form 10-Q.

One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net noninterest expenses (less nonrecurring) to average assets. For purposes of this calculation, net noninterest expenses equal noninterest expenses less noninterest income and nonrecurring expenses which include core system conversion/branding and merger/acquisition expenses. For the third quarter 2010 and 2009 this ratio equaled 3.0%. For the nine-month period ending September 30, 2010, this ratio equaled 3.1% compared to 3.0% for the same period ending September 30, 2009.

Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses (less nonrecurring) to net interest income plus noninterest income (less nonrecurring). For the quarter ending September 30, 2010, the operating efficiency ratio was 87.3%, compared to 88.6% for the similar period in 2009. This ratio equaled 90.4% for the first nine months of 2010, compared to 88.7 for the first nine months of 2009. The decrease in the operating efficiency ratio for the third quarter of 2010 primarily relates to the 8% increase in total revenues in 2010 compared to a 6% increase in noninterest expenses for the third quarter of 2010. The increase in the efficiency ratio for the nine months ended September 30, 2010 versus September 30, 2009 was due to a 10% increase in nonin terest expenses compared to an 8% increase in total revenues.

Benefit for Federal Income Taxes

The tax benefit realized for federal income taxes was $3.8 million for the third quarter of 2010, compared to the tax benefit for federal income taxes of $502,000 for the same period in 2009. For the nine months ending September 30, the tax benefit was $4.9 million for 2010 compared to the tax benefit of $1.4 million in 2009. The 2010 provision includes a $256,000 tax benefit the Company recorded during the first quarter of 2010 for merger-related expenses that were not deductible in previous periods. The Company’s statutory tax rate was 34% in 2010 and 35% in 2009.

Net Loss and Net Loss per Share

Net loss for the third quarter of 2010 was $6.2 million, a decrease of $5.7 million compared to the $490,000 net loss recorded in the third quarter of 2009. The decrease was due to a $9.7 million increase in the provision for loan losses and a $1.4 million increase in noninterest expense partially offset by a $1.3 million increase in net interest income, a $787,000 increase in noninterest income and a $3.3 million increase in the benefit for income taxes.

Net loss for the first nine months of 2010 was $5.8 million, a decrease of $4.8 million, from the $1.0 million net loss recorded in the first nine months of 2009. The decrease was due to a $7.8 million increase in the provision for loan losses and a $6.5 million increase in noninterest expenses partially offset by a $2.4 million increase in net interest income, a $3.6 million increase in noninterest income and a $3.5 million increase in the benefit for income taxes.

Basic and diluted loss per common share was $(0.46) for the third quarter of 2010, compared to a loss per share of $(0.08) for the third quarter of 2009. For the first nine months of 2010, both the basic and fully-diluted loss per share was $(0.43) compared to a basic and diluted loss per share of $(0.16), for the nine months ended September 30, 2009. This decrease of $0.27 per share for the nine months ended September 2010 versus the same period in 2009 was the result of a combination of the increase of $4.8 million in net loss as well as a 107% increase in the amount of average common shares outstanding in 2010 compared to 2009 due to the stock offering which took place the end of September 2009.

Return on Average Assets and Average Equity

Return on average assets (ROA) measures our net income (loss) in relation to our total average assets. Our annualized ROA for the third quarter of 2010 was (1.11)%, compared to (0.09)% for the third quarter of 2009. The ROA for the first nine months in 2010 and 2009 was (0.36)% and (0.06)%, respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income (loss) by average stockholders' equity. The ROE was (11.54)% for the third quarter of 2010, compared to (1.47)% for the third quarter of 2009. The ROE for the first nine months of 2010 was (3.75)%, compared to (1.10)% for the first nine months of 2009. This decrease in ROE resulted from a combination of the increased net loss of $5.8 million for t he first nine months of 2010 compared to $1.0 million for the same period in 2009 and the fact that average shareholders’ equity was 69% higher for the nine months ended September 30, 2010 over the nine months ended September 30, 2009.

FINANCIAL CONDITION

Securities

During the first nine months of 2010, the total investment securities portfolio increased by $129.2 million from $506.7 million to $635.9 million. The unrealized gain/loss position on available for sale (AFS) securities improved by $19.1 million from a loss of $16.7 million at December 31, 2009 to a gain of $2.4 million at September 30, 2010, as lower interest rates resulted in an increase to the fair market value of securities within the Bank’s portfolio.

Sales of securities with a market value of $240.0 million and calls of securities of $86.6 million occurred during the first nine months of 2010 with the Bank realizing net gains of $1.0 million.

During the first nine months of 2010, the fair value of securities available for sale increased by $20.3 million, from $388.8 million at December 31, 2009 to $409.1 million at September 30, 2010. The net change was a result of purchases of new securities totaling $372.2 million, partially offset by $70.0 million in securities called, $240.0 million of securities sold, and $61.1 million in principal pay downs during the first nine months of 2010 as well as the previously mentioned improvement of $19.1 million in the unrealized gain/loss on the AFS portfolio. The AFS portfolio is comprised of U.S. Government agency securities, mortgage-backed securities and collateralized mortgage obligations. At September 30, 2010, the after-tax unrealized gain on AFS securities included in stockholders’ equity totaled $1.6 million, compared to an unrealized loss of $10.9 million at December 31, 2009. The weighted-average life of the AFS portfolio at September 30, 2010 was approximately 3.1 years compared to 3.6 years at December 31, 2009 and the duration was 2.6 years at September 30, 2010 compared to 3.0 years at December 31, 2009. The current weighted-average yield was 3.64% at September 30, 2010 compared to 3.78% at December 31, 2009.

During the first nine months of 2010, the carrying value of securities in the held to maturity (HTM) portfolio increased by $109.1 million from $117.8 million to $226.9 million as principal repayments of $17.3 million, calls of $16.6 million, and maturities of $2.0 million were more than offset by purchases of $144.9 million. The securities held in this portfolio include agency debentures, collateralized mortgage obligations, one corporate debt security and mortgage-backed securities. The weighted-average life of the HTM portfolio at September 30, 2010 was approximately 6.7 years compared to 4.8 years at December 31, 2009 and the duration was 5.3 years at September 30, 2010 compared to 4.0 years at December 31, 2009. The current weighted-average yield was 3.97% at September 30, 2010 compared to 4.69% at December 31, 2009. Total investm ent securities aggregated $635.9 million, or 28%, of total assets at September 30, 2010 as compared to $506.7 million, or 24%, of total assets at December 31, 2009.

The average fully tax-equivalent yield on the combined investment securities portfolio as of September 30, 2010 was 3.76% as compared to 4.13% as of September 30, 2009. As mentioned previously in Note 8 of the Form 10-Q, the Bank undertook a large sale program in the latter half of the third quarter of 2010. This program included a large private-label CMO with a carrying value of $13.6 million; two agency debentures with a carrying value of $20.0 million; three variable-rate agency mortgage-backed securities with a carrying value of $22.8 million; and nine fixed rate agency mortgage-backed securities with a carrying value of $131.6 million. In total, this program sold 15 bonds with a combined carrying value of $188.0 million, a fair market value of $188.1 million and a gain of $116,000. The weighted average yield on the pieces sold was 3.22% and the proceeds were reinvested in a mix of callable agency debentures and agency CMOs with a weighted-average yield of 3.11%. This program, along with the historic low level of interest rates, contributed to the drop in portfolio yield.

The Bank’s investment securities portfolio consists primarily of U.S. Government agency securities, U.S. Government sponsored agency mortgage-backed obligations and private-label CMOs. The securities of the U.S. Government sponsored agencies and the U.S. Government mortgage-backed securities have little credit risk because their principal and interest payments are backed by an agency of the U.S. Government. Private-label CMOs are not backed by the full faith and credit of the U.S. Government nor are their principal and interest payments guaranteed. Historically (prior to 2009), most private-label CMOs carried a AAA bond rating on the underlying issuer, however, the subprime mortgage problems, rising foreclosures and the general decline in the residential housing market in the U.S. in recent years have led to several ratings downg rades and subsequent other-than-temporary impairment (OTTI) of many types of CMOs. The unrealized losses in the Company’s investment portfolio at September 30, 2010 are associated with two different types of securities. The first type includes three government agency-backed CMOs and one corporate bond. Management believes that the unrealized losses on these investments were caused by the overall very low level of market interest rates, including LIBOR and notes the contractual cash flows of the CMOs are guaranteed by an agency of the U.S. Government. Additionally, the sole corporate bond is a shorter-term holding in an investment grade company. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

See the detailed discussion in Note 8 to the Consolidated Financial Statements included in this interim report on Form 10-Q for details regarding our assessment and the determination of OTTI.

Loans Held for Sale

Loans held for sale are comprised of student loans, selected residential loans and SBA loans the Bank originates with the intention of selling in the future. These loans are carried at the lower of cost or estimated fair value, calculated in the aggregate. At the present time, the majority of the Bank’s residential loans are originated with the intent to sell to the secondary market unless the loan is nonconforming to the secondary market standards or if we agree not to sell the loan due to a customer’s request. The residential mortgage loans that are designated as held for sale are sold to other financial institutions in correspondent relationships. The sale of these loans takes place typically within 30 days of funding. At December 31, 2009 and September 30, 2010, there were no past due or impaired residential mortgage lo ans held for sale. Currently, the Company is originating SBA loans with the intent to sell the guaranteed portion of the loan. The Company originated and transferred $10.9 million in SBA loans with a deferred gain of $1.0 million during the third quarter of 2010. The gain will be recognized in the fourth quarter of 2010 at the expiration of the 90-day warranty period. Total SBA loan originations during the first nine months of 2010 were $21.7 million. A gain of $541,000 was recognized in the third quarter of 2010. Metro had another $3.5 million of SBA loans outstanding pending transfer at September 30, 2010.

Total loans held for sale were $18.9 million at September 30, 2010 and $12.7 million at December 31, 2009. At September 30, 2010, loans held for sale were comprised of $3.5 million of SBA loans, $6.2 million of student loans and $9.2 million of residential mortgages as compared to $6.6 million of student loans and $6.1 million of residential loans at December 31, 2009. The increase was the result of $43.6 million in new residential loan originations, partially offset by principal sales of $40.9 million. Loans held for sale, as a percent of total assets, were less than 1% at both September 30, 2010 and December 31, 2009.

Loans Receivable

Commercial loans outstanding are comprised of commercial mortgages, construction, land development, industrial, other business loans and lines of credit. Consumer loans consist of residential real estate mortgages, consumer lines of credit and other loans. We manage risk associated with our loan portfolio in part through diversification, with what we believe are sound policies and underwriting procedures. Additionally, we monitor concentrations of loans or loan relationships by purpose, collateral or industry.

During the first nine months of 2010, total gross loans receivable decreased by $47.9 million, or 3%, from $1.44 billion at December 31, 2009. Gross loans receivable represented 72% of total deposits and 63% of total assets at September 30, 2010, as compared to 80% and 67%, respectively, at December 31, 2009. Total loan originations during the first nine months of 2010 were below historical norms for the Bank. This is due to both lower loan demand and the current economic conditions. Due to the continued weakness in the global and local economies, the Bank continues to remain cautious and deliberate in its level of new loan originations as compared to the level of originations in previous years. Loan repayments have exceeded loan originations during the first nine months of 2010 and this trend may continue through the fourth quarter as well.

The following table reflects the composition of the Company’s loan portfolio as of September 30, 2010 and 2009, respectively.

(dollars in thousands)	As of September 30, 2010			% of Total			As of September 30, 2009			% of Total			$ Change			% Change
Commercial	$	426,902			31	%	$	493,261			33	%	$	(66,359	)		(13	)%
Owner-occupied		234,823			17			275,353			19			(40,530	)		(15	)
Total commercial		661,725			48			768,614			52			(106,889	)		(14	)
Consumer / residential		287,654			21			309,146			21			(21,492	)		(7	)
Commercial real estate		446,533			31			393,494			27			53,039			13
Gross loans		1,395,912			100	%		1,471,254			100	%	$	(75,342	)		(5	)%
Less: Allowance for loan losses		(21,169	)					(14,618	)
Net loans	$	1,374,743					$	1,456,636

Loan and Asset Quality

Nonperforming assets include nonperforming loans and foreclosed real estate. The table below presents information regarding nonperforming assets at September 30, 2010 and 2009 and at December 31, 2009.

	Nonperforming Loans and Assets
(dollars in thousands)	September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009			September 30, 2009
Nonaccrual loans:
Commercial	$	21,536		$	25,327		$	13,142		$	14,254		$	8,683
Consumer		1,871			1,437			1,064			654			984
Real Estate:
Construction		15,120			17,879			17,424			11,771			7,605
Mortgage		17,021			17,723			14,419			11,066			7,819
Total nonaccrual loans		55,548			62,366			46,049			37,745			25,091
Loans past due 90 days or more and still accruing		628			687			249			-			5
Renegotiated loans		178			171			-			-			-
Total nonperforming loans		56,354			63,224			46,298			37,745			25,096
Foreclosed real estate		6,815			7,367			7,154			7,821			6,875
Total nonperforming assets	$	63,169		$	70,591		$	53,452		$	45,566		$	31,971
Nonperforming loans to total loans		4.04	%		4.39	%		3.28	%		2.61	%		1.71	%
Nonperforming assets to total assets		2.83	%		3.22	%		2.46	%		2.12	%		1.53	%
Nonperforming loan coverage		38	%		26	%		33	%		38	%		58	%
Nonperforming assets / capital plus allowance for loan losses		27	%		31	%		24	%		21	%		15	%

Nonperforming assets at September 30, 2010, were $63.2 million or 2.83%, of total assets as compared to $45.6 million, or 2.12%, of total assets at December 31, 2009, and compared to $32.0 million, or 1.53%, at September 30, 2009.

Total nonperforming loans (nonaccrual loans, loans past due 90 days and still accruing interest and renegotiated loans) were $56.4 million at September 30, 2010 compared to $37.7 million at December 31, 2009 and versus $25.1 million at September 30, 2009.

Nonaccrual loans increased from $25.1 million at September 30, 2009 to $55.5 million at September 30, 2010. The increase in nonaccrual loans experienced by the Bank from September 30, 2009 to September 30, 2010 primarily resulted from the addition of commercial relationships totaling $46.6 million at September 30, 2010 partially offset by transfers to foreclosed assets and charge-offs. Nonaccrual commercial loans consisted of 44 relationships at September 30, 2010 compared to 35 relationships at September 30, 2009. This increase is attributable primarily to nine relationships, or a total of 45 loans, aggregating $44.9 million, or 96%, of the additions. The balance of 4% represents consumer loan exposure.

During the third quarter of 2010, nonaccrual loans decreased $6.8 million from $62.4 million at June 30, 2010 to $55.5 million, an 11% decrease. The decrease in total nonaccrual loans during the third quarter of 2010 is primarily related to the charge down of three commercial relationships totaling $6.7 million, $3.0 million, or 45%, of which was business loan exposure and $3.7 million, or 55%, of which was real estate loan exposure. In addition, other nonaccrual loans decreased $2.7 million for the quarter, $1.3 million of exposure was transferred to foreclosed real estate, offset by additions to nonaccrual totaling $3.9 million consisting of 29 loans, the largest being $644,000, with an average of $134,000 per loan.

During the second and third quarters of 2010, three large relationships totaling $16.8 million of outstanding loan balances were added to non accrual. Out of the $16.8 million, appraisals warranted the creation of $1.8 million of specific reserves during the third quarter 2010. Approximately 25% of the debt is expected to be restructured during the next six months. Another $2.7 million is expected to be paid in full by the end of 2010. The remaining balances on the three relationships along with other non accrual relationships will continue to go through the Bank’s recovery policies and procedures as further described in this section.

The table and verbiage that follows provides additional details of the components of our nonaccrual commercial and commercial real estate loans.

	Nonaccrual Loans
(dollars in thousands)	September 30, 2010		June 30, 2010		March 31, 2010		December 31, 2009
Commercial:
Number of loans		53		56		34		40
Number of loans greater than $1 million		4		4		2		2
Average outstanding balance of those loans:
Greater than $1 million	$	3,800	$	4,400	$	4,600	$	4,600
Less than $1 million	$	132	$	149	$	113	$	136
Commercial Real Estate:
Number of loans		37		38		31		22
Number of loans greater than $1 million		9		12		11		7
Average outstanding balance of those loans:
Greater than $1 million	$	2,400	$	2,300	$	2,300	$	2,500
Less than $1 million	$	241	$	201	$	175	$	165

At September 30, 2010, 53 loans were in the nonaccrual commercial category ranging from $3,000 to $5.6 million and 37 loans were in the nonaccrual commercial real estate category ranging from $17,000 to $4.8 million. Of the 53 commercial loans, four loans, or 8%, of the loans were in excess of $1.0 million and totaled $15.2 million, with an average outstanding balance of $3.8 million per loan. The remaining 49 loans account for the difference at an average outstanding balance of $132,000 per loan. Of the 37 commercial real estate loans, 9 loans, or 24% were in excess of $1.0 million and totaled $21.5 million, or 76%, of total nonaccrual commercial real estate loans, with an average outstanding balance of $2.4 million per loan. The remaining 28 loans account for the difference at an average outstanding balance of $241,000 per loan.

At December 31, 2009, 40 loans were in the nonaccrual commercial category ranging from $5,000 to $6.2 million and 22 loans were in the nonaccrual commercial real estate category ranging from $31,000 to $4.8 million. Of the 40 commercial loans, two loans, or 5%, of the loans were in excess of $1.0 million and totaled $9.3 million, with an average outstanding balance of $4.6 million per loan. The remaining 38 loans account for the difference at an average of $136,000 per loan. Of the 22 commercial real estate loans, seven loans, or 32%, of the loans were in excess of $1.0 million and totaled $17.8 million, with an average outstanding balance of $2.5 million per loan. The remaining 15 loans account for the difference at an average of $165,000 per loan.

Loans past due 90 days or more and still accruing were $628,000 at September 30, 2010 compared to $0 at December 31, 2009 and $5,000 at September 30, 2009. Renegotiated loans were $178,000 at September 30, 2010 and $0 at December 31, 2009 and September 30, 2009.

While it is difficult to forecast nonperforming loans due to numerous variables, the Bank, through its credit risk management tools and other credit metrics, believes it has currently identified the material problem loans in the portfolio.

Foreclosed real estate totaled $6.8 million at September 30, 2010, $7.8 million at December 31, 2009 and compared to $6.9 million one year ago. The decrease in foreclosed real estate during the first nine months of 2010 is the result of the sale of 14 properties for proceeds of $2.5 million and write-downs on 17 of the remaining properties totaling $814,000 partially offset by the transfer of 16 additional properties to foreclosed real estate for a total of $2.4 million.

Impaired loans and other loans related to the same borrowers totaled $76.3 million at September 30, 2010 with a specific allocation of $1.8 million compared to impaired loans of $66.9 million at December 31, 2009 with a $900,000 specific allocation. During the first nine months of 2010, there were three loans added totaling $9.6 million requiring a specific allocation and five loans totaling $2.2 million that no longer required a specific allocation at September 30, 2010. This was primarily due to the charge-off during the first quarter 2010 of four loans for a total of $1.3 million; $900,000 of which had been specifically allocated for at December 31, 2009. In addition, our internal loan review department evaluates other problem loans risk rated Special Mention and Substandard accrual loans in order to determine the adequacy of the al lowance for loan losses. At September 30, 2010 other problem loans totaled $44.4 million, of these $23.6 million, or 53%, were rated Special Mention and $20.8 million, or 47%, were rated Substandard accruing. Other problem loans decreased $8.7 million during the first nine months of 2010 from $53.1 million at December 31, 2009.

The Bank obtains third-party appraisals by a Bank pre-approved certified general appraiser on nonperforming loans secured by real estate at the time the loan is determined to be nonperforming. Appraisals are ordered by the Bank’s Real Estate Loan Administration Department which is independent of the loan production function. The Bank properly charges down loans based on the fair value of the collateral as determined by the current appraisal or other collateral valuations less any costs to sell.

The charge down of any nonperforming loan is done upon receipt and satisfactory review of the appraisal or other collateral valuation and, in no event, later than the end of the quarter in which the appraisal on valuation was accepted by the Bank. No significant time lapses during this process have occurred for any period presented.

The Bank also considers the volatility of the fair value of the collateral, timing and reliability of the appraisal, timing of the third party’s inspection of the collateral, confidence in the Bank’s lien on the collateral, historical losses on similar loans, and other factors based on the type of real estate securing the loan. As deemed necessary, the Bank will perform inspections of the collateral to determine if an adjustment of the value of the collateral is necessary.

Partially charged off loans with an updated appraisal remain on nonperforming status and are subject to the Bank’s standard recovery policies and procedures, including, but not limited to, foreclosure proceedings, a forbearance agreement, or classified as a Troubled Debt Restructure, unless collectability of the entire contractual balance of principal and interest (book and charged off amounts) is no longer in doubt, and the loan is current or will be brought current within a short period of time.

Management’s Allowance for Loan Loss Committee has performed a detailed review of the nonperforming loans and of the collateral related to these credits and believes the allowance for loan losses remains adequate for the level of risk inherent in these loans.

It is possible that increased levels of nonperforming assets and losses may continue in the foreseeable future due to the economic downturn, including record unemployment, lackluster consumer spending, stagnant home sales and declining or reduced collateral values.

Allowance for Loan Losses

The following table sets forth information regarding the Company’s provision and allowance for loan losses.

	Allowance for Loan Losses
	Three Months Ended						Year Ended			Nine Months Ended
	September 30,						December 31,			September 30,
(dollars in thousands)	2010			2009			2009			2010			2009
Balance at beginning of period	$	16,178		$	19,337		$	16,719		$	14,391		$	16,719
Provisions charged to operating expense		13,400			3,725			12,425			18,400			10,625
		29,578			23,062			29,144			32,791			27,344
Recoveries of loans previously charged-off:
Commercial		143			19			92			391			139
Consumer		5			-			6			7			5
Real estate		14			35			210			40			41
Total recoveries		162			54			308			438			185
Loans charged-off:
Commercial		(3,786	)		(3,878	)		(7,405	)		(5,540	)		(6,224	)
Consumer		(36	)		(2	)		(21	)		(117	)		(21	)
Real estate		(4,749	)		(4,618	)		(7,635	)		(6,403	)		(6,666	)
Total charged-off		(8,571	)		(8,498	)		(15,061	)		(12,060	)		(12,911	)
Net charge-offs		(8,409	)		(8,444	)		(14,753	)		(11,622	)		(12,726	)
Balance at end of period	$	21,169		$	14,618		$	14,391		$	21,169		$	14,618
Net charge-offs (annualized) as a percentage of average loans outstanding		2.35	%		2.29	%		1.02	%		1.09	%		1.17	%
Allowance for loan losses as a percentage of period-end loans		1.52	%		0.99	%		1.00	%		1.52	%		0.99	%

The Company recorded provisions of $13.4 million to the allowance for loan losses during the third quarter of 2010, compared to $3.7 million for the third quarter of 2009. The higher provision during the three months ended September 30, 2010 was a result, in part, of a change in the time period over which historical losses are analyzed and used by Management on its quantitative analysis to determine the adequacy of the allowance for probable losses. This change resulted in $3.6 million of additional provision in the third quarter of 2010.

Net charge-offs for the three months ended September 30, 2010 were $8.4 million, or 2.35% (annualized), of average loans outstanding compared to $8.4 million, or 2.29% (annualized), of average loans outstanding in the same period of 2009. There were two relationships which were previously included in nonaccrual balances in the previous reporting period and events occurring during the third quarter necessitated they be charged down by $5.5 million. These two relationships accounted for 66% of net charge-offs in the third quarter of 2010.

During the first nine months of 2010 the Company recorded provisions of $18.4 million to the allowance for loan losses compared to $10.6 million for the same period in 2009. Net charge-offs for the first nine months of 2010 totaled $11.6 million, or 1.09% (annualized), of average loans outstanding compared to $12.7 million, or 1.17% (annualized), for the same period last year.

The allowance for loan losses as a percentage of total loans receivable was 1.52% at September 30, 2010, compared to 1.00% at December 31, 2009; the increase was due to provisions exceeding net charge-offs combined with a slight decrease in loan balances outstanding during the same period.

Premises and Equipment

During the first nine months of 2010, premises and equipment decreased by $3.3 million, or 4%, from $93.8 million at December 31, 2009 to $90.5 million at September 30, 2010. This decrease was primarily due to depreciation and amortization of $4.7 million on existing assets partially offset by purchases of new fixed assets totaling $1.5 million.

Deposits

Total deposits at September 30, 2010 were $1.93 billion, up $114.0 million, or 6%, over total deposits of $1.81 billion at December 31, 2009 and up $191.7 million, or 11%, over September 30, 2009. Core deposits totaled $1.89 billion at September 30, 2010, compared to $1.78 billion at December 31, 2009 and were up $163.7 million, or 10%, over the previous twelve months. Total noninterest-bearing deposits increased by $21.1 million, or 7%, from $319.9 million at December 31, 2009 to $341.0 million at September 30, 2010 while total interest-bearing deposits increased by $92.8 million, or 6%, over the same period. Demand, interest checking, money market and savings deposits increased by $126.3 million in the first nine months of 2010 compared to growth of $63.7 million over the same period in 2009. Conversely, time deposits decr eased by $12.3 million for the first nine months of 2010 versus growth of $39.3 million over the same period last year.

The average balances and weighted average rates paid on deposits for the first nine months of 2010 and 2009 are presented in the table below.

	Nine Months Ending September 30,
	2010					2009
( in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Demand deposits:
Noninterest-bearing	$	331,627				$	303,227
Interest-bearing (money market and checking)		932,112		0.71	%		764,587		0.93	%
Savings		326,618		0.47			336,821		0.59
Time deposits		252,866		2.20			268,720		3.09
Total deposits	$	1,843,223				$	1,673,355

Short-Term Borrowings

Short-term borrowings used to meet temporary funding needs consist of short-term and overnight advances from the FHLB. At September 30, 2010, short-term borrowings totaled $14.6 million as compared to $51.1 million at December 31, 2009. Average short-term borrowings for the first nine months of 2010 were $53.9 million as compared to $217.6 million for the first nine months of 2009. Deposit growth in excess of increases in interest-earning assets has been utilized to reduce the level of average short-term borrowings over the past twelve months. The average rate paid on the short-term borrowings was 0.59% for the first nine months of both 2010 and 2009.

Long-Term Debt

Long-term debt totaled $54.4 million at both September 30, 2010 and at December 31, 2009. As of September 30, 2010, our long-term debt consisted of $29.4 million of Trust Capital Securities through Commerce Harrisburg Capital Trust I, Commerce Harrisburg Capital Trust II and Commerce Harrisburg Capital Trust III, our Delaware business trust subsidiaries as well as a longer-term borrowing through the FHLB of Pittsburgh. At September 30, 2010, all of the Capital Trust Securities qualified as Tier I capital for regulatory capital purposes for both the Bank and the Company. Proceeds of the trust capital securities were used for general corporate purposes, including additional capitalization of our wholly-owned banking subsidiary. As part of the Company’s Asset/Liability management strategy, management utilized the FHLB convertible se lect borrowing product during 2007 with a $25.0 million borrowing with a five year maturity and a six month conversion term at an initial and current interest rate of 4.29%.

Stockholders’ Equity and Capital Adequacy

At September 30, 2010, stockholders’ equity totaled $209.8 million, up $9.8 million, or 5%, over $200.0 million at December 31, 2009. Stockholders’ equity at September 30, 2010 included $1.6 million of unrealized gains, net of income tax expense, on securities available for sale. Excluding these unrealized gains at September 30, 2010 and unrealized losses at December 31, 2009, gross stockholders’ equity decreased by $2.7 million, from $210.9 million at December 31, 2009, to $208.2 million at September 30, 2010, primarily as a result of the proceeds from shares issued through our stock option and stock purchase plans offset by a reduction of retained earnings due to a net loss of $5.8 million for the first nine months of 2010. Banks are evaluated for capital adequacy based on the ratio of capital to risk-weighted asset s and total assets. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital (including Tier 1 capital) of at least 8% of risk-weighted assets. Tier 1 capital includes common stockholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Total capital includes total Tier 1 capital, limited life preferred stock, qualifying debt instruments and the allowance for loan losses. The capital standard based on average assets, also known as the “leverage ratio,” requires all, but the most highly-rated, banks to have Tier 1 capital of at least 4% of total average assets. At September 30, 2010, the Bank met the definition of a “well-capitalized” institution.

The following tables provide a comparison of the Company’s and the Bank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated.

Company	September 30, 2010			December 31, 2009			Minimum For Adequately Capitalized Requirements			Minimum For Well-Capitalized Requirements
Capital Ratios:
Risk-based Total		15.25	%		14.71	%		8.00	%		N/A
Risk-based Tier 1		14.00			13.88			4.00			N/A
Leverage ratio (to average assets)		10.76			11.31			4.00			N/A
Bank
Capital Ratios:
Risk-based Total		13.50	%		12.85	%		8.00	%		10.00	%
Risk-based Tier 1		12.25			12.01			4.00			6.00
Leverage ratio (to average assets)		9.40			9.82			4.00			5.00

Interest Rate Sensitivity

Our risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of our asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. Our Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk and to ensure procedures are established to monitor compliance with those policies. Our Board of Directors reviews the guidelines established by ALCO.

Our management believes the simulation of net interest income in different interest rate environments provides a meaningful measure of interest rate risk. Income simulation analysis captures not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them.

Our income simulation model analyzes interest rate sensitivity by projecting net interest income over the next twenty-four months in a flat rate scenario versus net interest income in alternative interest rate scenarios. Our management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, our model projects a 300 basis point (bp) increase and a 100 bp decrease during the next year, with rates remaining constant in the second year.

Our ALCO policy has established that income sensitivity will be considered acceptable if overall net interest income volatility in a plus 300 or minus 100 bp scenario is within 4% of net interest income in a flat rate scenario in the first year and 5% using a two-year planning window.

The following table compares the impact on forecasted net interest income at September 30, 2010 of a plus 300 and minus 100 basis point bp change in interest rates to the impact at September 30, 2009 in the same scenarios.

	September 30, 2010						September 30, 2009
	12 Months			24 Months			12 Months			24 Months
Plus 300		2.2	%		6.2	%		4.0	%		11.4	%
Minus 100		(3.7	)		(4.9	)		(1.7	)		(4.1	)

Management continues to evaluate strategies in conjunction with the Company’s ALCO to effectively manage the interest rate risk position. Such strategies could include the sale of a portion of our available for sale investment portfolio, purchasing floating rate securities, altering the mix of our deposits by type and therefore rate paid, the use of risk management tools such as interest rate swaps and caps, adjusting the investment leverage position funded by short-term borrowings extending the maturity structure of the Bank’s short-term borrowing position or fixing the cost of our short-term borrowings.

Management uses many assumptions to calculate the impact of changes in interest rates. Actual results may not be similar to our projections due to several factors including the timing and frequency of rate changes, market conditions and the shape of the yield curve. In general, a flattening of the yield curve would result in reduced net interest income compared to a normal-shaped interest rate curve scenario and proportionate rate shift assumptions. Actual results may also differ due to Management's actions, if any, in response to the changing rates.

Management also monitors interest rate risk by utilizing a market value of equity model. The model assesses the impact of a change in interest rates on the market value of all our assets and liabilities, as well as any off balance sheet items. Market value of equity is defined as the market value of assets less the market value of liabilities plus the market value of off balance sheet items. The model calculates the market value of our assets and liabilities in the current rate scenario, and then compares the market value given an immediate 300 bp increase and a 100 bp decrease in rates. Our ALCO policy indicates that the level of interest rate risk is unacceptable if the immediate change in rates would result in a loss of more than 30% of the market value calculated in the current rate scenario. At September 30, 2010 the ma rket value of equity calculation indicated acceptable levels of interest rate risk in all scenarios per the policies established by our ALCO.

The market value of equity model reflects certain estimates and assumptions regarding the impact on the market value of our assets and liabilities given an immediate plus 300 or minus 100 bp change in rates. One of the key assumptions is the market value assigned to our core deposits, or the core deposit premiums. Using an independent consultant, we have completed and updated comprehensive core deposit studies in order to assign our own core deposit premiums as permitted by regulation. The studies have consistently confirmed management’s assertion that our core deposits have stable balances over long periods of time, are generally insensitive to changes in interest rates and have significantly longer average lives and durations than our loans and investment securities. Thus, these core deposit balances provide an internal hedge t o market fluctuations in our fixed rate assets. Management believes the core deposit premiums produced by its market value of equity model at September 30, 2010 provide an accurate assessment of our interest rate risk. At September 30, 2010, the average life of our core deposition transaction accounts was eight years.

Liquidity

The objective of liquidity management is to ensure our ability to meet our financial obligations. These obligations include the payment of deposits on demand at their contractual maturity, the repayment of borrowings as they mature, the payment of lease obligations as they become due, the ability to fund new and existing loans and other funding commitments and the ability to take advantage of new business opportunities. Our ALCO is responsible for implementing the policies and guidelines of our board governing liquidity.

Liquidity sources are found on both sides of the balance sheet. Liquidity is provided on a continuous basis through scheduled and unscheduled principal reductions and interest payments on outstanding loans and investments. Liquidity is also provided through the following sources: the availability and maintenance of a strong base of core customer deposits, maturing short-term assets, the ability to sell investment securities, short-term borrowings and access to capital markets.

Liquidity is measured and monitored daily, allowing management to better understand and react to balance sheet trends. On a quarterly basis, our board of directors reviews a comprehensive liquidity analysis. The analysis provides a summary of the current liquidity measurements, projections and future liquidity positions given various levels of liquidity stress. Management also maintains a detailed liquidity contingency plan designed to respond to an overall decline in the condition of the banking industry or a problem specific to the Company.

The Company’s investment portfolio maintains a significant portion of its holdings in mortgage-backed securities and CMOs. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans slow. As rates decrease, cash flows generally increase as prepayments increase. The Company relies upon a well-structured, well-diversified portfolio of securities to provide sufficient liquidity regardless of the direction of interest rates. The Company does not anticipate selling investments to meet liquidity needs.

The Company and the Bank’s liquidity are managed separately. On an unconsolidated basis, the principal source of liquidity to the Company is dividends paid to the Company by the Bank. The Bank is subject to regulatory restrictions on its ability to pay dividends to the Company. The Company’s net cash outflows consist principally of interest on the trust-preferred securities, dividends on the preferred stock and unallocated corporate expenses.

We also maintain secondary sources of liquidity which can be drawn upon if needed. These secondary sources of liquidity includes a $15 million federal funds lines of credit through the Atlantic Central Bankers Bank and $494.8 million of borrowing capacity at the FHLB. In addition we have the ability to borrow at the Federal Discount Window. At September 30, 2010, our total potential liquidity through these secondary sources was $509.8 million, of which $470.2 million would normally be available, as compared to $496.1 million available out of our total potential liquidity of $572.1 million at December 31, 2009. The $62.3 million decrease in potential liquidity was mainly due to a decrease in the borrowing capacity at the FHLB, as a result of the bank’s lower level of qualifying loan collateral. FHLB borrowing capacity is determine d based on asset levels on a quarterly lag. Utilization of this capacity was increased as average short-term borrowings through the FHLB totaled $59.3 million in the third quarter of 2010 compared to $101.4 million in the second quarter of 2010 and compared to $178.6 million during the third quarter of 2009.

As a result of Metro Bank entering into a Consent Order with both the FDIC and the Pennsylvania Department of Banking on April 29, 2010, the FHLB has temporarily placed a soft cap limit on the Bank’s available borrowing level to 40% of the Bank’s normal maximum borrowing capacity. Therefore, at September 30, 2010, the maximum borrowing capacity that the Bank can borrow through the FHLB was limited to $197.9 million without prior approval, of which $158.3 million was currently available.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk principally includes interest rate risk, which was previously discussed. The information presented in the Interest Rate Sensitivity subsection of Part I, Item 2 of this Report, Management’s Discussion and Analysis of Financial Condition and Results of Operations, is incorporated by reference into this Item 3.

Item 4. Controls and Procedures

Quarterly evaluation of the Company’s Disclosure Controls and Internal Controls. As of the end of the period covered by this quarterly report, the Company has evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (Disclosure Controls). This evaluation (“Controls Evaluation”) was done under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Limitations on the Effectiveness of Controls. The Company’s management, including the CEO and CFO, does not expect that their Disclosure Controls or their “internal controls and procedures for financial reporting” (Internal Controls) will prevent all errors and all fraud. The Company’s Disclosure Controls are designed to provide reasonable assurance that the information provided in the reports we file under the Exchange Act, including this quarterly Form 10-Q report, is appropriately recorded, processed and summarized. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may dete riorate. The Company conducts periodic evaluations to enhance, where necessary, its procedures and controls.

Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, there have not been any changes in the Company’s controls and procedures for the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Additionally, the CEO and CFO have concluded that the Disclosure Controls are effective in reaching a reasonable level of assurance that management is timely alerted to material information relating to the Company during the period when its periodic reports are being prepared.

Part II OTHER INFORMATION

Item 1. Legal Proceedings.

On or about June 15, 2009, we changed our name and the name of the Bank and began using the red “M” logo. Several companies in the United States, including companies in the banking and financial services industries, use variations of the word “Metro” and the letter “M” as part of a trademark or trade name. As such, we face potential objections to our use of these marks.

On or about June 19, 2009, Members 1st Federal Credit Union, or “Members 1st,” filed a complaint in the United States District Court for the Middle District of Pennsylvania against Metro Bancorp, Inc., Metro Bank, Republic First and Republic First Bank. Members 1st’s claims are for federal trademark infringement, federal unfair competition, and common law trademark infringement and unfair competition. It is Members 1st’s assertion that Metro’s use of a red letter “M” purportedly infringes Members 1st’s federally registered and common law trademark for the mark M1ST (stylized). Metro has vigorously defended this matter. The complaint seeks permanent injunctive relief and damages in an unspecified amount. Metro has prevailed on a 60;motion for partial summary judgment on the issue of damages, and it is not yet possible to estimate the remaining portion of damages sought in the event Members 1st were successful in the proceeding. Trial in this case is set for early 2011.

Item 1A. Risk Factors.

There have been no material changes in the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, previously filed with the SEC with the exception of the addition of the following two factors:

We operate in a highly regulated environment; changes in laws and regulations and accounting principles may materially adversely affect us.

The Company disclosed in its Annual Report on Form 10-K for the year ended December 31, 2009, that it is subject to extensive regulation, supervision, and legislation governing almost all aspects of its operations and that laws and regulations applicable to the banking industry could change at any time. The Company is currently assessing the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) which was signed into law by President Obama on July 21, 2010. Among the key provisions of the Act is the creation of the Bureau of Consumer Financial Protection (“Bureau”), which will be an independent bureau within the Federal Reserve System with broad authority in the consumer finance industry. The Bureau will have exclusive authority through rulemaking, orders, policy statement s, guidance and enforcement actions to administer and enforce federal consumer financial laws. These laws are currently administered by different federal agencies, including the Federal Deposit Insurance Corporation (“FDIC”) and the Federal Reserve, current federal regulators of the Bank and Company, respectively.

While designed primarily to reform the financial regulatory system, the Act also contains a number of corporate governance provisions that will affect public companies. The Act requires the SEC to adopt rules which may affect the Company’s executive compensation policies and disclosure. The impact of the Act on the Company’s financial position cannot be estimated at this time. Various provisions of the Act will become effective over the next 18 months and the Company will adopt the necessary policies and procedures to comply with the Act.

Compliance with the Consent Order May Result in Significant Noninterest Expenses

On April 29, 2010, the Bank consented and agreed to the issuance of a Consent Order (“Order”) by the Federal Deposit Insurance Corporation (the “FDIC”), the Bank’s federal banking regulator, and a substantially similar consent order by the Pennsylvania Department of Banking. Following issuance of the orders and the Bank’s institution of compliance measures, the Company believes the following factor, in addition to those disclosed in the Annual Report on form 10-K, should be considered as possibly having a negative impact on the Company’s liquidity, financial position, or results of operations.

The Order requires the Bank to take all necessary steps, consistent with the Order and sound banking practices, to correct and prevent certain unsafe or unsound banking practices and violations of law or regulation alleged by the FDIC to have been committed by the Bank. Among other things, the Order requires certain analyses and assessments, including an analysis and assessment of the Bank Secrecy Act (“BSA”) and Office of Foreign Assets Control (“OFAC”) staffing needs and qualifications and an analysis and assessment of the independence and performance of the Bank’s directors and senior executive officers. It also requires the development, adoption and implementation of a system of internal controls designed to ensure full compliance with BSA and OFAC provisions; training programs to ensure tha t all appropriate personnel are aware of and can comply with applicable requirements of BSA and OFAC provisions; periodic reviews by internal and external auditors of compliance with BSA and OFAC provisions; and a review by an independent third party of the Bank’s compliance with the Order. As the Bank proceeds with efforts to comply with the Order, it has retained consultants and advisors for assistance and is incurring significant consulting and legal fees in the necessary review, analysis and remediation. During the second and third quarters, the Bank incurred approximately $2.1 million in consulting and remediation expenses relating to the Order. These expenses are on-going and an estimate of the total expenses that will be incurred in order to comply with the Order cannot be made at this time.

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

No items to report for the quarter ended September 30, 2010.

Item 3. Defaults Upon Senior Securities.

No items to report for the quarter ended September 30, 2010.

Item 4. (Removed and Reserved)

Item 5. Other Information.

No items to report for the quarter ended September 30, 2010.

Item 6. Exhibits.

4.1	Description of the Metro Bancorp, Inc. Dividend Reinvestment and Stock Purchase Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3, Registration Statement No. 333-169683, filed with the SEC on September 30, 2010)
10.1	Metro Bancorp, Inc. 2011 Director Stock Option Plan (incorporated by reference to Appendix A to the Company’s 2010 Proxy Statement filed with the SEC on June 7, 2010)*
10.2	Metro Bancorp, Inc. 2006 Employee Stock Option and Restricted Stock Plan, as amended and restated (incorporated by reference to Appendix B to the Company’s 2010 Proxy Statement filed with the SEC on June 7, 2010)*
11	Computation of Net Loss Per Share
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act)
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under Exchange Act
32	Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Denotes a compensatory plan or arrangement

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.

METRO BANCORP, INC.
(Registrant)


11/9/10		/s/ Gary L. Nalbandian
(Date)		Gary L. Nalbandian
		President/CEO


11/9/10		/s/ Mark A. Zody
(Date)		Mark A. Zody
		Chief Financial Officer

EXHIBIT INDEX

4.1	Description of the Metro Bancorp, Inc. Dividend Reinvestment and Stock Purchase Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3, Registration Statement No. 333-169683, filed with the SEC on September 30, 2010)
10.1	Metro Bancorp, Inc. 2011 Director Stock Option Plan (incorporated by reference to Appendix A to the Company’s 2010 Proxy Statement filed with the SEC on June 7, 2010)*
10.2	Metro Bancorp, Inc. 2006 Employee Stock Option and Restricted Stock Plan, as amended and restated (incorporated by reference to Appendix B to the Company’s 2010 Proxy Statement filed with the SEC on June 7, 2010)*
11	Computation of Net Loss Per Share
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act)
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under Exchange Act
32	Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Denotes a compensatory plan or arrangement

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Metro Bancorp (METR) Inactive 10-Q2010 Q3 Quarterly report

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