10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2008.

or

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

For the transition period from __________ to__________.

Commission file number   000-50961

PENNSYLVANIA COMMERCE BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

3801 Paxton Street, P.O. Box 4999, Harrisburg, PA	17111-0999
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (800) 653-6104

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

Title of each class	Name of each exchange on which registered
Common Stock, $1.00 par value	NASDAQ Stock Market LLC

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

 (Title of Class)

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.[ ] Yes   [X] No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [ ]

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

Large accelerated filer   [  ]	Accelerated filer   [X]
Non-accelerated filer (Do not check if a smaller reporting company.)  [  ]	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   [X] No

The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the Company’s most recently completed second fiscal quarter, June 30, 2008, was $107,250,855.

The number of shares of the registrant’s common stock, par value $1.00 per share, outstanding as of February 27, 2009 was 6,488,241.

DOCUMENTS INCORPORATED BY REFERENCE:

Part II incorporates certain information by reference to the registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2008 (the “Annual Report”). Part III incorporates certain information by reference to the registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

PENNSYLVANIA COMMERCE BANCORP, INC.

FORM 10-K CROSS-REFERENCE INDEX

			Page
Part I.
	Item 1.	Business	1
	Item 1A.	Risk Factors	9
	Item 1B.	Unresolved Staff Comments	12
	Item 2.	Properties	12
	Item 3.	Legal Proceedings	12
	Item 4.	Submission of Matters to a Vote of Security Holders	13
Part II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
		Issuer Purchases of Equity Securities	13
	Item 6.	Selected Financial Data	15
	Item 7.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	16
		(The information required by this item is incorporated by reference from the
		Company’s 2008 Annual Report.)
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	16
		(The information required by this item is incorporated by reference from the
		Company’s 2008 Annual Report.)
	Item 8.	Financial Statements and Supplementary Data	16
		(The information required by this item is incorporated by reference from the
		Company’s 2008 Annual Report.)
	Item 9.	Changes In and Disagreements with Accountants on Accounting and
		Financial Disclosure (This item is omitted since it is not applicable)	16
	Item 9A.	Controls and Procedures	16
	Item 9B.	Other Information	19
Part III.
	Item 10.	Directors, Executive Officers and Corporate Governance	19
	Item 11.	Executive Compensation	19
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and
		Related Stockholder Matters	19
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	19
	Item 14.	Principal Accounting Fees and Services	19
Part IV.
	Item 15.	Exhibits, Financial Statement Schedules	19
		Signatures

Part I.

Item1.                    Business

Forward-Looking Statements

The Company may, from time to time, make written or oral “forward-looking statements”, including statements contained in the Company’s filings with the Securities and Exchange Commission (including the annual report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Company’s control).  The words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan” and similar expressions are intended to identify forward-looking statements.  The following factors, among others, including those discussed in Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report on Form 10-K, could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements:

·   Company’s ability to successfully transition all services currently provided to it, by TD Bank, N.A. and Commerce Bancorp LLC (formerly Commerce Bancorp, Inc.) to the Company’s new service provider, Fiserv Solutions, Inc.

·   the receipt of a $6 million fee from TD Bank if the transition of all services is completed by the required dates as called for in the Transition Agreement between the two parties;

·   whether the transactions contemplated by the merger agreement with Republic First will be approved by the shareholders of both companies and by the applicable federal, state and local regulatory authorities;

·   the Company’s ability to complete the proposed merger with Republic First Bancorp, Inc., to integrate successfully Republic First’s assets, liabilities, customers, systems and management personnel into the Company’s operations, and to realize expected cost savings and revenue enhancements within expected timeframes;

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

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

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

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

1

·   continued levels of loan quality and volume origination;

·   the adequacy of loss reserves;

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

·   the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa;

·   unanticipated regulatory or judicial proceedings;

·   interest rate, market and monetary fluctuations;

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

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

·   effect of terrorists attacks and threats of actual war;

·   and the success of the Company 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 forward-looking statements, which speak only as of the date of this document.  The Company does 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 the Company.  For information, concerning events or circumstances after the date of this report, refer to the Company’s filings with the Securities and Exchange Commission (“SEC”).

General

Pennsylvania Commerce Bancorp, Inc. (the “Company”) is a Pennsylvania business corporation, which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”).  The Company was incorporated on April 23, 1999 and became an active bank holding company on July 1, 1999 through the acquisition of 100% of the outstanding shares of Commerce Bank/Harrisburg (the “Bank”) the Company’s wholly owned banking subsidiary. On June 15, 2000, the Company issued $5 million of 11.00% Trust Capital Securities through Commerce Harrisburg Capital Trust I, a newly formed Delaware business trust subsidiary of the Company.  Proceeds of this offering were invested in the Bank and all $5 million of the Trust Capital Securities qualifies as Tier 1 capital for regulatory capital purposes. On September 28, 2001, the Company issued $8 million of 10.00% Trust Capital Securities through Commerce Harrisburg Capital Trust II (“Trust II”), a newly formed Delaware business trust subsidiary of the Company.  Proceeds of this offering were invested in the Bank and  all $8 million of the Trust Capital Securities qualifies as Tier 1 capital for regulatory capital purposes.  On September 29, 2006, the Company issued $15 million of 7.75% Trust Capital Securities through Commerce Harrisburg Capital Trust III (“Trust III”), a newly formed Delaware business trust subsidiary of the Company.  Proceeds of this offering were invested in the Bank and all $15 million of the Trust Capital securities qualifies as Tier 1 Capital for regulatory capital purposes.

2

Pursuant to a Transition Agreement with TD Bank, N.A. and Commerce Bancorp LLC (formerly Commerce Bancorp, Inc.), which terminated the Network Agreement and Master Services Agreement with Commerce Bank N.A. (now known as TD Bank, N.A.), the Company has a non exclusive royalty free license until September 30, 2009 to continue using the name “Commerce Bank” and, subject to certain limitations, the red “C” logo,within its primary service area. Under the Transition Agreement, certain services provided under the Master Services Agreement were continued until July 15, 2009 or at the Bank’s option, until August 15, 2009, and certain tail services until August 15, 2009.  The Bank has entered into a master agreement with Fiserv Solutions, Inc. to provide many of the administrative and data processing services that have been provided by TD Bank. For additional information concerning TD Bank and the transition to Fiserv as a service provider, refer to the discussion in Item 1A “Risk Factors” included in this annual report on Form 10-K.

On November 10, 2008, we announced that we entered into a plan of merger, to acquire Republic First Bancorp, Inc. (“Republic First”) headquartered in Philadelphia, PA.  Republic First, with total assets of approximately $952.0 million as of December 31, 2008, will be merged with and into Pennsylvania Commerce and the combined company will be renamed Metro Bancorp, Inc.  This transaction is expected to close in the second quarter 2009, subject to regulatory and shareholder approval for both companies.

As of December 31, 2008, the Company had approximately $2.1 billion in assets, $1.6 billion in deposits, $1.5 billion in total net loans (including loans held for sale), and $114 million in stockholders’ equity. The Bank has applied to be a member of the Federal Reserve System.  Substantially all of the Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC) to the fullest extent permitted by law.  The Company’s total revenues (net interest income plus noninterest income) were $104.1 million and the Company recorded $12.9 million in net income for the year ended December 31, 2008.

The Company’s principal executive offices are located at 3801 Paxton Street, Harrisburg, Pennsylvania 17111, and its telephone number is (800) 653-6104.

As of December 31, 2008, the Company had 1,077 employees, of which 789 were full-time employees. Management believes the Company’s relationship with its employees is good.

Commerce Bank/Harrisburg

The Company has one reportable segment, consisting of Commerce Bank/Harrisburg (the Bank), as described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2008 included at Item 8 of this Report.

On July 13, 1984, the Bank filed an application to establish a state-chartered banking institution with the Pennsylvania Department of Banking. On September 7, 1984, the Bank was granted preliminary approval of its application, and on September 11, 1984, was incorporated as a Pennsylvania state-chartered banking institution under the laws of the Commonwealth of Pennsylvania. The Bank opened for business on June 1, 1985.

On October 7, 1994, the Bank was converted from a Pennsylvania state-chartered banking institution to a national banking association under the laws of the United States of America and changed its name to “Commerce Bank/Harrisburg, National Association.” The Bank’s conversion was consummated pursuant to preliminary and conditional approval of the conversion granted by the Office of the Comptroller of the Currency (OCC) on July 5, 1994 in response to a letter of intent to convert to a national bank filed by the Bank with the OCC on April 6, 1994.

On June 3, 2008, Commerce Bank/Harrisburg, N.A. filed an application to convert from a national charter to a state-chartered banking institution with the Pennsylvania Department of Banking. On November 7, 2008, the Pennsylvania Department of Banking approved the application of Commerce Bank/Harrisburg, N.A. to convert from a national bank charter to a state bank charter. As a result of the conversion to a state chartered bank, Commerce Bank/Harrisburg will now be supervised jointly by the Pennsylvania Department of Banking and the FDIC. The Company will continue to be supervised by the Federal Reserve Bank, which supervises all bank holding companies.

3

The Bank provides a full range of retail and commercial banking services for consumers and small and mid-sized companies. The Bank’s lending and investment activities are funded principally by retail deposits gathered through its retail store office network.

Service Area

The Bank offers its lending and depository services from its main office in Lemoyne, Pennsylvania, and its thirty-two other full-service stores located in Cumberland, Dauphin, York, Berks, Lancaster and Lebanon Counties, Pennsylvania.

Retail and Commercial Banking Activities

The Bank provides a broad range of retail banking services and products including free personal checking accounts and business checking accounts (subject to a minimum balance), regular savings accounts, money market accounts, interest checking accounts, fixed rate certificates of deposit, individual retirement accounts, club accounts, debit card services, and safe deposit facilities. Its services also include a full range of lending activities including commercial construction and real estate loans, land development and business loans, commercial lines of credit, consumer loan programs (including installment loans for home improvement and the purchase of consumer goods and automobiles), home equity and Visa Gold card revolving lines of credit, overdraft checking protection, student loans and automated teller facilities. The Bank also offers construction loans and permanent mortgages for homes. The Bank is a participant in the Small Business Administration Loan Program and is an approved lender for qualified applicants.

The Bank directs its commercial lending principally toward businesses that require funds within the Bank’s legal lending limit, as determined from time to time, and that otherwise do business and/or are depositors with the Bank. The Bank also participates in inter-bank credit arrangements in order to take part in loans for amounts that are in excess of its lending limit or to limit the concentration of lending to any individual. The Company is not dependent on any one or more major customers, and its business is not seasonal.

The Company has focused its strategy for growth primarily on the further development of its community-based retail-banking network. The objective of this corporate strategy is to build earnings growth potential for the future as the retail store network matures. The Company’s store concept uses a prototype or standardized store office building, convenient locations and active marketing, all designed to attract retail deposits. While the Company has not yet announced plans to open any new stores in 2009 it does intend to continue to open multiple stores over the next several years. It has been the Company’s experience that most newly opened store offices incur operating losses during the first 18 to 24 months of operations and become profitable thereafter. The Company’s retail approach to banking emphasizes a combination of long-term customer relationships, quick responses to customer needs, active marketing, convenient locations, free checking for customers maintaining certain minimum balances and extended hours of operation.

Competitive Business Conditions / Competitive Position

The Company’s current primary service area, the south central Pennsylvania area, including portions of Cumberland, Dauphin, York, Berks, Lancaster and Lebanon Counties, is characterized by intense competition for banking business. The Bank competes with local commercial banks as well as numerous regionally based commercial banks, most of which have assets, capital, and lending limits larger than that of the Bank. The Bank competes with respect to its lending activities as well as in attracting demand, savings, and time deposits with other commercial banks, savings banks, insurance companies, regulated small loan companies, credit unions, and with issuers of commercial paper and other securities such as shares in money market funds. Among those institutions, the Bank has a share of approximately 5% of the bank deposits in its market area.

4

Other institutions may have the ability to finance wide-ranging advertising campaigns, and to allocate investment assets to regions of highest yield and demand. Many institutions offer services, such as trust services and international banking, which the Bank does not directly offer (but which the Bank may offer indirectly through other institutions). Many institutions, by virtue of their greater total capital, can have substantially higher lending limits than the Bank.

In commercial transactions, the Bank’s legal lending limit to a single borrower (approximately $26.4 million as of December 31, 2008) enables it to compete effectively for the business of smaller companies. However, this legal lending limit is lower than that of some of the Bank’s competing institutions and thus may act as a constraint on the Bank’s effectiveness in competing for financing in excess of these limits.

In consumer transactions, the Bank believes it is able to compete on a substantially equal basis with larger financial institutions because it offers longer hours of operation, personalized service and competitive interest rates on savings and time accounts with low minimum deposit requirements.

In order to compete with other financial institutions both within and beyond its primary service area, the Bank uses, to the fullest extent possible, the flexibility which independent status permits. This includes an emphasis on specialized services for the small businessperson and professional contacts by the Bank’s officers, directors and employees, and the greatest possible efforts to understand fully the financial situation of relatively small borrowers. The size of such borrowers, in management’s opinion, often inhibits close attention to their needs by larger institutions. The Bank may seek to arrange for loans in excess of its lending limit on a participation basis with other financial institutions.  As of the end of 2008, all participations totaled approximately $32.1 million.  Participations are used to more fully service customers whose loan demands exceed the Bank’s lending limit.

The Bank endeavors to be competitive with all competing financial institutions in its primary service area with respect to interest rates paid on time and savings deposits, its overdraft charges on deposit accounts, and interest rates charged on loans.

Supervision and Regulation

The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to the Company. The regulatory framework is intended primarily for the protection of depositors, other customers and the Federal Deposit Insurance Funds and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Company.

5

The Company

The Company is subject to the jurisdiction of the Securities and Exchange Commission (“SEC”) and of state securities commissions for matters relating to the offering and sale of its securities and is subject to the SEC’s rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading.

The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate governance, accounting and reporting measures for companies that have securities registered under the Securities Exchange Act of 1934, such as the Company. Specifically, the Sarbanes-Oxley Act and the various regulations promulgated thereunder, established, among other things: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and the regulation of audits, including independence provisions that restrict non-audit services that accountants may provide to their audit clients; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers, including accelerated reporting of stock transactions and a prohibition on trading during pension blackout periods; (v) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on non-preferential terms and in compliance with other bank regulatory requirements; and (vi) a range of new and increased civil and criminal penalties for fraud and other violations of the securities laws. The Company has addressed the requirements imposed by regulations relating to the Sarbanes-Oxley Act, including forming a Nominating and Corporate Governance Committee (and establishing its charter), adopting a Code of Ethics applicable to the Company’s Chief Executive Officer, Chief Financial Officer and principal accounting officer (in addition to the Code of Conduct already in place for all employees and Board Members of the Company), and meeting NASDAQ’s and the SEC’s procedural and disclosure requirements.

In 1999, the Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act of 1999) became law. The law permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. Also, no regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Financial Services Modernization Act defines "financial in nature" to include: securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating. Banks chartered under the Pennsylvania Banking Code are generally permitted to engage in the same types of activities that are permissible for national banks. Except for the increase in competitive pressures faced by all banking organizations that is a likely consequence of the Act, the Company believes that the legislation and implementing regulations are likely to have a more immediate impact on large regional and national institutions than on community-based institutions engaged principally in traditional banking activities. Because the legislation permits bank holding companies to engage in activities previously prohibited altogether or severely restricted because of the risks they posed to the banking system, implementing regulations impose strict and detailed prudential safeguards on affiliations among banking and non-banking companies in a holding company organization.

6

The Company is subject to the provisions of the Bank Holding Company Act of 1956, as amended and to supervision and examination by the Federal Reserve Bank (“FRB”). Under the Bank Holding Company Act, the Company must secure the prior approval of the FRB before it may own or control, directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any institution, including another bank (unless it already owns a majority of the voting stock of the bank).

Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The Bank is currently rated “satisfactory” under the Community Reinvestment Act. The Company and the Bank are both subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Management believes, as of December 31, 2008, that the Company and the Bank meet all capital adequacy requirements to which they are subject. Also, at December 31, 2008, the consolidated capital levels of the Company and of the Bank met the definition of a “well-capitalized” financial institution. For further discussion regarding capital adequacy, please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as Note 15 of Notes to Consolidated Financial Statements for the year ended December 31, 2008 included in Item 8 in this annual report on Form 10-K.

The Company is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may also make examinations of the Company and any or all of its subsidiaries. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit or provision for any property or service. Thus, an affiliate of the Company, such as the Bank, may not condition the extension of credit, the lease or sale of property or furnishing of any services on (i) the customer’s obtaining or providing some additional credit, property or services from or to the Bank or other subsidiaries of the Company, or (ii) the customer’s refraining from doing business with a competitor of the Bank, the Company or of its subsidiaries.  The Company or the Bank may impose conditions to the extent necessary to reasonably assure the soundness of credit extended.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on (i) any extension of credit to the bank holding company or any of its subsidiaries, (ii) investments in the stock or other securities of the bank holding company, and (iii) taking the stock or securities of the bank holding company as collateral for loans to any borrower.

The Bank

The Bank became a state-chartered bank on November 7, 2008, following approval by the Pennsylvania Department of Banking of the Bank’s application to convert from a national bank charter to a state bank charter. As a nationally chartered bank, the Bank had been subject to regulation, supervision and examination by the Office of the Comptroller of the Currency. The Bank is now supervised jointly by the Pennsylvania Department of Banking and the FDIC. The Bank has applied to be a member of the Federal Reserve System. The Bank’s deposits are insured by the FDIC up to applicable legal limits. Some of the aspects of the lending and deposit business of the Bank that are regulated by these agencies include personal lending, mortgage lending and reserve requirements. The Bank is also subject to numerous federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with respect to the payment of dividends to the Company, extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions.  The approval of these agencies is required for the establishment of additional store offices.

7

Under the Federal Deposit Insurance Act, subject to certain exceptions, no person may acquire control of the Bank without giving at least sixty days’ prior written notice to the FDIC. Under this Act and its regulations, control of the Bank is generally presumed to be the power to vote ten percent (10%) or more of the Common Stock. The FDIC is empowered to disapprove any such acquisition of control.

The amount of funds that the Bank may lend to a single borrower is limited generally under the Pennsylvania Banking Code of 1965 to 15% of the aggregate of its capital, surplus and undivided profits and capital securities (all as defined by statute and regulation).

The FDIC has authority under the Financial Institutions Supervisory Act to prohibit state banks from engaging in any activity, which, in the FDIC’s opinion, constitutes an unsafe or unsound practice in conducting their businesses.  The Federal Reserve Board has similar authority with respect to the Company.

As a consequence of the extensive regulation of commercial banking activities in the United States, the Company’s business is particularly susceptible to being affected by federal and state legislation and regulations, which may affect the cost of doing business.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) imposes additional obligations on U.S. financial institutions, including banks, to implement policies, procedures and controls, which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank applications.

National Monetary Policy

In addition to being affected by general economic conditions, the earnings and growth of the Company are affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking, the FRB and the FDIC. An important function of the FRB is to regulate the money supply and credit conditions. Among the instruments used to implement these objectives are open market operations in U.S. Government securities, setting the discount rate, and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings, and growth of the Company cannot be predicted.

8

Environmental Laws

The costs and effects of compliance with environmental laws, federal, state and local, on the Company are minimal.

Available Information

The Company makes available free of charge under the Investor Relations link on the Company’s website, www.commercepc.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes to, the SEC.  Additionally, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at the web address, www.sec.gov.

Item1A.Risk Factors

The Company’s financial results are subject to a number of risks. The factors discussed below highlight risks that management believes are most relevant to the Company’s current operations. This list does not capture all risks associated with the Company’s business. Additional risks, including those that generally affect the banking and financial services industries and those that management currently believes are immaterial may also negatively impact the Company’s liquidity, financial position, or results of operations.

We plan to continue to grow rapidly and there are risks associated with rapid growth.

Over the past five years we have experienced significant growth in net income, assets, loans and deposits, all of which have been achieved through organic growth. We intend to continue to rapidly expand our business and operations.

Subject to regulatory approvals, we are targeting to open 15-20 new stores over the next five years. The cost to construct and furnish a new store will be approximately $3.1 million, excluding the cost to lease or purchase the land on which the store is located. Our ability to manage growth successfully will depend on our ability to attract qualified personnel and maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms, as well as on factors beyond our control, such as economic conditions and competition. If we grow too quickly and are not able to attract qualified personnel, control costs and maintain asset quality, this continued rapid growth could materially adversely affect our financial performance.

Growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We anticipate that our existing capital will satisfy our capital requirements for the foreseeable future. However, we may at some point need to raise additional capital to support continued growth.  Our ability to raise additional capital, if needed, will depend on our financial performance and on conditions in the capital markets at that time, which are outside of our control. The current financial crisis affecting the banking system and financial markets, which has resulted in a tightening in the credit markets, could have an adverse effect on our ability to raise additional capital.  Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on acceptable terms. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth, branching, de novo bank formations and/or acquisitions could be materially impaired.

9

Unfavorable economic and market conditions due to the current global financial crisis may adversely affect our financial position and results of operations.

Economic and market conditions in the United States and around the world have deteriorated significantly and may remain depressed for the foreseeable future.  Conditions such as slowing or negative growth and the sub-prime debt devaluation crisis have resulted in a low level of liquidity in many financial markets, and extreme volatility in credit, equity and fixed income markets.  These economic developments could have various effects on our business, including insolvency of major customers, an unwillingness of customers to borrow or to repay funds already borrowed and a negative impact on the investment income we are able to earn on our investment portfolio.  The potential effects of the current global financial crisis are difficult to forecast and mitigate.  As a consequence, our operating results for a particular period are difficult to predict.  Distress in the credit markets and issues relating to liquidity among financial institutions have resulted in the failure of some financial institutions around the world and others have been forced to seek acquisition partners. The United States and other governments have taken unprecedented steps in efforts to stabilize the financial system, including investing in financial institutions. There can be no assurance that these efforts will succeed.  Our business and our financial condition and results of operations could be adversely affected by (1) continued or accelerated disruption and volatility in financial markets; (2) continued capital and liquidity concerns regarding financial institutions; (3) limitations resulting from further governmental action in an effort to stabilize or provide additional regulation of the financial system; or (4) recessionary conditions that are deeper or longer lasting than currently anticipated.

The cost of re-naming and re-branding the Company and the Bank and transitioning certain services from TD Bank to Fiserv may be more costly than anticipated.

Prior to December 30, 2008, the Company and the Bank were parties to a Network Agreement and Master Services Agreement with Commerce Bank N.A. (now known as TD Bank, N.A.).  The Network Agreement granted the Company and the Bank the right to use the name “Commerce Bank” together with trademarks and service marks which have been registered by Commerce Bank N.A. and previously utilized in connection with its banking business including, but not limited to, the red “C” logo.  Under the Master Services Agreement, TD Bank performed a broad range of administrative and data processing services for the Bank for which the Bank paid various services fees.  The Network Agreement and the Master Services Agreement and Addenda were terminated as of December 30, 2008 when the parties executed a Transition Agreement.  Under the Transition Agreement, certain services provided under the Master Services Agreement were continued until July 15, 2009 or at the Bank’s option, until August 15, 2009, and certain tail services until August 15, 2009.  The Bank has entered into a Master Agreement with Fiserv Solutions, Inc. to provide many of the administrative and data processing services presently provided by TD Bank.  If all services provided by TD Bank under the Transition Agreement (except tail services) are terminated on or before July 15, 2009, and if all tail services terminate by or on August 15, 2009, TD Bank will pay the Bank an incentive fee in the amount of $6,000,000.  However, if all services other than tail services terminate on or after July 16, 2009 but on or before August 15, 2009 and if all tail services terminate on or before August 15, 2009, the incentive fee will be reduced to $3,250,000.  If these deadlines are not met by the Bank, TD Bank will pay no incentive fee.  The Transition Agreement also grants the Company and the Bank a non exclusive royalty free license until September 30, 2009 to continue using the name “Commerce Bank” and, subject to certain limitations, the red “C” logo, each in the same form and manner consistent with past practice.   By September 30, 2009, the Company intends to change its name to Metro Bancorp, Inc. and both the Bank and Republic First Bancorp, Inc. (Republic First) will re-brand their banking business as Metro Bank and use as their new primary trademark a 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.  If there are any objections, we may incur additional costs to defend our use, and may be required to further re-brand our banking business.  If the transition and conversion process does not proceed as planned, we may receive no incentive fee from TD Bank and incur additional costs.

10

Changes in interest rates could reduce our income and cash flows.

Our operating income and net income depend to a great extent on our net interest margin, i.e., the difference between the interest yields we receive on loans, securities and other interest earning assets and the interest rates we pay on interest-bearing deposits and other liabilities. These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the Board of Governors of the Federal Reserve System, referred to as "FRB." If the rate of interest we pay on our interest-bearing deposits and other liabilities increases more than the rate of interest we receive on loans, securities and other interest earning assets, our net interest income, and therefore our earnings, could be adversely affected. Our earnings could also be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other liabilities.

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

We are subject to extensive regulation, supervision, and legislation which govern almost all aspects of our operations. The laws and regulations applicable to the banking industry could change at any time and are primarily intended for the protection of customers, depositors and the deposit insurance funds. Any changes to these laws or any applicable accounting principles may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors and shareholders.

"Anti-takeover" provisions may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to shareholders.

We are a Pennsylvania corporation. Anti-takeover provisions in Pennsylvania law and our articles of incorporation and bylaws could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold. For example, our articles of incorporation provide that our Board of Directors may issue up to 960,000 shares of preferred stock without shareholder approval, subject to the rights of the outstanding preferred shares. In addition, "anti-takeover" provisions in our articles of incorporation and federal and state laws, including Pennsylvania law, may restrict a third party's ability to obtain control of the Company and may prevent shareholders from receiving a premium for their shares of our common stock.

11

Our common stock is not insured by any governmental agency and, therefore, investment in it involves risk.

Our common stock is not a deposit account or other obligation of any bank, and is not insured by the FDIC, or any other governmental agency, and is subject to investment risk, including possible loss.

Our common stock is currently traded on the NASDAQ Global Select Market. During the twelve months ended December 31, 2008, the average daily trading volume for our common stock was approximately 12,400 shares.

The sale of a large number of these shares could adversely affect our stock price and could impair our ability to raise capital through the sale of equity securities. Sales of our common stock could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of equity securities. As of December 31, 2008, there were 6,446,421 shares of our common stock outstanding. Most of these shares are available for resale in the public market without restriction, except for shares held by our affiliates. Generally, our affiliates may either sell their shares under a registration statement or in compliance with the volume limitations and other requirements imposed by Rule 144 adopted by the SEC.

In addition, as of December 31, 2008, we had the authority to issue up to approximately 781,786 shares of our common stock under our stock option plans and 255,000 shares under our Dividend Reinvestment and Stock Purchase Plan.

Our executive officers, directors and other five percent or greater shareholders own a significant percentage of our company, and could influence matters requiring approval by our shareholders.

As of December 31, 2008, our executive officers and directors as a group owned and had the right to vote approximately 24.4% of our outstanding stock and other five percent or greater shareholders owned and had the right to vote approximately 20.1% of our outstanding common stock. These shareholders, acting together, would be able to influence matters requiring approval by our shareholders, including the election of directors. This concentration of ownership might also have the effect of delaying or preventing a change of control of Pennsylvania Commerce.

Item1B.Unresolved Staff Comments

None.

Item2.Properties

As of December 31, 2008, the Company owned 18 properties and leased 24 other properties. The properties owned are not subject to any material liens, encumbrances, or collateral assignments. The principal executive office of the Company is owned and is located at 3801 Paxton Street, Harrisburg, Pennsylvania, 17111. The Bank presently has 33 stores located in the following Pennsylvania counties: Cumberland, Berks, Dauphin, Lebanon, Lancaster, and York.

Item3.Legal Proceedings

The Company is subject to certain 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. The Company is not required to make any disclosures pursuant to Section 6707A(e) of the Internal Revenue Code.

12

Item4.Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders in the fourth quarter of 2008.

Part II.

Item5.Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Pennsylvania Commerce Bancorp, Inc. common stock currently trades on the NASDAQ Global Select Market under the symbol COBH.  The table below sets forth the prices on the NASDAQ Global Select Market known to us for the period beginning January 1, 2007 through December 31, 2008.  As of December 31, 2008, there were approximately 2,200 holders of record of the Company’s common stock.

	Sales Price
Quarter Ended:	High		Low
December 31, 2008	$	31.00	$	22.23
September 30, 2008		33.82		20.81
June 30, 2008		29.39		24.01
March 31, 2008		27.92		23.79
December 31, 2007	$	33.11	$	27.46
September 30, 2007		31.65		22.35
June 30, 2007		29.28		25.20
March 31, 2007		29.26		26.09

Dividends and Dividend History

The Company distributed to stockholders 5% stock dividends in December 1992, and annually from February 1994 through February 2004.  The Company also distributed to stockholders a two-for-one stock split (payable in the form of a 100% stock dividend) on August 7, 1995, and on February 25, 2005.  Neither the Company nor the Bank has declared or paid cash dividends on its common stock since the Bank began operations in June 1985.  The Board of Directors intends to follow a policy of retaining earnings for the purpose of increasing the Company’s and the Bank’s capital for the foreseeable future.  Although the Board of Directors anticipates establishing a cash dividend policy in the future, no assurance can be given that cash dividends will be paid.

The holders of Common Stock of the Company are entitled to receive dividends as may be declared by the Board of Directors with respect to the Common Stock out of funds of the Company. While the Company is not subject to certain restrictions on dividends and stock redemptions applicable to a bank, the ability of the Company to pay dividends to the holders of its Common Stock will depend to a large extent upon the amount of dividends paid by the Bank to the Company.  Regulatory authorities restrict the amount of cash dividends the Bank can declare without prior regulatory approval. Presently, the Bank cannot declare dividends in one year in excess of retained earnings subject to risk based capital requirements.

13

The ability of the Company to pay dividends on its Common Stock in the future will depend on the earnings and the financial condition of the Bank and the Company. The Company’s ability to pay dividends will be subject to the prior payment by the Company of principal and interest on any debt obligations it may incur in the future as well as other factors that may exist at the time.

Information concerning securities authorized for issuance under equity compensation plans is set forth in Footnote 14 to the Consolidated Financial Statements included in the Company’s 2008 Annual Report attached to this Form 10-K as Exhibit 13 and is incorporated herein by reference. Additional information concerning equity compensation plans is included in Part III of this Form 10-K. The Company has prepared a graph comparing the cumulative shareholder return on the Company’s Common Stock as compared to the NASDAQ Bank Index and the NASDAQ Composite Market Index for the years ended December 31, 2004 to December 31, 2008. This graph is included in the Company’s 2008 Annual Report to Shareholders after Table 12 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

14

Item 6.  Selected Financial Data
Pennsylvania Commerce Bancorp, Inc.
Selected Consolidated Financial Data
		At or For the Year Ended December 31,
(dollars in thousands, except per share data)		2008			2007			2006			2005			2004
Balance Sheet Data:
Total assets		$	2,140,527		$	1,979,011		$	1,866,483		$	1,641,121		$	1,277,367
Loans held for sale			41,148			14,143			15,346			10,585			14,287
Loans receivable (net)			1,423,064			1,146,629			973,033			815,439			638,496
Securities available for sale			341,656			387,166			392,058			380,836			314,065
Securities held to maturity			152,587			257,467			319,628			306,266			209,917
Federal funds sold			0			0			0			0			12,000
Deposits			1,633,985			1,560,896			1,616,777			1,371,062			1,160,547
Short-term borrowings and long-term debt			379,525			296,735			142,200			171,500			13,600
Stockholders' equity			114,470			112,335			101,108			91,643			85,039
Income Statement Data:
Net interest income		$	78,705		$	59,492		$	52,791		$	50,905		$	46,585
Provision for loan losses			7,475			1,762			1,634			1,560			2,646
Noninterest income			25,433			22,823			18,752			14,156			11,296
Noninterest operating expenses			77,909			70,807			59,294			50,403			42,466
Income before income taxes			18,754			9,746			10,615			13,098			12,769
Net income			12,901			7,001			7,254			8,817			8,591
Common Share Data:
Net income per share:	Basic	$	2.02		$	1.11		$	1.18		$	1.47		$	1.75
	Diluted		1.97			1.07			1.12			1.38			1.63
Book value per share			17.60			17.63			16.27			15.07			14.31
Selected Ratios:
Performance:
Return on average assets			0.64	%		0.36	%		0.41	%		0.61	%		0.73	%
Return on average stockholders' equity			11.42			6.59			7.58			9.91			14.78
Net interest margin			4.09			3.30			3.18			3.77			4.28
Liquidity and Capital:
Average loans to average deposits			85.07	%		69.90	%		62.52	%		58.87	%		57.20	%
Average stockholders' equity to average total assets			5.57			5.52			5.40			6.12			4.96
Risk based capital:	Tier 1		9.67			10.03			10.00			9.79			11.57
	Total		10.68			10.78			10.72			10.61			12.49
Leverage ratio			7.52			7.26			7.31			6.69			7.79
Asset Quality:
Net charge-offs to average loans outstanding			0.11	%		0.07	%		0.13	%		0.02	%		0.14	%
Non-performing loans to total year-end loans			1.88			0.25			0.34			0.31			0.13
Non-performing assets to total year-end assets			1.30			0.17			0.19			0.16			0.11
Allowance for loan losses to total year-end loans			1.16			0.93			0.99			1.12			1.21
Allowance for loan losses to non-performing loans			62			366			287			364			916

15

Item  7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation

The information required by this item is incorporated by reference from the Company’s 2008 Annual Report, which is attached to this Form 10-K as Exhibit 13.

Item  7A.  Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is incorporated by reference from the Company’s 2008 Annual Report, which is attached to this Form 10-K as Exhibit 13.

Item  8.  Financial Statements and Supplementary Data

The information required by this item is incorporated by reference from the Company’s 2008 Annual Report, which is attached to this Form 10-K as Exhibit 13.

Item  9.Changes and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item  9A.  Controls and Procedures

The Company, under supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are adequate and effective as of December 31, 2008 to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them by others within those entities, particularly during the period in which this report was prepared.

During the most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Report on Management’s Assessment of Internal Control Over Financial Reporting is provided in the next section.

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. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary, its procedures and controls.

16

Management’s Report on Internal Control over Financial Reporting

Pennsylvania Commerce Bancorp, Inc. is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report.  The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of Pennsylvania Commerce Bancorp, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of the Company; provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statement in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are only being made in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.  The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for liability through a program of internal audits.  Actions are taken to correct potential deficiencies as they are identified.

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected.  Also, because of changes in conditions, internal control effectiveness may vary over time.  Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Company’s system of internal control over financial reporting as of December 31, 2008, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management concludes that, as of December 31, 2008, its system of internal control over financial reporting is effective and meets the criteria of Internal Control – Integrated Framework.

17

Beard Miller Company LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements of the Corporation for the year ended December 31, 2008, appearing elsewhere in this annual report, and has issued an attestation report on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2008, as stated in their report, which is included herein.

      /s/ Gary L. Nalbandian                                                                

Gary L. Nalbandian

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

      /s/ Mark A. Zody                                                      

Mark A. Zody

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

March 12, 2009

18

Item  9B.  Other Information

None.

Part  III.

Item 10.   Directors, Executive Officers and Corporate Governance

Information responsive to this item is incorporated by reference from the Company’s definitive proxy statement for the 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before April 30, 2009.

  In addition to a Code of Business Conduct and Ethics applicable to all employees and the Board of Directors, the Company has adopted a Code of Ethics for Senior Financial Officers that is specifically applicable to its Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer.  Both of these codes are posted under the Investor Relations link on the Company’s website, www.commercepc.com.

Item 11.  Executive Compensation

Information responsive to this item is incorporated by reference from the Company’s definitive proxy statement for the 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before April 30, 2009.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information responsive to this item is incorporated by reference from the Company’s definitive proxy statement for the 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before April 30, 2009.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

Information responsive to this item is incorporated by reference from the Company’s definitive proxy statement for the 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before April 30, 2009.

Item  14.  Principal Accounting Fees and Services

Information responsive to this item is incorporated by reference from the Company’s definitive proxy statement for the 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before April 30, 2009.

Part IV.

Item  15.  Exhibits, Financial Statement Schedules.

(a)(1)	The following financial statements are incorporated by reference in Part II, Item 8 hereof:
	Consolidated Balance Sheets as of December 31, 2008 and 2007
	Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006
	Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006

19

	Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
	Notes to Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm
(a)(2)	Financial Statement Schedules (This item is omitted since information required is either not applicable or is included in the footnotes to the Annual Financial Statements.)
(a)(3)	List of Exhibits:
2.1	Agreement and Plan of Merger dated as of November 7, 2008 between Pennsylvania Commerce Bancorp, Inc. and Republic First Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the SEC on November 13, 2008).
3.1.	Amended and Restated Articles of Incorporation of Pennsylvania Commerce Bancorp, Inc. (incorporated by reference to Exhibit 3(i) to the Company’s Current Report on Form 8-K, filed with the SEC on December 20, 2007)
3.2.	Amended and Restated Bylaws of Pennsylvania Commerce Bancorp, Inc. (incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K, filed with the SEC on December 20, 2007)
10.1	Master Agreement dated as of November 7, 2008 between Fiserv Solutions, Inc. and Commerce Bank/Harrisburg, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on November 13, 2008)
10.2.	Transition Agreement by and between TD Bank, N.A. and Commerce Bancorp LLC on the one hand and Commerce Bank/Harrisburg and Pennsylvania Commerce Bancorp, Inc., on the other hand, effective as of December 30, 2008
10.3.	The Company’s 1990 Directors Stock Option Plan, as amended November 21, 2008 *
10.4.	The Company’s 1996 Employee Stock Option Plan, as amended November 21, 2008 *
10.5.	The Company’s 2001 Directors Stock Option Plan, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form S-8 filed with the SEC on December 4, 2008)*
10.6.	Description of base salaries and discretionary cash bonuses awarded to the Company’s named executive officers, effective November 3, 2008, is incorporated by reference to Item 5.02 of the Company’s Current Report on Form 8-K, filed with the SEC on November 6, 2008*
10.7.	Description of base salaries for 2009 and bonuses and discretionary option awards to the Company’s named executive officers for the year ended December 31, 2008 is incorporated by reference to Item 5.02 of the Company’s Current Report on Form 8-K, filed with the SEC on February 26, 2009*
10.9.	The Company’s 2006 Employee Stock Option, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form S-8 filed with the SEC on December 4, 2008)*

20

10.10	Employment Agreement dated February 23, 2009 with Gary L. Nalbandian (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 27, 2009)*
10.11	Employment Agreement dated February 23, 2009 with Mark A. Zody (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 27, 2009)*
10.12	Form of Employment Agreement February 23, 2009 with Messrs. Mark A. Ritter, D. Scott Huggins and James R. Ridd (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 27, 2009)*
11.	Calculation of EPS
	(The information required by this item appears in Note 13 of the Consolidated Financial Statements of the Company’s 2008 Annual Report to Shareholders and is incorporated by reference herein.)
13.	Pennsylvania Commerce Bancorp, Inc. 2008 Annual Report to Shareholders
21.	Subsidiaries of the Company
23.	Consent of Beard Miller Company LLP.
31.1.	Certification of CEO, required by SEC Rule 13a-14(a)/15d-14(a)
31.2.	Certification of CFO, required by SEC Rule 13a-14(a)/15d-14(a)
32.	Section 1350 Certification by CEO and CFO
99.	Agreement to Furnish Debt Instruments
(b)	Exhibits – The exhibits required to be filed as part of this report are submitted as a separate section of this report.
(c)	Financial Statement Schedules – None required.

* Denotes a compensatory plan or arrangement

21

Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

	Pennsylvania Commerce Bancorp, Inc. (Registrant)
Date:  March 16, 2009	By   /s/ Gary L. Nalbandian
	Gary L. Nalbandian
	Chairman and President
Date:  March 16, 2009	By   /s/ Mark A. Zody
	Mark A. Zody
	Chief Financial Officer
	(Principal Accounting Officer)

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Gary L. Nalbandian	Chairman of the Board, President and Director (Principal Executive Officer)	March 16, 2009
Gary L. Nalbandian
/s/ Mark A. Zody	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 16, 2009
Mark A. Zody
/s/ James R. Adair	Director	March 16, 2009
James R. Adair
/s/ John J. Cardello	Director	March 16, 2009
John J. Cardello
/s/ Jay W. Cleveland, Jr.	Director	March 16, 2009
Jay W. Cleveland, Jr.
/s/ Douglas S. Gelder	Director	March 16, 2009
Douglas S. Gelder
/s/ Alan R. Hassman	Director	March 16, 2009
Alan R. Hassman
/s/ Howell C. Mette	Director	March 16, 2009
Howell C. Mette
/s/ Michael A. Serluco	Director	March 16, 2009
Michael A. Serluco
/s/ Samir J. Srouji, M.D.	Director	March 16, 2009
Samir J. Srouji, M.D.

EX-10.2

Exhibit 10.2

EXECUTION COPY

TRANSITION AGREEMENT

This TRANSITION AGREEMENT (“Agreement”) is effective as of December 30, 2008 (“Effective Date”) by and between TD Bank, N.A., a national banking association, and Commerce Bancorp LLC (formerly known as Commerce Bancorp, Inc.) a Delaware limited liability company (“Commerce Bancorp,” and together with TD Bank, N.A., “TD”), on the one hand, and Commerce Bank/Harrisburg, a Pennsylvania banking association (“Commerce Harrisburg” as successor to Commerce Bank/Harrisburg, N.A., "Commerce N.A."), and Pennsylvania Commerce Bancorp, Inc., a Pennsylvania corporation (“PA Bancorp,” and, together with Commerce Harrisburg and Commerce N.A., “Harrisburg”), on the other hand.  Each of Harrisburg and TD is referred to herein as “Party” and collectively as “Parties.”

WHEREAS, Commerce Bancorp, Commerce Bank/Harrisburg, N.A. (the predecessor to Commerce Harrisburg) and PA Bancorp are parties to that Network Agreement dated January 1, 1997 (as amended in April 2002 and September 29, 2004, the “Network Agreement”) and Commerce Bank N.A. (now known as TD Bank, N.A.) (“CBNA”), and Commerce Bank/Harrisburg, N.A. are parties to that Master Services Agreement dated July 21, 2006 (together with its addenda, the “Master Services Agreement”);

WHEREAS, the Parties wish to terminate the Network Agreement and the Master Services Agreement prior to the expiration of their current term (together, the “Prior Agreements”), and have determined that it will be mutually beneficial to provide Harrisburg with an orderly and reasonable transition of certain services and branding, and both Parties have agreed to cooperate in good faith to achieve such transition;

NOW, THEREFORE, in consideration of the promises and mutual agreements set forth herein, and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Parties hereto agree as follows:

ARTICLE I – PRIOR AGREEMENTS

Section 1.1.           Network Agreement.

(a)           Commerce Bancorp, Commerce Harrisburg and PA Bancorp hereby amend the Network Agreement, pursuant to Section 13 thereof, to add a new Section 1.4 as follows:  “The parties may terminate this Agreement at any time, for any reason or no reason, by mutual agreement.”

(b)           Commerce Bancorp, Commerce Harrisburg and PA Bancorp hereby amend the Network Agreement, pursuant to Section 13 thereof, so that any obligations of any party thereunder that were intended to survive its expiration or termination, either explicitly or implicitly, will not survive such event.  Such non-survival will not affect or modify the Parties’ obligations under this Agreement.

(c)           Effective immediately after the effect of the amendments in Section 1.1(a) and (b) and 1.2(a), Commerce Bancorp, Commerce Harrisburg and PA Bancorp hereby terminate the Network Agreement.

(d)           In full and final satisfaction of any obligations of TD to provide marketing assistance to Harrisburg under Section 4.1(d) of the Network Agreement, TD will pay Harrisburg the non-refundable amount of $250,000 on the Effective Date.

Section 1.2.            Master Services Agreement.

(a)           TD Bank, N.A. (as successor to CBNA) and Commerce Harrisburg hereby amend the Master Services Agreement, pursuant to Section 12 thereof, so that any obligations of any party thereunder that were intended to survive its expiration or termination, either explicitly or implicitly, will not survive such event.  Such non-survival will not affect or modify the Parties’ obligations under this Agreement.

(b)           Effective immediately after the effect of the amendments in Sections 1.1 and 1.2(a), TD Bank, N.A. (as successor to CBNA) and Commerce Harrisburg hereby terminate the Master Services Agreement.

Section 1.3.            Releases.

(a)           Subject to Harrisburg’s payment of any fee obligations accruing under the Prior Agreements prior to the Effective Date (which fees are set forth on Exhibit A hereto), TD hereby forever and irrevocably releases and discharges Harrisburg and its Affiliates and their respective officers, directors, employees, agents and representatives (such Affiliates and all such persons, “Related Parties”) from all pending and potential claims, demands, actions, suits, liabilities, losses, obligations, fees and costs of whatever nature, whether known or unknown, pending or future, certain or contingent (“Liabilities”) arising out of or relating to (i) the Prior Agreements (and the Lewis Road sublease referenced in Section 3.3) and Harrisburg’s compliance therewith and performance or non-performance thereunder; (ii) any rights and remedies reserved by TD in the August 26, 2008 and October 9, 2008 letters from Simpson Thacher & Bartlett LLP to J. Douglas Baldridge of Venable LLP; and (iii) Harrisburg's marketing campaign and all customer communications made by or on behalf of Harrisburg or its Affiliates prior to the Effective Date to announce Harrisburg’s new brand and the Republic Merger (as defined in Section 4.1(b)).  The term “Affiliates” shall mean any person or entity that directly or indirectly controls, is controlled by, or is under common control with a Party, and for greater certainty, with respect to TD, does not include TD AMERITRADE Holding Corporation.

(b)           Subject to TD’s compliance with the payment obligations set forth in Sections 1.1(d) and 3.3, Harrisburg hereby forever and irrevocably releases and discharges TD and its Related Parties from all Liabilities arising out of or relating to (i) the Prior Agreements (and the Lewis Road sublease referenced in Section 3.3) and TD’s compliance therewith and performance or non-performance thereunder; (ii) the allegations in the August 21, 2008 and October 2, 2008 letters from J. Douglas Baldridge of Venable LLP to Simpson Thacher & Bartlett LLP; and (iii) TD’s marketing campaign and all customer communications made by or on behalf of TD or its Affiliates prior to the Effective Date to announce TD’s new brand in the United States.

(c)           The releases in Sections 1.3(a) and (b) shall not affect either Party’s right to bring a claim, action, suit, arbitration or other proceeding (“Action”) against the other Party

2

based upon (i) a breach of this Agreement (including any breaches of Articles II, III and  IV herein) or any other separate agreement between the Parties or their respective Related Parties (other than the Prior Agreements and the Lewis Road agreement); (ii) any act or omission of either Party not arising out of or relating to the Prior Agreements (except to the extent specifically released by Sections 1.3(a)(ii) or 1.3(a)(iii) and 1.3(b)(ii) or 1.3(b)(iii); or (iii) or specifically limited by Section 1.3(d)).

(d)           The releases in Sections 1.3(a) and (b) shall not affect either Party’s right to bring an Action against the other Party or the other Party's Related Parties for any direct damages, proceeds, settlements or awards paid by the first Party to a third party (and any out-of-pocket attorney's fees paid by the first Party to defend such third party Action) to the extent arising from or relating to a third-party Action brought against the first Party or one of its Related Parties for any misuse, mishandling or unauthorized access to or disclosure of such third party’s confidential information by the other Party or the other Parties' Affiliates at any time prior to the Effective Date, including with respect to third-party claims for breach of privacy laws and regulations against a Party or its Related Parties caused by the other Party or the other Party's Related Parties.  Each Party represents to the other Party that such Party does not know or have reason to know of any basis for any such third-party Action as of the Effective Date.

ARTICLE II – SERVICES

Section 2.1.           Services.

(a)           From and after the Effective Date, TD will provide (or cause to be provided) to Harrisburg the services listed on Schedule A (the "Services") until the following cessation dates: (i) for the accommodation banking services ("Accommodation Banking Services"), until 11:59 pm on December 31, 2008 (or as soon as practicable thereafter, to the extent a delay in cessation is caused by any third-party action beyond TD’s reasonable control); (ii) all services described on Schedule A-1 ("Core Services"), until 11:59 pm on July 15, 2009, or at Harrisburg's option, provided that Harrisburg gives TD at least five (5) days advance notice for such extension, until 11:59 pm on August 15, 2009 and (iii) for the services described on Schedule A-2 ("Tail Services"), until 11:59 pm on August 15, 2009.  Pursuant to Section 2.1(e), Harrisburg may terminate individual services or all services in (ii) and (iii) above at a date earlier than as set forth above.

(b)           TD shall provide, or cause the Services to be provided (i) by competent professionals in the same scope and manner and with quality and service standards consistent with past practice for the provision of such services to Harrisburg prior to the Effective Date; and (ii) in compliance with all applicable laws, rules and regulations.  TD shall not allow any Services to be changed during the Services Term (as defined in Section 8.1), other than non-material changes that do not adversely affect their timeliness, features or functionality.  TD shall not suspend or allow any Services to be suspended or discontinued during their respective terms, except in accordance with Section 3.2.  Further, TD shall be responsible for correcting, at its expense, errors caused by TD, its Affiliates or contractors in the performance of the Services or the retrieval or provision of any data or images to Harrisburg.

3

(c)           TD may retain third parties to assist in providing the Services, provided that (i) TD is liable hereunder for their compliance with this Agreement; (ii) upon request, such third parties will sign reasonable agreements to protect any Confidential Information (as defined in Article IX) of Harrisburg; and (iii) if Harrisburg wishes to continue any of the Services provided by such third parties after the Services Term, Harrisburg shall contract directly with such third parties and be solely and directly responsible for all applicable fees.

(d)           The Parties agree that TD is initially obligated to provide only those specific services included in the Services, even if other services were provided to Harrisburg under the Network Agreement or Master Services Agreement.  If at any time after the Effective Date, either Party discovers that TD or any of its Affiliates has historically provided any other service to Harrisburg that is not initially listed on Schedule A (each, a “Historical Service”), TD will provide or cause such Historical Service to be provided to Harrisburg in a manner that is consistent or substantially consistent with past practice, for the Services Term and for the fees historically charged to Harrisburg, and such Historical Service shall be included in the definition of “Services” for all purposes hereunder.  If at any time after the Effective Date, the Parties agree, in the sole discretion of each Party, for TD to provide to Harrisburg (i) new services that are not included in the Services or the Historical Services or (ii) any material modifications or supplements to the Services or Historical Services as currently provided as of the Effective Date (each of (i) and (ii), an “Additional Service”), the Parties shall execute additional addenda to be included in Schedule A and such Additional Services shall be included in the definition of “Services” for all purposes hereunder.

(e)           Harrisburg may terminate the provision of any Service hereunder for convenience, effective 30 days after written notice thereof to TD.  Upon the effective date of such termination, TD shall have no further obligation to provide any such Service, and fees for the terminated Service will no longer accrue but all other terms and conditions in this Agreement shall remain in full force and effect.

(f)           If the Republic Merger (as defined in Section 4.1(b)) changes Harrisburg's requirements under any pre-existing Services, the Parties will cooperate in good faith to accommodate changes that are nominal in nature and that do not increase the cost to TD of providing such Services in a material way, such as for example, the addition of logos or new names provided by Harrisburg that comply with Article IV to materials traditionally processed by TD for Harrisburg; the inclusion of Harrisburg merger mailer announcements that comply with Article IV and Section 6.2 in customer communications and statements traditionally processed by TD; and minor alterations in the manner information is reported or organized, to be able to identify data relating to Harrisburg.  Harrisburg will pay all incremental out-of-pocket fees of TD and a mutually agreed amount for TD’s incremental internal costs as a result of the above changes.  For clarity, Harrisburg acknowledges and agrees that TD is not required to accommodate any request for Services by Harrisburg to integrate with Harrisburg the back-end or infrastructure of Republic First Bancorp, Inc. as a result of the Republic Merger, or to assist with or provide marketing communications to be made by or on behalf of the Republic First Bancorp, Inc. business after the Republic Merger.  The Services, as required to be provided in this Agreement, shall continue to be provided after the Republic Merger solely with respect to Harrisburg’s legacy branches and business operations and the continuation of such business

4

operations (including new branches of the Harrisburg business) after the relevant transaction is effectuated.

(g)           Both Parties acknowledge and agree that (subject to Section 2.6) no Services will be provided to Harrisburg after August 15, 2009.     

Section 2.2.           Project Team.  TD hereby designates Robert W. Pompey and his designees, and Harrisburg hereby designates Mark A. Ritter and his designees, to act as lead coordinators and contact persons for the Services and related transition matters (the “Project Team Managers”), which may be amended by either Party upon notice.  The Parties acknowledge that they have, as of the Effective Date, agreed upon a transition project plan (the “Transition Plan”) that identifies the tasks and efforts that are necessary for an orderly transition of the Services to Harrisburg and agree to make all commercially reasonable best efforts to perform in a timely and reasonable manner their respective requests for information, tasks, duties and obligations thereunder, and to direct all communications regarding the Transition Plan to the Project Team Managers.  Each Party shall keep its Project Team Manager apprised of all material issues regarding the Transition Plan throughout the Services Term.  If a Party becomes aware of any problems regarding the Transition Plan or any circumstances that may cause or have caused a delay in Harrisburg’s transition process, it shall promptly inform its Project Team Manager and that Project Team Manager shall promptly inform the Project Team Manager of the other Party and such persons shall, as may be appropriate, confer in good faith on the appropriate response, amend the Transition Plan accordingly, and design a responsive plan of action in order to ensure that all the Services can be transitioned in an orderly manner by the end of the Services Term.

Section 2.3.            Cooperation.

(a)           Each Party shall provide the other Party and the other Party's vendors and contractors with all resources, notices and cooperation as may be reasonably necessary or desirable for (i) performance of the Services, (ii) effectuation of the Transition Plan in a timely manner  (including without limitation any related testing, data and image retrieval and conversion, and systems transition); (ii) resolution of any problems with respect to the Services or the Transition Plan; and (iii) timely, orderly and cost-effective transition of Harrisburg from use of the Services.  Both Parties agree that time is of the essence in the performance of their respective obligations required in order for the transition of Harrisburg to be accomplished in an effective and orderly manner by the dates set forth in Section 2.1 above.

(b)           Each Party shall provide the other Party and the other Party's vendors and contractors with reasonable access to its relevant personnel, premises, equipment and information, provided that such access (i) will be pursuant to a reasonably necessary request by the other Party, and (ii) complies with reasonable provisions of confidentiality.  Without limiting the generality of the foregoing, TD agrees that it will take all necessary actions during the Services Term to effectuate the retrieval, conversion and migration of Harrisburg’s data and images to Harrisburg’s systems in a timely manner within the dates set forth in Section 2.1 above.  The Parties agree to cooperate further in good faith to effect Harrisburg’s transition of Services as contemplated under this Agreement.

5

(c)           During and for a reasonable time after the Services Term, TD agrees to be reasonably responsive to Harrisburg's and its successors’ reasonable requests for data, materials and information relating to Services that were provided pursuant to this Agreement or the Prior Agreements and/or data and information that was collected or stored as a result thereof.  Harrisburg agrees to pay TD’s reasonable expenses to comply with such requests after the Services Term.

(d)           The Parties agree to cooperate in good faith in the event either Party is required to respond to any governmental request for information relating to the Services that were provided pursuant to this Agreement or the Prior Agreements and/or data and information that was collected or stored as a result thereof, or any audit with respect thereto.

Section 2.4.            Transition Milestones.  The Parties agree to use commercially reasonable best efforts to complete the milestone events set forth in Schedule B.  For clarity, any failure by Harrisburg or TD to meet the milestone events set forth in Schedule B will not affect Harrisburg’s right to receive the incentive fees set forth in Section 3.4.  Whenever a milestone date is materially missed, the Parties agree to confer promptly to develop a plan of action to keep the transition on course to meet the dates set forth in Section 2.1(a).  Nothing herein is intended to take away from the Project Team Managers the flexibility to mutually agree to changes in the Transition Plan, provided that neither Project Team Manager shall have the authority to request or consent to an extension of any dates set forth in Section 2.1(a).

Section 2.5.            Personnel.  Each of TD and Harrisburg agrees that TD is an independent contractor of Harrisburg, and this Agreement does not create a partnership, agency, fiduciary or joint venture relationship between the Parties or an employment relationship between a Party and the other Party’s employees or contractors.  Neither Party is authorized to enter into agreements or create obligations on behalf of the other Party.  Each Party shall be solely responsible for, with respect to its own employees and contractors: (i) filing on a timely basis, tax returns, payments and all other documents with respect thereto; (ii) paying all compensation, workers’ compensation, disability benefits, taxes and unemployment insurance; (iii) making all withholdings and deductions; and (iv) maintaining their eligibility or entitlement (or lack thereof) to any benefit under any employee benefit plan (including, without limitation, those that are subject to the Employee Retirement Income Security Act of 1974, as amended), incentive, compensation or other employee program or policy.

Section 2.6.           Harrisburg Data and Images.   TD agrees to retrieve and deliver to Harrisburg in a timely manner the data and images of Harrisburg required for the effectuation of the Transition Plan and milestone events set forth on Schedule B.  All such data and images shall be and remain at all times the property of Harrisburg, whether in the possession or control of TD, its Related Parties or its contractors.  TD shall pay its own internal and out-of-pocket costs with respect to the foregoing, including costs for CGI or any other contractors and suppliers it engages in connection therewith and for all equipment and software purchased by or on behalf of TD prior to the Effective Date.  Any costs with respect to hardware, software, equipment or third party rights to be incurred pursuant to this Section 2.6 after the Effective Date shall be governed by Section 3.4 hereunder.  Notwithstanding Section 2.1(a)(iii), the Parties acknowledge and agree that the Transition Plan cannot be completed until and unless at least seven (7) years of Harrisburg data and images are accurately retrieved and delivered to Harrisburg.  TD agrees that

6

if TD has not provided to Harrisburg all data and images necessary for the full transition of Harrisburg's banking operations by August 15, 2009, TD will at its expense continue to store and provide access to such data and images for Harrisburg until such provision of data and images is complete and TD has delivered to Harrisburg, in a medium, to be mutually agreed to by the parties, all such data and images.  TD agrees that at no time will Harrisburg be denied both (x) possession of its data and images and (y) TD’s services with respect to storing and allowing access to same.

ARTICLE III – FEES

Section 3.1.           Fees for Services.  Harrisburg shall pay TD the fees specified in Schedule A for the Services, subject to any terms and conditions therein.  Other than the fees specified on Schedule A and the reimbursement of certain pass-through expenses as set forth in Section 3.4, no other compensation is due to TD for the Services provided hereunder.  For any such fees that are charged on a per-unit basis per Schedule A, TD shall not increase the per-unit rates during the Term, except to pass through (i) its own higher out-of-pocket costs solely to the extent arising under existing third-party agreements under which TD procures the item (e.g., the costs of credit reports furnished by third parties), (ii) increases of external costs beyond TD’s control (e.g., increases in postage or shipping costs), in a manner consistent with historical practice, or (iii) higher costs pursuant to Section 2.1(f).  For clarity, Harrisburg acknowledges that (a) if Harrisburg increases the volume of Services provided by TD on a per-unit basis, its overall cost for such Services will increase, and (b) no fees paid by Harrisburg for the Services shall be construed as a payment for the use of any intellectual property of TD during the Term, whether pursuant to Section 4.1(a) or otherwise.  Absent any conflicting language in Schedule A, which shall control in such circumstances, or a new written agreement signed by the Parties, TD shall send invoices to Harrisburg, and Harrisburg shall pay such invoices, in accordance with historical practices.  Any undisputed amounts payable shall bear interest from the fifth day after their due date, at a rate of 1% over the prime interest rate published by The Wall Street Journal on such date.

Section 3.2.           Suspension of Services.  If Harrisburg fails to pay any undisputed amounts due for the Services, and fails to cure within 30 days after written notice from TD, TD shall have the right, upon notice to Harrisburg, to suspend providing the applicable Services until such payment, together with any interest thereon as provided in Section 3.1, is received.  TD shall send notice of suspension at least five days prior to the suspension date.  The Services Term shall not be modified or extended in any manner as a result of any such period of suspension.

Section 3.3.           Furniture and Lease  Payments.  On the Effective Date, TD will pay Harrisburg the non-refundable amounts of (i) $107,527.79 for call center furniture previously provided to TD and invoiced by Harrisburg, and (ii) $42,472.21 for rent on the Lewis Road office space sublease.  Upon receipt of the foregoing payments, the furniture shall be fully paid for and the Lewis Road sublease will automatically terminate.

Section 3.4.           Other Fees and Expenses.  Absent any specific provisions to the contrary in this Agreement, each Party agrees to pay all internal and out-of-pocket fees, costs and expenses (including personnel salaries and increases, contractor and vendor fees) it and its Affiliates incur in connection with the Transition Plan and Harrisburg’s transition from the Prior

7

Agreements and all activities performed in connection therewith.  If either Party incurs an expense in connection with the purchase or acquisition of hardware, software, equipment or third-party rights that will remain with and be owned, leased or licensed by the other Party after the Services Term, the Party that will retain such hardware, software, equipment or third-party rights will be responsible for the expense associated with its purchase or acquisition and shall have the right to agree in advance to the price and terms upon which it will be purchased or acquired.  If from and after the Effective Date, the Parties agree that hardware, software, equipment or third-party rights must be purchased or acquired during the Services Term that will not be retained by either Party thereafter, the Parties must agree beforehand as to the price and purchase terms.  When such items are no longer needed, the Parties will make a reasonable effort to sell such items and shall split evenly any proceeds obtained from the sale thereof.

Section 3.5.           Incentive Fee.  TD will pay to Harrisburg a non-refundable fee for reimbursement of transition costs (“Incentive Fee”) as follows:  (i) US $6,000,000 if (a) all Services other than Tail Services terminate by July 15, 2009 (except any continuation of accommodation banking caused by TD) and (b) subject to Section 2.6, all Tail Services terminate by or on August 15, 2009; or (ii) US $3,250,000 if (a) all Services other than Tail Services terminate on or after July 16, 2009 but before or on August 15, 2009 and (b) subject to Section 2.6, all Tail Services terminate by or on August 15, 2009.  Harrisburg will not be penalized, and will not lose its right to receive the above Incentive Fee, if it misses any of the above deadlines due to delay caused by TD or its Affiliates or their respective contractors.  If Harrisburg qualifies for the Incentive Fee, it will be paid by TD on August 17, 2009 by check or wire transfer.  Harrisburg agrees that TD is obligated to pay an Incentive Fee only if Harrisburg meets either of the above sets of deadlines, and Harrisburg agrees that it will not be entitled to any pro rata payment for any partial satisfaction thereof.  If the Services are terminated by the dates noted above, the Incentive Fee shall be paid to Harrisburg and TD shall not withhold such payment on account of alleged breaches of other provisions of this Agreement or based on any other dispute or action between the Parties or their Affiliates.

ARTICLE IV  – TRADEMARKS AND TRADE DRESS

Section 4.1.           License.

(a)           From the Effective Date until the earlier of (i) September 30, 2009 or (ii) the date that Harrisburg notifies TD in writing that Harrisburg no longer needs the license herein (the “License Term”), TD hereby grants Harrisburg a non-exclusive, royalty-free license to use the trademarks, service marks, logos and domain names of TD and its Affiliates set forth on Schedule C and the name “Commerce Bank/Harrisburg” (the “Prior Marks”) in the form and manner consistent with past practice.  For clarity, Harrisburg may use the Prior Marks only on corporate offices, centers (including the Lewis Road facility), and bank branches that are physically located in the Pennsylvania counties comprising the territory on Schedule D (the “Territory”), but may use the Prior Marks, subject to the last sentence of Section 4.1(b)(iv), in websites, customer and corporate communications, advertising and promotional materials published, accessible or distributed anywhere to promote Harrisburg’s banking operations located in the Territory.

8

(b)           (i)  During the License Term, Harrisburg may use the Prior Marks only in their exact form depicted on Schedule C, or, with respect to “Commerce Bank/Harrisburg” in the form and manner consistent with past practice and, except as provided in subsections (ii) and (iii) below, may not combine any Prior Marks with other trademarks.  Subject to the foregoing sentence and the other provisions of this Article IV, Harrisburg may, during the License Term, adopt new branding that incorporates the Prior Marks in the regular course of its business to designate new financial products and services and conduct customer promotions for the Harrisburg operations.

(ii)           During the License Term, subject to the proviso in Section 4.1(b)(iii), Harrisburg may use the names “Commerce Bank,” “Commerce Bank/Harrisburg” and Pennsylvania Commerce Bancorp, Inc. as a trademark (including in the Frutiger or Univers Black Oblique typefaces and/or in the color red), and/or use the red “C” logo, in each case, in the same communication as Harrisburg’s proposed new Primary Brand (as defined in Section 4.2(a)) and/or the names and logos of Republic First Bancorp, Inc. and its banking subsidiary, solely (a) in direct mailings and other direct communications (including, by way of example, in on-premises bank branch announcements and materials) to its existing customers and/or on the website www.commercepc.com (or any other websites operated or controlled by Harrisburg), to announce or promote that the merger between PA Bancorp and Republic First Bancorp, Inc. (the “Republic Merger”) is planned or has occurred and/or that there will be a transition of the “Commerce Bank” brand to the new Primary Brand; (b) as otherwise required for regulatory and governmental purposes; or (c) as permitted as a “fair use” under applicable law.  By way of example, Harrisburg may use “[new Primary Brand] Bank, formerly Commerce Bank” and "Commerce Bank will become [new Primary Brand] Bank" but may not use “[new Primary Brand] Commerce Bank.”

(iii)            Without limiting Section 4.1(b)(ii), Harrisburg may also use (a) the names “Commerce Bank,” “Commerce Bank/Harrisburg” and Pennsylvania Commerce Bancorp, Inc. as a trademark (including in the Frutiger or Univers Black Oblique typefaces and/or in the color red) and/or (b) use the red “C” logo, in each case, in the same communication as Harrisburg’s proposed new Primary Brand (as defined in Section 4.2(a)) and/or the names and logos of Republic First Bancorp, Inc. and its banking subsidiary, in the Territory from the Effective Date until September 30, 2009, to announce or promote that the Republic Merger is planned or has occurred and/or that there will be a transition of the “Commerce Bank” brand to the new Primary Brand, and solely:  (i) for signage, collateral, and other physical or tangible materials owned, controlled or leased by Harrisburg or the surviving entity of the Republic Merger (the “Republic Survivor”) that are physically located within the Territory; (ii) for advertising placement in newspapers, magazines or other print media that are exclusively or primarily distributed and targeted or directed towards residents in the Territory (including the most Territory-specific edition available of print media with wider general circulation), subject to a reasonable disclaimer making clear that Harrisburg is not an affiliate of TD such as, by way of example, “Commerce Bank is not an affiliate of TD Bank”; (iii) for advertising placement in radio and television stations that are exclusively or primarily targeted or directed towards residents in the Territory, subject to a reasonable disclaimer making clear that Harrisburg is not an affiliate of TD such as, by way of example, “Commerce Bank is not an affiliate of TD Bank”; and (iv) on the website www.commercepc.com (or any other websites operated or controlled by Harrisburg); provided that, in each case of such uses in subsections 4.1(b)(ii) and (iii),

9

Harrisburg will not (x) suggest, in violation of applicable law, that TD or its Affiliates is affiliated with or endorses Harrisburg, Republic First Bancorp, Inc. or the Republic Survivor, (y) display the “Commerce Bank” and/or “Commerce Bank/Harrisburg” trademark and/or the red “C” logo in an unfavorable visual manner (e.g., distorting or breaking the “C” logo), and/or (z) depict the likeness of any past or current "director" or "senior executive officer" (each as defined in 12 C.F.R. 5.51(c)(1) and (3), respectively) of TD or its predecessors or of its Affiliates.  For clarity, Harrisburg will not breach this Section 4.1(b)(iii) or the last sentence of Section 4.1(b)(iv) if persons outside the Territory access, possess, view or hear any materials or media that comply with the above criteria in (i)-(iv) so long as Harrisburg otherwise complies with this Section 4.1(b)(iii).

(iv)           Without limiting Section 4.1(a), 4.1(b)(ii) or (iii) or Section 4.2(d) below, Harrisburg may at any time during or after the License Term also use the names “Commerce Bank/Harrisburg” and/or “Pennsylvania Commerce Bancorp, Inc.,” alone or with other names or logos, in a type font or other manner that does not give it substantial prominence or distinction, not in the color red, not using the standalone “C” logo, and not in the Frutiger or Univers Black Oblique type font on any materials or in any media inside or outside the Territory (including in connection with Harrisburg’s transition to a new Primary Brand, the Republic Merger, communications to customers of Republic First Bancorp, Inc., employment descriptions in individual biographies, and for legal and regulatory purposes) and such use shall be considered “fair use” provided that such use does not otherwise suggest, in violation of applicable law, that TD or its Affiliates is affiliated with or endorses Harrisburg, Republic First Bancorp, Inc. or the Republic Survivor.  Without limiting Section 4.1(a) with respect to Prior Marks other than the exact trademarks “C,” “Commerce,” or “Commerce Bank,” Harrisburg agrees that, during the License Term, it will not use the name “Commerce Bank” or “Commerce” or a standalone “C” logo on any materials for wide or general public distribution outside the Territory (excluding Harrisburg websites and communications to existing customers outside the Territory who bank at Harrisburg branches within the Territory) or in any print, radio or television media exclusively or primarily targeted or directed towards residents outside the Territory, except for use of the name “Commerce Bank/Harrisburg” and/or “Pennsylvania Commerce Bancorp, Inc.” and except as otherwise required for legal or regulatory purposes or employment and similar descriptions in individual biographies.

(c)           Harrisburg will use such Prior Marks solely in a manner and solely in connection with products and services that maintain quality levels consistent with those employed by Harrisburg prior to the Effective Date.  Subject to the foregoing obligation and the other provisions of this Article IV, Harrisburg may create or acquire from others new materials, merchandise and promotional programs and banking products that bear the Prior Marks and the other names referenced in Section 4.1(b)(ii) solely as permitted by Section 4.1(b) above.  Any goodwill of the Prior Marks generated by Harrisburg’s use thereof shall inure to TD as owner.  Harrisburg shall not, during or after the License Term, directly or indirectly, contest the validity or ownership of any registered trademarks or pending applications on Schedule C.

(d)           At the end of the License Term, Harrisburg has no obligation to destroy or return to TD (or to cause third parties to destroy or return to TD or to Harrisburg ) or to refuse to honor any documents, materials or items bearing the Prior Marks that are no longer in its or its Affiliates’ possession or control (including checks, check covers, debit cards, credit cards,

10

deposit slips and withdrawal slips in the possession of customers).  Harrisburg has no obligation to request the deletion of the Prior Marks after the Term from any Yellow Pages or other directory listings, trade directories, third-party web sites, governmental records (except as provided in Section 4.4), or other third-party publications and materials not controlled by Harrisburg or its Affiliates, provided that Harrisburg will not renew or take other actions to prolong the use or display of the Prior Marks by such sources after the License Term and will reasonably cooperate with TD in all attempts to cancel or end such use or display.

(e)           Notwithstanding anything to the contrary in Section 4.6 below, if a Party becomes aware of any accidental, unintentional, nominal, or residual use of a Prior Mark or a mark on Schedule E by Harrisburg after the License Term that is inconsistent with the provisions of this Article IV, it shall promptly notify the other Party.  Such use shall not breach this Agreement, if Harrisburg immediately takes corrective action to cease or remove such use, subject to Section 4.1(d).

(f)           Harrisburg acknowledges and agrees that TD has no obligation, either express or implied, to (I) extend this trademark license after September 30, 2009; or (II) take any action after such date to assist harrisburg in transitioning to new trademarks or in mitigating its costs or expenses in connection therewith.  Harrisburg waives all of its rights (under this Agreement or otherwise) to request or claim any of the foregoing.

Section 4.2.           Harrisburg’s New Trademarks.

(a)           Primary Trademark.  Harrisburg agrees that, by September 30, 2009, Harrisburg will adopt a new primary trademark, service mark, and logo to replace the “Commerce Bank” trademark and the “C” logo (“Primary Brand”) that does not (i) begin with “Com,” (ii) contain the word “commerce” or any composite or foreign equivalent thereof (e.g., Commerz or CommerceOne); (iii) use a standalone “C” in a logo in any color or font; (iv) contain any of the word-only trademarks or service marks listed on Schedule C, or any of the terms on Schedule E (or their foreign equivalents), in each case, in any font or color; (v) contain any of the exact logos on Schedule C, and/or (vi) use the Frutiger or Univers Black Oblique fonts.  Harrisburg may change its Primary Brand at any time before or after September 30, 2009, and agrees that all of the above criteria will apply to any new Primary Brand, except the requirement in subsection 4.2(a)(i) shall expire on September 30, 2012.

(b)           Other Trademarks.  Harrisburg agrees that, after the License Term, Harrisburg will not adopt or use for banking, financial or insurance services any other trademark, service mark, logo or domain name (subject to Section 4.4) that (i) contains the word “commerce” or any composite or foreign equivalent thereof (e.g., Commerz or CommerceOne); (ii) uses a standalone “C” in a logo in any color or font; or (iii) contains any of the word-only trademarks or service marks listed on Schedule C, or any of the terms on Schedule E (or their foreign equivalents), in each case, in any font or color, (iv) contain any of the exact logos on Schedule C, provided that Harrisburg may adopt and use or announce the term “Red [day of week]” after September 30, 2010.  Harrisburg agrees that until September 30, 2012, Harrisburg will not adopt or use in the banking, financial or insurance services any trademark, service mark, logo or domain name in the Frutiger or Univers Black Oblique fonts, provided that if a Party

11

becomes aware of any accidental, unintentional, nominal or residual use of either font before such date, it shall promptly notify the other Party, and such use shall not breach this Agreement if Harrisburg immediately takes such action to cease or remove such use.

(c)           Other Generic Terms.  Notwithstanding any other provisions of this Article IV, at any time during and after the License Term,  TD agrees that Harrisburg or its successors may use (i) the words on Schedule E in their fair, generic or descriptive sense, and (ii) any word or element contained in a trademark on Schedule C that is not listed on Schedule E in a fair, generic or descriptive sense, or as part of trademarks, service marks, slogans and other branding, whether standing alone or contained in another trademark, provided that Sections 4.2(a) or (b) are not violated.

(d)           Fair Use.  Notwithstanding any other provision of this Article IV, TD agrees that, during and after the License Term, Harrisburg has the right to make “fair use” of TD’s trademarks and service marks under U.S. law, provided that such right shall not be construed or asserted to limit any of Harrisburg’s obligations under Sections 4.1(b)(iv) (last sentence), 4.2(a) or 4.2(b).  Except for the provision on agreed “fair use” in Section 4.1(b)(iv) with respect to “Commerce Bank/Harrisburg,” and without limiting Harrisburg’s obligations under Sections 4.2(a) or (b), each Party reserves its rights as to whether any other use by Harrisburg of the “Commerce” or “Commerce Bank” name (other than as “Commerce Bank/Harrisburg”) after the License Term constitutes a “fair use” under U.S. law, and Harrisburg agrees that the release in Section 4.6 shall not apply to any such use.

Section 4.3.           Coin Counters and ATM Machines.

(a)           Harrisburg agrees that, after September 30, 2009, it will not adopt or use any trade dress or look and feel for any “Penny Arcade” coin counters displayed at Harrisburg bank branches that uses or displays (i) the name “Penny” and/or “Arcade”; (ii) a character named “Penny” or a juvenile female character that is substantially similar under U.S. copyright law or confusingly similar under U.S. trademark law to TD’s current “Penny” character; (iii) the audio and/or visual material displayed on TD’s “Penny Arcade” coin counter screens as of the Effective Date; and/or (iv) any of the Prior Marks or the trademarks listed on Schedule E.  TD agrees that if Harrisburg complies with the criteria in subsections (i)-(iv), TD, for itself and its Affiliates, hereby forever and irrevocably releases and discharges Harrisburg from all Liabilities arising out of or relating to any claim by TD or its Affiliates that Harrisburg’s or its Affiliates’ (including successors thereto) continued display or use of the coin counters located in Harrisburg’s bank branches from and after the License Term tarnishes, disparages, infringes, dilutes, or misappropriates TD’s or its Affiliates’ trademark, trade dress, copyright, design rights, patent, or other intellectual property rights, or is otherwise actionable by TD or its Affiliates under deceptive trade practices or other commercial laws.  For the avoidance of doubt, the foregoing releases shall not imply that such continued use of the coin counters after the License Term may not be subject to claims by third parties unrelated to TD or TD's Affiliates based on rights of such third parties not acquired or derived from TD or TD's Affiliates.

(b)           Harrisburg further agrees that, after September 30, 2009, it will not adopt or use any new trade dress or look and feel for any Harrisburg ATM banking machine that uses or displays any of the Prior Marks or the trademarks listed on Schedule E.  TD agrees that if

12

Harrisburg complies with the prior sentence, TD, for itself and its Affiliates, hereby forever and irrevocably releases and discharges Harrisburg and its Affiliates (including successors thereto)  from all Liabilities arising out of or relating to any claim by TD or its Affiliates that Harrisburg’s or its Affiliates’ continued display or use of the ATM banking machines located in Harrisburg’s bank branches or other locations within the Territory from and after the License Term tarnishes, disparages, infringes, dilutes or misappropriates TD’s or its Affiliates’ trademark,  trade dress, copyright, design rights, patent, or other intellectual property rights, or is otherwise actionable by TD or its Affiliates under deceptive trade practices or other commercial laws.  For the avoidance of doubt, the foregoing releases shall not imply that such continued use of the ATM machines after the License Term  may not be subject to claims by third parties unrelated to TD or TD's Affiliates based on rights of such third parties not acquired or derived from TD or TD's Affiliates.

(c)           The releases in Section 4.3(a) and (b) apply to coin counters and ATM banking machines that Harrisburg may, in the regular course of business, place in new Harrisburg branches in the Territory during the License Term.  For the avoidance of doubt, such releases shall not apply to any claim brought against Harrisburg by a third party relating to any new ATM banking machines and/or coin counters of Harrisburg.

Section 4.4.           Corporate Filings.  Harrisburg agrees that, by September 30, 2009, it will have made all filings and taken all actions at all applicable government agencies or offices to change its corporate, trade and similar names to names that comply with Section 4.2.  Harrisburg shall notify TD promptly after the effect of such name changes.  The Parties agree that failure of a governmental agency or office to process or approve by September 30, 2009 any filings made by Harrisburg prior thereto shall not be a breach of this Section 4.4, provided, however, that for the sake of clarity, Harrisburg acknowledges that notwithstanding the foregoing, it shall not have any right to use the Prior Marks after the License Term except as otherwise permitted in Section 4.2(d) and the sentence below.  By December 31, 2009, Harrisburg will promptly, at TD’s option and expense, cancel or transfer to TD all domain names of Harrisburg containing any term on Schedule E, and TD and Harrisburg agree that from the end of the License Term until December 31, 2009, Harrisburg may use the domain name www.commercepc.com solely to redirect Internet users to the website of the Republic Survivor (or such other replacement website owned or controlled by Harrisburg)..

Section 4.5.           Branded Materials.

(a)           Harrisburg will cease using all stationery, office supplies, customer or collateral items (e.g., “C” banks) containing Prior Marks (“Branded Supplies”) after September 30, 2009.  After the License Term, Harrisburg and its Related Parties may continue using similar stationery, supplies and customer or collateral items but they may not depict the Prior Marks.  After the Effective Date, at Harrisburg’s request, TD will provide Harrisburg with all Branded Supplies in TD’s possession that TD no longer uses, at a mutually-agreed discounted price.  Harrisburg will, at TD’s option, promptly destroy all Branded Supplies in its possession after September 30, 2009 or promptly make all Branded Supplies available for retrieval by TD (in the case of retrieval, at the place where the items are located and at TD’s cost).  TD shall notify Harrisburg of which of the above options it elects (which may vary for different types of Branded Supplies) by April 1, 2009.  Unless different arrangements have been made by the

13

Parties, items not retrieved within 30 days of the date by which Harrisburg has notified TD that it has earlier ceased using a particular Branded Supply will be destroyed or reasonably disposed of by Harrisburg.

(b)           Harrisburg and its Related Parties may use, copy, create derivative works of, distribute copies of and display in perpetuity any internal procedures, training manuals and other technical or business documentation relating to such procedures or manuals (“Technical Materials”) that are in Harrisburg’s possession, custody or control as of the Effective Date, provided that all such materials used after the License Term do not depict any of the Prior Marks, and further provided that this shall not require any removal of Prior Marks from legal documents, existing files and records and official forms or from back-up tapes and archived documents so long as such documents, forms, files, records and tapes are not generally visible to customers.  After the Effective Date, at Harrisburg’s request, TD will provide Harrisburg with all Technical Materials in its possession that TD no longer uses, redacted at TD’s option to remove all Prior Marks, at no additional charge.

(c)           Harrisburg will remove all Prior Marks from all of its décor, fixtures, murals, artwork, rugs, carpets, furniture, signage and promotional, customer or collateral items (including pens, lollipops, dog biscuits and stamps), materials and content in any media or format (including online, interactive displays and all user interfaces) that are in Harrisburg’s possession, custody or control and are used by or visible to the public (such materials that depict the Prior Marks are referred to as “Customer Materials”) by September 30, 2009.  The same or similar Customer Materials may continue to be used after September 30, 2009, except that they may not depict the Prior Marks.  Harrisburg will, at TD’s option, promptly destroy all Customer Materials in its possession after September 30, 2009 or promptly make all Customer Materials available for retrieval by TD (in the case of retrieval, at the place where the items are located and at TD’s cost).  TD shall notify Harrisburg of which of the above options it elects (which may vary for different types of Customer Materials) by April 1, 2009.  Unless different arrangements have been made by the Parties, items not retrieved within 30 days of the date when Harrisburg has earlier ceased using a particular Customer Material will be destroyed or reasonably disposed of by Harrisburg.

Section 4.6.           Proprietary Rights Release.

(a)           To the extent that Harrisburg complies with the provisions of Article IV, TD, for itself and its Affiliates, hereby forever and irrevocably releases and discharges Harrisburg from all Liabilities arising out of or relating to any claim by TD or its Affiliates (or the respective successors to their rights) that Harrisburg’s use or display of any trademarks, service marks, logos, domain names, trade dress, “look and feel”, or designs, of TD in existence as of the Effective Date tarnishes, disparages, infringes, dilutes or misappropriates TD’s or its Affiliates’ (subject to Section 4.6(a)(iii) below) trademark, service mark, copyright, design rights, logos, domain name, trade dress rights or other intellectual property rights existing or claimed as of the Effective Date, or violates any deceptive trade practices or other commercial laws.  This release and the other releases in this Article IV do not waive TD’s or its Affiliates’ rights under the last sentence in Section 4.2(d) or to bring an Action against Harrisburg alleging that (i) Harrisburg has not complied with Article IV, in a timely manner or otherwise, (ii) Harrisburg is infringing or diluting any new intellectual property rights that TD or its

14

Affiliates create, invent or adopt after the Effective Date, and Harrisburg reserves its defenses and counterclaims with respect thereto and nothing in this Agreement shall release any claims or rights with respect thereto, or (iii) Harrisburg is infringing or diluting the “TD” name and/or green shield logo or any other intellectual property rights of The Toronto-Dominion Bank, TD Bank, N.A. or its Affiliates, other than those rights relating to the “Commerce Bank” banking system, Commerce Bancorp LLC, its subsidiaries and predecessors.  If Harrisburg does not comply with any provision of Article IV, such non-compliance will not void this release in its entirety, but such release will not be in effect and may not be raised as a defense to any such instance of non-compliance.

(b)           Except as expressly provided in this Article IV, TD for itself and its Affiliates agrees that Harrisburg and its successors do not need to change, remove, delete or cease using, on account of any right of TD or its Affiliates, any other branding, name, trade dress, domain name, look and feel, policy, procedure, method of doing business, forms, office documentation and supplies and collateral materials that Harrisburg has used in connection with its Commerce Bank banking operations prior to and up to the end of the License Term.

Section 4.7.           Effect on Affiliates.  Harrisburg agrees that the provisions of this Article IV shall bind Harrisburg and its Affiliates existing as of the Effective Date (“Current Affiliates”).  Despite the foregoing, if any Current Affiliates are deemed not to be bound hereby, Harrisburg agrees that it shall be liable to TD for breach of this Article IV for any act or omission by any Current Affiliate that would breach this Article IV if committed by Harrisburg.  Notwithstanding Section 10.2(a), if Harrisburg is acquired by or merged into any third party after the Effective Date (an “Acquiror”), or if Harrisburg acquires another banking company after the Effective Date (an “Acquired Business”) Harrisburg’s obligations in Sections 4.1-4.5 and TD’s release in Section 4.6 shall be unchanged with respect to Harrisburg’s legacy branches and business operations and the continuation of such business operations (including new branches of the Harrisburg business) after the relevant transaction is effectuated, but shall not bind or extend to or from any legacy branches of the Acquiror or the Acquired Business (including new branches of the Acquiror or the Acquired Business), and the Parties and their Affiliates and any Person acquired or acquiring such business would reserve their rights in this regard.  For clarity, if Harrisburg acquires “Comet Bank” or is acquired by “Comet Bank,” (x) Harrisburg’s obligations in Sections 4.1-4.5 and release in Section 4.6 would not bind or extend to the legacy Comet Bank branches; (y) TD and its Affiliates would reserve all rights to assert infringement or other claims arising from the use of Comet Bank’s trade dress and trademarks and Comet Bank will reserve all rights and defenses with respect thereto; and (z) Harrisburg could not use the Prior Marks in connection with any bank branches of “Comet Bank” in the Territory.  This section does not alter, modify, or limit the provisions of Section 4.1(b) above.

ARTICLE V – REPRESENTATIONS AND WARRANTIES

Section 5.1.           By Each Party.  Each Party represents and warrants to the other Party that: (i) the warranting Party has full power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement, (ii) this Agreement has been duly executed and delivered by the warranting Party and, assuming the due execution and delivery of this Agreement by both Parties, constitutes a valid and binding agreement of the warranting Party enforceable against the warranting Party in accordance with its terms, except as such

15

enforceability may be limited by bankruptcy, insolvency, receivership, moratorium, reorganization or similar laws affecting the enforcement of creditors’ rights generally and general equitable principles, and (iii) it has all necessary rights to provide the releases in Section 1.3.

Section 5.2.           By TD.  TD further represents and warrants to Harrisburg that it shall provide the Services in a timely manner by competent professionals in the same scope and manner and with the quality and service standards consistent with past practice.

Section 5.3.           Disclaimer.  Except as expressly provided in this Agreement (including Schedule A), each party hereby disclaims all representations and warranties, either express or implied, under this Agreement or with respect to the Services, including without limitation any representations or warranties with respect to the value, suitability, merchantability, reliability, non-infringement or fitness for use of the Services.

Section 5.4.           Limitation on Liability.  Except for a Party’s indemnification obligations under Article VII, no Party shall be liable to the other Party for indirect, special, incidental, consequential or punitive damages (including business interruption losses or lost profits) arising from this Agreement or the provision of Services.

ARTICLE VI  – PARTIES’ OBLIGATIONS

Section 6.1.           Non-Solicitation.  Each Party agrees that it will not, directly or indirectly through its Related Parties, for a period of time beginning on the Effective Date until the earlier of (a) May 31, 2009 or (b) the effective date of the announced merger between PA Bancorp and Republic First Bancorp, Inc., and without the prior written consent of the other Party (which may be withheld in its sole discretion), directly or indirectly hire, employ, recruit or solicit for employment by a Party or its Affiliates any person who was, at any time during the Term, an employee of the other Party or its Affiliates at or higher than the vice president level, provided that any Party or its Affiliates may hire any employee of the other Party who responds to a general employment advertisement and is not directly or specifically solicited for employment, either alone or in conjunction with others.

Section 6.2.           Non-Disparagement.  Each Party agrees that it will not, directly or indirectly through its Related Parties, for a period of time beginning on the Effective Date until December 31, 2009, make any verbal or written official public statement that is disparaging or derogatory of the other Party or its Affiliates and would reasonably be expected to adversely affect such Party’s reputation and business dealings, except for any statements arising from or made in connection with any Action or as required by applicable law, rule or regulation.  For clarity, the Parties may engage in comparative advertising or competitive business practices so long as such advertising and practices do not violate this Section 6.2.  The provisions of Section 10.5 shall apply to any alleged breach of this Section 6.2, except that (i) the initial negotiation period in Section 10.5 shall be reduced to 10 days for the first alleged breach by each party, (ii) the initial negotiation period may be waived entirely by the aggrieved Party for any subsequent breaches by the other Party, and (iii) if a Party engages in more than one intentional breach of this Section 6.2 (as determined pursuant to the dispute resolution procedures of this Agreement),

16

the prevailing Party in any such Action(s) to enforce this Section 6.2 may be awarded its reasonable attorney’s fees for any such dispute resolution pursuant to Section 10.5.  For clarity, the Parties agree that a breach or alleged breach of this Section 6.2 shall not give either Party the right to withhold its performance of the Services, to terminate Article IV, or to fail to otherwise comply with its obligations under other sections of this Agreement (including any payment obligations).

Section 6.3.           Parties’ Personnel.  Each Party is solely responsible for the acts and omissions of its and its Related Parties’ employees and contractors in connection with performing the Services, at all times and in any location.

Section 6.4.           Call Center Personnel.  As of the Effective Date, the Parties share use of a call center managed by TD and located at Harrisburg’s premises. The Parties agree to develop a plan within forty-five (45) of the Effective Date to (i) segregate the call center personnel so that such personnel shall be responsible as soon as possible for responding to calls solely from one Party’s customers, (ii) implement the permanent and equitable allocation of call center agents between the Parties and the potential employment by each Party of its call center agents as soon as possible, and (iii) otherwise to fully transition the call center arrangement and the relocation of the call center from Harrisburg's premises on or before July 15, 2009, including with respect to technology and other equipment, as appropriate.  All actions taken in accordance with this plan will not be deemed “Services” under Section 2.1(a).

ARTICLE VII  – INDEMNIFICATION

Section 7.1.           Indemnification.  Each Party shall indemnify, hold harmless and defend at its expense the other Party and its Related Parties from all Liabilities actually incurred by such other Party or its Related Parties to the extent (i) the indemnifiable claim arises from an Action brought by a person or entity who is not a Party to this Agreement or any of its Related Parties; and (ii) such Action arises from (x) any act or omission by the indemnifying Party or its employees or contractors in connection with the provision of the Services or (y) the indemnifying Party’s breach of this Agreement or any representation, warranty, covenant or agreement herein.

Section 7.2.           Procedure.  A Party seeking indemnification under Section 7.1 shall promptly (and in any event, within 10 business days) notify the indemnifying Party in reasonable detail of any actual or potential indemnifiable claim, provided that any failure or delay in such notice shall not relieve the indemnifying Party of its obligations hereunder except to the extent it is prejudiced thereby.  The indemnifying Party shall have the right to control the defense or settlement of any indemnifiable claim, provided that the indemnified Party must cooperate in the foregoing and may participate with counsel of its choice at its own expense.  The indemnifying Party shall not settle or compromise any indemnifiable claim in any manner that adversely affects the indemnified Party without its prior written consent, which consent shall not be unreasonably withheld or delayed; provided, however, that no consent shall be required with respect to any settlement which (i) includes a full release of the indemnified Party from all Liabilities with respect to such indemnified claim; (ii) does not involve the imposition of non-monetary obligations or commitments that materially affect the conduct of the business or

17

operations of the indemnified Party; and (iii) does not include an admission of fault or guilt by the indemnified Party.

ARTICLE VIII  – TERM AND TERMINATION

Section 8.1.           Term.  The term of this Agreement (“Term”) commences on the Effective Date and lasts until September 30, 2009.  The term for provision of Services by TD (the “Services Term”) commences on the Effective Date and lasts until August 15, 2009.  Without limiting the Parties’ respective rights under Section 2.1(e) or Section 3.2, neither Party has the right to terminate this Agreement, the license contained in Section 4.1(a) and the other rights under Article IV, or the provision of Services hereunder (including as a remedy for the other Party’s breach of or relating to any provision of this Agreement) other than Harrisburg’s rights pursuant to Section 8.2.

Section 8.2.           Termination for Convenience.  Harrisburg may terminate the provision of one or more specific Services pursuant to Section 2.1(e).

Section 8.3.           Effect of Termination.  Termination of one or more specific Services under this Agreement shall not affect the remainder of this Agreement, which shall remain in full force and effect.

Section 8.4.           Survival.  The expiration of this Agreement shall not affect the Parties’ rights and remedies accruing prior to such date.  The provisions of Articles I, III (with respect to fees accruing prior to termination), IV (except to the extent of obligations applicable only during the License Term or that otherwise have an express applicability period), VI (subject to the express termination dates set forth therein), VII, IX and X (except Sections 10.1 and 10.2) and Sections 2.3(c), 2.3(d), 2.5, 2.6, 3.4, 5.3, 5.4 & 8.4 shall survive such expiration or termination in accordance with their terms.

ARTICLE IX – CONFIDENTIALITY

Section 9.1.           Restrictions.

(a)           Each Party (a “Receiving Party”) agrees that it will not (i) use Confidential Information of the other Party (the “Disclosing Party”) for any reason or purpose, except as necessary to perform its obligations under this Agreement, or (ii) disclose, share, communicate, provide access to or make available any Confidential Information, directly or indirectly, to any person other than its or its Affiliates’ (subject to the last sentence of this Section 9.1(a)) employees (or their respective contractors, auditors and advisors subject to reasonable confidentiality agreements) who need to know it to perform under this Agreement or to assist the Receiving Party with a legitimate internal business task, such as the maintenance, repair, management and operation of the systems that house the Confidential Information of the other Party, conducting internal privacy and security audits, and obtaining advice on legal and regulatory matters (“Recipients”), in each case, without the Disclosing Party’s prior written consent.  Confidential Information of a Disclosing Party in the possession of the Receiving Party may be disclosed to an acquiror of the Receiving Party or a third party who has been acquired by the Receiving Party, in each case, solely for viewing and use by such acquiror or acquired party

18

in connection with operating the new combined business, but in each case, not for a separate purpose relating to the legacy business of such acquiror or acquired business.

(b)           Without limiting Section 9.1(a), each Party agrees to take all commercially reasonable actions to safeguard and properly store the other Party’s Confidential Information so long as it is in its or its other Recipients’ possession, and to protect the other Party’s Confidential Information with the same degree of care exercised to protect its own Confidential Information of a similar nature, provided that such protection is not less than a reasonable standard of care.  Each Party is liable for any unauthorized use or disclosure of the other Party’s Confidential Information by its Recipients.

Section 9.2.           Definition.  “Confidential Information” shall mean non-public, confidential or proprietary information in any form or medium (including print, computerized or electronic), whether or not it is marked as confidential, relating to the Disclosing Party (or person who has provided same to the Disclosing Party in confidence) or its past, current or future business, activities and operations, whether provided to the Receiving Party pursuant to the Prior Agreements, this Agreement or any other agreement or relationship, including without limitation any such information relating to past, current and future: (i) finances, investments, profits, pricing, costs, and accounting, (ii) products, product distribution, services, sales, marketing, advertising and promotions, (iii) intellectual property (including patents, inventions, discoveries, research and development, processes, protocols, computer software, databases, documentation, trade secrets and business methods), (iv) personnel, compensation, recruiting and training, (v) customers, consultants, contractors, competitors, vendors, suppliers, licensees, partners, joint venturers, members or shareholders; and (vi) government and regulatory activities and approvals.

Section 9.3.           Exceptions.  “Confidential Information” does not include any information that (i) is in the public domain or known in the banking industry through no fault of the Receiving Party, (ii) is already in the Receiving Party’s possession, provided that such information is not known by the Receiving Party to be subject to another confidentiality agreement with or other contractual or legal obligation of confidentiality to the Disclosing Party; (iii) is independently developed by the Receiving Party without use or reference to the Disclosing Party’s Confidential Information; or (iv) is required to be disclosed to enforce a Party’s rights under this Agreement or pursuant to applicable law, rule, regulation, order, subpoena, document request or proceeding or at the request of a governmental or regulatory authority having jurisdiction over the Receiving Party; provided that, in the case of this clause (iv), the Receiving Party provides the Disclosing Party with prompt notice of the intended disclosure (to the extent permitted to do so) and cooperates with the Disclosing Party at the Disclosing Party’s expense in any attempt to seek a protective order or similar treatment.  In addition, for clarity, notwithstanding any other provision hereof, TD agrees that TD and its Affiliates will not try to restrict or enjoin or otherwise seek a legal remedy against Harrisburg’s or its Affiliates (and their respective successors) use or disclosure at any time hereinafter of information and materials in any form or medium relating to any aspect of the business practices or operations of Harrisburg’s Commerce Bank business prior to the end of the License Term on the grounds that such information constitutes TD’s or its Affiliates’ “Confidential Information” under this or any other agreement between the parties or their Affiliates and shall not seek the return of any information or materials with respect thereto.

19

Section 9.4.           Remedies.  In the event of actual or threatened breach of Section 9.1, without limiting its other rights and remedies hereunder, the non-breaching Party will be entitled to seek immediate injunctive and other equitable relief in the forum in Section 10.5, without posting bond or other security.  The Parties shall cooperate to remedy any unauthorized use or disclosure of either Party’s Confidential Information.

Section 9.5.           Compliance.  Each Party shall comply with all applicable laws, rules and regulations with respect to any Confidential Information of the other Party in the first Party’s possession or control at any time, including with respect to any and all data and images relating to the other Party’s past, present and future customers (“Customer Information”).  Each Party agrees to hold, store and access the other Party’s Customer Information in accordance with privacy and security requirements of applicable federal and state privacy and other laws.  To the extent that either Party or its Affiliates becomes aware of any loss or compromise of the other Party’s Customer Information or a breach of any applicable legal privacy or security requirement with respect to the other Party’s Customer Information, it shall promptly notify the other Party and fully cooperate in all efforts to mitigate the impact of the loss, compromise, or breach.  Without limiting Section 9.1(a), neither Party will allow the other Party’s Customer Information in its or its Recipients’ possession or control to be viewed or used for its or its Recipients’ own competitive or commercial benefit or for any purpose other than to provide a service to or to otherwise benefit the Party owning such Customer Information.

Section 9.6.           Return of Information.  Except with respect to Confidential Information of a Party that is co-mingled with Confidential Information of another Party, at the Disclosing Party’s request, the Receiving Party shall promptly destroy all originals and copies of Confidential Information of the Disclosing Party in the Receiving Party or its Recipients’ possession, custody or control.  During the Services Term and for one year thereafter, TD and its Recipients will retain copies of any of Harrisburg’s Confidential Information that is co-mingled with TD’s own Confidential Information consistent with TD’s normal backup and document retention policies and practices (which shall be not less than reasonable and shall comply with applicable laws and regulations).  TD and its Affiliates and their respective Recipients will continue to protect such Confidential Information of Harrisburg in such a manner and to safeguard it as Confidential Information for as long as TD or any of its Affiliates or their Recipients holds copies of any such information.  Commencing January 1, 2010,  TD may decide to destroy such Confidential Information of Harrisburg in its possession, provided that it shall first notify Harrisburg in writing prior to such destruction and allow Harrisburg an opportunity to request a copy of any such data (at Harrisburg’s expense) within 60 days of receipt of TD’s notice.  TD shall provide any certification reasonably requested by Harrisburg or its auditors regarding the destruction of the Confidential Information of Harrisburg.

ARTICLE X  – MISCELLANEOUS

Section 10.1.           Amendments.  This Agreement shall not be amended except by written agreement of the Parties.

Section 10.2.           Assignment.

20

(a)           During the Term, Harrisburg may not assign this Agreement , in whole or in part (including by operation of law or a de facto assignment by a change of control) (“Assignment”), without the prior written consent of TD in its sole discretion, except that Harrisburg’s Assignment does not require such consent if it is (i) to an Affiliate as part of an internal reorganization or restructuring for tax, administrative or legal purposes; (ii) to the Republic Survivor, or otherwise in connection with any changes of control relating to the Republic Merger; (iii) to a financial buyer or Harrisburg’s successor entity if it engages in a “going private” or similar transaction in which a strategic buyer that is a competitor of TD is not a controlling party; or (iv) to a successor or acquiror that is reputable and financially solvent such that it has more than $1 billion in assets, so long as Harrisburg has provided TD with prior notice of such transaction (to the extent permitted by law).  Nothing herein shall (a) preclude Harrisburg from using Affiliates, contractors and other third parties to perform and comply with its obligations hereunder; (b) prohibit the use of this Agreement or the proceeds hereunder as collateral under general credit obligations of Harrisburg, provided that in the event of foreclosure, the assignment provisions in this Section 10.2(a) shall still apply; or (c) require any action in violation of applicable bankruptcy law.  For clarity, notwithstanding anything in this Agreement to the contrary, in the event of any permitted Assignment by Harrisburg under this Section 10.2(a), the rights and obligations under this Agreement shall continue to apply, in accordance with the express terms hereof, to the legacy business of Harrisburg existing at the time of such Assignment and as it continues to be conducted after the transaction, but shall not extend to the other businesses, bank branches or activities of the successor or acquiror (including the Republic Survivor).

(b)           TD may not effect an Assignment of this Agreement or any of its rights or obligations hereunder, in whole or in part, to any person other than an Affiliate without the prior written consent of Harrisburg, which cannot be unreasonably withheld by Harrisburg and will be deemed consented to if Harrisburg has not refused it within fifteen days of receipt of the request.  

(c)           Any attempted action in violation of Section 10.2(a) or (b) shall be null and void ab initio and of no force or effect.  In the event of a permitted assignment hereunder, this Agreement shall be binding upon and inure to the benefit of the Parties and their successors and permitted assigns.  Each Party is liable hereunder, and it will be considered a breach of this Agreement by a Party, for any act or omission by a Party’s Affiliates, agents, sponsors, licensees or venture partners that would breach this Agreement if committed by a Party.

Section 10.3.           Notices.  All notices must be in writing and shall be by personal service, facsimile (with telephonic confirmation of receipt), registered mail or certified mail (or its equivalent), or overnight courier to the other Party at its respective address or telephone number set forth below.  Notices shall be deemed given (i) upon confirmation of receipt, if delivered by facsimile (ii) on the first business day following the date of dispatch, if delivered by overnight courier, and (iii) on the third business day following the date of mailing, if delivered by registered or certified mail (or its equivalent).

If to TD Bank, N.A. or	If to Commerce Harrisburg or
Commerce Bancorp:	PA Bancorp:

21

Attention: Chief Executive Officer	Gary L. Nalbandian
and General Counsel	Chairman, Chief Executive
TD Bank, N.A.	Officer and President
1701 Route 70 East	Commerce Bank/Harrisburg
Cherry Hill, New Jersey 08034	3801 Paxton Street
Facsimile: 856.874.2423	Harrisburg, Pennsylvania 17111
	Facsimile:  717.412.6182
With a copy to:	With a copy to:
Simpson Thacher & Bartlett LLP	James A. Ulsh
425 Lexington Avenue	Mette, Evans & Woodside
New York, New York 10017	3401 North Front Street
Attention: Lori E. Lesser, Esq. and	P.O. Box 5950
Ellen R. Patterson, Esq.	Harrisburg, Pennsylvania 17110-0950
Facsimile:  212.455.2502	Facsimile:  717.236.1816
	and
	Thomas J. Kelly, Jr.
	Venable LLP
	575 Seventh Street, NW
	Washington, DC 20004
	Facsimile:  202.344.8300

Section 10.4.           Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware and considered as a contract made and to be performed in the State of Delaware.

Section 10.5.           Dispute Resolution.   If any dispute arises under this Agreement, the aggrieved Party shall promptly notify the other Party and the Parties shall first promptly negotiate in good faith to resolve such dispute amicably.  If such negotiations fail to reach an amicable resolution within 30 days after a Party is notified in writing of the other Party’s grievance (or a mutually agreed extension of time), the Parties agree to have the dispute resolved solely by binding arbitration in Wilmington, Delaware before a panel of three arbitrators (unless the Parties agree otherwise) in accordance with the Commercial Arbitration Rules of the American Arbitration Association.  Each Party shall appoint one of the arbitrators, and the third arbitrator will be appointed by the first two arbitrators.  Judgment on the award rendered may be entered in any court having jurisdiction thereof.  Notwithstanding the foregoing, in appropriate circumstances, either Party may seek temporary or preliminary injunctive relief pending the initiation or outcome of the above arbitration in the state or federal courts located in the State of Delaware.

Section 10.6.           Construction.  Headings in this Agreement are for convenience only and shall not be used to interpret its provisions.  This Agreement shall be construed as if it were drafted jointly by the Parties.  The word “including” shall be construed to mean “including without limitation.”

22

Section 10.7.           Severability.  If any term of this Agreement is held to be invalid or unenforceable, such holding will not affect the validity or enforceability of any other term hereto.

Section 10.8.           Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which shall constitute the same instrument.

Section 10.9.           Waiver/Cumulative Rights.  The failure or delay of a Party in exercising any right or remedy hereunder shall not waive any other right or remedy.  The rights and remedies of the Parties hereunder are cumulative and in addition to any other rights and remedies at law or equity.

Section 10.10.          Relationship of the Parties.  The Parties shall not be deemed partners, agents or joint venturers of each other.  Neither Party will have any right or authority to obligate or bind the other Party in any manner.

Section 10.11.          No Third Party Beneficiaries.  Except for express references to Affiliates, no person other than the Parties shall be considered a third-party beneficiary of this Agreement or otherwise entitled to any rights or remedies under this Agreement.

Section 10.12.           Entire Agreement.  This Agreement, including the Schedules hereto (all of which are hereby incorporated herein by this reference), constitutes the entire agreement between the Parties concerning the subject matter hereof and supersedes any prior understandings and agreements with respect thereto.

23

IN WITNESS WHEREOF, the Parties hereto have caused this Transition Agreement to be executed as of the Effective Date.

TD BANK, N.A.	COMMERCE HARRISBURG
(as successor to Commerce Bank N.A.)
By:  ____________________________	By:_________________________________
Name:	Name:
Title:	Title:
COMMERCE BANCORP LLC	PENNSYLVANIA COMMERCE
(as successor to Commerce Bancorp, Inc.)	BANCORP, INC.
By:  ____________________________	By:________________________________
Name:	Name:
Title:	Title:

24

SCHEDULE A-1

CORE SERVICES

AML/BSA SERVICE AND SUPPORT

A.  Applications and Licensed Software

TD shares certain data processing, software licenses and support services with Harrisburg, as has been agreed to between the Parties from time to time.  TD and Harrisburg have agreed to apportion the cost of the following applications (each an “Application” and collectively, “Applications”):

Application	Annual Fee Apportioned to Harrisburg		Annual Maintenance Fee Apportioned to Harrisburg
Monetary Instrument Database	$	731	$	110
SAR Database	$	1,371	$	206
Suspect Analysis Report (70 Report)	$	914	$	137
TIN, PO BOX and DOB Report	$	1,514	$	227
Wire Reports	$	2,734	$	410
EDDO Reports	$	1,402	$	210
Atchley KYC	$	14,893	$	2,234
Atchley CTR	$	12,443	$	1,886
TOTAL	$	36,002	$	5,420

In addition, TD grants Harrisburg a nonexclusive and nontransferable license during the Services Term to use the following Applications developed by TD: Monetary Instrument Database, SAR Database, Suspect Analysis Report (70 Report), TIN, PO BOX and DOB Report, Wire Reports, and EDDO Reports (the “Licensed Software”).  Harrisburg may use the Licensed Software solely for Licensee’s internal data processing operations only.  Harrisburg shall not decompile, reverse engineer, or otherwise attempt to derive or modify the source code of the Licensed Software.

B.  Apportionment Fees

Harrisburg agrees to pay TD the annual fees set forth above as its apportioned contribution for its use of the Applications, the license to the Licensed Software and any maintenance as may be requested by Harrisburg from time to time in its discretion during the Services Term.  Such payments are to be paid directly to TD.  Payment shall be made within 30 days of the date of TD’s invoice.  Harrisburg shall also reimburse TD for Harrisburg’s portion of all applicable sales, use, gross receipts, value added or similar taxes now or hereinafter imposed by federal, state or other taxing authorities as a result of licensing the Licensed Software.

25

Upon delivery of each Application, TD shall invoice Harrisburg for the applicable apportioned fee.  Maintenance fees shall be invoiced annually.

C.  Expenses

Harrisburg shall reimburse TD for the following expenses: (1) expenses in the amount of $150/hour for information technology support services as may be agreed to by and between the Parties from time and time; and (2) out-of-pocket expenses actually and reasonably incurred in connection with TD’s support of the Applications and/or Licensed Software for Harrisburg.  Such expenses shall be paid directly to TD.

26

CASH MANAGEMENT

A.  Services to be provided:

Services Scope. The Cash Management department of TD agrees to provide various cash management product and consulting services to Harrisburg.  These services include:

Product	Detail
Commerce TreasuryDirect	Maintain website, customer service, implementation and consulting services for unique Harrisburg Web address.
ACH Services	All ACH processing through PEP+ files on behalf of Harrisburg and the processing of deletions, reversals and NOCs.  This includes direct transmissions and Commerce TreasuryDirect.  Harrisburg will also utilize PAL/VRS system for ACH control total validation prior to transmissions.  Harrisburg to be granted access to PEP+ site to perform account research.
Positive Pay	Provide daily processing, delivery through Commerce TreasuryDirect and customer service.
Account Reconcilement Services	Extend services to Harrisburg and provide processing and customer service support.
Wire Transfers	Domestic and International Wires through Commerce TreasuryDirect and via the Lotus Notes Database.  Harrisburg to be granted access to PAM, wire archive, to perform account research and run monthly reports.
CD-Rom	Provide CD ROMs of check images and statement copies for individual customers.
Controlled Disbursement	Utilize our Delaware controlled disbursement point for cash management customers.  Reporting through Commerce TreasuryDirect.
Lockbox Services	Lockbox services through ImageRemit, including Web services.
Coin/Currency Services	Provide coin/currency processing through AT Systems.
Cash Management Consulting Services	Marketing materials, legal documents, proposal information, new product development.
Customer Care	8:00 a.m. to 5:30 p.m. Eastern Time each business day.  9:00 a.m. to 3:00 p.m. Eastern Time Saturday.  Toll free access number.
Account Analysis	Provide account analysis system conversion/production support
Implementation Services	Provide customer implementation forms, agreements, and actual customer implementation with 45 day post follow-up.  Harrisburg to be granted access to Lotus Notes Cash Management Implementation database to initiate new account set-ups.

27

B.  TD Service Level Commitment and Responsibilities:

TD Responsibilities.

1. TD agrees to provide the following Service Level Standards:

o Controlled Disbursement Information Reporting – First Presentment  8:30 a.m., Second Presentment 10:30 a.m. - meet deadline 98% of the time.

o Commerce TreasuryDirect® Previous Day Balance Reporting – 7:00 a.m. – meet deadline 100% of the time.

o EDI Reporting – 8:30 a.m. – meet deadline 95% of the time.

o On-Time Delivery of Full Reconcilement Statements – 100% by 3rd Business Day.

o On-time Delivery of Partial Reconcilement Statements – 100% by 3rd Business Day.

o ACH Memo Post – 7:30 a.m. – meet deadline 95% of the time.

o Customer Care – average speed of answer: 40 seconds or less, 95% of the time.

o Wire Transfers Domestic  - 95% of wires completed within 1/2 hour.

2. TD agrees to keep Harrisburg informed of planned and proposed major system changes.

3. TD agrees to provide monthly written reports to Harrisburg that demonstrates TD’s performance under the foregoing Service Level Standards.

4. TD agrees to notify Harrisburg of system outages or other processing difficulties that might affect Harrisburg work.

5. TD agrees to cooperate with any third party authorized to examine Harrisburg for audit or regulatory purposes (including but not limited to the Office of the Comptroller of the Currency) and provide specific information to Harrisburg as requested by such third parties.

C.  Harrisburg Responsibilities:

1. Harrisburg will provide timely, accurate and complete customer information for customer implementations, including all appropriate set-up forms and agreements.

2. Harrisburg will perform appropriate customer due diligence and maintain appropriate documentation within Harrisburg files as required by the USA Patriot Act.  This documentation will be made available to TD in the event that TD is required by a regulatory agency or a judicial proceeding to produce such documentation.

28

D.  Fees and Costs:

Fees.  As consideration for services, Harrisburg shall pay the monthly fee set forth on the Pricing Exhibit attached hereto.

Expenses.  Not applicable, but see Additional Charges.

Additional Charges.  Harrisburg shall pay fees for pass-through expenses, such as third-party processing, forms, supplies, plastics, and other materials.  Harrisburg shall furnish (or, if TD agrees to so furnish, reimburse TD for) any special forms, supplies or courier services applicable to the provision of the services listed herein.

Invoicing. TD will produce a monthly invoice on or around the first of the month and TD  shall process a direct debit to Harrisburg’s account on or around the 15th business day of the same.

29

CASH MANAGEMENT - Pricing Exhibit

Service	Price
A20000 CD-ROM MAINTENANCE	10.00
A20001 CD-ROM ACCOUNTS	3.00
A20002 CD-ROM ITEMS	0.020
B20001 ACH MONTHLY MAINTENANCE (Cash Mgt)	10.00
B20002 ACH FILES PROCESSED (Cash Mgt)	7.00
B20003 ACH ORIGINATED ITEMS (Cash Mgt)	0.06
B20004 ACH REVERS/DELET ITEMS (Cash Mgt)	2.50
B20005 ACH BATCH MAINTENANCE (Cash Mgt)	5.00
B20006 ACH RETURN ITEMS (Cash Mgt)	3.00
B20008 ACH NOTICE OF CHANGE (Cash Mgt)	1.50
B20009 ACH DEBIT BLOCK MAINT (Cash Mgt)	2.50
B20015 CORP PAYMENT NOTIFICATION RECORDS (Cash Mgt)	0.75
Rapid Deposit 1-5 Accts	75.00
Rapid Deposit 6-9 Accts	85.00
Rapid Deposit >10 Accts	95.00
Rapid Deposit Additional Scanner	35.00
C00001 ARP FULL RECON	50.00
C00002 ARP PARTIAL RECON	15.00
C00003 POSITIVE PAY	25.00
C00004 ARP ISSUED ITEM FILES	5.00
C00006 ARP FULL/POS PAY ITEMS	0.03
C00012 ARP PAID ITEM EXTRACT FILES	15.00
C00013 POS PAY SCRUBBED FILE	0.00
C00017 ARP FULL W/POS PAY	50.00
C00019 ARP PARTIAL RECON ITEMS	0.03
C00020 PAID/DEPOSIT ITEM EXT FILE -W	60.00
B10001 COMMERCE TREASURYDIRECT	75.00
WIRE TRANSACTIONS (TOTAL)	2.00
ACH TRANSACTIONS (TOTAL)	0.02
ESCROW MASTERS	10.00
DATA EXCHANGE	30.00
DATA EXCHANGE  ITEMS	0.10
* Wire FAX	50.00
TRAINING/PER HOUR	75.00
Serial Sort - Number of Accounts	30.00
Serial Sort - Number of Items Processed	0.06
**Corp. Payment Notification	10.00
SecurePay Setup Fee	400.00
Government Banking
Public Fund Deposit Report	125.00
Public Fund/Nonprofit Relationship Review Report	375.00
** FEES FOR ADDITIONAL SERVICES MAY BE ADDED AS REQUIRED

30

INTERNATIONAL WIRES

A.  Services to be provided:

 The TD International Department provides various International Wire processing to Harrisburg.  The Parties agree as follows:

Services Scope.  TD shall provide support and processing services to Harrisburg customers in response to wire support requests (for incoming and outgoing international wires) submitted by Harrisburg.

B.  Harrisburg Responsibilities:

Harrisburg submits wire support request(s) from time to time by authorized representatives of both Parties and which reference this portion of Schedule A.

C.  Fees and Costs:

Fee.  As consideration for processing of an International Wire, a $10.00 per transaction fee shall be assessed.

Expenses and Additional Charges.  None.

Invoicing.  Fee charged per transaction at the time service rendered.

31

INFORMATION TECHNOLOGY

A.  Services to be provided:

The Information Technology Department of TD provides various software and services to Harrisburg.  The Parties agree as follows:

1. Services Scope.

(a) Software, including software maintenance updates to third party products (“Software”) and related services are listed on Exhibits A, B and C, attached hereto.  TD and Harrisburg are authorized users of the Software included in such Exhibits.  As such, Harrisburg will receive updates to the software as they are offered to and implemented by TD.

(b) TD technical services, identified as “infrastructure services,” involve hardware management and operational support for TD’s systems, and any applicable communications equipment operating as of July 21, 2006, located at TD’s primary data center at 1700 Horizon Way, Mt. Laurel, NJ (the “Data Center”).

Unless otherwise provided herein, TD shall provide Harrisburg and its authorized users with technical support regarding the use of such services.  Such support shall include: (1) reasonable telephone, facsimile and e-mail “hot-line” support during Harrisburg’s business hours; and (ii) on-site support as is necessary to maintain the Services in accordance with the representations and warranties set forth in this portion of Schedule A.

2.  Consulting Services.  At Harrisburg’s request, which TD may refuse in its reasonable discretion, TD shall provide Harrisburg with consulting services relating to information technology Project Management Services (including development, programming, installation, implementation, projects, and project related support), Moves, Adds, Change Services, and other information technology services that the Parties shall mutually agree upon (“Consulting Services”).  Such Consulting Services are subject to the fees set forth below.

Additional TD Responsibilities.

1. TD agrees to provide 99% availability for all systems, except during scheduled maintenance or scheduled outages.

2. TD agrees to make available any applicable TD systems in the event of an emergency affecting only Harrisburg systems.  TD shall maintain a hot backup site with sufficient capacity to restore core data processing and delivery systems for Harrisburg in the event of a disaster.  If such an event occurs, TD shall not give Harrisburg systems and data lesser priority than granted to TD data and systems.

3. TD agrees to notify Harrisburg of information technology system outages or other processing difficulties that might affect Harrisburg work.

32

4. TD agrees to cooperate with any third party authorized to examine Harrisburg for audit or regulatory purposes and provide specific information to Harrisburg as requested by such third parties.

B.  Harrisburg Responsibilities:

1. Harrisburg will be obligated under all licensee obligations as they may apply and as modified by this agreement.

2. Harrisburg will purchase and maintain, at its own expense, all such data processing hardware and communications equipment which it owns, and which is necessary to facilitate the proper use of and receipt of the data processing services supplied by TD.

3. Harrisburg will comply with TD’s security policies and related procedures.

4. Harrisburg will report to TD any and all technical issues that TD needs to address by contacting the IT Helpdesk at (856) 222-3601.

5. Harrisburg shall submit to TD a Written Service Request for Consulting Services, as needed.  The Consulting Services shall reference this portion of Schedule A and be effective upon written acceptance by authorized representatives of both parties.

C.  Fees and Costs:

Fees.Harrisburg agrees to pay TD a base monthly fee of $50 per million dollars in Harrisburg assets on or about the 1st of each month.  The fee is subject to modification if the products and services provided herein are modified as agreed by the parties.  Harrisburg agrees to pay its share of the Bankway license fee.  Harrisburg receives the benefit of a discounted rate by being included with Bancorp’s (as defined in the Agreement) total assets.  This fee is based on Harrisburg’s asset total as of March 31st of the current year that is included with TD and other banks for the purpose of calculating the annual Bankway license fee based on the Metavante Agreement.  Harrisburg’s asset size as of March 31st of each year should be reported to TD by April 30th of each year.  For purposes of this schedule, the current fee calculation shall be as follows: for Bancorp’s total assets between $40 billion to less than $50 billion, applicable rate will equal $103-[(asset size in millions-40,000) x ..0011].  This shall be due the first day of July every year.  Note: as Bancorp’s assets exceed $50 billion, the above calculation changes in accordance with the Bankway License Agreement.

Compensation.As consideration for Consulting Services, Harrisburg agrees to a time and material cost of $100 per hour.

Expenses and Additional Charges.  Harrisburg shall reimburse TD for all out-of-pocket expenses, such as travel, lodging and the like, which are incurred at the request of and approved by Harrisburg.  All other expenses are the responsibility of TD.  Software licenses listed in Exhibit B are subject to additional allocation payments by Harrisburg: (a) purchased hardware and per unit third-party costs should be directly allocated based on specific Harrisburg units; (b) shared costs, including enterprise-wide software licenses, should be allocated based on proportional usage as negotiated by authorized TD and Harrisburg representatives, to the extent

33

such costs are not covered by this Schedule A or a further agreement between the Parties.  Harrisburg and TD representatives must be able to document the criteria used as part of the negotiated pricing schedule

INFORMATION TECHNOLOGY - Exhibit A

Vendor	Product
Momentum	Momentum
Attachmate	Extra
IBM	Operating System
IBM	Lotus Notes (Mail)
IBM	Lotus Notes (Databases)
Front Range	Heat
Sungard	Disaster Recovery
LURHQ	Intrusion Detection Services
Novell	Enterprise License Products*
Microsoft	Office Suite*
RIM	Blackberry Enterprise Server
EMC	Storage Area Network
HP	Storage Area Network

*           see individual vendor contract for list of products

INFORMATION TECHNOLOGY - Exhibit B

Vendor	Product
Metavante	Bankway
Metavante	AFS*
CheckFree	Pep+
Corrillian	Commerce Online (Voyager)
Carreker	AS/19 and AS/16
Princeton E-Com	Commerce Bill Payer
SI	Yes2003 (Telephone Banking)
Mgnet	Commerce Treasury Direct
Fundtech	Pay Plus
Harland	Encore!
Harland	Flextran
Harland	LaserPro
Magtec	Magtec
Metavane	ISVIEW
Sigtech	Signature Technology
MCOM	Penny Arcade
Bancware	Convergence
Baker Hill	One Point
US Treasury Department	Saving BondPro

*           see individual vendor contract for list of products

34

INFORMATION TECHNOLOGY - Exhibit C

Business As Usual Services

Commerce Bank Network including routers, hubs, Wide Area Network connectivity

Intrusion Detection Services

Commerce Bank Firewalls

Virus Management Services

Patch Management Services

Remote Access Capability and Service

Data Security Functions

IT Procurement Functions

Help Desk Functions (Level 1)

Disaster Recovery Functions

Moves, Adds and Changes (includes only branch openings)

Storage Area Network (EMC and HP)

Xerox Print Services

Offsite Media Storage Services for Disaster Recovery

System Administration Services

Mail Services

35

DEPOSIT LOSS PREVENTION

A.  Services to be provided:

TD shall provide the following fraud prevention, detection and analysis services to Harrisburg:

1. Wire Transfer Review. Analyze all outbound wire transfers exceeding predetermined thresholds to validate the legitimacy of the funds being transferred.

2. System Support.  Ensure all fraud systems are maintained and updated in accordance with vendor specifications.  Monitor system performance and support the initiation and implementation of required enhancements and modifications.  Ensure the balance reduction process is completed timely, when appropriate.

3. Overdraft Account Administration.  Ensure the Process/System utilized to generate weekly management reports is functioning as intended and update/enhance the system/process as required.  Generate daily management reports timely.

4. Debit Card Fraud System Support.  Monitor system performance and support the initiation and implementation of required enhancements and modifications.  Design and implement fraud strategies based upon scoring as well as mutually agreed upon operating procedures.

Additional TD Responsibilities.

1. TD will ensure that balance reductions associated with the deposit/check fraud and warning processes are applied immediately upon completion of the prerequisite processes.

2. Wire transfers initiated through Lotus Notes will be reviewed and approved within 30 minutes of receipt in the loss prevention review database.  Harrisburg will be contacted immediately when warranted.

3. TD agrees to evaluate systems/process enhancement requests as appropriate and provide Harrisburg with an appropriate response and implementation plan if applicable.

4. The overdraft report will be generated and distributed each day by TD unless an unavoidable delay is communicated to Harrisburg.

5. TD agrees to evaluate Visa debit card fraud system/process/strategy enhancement requests as appropriate and provide Harrisburg with an appropriate response and implementation plan if applicable.

36

B.  Harrisburg Responsibilities:

Harrisburg will provide timely, accurate and complete response for decisions on services required to meet established deadlines.

C.  Fees and Costs:

Fees.  Harrisburg agrees to pay the fees set forth in the attached Pricing Exhibit.

Expenses and Additional Charges. Harrisburg shall pay fees for pass-through expenses, such as special forms, courier services, special requests, and other charges incurred by TD for goods and services obtained by TD on Harrisburg’s behalf.  These shall be billed to Harrisburg at cost.

Invoicing.  TD will produce a monthly invoice on or around the 1st of each month and process a direct debit to Harrisburg’s account on or around the 25th of the same month.

37

DEPOSIT LOSS PREVENTION - Pricing Exhibit

Service*	Monthly Hours	Unit Cost	Monthly Cost
Wire Transfer Review	5
Miscellaneous Fraud Detection Functions	2
Daily Overdraft Report Generation	5
Total	12	$25.00	$300

Pass Through Costs
Processing
Early Warning Deposit Check Batch	as billed
Early Warning Deposit Check Real Time	as billed
Visa Checkcard/Falcon	as billed
Maintenance**
AFS Fraud	$93/month
AFS Teller Vision	$162/month
System Administration***
(including but not limited to: Deposit Fraud System, Early Warning, ATM Deposit Float, Wire Transfer Review, Overdraft Reporting, Visa Debit Card Fraud System)	N/C

* Service hours and costs will be reviewed and adjusted (as applicable); interim adjustments will be required if new services are implemented or Harrisburg requests adjustments to parameters and TD agrees, which result in significant volume increase.

** Maintenance costs will be allocated at a percentage equivalent to the percentage of Harrisburg’s branches (currently [6.5]%).

***System Administration will continue to be provided at no cost unless Harrisburg requests enhancements/modifications unique to Harrisburg.  If applicable, a statement of work and cost estimate will be provided to Harrisburg prior to project initiation.

38

CARD PRODUCTION

A.  Services to be provided:

TD shall provide card expiration re-issue, production, support and distribution services to Harrisburg for all ATM and debit card account holders of Harrisburg.

TD shall rely on information provided by Harrisburg and shall have no obligation or responsibility to audit, check or verify the items provided to: (a) verify account names, threshold, limits, addresses, fees and charges imposed by Harrisburg on its customers and other similar matters on all debit/credit cards produced to TD; (b) place stop payments and holds on accounts; and (c) determine the accuracy, completeness or authenticity of account holders, account information or account statuses.

B.  Harrisburg Responsibilities:

1. Harrisburg shall deliver to TD all items in a condition consistent with generally accepted requirements of a high-speed image processing operation.

2. Harrisburg shall assume full responsibility for the accuracy, completeness, and authenticity of all account holders and account information furnished to TD.

3. Harrisburg shall provide to TD all data, information, management decision(s), regulatory interpretations and policy guidelines as TD reasonably requires.

4. Harrisburg shall provide to TD all contact lists and escalation procedures to ensure that production problems and other issues requiring attention are addressed on a timely basis by the appropriate individual(s).

C.  Fees and Costs:

           Fees.  Harrisburg shall pay a transaction fee of $5.81 per card issued and mailed via express courier, and $1.34 per card issued and mailed via regular postal mail.

           Expenses and Additional Charges.  None.

  Invoicing. TD will produce a quarterly invoice payable by Harrisburg within 30 days of presentment.

39

CURRENCY RECONCILEMENT

A.  Services to be provided:

TD shall provide currency reconciliation recap services for Harrisburg’s branch network.

Teller Change Calls Process.  Change calls will not appear on Store Recap and will be posted to a “Teller Difference in Process” GL.  Harrisburg will have 5 days to clear any teller changes from the GL, beyond that if they are unrecoverable, they will require Harrisburg to move the amounts to the “Teller Differences” GL.  All changes under $5.00 will automatically post to Harrisburg’s “Other Differences” GL.  After submission of Harrisburg recap, TD will post a Teller Change Report for review and action by Harrisburg for Teller Differences in Process postings.

Additional TD Responsibilities.

1. TD shall assist in all change research requests.  The requests will be answered in the order in which they were received.  Prior day changes must be requested through voicemail or email sent to TD following the published Store process.

2. TD shall provide the teller cash recap report via email by 11:00 am daily, provided that store recaps were submitted by Harrisburg by the prior day deadline as published in the Store process.

3. TD shall notify Harrisburg at agreed upon timing when a store recap has not been submitted.

4. TD shall assist with research requests for store changes.

B.  Harrisburg Responsibilities:

1. Harrisburg shall review and communicate actions from teller change reports and teller cash reports as provided by process.

2. Harrisburg shall input and forward to TD all branches’ currency teller recaps before 7:30 p.m. daily for the current settlement date via the store cash recap.  If, for any reason, this deadline cannot be met, notification to TD must be made via voicemail or email to TD following the published Store process.

3. Harrisburg shall communicate the following content for currency changes: branch name or number, the date the change was received, the change call amounts (=/-), the teller number, and if the adjustments relate to the cash-ins or cash-outs.

4. Harrisburg shall assume full responsibility for the accuracy, completeness, and authenticity of information furnished to TD.

5. Harrisburg shall provide to TD all data, information, management decision(s), regulatory interpretations and policy guidelines as TD reasonably requires.

40

C.  Fees and Costs:

             Fees.  None.

Expenses and Additional Charges.  Harrisburg shall pay fees for pass-through expenses, such as forms, supplies, plastics, and other materials.  Harrisburg shall furnish (or, if TD agrees to so furnish, reimburse TD for) any special forms, supplies or courier services applicable to the provision of the services listed herein.

41

CENTRALIZED CUSTOMER SERVICE

A.  Services to be provided:

TD shall provide customer call center operations for Harrisburg at Harrisburg’s facility located at 3801 Paxton St., Harrisburg, Pennsylvania (PAXTON).  TD shall provide the following call center and directory services to Harrisburg on a 24/7 basis:

1. Perform call center strategies and activities for Harrisburg to the extent allowed for TD’s own processing, including but not limited to:

· Answer calls for Harrisburg’s published customer service number

· Interbank and Intrabank telephone transfers

· Stop Payments

· Research Requests

· Memo Posting and grant provisional account credit

· Account Information Inquiry and Update

· Fee Reversals

· Account Freeze/Hot Card

· Order Checks and ATM Cards

· COL PIN Reset

· Call requiring Spanish translation

· Fraud Unit Call and Reporting

· Temporary/Limit Increase/authorization overrides

· Customer Authentication

2. Provide the following change management services:

· Inform Harrisburg of technology changes for PAXTON call center utilizing TD’s change management process, including Harrisburg participation in TD’s change control meetings.  TD will notify Harrisburg in advance of any technology changes that will impact Harrisburg.

· Notice to vendors for shared PAXTON call center support shall be handled by TD for vendors providing PAXTON infrastructure, and shall supersede Harrisburg requests for the same.

· Resolve conflicts between Harrisburg and TD directions to mutual vendors for conflicting system changes through the change management and escalation process, including parties’ risk/impact assessment.

· Minimize impact to Harrisburg, to the extent possible, when making changes to the PAXTON call center environment.

3. Provide communication and issue escalation services.  All

42

PAXTON call center technology issues shall be reported to TD.  Harrisburg will not be specifically notified of PAXTON call center issues unless there is a reasonable likelihood that such issues will affect Harrisburg.  In the event that a technology issue does affect Harrisburg, TD will be responsible for problem determination and issue resolution.  TD will communicate to Harrisburg the results of findings until the issue is closed, frequency to be agreed upon by both parties.

4. Provide Harrisburg with standard service level reports as requested and published in Wow! Metrics and Risk Management reporting for operational measurement.  Custom reports requested may be handled as billable services under this agreement.

TD will extend the same standards of service and performance monitoring to Harrisburg as it applies to its own processing.

B.  Harrisburg Responsibilities:

1. Provide TD with account inquiry and update access to Harrisburg accounts as needed to support service and support, and call transfer capability into Harrisburg telephone banking system (IVR).

2. Provide to TD such data and information that may affect maintenance of customer call center operations service continuity.

3. Lease to TD sufficient space at PAXTON to accommodate approximately 175 agent seats and appropriate TD support staff (4).

4. Provide TD with training space and 24/7 access to facilities to appropriately support TD call center.

5. Ensure TD with uninterrupted building access (24/7), workspace, configuration space for computer and telephony equipment, and a secured storage.

6. Ensure TD is provided with access to data center, wiring closets, telecom demarcation points, server racks, patch panels, power sources, data communications equipment, telecommunications equipment, servers, and workstations.

7. Provide TD with remote/local support administrative access to computing and telecommunications equipment applicable to the provision of services, so TD may modify hardware or software configuration as necessary.

8. Provide TD with network port capacity to accommodate computer and telephony equipment required for approximately 175 all center agent seats and 4 support staff.

9. Change management obligations:

· Notify TD in advance for Harrisburg technology changes outside the PAXTON call center that may/will impact the call center environment.  Such changes shall be implemented following TD’s change management and escalation process.

43

· Restrict and enforce Harrisburg controls of its staff to TD infrastructure located in PAXTON.

· Refer to and notify TD of all required vendor communications related to the PAXTON infrastructure.

· Resolve change request conflicts between TD and mutual support vendors through the change management and escalation process, to include a risk/impact assessment.

10. Provide communication and issue escalation services.  In the event that a technology issue at PAXTON unrelated to the call center infrastructure affects the PAXTON call center, Harrisburg shall be responsible for problem determination and issue resolution, and shall communicate to TD management the results findings until the issue is closed (frequency to be agreed upon by both parties).

C.  Fee and Costs:

Fees. Harrisburg shall pay $1.75 per customer call handled by TD.

Expenses and Additional Charges.  TD will reimburse Harrisburg for direct expenses incurred in fingerprinting and security badge administration for PAXTON TD employees.  Fees for pass-through expenses, such as special forms, courier services, special requests, and other charges incurred by TD for goods and services obtained by TD on Harrisburg’s behalf shall be billed to Harrisburg at cost.

44

COMPLIMENTARY STORE SERVICES  

A.  Services to be provided:

TD shall provide Harrisburg with Commerce Online services, including Internet banking administration services, bill payment administration services, and related support services.

TD shall rely on information provided by Harrisburg and shall have no obligation or responsibility to audit, check or verify the items provided, including without limitation to: (a) verify account names, threshold, limits, addresses, fees and charges imposed by Harrisburg on its customers and other similar matters; (b) place stop payments and holds on accounts; and (c) determine the accuracy, completeness or authenticity of account holders, account information or account statuses.

B.  Harrisburg Responsibilities:

1. Harrisburg shall assume full responsibility for the accuracy, completeness, and authenticity of all account holders and account information furnished to TD.

2. Harrisburg shall provide to TD all data, information, management decision(s), regulatory interpretations and policy guidelines as TD reasonably requires.

3. Harrisburg shall provide to TD all contact lists and escalation procedures to ensure that production problems and other issues requiring attention are addressed on a timely basis by the appropriate individual(s).

C.  Fees and Costs:

             Fees.  None.

Expenses and Additional Charges.  Harrisburg shall pay fees for pass-through expenses (as set forth in the Pricing Exhibit attached hereto), such as third party processing and materials including but not limited to forms, supplies, and plastics.  Harrisburg shall furnish (or, if TD agrees to so furnish, reimburse TD for) any special forms, supplies or courier services applicable to the provision of the services listed herein.

45

COMPLIMENTARY STORE SERVICES - Pricing Exhibit

Service	Volume		Price	Total
Annual Charges – License Fees
Yearly Corillian Harrisburg Site Maintenance	1		$25,000
Yearly Corillian User Maintenance	37,000		$1.00
Yearly Intuit Gold Support Fee (Quicken)	1		$10,000
Monthly Charges - License Fees
Corillian Additional Users			$1.90
Princeton eCom Bill Pay			$_**____
Current Total Due
* *Based on the current contract with PrincetonEcom, the current price based on volume tiering is as follows:
Paper Payments		$       0.37
Electronic Payments		$       0.08
Current % of payments sent electronically		76.00%
Current % of payments sent by paper check		24.00%

46

TRANSACTION SERVICES

A.  Services to be provided:

TD shall provide the basic item processing services listed in attached Exhibit A, including but not limited to Inclearing, POD, Finesort, Mail Rendering, Returns and Adjustments (“Item Processing”), and shall fulfill the performance standards set forth in Exhibit B.  TD shall provide sort pattern changes and application testing services for Harrisburg’s function migration.  Should Harrisburg desire conversion testing, support and training in connection with such transaction services, TD shall perform all necessary work as documented in written statements of work as part of the TD Project Methodology.

The service levels set forth below are intended to establish TD’s performance of the Item Processing prerequisites.

a.	Service levels shall include nine (7) critical service standard categories:
i.	Files Extracts – Inclearing and POD Items
ii.	Statement Rendering – Image and Non-image
iii.	Transit Cash Letter Processing
iv.	Image Item Storage and Archive
v.	Print Statements and Notices
vi.	Exceptions Item Pull & Statement Cycle Finesort
vii.	Controlled Disbursement
b.	Service level prerequisites shall comprise five (4) levels:
i.	Item/Work Time Delivery
ii.	Incoming Work Quality
iii.	Outgoing Return Item Payment Decisions
iv.	Incoming Return Special Instructions

B.  Harrisburg Responsibilities:

1. Harrisburg shall deliver to TD all items in a condition consistent with the generally accepted requirements of a high-speed image processing operation.

2. Harrisburg shall assume full responsibility for the accuracy, completeness, and authenticity of all items furnished to TD.  TD will rely thereon and shall have no obligation or responsibility to audit or check such items to (a) verify dates, signatures, amounts, authorizations, endorsements, payment notices, collection times, fees and charges imposed by Harrisburg on its customers and other similar matters on all items delivered to TD; (b) place stop payments and holds on accounts; and (c) determine the accuracy of all magnetic ink inscribed or appearing on items, regardless of by whom or when inscribed.

3. Harrisburg shall provide Inclearing, Un-encoded and Pre-encoded over-the-counter items to TD each business day (Monday through Friday) as follows:

47

· Inclearing Items - 100% by 9:00 a.m.

· SDS Items - 100% by 8:00 a.m.

4. Harrisburg shall provide to TD such data and information, management decision(s), regulatory interpretations and policy guidelines as TD reasonably requires.

5. Harrisburg shall provide to TD contact lists and escalation procedures to ensure that production problems and other issues requiring attention are addressed on a timely basis by the appropriate individual(s).

C.  Fees and Costs:

Basic Services Fee:

· Monthly Fees.  Harrisburg shall pay a minimum monthly fee of $79,003, as set forth on Exhibit A (Basic Service Fee Schedule at the volumes and amounts outlined, less any monthly credits or adjustments).  

· Fee Basis. A monthly service fee shall be calculated using average item volumes and unit cost pricing per job function.  The fee shall be derived by multiplying the item volumes provided by TD, and agreed upon by Harrisburg, and published in the Basic Service Fee Schedule, by the Harrisburg unit cost factor per function.

Conversion Fee.  Harrisburg will pay all software technical support, application development, file extract creation and associated on-site travel related expenses (if required) to support the function migration.  Where appropriate, vendor invoices will be billed directly to Harrisburg.

Expenses and Additional Charges.  Fees for pass-through expenses, such as correspondent bank charges, postage, zip sort, branch hub courier, mailing supplies, forms and paper, and other charges incurred by TD for goods or services obtained by TD on Harrisburg’s behalf shall be billed to Harrisburg at cost, plus any TD service fees if applicable.

Travel Expenses. Harrisburg shall reimburse any consultants that the Parties mutually agree to employ for all out-of-pocket expenses such as travel, lodging, and related expenses, which shall be incurred at the request of and approved by the Parties.  All other expenses are the responsibility of the consultant.

Invoicing.TD will produce a monthly invoice, which is payable by Harrisburg within 30 days of presentment.

Fee Change Basis.  TD shall apply a 20% volume growth allowance per job function.  Harrisburg will adjust the unit cost and minimum monthly fee pricing per function when the allowable growth factor is exceeded.  The actual volume growth and the resulting staffing and capital impact will determine the actual adjustment.

48

TRANSACTION SERVICES

Exhibit A - Basic Services Fee Schedule

Item Processing Services

Function	Current Volume as of 3/31/06		Unit Cost ($)
Inclearing		732,542		0.021
Inclearing Rejects		14,693		0
POD		770,808		0.035
POD Rejects		10,993		0
Data Entry/Recon		654,572		0.024
Transit Dispatch		763,219		0.003
Finesort		91,605		0.022
Exceptions		45,312		0.022
Inbound Returns		2,144		0.109
Outbound Returns		11,020		0.109
Unposted		6,006		0.109
DDA Statements – Auto		96,452		0.068
DDA Statements- Checks		6,468		0.068
Savings Others		30,239		0.068

Other Expense	TD Expense	Harrisburg Expense
Correspondent Bank Charges		X
Postage		X – pass-through
Zip Sort		X – pass-through
Federal Reserve Courier
Branch Hub Courier**		X
Weekend/Westbound Courier**	X	X – direct bill credit **
Mailing Supplies		X
Forms and Paper		X

**As agreed upon between Harrisburg and TD, Branch Hub Courier would be Harrisburg’s responsibility, while Westbound Courier would remain a TD charge.  Harrisburg is directly billed for Westbound Courier services provided by AEX.  A credit adjustment to the monthly transaction services bill in the amount of $8,442 per month shall be processed until amended by mutual agreement of the parties, or upon elimination of the service requirement, i.e. Harrisburg remote capture site.

49

TRANSACTION SERVICES

Exhibit B - Transaction Services Performance Standards

The measurements and service levels set forth below are intended to ensure TD’s performance of the services and Harrisburg’s performance of service level prerequisites.  TD performance standards are measured monthly except as where noted.

1.  File Extract

A. Harrisburg Prerequisite

Inclearing Items from the Federal Reserve Bank and other financial institutions are delivered to TD, according to the schedule below.  Over-the-Counter Items, Transit Items and Pre-encoded Items are presented in a condition consistent with the generally accepted requirements of a high-speed image processing operation according to the predetermined delivery schedule.

Pre-encoded Items are presented in the standard format of not greater than 250-300 items per batch, a listing for each bundle, physical item order matches list tape for each bundle and Credits are pre-encoded.

Inclearing, Un-encoded and Pre-encoded Over-the-Counter (OTC) items will be delivered to TD each Business Day (Monday through Friday) as follows: Inclearing Items - 100% by 09:00 and SDS -100% by 08:00.

B.  TD Service Level Standard

Complete transmission of Item Posting Files or delivery of CD-ROM according to the following schedule eighty-nine (89) percent of each month’s Business Days.

Inclearing - - 18:00 Monday thru Friday, POD Items File –  12:00 a.m. Monday thru Friday.

2. Statement Rendering

A. Harrisburg Prerequisite

For TD IT Services, delivery of statement print by 8:00 a.m. on the first Business Day after the Statement Cycle Date. TD to forward the statement cycle file by 05:00 of the first Business Day after the Statement Cycle Date for all statement cycles.  The delivery of finesorted items in account number order by 17:00 on the Business Day following the Statement Cycle Date for all statement cycles.  Harrisburg will deliver marketing inserts to TD five (5) Business Days prior to insertion and must be of a size, format and quality required by automated statement rendition equipment and acceptable to Harrisburg and TD.

B.  TD Service Level Standard

50

Daily Image Statement Cycles: 100% of non-crippled paper, including mutilated statements requiring reprint, will be rendered and made available for pickup by Harrisburg’s zip-sort vendor, 75% on Business Day 1 and 25% on Business Day 2, after the printed statements are received.

Daily Non-Image Statement Cycles: 100% of finesorted checks, non-crippled paper, including mutilated statements requiring reprint, will be rendered and made available for pickup by Harrisburg’s zip-sort vendor, 75% on Business Day 2 and 25% on Business Day 3, after the printed statements are received.

EOM Statement Cycle: 100% of month end non-crippled paper, including mutilated statements requiring reprint, will be rendered and made available for pickup by Harrisburg’s zip-sort vendor, 20% each Business Day for a total of five (5) Business Days after the Statement Cycle Date.

TD will print statements prior to 7:00 on the first Business Day following the Statement Cycle Date.  The print quality must be consistent with that required by automated ZIP code sorting equipment and acceptable to Harrisburg, TD and TD’s zip-sort vendor.

Meet Service Level Standard ninety-five (95) percent of each month’s Business Days.

3. Transit Cash Letter Processing

A. Harrisburg Prerequisite

Over-the-Counter Un-encoded and Pre-encoded Items are presented in a condition consistent with the generally accepted requirements of a high-speed item processing operation according to the delivery schedule.  Items are presented in the format of credit(s) before the associated debit(s), not greater than 250-300 Items per batch, a tape listing for each bundle and the physical Item order matches list tape for each bundle.

Over-the-Counter Items and Pre-encoded Items are delivered twice daily to TD on the following schedule: Monday to Friday, 60% by 19:30, 100% by 21:30.  The MICR reject rate will not exceed 1%.  If reject rate exceeds 1%, normal SLA’s will not be applicable.

B. TD Service Level Standard

On-time release by TD of Transit Cash Letters to meet deadlines established by the Federal Reserve Bank of Philadelphia, Liberty Clearing House or other upstream correspondents utilized by Harrisburg with no more than fifteen (15) cash letter exceptions per one hundred thousand (100,000) Transit Items processed, said exception rate to be adjusted over time. Outgoing cash letters will be labeled according to reasonable Harrisburg requirements and instructions, said requirements subject to change.

Meet Service Level Standard ninety-five (95) percent of each month’s Business Days.

C. Measurement

51

TD will provide to Harrisburg monthly Transit Item volume and dollar total, reporting of Federal Reserve Bank and upstream correspondent cash letter deadline misses, incoming work time deliveries and volume percentages per run extracted from the Receive Sentry application.

Harrisburg will present Cash letter exceptions to TD for review, validation and tracking. Transit Cash Letter exceptions refer only to free or missing Item conditions created by TD, encoding errors committed by TD and packaging and labeling errors reported.

4. Image Item Storage and Archive

A. Harrisburg Prerequisite

Inclearing Items from the Federal Reserve Bank, Clearing House and other financial institutions and the Over-the-Counter Items, Transit Items and Pre-encoded Items will be presented in a condition consistent with the generally accepted requirements and according to schedule and percentages listed in section 2 of the Customer Deliverables.

B. TD Service Level Standard

Inclearing and Over-the-Counter check images will be available to Harrisburg users each day, Monday through Saturday, between the hours of 07:00 and 20:00.  If the image archive is unavailable as a result of a failure that is within TD’s scope of control, TD will retrieve Item images from the archive, or retrieve available original items.

Meet Service Level Standard ninety-five (95) percent of each month’s Business Days.

C. Measurement

TD daily status reports.  Harrisburg reported instances where archived image Items access was late or unavailable.

5. Print Statements and Notices

A. Harrisburg Prerequisite

Errors reported to TD as they are reported to Harrisburg by their end-users and customers.

B. TD Service Level Standard

TD will laser print Harrisburg statements in simplex mode as is mutually agreed to by Harrisburg and TD.  Conventional statement print quality must be legible and readable, of a quality that is consistent with that required by automated ZIP code sorting equipment and acceptable to Harrisburg zip-sort vendor and reasonably acceptable to Harrisburg’s end-user.

Meet Service Level Standard ninety-five (95) percent of each month’s Business Days.

C. Measurement

52

Harrisburg maintained log of end-Harrisburg complaints, a copy of which will be provided to TD for review, validation and tracking.

6. Exception Item Pull and Statement Cycle Finesort

A. Harrisburg Prerequisite

Transmission of Exception Item pull file to TD completed prior to 04:00 a.m. on Tuesday or day following a holiday, 02:30 a.m. on Wednesday through Saturday.  Transmission of the Harrisburg Statement Cycle Finesort completed prior to 4:00 am on the designated cycle dates.

B. TD Service Level Standard

Harrisburg Exception items will be delivered to MTL Returns unit by 06:30 a.m. on Monday and Wednesday through Friday Business Days and 08:00 on Tuesday Business Days. Statement Cycle Finesort will be completed and delivered to the MTL Statement Rendering unit by 12:00 p.m. on the Business Day following the statement cycle cut.

Meet Service Level Standard ninety-five (95) percent of each month’s Business Days.

C. Measurement

TD daily status report.  TD reported instances where file transmissions are not completed prior to the established time.  Harrisburg internal reported instances where the exception items and the statement finesort are not available prior to the established time.

7. Controlled Disbursement

A. Harrisburg Prerequisite

Inclearing Items from the Federal Reserve Bank are delivered to TD in Mt. Laurel by 9:00 a.m.  Incoming SDS items from Mellon Bank, M&T Bank, Citizens Bank, Bank of America, Wachovia Bank and PNC Bank are delivered to TD by 8:00 a.m. Monday to Friday.  Harrisburg is responsible for notifying TD of any additional accounts to be added to reporting mechanism or those accounts to be deleted.  Reporting modifications will take effect 24 hours from time of notification.

B. TD Service Level Standard

TD will capture the above presentment and provide by 11:00 a.m. daily a summary report of all activity on Harrisburg specified Corporate accounts.  Report will identify total volume and dollars for each account, and consist of all checks captured/balanced up through the 11:00 a.m. deadline.  Report will be dispatched to a designated Harrisburg representative via email and/or fax.

C. Measurement

53

TD daily status reports listing reported instances where the report was not delivered prior to the established time.

8. Incoming & Outgoing Returns

A. Harrisburg Prerequisite

Harrisburg will complete all Outgoing NSF/UCF payment decisions on D3000 prior to 12 p.m. daily.  All Unposted payment decisions must be phoned or faxed to TD Returns unit prior to 12 p.m. daily.  Large Dollar verification payment decision, requested by TD, must be completed prior to 2 p.m.  Harrisburg must provide any Incoming (RDI) special instruction requests to TD in a timely matter via email (re: special handling or mailing address).

B. TD Service Level Standard

TD will release Returns Cash Letters to IP to meet deadlines established by the Federal Reserve Bank of Philadelphia.  All Inclearing Return Items from the Federal Reserve Bank will be processed the same day received.  TD will forward all Overdrawn Return Deposited Items the following morning to Harrisburg’s Security unit via the established internal mail delivery between the two sites.  The delivery will leave MTL at 6:30 a.m. and arrive at the Harrisburg Operations Center by 9:30 a.m.

C. Measurement

TD daily management reports.  TD reported instances where file transmissions are not completed prior to the established time.

54

NJ Services – Additional Service Activities

Network

1. McGuire Forecasting to service performance modeling & market value calculations

2. Encore new account forms

AML/BSA

3. Crystal reports for Atchley Suspects, Wires, CIP information alerts

Cash Management

4. Secure ID tokens

5. Remote Deposit

6. Merchant Credit Cards Heartland

7. Corporate payment notification

Deposit Loss & Fraud

8. Formatting and delivery of visa reports

Technology

9.	A2i support and hosting
10.	Lexis Nexis file transmission for day 2 processing
11.	Collections file transmission – to CARMS Pro application
12.	ATM staging and machine certification
13.	PHEAA BAI file
14.	Karns BAI file
15.	FTP transmissions
16.	Data Exchange
17.	RDI special handling
18.	Credit Bureau file transmission (monthly)
19.	AA statement file upload to Kirchman

Transaction Services

20.	Foreign check special handling
21.	Administration of ORA database

Other

22. Referrals to capital market, insurance, leasing

55

SCHEDULE A-2

TAIL SERVICES

Historical information for AFS, MCIS, subpoena processing and TREEV

56

SCHEDULE B

MILESTONE EVENTS

1. The Parties complete and publish (i) a draft detailed integrated conversion and transition plan, project charters to include core, non-core applications, services, and infrastructure, by November 28, 2008, and (ii) the final detailed integrated conversion and transition plan to include ancillary applications by December 15, 2008.

2. TD provides full file data cuts, effective after nightly processing January 23, 2009; delivery no later than January 26, 2009.

3. Harrisburg completes the network infrastructure build-out by January 31, 2009.

4. TD provides all signature cards and snippets by February 23, 2009.

5. Harrisburg completes core and noncore data verification conversion by February 23, 2009.

6. TD delivers all deposit, check and statement images from July 1, 2008 to Current date by March 13, 2009.

7. TD provides full file data cut, effective date as of April 10, 2009 after nightly processing; delivery no later than April 13, 2009.

8. TD provides full image file containing eighteen (18) months of all check, deposit and statement images by April 10, 2009.

9.	TD provides full file data cut, effective date as of May 15, 2009 after nightly processing; delivery immediately following batch processing by an agreed AM delivery time on May 16, 2009.
10.	Harrisburg completes mock conversion readiness sign-off for live conversion by May 20, 2009.
11.	TD provides full file data cut, effective as of June 12, 2009 after nightly processing; delivery immediately following batch processing by an agreed AM delivery time June 13, 2009.
12.	Harrisburg implements Go-Live Transition on June 13, 2009.
13.	Harrisburg completes all Core Services (other than Tail Services) by July 15, 2009.
14.	The Parties complete all Tail Services by August 15, 2009, including TD provides seven years of all images including but not limited to check, deposit, statement images (the remaining 5.5 years, related to Milestone 8) and reports.

57

 SCHEDULE C

PRIOR MARKS

Title	Reg./App. No.	Current Owner
THERE’S NO PLACE LIKE COMMERCE!	3,283,043	Commerce Bancorp, LLC
MONEY ROCKS!	3,262,905	Commerce Bancorp, LLC
C AND DESIGN	3,068,258	Commerce Bancorp, LLC
AMERICA’S MOST CONVENIENT GIFT	3,133,194	Commerce Bancorp, LLC
MAKING MONEY MAKE SENSE	2,931,623	Commerce Bancorp, LLC
WOW! THE CUSTOMER	2,961,932	Commerce Bancorp, LLC
AMERICA’S #1 BANK	3,235,767	Commerce Bancorp, LLC
WOW ANSWER GUIDE AND DESIGN	2,572,852	Commerce Bancorp, LLC
WOW ANSWER GUIDE	2,570,816	Commerce Bancorp, LLC
C COMMERCE BANK AND DESIGN	3,214,418	Commerce Bancorp, LLC
CAMP BUSINESS AND DESIGN	3,009,960	Commerce Bancorp, LLC
MOST CONVENIENT BANK	3,204,243	Commerce Bancorp, LLC
C AND DESIGN	2,506,199	Commerce Bancorp, LLC
COMMERCE C COMMERCIAL LEASING	2,795,525	Commerce Bancorp, LLC
COMMERCE TRADEFINANCEDIRECT	3,177,453	Commerce Bancorp, LLC
COMMERCE UNIVERSITY	3,115,621	Commerce Bancorp, LLC
PENNY ARCADE	3,102,701	Commerce Bancorp, LLC
RED FRIDAY	3,104,346	Commerce Bancorp, LLC
CAMP BUSINESS	2,914,229	Commerce Bancorp, LLC
AMERICA’S MOST CONVENIENT INVESTMENTS	3,012,501	Commerce Bancorp, LLC
CAMP BUSINESS: THE LEARNING JOURNEY	2,911,543	Commerce Bancorp, LLC
COMMERCE U C UNIVERSITY AND DESIGN	2,996,378	Commerce Bancorp, LLC
THE LEARNING JOURNEY	2,862,324	Commerce Bancorp, LLC
AMERICA’S MOST CONVENIENT INSURANCE	2,922,054	Commerce Bancorp, LLC

58

Title	Reg./App.No.	Current Owner
AMERICA’S MOST CONVENIENT BANK	2,890,738	Commerce Bancorp, LLC
COMMERCEWOW!ZONE	2,671,666	Commerce Bancorp, LLC
COMMERCEWOW! ZONE AND DESIGN	2,680,303	Commerce Bancorp, LLC
COMMERCE TREASURYDIRECT	2,839,401	Commerce Bancorp, LLC
COMMERCE CHECKVIEW	2,831,145	Commerce Bancorp, LLC
COMMERCE	2,084,001	Commerce Bancorp, LLC
AMERICA’S MOST CONVENIENT BANK	2,462,917	Commerce Bancorp, LLC
YESBANK.COM	2,917,576	Commerce Bancorp, LLC
THE YES BANK	2,331,011	Commerce Bancorp, LLC
THE COMMERCE ADVANTAGE	2,708,238	Commerce Bancorp, LLC
1-800-YES-2000	2,533,220	Commerce Bancorp, LLC
COMMERCE CAPITAL MARKETS	2,664,917	Commerce Bancorp, LLC
AMERICA’S MOST CONVENIENT BANK	2,260,060	Commerce Bancorp, LLC
CAMP-NJ	2,555,571	Commerce Capital Markets, Inc.
MONEY ROCKS! AND DESIGN	78/733,688	Commerce Bancorp, LLC
YOU’VE EARNED IT!	78/710,749	Commerce Bancorp, LLC
AMERICA’S MOST CONVENIENT GIFT	78/532,315	Commerce Bancorp, LLC
AMERICA’S COMMERCE BANK	78/764,450	Commerce Bancorp, LLC
ESCROWDIRECT	78/545,599	Commerce Bancorp, LLC
COMMERCE REWARDS	78/710,746	Commerce Bancorp, LLC
COMMERCE C CAPITAL MARKETS AND DESIGN	78/807,821	Commerce Bancorp, LLC
COMMERCE BANC INSURANCE SERVICES	78/962,454	Commerce Bancorp, LLC
COMMERCE C BANC INSURANCE SERVICES AND DESIGN	78/920,813	Commerce Bancorp, LLC
COMMERCE C WEALTH MANAGEMENT AND DESIGN	77/209,408	Commerce Bancorp, LLC

59

Title	Reg./App.No.	Current Owner
COMMERCE WEALTH MANAGEMENT	77/190,893	Commerce Bancorp, LLC
COMMERCE BANC INSURANCE AGENCY	77/007,716	Commerce Bancorp, LLC
AMERICA’S BEST BANK	77/026,760	Commerce Bancorp, LLC
COMMERCE INSURANCE SERVICES	76/519,871	Commerce Bancorp, LLC
COMMERCE RAPIDDEPOSIT	76/595,029	Commerce Bancorp, LLC
WOW	76/536,100	Commerce Bancorp, LLC
PENNY ARCADE	76/977,915	Commerce Bancorp, LLC
WOW!	76/519,868	Commerce Bancorp, LLC

Title	Reg./App. No.	Current Owner	State of Reg. or App.
C	199806232	Commerce Bancorp, LLC	Delaware
C COMMERCE BANK	(200)51856245	Commerce Bancorp, LLC	Delaware
COMMERCE NATIONAL	(200000)70367	Commerce Bancorp, LLC	Delaware
COMMERCE BANK	(199)9806231	Commerce Bancorp, LLC	Delaware
COMMERCE	9806233	Commerce Bancorp, LLC	Delaware
COMMERCE BANK	20521	Commerce Bancorp, LLC	New Jersey
C	20522	Commerce Bancorp, LLC	New Jersey
COMMERCE	20523	Commerce Bancorp, LLC	New Jersey
COMMERCE NATIONAL	20520	Commerce Bancorp, LLC	New Jersey
C COMMERCE BANK	22189	Commerce Bancorp, LLC	New Jersey
COMMERCE BANK	N/A	Commerce Bancorp, LLC	Virginia

www.commercepc.com

60

SCHEDULE D

PENNSYLVANIA COUNTY LIST

Adams

Berks

Bradford

Carbon

Centre

Clinton

Columbia

Cumberland

Dauphin

Franklin

Fulton

Huntingdon

Juniata

Lackawanna

Lancaster

Lebanon

Luzerne

Lycoming

Mifflin

Monroe

Montour

Northumberland

Perry

Pike

Potter

Schuylkill

Snyder

Sullivan

Susquehanna

Tioga

Union

Wayne

Wyoming

York

61

SCHEDULE E

PROHIBITED MARKS

Any trademark containing:

1.  COMMERCE

2.  MOST CONVENIENT or MORE CONVENIENT

3.  YES

4.  WOW

5.  A RED C AS A STANDALONE OR DISTINCTIVE MARK

6.  RED [DAY OF WEEK]

7.  PENNY ARCADE

62

EX-10.3

Exhibit 10.3

1990 DIRECTORS STOCK OPTION PLAN

COMMERCE BANK/HARRISBURG, N.A.

Amended November 21, 2008

1. Purpose of Plan

The purpose of this Plan is to enable Commerce Bank/Harrisburg, N.A. (hereinafter referred to as the "Bank") to continue to attract and retain nonemployee Directors with outstanding abilities by making it possible for them to purchase shares of the Bank's Common Stock on terms which will give them a direct and continuing interest in the future success of the Bank's business.

2. Definitions

"Bank" means Commerce Bank/Harrisburg, N.A., a national banking association.

"Committee of the Board" means a committee established by the Board consisting of three or more members of the Board. The Personnel Committee may be this committee.

"Director" means a Director of the Bank who is not regularly employed on a salary basis by the Bank.

“Shares” means of Common Stock of the Bank.

“Board” means the Board of Directors of the Bank.

"Optionee" means a person to whom an option has been granted under this Plan which has not expired or been fully exercised or surrendered.

3. Limits on Options

The total number of shares for which options may be granted under this Plan shall not exceed in the aggregate 50,000 shares. This number shall be appropriately adjusted if the number of issued shares shall be increased or reduced by change in par value, combination, or split-up, reclassification, distribution of a dividend payable in stock, or the like. The number of shares previously optioned and not theretofore delivered and the option prices therefor shall likewise be appropriately adjusted whenever the number of issued shares shall be increased or reduced by any such procedure after the date or dates on which such shares were optioned. Shares covered by options which have expired or which have been surrendered may again be optioned under this Plan.

4. Adjustment of Options

The number of shares optioned from time to time to individual Optionees under the Plan, and the option prices therefor, shall be appropriately adjusted to reflect any changes in par value, combination, split-up, reclassification, distribution of dividend payable in stock, or the like.

5. Granting of Options

The Board, or if the Board so determines, the Committee of the Board, is authorized to grant options to Directors pursuant to this Plan during the calendar year 1990 and in any calendar year thereafter to December 31, 2000, but not thereafter. The number of shares, if any, optioned in each year, the Directors to whom options are granted, and the number of shares optioned to each Director selected shall be wholly within the discretion of the Board or the Committee of the Board. If the Board acts, however, it shall do so only upon the advice and recommendation of the Committee of the Board upon all matters relating to the granting of options and the administration of this Plan, including determination of the rights and obligations of the Optionees.

6. Terms of Stock Options

The terms of stock options granted under this Plan shall be as follows:

(a) The option price shall be fixed by the Board or the Committee of the Board but shall in no event be less than 100% of the fair market value of the shares subject to the option on the date the option is granted.

(b) Options shall not be transferable otherwise than by will or by the laws of descent and distribution. No option shall be subject, in whole or in part, to attachment, execution or levy of any kind.

(c) Each option shall expire and all rights thereunder shall end ten

(10) years after the date on which it was granted, subject in all cases to earlier expiration as provided in paragraphs (d), (e) and of this Section 6 in the event a Director ceases to serve as such or dies.

(d) During the lifetime of an Optionee, his option shall be exercisable only by him and only while a Director of the Bank or within three (3) months after he otherwise ceases so to serve (but in any event not later than the end of the period specified in paragraph (c) of this,

Section 6).

(e) If an Optionee dies within a period during which his option could have been exercised by him, his option may be exercised within three months after his death (but not later than the end of the period specified in paragraph (c) of this Section 6) by those entitled under his will or the laws of descent and distribution, but only if and to the extent the option was exercisable by him immediately prior to his death.

(f) If Optionee is removed as a Director for any of the reasons specified in Section 1408(b) of the Banking Code of 1965, all options theretofore granted to the Optionee preceding such removal shall be forfeited by Optionee and rendered unexercisable.

(g) Subject to the foregoing terms and to such additional or different terms regarding the exercise of the options as the Board or the Committee of the Board may fix at the time of grant, options may be exercised in whole or in part from time to time.

7. Exercise of Options

No option granted under this Plan may be exercised before the first to occur of (i) one year from the date of option grant, and (ii) a Change in Control of the Bank. Thereafter, options may be exercised in whole, or from time to time in part, for up to the total number of shares then subject to the option, less the number of shares previously purchased by exercise of the option.

8. Change in Control

For the purposes of this Agreement, a Change in Control with respect to any Optionee shall be deemed to have occurred when any of the following events shall have occurred without the prior written consent of such Optionee:

(a) A change in identity of at least four (4) members of the Board of Directors or the addition of four (4) or more new members to the Board of Directors, or any combination of the foregoing, within any two (2) consecutive calendar year periods.

(b) A person or group acting in concert as described in Section 13(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") proposes to hold or acquire beneficial ownership within the meaning of Rule 13(d)(3) promulgated under the Exchange Act of a number of voting shares of the Bank which constitutes either more than 50%, of the shares which voted in the election of Directors of the Bank at the Shareholder's Meeting immediately preceding such determination, or (ii) more than 50% of the Bank's outstanding voting shares. The term "proposes to hold or acquire" shall mean the right of a person or group to acquire or merge (whether such right is exercisable immediately or only after the passage of time, or upon the receipt of such regulatory approvals as are required by applicable law) pursuant to an agreement, arrangement or understanding (whether or not in writing) or upon the exercise or conversion of rights, exchange rights, warrants or options, or otherwise.

(c) A person or group acting in concert as described in Section 13(d)(2) of the Exchange Act has commenced a tender or exchange offer with respect to the voting shares of the Bank or securities convertible or exchangeable into voting shares of the Bank, or

(d) A person or group acting in concert as described in Section 13(d)(2) of the Exchange Act has the right to vote shares of the Bank pursuant to any agreement, arrangement or understanding (whether or not in writing), either (i) more than 50% of the shares which voted in the election of Directors of the Bank at the Shareholder's Meeting immediately preceding such determination, or (ii) more than 50% of the Bank's outstanding voting shares; provided, however, that such person or group acting in concert, shall not be deemed to have acquired such shares if the agreement, arrangement or understanding to vote such securities rises solely from a revocable proxy given in response to a Proxy Solicitation by management of the Bank in connection with the Annual Meeting of the Shareholders of the Bank.

9. Reorganization of the Bank

In the event that the Bank is succeeded by another corporation or bank in a reorganization, merger, consolidation, acquisition of property or stock, separation or liquidation, the successor corporation or bank shall assume the outstanding options granted under this Plan or shall substitute new options for them.

10. Delivery of Shares

No shares shall be delivered upon the exercise of an option until the option price has been paid in full in cash or, at the discretion of the Board or the Committee of the Board, in whole or in part in the Bank's Common Stock owned by the Optionee valued at fair market value on the date of exercise. If required by the Board. no shares will be delivered upon the exercise of an option until the Optionee has given the Bank a satisfactory written statement that he is purchasing the shares for investment and not with a view to the sale or distribution of any such shares.

11. Administration

The Board or the Committee of the Board may make such rules and regulations and establish such procedures as it deems appropriate for the administration of this Plan. In the event of a disagreement as to the interpretation of this Plan or any amendment thereto or any rule, regulation or procedure thereunder or as to any right or obligation arising from or related to this Plan, the decision of the Board or the Committee of the Board (excluding, however, the Director(s) affected by such dispute or disagreement) shall be final and binding upon all persons in interest, including the Bank and its shareholders.

12. Reservation of Shares

Shares delivered upon the exercise of an option shall, in the discretion of the Board or the Committee of the Board, be either shares heretofore or hereafter authorized and then unissued, or previously issued shares heretofore or hereafter acquired through purchase in the open market or otherwise, or some of each. The Bank shall be under no obligation to reserve or to retain in its treasury any particular number of shares at any time, and no particular shares, whether unissued or held as treasury shares, shall be identified as those optioned under this Plan.

13. Amendment of Plan

The Board may amend this Plan from time to time as it deems desirable, however, no amendment shall (i) reduce the option price below 100% of the fair market value of the shares subject to the option on the date the option is granted or (ii) extend the option exercise period beyond the period set forth in paragraph (c) of Section 6.

14. Termination of the Plan

The Board may, in its discretion, terminate this Plan at any time prior to December 31, 2000, but no such termination shall deprive Optionees of their rights under their options.

15. Effective Date

This Plan shall become effective on January 2, 1990, and options hereunder may be granted at any time on or after that date.

EX-10.4

Exhibit 10.4

AMENDED 1996 EMPLOYEE STOCK OPTION PLAN OF

PENNSYLVANIA COMMERCE BANCORP, INC. **

1. Purpose of Plan

The purpose of this Plan is to enable Pennsylvania Commerce Bancorp, Inc. (hereinafter referred to as “Commerce”) to continue to compete successfully in attracting and retaining key employees with outstanding abilities by making it possible for them to purchase shares of Commerce's common stock on terms which will give them a more direct and continuing interest in the future success of Commerce.

2. Definitions

"Commerce" means Pennsylvania Commerce Bancorp, Inc., a Pennsylvania Corporation and bank holding company.

"Board" means the Board of Directors of Commerce.

"Committee" means a committee established by the Board.  The Committee shall consist of three or more members of the Board.  No member of the Committee may receive Options under the Plan.  The Personnel Committee may be the Committee if it meets these qualifications.

"Employees" means employees’, including officers, regularly employed on a salary basis by Commerce.  “Employment with Commerce”, or words to that effect, shall include employment by any subsidiary or affiliate of Commerce.

“Fair Market Value” of a share of Commerce's common stock shall mean its closing sale price on the principal stock exchange on which the stock is traded on the date as of which the value is being determined.  If there is no reported sale on that date, the Fair Market Value shall be the closing sale on the next preceding day for which a sale was reported.  However, the Committee, in the good faith exercise of its discretion, may determine that the closing sale price does not reflect the true Fair Market Value of a share of common stock.  If it so determines, the Fair Market Value shall be the average closing sale price on the principal stock exchange on which Commerce's common stock is traded during the twenty (20) day period immediately preceding the date on which Fair Market Value is being determined.

“ISO” means an incentive stock option described in Section 422 of the Internal Revenue Code of 1986, as amended.

“NQSO” means a stock option, which is not described in Section 422 of the Internal Revenue Code of 1986, as amended.

“Option” means an option, either in the form of an ISO or NSQO, granted in accordance with the terms of this Plan.

"Optionee" means a person to whom an option has been granted under this Plan, which has not expired or been fully exercised or surrendered.

"Shares" means shares of common stock of Commerce.

3. Limits on Number of Shares

The total number of Shares for which Options may be granted under this Plan shall not exceed in the aggregate 527,369 Shares.  This number shall be appropriately adjusted if the number of issued Shares shall be increased or reduced by change in par value, combination, or split-up, reclassification, distribution of a dividend payable in stock, or the like.  Shares covered by Options, which have expired, or which have been surrendered may again be optioned under this Plan.  Options may be granted in the form of ISOs or NQSOs.

4. Adjustment of Options

The number of Shares optioned from time to time to individual Optionees under the Plan, and the Option prices therefore, shall be appropriately adjusted to reflect any changes in par value, combination, split-up, reclassification, distribution of dividend payable in stock, or the like.

5. Granting of Options

The Board, or if the Board so determines, the Committee, is authorized to grant Options to selected employees pursuant to this Plan during the calendar year 1996 and in any calendar year thereafter to December 31, 2005.  The number of Shares, if any, optioned in each year, the employees to whom Options are granted, and the number of Shares optioned to each employee selected shall be wholly within the discretion of the Board or the Committee.  The Board may grant both ISOs and NQSOs to the same employee.  Board action on Options and administration of this Plan shall be only upon the advice and recommendation of the Committee if the Board has appointed a Committee.

6. Terms of ISOs

ISOs granted under this Plan shall contain the following terms:

(a) The ISO price shall be fixed by the Board or the Committee but shall in no event be less than 100% of the fair market value of the Shares subject to the ISO on the date the ISO is granted.  The ISO price, in the case of an Optionee who, at the time the Option is granted, owns more than 10% of the outstanding Shares of Commerce's common stock shall be at least 110% of the fair market value of the Shares subject to the ISO on the date the ISO is granted.

(b) ISOs shall not be transferable otherwise than by will or by the laws of descent and distribution.  No ISO shall be subject, in whole or in part, to attachment, execution or levy of any kind.

(c) Each ISO shall expire and all rights under the ISO shall end at the expiration of the exercise period for the ISO, which shall in no event be extended beyond its original term and shall not be more than ten years after the date on which it was granted.  Provided, however, that in the case of an Optionee who, at the time the Option is granted, owns more than 10% of the outstanding shares of Commerce's common stock, ISOs shall expire no more than five years after the date on which the ISO was granted.

(d) ISOs shall be exercisable only by the Optionee during the Optionee’s lifetime.  ISOs may be exercised only while employed by Commerce or within (i) three years after retirement, or (ii) three months after termination of employment (but in any event not later than the end of the period fixed by the Board or the Committee of the Board in accordance with the provisions of paragraph (c) of Section 6.  An ISO is exercisable by retired or terminated Optionees only to the extent the ISO was exercisable by the Optionee on the last day of his or her employment with Commerce.  For purposes of this paragraph (d), retirement shall mean termination of employment by an Optionee who has attained age 62.  If an Optionee retires due to disability, the ISOs granted to the Optionee shall be exercisable within 12 months of the date of retirement (but in any event not later than the end of the period fixed by the Board or the Committee of the Board in accordance with the provisions of paragraph (c) of this Section 6.

(e) If an Optionee dies within a period during which an ISO could have been exercised by the Optionee, the ISO may be exercised within three years after the Optionee’s death (but not later than the end of the period fixed by the Board or the Committee of the Board in accordance with the provisions of paragraph (c) of this Section 6) by those entitled under the Optionee’s will or the laws of descent and distribution, but only if and to the extent the ISO was exercisable by the Optionee immediately prior to the Optionee’s death.

(f) If Optionee's employment with Commerce is terminated by Commerce for the misconduct of Optionee, all ISOs granted to the Optionee prior to termination shall be forfeited by Optionee and rendered unexercisable.

(g) ISOs may be exercised in whole or in part from time to time, subject to the provisions of this Plan and to such additional or different terms regarding the exercise of the ISOs as the Board or the Committee of the Board may fix at the time of grant.

(h) ISOs shall not be granted to any individual pursuant to this Plan, the effect of which would be to permit that individual first to exercise ISOs, in any calendar year, for the purchase of Shares having a fair market value in excess of $100,000 (determined at the time of the grant of the ISOs.  Any Optionee may exercise ISOs for the purchase of Shares valued in excess of $100,000 (determined at the grant of the ISOs) in any calendar year, but only if the right to exercise the ISOs shall have first become available in prior calendar years.

7.           Terms of NQSOs.

NQSOs granted under this Plan shall contain the following terms:

(a) The NQSO price shall be fixed by the Board or the Committee, and may be less than 100% of the fair market of the Shares subject to the NQSO on the date the NQSO is granted.

(b) NQSOs shall not be transferable otherwise than by will or by the laws of descent and distribution.  No NQSO shall be subject, in whole or in part, to attachment, execution or levy of any kind.

(c) Each NQSO shall expire and all rights under the NQSO shall end at the expiration of the exercise period for the NQSO, which shall in no event be extended beyond its original term and shall not be more than ten years after the date on which it was granted.  The Board or the Committee shall establish the exercise period for each NQSO, subject in all cases to paragraphs (d), (e) and (f) of this Section 7.

(d) NQSOs shall be exercisable only by the Optionee during the Optionee’s lifetime.  NQSOs may be exercised only while employed by Commerce or within (i) three years after retirement, or (ii) three months after termination of employment (but in any event not later than the end of the period fixed by the Board or the Committee of the Board in accordance with the provisions of paragraph (c) of Section 7).  An NQSO is exercisable by retired or terminated Optionees only to the extent the NQSO was exercisable by the Optionee on the last day of his or her employment with Commerce.  For purposes of this paragraph (d), retirement shall mean termination of employment by an Optionee who has attained age 62.  If an Optionee retires due to disability, the NQSOs granted to the Optionee shall be exercisable within 12 months of the date of retirement (but in any event not later than the end of the period fixed by the Board or the Committee of the Board in accordance with the provisions of paragraph (c) of this Section 7).

(e) If an Optionee dies within a period during which an NQSO could have been exercised by the Optionee, the NQSO may be exercised within three years after the Optionee’s death (but not later than the end of the period fixed by the Board or the Committee of the Board in accordance with the provisions of paragraph (c) of this Section 7) by those entitled under the Optionee’s will or the laws of descent and distribution, but only if and to the extent the NQSO was exercisable by the Optionee immediately prior to the Optionee’s death.

(f) If Optionee's employment with Commerce is terminated by Commerce for the misconduct of Optionee, all NQSOs granted to the Optionee prior to termination shall be forfeited by Optionee and rendered unexercisable.

(g) NQSOs may be exercised in whole or in part from time to time, subject to the provisions of this Plan and to such additional or different terms regarding the exercise of the NQSOs as the Board or the Committee of the Board may fix at the time of grant.

8. Vesting of Options

(a)           Options Granted Prior to January 1, 2005.

No Option granted under this Plan may be exercised within one year from the date of the grant of the Option.  Options held more than one year may be exercised based upon years of service or upon the Option holding period, whichever is sooner, pursuant to the following schedule:

Years of Service	Percent Vested
Less than 3 years	25%
More than 3 years and less than 6 years	50
More than 6 years and less than 8 years	75
More than 8 years	100
Option Holding Period	Percent Vested
Less than 1 year	0%
More than 1 year and less than 2 years	25
More than 2 years and less than 3 years	50
More than 3 years and less than 4 years	75
More than 4 years	100

(b)           Options Granted After January 1, 2005.

No Option granted under this Plan may be exercised within one year from the date of the grant of the Option.  Options held more than one year may be exercised based upon the Option holding period, pursuant to the following schedule:

Option Holding Period	Percent Vested
Less than 1 year	0%
More than 1 year and less than 2 years	25
More than 2 years and less than 3 years	50
More than 3 years and less than 4 years	75
More than 4 years	100

9. Exercise Eligibility Period Following Termination of Employment

Options granted under this Plan less than one year prior to date of termination of employment are not exercisable under any circumstances.  Options granted at least one year prior to termination of employment must be exercised prior to the expiration date of the Option and within the period set forth below depending upon the reason for termination:

		Exercise Eligibility
	Options Eligible	Period for Option
Termination Reason	for Exercise	Tax Treatment
Retirement	100% of outstanding	3 years from
	Options	retirement date
Death while employed	100% of outstanding	3 years from
	Options	date of death
Total & permanent	100% of outstanding	1 year from term-
disability	Options	ination date
Misconduct	None	Not applicable
Any other reason	Any Option 100% vest-	3 months from
	ed plus the vested	termination date
	portion of the next
	oldest Option

10. Reorganization of Commerce

In the event that Commerce is succeeded by another corporation or bank in a reorganization, merger, consolidation, acquisition of property or stock, separation or liquidation, the successor corporation or bank shall assume the outstanding Options granted under this Plan or shall substitute new Options for them.

11. Delivery of Shares

No Shares shall be delivered upon the exercise of an Option until the Option price has been paid in full in cash or, at the discretion of the Board or the Committee, in whole or in part in Commerce's common stock owned by the Optionee valued at fair market value on the date of exercise.  If required by the Board, no Shares will be delivered upon the exercise of an Option until the Optionee has given Commerce a satisfactory written statement that he is purchasing the Shares for investment and not with a view to the sale or distribution of Shares.

12. Continuation of Employment

Neither this Plan nor any Option granted under this Plan shall confer upon any employee any right to continue in the employ of Commerce or limit in any respect the right of Commerce or to terminate the employee’s employment at any time.

13. Administration

The Board or the Committee may make rules and regulations and establish procedures as it deems appropriate for the administration of this Plan.  In the event of a disagreement as to the interpretation of this Plan,  any amendment thereto, any rule, regulation or procedure thereunder, or as to any right or obligation arising from or related to this Plan, the decision of the Board or the Committee shall be final and binding upon all persons in interest, including Commerce, Optionees, and shareholders of Commerce.

14. Reservation of Shares

Shares delivered upon the exercise of an Option shall, in the discretion of the Board or the Committee, be either authorized but unissued Shares, or previously issued Shares acquired by Commerce through purchase in the open market or otherwise, or a combination of both.  Commerce shall be under no obligation to reserve or to retain in its treasury any particular number of Shares at any time, and no particular Shares, whether unissued or held as treasury Shares, shall be identified as those optioned under this Plan.

15. Amendment of Plan

The Board without further action by the shareholders may amend this Plan from time to time as it deems desirable.  However, no amendment shall increase the maximum number of Shares for which Options may be granted, reduce the minimum Option price, extend the maximum Option period, or permit the granting of Options after December 31, 2005.

16. Termination of the Plan

The Board may, in its discretion, terminate this Plan at any time prior to December 31, 2005.  Termination of the Plan shall not deprive Optionees of Options granted prior to termination of the Plan.

17. Effective Date - Shareholder Approval

This Plan shall become effective as of January 2, 1996, and Options may be granted at any time on or after that date.  However, no Option may be exercised unless this Plan is approved by a vote of the holders of a majority of the outstanding Shares of Commerce's common stock at a meeting of shareholders of Commerce held within twelve months after January 2, 1996.

** AS APPROVED IN 2001

As amended by the shareholders at the annual meeting on May 21, 2004

As amended by the Board December 17, 2004

EX-13

Exhibit 13

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

Executive Summary

2008 was the most profitable year in the history of Pennsylvania Commerce Bancorp (the Company) and its wholly owned subsidiary Commerce Bank/Harrisburg (Commerce Bank).  Our focus on community banking produced an 84% increase in net income, driven by a 16% increase in core commercial and consumer deposits and a 24% increase in net loans as we continued to support the credit needs of our communities.  We were able to achieve this record profitability while at the same time increasing our allowance for loan losses by $6.0 million, or 56%, in 2008. We did not participate in sub prime lending and our overall asset quality remained sound despite the distressed economic conditions.

On November 10, 2008, we announced that we entered into a plan of merger, to acquire Republic First Bancorp, Inc. (“Republic First”) headquartered in Philadelphia, PA.  Republic First, with total assets of approximately $952.0 million as of December 31, 2008, will be merged with and into Pennsylvania Commerce and the combined company will be renamed Metro Bancorp, Inc.  This transaction is expected to close in the second quarter 2009, subject to regulatory and shareholder approval for both companies.

2008 was also our last year under the Commerce Bank network as we embark on an exciting new plan to expand into the metro Philadelphia market. In 2009 Commerce Bank will become Metro Bank as we acquire Republic First and rebrand.  The new company will have $3.1 billion in assets and 45 offices in Pennsylvania and New Jersey.  Also, in 2009, we will begin an exciting new expansion of stores, based on our successful service and convenience model as we create:  “America’s Next Great Bank”, with unlimited potential.

On December 30, 2008, we entered into a Transition Agreement with TD Bank, N.A. and Commerce Bancorp, LLC (formerly Commerce Bancorp, Inc.) which terminates the Network Agreement and Master Services Agreement between the Company and TD Bank for data processing, item processing, branding and other ancillary services.  If all services are transitioned away from TD Bank by July 15, 2009, Commerce Bank will receive a fee of $6 million from TD Bank which will substantially defray the costs of our first year obligation of approximately $6.3 million to transition to the new service provider, Fiserv Solutions, Inc.  See Note 19 in the Notes to the Consolidated Financial Statements for the year ended December 31, 2008 for additional discussion regarding the Transition Agreement.

Additional 2008 highlights are summarized below.

● For the fifth straight year, Commerce Bank was voted Best Bank by the Harrisburg Magazine Simply the Best Readers’ Poll.

● Total revenues increased 27% over the previous year to a total of $104.1 million.

● Net income totaled $12.9 million, up $5.9 million, or 84%, over 2007.

● Diluted net income per share for 2008 was $1.97, up $0.90, or 84%, over the prior year.

● Our net interest margin for the year 2008 improved 79 basis points from 3.30% to 4.09%.

● Total assets reached $2.14 billion.

● In this extremely difficult credit environment, our net loans grew $276 million, or 24%.

● Core deposits, excluding government deposits, increased 16% in 2008.

● Total deposits now exceed $1.6 billion.

● Both the Company and its subsidiary bank continue to be “well-capitalized” institutions under various regulatory capital guidelines as required by federal banking agencies.

During 2008, our total assets grew by $161.5 million from $1.98 billion at December 31, 2007 to $2.14 billion as of December 31, 2008. During this same time period, interest earning assets (primarily loans and investments) increased by $180 million from $1.84 billion to $2.02 billion.

During 2008, our total net loans (including loans held for sale) increased 26% in going from $1.16 billion at December 31, 2007 to $1.46 billion at December 31, 2008. This growth was primarily in commercial real estate, tax exempt and consumer loans as well as commercial lines of credit. Commerce Bank continues to be the premier provider of business and personal loans throughout our footprint. Our experienced calling officers and lending management team have continued to take advantage of the bank mergers and poor financial performance of many of our competitors by gathering both customers and skilled employees from those affected institutions.  At the same time, Commerce Bank has avoided the pitfalls of poor performance caused by sub-prime lending, out-of market lending and indirect lending.  At Commerce Bank, we focus on face-to-face relationship lending with creditworthy individuals

1

and businesses within our market footprint, thereby preserving shareholder return with strong asset quality.

Total deposits increased from $1.56 billion at December 31, 2007 to $1.63 billion at December 31, 2008. In 2008, we again made a strategic decision not to match the unusually “high rate” deposit pricing on deposits offered by most other banks in our footprint. As a result, our deposit growth was somewhat below our historical norm. Our pricing discipline served to stabilize and lower our overall cost of funds. In turn, this provided us with increased net interest income and an improved net interest margin throughout 2008.

Net income totaled $12.9 million for 2008, reflecting significant improvement over the $7.0 million recorded in 2007 and diluted net income per share was $1.97 vs. $1.07 for the prior year. The increase was primarily due to the significant reduction in funding costs and steady improvement in noninterest income offset by an increased provision for loan losses and a higher level of noninterest expenses.  The increased levels of expenses were primarily due to the following: a full year worth of expenses associated with the three new stores we opened during the second half of 2007; costs associated with planning and training for the conversion of a multitude of services from TD Bank to our new provider; and costs associated with consummating the acquisition of Republic First.

Key financial highlights for 2008 compared to 2007 are summarized in the following table.

	December 31,				%
	2008		2007		Change
Total Assets	$	2,140.5	$	1,979.0		8	%
Total Loans (Net)		1,423.1		1,146.6		24
Total Deposits		1,634.0		1,560.9		5

	December 31,				%
	2008		2007		Change
(dollars in millions, except per share data)
Total Revenues	$	104.1	$	82.3		27	%
Net Income		12.9		7.0		84
Diluted Net Income    per Share		1.97		1.07		84

In the future we expect that we will continue our pattern of expanding our footprint not only with the aforementioned acquisition of Republic First but also by branching into contiguous areas of our new and existing markets, and by filling gaps between existing store locations. Accordingly, we anticipate notable balance sheet and revenue growth as a result of the expansion. Additionally, we expect to incur direct acquisition expenses as we consummate the merger with Republic First including expenses to combine the operations of the two companies. We also anticipate that the upcoming core system conversion and re-branding initiative will result in significant increased levels of expense. We anticipate that these initiatives will primarily be funded through cash generated from operations, our existing funding sources and the $6 million fee to be received from TD Bank if all services are transitioned away by July 15, 2009. Operating results for 2009 and the years that follow could also be heavily impacted by the overall state of the local and global economy.  The Bank, like all financial institutions whose deposits are guaranteed by the Federal Deposit Insurance Corporation, (“FDIC”), pays a quarterly premium to the FDIC for such deposit insurance coverage. The premium rates paid by the Bank were the same for both 2008 and 2007.  For 2009, the FDIC has increased these rates significantly over the prior years.  The new rates, as currently in effect, are projected to increase the Bank's expense for such coverage by $1.3 million over the level incurred in 2008.  The FDIC has further announced its intention to assess a one-time emergency deposit premium fee on all covered institutions during the third quarter of 2009 to bolster the level of Deposit Insurance Funds available to cover possible future bank failures.  The proposal to assess such a fee is currently open for public comment as of the date of this document.  Continued poor economic conditions could lead to deterioration in the credit quality of our loan portfolio, declines in investment values, and lower loan demand.

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 for December 31, 2008 included herein. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. These principles require our management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments to its assumptions and estimates when facts and circumstances dictate. We evaluate our estimates and assumptions on an ongoing basis and predicate those estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management believes the following critical accounting policies encompass the more significant assumptions and estimates used in preparation of our consolidated financial statements.

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

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

2

provision for loan losses to be charged against earnings. Such changes could impact future results.

Monthly, systematic reviews of our loan portfolio are performed to identify inherent 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 to cover the estimated probable losses existing in specific loan types. Management judgment involving the estimates of loss factors can be impacted by many variables, such as the number of years of actual default and loss history included in the evaluation and the volatility of forecasted net credit losses.

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 evaluations. In addition, significant estimates are made 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 discounted cash flows using the loan’s effective interest rate, or the fair value of the collateral for collateral-dependent loans, or the observable market price of the impaired loan. Each of these variables involves judgment and the use of estimates.

In addition to calculating and testing of loss factors, we periodically evaluate changes in levels and trends of charge-offs, delinquencies and nonaccrual loans, trends in the volume and the term of loans, changes in underwriting standards and practices, tenure of the loan officers and management, changes in credit concentrations, and national and local economic trends and conditions, among other things. 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, including historical or forecasted net credit losses.

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

In estimating other-than-temporary impairment losses, management considers (1) adverse changes in the general market condition of the industry in which the investment is related, (2) the financial condition and near-term prospects of the issuer, (3) the seniority of the tranche owned by the Bank in relation to the entire bond issue, (4) current prepayment behavior, (5) current credit agency ratings, (6) the credit support available in the bond structure to absorb losses, and (7) each of the following with respect to the underlying collateral: (a) delinquency percentages and trends, (b) weighted average loan-to-value ratios, (c) weighted average FICO scores, and (d) the level of foreclosure and OREO activity. Also considered is the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Stock-Based Compensation. Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 123(R), “Share-Based Payment,” (“FAS 123(R)”) using the modified prospective method. FAS 123(R) 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.

Adoption of SFAS No. 157.  Beginning in 2008, the Company is required to disclose the fair value of financial assets and liabilities that are measured at fair value within the fair value hierarchy prescribed by SFAS No. 157. 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 20 of the Notes to Consolidated Financial Statements for the year ended December 31, 2008. 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 December 31, 2008, the fair value of assets based on level 3 measurements constituted 3% of the total assets measured at fair value. The fair value of collateral securing impaired loans or constituting foreclosed assets is generally determined based upon independent third party appraisals of the properties, recent offers, or prices on comparable properties in the proximate vicinity.  Such estimates can differ significantly from the amounts the Company would ultimately realize from the loan or disposition of underlying collateral.

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

3

Results of Operations

Average Balances and Average Interest Rates

Table 1 on the following page sets forth balance sheet items on a daily average basis for the years ended December 31, 2008, 2007 and 2006 and presents the daily average interest rates earned on assets and the daily average interest rates paid on liabilities for such periods. During 2008, average interest-earning assets were $1.90 billion, an increase of $121.2 million, or 7%, over 2007. This was the result of an increase in the average balance of loans receivable (including loans held for sale) of $240.3 million, offset by a decrease in the average balance of investment securities of $119.2 million. The growth in the average balance of interest earning assets was funded primarily by an increase in the average balance of noninterest bearing funds (net) of $34.2 million, an increase in the average level of short-term borrowings of $57.4 million and an increase in the average level of long-term borrowings of $30.9 million.

The tax-equivalent yield on total interest-earning assets decreased by 64 basis points, from 6.53% in 2007 to 5.89% in 2008.  This decrease resulted from lower yields on our securities and loan portfolios during 2008. Approximately 20% of our investment securities have a floating interest rate and provide a yield that consists of a fixed spread tied to the one month LIBOR interest rate. During 2008, the average one-month LIBOR decreased approximately 258 bps from 5.25% during 2007 to 2.67% for 2008.  Likewise, yields received on any new investment securities purchased in 2008 were lower than yields received on the existing portfolio due to the overall lower level of market interest rates in 2008 vs. prior years. Floating rate loans represent approximately 38% of our total loans receivable portfolio. The interest rates charged on the majority of these loans are tied to the New York prime lending rate which decreased 100 bps during the second half of 2007 and subsequently decreased another 400 bps during 2008, following similar decreases in the overnight federal funds rate by the Federal Open Market Committee (“FOMC”).

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 be lower in 2009 than in 2008.

The aggregate cost of interest-bearing liabilities decreased 168 basis points from 3.66% in 2007 to 1.98% in 2008.  Our deposit cost of funds decreased from 2.37% in 2007 to 1.17% for 2008. The dramatic decreases are primarily related to the lower level of general market interest rates present during 2008 compared to in 2007. At December 31, 2008, approximately 36% of our total deposits were those of local municipalities, school districts, not-for-profit organizations or corporate cash management customers, indexed to either the 91-day Treasury bill, the overnight federal funds rate, or the one-month LIBOR. The average interest rate of the 91-day Treasury bill decreased from 4.31% for 2007 to 1.35% in 2008 thereby significantly reducing the average interest rate paid on these deposits. Also, the overnight federal funds rate decreased by 400 basis points in 2008 from 4.25% to 0.25%. The average rate paid on savings deposits decreased by 131 basis points from 2.41% in 2007 to 1.10% in 2008. The average rate paid on interest checking and money market accounts decreased by 194 basis points from 3.47% to 1.53%. For time deposits, the average rate paid in 2008 was 3.52%, down 68 basis points from 4.20% in 2007 and the rate on public fund time deposits decreased by 119 basis points in 2008 from 4.91% to 3.72%.

Our aggregate cost of nondeposit funding sources decreased 261 basis points in 2008 to 2.96% from 5.57% in 2007.  The decrease is primarily related to a 314 basis point decline in the average cost of short-term borrowings, another result of the steep decline of general market interest rates in 2008. While the average rate paid on long-term debt decreased slightly, the average outstanding balance increased in 2008 to include the full impact of Federal Home Loan Bank convertible select borrowings taken out in 2007. See the Long-Term Debt section later in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion regarding the convertible select borrowings.

In Table 1, nonaccrual loans have been included in the average loan balances. Securities include securities available for sale and securities held to maturity. Securities available for sale are carried at amortized cost for purposes ofcalculating the average rate received on taxable securities. Yields on tax-exempt securities and loans are computed on a tax-equivalent basis, assuming a 35% tax rate for the years ending 2008 and 2006 and assuming a 34% tax rate for the year ending 2007.

4

TABLE 1

	Years Ended December 31,
(dollars in thousands)	2008							2007							2006
Earning Assets	Average Balance		Interest		Average  Rate			Average Balance		Interest		Average  Rate			Average  Balance		Interest		Average  Rate
Securities:
Taxable	$	575,402	$	28,401		4.94	%	$	694,575	$	37,060		5.34	%	$	733,990	$	38,845		5.29	%
Tax-exempt		1,622		101		6.23			1,620		99		6.11			1,985		130		6.55
Total securities		577,024		28,502		4.94			696,195		37,159		5.34			735,975		38,975		5.30
Loans receivable:
Mortgage and construction		652,907		42,457		6.41			525,063		38,288		7.21			452,781		32,267		7.05
Commercial loans and lines of credit		349,590		21,814		6.14			307,540		24,425		7.83			259,280		20,914		7.96
Consumer		244,625		14,976		6.12			206,459		14,040		6.80			170,535		11,412		6.69
Tax-exempt		79,124		5,272		6.66			46,840		3,195		6.82			23,788		1,582		6.65
Total loans receivable		1,326,246		84,519		6.30			1,085,902		79,948		7.29			906,384		66,175		7.23
Total earning assets	$	1,903,270	$	113,021		5.89	%	$	1,782,097	$	117,107		6.53	%	$	1,642,359	$	105,150		6.36	%
Sources of Funds
Interest-bearing deposits:
Regular savings	$	351,291	$	3,849		1.10	%	$	373,209	$	8,997		2.41	%	$	363,515	$	8,533		2.35	%
Interest checking and money market		727,783		11,160		1.53			712,418		24,738		3.47			605,043		22,282		3.68
Time deposits		187,467		6,595		3.52			181,080		7,604		4.20			194,611		7,541		3.87
Public funds time		16,338		607		3.72			17,464		858		4.91			32,873		1,406		4.28
Total interest-bearing   deposits		1,282,879		22,211		1.73			1,284,171		42,197		3.29			1,196,042		39,762		3.32
Short-term borrowings		265,518		5,349		1.98			208,112		10,804		5.12			199,742		10,267		5.07
Long-term debt		79,400		4,875		6.14			48,510		3,494		7.18			17,669		1,731		9.80
Total interest-bearing liabilities		1,627,797		32,435		1.98			1,540,793		56,495		3.66			1,413,453		51,760		3.65
Noninterest-bearing funds (net)		275,473							241,304							228,906
Total sources to fund assets	$	1,903,270	$	32,435		1.70	%	$	1,782,097	$	56,495		3.16	%	$	1,642,359	$	51,760		3.14	%
Net interest income and margin on a tax- equivalent basis			$	80,586		4.19	%			$	60,612		3.37	%			$	53,390		3.22	%
Tax-exempt adjustment				1,881							1,120							599
Net interest income and margin			$	78,705		4.09	%			$	59,492		3.30	%			$	52,791		3.18	%
Other Balances:
Cash & due from banks	$	44,699						$	51,874						$	49,210
Other assets		80,605							90,437							79,815
Total assets		2,028,574							1,924,408							1,771,384
Noninterest-bearing demand deposits		276,120							269,353							253,671
Other liabilities		11,687							8,035							8,558
Stockholders’ equity		112,970							106,227							95,702

5

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income on loans, investment securities, and other interest-earning assets and the interest expense 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 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 tax-equivalent basis (which adjusts for the tax-exempt status of income earned on certain loans and investment securities in order to show such income as if it were taxable) for 2008 increased $20.0 million, or 33%, over 2007 to $80.6 million. Interest income on a tax-equivalent basis totaled $113.0 million, a decrease of $4.1 million, or 3%, from 2007. The majority of this decrease was related to the lower interest rate environment throughout 2008, partially offset by a volume increase in the level of interest earning assets. Volume increases in the loans receivable portfolio more than offset volume decreases in the investment securities portfolio. Interest expense for 2008 decreased $24.1 million, or 43%, from $56.5 million in 2007 to $32.4 million in 2008. This decrease was related to the lower interest rate environment as a slight volume increase in the level of interest bearing liabilities was more than offset by significant decreases in the average rates paid on interest-bearing deposits and short-term borrowings.

During the second half of 2007, the United States Treasury yield curve began to move from flat (and sometimes inverted) to a more traditional slope with short-term rates lower than long-term rates. As a result, the Company began to experience a lower cost of deposits and lower cost of borrowings, thereby improving our net interest margin. During the last four months of 2007 the FRB decreased the overnight federal funds rate by 100 basis points from 5.25% to 4.25%. The FRB continued its accommodative stance to interest rates throughout 2008 by lowering the overnight federal funds rate several times throughout the year by a total of 400 basis points from 4.25% to 0.25% The decreases in the federal funds rate have led to a lower level of interest rates associated with our overnight short-term borrowings as well as lower yields on the 91-day Treasury bill and one-month LIBOR. Approximately 36% of our deposits are tied to either the federal funds rate, the 91-day Treasury bill or the one-month LIBOR. The overall lower level of general market interest rates also allowed us to significantly reduce the rates we paid on our interest-bearing deposits in an effort to offset corresponding decreases on the yields we received on our interest earning assets.

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 earning assets and the average rate incurred on interest-bearing liabilities. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets. Our net interest rate spread increased to 3.91% in 2008 from 2.87% in 2007 on a fully tax-equivalent basis. The net interest margin (non-tax-equivalent) increased 79 basis points from 3.30% in 2007 to 4.09% in 2008.

6

Table 2 demonstrates the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances and tax-exempt loans and securities are reported on a fully taxable-equivalent basis.

TABLE 2

	2008 v. 2007									2007 v. 2006
	Increase (Decrease)									Increase (Decrease)
	Due to Changes in (1) (2)									Due to Changes in (1)
(in thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest on securities:
Taxable	$	(6,377	)	$	(2,282	)	$	(8,659	)	$	(2,059	)	$	274		$	(1,785	)
Tax-exempt		1			1			2			(23	)		(8	)		(31	)
Interest on loans receivable:
Mortgage and construction		8,200			(4,031	)		4,169			5,390			631			6,021
Commercial		2,321			(4,932	)		(2,611	)		3,255			256			3,511
Consumer		2,035			(1,099	)		936			2,199			429			2,628
Tax-exempt		2,165			(88	)		2,077			1,570			43			1,613
Total interest income		8,345			(12,431	)		(4,086	)		10,332			1,625			11,957
Interest on deposits:
Regular savings		(540	)		(4,608	)		(5,148	)		848			(384	)		464
Interest checking and money market		314			(13,892	)		(13,578	)		4,269			(1,813	)		2,456
Time deposits		(59	)		(950	)		(1,009	)		(277	)		340			63
Public funds		(44	)		(207	)		(251	)		(659	)		111			(548	)
Short-term borrowings		1,155			(6,610	)		(5,455	)		434			103			537
Long-term debt		1,380			1			1,381			1,905			(142	)		1,763
Total interest expense		2,206			(26,266	)		(24,060	)		6,520			(1,785	)		4,735
Net increase (decrease)	$	6,139		$	13,835		$	19,974		$	3,812		$	3,410		$	7,222

(1)   Changes due to both volume and rate have been allocated on a pro rata basis to either rate or volume.

(2)   Changes due to the difference in days (during leap years) are divided between Rate & Volume columns based on each categories percent of the total difference.

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. We recorded $7.5 million as a provision for loan losses in 2008 compared to $1.8 million in 2007. The increase in the provision for loan losses in 2008 is a direct result of the Company’s strong loan growth over the past twelve months, an increase in the level of nonperforming loans, the increased level of net charge-offs as well as other qualitative factors which management considers relevant in assessing the level of risk associated with the loan portfolio.The level of nonperforming loans increased from $2.9 million, or 0.25% of total loans outstanding at December 31, 2007 to $27.1 million, or 1.88% of total loans outstanding at December 31, 2008. See the Nonperforming Loans and Assets section later in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion regarding the increase in nonperforming loans.Net charge-offs during 2008 were $1.5 million, or 0.11%, of average loans outstanding as compared to $705,000, or 0.07%, of average loans outstanding in 2007. Four loans totaling $1.2 million made up the largest loan charge-offs for 2008. All other loans charged-off in 2008 were under $100,000 each. One loan totaling $165,000 made up the largest single loan charge-off for 2007. All other loans charged-off in 2007 were under $100,000 each. See the Application of Critical Accounting Policies section in this Management’s Discussion and Analysis regarding the allowance for loan losses as well as Note 1 in the Notes to Consolidated Financial Statements for the year ended December 31, 2008 included herein for further discussion regarding our methodology for determining the provision for loan losses.

Noninterest Income

Noninterest income for 2008 increased by $2.6 million, or 11%, over 2007 to $25.4 million. Service charges and fees increased $3.2 million, or 16%. The increase in this line item as well as in other operating income was attributable to servicing a higher volume of deposit and loan accounts. Conversely, gains on sales of loans were $738,000 for 2008 as compared to $1.26 million in 2007, with the decrease attributable to three factors. First, the slowing economy during the second half of 2008 resulted in a lower level of residential mortgage loans originated, which the Bank typically sells to investors in the secondary market. The second factor was that we did not sell our student loan portfolio in the secondary market in 2008 as we typically have over the past several years. Lastly, we sold a lower volume of Small Business Administration loans in the secondary market in 2008 as compared to 2007. Netted against noninterest income for 2008 was a $157,000 pretax loss on sale of a corporate debt htm security which experienced deterioration in the creditworthiness of the underlying issuer. Conversely, noninterest income for 2007 included $171,000 of pretax gains on the call of

7

two securities prior to their stated final maturity.

Noninterest Expenses

Noninterest expenses totaled $77.9 million for 2008, an increase of $7.1 million, or 10%, over 2007. Several expense line items were impacted by our continued growth including the full year’s impact of opening three new full-service stores in the second half of 2007. Additionally, costs associated with the pending acquisition of Republic First, the pending core system conversion and transition of services from TD Bank to a new service provider as well as our rebranding initiatives all served to increase our expense levels in 2008.  A comparison of noninterest expenses for certain categories for 2008 and 2007 is discussed below.

Salary expenses and employee benefits, which represent the largest component of noninterest expenses, increased by $3.6 million, or 10%, in 2008 over 2007. The increased level of these expenses includes the impact of salary and benefit costs associated with the additional staff hired to operate the new stores opened in the third quarter of 2007 along with general merit increases for all eligible employees. The increase was also partially a result of higher overall benefit plan costs as well as additional expense related to the issuance of stock options to employees.

Occupancy expenses totaled $8.1 million in 2008, an increase of 7%, over 2007 while furniture and equipment expenses increased by 6%. The full-year impact of the three stores opened in 2007 contributed primarily to these increases.

Advertising and marketing expenses decreased $587,000, or 18%, in 2008 as the 2007 total included grand opening expenses associated with the three new stores.

Data processing expenses increased by $733,000, or 11%, in 2008 over 2007 due to costs associated with processing additional transactions as a result of growth in the number of accounts serviced, the costs associated with operating additional stores, adding additional electronic products and services for customer use and enhancements and upgrades to existing systems.

Regulatory expenses of $2.8 million in 2008 reflected a 7% decrease from 2007.  Included in total regulatory expenses for 2007 were costs incurred to address the matters identified by the Office of the Comptroller of the Currency (“OCC”) in the formal written agreement which the Bank entered into with the OCC on January 29, 2007, as well as costs incurred during the fourth quarter of 2007 with respect to the Consent Order entered into with the OCC on February 5, 2008.  Offsetting this decrease in regulatory compliance costs in 2008 was an increase in the level of FDIC premiums paid by the Bank for deposit insurance in 2008, from $1.5 million in 2007 to $1.7 million in 2008.  The Bank, like all financial institutions whose deposits are guaranteed by the Federal Deposit Insurance Corporation, (“FDIC”), pays a quarterly premium to the FDIC for such deposit insurance coverage. The premium rates paid by the Bank were the same for both 2008 and 2007.  For 2009, the FDIC has increased these rates significantly over the prior years.  The new rates, as currently in effect, are projected to increase the Bank's expense for such coverage by $1.3 million over the level incurred in 2008.  The FDIC has further announced its intention to assess a one-time emergency deposit premium fee on all covered institutions during the third quarter of 2009 to bolster the level of Deposit Insurance Funds available to cover possible future bank failures.

Included in noninterest expenses for the fourth quarter of 2008 was $935,000 related to negotiating, planning and training for the conversion of core processing, item processing and network infrastructure services from our current service provider, TD Bank, to our new service provider, Fiserv Solutions, Inc.  This conversion is planned for mid-2009.  Also included in noninterest expenses for 2008 was $491,000 associated with the Company’s pending acquisition of Republic First which is expected to close in the second quarter of 2009. In 2009, we expect our level of expenses associated with the transition of services from TD Bank to Fiserv Solutions to increase dramatically over the level experienced in 2008. We also expect significant costs in 2009 associated with our acquisition of Republic First. These higher expense levels may constrain our ability to increase net income in 2009 over the level achieved in 2008.

Other noninterest expenses totaled $9.1 million for 2008, compared to $7.4 million for 2007, an increase of $1.7 million or 22%.  Components of the increase included costs related to lending expenses, legal expenses, bank shares tax, expenses relating to a potential future branch site we discontinued exploring and expenses relating to foreclosed real estate properties.

One key measure used to monitor progress in controlling overhead expenses is the ratio of net noninterest expenses to average assets. For purposes of this calculation, net noninterest expenses equal noninterest expenses less noninterest income (exclusive of gains or losses on sales/calls of investment securities). This ratio equaled 2.59% for 2008, compared to 2.49% for 2007. Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses to net interest income plus noninterest income (excluding gains or losses on sales of investment securities). For 2008, the operating efficiency ratio was 74.7% compared to 86.0% for 2007. The improvement was a result of positive operating leverage in 2008 as the growth in total revenues far exceeded the growth in noninterest expenses. Our operating efficiency ratio remains above our peer group primarily due to our aggressive growth expansion activities.

Provision for Federal Income Taxes

The provision for federal income taxes was $5.9 million for 2008, compared to $2.7 million for 2007. The effective tax rate, which is the ratio of income tax expense to income before taxes, was 31.2% in 2008 compared to 28.2% in 2007 due to a 35% statutory income tax rate for 2008 vs. a 34% statutory rate in 2007, a higher level ratio of taxable income to tax-exempt income in 2008 as compared to 2007 and partially due to non-deductible merger expenses incurred in 2008. See Note 11 of the Notes to Consolidated Financial Statements for the year ended December 31, 2008, included herein, for an additional analysis of the provision for income taxes for 2008 and 2007.

In accordance with Statement of Financial Accounting Standard No. 109 (SFAS No. 109), “Accounting for Income Taxes”, income taxes are accounted for under the liability method. Under the liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial state­ment and tax bases of existing assets and liabilities.

8

At December 31, 2008, deferred tax assets amounted to $15.7 million and deferred tax liabilities amounted to $4.1 million. Deferred tax assets are realizable primarily through carryback of existing deductible temporary differences to recover taxes paid in prior years, and through future reversal of existing taxable temporary differences. Management currently anticipates future earnings will be adequate to utilize the net deferred tax assets.

Net Income and Net Income per Share

Net income for 2008 was $12.9 million, an increase of $5.9 million, or 84%, from the $7.0 million recorded in 2007. This increase was due to an increase in net interest income of $19.2 million and an increase in noninterest income of $2.6 million offset by an increase in the provision for loan losses of $5.7 million, an increase in noninterest expenses of $7.1 million and an increase in the provision for federal income taxes of $3.1 million.

Basic earnings per common share were $2.02 in 2008 compared to $1.11 in 2007. Diluted earnings per common share were $1.97 for 2008 and $1.07 for 2007. See Note 13 in the Notes to Consolidated Financial Statements for the year ended December 31, 2008, included herein, for an analysis of earnings per share.

Return on Average Assets and Average Equity

Return on average assets, referred to as “ROA,” measures our net income in relation to our total average assets. Our ROA was 0.64% for 2008 compared to 0.36% for 2007. Return on average equity, referred to as “ROE,” indicates how effectively we can generate net income on the capital invested by our shareholders. ROE is calculated by dividing net income by average stockholders’ equity. ROE for 2008 improved to 11.42%, compared to 6.59% for 2007.

Both ROA and ROE in 2008 were benefited by the substantial improvement in our net income.

Results of Operations

2007 versus 2006

Net income for 2007 was $7.0 million, a decrease of $253,000, or 3%, from the $7.3 million recorded in 2006.

Diluted earnings per common share decreased to $1.07 for 2007 from $1.12 in 2006.

Net interest income on a tax-equivalent basis for 2007 increased $7.2 million, or 14%, over 2006 to $60.6 million. Interest income on a tax-equivalent basis on earning assets totaled $117.1 million, an increase of $12.0 million, or 11%, over 2006. Interest expense for 2007 increased by $4.7 million, or 9%, from $51.8 million to $56.5 million.

Our net interest rate spread increased to 2.87% in 2007 from 2.71% in 2006 and the net interest margin increased 12 basis points from 3.18% in 2006 to 3.30% in 2007 on a fully tax-equivalent basis.

The provision for loan losses totaled $1.8 million in 2007 compared to $1.6 million in 2006. Net charge-offs in 2007 totaled $705,000, or 0.07%, of average loans outstanding as compared to $1.2 million, or 0.13%, of average loans outstanding in 2006.

Noninterest income for 2007 increased by $4.1 million, or 22%, over 2006 to $22.8 million. The increase was primarily due to increases in other operating income attributable to service charges and fees associated with servicing a higher volume of deposit and loan accounts. Included in total noninterest income in 2007 were gains of $1.3 million on the sale of residential loans, student loans and small business administration loans as well as a gain on the call of securities of $171,000. Included in total noninterest income in 2006 were gains of $1.1 million on the sale of residential loans, student loans and small business administration loans as well as gains on the sale and call of securities of $160,000.

Noninterest expenses totaled $70.8 million for 2007, an increase of $11.5 million, or 19%, over 2006. Staffing levels, occupancy, furniture and equipment, and related expenses increased as a result of opening three full-service stores in 2007 as well as the opening of two full-services stores in the fourth quarter of 2006.

Salary expenses and employee benefits increased by $3.6 million, or 12%, in 2007 over 2006 primarily to staff the new stores mentioned above.  Benefit costs for 2007 included an increase of approximately $750,000 for employee medical and prescription plan costs over the level incurred in 2006.

Occupancy expenses totaled $7.6 million in 2007, an increase of $1.0 million, or 15%, over 2006 while furniture and equipment expenses increased by $488,000, or 14%, to $4.1 million.  Again, the increase was related to the new stores as well as expenses related to the opening of our new Headquarters, Operations and Training Center in late March 2006.

Advertising and marketing expenses were $3.3 million for 2007, an increase of $363,000, or 12%, over 2006. Data processing expenses increased by $1.1 million, or 20%, in 2007 over 2006. Postage and supplies expenses of $2.0 million were $342,000, or 21%, higher than the prior year.

Regulatory expenses of $3.1 million in 2007 were $2.6 million higher than 2006 due to expenses incurred for regulatory compliance matters as well as the reinstatement of deposit insurance premiums by the FDIC during the first quarter of 2007. Telephone expenses of $2.4 million were $1.2 million higher for 2007 compared to 2006 due to our outsourcing of our call center services to a third party in October 2006.

9

Other noninterest expenses totaled $7.4 million for 2007, compared to $6.6 million for 2006.

Financial Condition

Securities

Securities are purchased and sold as part of our overall asset and liability management function. The classification of all securities is determined at the time of purchase. Securities expected to be held for an indefinite period of time are classified as securities available for sale and are carried at fair value. Decisions by management to purchase or sell these securities are based on an assessment of financial and economic conditions, including changes in prepayment risks and interest rates, liquidity needs, capital adequacy, collateral requirements for pledging, alternative asset and liability management strategies, tax considerations, and regulatory requirements.

Securities are classified as held to maturity if, at the time of purchase, management has both the intent and ability to hold the securities until maturity. Securities held to maturity are carried at amortized cost. Sales of securities in this portfolio should only occur in unusual and rare situations where significant unforeseeable changes in circumstances may cause a change in intent. Examples of such instances would include deterioration in the issuer’s creditworthiness that is evidently supportable and significant or a change in tax law that eliminates or reduces the tax-exempt status of interest (but not the revision of marginal tax rates applicable to interest income). Held to maturity securities cannot be sold based upon any of the decisions used to sell securities available for sale as listed above. See Note 3 in the Notes to Consolidated Financial Statements for the year ended December 31, 2008, included herein, for further analysis of our securities portfolio.

Approximately 80% of our investment securities carry fixed rate coupons that do not change over the life of the securities. Since most securities are purchased at premiums or discounts, their yield and average life will change depending on any change in the estimated rate of prepayments. We amortize premiums and accrete discounts over the estimated average life of the securities. Changes in the estimated average life of the securities portfolio will lengthen or shorten the period in which the premium or discount must be amortized or accreted, thus affecting our securities yields. For the year ended December 31, 2008, the yield on our securities portfolio was 4.94%, down 40 basis points from 5.34% in 2007. This decrease was due to: significantly lower yields earned on the 20% of our investment securities portfolio which have floating interest rates due to the overall lower level of general market interest rates; prepayments, calls and maturities of securities with higher interest rates, and purchases of securities in 2008 at lower yields than those purchased n previous years, again due to the level of market interest rates.

At December 31, 2008, the weighted average life and duration of our securities portfolio was approximately 4.7 and 3.8 years, respectively, as compared to 5.0 years and 4.0 years, respectively, at December 31, 2007. The weighted average life of the portfolio is calculated by estimating the average rate of repayment of the underlying collateral of each security. Mortgage-backed obligations historically experience repayment rates in excess of the scheduled repayments, causing a shorter weighted average life of the security. Our securities portfolio contained no “high-risk” securities or derivatives as of December 31, 2008 or 2007.

Securities available for sale decreased by $24.8 million in 2008 (excluding the effect of changes in unrealized gains or losses) primarily as a result in purchases of $23.2 million, offset by principal repayments and maturities of $47.6 million. The securities available for sale portfolio is comprised of U.S. Government Agency securities, mortgage-backed securities, and Whole Loan CMO securities. At December 31, 2008, the unrealized loss on securities available for sale included in stockholders’ equity totaled $17.3 million, net of tax, compared to the $3.9 million, net of tax, unrealized loss on securities available for sale included in stockholders’ equity at December 31, 2007.  The market for certain securities held in the Company’s available for sale portfolio was extremely volatile during 2008 due to extraordinary economic and market dislocations. As a result of this volatility, the market prices for many types of securities at the end of 2008 were much lower than at December 31, 2007 due to the distressed market conditions. Management believes that the unrealized losses on these securities are primarily the result of changes in the liquidity levels in the market in addition to changes in general market interest rates and not material changes in the credit characteristics of the investment

10

securities portfolio.

During 2008, securities held to maturity decreased by $104.9 million primarily as a result of purchases of $10.6 million offset by principal repayments and maturities of $31.3 million and the call of nine bonds totaling $82.0 million. A $157,000 loss on the sale of one security with a principal balance of $2 million was realized in 2008 due to significant deterioration in the credit worthiness of the issuer. The securities held in this portfolio include U.S. Government Agency securities, mortgage-backed securities, tax-exempt municipal bonds, Whole Loan CMO securities, and corporate debt securities.

The amortized cost of available for sale and held to maturity securities are summarized in Table 3 as of December 31, for each of the years 2006 through 2008.

TABLE 3

	December 31,
(in thousands)	2008		2007		2006
Available for Sale:
U.S. Government Agency securities	$	5,000	$	5,000	$	5,000
Mortgage-backed securities		363,241		388,000		393,909
Total available for sale	$	368,241	$	393,000	$	398,909
Held to Maturity:
U.S. Government Agency securities	$	36,500	$	133,303	$	175,043
Municipal securities		1,623		1,621		1,619
Mortgage-backed securities		112,472		116,058		131,979
Corporate debt securities		1,992		6,485		10,987
Total held to maturity	$	152,587	$	257,467	$	319,628

The contractual maturity distribution and weighted average yield of our available for sale and held to maturity portfolios at December 31, 2008 are summarized in Table 4. For mortgage-backed obligations, the contractual maturities may be significantly different than actual maturities. Changes in payment patterns and prepayments may occur depending on the market conditions and economic variables. Weighted average yield is calculated by dividing income within each maturity range by the outstanding amount of the related investment and has been tax effected, assuming a tax rate of 35%, on tax-exempt obligations.

TABLE 4

December 31, 2008	Due Under 1 Year				Due 1-5 Years				Due 5-10 Years				Due Over 10 Years				Total
(dollars in thousands)	Amount/Yield				Amount/Yield				Amount/Yield				Amount/Yield				Amount/Yield
Available for Sale:
U.S. Government Agency obligations									$	5,000	5.00	%					$	5,000	5.00	%
Mortgage-backed obligations					$	35	6.18	%		16,252	4.74		$	346,954	4.19	%		363,241	4.21
Total available for sale	$	0	0	%	$	35	6.18	%	$	21,252	4.80	%	$	346,954	4.19	%	$	368,241	4.22	%
Held to Maturity:
U.S. Government Agency obligations	$	1,500	3.50	%	$	5,000	4.75	%	$	15,000	5.34	%	$	15,000	6.15	%	$	36,500	5.52	%
Municipal obligations		0	0			654	5.53			0	0			969	6.65			1,623	6.20
Mortgage-backed obligations		22	5.51			43	6.67			6,599	4.26			105,808	4.85			112,472	4.81
Corporate debt securities		0	0			1,992	6.62			0	0			0	0			1,992	6.62
Total held to maturity	$	1,522	3.53	%	$	7,689	5.31	%	$	21,599	5.01	%	$	121,777	5.02	%	$	152,587	5.02	%

Note: Securities available for sale are carried at amortized cost in the table above for purposes of calculating the weighted average yield received on such securities.

11

Loan portfolio

The following table summarizes the composition of our loan portfolio by type as of December 31, for each of the years 2004 through 2008.

TABLE 5

	December 31,
(in thousands)	2008		2007		2006		2005		2004
Commercial mortgage	$	599,321	$	430,778	$	365,259	$	299,219	$	239,576
Construction and land development		54,075		54,475		61,365		47,334		39,467
Residential real estate mortgage loans		86,490		80,575		83,690		83,213		79,672
Tax-exempt loans		96,506		53,690		31,446		17,055		6,303
Commercial, industrial and other business loans		195,258		192,390		163,708		138,174		97,198
Consumer loans		237,628		211,536		182,058		148,906		109,568
Commercial lines of credit		170,505		133,927		95,192		90,769		74,559
Total loans	$	1,439,783	$	1,157,371	$	982,718	$	824,670	$	646,343

We manage risk associated with our loan portfolio in part through diversification, with what we believe are sound policies and underwriting procedures that are reviewed, updated and approved at least annually, as well as through our ongoing loan monitoring efforts. Additionally, we monitor concentrations of loans or loan relationships by purpose, collateral or industry using a red/yellow/green measurement for acceptable levels of exposure. At December 31, 2008, we do not have a concentration to any one industry or borrower.

Our commercial mortgage and our construction and land development loans are typically made to small and medium-sized investors, builders and developers and are secured by mortgages on real property located principally in South Central Pennsylvania (principally office buildings, multifamily residential, land development and other commercial properties). The average loan size originated in 2008 in this category was approximately $810,000. Our underwriting policy has established maximum terms for commercial mortgage and construction loans depending on the type of loan within the commercial real estate category. A five-year call option is standard on commercial mortgages. Our underwriting policy generally requires a loan-to-value ratio of no more than 80% on loans in this category and typically requires owner guarantees and other collateral depending on our total risk assessment of the transaction.

Our commercial, industrial and other business loans and lines of credit are typically made to small and medium-sized businesses. The average loan size originated in 2008 in this category was approximately $620,000. Based on our underwriting standards, loans may be secured in whole or in part by collateral such as liquid assets, accounts receivable, equipment, inventory and real property. Additionally, our underwriting policy has established maximum terms for these loans depending on the loan type within the commercial, industrial and other business loans category. The value of the collateral in this category may vary depending on market conditions. The Bank maintains advance rates for particular collateral categories to mitigate the risk that the borrower defaults and the value of the collateral is not sufficient to cover the outstanding loan balance. We also actively manage the unused portion of commercial lines of credit and would freeze a commitment if a borrower were in default. As of December 31, 2008, outstanding balances under commercial lines of credit were $170.5 million and unused commitments were $215.5 million.

Residential real estate mortgage loans represented approximately 6% of our total loans at December 31, 2008. Loans in this category are collateralized by first mortgages on residential properties located in South Central Pennsylvania. Our underwriting policy provides that all residential loans are to be written based upon standards used by the secondary market.

Consumer loans and consumer lines of credit represented approximately 16% of our total loans at December 31, 2008. These loans and lines are secured by first and second mortgages, personal assets of the borrower, or may be unsecured. As of December 31, 2008, 33% of consumer loans and consumer lines of credit were secured by second liens. When originating consumer loans, our underwriting policy sets limitations on the term of the loan, defines allowable collateral and the valuation of the collateral, outlines acceptable debt to income ratios as well as acceptable credit sources to identify those loan applicants with a proven record of credit management. We actively manage the unused portion of our consumer lines of credit and would freeze a commitment if a borrower becomes delinquent. As of December 31, 2008, unused commitments under consumer lines of credit were $63.8 million.

During 2008, total gross loans increased by $309.4 million from $1.2 billion at December 31, 2007, to $1.5 billion at December 31, 2008, which included $41.1 million of loans held for sale on December 31, 2008 and $14.1 million of loans held for sale on December 31, 2007. The loans held for sale represent student loans and certain residential and small business administration loans our management intends to sell and reinvest in higher yielding loans and securities. Also included in gross loans are deposit accounts that are reclassified as loans as a result of overdrawn deposit account balances. The total of overdrawn deposit accounts reclassified as loans aggregated $3.7 million at December 31, 2008 and $740,000 at December 31, 2007. The increase in loans receivable in 2008 was represented across all loan categories except for construction and land development loans which remained flat from 2007 to 2008 at $54 million.

During 2008, commercial mortgage loans increased by $168.5 million, or 39%, tax-exempt loans increased by $42.8 million or 80% and commercial lines of credit increased by $36.6 million, or 27%. The addition to our staff of experienced lenders with long-term ties to the business communities in our markets has enhanced our lending portfolio and, as a result, our access to commercial lending

12

opportunities. Consumer loans increased $26.1 million or 12%. Residential real estate mortgage loans and commercial, industrial and business loans increased $5.9 million and $2.9 million, respectively.

Total loans outstanding represented 88% of total deposits and 67% of total assets at December 31, 2008, excluding the loans held for sale, compared to 74% and 58%, respectively, at December 31, 2007.

The maturity ranges of the loan portfolio and the amounts of loans with predetermined interest rates and floating interest rates in each maturity range, as of December 31, 2008, are presented in the following table.

TABLE 6

	December 31, 2008
(in thousands)	Due Within One Year		Due 1-5  Years		Due Over  Five Years		Total
Real estate:
Commercial mortgage	$	94,445	$	45,298	$	459,578	$	599,321
Construction and land development		26,262		14,218		13,595		54,075
Residential mortgage		2,341		14,216		69,933		86,490
Tax-exempt		148		22,908		73,450		96,506
		123,196		96,640		616,556		836,392
Commercial		18,514		70,605		106,139		195,258
Consumer		33,871		23,823		179,934		237,628
Commercial lines of credit		125,126		45,360		19		170,505
Total loans	$	300,707	$	236,428	$	902,648	$	1,439,783
Interest rates:
Predetermined	$	39,125	$	121,546	$	732,046	$	892,717
Floating		261,582		114,882		170,602		547,066
Total loans	$	300,707	$	236,428	$	902,648	$	1,439,783

Concentrations of Credit Risk

The largest portion of loans, 42%, on our balance sheet is for commercial mortgage related loans. Our commercial real estate loan portfolio is principally to borrowers throughout Cumberland, Dauphin, Lancaster, Lebanon, York and Berks counties of Pennsylvania where we have full-service store locations. Commercial real estate, construction, and land development loans aggregated $653.4 million at December 31, 2008, compared to $485.3 million at December 31, 2007. Commercial real estate loans are collateralized by the related project (principally office building, multi-family residential, land development and other properties) and we generally require loan-to-value ratios of no greater than 80%. Collateral requirements on such loans are determined on a case-by-case basis based on managements’ credit evaluations of the respective borrowers.

Commercial loans represented 14% of total loans at December 31, 2008. Collateral for these types of loans varies depending upon managements’ credit evaluations of the respective borrowers and generally includes the following: business assets, personal guarantees and/or personal assets of the borrower.

Consumer loans comprised 17%, or $237.6 million, of total loans at December 31, 2008. Approximately $225.4 million of consumer loans are secured by real estate, $3.0 million are loans collateralized by personal assets of the borrower, and $9.2 million are unsecured.

On a monthly basis, the Bank’s credit services personnel prepare two different loan concentration reports: one using standardized North American Industry Classification codes and the second report by loan product type. Management reviews and uses these concentration reports to monitor risks. Quarterly, a Risk Management Booklet is prepared and reviewed by both management and our Board of Directors, which identifies areas of risk and quantifies if any exceptions were made to policies and procedures in the lending area during the preceding quarter. Management and the board utilize the Risk Management Booklet as a tool to identify and limit procedure and policy exceptions and to reduce any unnecessary risk in the lending function.

Nonperforming Loans and Assets

Total nonperforming assets (nonperforming loans, foreclosed real estate and loans past due 90 days or more and still accruing interest) at December 31, 2008, were $27.9 million, or 1.30%, of total assets as compared to $3.4 million, or 0.17%, of total assets at December 31, 2007. Total nonperforming loans (nonaccrual loans, 90 days or more past due loans and restructured loans) at December 31, 2008 were $27.1 million compared to $2.9 million a year ago. Much like most of the industry, we experienced significant increases in non-performing loans during 2008 as overall economic conditions in our market area and most of the United States deteriorated. The increase in nonperforming loans experienced by the bank during 2008, primarily resulted from the addition of five commercial relationships totaling $18.8 million at December 31, 2008.  These five loans had an aggregate specific allocation of $2.6 million at year end 2008.  Total nonperforming commercial loans at December 31, 2008 totaled $23.7 million and consisted of 24 relationships including those mentioned above.  At December 31, 2007, total nonperforming commercial loans totaled $710,000 and consisted of 23 relationships.

13

Additionally, total delinquent loans (those loans 30 days or more delinquent) as a percentage of total loans were 2.20% at December 31, 2008, compared to 0.46% at December 31, 2007. We generally place a loan on nonaccrual status and cease accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more, unless the loan is both well-secured and in the process of collection. At December 31, 2008 and 2007, there were no loans past due 90 days and still accruing interest. Additional loans considered by our internal loan review department as potential problem loans of $22.5 million at December 31, 2008, compared to $17.2 million at December 31, 2007, have been evaluated as to risk exposure in determining the adequacy of the allowance for loan losses.

Foreclosed real estate totaled $743,000 as of December 31, 2008 as compared to $489,000 as of December 31, 2007. These properties have been written down fair value less disposition costs. We obtain updated appraisals on nonperforming loans secured by real estate. In those instances where appraisals reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need for possible write-downs or appropriate additions to the allowance for loan losses.  It is likely that increased levels of nonperforming assets and probable losses will continue in the foreseeable future due to the economic downturn, including record unemployment, lackluster consumer spending, stagnant home sales and declining collateral values.

The following table summarizes information regarding nonperforming loans and nonperforming assets as of December 31, 2004 through 2008.

TABLE 7

	December 31,
(dollars in thousands)	2008			2007			2006			2005			2004
Nonaccrual loans:
Commercial	$	6,863		$	534		$	984		$	684		$	308
Consumer		492			57			19			296			11
Real estate:   Construction		7,646			385			247			0			0
Mortgage		12,121			1,959			2,129			1,322			267
Total nonaccrual loans		27,122			2,935			3,379			2,302			586
Loans past due 90 days or more and still accruing		0			0			2			233			0
Restructured loans		0			0			0			0			271
Total nonperforming loans		27,122			2,935			3,381			2,535			857
Foreclosed real estate		743			489			159			159			507
Total nonperforming assets	$	27,865		$	3,424		$	3,540		$	2,694		$	1,364
Nonperforming loans to total loans		1.88	%		0.25	%		0.34	%		0.31	%		0.13	%
Nonperforming assets to total assets		1.30	%		0.17	%		0.19	%		0.16	%		0.11	%
Interest income received on nonaccrual loans	$	1,268		$	157		$	133		$	106		$	30
Interest income that would have been recorded under the original terms of the loans	$	1,776		$	280		$	329		$	220		$	40

Allowance for Loan Losses

The allowance for loan losses (ALLL) is a reserve established in the form of a provision expense for loan losses and is reduced by loan charge-offs net of recoveries. When loans are deemed to be uncollectible, they are charged off. Management has established a reserve that it believes is adequate for estimated losses in the loan portfolio. In conjunction with an internal loan review function that operates independently of the lending function, management monitors the loan portfolio to identify risks on a timely basis so that an appropriate allowance is maintained. Based on an evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to the Board of Directors, indicating any changes in the allowance since the last review. In making the evaluation, management considers the results of recent regulatory examinations, which typically include a review of the allowance for loan losses as an integral part of the examination process.

In establishing the allowance, management evaluates on a quantitative basis individual classified loans and nonaccrual loans, and determines an aggregate reserve for those loans based on that review. In addition, an allowance for the remainder of the loan portfolio is determined based on historical loss experience within certain components of the portfolio. These allocations may be modified if current conditions indicate that loan losses may differ from historical experience.

In addition, a portion of the allowance is established for losses inherent in the loan portfolio, which have not been identified by the quantitative processes described above. This determination inherently involves a higher degree of subjectivity, and considers risk factors that may not have yet manifested themselves in historical loss experience. These factors 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.

14

·   Changes in the quality of the institution’s loan review system.

·   Changes in the experience, ability, and depth of lending management and other relevant staff.

·   The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

·   Changes in international, national, regional and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

·   The factor used in the allowance calculation with the most significant increase from 2007 to 2008, was that of the economic conditions.

More specifically, the methodology utilized to assess the adequacy of the allowance includes:

·   Identifying loans for individual review under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (Statement 114). In general, the loans identified for individual review under Statement 114 consist of larger balance commercial loans and commercial mortgages.

·   Assessing whether the loans identified for review under Statement 114 are “impaired” based on the probability that all amounts due under the loan will not be collected according to the contractual terms of the loan agreement.

·   For loans identified as impaired, calculating the estimated fair value of the loan, using one of the following methods, a) observable market price, b) discounted cash flow or c) the value of the underlying collateral.

·   Segmenting classified, but non-impaired loans based on credit risk ratings and allocating an allowance for loan losses based on appropriate factors, including recent loss history for similar loans.

·   Identifying other loans for evaluation collectively under the provisions of Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies” (Statement 5). In general, these other loans include residential mortgages and consumer loans.

·   Segmenting Statement “defined” term loans into groups with similar characteristics and allocating an allowance for loan losses to each segment based on recent loss history and other relevant information.

·   Reviewing the results to determine the appropriate amount of the allowance for loan losses.

While the allowance for loan losses is maintained at a level believed to be adequate by management for covering estimated losses in the loan portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change. Changes in these estimates may impact the provisions charged to expense in future periods.

The Bank recorded provisions of $7.5 million to the allowance for loan losses in 2008, compared to $1.8 million for 2007. During 2008, net charge-offs amounted to $1.5 million, or 0.11%, of average loans outstanding for the year, compared to $705,000, or 0.07%, of average loans outstanding for 2007. The majority of the total net charge-off figure for 2008 was related to two loans for approximately $960,000. One loan totaling $165,000 made up the largest single loan charge-off for 2007. All other loans charged-off in 2007 were under $100,000 each. The allowance for loan losses increased as a percentage of loans receivable from 0.93% of total loans outstanding at December 31, 2007, to 1.16% of total loans outstanding at December 31, 2008 due in part to increased levels of delinquent, nonperforming and impaired.  The allowance at December 31, 2008 provided coverage of 62% of nonperforming loans compared with 366% at December 31, 2007.

15

Table 8 presents, for the years 2004 through 2008, information regarding our provision and allowance for loan losses.

TABLE 8

	Years Ended December 31,
(dollars in thousands)	2008			2007			2006			2005			2004
Balance at beginning of year	$	10,742		$	9,685		$	9,231		$	7,847		$	6,007
Provisions charged to operating expenses		7,475			1,762			1,634			1,560			2,646
		18,217			11,447			10,865			9,407			8,653
Recoveries of loans previously charged-off:
Commercial		145			11			34			546			110
Consumer		25			53			71			50			113
Real estate		0			8			0			0			8
Total recoveries		170			72			105			596			231
Loans charged-off:
Commercial		(1,426	)		(634	)		(895	)		(627	)		(528	)
Consumer		(173	)		(69	)		(390	)		(135	)		(350	)
Real estate		(69	)		(74	)		0			(10	)		(159	)
Total charged-off		(1,668	)		(777	)		(1,285	)		(772	)		(1,037	)
Net charge-offs		(1,498	)		(705	)		(1,180	)		(176	)		(806	)
Balance at end of year	$	16,719		$	10,742		$	9,685		$	9,231		$	7,847
Net charge-offs to average loans outstanding		0.11	%		0.07	%		0.13	%		0.02	%		0.14	%
Allowance for loan losses to year-end loans		1.16	%		0.93	%		0.99	%		1.12	%		1.21	%

Allocation of the Allowance for Loan Losses

The following table details the allocation of the allowance for loan losses to the various categories. The allocation is made for analytical purposes and it is not necessarily indicative of the categories in which future credit losses may occur. The total allowance is available to absorb losses from any segment of loans. The allocations in the table below were determined by a combination of the following factors: specific allocations made on loans considered impaired as determined by management and the loan review committee, a general allocation on certain other impaired loans, and historical losses in each loan type category combined with a weighting of the current loan composition.

TABLE 9

	Allowance for Loan Losses at December 31,
	2008					2007					2006					2005					2004
(dollars in thousands)	Amount		% Gross Loans			Amount		% Gross Loans			Amount		% Gross Loans			Amount		% Gross Loans			Amount		% Gross Loans
Commercial loans and lines of credit	$	6,772		32	%	$	4,253		31	%	$	4,417		28	%	$	3,675		28	%	$	3,063		27	%
Consumer		1,899		17			1,800		18			1,868		19			1,785		18			1,657		17
Real estate, construction and land development:
Commercial		7,046		45			3,796		43			2,695		43			3,058		42			2,540		43
Residential		1,002		6			893		8			705		10			713		12			587		13
Total	$	16,719		100	%	$	10,742		100	%	$	9,685		100	%	$	9,231		100	%	$	7,847		100	%

Deposits

Total deposits at December 31, 2008, were $1.63 billion, an increase of $73.1 million, or 5%, from total deposits of $1.56 billion at December 31, 2007. We made a strategic decision not to match the unusually “high rate” deposit pricing on deposits offered by most other banks in our footprint. As a result, our deposit growth was below our historical norm. This pricing discipline served to stabilize and eventually began to lower our overall cost of funds. In turn, this provided us with increased net interest income and an improved net interest margin throughout 2008.

We remain a deposit-driven financial institution with emphasis on core deposit accumulation and retention as a basis for sound growth and profitability. We regard core deposits as all deposits other than public certificates of deposits. Deposits in the various core categories increased slightly to $1.63 billion at December 31, 2008. Similarly, total deposits averaged $1.56 billion for 2008, a slight increase over the 2007 average of $1.55 billion. As noted in Table 10 below, declines in savings balances were more than offset by

16

growth in demand deposits and time deposits.

We believe that our record of sustaining core deposit growth is reflective of our retail approach to banking which emphasizes a combination of free checking accounts, convenient store locations, extended hours of operation, unparalleled quality customer service and active marketing.

The average balances and weighted average rates paid on deposits for 2008, 2007 and 2006 are presented below.

TABLE 10

	Years Ended December 31,
	2008 Average				2007 Average				2006 Average
(dollars in thousands)	Balance/Rate				Balance/Rate				Balance/Rate
Demand deposits:
Noninterest-bearing	$	276,120			$	269,353			$	253,671
Interest-bearing (money market and checking)		727,783	1.53	%		712,418	3.47	%		605,043	3.68	%
Savings		351,291	1.10			373,209	2.41			363,515	2.35
Time		203,805	3.53			198,544	4.26			227,484	3.93
Total deposits	$	1,558,999			$	1,553,524			$	1,449,713

The remaining maturity for certificates of deposit of $100,000 or more as of December 31, 2008, 2007 and 2006 is presented in Table 11.

TABLE 11

	At December 31,
(in thousands)	2008		2007		2006
3 months or less	$	29,294	$	22,844	$	25,696
3 to 6 months		13,603		19,452		22,759
6 to 12 months		30,332		12,847		38,901
Over 12 months		20,850		17,263		20,034
Total	$	94,079	$	72,406	$	107,390

Short-Term Borrowings and Repurchase Agreements

Short-term borrowings used to meet temporary funding needs consist of overnight and short-term advances from the Federal Home Loan Bank, securities sold under agreements to repurchase and overnight federal funds lines of credit. For 2008, short-term borrowings averaged $265.5 million, a $57.4 million or 28% increase from 2007. The weighted average rate paid during 2008 was 1.98% compared with 5.12% for 2007 for short-term borrowings. At December 31, 2008, short-term borrowings totaled $300.1 million at an average rate of 0.57%. As of December 31, 2007, short-term borrowings totaled $217.3 million at an average rate of 3.59%. As of December 31, 2006, short-term borrowings totaled $112.8 million at an average rate of 5.40%. The maximum short-term borrowings outstanding at any month-end were $356.5 million in 2008, $249.4 million in 2007 and $227.1 million in 2006. The maximum repurchase agree­ments outstanding at any month-end were $55.0 million in 2006. There were no repurchase agreements outstanding during any time in 2008 and 2007.

Long-Term Debt

Long-term debt totaled $79.4 million at December 31, 2008 and 2007. Our long-term debt consists 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 convertible borrowings. At December 31, 2008, all of the Capital Trust Securities qualified as Tier I capital for regulatory capital purposes. 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 Federal Home Loan Bank convertible select borrowing product during the third quarter of 2007 with the acquisition of a $25.0 million borrowing with a 5-year maturity and a six month conversion term at an initial interest rate of 4.29% and a $25.0 million borrowing with a 2-year maturity and a three-month conversion term at an initial interest rate of 4.49%. See Note 10 in the Notes to Consolidated Financial Statements for the year ended December 31, 2008 for further analysis of our long-term debt.

Stockholders’ Equity and Capital Adequacy

At December 31, 2008, stockholders’ equity totaled $114.5 million, up $2.1 million, or 2%, over stockholders’ equity at December 31, 2007. Increases in stockholders’ equity was due to our net income for the year as well as proceeds for shares issued under our stock purchase and stock option plans were partially offset by a decline in the fair value of investment securities available for sale. As a result of the increased unrealized losses on securities and strong asset growth during the year, the ratio of stockholders’ equity as a percent of total assets declined to 5.35% at December 31, 2008, from 5.68% at December 31, 2007. See Note 12 of Notes to Consolidated Financial Statements for the year ended December 31, 2008, included herein, for additional discussion regarding

17

Stockholders’ Equity. The average equity to assets ratio at December 31, 2008 was 5.57% compared to 5.52% at December 31, 2007.

Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. 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-adjusted assets. Tier 1 capital includes common stockholders’ equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Total capital may be comprised of total Tier 1 capital plus limited life preferred stock, qualifying debt instruments, and the allowance for loan losses.

Table 12 provides a comparison of the Bank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated.

TABLE 12

							Minimum
	December 31,						Regulatory
	2008			2007			Requirements
Tier 1 Capital		9.67	%		10.02	%		4.00	%
Total Capital		10.68			10.77			8.00
Leverage ratio    (to total average assets)		7.52			7.24			4.00

At December 31, 2008, the consolidated capital levels of the Company and of the Bank met the regulatory definition of a “well-capitalized” financial institution, i.e., a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6%, and a total risk-based capital ratio exceeding 10%.

Our common stock trades on the NASDAQ Global Select Market under the symbol COBH. The table below sets forth the prices on the NASDAQ Global Select Market known to us for the period beginning January 1, 2007 through December 31, 2008. As of December 31, 2008, there were approximately 2,200 holders of record of the Company’s common stock.

	Sales Price
Quarter Ended:	High		Low
March 31, 2008	$	27.92	$	23.79
June 30, 2008		29.39		24.01
September 30, 2008		33.82		20.81
December 31, 2008		31.00		22.23
March 31, 2007	$	29.26	$	26.09
June 30, 2007		29.28		25.20
September 30, 2007		31.65		22.35
December 31, 2007		33.11		27.46

18

The following graph shows the yearly percentage change in the Company’s cumulative total shareholder return on its common stock from December 31, 2003 to December 31, 2008 compared with the cumulative total return of a NASDAQ Bank Index and the NASDAQ Composite Market Index.

We offer a Dividend Reinvestment and Stock Purchase Plan by which dividends on our Common Stock and optional cash payments of up to $10,000 per month may be invested in our Common Stock at a 3% discount to the market price and without payment of brokerage commissions.

Interest Rate Sensitivity

The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates.

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.

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. Historically, the most common method of estimating interest rate risk was to measure the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time, referred to as “GAP,” typically one year. Under this method, a company is considered liability sensitive when the amount of its interest-bearing liabilities exceeds the amount of its interest-earning assets within the one-year horizon. However, assets and liabilities with similar repricing characteristics may not reprice at the same time or to the same degree. As a result, our GAP does not necessarily predict the impact of changes in general levels of interest rates on net interest income. Table 13 shows our GAP position as of December 31, 2008. The repricing assumptions used in the table are as follows:

·   Fixed rate loans receivable are scheduled according to their contractual amortization and payment schedules specific to each loan. A market consensus Constant Prepayment Rate is applied to Residential Mortgage Fixed rate loans.

·   Floating rate loans receivable are scheduled in the 1-90 day category as they are tied to a floating index such as New York Prime and available for immediate repricing.

19

·   Securities with pre-payment characteristics such as mortgage-backed securities and collateralized mortgage obligations are scheduled based upon their remaining weighted average lives as calculated utilizing a market consensus Constant Prepayment Rate. Securities with call options are analyzed in the context of the existing interest rate environment to estimate the likelihood of their call, and to project their resulting payment schedule. All other securities are assumed to reprice at their contractual maturity.

·   Fixed rate transaction accounts are scheduled to reprice in accordance with their estimated decay rates as determined in a core deposit study produced by an independent consultant. Floating rate transaction accounts are scheduled in the 1-90 day category as they are tied to a floating index such as the 91 Day Treasury bill.

·   Time deposit accounts, short-term borrowings, and trust capital securities are scheduled based upon their contractual maturity dates.

TABLE 13

	December 31, 2008
(dollars in thousands)	1 – 90 Days			91 – 180 Days			181 – 365 Days			1 – 5 Years			Beyond 5 Years			Total
Interest-earning assets:
Loans receivable	$	537,534		$	60,923		$	94,778		$	573,955		$	213,741		$	1,480,931
Securities		167,622			24,218			38,768			311,132			0			541,740
Total interest-earning assets		705,156			85,141			133,546			885,087			213,741			2,022,671
Interest-bearing liabilities:
Transaction accounts, excluding DDA		620,163			30,060			36,091			168,474			269,057			1,123,845
Time deposits		65,460			33,299			57,771			73,054			0			229,584
Short-term borrowings		300,125			0			0			0			0			300,125
Long-term debt		0			0			25,000			25,000			29,400			79,400
Total interest-bearing liabilities		985,748			63,359			118,862			266,528			298,457			1,732,954
Period GAP		(280,592	)		21,782			14,684			618,559			(84,716	)	$	289,717
Cumulative GAP	$	(280,592	)	$	(258,810	)	$	(244,126	)	$	374,433		$	289,717
Cumulative RSA / RSL		71.54	%		75.33	%		79.10	%		126.10	%		116.72	%

Notes: Securities are reported at fare value  for purposes of this table. RSA means rate sensitive assets; RSL means rate sensitive liabilities.

Shortcomings are inherent in any GAP analysis since certain assets and liabilities may not move proportionately as interest rates change. As the interest rate environment has become more volatile, we have continued to place greater reliance on interest income sensitivity modeling and less on GAP reporting.

Our management understands that the preparation of GAP reports can only provide a guide to the impact of the movement of interest rates. Modeling is the best means to predict the movement in interest rates. This is true because even with the achievement of a perfectly matched balance sheet (per a GAP report), we may be subject to interest rate risk due to: differences in the timing of repricing, basis risk, market risk, customer ability to prepay loans or withdraw funds and yield curve risk.

Our management believes the simulation of net interest income in different interest rate environments provides a more 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 24 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 200 basis point increase and a 100 basis point decrease during the next year, with rates remaining constant in the second year. The 100 basis point decrease scenario represents a change in risk measurement adapted by management in the second quarter of 2008.

Our Asset/Liability Committee (ALCO) policy has established that income sensitivity will be considered acceptable if net interest income in the above mentioned interest rate scenario is within 4% of forecasted net interest income in the first year and within 5% using a two-year time frame.

20

The following table compares the impact on forecasted net income at December 31, 2008 of a plus 200 and minus 100 basis point (bp) change in interest rates to the impact at December 31, 2007 in the plus 200 and minus 200 bp scenarios.

	Plus 200			Minus 100			Minus 200
December 31, 2008:
Twelve Months		0.3	%		(0.6	)%		n/a
Twenty-Four Months		3.1	%		(2.3	)%		n/a
December 31, 2007:
Twelve Months		(1.9	)%		n/a			1.9	%
Twenty-Four Months		(0.5	)%		n/a			0.5	%

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, the use of risk management tools such as interest rate swaps and caps, adjusting the investment leverage position funded by short-term borrowings or fixing the cost of our short-term borrowings.

Many assumptions were used by us 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. The model calculates the market value of our assets and liabilities in excess of book value in the current rate scenario, and then compares the excess of market value over book value given an immediate 200 basis point increase and a 100 basis point decrease in rates. Our ALCO policy indicates that the level of interest rate risk is unacceptable if the immediate change would result in the loss of 40% or more of the excess of market value over book value in the current rate scenario.  At December 31, 2008, the market value of equity calculation, when utilizing the normal practice of valuing all investments based on spot prices obtained in the marketplace, indicates an unacceptable level of interest rate risk in the plus 200 basis point scenario.  It is the Bank’s opinion that spot prices for securities in the Private Label CMO portfolio at December 31, 2008 were not indicative of their true fair value, as the marketplace for these instruments was displaced.  The Bank estimated alternative fair values for Private Label CMOs, incorporating acceptable methodology outlined in FAS 157 (3).  When utilizing the results of this alternative fair value methodology, the negative variability in the market value of equity in the plus 200 basis point scenario is reduced by approximately 62%, and is within acceptable limits.  The market value of equity in the minus 100 basis point scenario is within acceptable policy limits utilizing either traditional valuation methodology or the alternative methodology for Private Label CMOs.

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 200 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 premium. 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 relatively 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 to market fluctuations in our fixed rate assets. Management believes the core deposit premiums produced by its market value of equity model at December 31, 2008 provide an accurate assessment of our interest rate risk.

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 availability and maintenance of a strong base of core customer deposits; maturing short-term assets; the ability to sell marketable 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 monthly basis, a comprehensive liquidity analysis is reviewed by our Board of Directors. 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

21

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 Consolidated Statements of Cash Flows provide additional information on our sources and uses of funds. From a funding standpoint, we have been able to rely over the years on a stable base of strong “core” deposit growth. Cash from operating activities during 2008 declined to $3.5 million from $23.2 million during 2007. This decrease was primarily attributed to the timing of loan sales and resultant higher 2008 balance in loans held for sale. Investing activities resulted in a net cash outflow of $162.4 million during 2008 compared to $126.3 million in 2007, primarily due to the strong loan growth. Financing activities resulted in a net inflow of $157.4 million in 2008 compared to $101.6 million in 2007. The cash inflow in 2008 was mostly from an increase in short-term borrowings of $82.8 million and an increase in deposits of $73.1 million.

At December 31, 2008, liquid assets (defined as cash and cash equivalents, short-term investments, mortgages available for sale, securities available for sale, and non-mortgage-backed securities held to maturity due in one year or less) totaled $399.4 million, or 19%, of total assets. This compares to $444.9 million, or 23%, of total assets, at December 31, 2007.

Our investment portfolio consists mainly of mortgage-backed securities, which do not have bullet final maturities. 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. We also maintain secondary sources of liquidity consisting of federal funds lines of credit, repurchase agreements, and borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if needed. As of December 31, 2008, our total potential liquidity through these secondary sources was $627.7 million of which $277.6 million was currently available, as compared to $694.2 million at December 31, 2007 of which $426.8 million was currently available.

Two other key statistics that are utilized in the liquidity measurement and management process are the available liquidity statistic and the contingency liquidity ratio.  Available liquidity is defined as the sum of cash and due from banks net of the Federal Reserve Bank’s reserve requirement, plus federal funds sold, the market value of non-pledged investment securities, and unused borrowing capacity.  The contingency liquidity ratio is defined as the sum of unencumbered investment securities and federal funds sold divided by total deposits.  Available liquidity totaled $330.9 million at December 31, 2008, down $192.9 million from December 31, 2007 due to investment portfolio run-off and a lower level of unused borrowing capacity that resulted from loan growth out pacing deposit growth.  The contingency liquidity ratio measured 10.9% at year-end 2008 versus 12.1% at year-end 2007.  The decrease in this ratio reflected investment portfolio run-off that was not reinvested.  The lower levels of these two liquidity measurement statistics are coupled with the current distressed market environment which has adversely impacted the pricing of Collateralized Mortgage Obligation (CMO) securities in the Bank’s investment portfolio and impedes our inclination to act on a sale of CMO securities in the available for sale portfolio for liquidity purposes.  Current economic conditions and the lack of a liquid market could affect our ability to sell these securities, as well as the value we would be able to realize.  The Bank continues to evaluate alternative sources of liquidity, and recently undertook a $15.0 million unsecured line of credit with the Atlantic Central Bankers Bank.  The Bank has also opted to participate in the Temporary Liquidity Guarantee Program which provides 100% federal insurance coverage for any individual non-interest demand checking account and low-interest NOW checking account whose balance exceeds $250,000.  The Bank is also currently evaluating the recently developed Capital Assistance Program which offers tier 1 capital assistance in the form of convertible preferred stock.

The Company and the Bank’s liquidity are managed separately. On an unconsolidated basis, the principal source of our revenue 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.

Aggregate Contractual Obligations

The following table represents our on-and–off balance sheet aggregate contractual obligations to make future payments as of December 31, 2008:

TABLE 14

	December 31, 2008
(in thousands)	Less than 1 Year		1 to 3 Years		3 to 5 Years		Over 5 Years		Total
Time Deposits	$	156,530	$	57,312	$	15,742	$	0	$	229,584
Long-Term Debt		25,000		0		25,000		29,400		79,400
Fiserv Obligation	$	6,309	$	8,238	$	6,736	$	6,629	$	27,912
Operating Leases		2,288		4,371		4,081		26,678		37,418
Sponsorship Obligation		467		467		467		932		2,333
Total	$	190,594	$	70,388	$	52,026	$	63,639	$	376,647

For further discussion regarding our commitments and contingencies, please see Notes 7 and 18 in the Notes to Consolidated Financial Statements for December 31, 2008, included herein.

22

Off-Balance Sheet Arrangements

In the conduct of ordinary business operations we routinely enter into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for the early termination of the contract. Management is not aware of any additional commitments or contingent liabilities, which may have a material adverse impact on our liquidity or capital resources.

On November 10, 2008, we announced that we have signed a definitive agreement and plan of merger, to acquire Republic First Bancorp, Inc. (“Republic First”) through the issuance of 0.34 to 0.38 shares of Pennsylvania Commerce common stock for each share of Republic First common stock outstanding immediately prior to completion of the merger.  Republic First, with total assets of approximately $952.0 million as of December 31, 2008, will be merged with and into Pennsylvania Commerce.  This transaction is expected to close in the second quarter 2009, subject to regulatory and shareholder approval for both companies

We are also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. See Note 5 in the Notes to the Consolidated Financial Statements for December 31, 2008, included herein, for additional information.

Forward-Looking Statements

The Company may, from time to time, make written or oral “forward-looking statements”, including statements contained in the Company’s filings with the Securities and Exchange Commission (including the annual report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Company’s control). The words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, including those discussed in Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements:

·   the Company’s ability to successfully transition all services currently provided to it, by TD Bank, N.A. and Commerce Bancorp LLC (formerly Commerce Bancorp, Inc.) to the Company’s new service provider, Fiserv Solutions, Inc.

·   the receipt of a $6 million fee from TD Bank if the transition of all services is completed by the required dates as called for in the Transition Agreement between the two parties;

·   whether the transactions contemplated by the merger agreement with Republic First will be approved by the shareholders of both companies and by the applicable federal, state and local regulatory authorities;

·   the Company’s ability to complete the proposed merger with Republic First Bancorp, Inc., to integrate successfully Republic First’s assets, liabilities, customers, systems and management personnel into the Company’s operations, and to realize expected cost savings and revenue enhancements within expected timeframes;

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

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

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

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

·   continued levels of loan quality and volume origination;

·   the adequacy of loss reserves;

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

·   the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa;

23

·   unanticipated regulatory or judicial proceedings;

·   interest rate, market and monetary fluctuations;

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

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

·   effect of terrorists attacks and threats of actual war;

·  and the success of the Company 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 forward-looking statements, which speak only as of the date of this document. The Company does 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 the Company. For information concerning events or circumstances after the date of this report, refer to the Company’s filings with the Securities and Exchange Commission (“SEC”).

Impact of Inflation and Changing Prices

Interest rates have a more significant impact on our performance than do the effects of general levels of inflation, since most of our assets and liabilities are monetary in nature. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services as measured by the Consumer Price Index. The liquidity and maturity structure of our assets and liabilities are critical to the maintenance of acceptable performance levels.

Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk principally includes interest rate risk, which was previously discussed. Historically, our net interest margin has remained fairly stable; our net interest margin for the year ended December 31, 2008 was 4.09%, an increase of 79 basis points from 3.30% for the year ended December 31, 2007. See the section titled “Net Interest Income and Net Interest Margin” in this Management’s Discussion and Analysis for further discussion regarding our net interest margin performance.

Currently, we have 99% of our deposits in accounts which we consider core deposits. These accounts, which have a relatively low cost of deposits, have historically contributed significantly to the net interest margin.

24

Pennsylvania Commerce Bancorp, Inc.

Report on Management’s Assessment of Internal Control Over

Financial Reporting

Pennsylvania Commerce Bancorp, Inc. is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report.  The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of Pennsylvania Commerce Bancorp, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of the Company; provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statement in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are only being made in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.  The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for liability through a program of internal audits.  Actions are taken to correct potential deficiencies as they are identified.

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected.  Also, because of changes in conditions, internal control effectiveness may vary over time.  Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Company’s system of internal control over financial reporting as of December 31, 2008, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management concludes that, as of December 31, 2008, its system of internal control over financial reporting is effective and meets the criteria of Internal Control – Integrated Framework.

Beard  Miller  Company  LLP, an independent registered public accounting firm,   has   audited  the  Consolidated  Financial  Statements  of  the Corporation for the year ended December 31, 2008, appearing elsewhere in this  annual  report,  and  has  issued  an  attestation  report  on the effectiveness  of  the  Corporation's  internal  control  over financial reporting  as  of December 31, 2008, as stated in their report, which is included herein.

/s/ Gary L. Nalbandian

Gary L. Nalbandian

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

/s/ Mark A. Zody

Mark A. Zody

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

March 12, 2009

25

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Pennsylvania Commerce Bancorp, Inc.

Harrisburg, Pennsylvania

We have audited the accompanying consolidated balance sheets of Pennsylvania Commerce Bancorp, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008. Pennsylvania Commerce Bancorp, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Commerce Bancorp, Inc. and its subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pennsylvania Commerce Bancorp, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2009 expressed an unqualified opinion.

            /s/ Beard Miller Company LLP

Beard Miller Company LLP

Harrisburg, Pennsylvania

March 16, 2009

26

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Pennsylvania Commerce Bancorp, Inc.

Harrisburg, Pennsylvania

We have audited Pennsylvania Commerce Bancorp, Inc.’s (the “Corporation”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pennsylvania Commerce Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. 

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

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

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

In our opinion, Pennsylvania Commerce Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, stockholders’ equity and cash flows of Pennsylvania Commerce Bancorp, Inc. and subsidiaries, and our report dated March 16, 2009 expressed an unqualified opinion.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Harrisburg, Pennsylvania

March 16, 2009

27

Consolidated Balance Sheets

	December 31,
(in thousands, except share and per share amounts)	2008			2007
Assets
Cash and cash equivalents	$	49,511		$	50,955
Securities, available for sale at fair value		341,656			387,166
Securities, held to maturity at cost
(fair value 2008: $154,357;  2007: $256,248)		152,587			257,467
Loans, held for sale		41,148			14,143
Loans receivable, net of allowance for loan losses
(allowance 2008: $16,719;  2007: $10,742)		1,423,064			1,146,629
Restricted investments in bank stocks		21,630			18,234
Premises and equipment, net		87,059			89,307
Other assets		23,872			15,110
Total assets	$	2,140,527		$	1,979,011
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	280,556		$	271,894
Interest-bearing		1,353,429			1,289,002
Total deposits		1,633,985			1,560,896
Short-term borrowings and repurchase agreements		300,125			217,335
Long-term debt		79,400			79,400
Other liabilities		12,547			9,045
Total liabilities		2,026,057			1,866,676
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; 10,000,000 shares authorized;
(issued and outstanding shares 2008: 6,446,421;  2007: 6,313,663)		6,446			6,314
Surplus		73,221			70,610
Retained earnings		51,683			38,862
Accumulated other comprehensive loss		(17,280	)		(3,851	)
Total stockholders’ equity		114,470			112,335
Total liabilities and stockholders’ equity	$	2,140,527		$	1,979,011

See accompanying notes.

28

Consolidated Statements of Income
	Years Ended December 31,
(in thousands, except per share amounts)	2008			2007		2006
Interest Income
Loans receivable, including fees:
Taxable	$	79,247		$	76,753	$	64,592
Tax-exempt		3,427			2,109		1,029
Securities:
Taxable		28,401			37,060		38,845
Tax-exempt		65			65		85
Total interest income		111,140			115,987		104,551
Interest Expense
Deposits		22,211			42,197		39,762
Short-term borrowings		5,349			10,804		10,267
Long-term debt		4,875			3,494		1,731
Total interest expense		32,435			56,495		51,760
Net interest income		78,705			59,492		52,791
Provision for loan losses		7,475			1,762		1,634
Net interest income after provision for loan losses		71,230			57,730		51,157
Noninterest Income
Service charges and other fees		23,929			20,688		16,816
Other operating income		923			702		640
Gains on sales of loans		738			1,262		1,136
Gains (losses) on sales/call of securities		(157	)		171		160
Total noninterest income		25,433			22,823		18,752
Noninterest Expenses
Salaries and employee benefits		38,085			34,495		30,864
Occupancy		8,087			7,560		6,568
Furniture and equipment		4,307			4,075		3,587
Advertising and marketing		2,747			3,334		2,971
Data processing		7,234			6,501		5,420
Postage and supplies		1,878			1,963		1,621
Regulatory assessments and related fees		2,834			3,062		511
Telephone		2,214			2,386		1,152
Core system conversion/branding		935			-		-
Merger/acquisition		491			-		-
Other		9,097			7,431		6,600
Total noninterest expenses		77,909			70,807		59,294
Income before taxes		18,754			9,746		10,615
Provision for federal income taxes		5,853			2,745		3,361
Net income	$	12,901		$	7,001	$	7,254
Net Income per Common Share
Basic	$	2.02		$	1.11	$	1.18
Diluted		1.97			1.07		1.12
Average Common and Common Equivalent Shares Outstanding
Basic		6,356			6,237		6,099
Diluted		6,520			6,462		6,381

See accompanying notes.

29

Consolidated Statements of Stockholders’ Equity

(dollars in thousands)		Preferred Stock		Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive(Loss)			Total
January 1, 2006	$	400	$	6,014	$	64,859	$	24,767		$	(4,397	)	$	91,643
Comprehensive income:
Net income		-		-		-		7,254			-			7,254
Change in unrealized gains (losses) on securities, net of taxes		-		-		-		-			(57	)		(57	)
Total comprehensive income														7,197
Dividends declared on preferred stock		-		-		-		(80	)		-			(80	)
Common stock of 95,561 shares issued under stock option plans, including tax benefit of $513		-		96		877		-			-			973
Common stock of 210 shares issued under employee stock purchase plan		-		-		6		-			-			6
Proceeds from issuance of 39,525 shares of common stock in connection with dividend reinvestment and stock purchase plan		-		39		1,001		-			-			1,040
Common stock share-based awards		-		-		329		-			-			329
December 31, 2006		400		6,149		67,072		31,941			(4,454	)		101,108
Comprehensive income:
Net income		-		-		-		7,001			-			7,001
Change in unrealized gains (losses) on securities, net of taxes		-		-		-		-			603			603
Total comprehensive income														7,604
Dividends declared on preferred stock		-		-		-		(80	)		-			(80	)
Common stock of 106,260 shares issued under stock option plans, including tax benefit of $368		-		106		1,294		-			-			1,400
Common stock of 220 shares issued under employee stock purchase plan		-		-		6		-			-			6
Proceeds from issuance of 58,028 shares of common stock in connection with dividend reinvestment and stock purchase plan		-		59		1,519		-			-			1,578
Common stock share-based awards		-		-		719		-			-			719
December 31, 2007		400		6,314		70,610		38,862			(3,851	)		112,335
Comprehensive income:
Net income		-		-		-		12,901			-			12,901
Change in unrealized gains (losses) on securities, net of taxes		-		-		-		-			(13,429	)		(13,429	)
Total comprehensive (loss)														(528	)
Dividends declared on preferred stock		-		-		-		(80	)		-			(80	)
Common stock of 95,386 shares issued under stock option plans, including tax benefit of $102		-		95		548		-			-			643
Common stock of 160 shares issued under employee stock purchase plan		-		-		4		-			-			4
Proceeds from issuance of 37,212 shares of common stock in connection with dividend reinvestment and stock purchase plan		-		37		917		-			-			954
Common stock share-based awards		-		-		1,142		-			-			1,142
December 31, 2008	$	400	$	6,446	$	73,221	$	51,683		$	(17,280	)	$	114,470

See accompanying notes.

30

Consolidated Statements of Cash Flows

(in thousands)	Years Ended December 31,
	2008			2007			2006
Operating Activities
Net income	$	12,901		$	7,001		$	7,254
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		7,475			1,762			1,634
Provision for depreciation and amortization		5,007			4,789			4,004
Deferred income taxes		(2,215	)		73			1,319
Amortization of securities premiums and accretion of discounts, net		450			567			776
Net (gains) losses on sales and calls of securities		157			(171	)		(160	)
Proceeds from sales of loans originated for sale		60,620			86,604			93,789
Loans originated for sale		(86,897	)		(84,301	)		(97,524	)
Gains on sales of loans originated for sale		(738	)		(1,262	)		(1,136	)
Loss on disposal of equipment		0			0			270
Stock-based compensation		1,142			719			329
Amortization of deferred loan origination fees and costs		1,726			1,858			2,174
(Increase) decrease in other assets		406			2,904			(5,847	)
Increase (decrease) in other liabilities		3,502			2,647			(518	)
Net cash provided by operating activities		3,536			23,190			6,364
Investing Activities
Securities held to maturity:
Proceeds from principal repayments, calls and maturities		113,348			149,790			44,923
Proceeds from sales		1,840			0			2,081
Purchases		(10,571	)		(87,590	)		(60,400	)
Securities available for sale:
Proceeds from principal repayments and maturities		47,627			55,423			112,533
Purchases		(23,212	)		(49,949	)		(124,527	)
Proceeds from sales of loans receivable		1,806			2,683			1,181
Net increase in loans receivable		(287,430	)		(179,720	)		(162,473	)
Net purchase of restricted investments in bank stock		(3,396	)		(6,507	)		(265	)
Proceeds from sale of premises and equipment and foreclosed real estate		479			62			827
Purchases of premises and equipment		(2,867	)		(10,479	)		(22,516	)
Net cash used by investing activities		(162,376	)		(126,287	)		(208,636	)
Financing Activities
Net increase in demand, interest checking, money market, and savings deposits		9,247			3,270			249,695
Net increase (decrease) in time deposits		63,842			(59,151	)		(3,978	)
Net increase (decrease) in short-term borrowings		82,790			104,535			(45,100	)
Proceeds from long-term debt		0			50,000			15,800
Proceeds from common stock options exercised		541			1,032			460
Proceeds from dividend reinvestment and common stock purchase plan		954			1,578			1,040
Tax benefit on exercise of stock options		102			368			513
Cash dividends on preferred stock		(80	)		(80	)		(80	)
Net cash provided by financing activities		157,396			101,552			218,350
Increase (decrease) in cash and cash equivalents		(1,444	)		(1,545	)		16,078
Cash and cash equivalents at beginning of year		50,955			52,500			36,422
Cash and cash equivalents at year-end	$	49,511		$	50,955		$	52,500

See accompanying notes.

31

Notes to Consolidated Financial Statements

1.Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The consolidated financial statements presented include the accounts of Pennsylvania Commerce Bancorp, Inc. (the Company) and its wholly-owned subsidiary Commerce Bank/Harrisburg (Commerce or Bank). All material intercompany transactions have been eliminated. The Company was formed July 1, 1999 and is subject to regulation of the Federal Reserve Bank.

The Company is a one-bank holding company head­quartered in Harrisburg, Pennsylvania and provides full banking services through its subsidiary Commerce Bank. As a Pennsylvania state chartered bank, Commerce is subject to regulation of the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. The Bank serves primarily the Harrisburg, York, Reading and Lancaster markets of South Central Pennsylvania.

Estimates

The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts of assets and liabilities and require disclosure of contingent assets and liabilities. In the opinion of management, all adjustments considered necessary for fair presentation have been included and are of a normal, recurring nature. 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, and the valuation of securities available for sale.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within the South Central Pennsylvania Region. Note 3 discusses the types of securities that the Company invests in. Notes 4 and 6 discuss the types of lending that the Company engages in as well as loan concentrations. The Company does not have any significant concentrations to any one customer.

Securities

Securities classified as held to maturity are those debt securities that the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over the estimated average life of the securities.

Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the estimated average life of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) adverse changes in the general market condition of the industry in which the investment is related, (2) the financial condition and near-term prospects of the issuer, (3) the seniority of the tranche owned by the Bank in relation to the entire bond issue, (4) current prepayment behavior, (5) current credit agency ratings, (6) the credit support available in the bond structure to absorb losses, and (7) each of the following with respect to the underlying collateral: (a) delinquency percentages and trends, (b) weighted average loan-to-value ratios, (c) weighted average FICO scores, and (d) the level of foreclosure and OREO activity. Also considered is the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Bank is generally amortizing these amounts over the contractual life of the loan or the call date.

32

The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal.  When a loan is considered impaired and it is also in non accrual status, the unpaid interest is treated the same as it is for a non accrual loan.  If a loan is considered impaired and accruing, interest is recognized as accrued.  Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified impaired. For such loans, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Additionally, the general component is maintained to cover uncertainties that could affect management’s estimates of probable losses. This component reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating losses in the portfolio.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change, including the amounts and timing of future cash flows expected to be received on impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, commercial mortgage and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

All nonaccrual loans, including any non-homogenous portfolio residential mortgages and home equity loans with balances greater than $25,000,are evaluated individually to determine whether a valuation allowance is necessary due to collateral deficiencies that may exist within the loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment, unless such loans are the subject of a restructuring agreement.

Loans Held for Sale

Loans held for sale are comprised of student loans and selected residential loans the Company originates with the intention of selling in the future. Occasionally, loans held for sale also include selected small business administration loans and business and industry loans that the Company decides to sell. These loans are carried at the lower of cost or estimated fair value, calculated in the aggregate.

Restricted Investments in Bank Stock

Prior to 2008, restricted investments in bank stocks included Federal Home Loan Bank of Pittsburgh (FHLB) and Federal Reserve Bank (FRB) stocks. At December 31, 2008, restricted investments in bank stocks included FHLB stock only. During the fourth quarter of 2008, the Bank applied for and was granted a change from a national bank charter to a Pennsylvania state bank charter. At the same time, the Bank’s primary federal regulator changed from the FRB to the Federal Deposit Insurance Corporation (FDIC). Therefore, the Bank was required to redeem $2.8 million of FRB stock. Federal law requires a member institution of the FHLB system to hold stock of its district FHLB according to a predetermined formula. At December 31, 2008, $18.8 million of the Company’s $21.6 million of FHLB stock was purchased to cover the Company’s borrowing level on its credit line at the FHLB. The stock is carried at cost.

The Company evaluates the restricted investment in bank stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. The Company’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

33

The Company believes no impairment charge is necessary related to the FHLB restricted stock as of December 31, 2008.

Advertising Costs

The Company follows the policy of charging the costs of advertising to expense as incurred.

Income Taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. As a result of the Company’s evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified.  The Company did not recognize any income tax interest or penalties for the years ended December 31, 2008, 2007 and 2006. The tax years subject to examination by the taxing authorities are calendar years 2005 through 2008. 

Bank Premises and Equipment

Bank premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is charged to operations over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Depreciation and amortization are determined on the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less estimated costs to sell the asset.  Losses on foreclosed real estate were $303,000 as stated in the Consolidated Statement of Income under other non interest expense for year ended December 31, 2008.  Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Foreclosed assets are included in other assets. Foreclosed real estate assets totaled $743,000 as of December 31, 2008 as compared to $489,000 as of December 31, 2007.

Transfers of Financial Assets

Transfers of financial assets, including sales of loans and loan participations, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Per Share Data

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.

Off Balance Sheet Financial Instruments

In the ordinary course of business, the Company has entered into off balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded on the balance sheet when they become payable by the borrower to the Company.

Cash Flow Information

For purposes of the statements of cash flows, the Company considers cash and due from banks and federal funds sold as cash and cash equivalents. Generally, federal funds, a component of cash and cash equivalents are purchased and sold for one-day periods. Cash paid during the years ended December 31, 2008, 2007, and 2006 for interest expense on deposits, borrowings and debt was $32.2 million, $56.4 million, and $51.5 million respectively. Income taxes paid totaled $8.0 million, $1.7 million, and $2.7 million in 2008, 2007, and 2006, respectively.

34

Stock-Based Compensation

Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 123(R), “Share-Based Payment,” (“FAS 123(R)”) using the modified prospective method. FAS 123(R) 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 cash flows resulting from the tax benefits due to deductions in excess of the compensation cost recognized for options (excess tax benefits) are classified as financing cash flows.

Recent Accounting Standard

FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will impact business combinations which occur after January 1, 2009.  Given that FASB Statement No.  141(R) will require the expensing of direct acquisition costs, the Company expensed such costs in 2008 that were incurred in conjunction with the pending acquisition described in Note 23.

Segment Reporting

Commerce acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business and government customers. Through its stores, the Company offers a full array of commercial and retail financial services.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful.

Reclassifications

Certain amounts in the 2006 and 2007 financial statements have been reclassified to conform to the 2008 presentation format. Such reclassifications had no impact on the Company’s net income.

2.Restrictions on Cash and Due from Bank Accounts

The Bank is required to maintain average reserves, in the form of cash and balances with the Federal Reserve Bank, against its deposit liabilities. The average amount of these reserve balances maintained for 2008 and 2007 was approximately $7.8 million and $24.8 million, respectively.

3.Securities

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

	December 31, 2008
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale:
U.S. Government Agency securities	$	5,000	$	2	$	0		$	5,002
Mortgage-backed securities		363,241		2,253		(28,840	)		336,654
Total	$	368,241	$	2,255	$	(28,840	)	$	341,656
Held to Maturity:
U.S. Government Agency securities	$	36,500	$	258	$	0		$	36,758
Municipal securities		1,623		12		0			1,635
Mortgage-backed securities		112,472		2,049		(557	)		113,964
Corporate debt securities		1,992		8		0			2,000
Total	$	152,587	$	2,327	$	(557	)	$	154,357

35

	December 31, 2007
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale:
U.S. Government Agency securities	$	5,000	$	0	$	(42	)	$	4,958
Mortgage-backed securities		388,000		375		(6,167	)		382,208
Total	$	393,000	$	375	$	(6,209	)	$	387,166
Held to Maturity:
U.S. Government Agency securities	$	133,303	$	606	$	(163	)	$	133,746
Municipal securities		1,621		16		0			1,637
Mortgage-backed securities		116,058		213		(1,545	)		114,726
Corporate debt securities		6,485		70		(416	)		6,139
Total	$	257,467	$	905	$	(2,124	)	$	256,248

The amortized cost and fair value of debt securities at December 31, 2008 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	$	0	$	0	$	1,500	$	1,502
Due after one year through five years		0		0		7,646		7,674
Due after five years through ten years		5,000		5,002		15,000		15,099
Due after ten years		0		0		15,969		16,118
		5,000		5,002		40,115		40,393
Mortgage-backed securities		363,241		336,654		112,472		113,964
Total	$	368,241	$	341,656	$	152,587	$	154,357

There were no sales of securities in the available for sale portfolio in 2008. There was one sale in the held to maturity portfolio during the second quarter of 2008. The Company sold a $2.0 million corporate debt security due to significant deterioration in the creditworthiness of the issuer. A pretax loss of $157,000 was recognized on this sale during the second quarter of 2008.

There were no sales of securities in the available for sale or held to maturity portfolios in 2007. There was $171,000 in premiums on the call of two securities realized in net income for 2007.

There were no sales of securities in the available for sale portfolio in 2006. A gross gain of $80,000 was realized on the sale of one security from the held to maturity portfolio. This sale consisted of a $2.1 million debt security which was sold due to the expected and impending call of the security by the issuer. The sale was near the call date and changes in market interest rates had no effect on the security’s fair value. The amount of gain on sale was essentially the same as the call premium that would have been recognized on the call date. An $80,000 premium on the call of another debt security was also realized in net income for 2006.

At December 31, 2008 and 2007, securities with a carrying value of $320.3 million and $455.4 million respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

36

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

	December 31, 2008
	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:
Mortgage-backed securities	$	60,927	$	(5,025	)	$	144,387	$	(23,815	)	$	205,314	$	(28,840	)
Total	$	60,927	$	(5,025	)	$	144,387	$	(23,815	)	$	205,314	$	(28,840	)
Held to Maturity:
Mortgage-backed securities	$	0	$	0		$	4,916	$	(557	)	$	4,916	$	(557	)
Total	$	0	$	0		$	4,916	$	(557	)	$	4,916	$	(557	)
	December 31, 2007
	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	$	0	$	0		$	4,958	$	(42	)	$	4,958	$	(42	)
Mortgage-backed securities		80,732		(1,110	)		226,261		(5,057	)		306,993		(6,167	)
Total	$	80,732	$	(1,110	)	$	231,219	$	(5,099	)	$	311,951	$	(6,209	)
Held to Maturity:
U.S. Government Agency securities	$	9,990	$	(9	)	$	59,846	$	(154	)	$	69,836	$	(163	)
Mortgage-backed securities		10		0			88,362		(1,545	)		88,372		(1,545	)
Corporate debt securities		1,580		(416	)		0		0			1,580		(416	)
Total	$	11,580	$	(425	)	$	148,208	$	(1,699	)	$	159,788	$	(2,124	)

At December 31, 2008, eight mortgage-backed securities were in an unrealized loss position for less than twelve months. At the same date, thirty-two mortgage-backed securities have been in a continuous unrealized loss position for twelve months or more.

Our investment securities portfolio consists primarily of U.S. Government agency securities, U.S. Government sponsored agency mortgage-backed obligations and private-label collateralized mortgage obligations (CMO’s). The securities of the U.S. Government sponsored agencies and the U.S. Government mortgage-backed securities have little, if any, credit risk because they are either backed by the full faith and credit of the U.S. Government or their principal and interest payments are guaranteed by an agency of the U.S. Government. Private label CMO’s 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 CMO’s have carried an AAA insurance rating on the underlying issuer, however, the sub-prime mortgage problems and collapse in the residential housing market in the U.S. throughout 2008 have led to ratings downgrades and subsequent other-than-temporary impairment of many types of CMO’s.

The unrealized losses in the Company’s investment portfolio at December 31, 2008 were associated with two different types of securities. The first type includes eight floating rate government agency sponsored collateralized mortgage obligations (CMO’s), all of which have yields that are indexed to a spread over the one month London Interbank Offered Rate (LIBOR). Management believes that the unrealized losses on the Company’s investment in these federal agency CMO’s was caused by the overall very low level of market interest rates, including LIBOR. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the 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 because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2008.

The second type of security in the Company’s investment portfolio with unrealized losses at December 31, 2008 were private label CMO’s. As of December 31, 2008, Commerce Bank owned thirty-two CMO securities in its investment portfolio with a total book value of $160.4 million.  Management performs periodic assessments of these securities for other-than-temporary impairment. See Note 1 for a list of considerations management utilizes in its assessment.  To help with this assessment, management requested an independent third party (the third party) with expertise regarding CMO securities to prepare an analysis of all private-label CMO’s held in the Bank’s investment portfolio.  The third party produced a book which detailed historical performance for each CMO dating back to the bonds issuance as well as a separate collateral default analysis with various levels of loss severity for each bond. The third party also assigned each bond to one of four categories based upon their knowledge and analysis of the bonds.  They ranked 7 of the Bank’s private-label CMO’s as excellent, 20 of them as very good, 5 of them as fair and none were rated as poor.  Management discussed the characteristics and performance of each of the fair-rated bonds with a CMO analyst employed by the third party to gain better insight into the risks and probability of loss potential associated with each bond.

While each of these five bonds has experienced an increase in delinquency, foreclosure and OREO activity, none has yet experienced default rates high enough, in management’s opinion, to warrant impairment of the tranche owned by the Bank at this time.  Also, at this time there appears to be sufficient credit support built into the structure of each bond to absorb losses ranging from 6% to 9% of the remaining balance before impairment could begin to affect the tranches owned by the Bank.  Two of the bonds were recently downgraded by Fitch rating service, one to BBB and the other to BB status.  These bonds are split-rated as S&P and Moody’s continue to rate them above investment grade.  The downgrading by one of the three rating service agencies does not necessarily indicate current impairment in management’s opinion.

Management also applied a pricing methodology as permitted by FAS #157(3) to the Bank’s entire private-label CMO portfolio in an effort to provide what may be more reasonable pricing of these bonds at December 31, 2008 in a more normalized trading market.   The results produced much higher market prices as of 12/31/08 than were obtained by way of matrix pricing the securities with street bids.  Although the accounting guidance would permit the Bank to utilize these higher prices, management has elected to utilize the lower matrix pricing for its year-end financial statements.

In summary, based upon a detailed analysis, management does not believe that the decreased market prices associated with any of the Bank’s private label CMO investments represent other-than-temporary impairment as of December 31, 2008.

37

4.Loans Receivable and Allowance for Loan Losses

A summary of loans receivable is as follows:

	December 31,
(in thousands)	2008		2007
Real Estate:
Commercial Mortgage	$	599,321	$	430,778
Construction and Land Development		54,075		54,475
Residential Mortgage		86,490		80,575
Tax-Exempt		96,506		53,690
Commercial Business		195,258		192,390
Consumer		237,628		211,536
Commercial Lines of Credit		170,505		133,927
		1,439,783		1,157,371
Less: Allowance for Loan Losses		16,719		10,742
Net Loans Receivable	$	1,423,064	$	1,146,629

The following is a summary of the transactions in the allowance for loan losses.

	Years Ended December 31,
(in thousands)	2008			2007			2006
Balance at beginning of year	$	10,742		$	9,685		$	9,231
Provision charged to expense		7,475			1,762			1,634
Recoveries		170			72			105
Loans charged off		(1,668	)		(777	)		(1,285	)
Balance at end of year	$	16,719		$	10,742		$	9,685

At December 31, 2008 and 2007, the recorded investment in loans considered to be impaired under FASB Statement No. 114 “Accounting by Creditors for Impairment of a Loan” totaled $41.8 million and $9.1 million, respectively. At December 31, 2008, $12.7 million of impaired loans have a specific valuation allowance of $3.7 million as compared to $1.3 million of impaired loans having a specific valuation allowance of $536,000 at December 31, 2007. Nonaccrual loans at December 31, 2008 and 2007 totaled $27.1 million and $2.9 million, respectively. Loans past due 90 days or more and still accruing interest totaled $0 at both December 31, 2008 and December 31, 2007.

Impaired loans averaged approximately $21.0 million, $11.7 million and $10.5 million during 2008, 2007 and 2006, respectively. Interest income recognized on these loans amounted to $1.9 million, $883,000 and $1.1 million during 2008, 2007 and 2006, respectively.

Certain directors and executive officers of the Company, including their associates and companies, have loans with the Bank. Such loans were made in the ordinary course of business at the Bank’s normal credit terms including interest rate and collateralization, and do not represent more than a normal risk of collection. Total loans to these persons and companies amounted to approximately $15.1 million and $14.9 million at December 31, 2008 and 2007, respectively. During 2008, $5.9 million of new advances were made and repayments totaled $5.7 million.

5.Loan Commitments and Standby Letters of Credit

Loan commitments are made to accommodate the financial needs of Commerce’s customers. Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate the customers’ normal course of business transactions. Historically, almost all of the Bank’s standby letters of credit expire unfunded.

Both types of lending arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank’s normal credit policies. Letter of credit commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twenty-four months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of December 31, 2008 as well as at December 31, 2007 for guarantees under standby letters of credit issued was $0.

38

The Bank’s maximum exposure to credit loss for loan commitments (unfunded loans and unused lines of credit, including home equity lines of credit) and standby letters of credit outstanding were as follows:

	December 31,
(in thousands)	2008		2007
Commitments to grant loans	$	3,885	$	5,537
Unfunded commitments of existing commercial loans		361,951		309,134
Unfunded commitments of existing consumer loans		63,785		59,970
Standby letters of credit		41,771		37,004
Total	$	471,392	$	411,645

6.Concentrations of Credit Risk

The Company’s loan portfolio is principally to borrowers throughout Cumberland, Dauphin, York, Lebanon, Lancaster and Berks counties of Pennsylvania where it has full-service stores. Commercial real estate loans and loan commitments for commercial real estate projects aggregated $722.0 million at December 31, 2008.

Commercial real estate loans are collateralized by the related project (principally office buildings, multifamily residential, land development, and other properties) and the Company generally requires loan-to-value ratios of no greater than 80%. Collateral requirements on such loans are determined on a case-by-case basis based on management’s credit evaluations of the respective borrowers.

7.Bank Premises, Equipment and Leases

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation expense for 2008, 2007 and 2006 was $5.0 million, $4.8 million and $4.0 million, respectively, and is computed on the straight-line method over the following estimated useful lives of the related assets:

	Years
Buildings and leasehold improvements	1 - 40
Furniture, fixtures and equipment	1 - 15
Computer equipment and software	3 - 8

A summary of premises and equipment is as follows:

	December 31,
(in thousands)	2008		2007
Land	$	15,386	$	15,386
Buildings		66,841		66,217
Construction in process		972		1,010
Leasehold improvements		2,396		2,346
Furniture, fixtures and equipment		25,920		24,052
		111,515		109,011
Less accumulated depreciation and amortization		24,456		19,704
	$	87,059	$	89,307

Land, buildings, and equipment are leased under non­cancelable operating lease agreements that expire at various dates through 2033. Total rental expense for operating leases in 2008, 2007, and 2006 was $2.7 million, $2.6 million, and $2.3 million, respectively. At December 31, 2008, future minimum lease payments for noncancelable operating leases are payable as follows:

(in thousands)
2009	$   2,288
2010	2,185
2011	2,186
2012	2,053
2013	2,028
Thereafter	26,678
Total minimum lease payments	$ 37,418

39

8.Deposits

The composition of deposits is as follows:

	December 31,
(in thousands)	2008		2007
Noninterest bearing demand	$	280,556	$	271,894
Interest checking and money market		732,234		747,550
Savings		391,611		375,710
Time certificates $100,000 or more		94,079		72,406
Other time certificates		135,505		93,336
	$	1,633,985	$	1,560,896

At December 31, 2008, the scheduled maturities of time deposits are as follows:

(in thousands)
2009	$ 156,530
2010	32,108
2011	25,204
2012	2,656
2013	13,086
	$ 229,584

9.Short-term Borrowings

Short-term borrowings consist of securities sold under agreements to repurchase and lines of credit. The Bank has a line of credit commitment from the Federal Home Loan Bank (FHLB) for borrowings up to $563 million and certain qualifying assets of the Bank collateralize the line. There was $300.1 million outstanding at December 31, 2008 and $191.8 million outstanding at December 31, 2007 on this line of credit. At December 31, 2008 and December 31, 2007 the Bank had availability under one repurchase agreement to borrow up to $50 million of which $0 was outstanding. The Company did not have any securities pledged at December 31, 2008 and 2007 under these repurchase agreements. The Bank has a $25 million line of credit from TD Bank, N.A. of which $0 was outstanding at December 31, 2008. At December 31, 2007, $25.5 million was outstanding on this line of credit which, at that time, was a $50 million line. The Bank will discontinue this line of credit arrangement in 2009 as it transitions its relationship away from TD Bank, N.A. In addition to the previously mentioned sources, the Bank has a $15.0 million federal funds line of credit with another correspondent bank of which there was $0 outstanding at December 31, 2008 and December 31, 2007, respectively.  The weighted average interest rate of total short-term borrowings was 0.57% at December 31, 2008 and 3.59% at December 31, 2007.

10. Long-term Debt

As part of the Company’s Asset/Liability management strategy, management utilized the Federal Home Loan Bank convertible select borrowing product during the third quarter of 2007 when it obtained $25.0 million in borrowings with a 5 year maturity and a six month conversion term at an initial interest rate of 4.29% and a $25.0 million borrowing with a 2 year maturity and a three month conversion term at an initial interest rate of 4.49%. At December 31, 2008, all $50.0 million of convertible select borrowings were outstanding at their respective initial interest rates.

On June 15, 2000, the Company issued $5 million of 11% fixed rate Trust Capital Securities to Commerce Bancorp, Inc. (now known as Commerce Bancorp LLC) through Trust I, a Delaware business trust subsidiary. The Trust Capital Securities evidence a preferred ownership interest in the Trust, of which the Company owns 100% of the common equity. The proceeds from the issuance of the Trust Capital Securities were invested in substantially similar Junior Subordinated Debt of the Company. The Company unconditionally guarantees the Trust Capital Securities. Interest on the debt is payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year. The Trust Capital Securities are scheduled to mature on June 15, 2030. The Trust Capital Securities may be redeemed in whole or in part at the option of the Company on or after June 15, 2010 at 105.50% of the principal plus accrued interest, if any. The redemption price declines by 0.55% on June 15 of each year from 2011 through 2020 at which time the securities may be redeemed at 100% of the principal plus accrued interest, if any, to the date fixed for redemption, subject to certain conditions. All $5 million of the Trust Capital Securities qualified as Tier 1 capital for regulatory capital purposes.

On September 28, 2001, the Company issued $8 million of 10% fixed rate Trust Capital Securities to Commerce Bancorp LLC through Trust II, a Delaware business trust subsidiary. The issuance of the Trust Capital Securities has similar properties as Trust I. The Trust Capital Securities evidence a preferred ownership interest in the Trust II of which the Company owns 100% of the common equity. The proceeds from the issuance of the Trust Capital Securities were invested in substantially similar Junior Subordinated Debt of the Company. The Company unconditionally guarantees the Trust Capital Securities. Interest on the debt is payable quarterly with similar terms as in Trust I. The Trust Capital Securities are scheduled to mature on September 28, 2031. The Trust Capital Securities may be redeemed in whole or in part at the option of the Company on or after September 28, 2011 at 105.00% of the principal plus accrued interest, if any. The redemption price declines by 0.50% on September 28 of each year from 2012 through 2021 at which time the securities may be redeemed at 100% of the principal plus accrued interest, if any, to the date fixed for redemption, subject to certain conditions. All $8 million of the Trust Capital Securities qualified as Tier 1 capital for regulatory capital purposes.

40

On September 29, 2006, the Company issued $15 million of 7.75% fixed rate Trust Capital Securities to Commerce Bank, N.A. through Trust III, a Delaware business trust subsidiary. Commerce Bank, N.A. subsequently changed its name to TD Bank, N.A. as the result of the purchase of its holding company, Commerce Bancorp, Inc., by a wholly-owned subsidiary of the Toronto-Dominion Bank. The issuance of the Trust Capital Securities has similar properties as Trust I and Trust II. The Trust Capital Securities evidence a preferred ownership interest in Trust III of which the Company owns 100% of the common equity. The proceeds from the issuance of the Trust Capital Securities were invested in substantially similar Junior Subordinated Debt of the Company. The Company unconditionally guarantees the Trust Capital Securities. Interest on the debt is payable quarterly with similar terms as in Trust I and Trust II. The Trust Capital Securities are scheduled to mature on September 29, 2036. The Trust Capital Securities may be redeemed in whole or in part at the option of the Company on or after September 29, 2011 at 100.00% of the principal plus accrued interest, if any. All $15 million of the Trust Capital Securities qualified as Tier 1 capital for regulatory capital purposes.

The remaining $1.4 million in long-term debt represents the Company’s ownership interest in the non-bank subsidiary Trusts, which the Company was required to deconsolidate in 2004 as a result of FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”.

The scheduled maturities for long-term debt over the next five years and thereafter are as follows:

(in thousands)
2009	$ 25,000
2012	25,000
Thereafter	29,400
	$ 79,400

11. Income Taxes

A reconciliation of the provision for income taxes and the amount that would have been provided at statutory rates is as follows:

	Years Ended December 31,
(in thousands)	2008			2007			2006
Provision at statutory rate on pretax income	$	6,564		$	3,314		$	3,715
Tax-exempt income on loans and investments		(1,087	)		(647	)		(339	)
Other		376			78			(15	)
	$	5,853		$	2,745		$	3,361

The statutory tax rate used to calculate the provision in 2008 and 2006 was 35% and a 34% statutory tax rate was used in 2007 due to the projected pretax consolidated earnings of the Company.

The components of income tax expense are as follows:

	Years Ended December 31,
(in thousands)	2008			2007		2006
Current	$	8,068		$	2,672	$	2,042
Deferred expense (benefit)		(2,215	)		73		1,319
	$	5,853		$	2,745	$	3,361

41

The components of the net deferred tax assets were as follows:

	December 31,
(in thousands)	2008			2007
Deferred tax assets:
Allowance for loan losses	$	5,852		$	3,652
Unrealized losses on securities		9,305			1,984
Other		495			271
Total deferred tax assets		15,652			5,907
Deferred tax liabilities:
Premises and equipment		(2,772	)		(2,428	)
Prepaid expenses		(267	)		(414	)
Deferred loan fees		(1,051	)		(1,039	)
Total deferred tax liabilities		(4,090	)		(3,881	)
Net deferred tax assets	$	11,562		$	2,026

A tax benefit of $55,000 was recognized on net securities losses during 2008 and tax expense of $58,000 and $56,000 was recognized on net securities gains during 2007 and 2006, respectively. For 2008, the Company will receive a tax benefit on its federal income tax return totaling $102,000, and for 2007 and 2006, the Company received a tax benefit on its federal income tax return totaling $368,000 and $513,000, respectively for the exercise of non-qualified stock options and disqualified dispositions of employee stock from options exercised.

12. Stockholders’ Equity

At December 31, 2008 and 2007, Commerce Bancorp LLC, owned 40,000 shares of the Company’s Series A $10 par value noncumulative nonvoting preferred stock.  Warrants that entitled Commerce Bancorp LLC to purchase 287,332 shares of the Company’s common stock, exercisable at $3.48 per share, in the event of a “change in control” (as defined in the Warrant Agreement) expired on October 7, 2008. None of these warrants were exercised during 2008, 2007, or 2006. The preferred stock is redeemable at the option of the Company at the price of $25 per share plus any unpaid dividends. Dividends on the preferred stock are payable quarterly at a rate of $2 per share per annum.

The Company has implemented a dividend reinvestment and stock purchase plan. Holders of common stock may participate in the plan in which reinvested dividends and voluntary cash payments of up to $10,000 per month may be reinvested in additional common shares at a 3% discount from the current market price. Employees who have been continuously employed for at least one year are also eligible to participate in the plan under the same terms as listed above for shareholders. A total of 37,372, 58,248 and 39,735 common shares were issued pursuant to this plan in 2008, 2007, and 2006, respectively. At December 31, 2008, the Company had reserved approximately 255,000 common shares to be issued in connection with the plan.

13. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share.

	For the Years Ended December 31,
	2008			2007				2006
(in thousands, except per share amounts)	Income	Shares	Per Share Amount	Income	Shares		Per Share Amount	Income	Shares	Per Share Amount
Basic earnings per share:
Net income	$ 12,901			$ 7,001				$ 7,254
Preferred stock dividends	(80)			(80)				(80)
Income available to common stockholders	12,821	6,356	$ 2.02	6,921	6,237		$ 1.11	7,174	6,099	$ 1.18
Effect of dilutive securities:
Stock options		164			225				282
Diluted earnings per share:
Income available to common stockholders plus assumed conversions	$ 12,821	6,520	$ 1.97	$ 6,921	6,462	$ 1.07		$ 7,174	6,381	$ 1.12

42

There were 533,966 options excluded from the computation of diluted earnings per share for the year ended December 31, 2008 which were exercisable  between the prices of $27.00 and $33.50 per option. There were 228,311 options excluded from the computation of diluted earnings per share for the year ended December 31, 2007 which were exercisable between the prices of $29.92 and $33.50 per option. There were 268,530 options excluded from the computation of diluted earnings per share for the year ended December 31, 2006 which were exercisable between the prices of $29.92 and $33.50 per option.

14. Stock Option Plans

In 2005, the Board of Directors adopted and the Company’s shareholders approved the adoption of the 2006 Employee Stock Option Plan for the officers and employees of the Company. The Plan commenced January 1, 2006 and replaced the 1996 Employee Stock Option Plan, which expired December 31, 2005. The Plan covers 1,000,000 authorized shares of common stock which includes an additional 500,000 of authorized shares added to the plan approved in May 2008 by vote of the stockholders reserved for issuance upon exercise of options granted or available for grant to employees and will expire on December 31, 2015. The Plan provides that the option price of qualified incentive stock options will be fixed by the Board of Directors, but will not be less than 100% of the fair market value of the stock at the date of grant. In addition, the Plan provides that the option price of nonqualified stock options (NQSO’s) also will be fixed by the Board of Directors, however for NQSO’s the option price may be less than 100% of the fair market value of the stock at the date of grant. Options granted are exercisable one year after the grant date, will vest over a four-year period, and expire ten years after the grant date.

In 2000, the Board of Directors adopted and the Company’s shareholders approved the adoption of the 2001 Directors’ Stock Option Plan. The Plan commenced January 1, 2001 and replaced the 1990 Directors’ Stock Option Plan, which expired December 31, 2000. The Plan covers 343,100 authorized shares of common stock which includes an additional 100,000 of authorized shares added to the plan approved in May 2008 by vote of the stockholders reserved for issuance upon exercise of options granted or available for grant to non-employee directors and will expire on December 31, 2010. Under the Company’s Directors’ Stock Option Plan, each non-employee director of the Company who is not regularly employed on a salaried basis by the Company may be entitled to an option to acquire shares, as determined by the Board of Directors, of the Company’s common stock during each year in which the Director serves on the Board. The Plan provides that the option price will be fixed by the Board of Directors, but will not be less than 100% of the fair market value of the stock on the date of the grant. Options granted through December 16, 2004 are exercisable from the earlier of (1) one year after the date of the option grant, or (2) the date of a change in control of the Bank. As a result of a plan amendment adopted on December 17, 2004, all options granted subsequent to that date will vest over a four-year period.

As of December 31, 2008, there was $2.8 million of total unrecognized compensation cost related to nonvested stock option awards. This cost is expected to be recognized over an additional 2.5 year period. Cash received from the exercise of options for 2008, 2007, and 2006 was $541,000, $1.0 million and $460,000, respectively.

The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options. The Black-Scholes model used the following weighted-average assumptions for 2008, 2007, and 2006 respectively: risk-free interest rates of 3.3%, 4.7% and 4.6%; volatility factors of the expected market price of the Company's common stock of .29, .19 and .19; weighted average expected lives of the options of 8.2 years for the three years presented and no cash dividends. Based upon these assumptions, the weighted average fair value of options granted was $10.66, $10.21, and $11.11 for the years ended December 31, 2008, 2007 and 2006, respectively.

The Company recorded compensation expense of approximately $1.1 million for the year ended December 31, 2008 compared to $719,000 and $329,000 for the years ended December 31, 2007 and 2006, respectively. The tax benefit associated with compensation expense was $170,000, $116,000 and $51,000 for 2008, 2007 and 2006, respectively.

43

Stock options transactions under the Plans were as follows:

	Years Ended December 31,
	2008		2007		2006
	Options	Weighted Avg. Exercise Price	Options	Weighted Avg. Exercise Price	Options	Weighted Avg. Exercise Price
Outstanding at beginning of year	924,215	$ 22.19	933,726	$ 20.18	921,966	$ 17.18
Granted	174,325	27.00	164,250	28.51	153,650	31.18
Exercised	(133,232)	11.53	(133,098)	13.27	(118,672)	9.61
Forfeited	(21,393)	29.61	(40,663)	30.64	(23,218)	28.08
Outstanding at end of year	943,915	$ 24.42	924,215	$ 22.19	933,726	$ 20.18
Exercisable at December 31	601,805	$ 22.23	673,063	$ 19.43	786,526	$18.11
Options available for grant at December 31	781,786
Weighted-average fair value of options granted during the year		$ 10.66		$ 10.21			$ 11.11

Options exercisable and outstanding at December 31, 2008 had an intrinsic value of $3.6 million. The intrinsic value of options exercised was $2.0 million in 2008, $1.9 million in 2007 and $2.4 million in 2006.

The Company allows for the option exercise to be paid for in cash or in whole or in part with Commerce stock owned by the optionee.  The value of the stock used to exercise the options is the fair market value on the date of exercise.  Stock option exercises paid for with the Company’s stock were 37,846 shares, 26,838 shares, and 23,111 shares for the years ended December 31, 2008, 2007 and 2006, respectively.

Exercise prices for options outstanding as of December 31, 2008 are presented in the following table.

	Options Outstanding	Weighted Avg. Exercise Price	Weighted Avg. Remaining Contractual Life	Options Exercisable	Weighted Avg. Exercise Price
Options with exercise prices ranging from $6.93 to $16.41	180,781	$ 13.06	2.2 Years	180,781	$ 13.06
Options with exercise prices ranging from $16.42 to $25.38	228,618	21.45	4.5 Years	228,243	21.45
Options with exercise prices ranging from $25.39 to $33.50	534,516	29.52	7.9 Years	192,781	31.76
Total options outstanding with exercise prices ranging from $6.93 to $33.50	943,915	$ 24.42	6.0 Years	601,805	$ 22.23

The remaining weighted average remaining contractual life for options exercisable at December 31, 2008 is 4.5 years.

	Number of Shares	Weighted Avg. Grant Date Fair Value
Non-vested options, December 31, 2007	251,152	$  10.75
Granted	174,325	10.66
Vested	(70,759)	9.71
Forfeited/expired	(12,608)	10.88
Non-vested options, December 31, 2008	342,110	$ 10.92

15. Regulatory Matters

Regulatory authorities restrict the amount of cash dividends the Bank can declare without prior regulatory approval. Presently, the Bank cannot declare cash dividends in one year in excess of its net profits for the current year plus its retained net profits for the two preceding years, less any required transfers to surplus. In addition, dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2008, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

44

As of December 31, 2008 the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The following table presents the risk-based and leverage capital amounts and ratios at December 31, 2008 and 2007 for the Company and the Bank.

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount	Ratio			Amount		Ratio			Amount		Ratio
Company As of December 31, 2008
Risk based capital ratios:
Total capital	$ 176,469	10.68	%	≥	$ 132,189	≥	8.0	%	≥	N/A	≥	N/A
Tier 1 capital	159,750	9.67		≥	66,094	≥	4.0		≥	N/A	≥	N/A
Leverage ratio	159,750	7.52		≥	84,922	≥	4.0		≥	N/A	≥	N/A
Bank As of December 31, 2008
Risk based capital ratios:
Total capital	$ 176,322	10.68	%	≥	$ 132,059	≥	8.0	%	≥	$165,074	≥	10.0	%
Tier 1 capital	159,603	9.67		≥	66,030	≥	4.0		≥	99,044	≥	6.0
Leverage ratio	159,603	7.52		≥	84,857	≥	4.0		≥	106,071	≥	5.0
Company As of December 31, 2007
Risk based capital ratios:
Total capital	$ 154,928	10.78	%	≥	$ 114,948	≥	8.0	%	≥	N/A	≥	N/A
Tier 1 capital	144,186	10.03		≥	57,474	≥	4.0		≥	N/A	≥	N/A
Leverage ratio	144,186	7.26		≥	79,480	≥	4.0		≥	N/A	≥	N/A
Bank As of December 31, 2007
Risk based capital ratios:
Total capital	$ 154,556	10.77	%	≥	$ 114,818	≥	8.0	%	≥	$143,522	≥	10.0	%
Tier 1 capital	143,814	10.02		≥	57,409	≥	4.0		≥	86,113	≥	6.0
Leverage ratio	143,814	7.24		≥	79,415	≥	4.0		≥	99,269	≥	5.0

16. Employee Benefit Plan

The Company has established a 401(k) Retirement Savings Plan for all of its employees who meet eligibility require­ments. Employees may contribute up to 15% of their salary to the Plan. The Company will provide a discretionary matching contribution for up to 6% of each employee’s salary. In 2008, 2007, and 2006, the Company’s matching contribution was established at 50% of the employees’ salary deferral. The amount charged to expense was $407,000, $347,000, and $407,000 in 2008, 2007, and 2006, respectively.

17. 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 comprehensive income item that the Company presently has is unrealized gains (losses) on securities available for sale. The federal income taxes allocated to the unrealized gains (losses) are presented in the table below.

	Years Ended December 31,
(in thousands)	2008			2007			2006
Unrealized holding gains (losses) arising during the year	$	(20,751	)	$	1,017		$	(88	)
Income tax effect		7,322			(414	)		31
Net of tax amount	$	(13,429	)	$	603		$	(57	)

45

18. Commitments and Contingencies

In January 2005, the Company entered into an agreement for naming rights to Commerce Bank Park located on Harrisburg City Island, Harrisburg, Pennsylvania. Commerce Bank Park is home of the Harrisburg Senators, an AA team affiliated with Major League Baseball. The term of the naming rights agreement is 15 years with a total obligation of $3.5 million spread over the term.

The Company has purchased the 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 to be opened in the future.

On November 10, 2008, Commerce announced it had entered into a services 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. The agreement will allow the Bank to transition to Fiserv many of the services that have been provided by Commerce Bank, N.A., now known as TD Bank, N.A.  The initial investment with Fiserv is $3.4 million with an expected obligation for support, license fees and processing services of $24.6 million over the next 7 years. The various services include: core system hosting, item processing, deposit and loan processing, electronic banking, data warehousing and other banking functions. The transition is expected to be completed either late second quarter or early third quarter 2009.

In addition, the Company is also 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.

19. Related Party Transactions

Commerce Bancorp LLC (a 10.3% shareholder of common stock and 100% shareholder of Series A preferred stock of the Company), through an affiliate (TD Bank, N.A., a national bank located in Cherry Hill, New Jersey), provides various services to the Company. These services include maintenance to the store LAN network, proof and encoding services, deposit account statement rendering, ATM/VISA card processing, data processing, advertising support, implementation of new software for systems, and call center support. The Company paid approximately $4.7 million, $4.4 million, and $3.1 million for services provided by TD Bank, N.A. during 2008, 2007, and 2006, respectively. Insurance premiums and commissions, which are paid to a subsidiary of Commerce Bancorp, LLC, are included in the total amount paid. At December 31, 2008 and December 31, 2007, there were no participation balances outstanding.

On and effective as of December 30, 2008, the Company and the Bank entered into a Transition Agreement with TD Bank N.A. and Commerce Bancorp, LLC (formerly Commerce Bancorp, Inc. and together with TD Bank, N.A., “TD”).  The Transition Agreement terminated the Network Agreement dated January 1, 1997, as thereafter amended in April 2002 and September 29, 2004 (the “Network Agreement”) and the Master Services Agreement dated July 21, 2006 and its addenda (the “Master Services Agreement”) by and between the Company, the Bank and/or TD (and/or their predecessors). With timely advance notice by TD under the Network and Master Services agreements, the agreements would have otherwise terminated on December 31, 2009.  The agreements are being terminated prior to such date in connection with the March 2008 merger of Commerce Bancorp, Inc. into a subsidiary of TD Bank N.A.

The Network Agreement granted to the Company and the Bank, inter alia, the right to use the name “Commerce Bank” and the red “C” logo.  Under the Master Services Agreement, TD performed a broad range of administrative and data processing services for the Bank.

Pursuant to the Transition Agreement, TD will provide to the Bank certain transaction services, representing a continuation of the services provided to the Bank under the terms of the Master Services Agreement until July 15, 2009 or at the Bank’s option, until August 15, 2009, and certain tail services until August 15, 2009, at which time TD will discontinue the provision of all such services, which will thereafter be provided to the Bank by other service providers.  If all services provided by TD under the Transition Agreement (except tail services) are terminated by or on July 15, 2009, and if all tail services terminate by or on August 15, 2009, TD will pay to the Bank a fee in the amount of $6.0 million (“Incentive Fee”).  The Incentive Fee will be reduced to $3.25 million if all services other than tail services terminate on or after July 16, 2009 but by or on August 15, 2009 and if all tail services terminate by or on August 15, 2009.  No Incentive Fee will be paid by TD if the above deadlines are not met, unless such failure is due to delays caused by TD.

A federal funds line of credit was established in 2007 with Commerce Bank, N.A. in the amount of $50 million, which could be drawn upon if needed. In 2008, the amount of the line was reduced to $25 million when The Toronto-Dominion Bank acquired Commerce Bancorp, Inc., the parent of the former Commerce Bank, N.A. The balance was $0 at December 31, 2008 and $25.5 million at December 31, 2007.

46

The Company has engaged in certain transactions with entites, which are considered related parties. Payments for goods and services, including legal services, to these related parties totaled $756,000, $355,000 and $340,000, in 2008, 2007 and 2006, respectively. Management believes disbursements made to related parties were substantially equivalent to those that would have been paid to unaffiliated companies for similar goods and services.

Note 20. Fair Value Measurements

The Company uses its best judgment in estimating the fair value of the Company’s 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 Bank could have realized in a sale transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these 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 at each year-end.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under  Generally Accepted Accounting Principles (“GAAP”), and expands disclosures about fair value measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements.  The Company adopted SFAS 157 effective for its fiscal year beginning January 1, 2008.

In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.  As such, the Company only partially adopted the provisions of SFAS 157, and will begin to account and report for non-financial assets and liabilities in 2009.  In October 2008, the FASB issued FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP 157-3”), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market.  FSP 157-3 is effective immediately and applies to the Company’s December 31, 2008 consolidated financial statements.  The adoption of SFAS 157 and FSP 157-3 had no impact on the amounts reported in the financial statements.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority 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).  The three levels of the fair value hierarchy under SFAS 157 are as follows:

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).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

47

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2008 are as follows:

Description		December 31, 2008		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
				(In Thousands)
Securities available for sale	$	341,656	$	-	$	341,656	$	-

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2008 are as follows:

(In Thousands)

Description		December 31, 2008		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	9,034	$	-	$	-	$	9,034

As discussed above, the Company has delayed its disclosure requirements of non-financial assets and liabilities.  Certain foreclosed real estate with write-downs subsequent to foreclosure is carried at fair value at the balance sheet date for which the Company has not yet adopted the provisions of SFAS 157.

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 methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2008 and 2007:

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 obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or 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.  The Company has not identified any investments where fair values were based on Level 3 inputs.

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

48

specific attributes of that loan.  The Company did not write down any loans held for sale during the years ended December 31, 2008 and 2007.

Loans Receivable (Carried at Cost)

The fair values of loans 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 are accounted for under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”), in which 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 of $12.7 million, net of a valuation allowance of $3.7 million.  Additional provisions for loan losses of $3.2 million were recorded during the period.

Restricted Investment in Bank Stock (Carried at Cost)

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.  The restricted investments in bank stock consisted of Federal Reserve Bank and Federal Home Loan Bank stock at December 31, 2007 and Federal Home Loan Bank stock as of December 31, 2008.

Accrued Interest Receivable and Payable (Carried at Cost)

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

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)

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent 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.

49

The estimated fair values of the Company’s financial instruments were as follows at December 31, 2008 and 2007.

	2008				2007
(in thousands)	Carrying Amount		Fair  Value		Carrying Amount		Fair  Value
Financial assets:
Cash and cash equivalents	$	49,511	$	49,511	$	50,955	$	50,955
Securities		494,243		496,013		644,633		643,414
Loans, net (including loans held for sale)		1,464,212		1,472,037		1,160,772		1,165,793
Restricted investments in bank stock		21,630		21,630		18,234		18,234
Accrued interest receivable		7,686		7,686		8,799		8,799
Financial liabilities:
Deposits	$	1,633,985	$	1,636,027	$	1,560,896	$	1,560,303
Long-term debt		79,400		71,424		79,400		79,428
Short-term borrowings		300,125		300,125		217,335		217,335
Accrued interest payable		1,164		1,164		989		989
Off-balance sheet instruments:
Standby letters of credit	$	-	$	-	$	-	$	-
Commitments to extend credit		-		-		-		-

50

21. Quarterly Financial Data (unaudited)

The following represents summarized unaudited quarterly financial data of the Company which, in the opinion of management, reflects adjustments (comprising only normal recurring accruals) necessary for fair presentation (in thousands, except per share amounts):

	Three Months Ended
	December 31		September 30		June 30			March 31
2008
Interest income	$	27,865	$	28,030	$	27,088		$	28,157
Interest expense		6,482		8,378		8,001			9,574
Net interest income		21,383		19,652		19,087			18,583
Provision for loan losses		3,400		1,700		1,400			975
Losses on sales/call of securities		0		0		(157	)		0
Provision for federal income taxes		1,239		1,523		1,597			1,494
Net income		2,756		3,433		3,506			3,206
Net income per share:
Basic	$	0.43	$	0.54	$	0.55		$	0.50
Diluted		0.42		0.52		0.54			0.49
2007
Interest income	$	29,885	$	29,450	$	28,865		$	27,787
Interest expense		13,065		14,260		14,611			14,559
Net interest income		16,820		15,190		14,254			13,228
Provision for loan losses		245		537		500			480
Gains (losses) on sales of securities		0		0		0			171
Provision for federal income taxes		1,069		780		580			316
Net income		2,467		1,851		1,571			1,112
Net income per share:
Basic	$	0.39	$	0.29	$	0.25		$	0.18
Diluted		0.38		0.28		0.24			0.17

51

22. Condensed Financial Statements of Parent Company

Balance Sheets

	December 31,
(in thousands)	2008			2007
Assets
Cash	$	797		$	883
Investment in subsidiaries:
Banking subsidiary		142,323			139,963
Non-banking subsidiaries		1,400			1,400
Other assets		395			230
Total assets	$	144,915		$	142,476
Liabilities
Long-term debt	$	29,400		$	29,400
Other liabilities		1,045			741
Total liabilities		30,445			30,141
Stockholders’ Equity
Preferred stock		400			400
Common stock		6,446			6,314
Surplus		73,221			70,610
Retained earnings		51,683			38,862
Accumulated other comprehensive loss		(17,280	)		(3,851	)
Total stockholders’ equity		114,470			112,335
Total liabilities and stockholders’ equity	$	144,915		$	142,476

52

Statements of Income

	Years Ended December 31,
(in thousands)	2008			2007			2006
Income:
Dividends from bank subsidiary	$	2,337		$	2,018		$	1,725
Interest income		124			124			78
		2,461			2,142			1,803
Expenses:
Interest expense		2,645			2,645			1,731
Other		1,265			491			677
		3,910			3,136			2,408
Loss before income (taxes) benefit and equity in undistributed net income of subsidiaries		(1,449	)		(994	)		(605	)
Income (taxes) benefit		1,304			1,029			812
		(145	)		35			207
Equity in undistributed net income of bank subsidiary		13,046			6,966			7,047
Net income	$	12,901		$	7,001		$	7,254

Statements of Cash Flows

	Years Ended December 31,
(in thousands)	2008	2007	2006
Operating Activities:
Net Income	$   12,901	$    7,001	$    7,254
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of financing costs	8	8	6
Stock-based compensation	1,142	719	329
Increase in other liabilities	304	338	20
(Increase) decrease in other assets	(173)	(23)	10
Equity in undistributed net income of bank subsidiary	(13,046)	(6,966)	(7,047)
Net cash provided by operating activities	1,136	1,077	572
Investing Activities:
Investment in bank subsidiary	(2,637)	(3,329)	(16,829)
Investment in nonbank subsidiary	-	-	(800)
Net cash (used) by investing activities	(2,637)	(3,329)	(17,629)
Financing Activities:
Proceeds from common stock options exercised	541	1,032	460
Proceeds from issuance of common stock under stock purchase plan	954	1,578	1,040
Proceeds from issuance of long-term debt	-	-	15,800
Cost of issuing long-term debt	-	-	(43)
Cash dividends on preferred stock and cash in lieu of fractional shares	(80)	(80)	(80)
Net cash provided by financing activities	1,415	2,530	17,177
Increase (decrease) in cash and cash equivalents	(86)	278	120
Cash and cash equivalents at beginning of the year	883	605	485
Cash and cash equivalents at end of year	$       797	$       883	$       605

23. Pending Acquisition

On November 7, 2008 the Company announced that it has entered into a plan of merger to acquire Republic First Bancorp, Inc. (Republic First) which is headquartered in Philadelphia, Pennsylvania.  Republic First, with total assets of approximately $952.0 million as of December 31, 2008, will be merged with and into Pennsylvania Commerce Bancorp and the combined company will be named Metro Bancorp, Inc.  The new company will have $3.2 billion in assets and 45 offices in Pennsylvania and New Jersey combined.

Under the terms of the merger agreement, for each share of Republic First common stock owned immediately prior to completion of the merger, Republic First shareholders will receive between 0.34 and 0.38 of a share of the Company’s common stock, calculated on the basis of $10.00 per share of Republic First common stock.  The actual exchange ratio will be based on the average closing price of the Company’s common stock for a set period of twenty (20) consecutive trading days preceding the effective date of merger.

The merger will be accounted for under the purchase method of accounting; a such term is defined under the accounting principles generally accepted in the United States of America.  The merge is also subject to regulatory and shareholder approval for both companies and is expected to be completed during the second quarter of 2009.

53

EX-21

Exhibit 21

Subsidiaries of Pennsylvania Commerce Bancorp, Inc.

Name of Business	Doing Business As	State of Incorporation
Commerce Bank / Harrisburg	Commerce Bank / Harrisburg	Pennsylvania
Commerce Harrisburg Capital Trust I	Commerce Harrisburg Capital Trust I	Delaware
Commerce Harrisburg Capital Trust II	Commerce Harrisburg Capital Trust II	Delaware
Commerce Harrisburg Capital Trust III	Commerce Harrisburg Capital Trust III	Delaware

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

Pennsylvania Commerce Bancorp, Inc. and Subsidiaries

Harrisburg, Pennsylvania

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-87329) and Form S-8 (No. 333-82085, No. 333-82083, No. 333-87313, No. 333-61634, No. 333-61636, No. 333-122490, No. 333-128382, No. 333-155931 and No. 333-155930) of Pennsylvania Commerce Bancorp, Inc. of our reports dated March 16, 2009, relating to the consolidated financial statements and the effectiveness of Pennsylvania Commerce Bancorp, Inc.’s internal control over financial reporting, which appear in the Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Harrisburg, Pennsylvania

March 16, 2009

EX-31.1

Exhibit 31.1

Certification

of Chief Executive Officer

I, Gary L. Nalbandian, certify that:

1.   I have reviewed this Annual Report on Form 10-K of Pennsylvania Commerce Bancorp, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2009

/s/ Gary L. Nalbandian

Gary L. Nalbandian

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification

of Chief Financial Officer

I, Mark A. Zody, certify that:

1.   I have reviewed this Annual Report on Form 10-K of Pennsylvania Commerce Bancorp, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2009

/s/ Mark A. Zody

Mark A. Zody

Chief Financial Officer

EX-32

Exhibit 32

Certification of Pennsylvania Commerce Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Pennsylvania Commerce Bancorp, Inc. (the “Company”) does hereby certify with respect to the Annual Report of the Company on Form 10-K for the period ended December 31, 2008 (the “Report”), that:

·   The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and

·   The information contained in the Report fairly represents, in all material respects, the Company’s financial condition and results of operations.

/s/ Gary L. Nalbandian

Gary L. Nalbandian,

Chief Executive Officer

/s/ Mark A. Zody

Mark A. Zody,

Chief Financial Officer

Dated:   March 16, 2009

The foregoing certification is being furnished solely pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Report or as a separate disclosure document.

EX-99

Exhibit 99

AGREEMENT TO FURNISH DEBT INSTRUMENTS

Pursuant to Instruction 3(b)(4)(iii) to Item 601 of Regulation S-K, the Company has not included as an Exhibit any instrument with respect to long-term debt if the total amount of debt authorized by such instrument does not exceed 10% of the consolidated assets of the Company and its subsidiaries.  The Company agrees, pursuant to this Instruction, to furnish a copy of any such instrument to the Securities and Exchange Commission upon request of the Commission.

Pennsylvania Commerce Bancorp, Inc.

/s/ Mark A. Zody

Mark A. Zody,

Chief Financial Officer

Dated:  March 16, 2009