FIRST PRIORITY FINANCIAL CORP. - FORM 8-K - EX-99.1

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8-K - FORM 8-K - FIRST PRIORITY FINANCIAL CORP.	d491434d8k.htm

Exhibit 99.1

February 26, 2013

Dear Investor,

First Priority Financial Corp. (“FPFC”) reported net income for the year ended December 31, 2012 of $753,000 compared to net income of $70,000 reported for 2011. Included in 2012 results are merger related expenses of $484,000 related to the upcoming merger with Affinity Bancorp, Inc. (“ABI”). Net income available to common shareholders, after payment of the preferred dividend and related amortization totaling $532,000 in each year, was $221,000 or $0.07 per basic and fully diluted common share in 2012 compared to a net loss of $462,000 or $0.15 in the prior year.

The fourth quarter, 2012 provided the sixth consecutive quarter of profitability. Net income in the fourth quarter was $202,000, or $0.02 per basic and diluted common share, compared to $218,000, or $0.03 per basic and diluted common share in the prior quarter, and $325,000, or $0.06 per basic and diluted common share in the fourth quarter, 2011, after payment of the preferred dividend and related amortization in each respective period. Merger expenses in the current quarter totaled $156,000 and were $185,000 in the prior quarter.

Enclosed are our summary financial statements for the year ended December 31, 2012. Highlights of the financial results are as follows:

•

Loans outstanding at December 31, 2012 totaled $244.3 million. Annual loan growth of $4.2 million was impacted by the significant level of loan paydowns in this low interest rate environment. New loans totaling approximately $40 million were originated during the year; however, the growth was offset by a similar level of refinancings and paydowns as borrowers took actions to deleverage their balance sheets or looked to refinance loans in a highly competitive interest rate environment. We did realize a favorable shift in the mix of our loan portfolio, however, with commercial loan outstandings increasing $14.8 million or 10.2%. Much of the loan repayments occurred in the residential mortgage portfolio, where outstandings declined by approximately $8 million or 13.8%.

•

Asset quality continues to improve. Non-performing assets (“NPAs”) totaled $4.3 million at December 31, 2012 compared to $7.1 million at December 31, 2011, for a decline of $2.8 million or 39%. NPAs as a percent of total assets was 1.55% at December 31, 2012 compared to 2.50% at December 31, 2011. Non-performing loans totaled $4.1 million at December 31, 2012, or 1.68% of total loans, compared to $6.8 million, or 2.84% of total loans, at December 31, 2011.

•

The net interest margin averaged 3.56% in 2012 compared to 3.45% in 2011. The net interest margin has benefited from the continued repricing of interest rates paid on deposit products and by the positive shift in the loan portfolio mix.

•

Operating expenses totaled $9.3 million in 2012 compared to $9.7 million in 2011, representing a decline of $416,000 or 4.3%. The decline in operating expenses primarily reflects actions taken in 2011 to improve operating efficiencies and costs. Expenses in 2012 included merger related expenses of $484,000 and deferred salary expense of $255,000 related to the 2009 Deferred Compensation Plan. All other operating expenses, excluding these specific items, declined $1.2 million in 2012 compared to 2011.

•

Capital ratios remain strong. First Priority Bank’s total risk based capital ratio at December 31, 2012 was 12.48%, well above regulatory requirements to be classified as “well capitalized”. Shareholders’ equity totaled $27.7 million.

•

Book value per common share was $5.82 and tangible book value per share was $5.44.

Report on Merger with Affinity Bancorp, Inc.

•

The shareholders of First Priority Financial Corp and Affinity Bancorp., Inc. will meet on February 26, 2013 and February 27, 2013, respectively, to vote on the merger agreement.

•

Our private placement capital raise generated $6.6 million in common equity. Funds will be released from escrow with the legal close of the merger.

•

Closing of the transaction is scheduled to occur on February 28, 2013.

•

The merger integration process will begin immediately upon closing; however, the full system integration and conversion is anticipated to occur in the third quarter, 2013.

FPFC completed 2012 as a strong, high quality and well capitalized institution operating on a sound foundation well positioned for growth. The merger with ABI and the increased capital base provided by the private placement provides the opportunity to leverage our progress and enhance shareholder value.

Very truly yours,

David E. Sparks

Chairman, President and Chief Executive Officer

First Priority Financial Corp.

Consolidated Financial Highlights

For the Year Ended December 31, 2012

Unaudited (In thousands, except per share data)


For the Quarter Ended							For the Year Ended
12/31/12			9/30/12				12/31/12			12/31/11
						Income Statement

$	3,169		$	3,304		Interest income	$	13,078		$	13,625
	785			831		Interest expense		3,520			4,318

	2,384			2,473		Net interest income before provision		9,558			9,307
	230			80		Provision for loan loss reserve		640			1,082

	2,154			2,393		Net interest income after provision		8,918			8,225
	263			57		Gain (loss) on sale of investment securities		685			1,114
	101			110		Other non-interest income		430			427
	2,316			2,342		Non-interest expenses *(a)(b)(c)*		9,280			9,696

$	202		$	218		Net Income	$	753		$	70


$	0.02		$	0.03		Basic income (loss) per common share *(d)*	$	0.07		$	(0.15	)
$	0.02		$	0.03		Diluted income (loss) per common share *(d)*	$	0.07		$	(0.15	)

						Key Yields and Rates
	4.75	%		4.92	%	Average yield on earning assets		4.88	%		5.05	%
	1.43	%		1.51	%	Average rate on costing liabilities		1.59	%		1.86	%
	3.32	%		3.41	%	Net interest spread		3.29	%		3.19	%
	3.57	%		3.68	%	Net interest margin		3.56	%		3.45	%


NOTES:		(a) Includes insurance premiums paid of $168 and $594 for the years ended 2012 and 2011, respectively; and $56 and $362 in legal costs for each of those same periods, respectively, to protect the Bank’s interests on insurance collateral related to an outstanding loan.

		*(b) Includes merger related costs of $156, $185, and $484 in the current quarter, prior quarter and the current year for the proposed merger with Affinity Bancorp.*

		*(c) Includes $255 in deferred salary costs in the current year covering all costs, as required, under the Company’s 2009 Deferred Compensation Plan.*

		*(d) Income (loss) per common share is calculated based on income (loss) after preferred dividends; see income statement for further details.*


	12/31/12			12/31/11
Selected Period End Balance Sheet Items

Total assets	$	275,146		$	285,350
Total earning assets		267,129			278,351
Total securities available for sale		16,679			25,261
Total loans		244,275			240,115
Allowance for loan losses		2,460			2,470
Total deposits		233,043			245,736
Total borrowings		13,000			11,000
Shareholders’ equity		27,710			27,444

Period End Balance Sheet Ratios
Loan to deposit ratio		104.8	%		97.7	%
Equity to assets		10.07	%		9.62	%
First Priority Bank total risk based capital ratio		12.48	%		12.61	%
Book value per common share	$	5.82		$	5.74
Tangible book value per common share	$	5.44		$	5.36
Tangible common to tangible assets		6.25	%		5.93	%

Selected Asset Quality Balances

Non-performing loans	$	4,093		$	6,816
Other real estate owned		184			230
Repossessed assets		—			89

Total non-performing assets	$	4,277		$	7,135


Selected Asset Quality Ratios
Non-performing loans as a percentage of total loans		1.68	%		2.84	%
Non-performing assets as a percentage of total assets		1.55	%		2.50	%
Allowance for loan losses as a percentage of total loans		1.01	%		1.03	%

First Priority Financial Corp.

Consolidated Balance Sheets

Unaudited (In thousands, except share and per share data)


	December 31, 2012			December 31, 2011
Assets
Cash and due from banks	$	4,841		$	3,243
Interest bearing deposits in banks		6,175			12,975

Total cash and cash equivalents		11,016			16,218

Securities available for sale (amortized cost: $15,996 and $24,400, respectively)		16,679			25,261

Loans receivable		244,275			240,115
Less: allowance for loan losses		2,460			2,470

Net loans		241,815			237,645

Restricted investment in bank stock		1,337			1,461
Premises and equipment, net		901			1,055
Accrued interest receivable		1,040			1,056
Other real estate owned		184			230
Goodwill		1,194			1,194
Other assets		980			1,230


Total assets	$	275,146		$	285,350


Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	28,176		$	23,757
Interest-bearing		204,867			221,979

Total deposits		233,043			245,736

Short-term borrowings		—			3,000
Long-term debt		13,000			8,000
Accrued interest payable		378			482
Other liabilities		1,015			688


Total liabilities		247,436			257,906


Shareholders’ Equity
Preferred stock, $100 par value; authorized 10,000,000 shares; liquidation value: $1,000:
Series A: 5%; 4,579 shares issued and outstanding		4,513			4,456
Series B: 9%; 229 shares issued and outstanding		236			242
Series C: 5%; 4,596 shares issued and outstanding		4,593			4,591

Common stock, $1 par value; authorized 10,000,000 shares; 3,144,000 and 3,142,000 shares issued and outstanding, respectively		3,144			3,142

Surplus		26,230			26,062
Accumulated deficit		(11,689	)		(11,910	)
Accumulated other comprehensive income		683			861

Total shareholders’ equity		27,710			27,444


Total liabilities and shareholders’ equity	$	275,146		$	285,350

First Priority Financial Corp.

Consolidated Statements of Income

Unaudited (In thousands, except per share data)


	For the three months ended December 31,				For the year ended December 31,
	2012		2011		2012		2011

Interest Income
Loans receivable, including fees	$	2,994	$	3,137	$	12,293	$	12,643
Securities – taxable		146		215		687		960
Securities – exempt from federal taxes		27		10		91		10
Interest bearing deposits and other		2		5		7		12

Total Interest Income		3,169		3,367		13,078		13,625


Interest Expense
Deposits		738		952		3,287		3,979
Short-term borrowings		2		2		8		8
Long-term debt		45		83		225		331

Total Interest Expense		785		1,037		3,520		4,318


Net Interest Income		2,384		2,330		9,558		9,307

Provision for Loan Losses		230		405		640		1,082


Net Interest Income after Provision for Loan Losses		2,154		1,925		8,918		8,225


Non-Interest Income
Wealth management fee income		55		31		255		265
Gains on sales of investment securities		263		435		685		1,114
Other		46		39		175		162

Total Non-Interest Income		364		505		1,115		1,541


Non-Interest Expenses
Salaries and employee benefits		1,318		1,179		5,366		5,264
Occupancy and equipment		257		270		1,042		1,064
Data processing equipment and operations		133		115		518		455
Professional fees		134		187		516		719
Marketing, advertising and business development		19		20		71		116
FDIC insurance assessments		51		57		243		282
Pennsylvania bank shares tax expense		57		44		227		175
Collateral protection expense		—		74		168		594
Merger integration costs		156		—		484		—
Other real estate owned costs		50		27		50		495
Other		141		132		595		532

Total Non-Interest Expenses		2,316		2,105		9,280		9,696


Net Income (Loss)	$	202	$	325	$	753	$	70


Preferred Stock Dividends, Net of Amortization		133		133		532		532


Income (Loss) Available to Common Shareholders	$	69	$	192	$	221	$	(462	)


Basic earnings (loss) per common share	$	0.02	$	0.06	$	0.07	$	(0.15	)
Fully diluted earnings (loss) per common share	$	0.02	$	0.06	$	0.07	$	(0.15	)

Weighted average common shares outstanding:
Basic		3,144		3,142		3,144		3,142
Diluted		3,152		3,142		3,150		3,142

First Priority Financial Corp.

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, 2012 and 2011

Unaudited (Dollars in thousands)


																Accumulated
																Other
	Preferred		Preferred			Preferred		Common					Accumulated			Comprehensive
	Series A		Series B			Series C		Stock		Surplus			Deficit			Income			Total

Balance - December 31, 2010	$	4,399	$	247		$	4,590	$	3,142	$	25,966		$	(11,448	)	$	6		$	26,902

Preferred stock dividends		—		—			—		—		—			(479	)		—			(479	)
Net amortization on preferred stock		57		(5	)		1		—		—			(53	)		—			—
Comprehensive income:
Net income		—		—			—		—		—			70			—			70
Net unrealized holding gain on available for sale securities arising during the period		—		—			—		—		—			—			855			855


Total comprehensive income																				925


Stock option expense		—		—			—		—		96			—			—			96


Balance - December 31, 2011		4,456		242			4,591		3,142		26,062			(11,910	)		861			27,444

Preferred stock dividends		—		—			—		—		—			(479	)		—			(479	)
Net amortization on preferred stock		57		(6	)		2		—		—			(53	)		—			—
Issuance of restricted common stock		—		—			—		2		(2	)		—			—			—
Comprehensive income:
Net income		—		—			—		—		—			753			—			753
Net unrealized holding gain on available for sale securities arising during the period		—		—			—		—		—			—			(178	)		(178	)


Total comprehensive income																				575


Stock option expense		—		—			—		—		170			—			—			170


Balance - December 31, 2012	$	4,513	$	236		$	4,593	$	3,144	$	26,230		$	(11,689	)	$	683		$	27,710

FIRST PRIORITY FINANCIAL CORP. - FORM 8-K - EX-99.1 - February 26, 2013

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FIRST PRIORITY FINANCIAL CORP. Reports