Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended June 30, 2014

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 No. 333-140879

 

 

FIRST PRIORITY FINANCIAL CORP.

 

 

 

Pennsylvania		20-8420347
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
2 West Liberty Boulevard, Suite 104 Malvern, Pennsylvania		19355
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (877) 533-4420

 

 

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 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and has been subject to such filing requirements for the past 90 days.    Yes   x     No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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		¨
Non-accelerated filer		¨		Smaller reporting company		x

Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No  x

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

 

Title of Each Class		Number of Shares Outstanding as of August 11, 2014
Common Stock, $1.00 Par Value		6,447,369 Outstanding Shares

 

 

 

---

Table of Contents

TABLE OF CONTENTS

 

		Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)		2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3. Quantitative and Qualitative Disclosures About Market Risk		56
Item 4. Controls and Procedures		57
PART II—OTHER INFORMATION		57
Item 1. Legal Proceedings		57
Item 1A. Risk Factors		57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3. Defaults Upon Senior Securities		57
Item 4. Mine Safety Disclosures		57
Item 5. Other Information		57
Item 6. Exhibits		58

---

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, and as such, statements containing the words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “projects,” “predicts,” “intends,” “seeks,” “will,” “may,” “should,” “would,” “continues,” “hope” and similar expressions, or the negative of these terms, constitute forward-looking statements that involve risks and uncertainties. Such statements are based on current expectations and are subject to risks, uncertainties and changes in condition, significance, value, and effect. Such risks, uncertainties and changes in condition, significance, value and effect could cause First Priority Financial Corp.’s actual results to differ materially from those anticipated.

Although the Company believes its plans, intentions, and expectations as reflected in or suggested by these forward-looking statements are reasonable, it can give no assurance that its plans, intentions, or expectations will be achieved. Accordingly, you should not place undue reliance on them. Listed below, and discussed elsewhere, are some important risks, uncertainties, and contingencies that could cause actual results, performances, or achievements to be materially different from the forward-looking statements made in this document. These factors, risks, uncertainties, and contingencies include, but are not limited to, the following:

 

•

the strength of the United States economy in general and the strength of the regional and local economies in which First Priority conducts operations;

 

•

the effects of changing economic conditions in First Priority’s market areas and nationally;

 

•

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

 

•

changes in federal and state banking, insurance, and investment laws and regulations which could impact First Priority’s operations;

 

•

inflation, interest rate, market, and monetary fluctuations;

 

•

First Priority’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers;

 

•

the impact of changes in financial services policies, laws, and regulations, including laws, regulations, policies, and practices concerning taxes, banking, capital, liquidity, proper accounting treatment, securities, and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretations of generally accepted accounting principles;

 

•

the occurrence of adverse changes in the securities markets;

 

•

the effects of changes in technology or in consumer spending and savings habits;

 

•

terrorist attacks in the United States or upon United States interests abroad, or armed conflicts involving the United States military;

 

•

regulatory or judicial proceedings;

 

•

changes in asset quality;

 

•

First Priority’s success in managing the risks involved in the foregoing.

The effects of these factors are difficult to predict. New factors emerge from time to time, and we are not able to assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements speak only as of the date of this document.

Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this quarterly report or the date of any document incorporated by reference in this quarterly report.

 

1

---

Table of Contents

First Priority Financial Corp.

Consolidated Balance Sheets

( in thousands, except share and per share data)

 

		June 30, 2014				December 31, 2013
		(Unaudited)
Assets
Cash and due from banks		$	6,660			$	5,217
Interest-bearing deposits in banks			7,656				6,031
Total cash and cash equivalents			14,316				11,248
Securities available for sale, at fair value (amortized cost: $52,397 and $80,085, respectively)			52,214				78,636
Securities held to maturity, at amortized cost (fair value: $14,411 and $10,268, respectively)			14,455				10,963
Residential mortgage loans held for sale			200				—
Loans receivable			362,789				335,737
Less: allowance for loan losses			2,237				2,273
Net loans			360,552				333,464
Restricted investments in bank stocks			3,250				2,731
Premises and equipment, net			2,437				2,533
Bank owned life insurance			3,042				—
Accrued interest receivable			1,435				1,454
Other real estate owned			861				914
Goodwill			2,725				2,725
Intangible assets with finite lives, net			445				494
Other assets			963				926
Total Assets		$	456,895			$	446,088
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing		$	52,602			$	47,997
Interest-bearing			301,121				309,423
Total deposits			353,723				357,420
Short-term borrowings			46,242				33,625
Long-term debt			11,000				11,000
Accrued interest payable			274				313
Other liabilities			1,075				1,338
Total Liabilities			412,314				403,696
Commitments and contingencies (Note 10)			—				—
Shareholders’ Equity
Preferred stock, $100 par value; authorized 10,000,000 shares; liquidation value: $1,000 per share:
Series A: 9%; 4,579 shares issued and outstanding; liquidation value: $4,579			4,579				4,570
Series B: 9%; 229 shares issued and outstanding; liquidation value: $229			229				231
Series C: 5%; 4,596 shares issued and outstanding; liquidation value: $4,596			4,595				4,594
Common stock, $1 par value; authorized 10,000,000 shares; issued and outstanding: 2014: 6,438,769; 2013: 6,438,994			6,439				6,439
Surplus			39,907				39,780
Accumulated deficit			(11,075	)			(12,025	)
Accumulated other comprehensive loss			(93	)			(1,197	)
Total Shareholders’ Equity			44,581				42,392
Total Liabilities and Shareholders’ Equity		$	456,895			$	446,088

See unaudited notes to consolidated financial statements.

 

2

---

Table of Contents

First Priority Financial Corp.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

 

		For the three months ended June 30,								For the six months ended June 30,
		2014				2013				2014				2013
Interest Income
Loans receivable, including fees		$	4,260			$	4,403			$	8,321			$	7,891
Securities—taxable			368				225				728				391
Securities—exempt from federal taxes			27				29				54				56
Interest bearing deposits and other			31				18				57				27
Total Interest Income			4,686				4,675				9,160				8,365
Interest Expense
Deposits			644				790				1,320				1,518
Short-term borrowings			24				—				36				2
Long-term debt			25				32				49				95
Total Interest Expense			693				822				1,405				1,615
Net Interest Income			3,993				3,853				7,755				6,750
Provision for Loan Losses			255				175				360				340
Net Interest Income after Provision for Loan Losses			3,738				3,678				7,395				6,410
Non-Interest Income
Wealth management fee income			104				56				227				115
Bank owned life insurance income			25				—				42				—
Other			87				102				166				163
Total Non-Interest Income			216				158				435				278
Non-Interest Expenses
Salaries and employee benefits			1,743				1,801				3,465				3,341
Occupancy and equipment			542				579				1,107				934
Data processing equipment and operations			208				242				440				411
Professional fees			209				208				426				354
Marketing, advertising, and business development			113				74				143				110
FDIC insurance assessments			80				92				156				165
Pennsylvania bank shares tax expense			80				102				158				176
Merger related costs			—				413				—				1,210
Other real estate owned			45				44				87				162
Other			330				226				634				418
Total Non-Interest Expenses			3,350				3,781				6,616				7,281
Income (Loss) before Income Tax Expense			604				55				1,214				(593	)
Federal Income Tax Expense			7				—				16				—
Net Income (Loss)		$	597			$	55			$	1,198			$	(593	)
Preferred dividends, including net amortization			121				133				248				266
Income (Loss) to Common Shareholders		$	476			$	(78	)		$	950			$	(859	)
Income (loss) per common share:
Basic		$	0.07			$	(0.01	)		$	0.15			$	(0.16	)
Diluted		$	0.07			$	(0.01	)		$	0.15			$	(0.16	)
Weighted average common shares outstanding
Basic			6,439				6,328				6,439				5,290
Diluted			6,439				6,328				6,439				5,290

See unaudited notes to consolidated financial statements.

 

3

---

Table of Contents

First Priority Financial Corp.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, in thousands)

 

		For the three months ended June 30,								For the six months ended June 30,
		2014				2013				2014				2013
Net income (loss)		$	597			$	55			$	1,198			$	(593	)
Other comprehensive income (loss):
Securities available for sale:
Net unrealized gains (losses) arising during the period			490				(1,664	)			1,266				(1,600	)
Net unrealized holding gains (losses) on securities transferred between available for sale and held to maturity:
Reclassification adjustment for net unrealized holding gains (losses) on securities transferred			—				293				(137	)			293
Amortization of net unrealized holding gains (losses) to income during the period			(11	)			(5	)			(25	)			(5	)
Net unrealized holding gains (losses) on securities transferred during the period			(11	)			288				(162	)			288
Total other comprehensive income (loss)			479				(1,376	)			1,104				(1,312	)
Total comprehensive income (loss)		$	1,076			$	(1,321	)		$	2,302			$	(1,905	)

See unaudited notes to consolidated financial statements.

 

4

---

Table of Contents

First Priority Financial Corp.

Consolidated Statements of Shareholders’ Equity

For the Six Months Ended June 30, 2014 and 2013

(Unaudited, dollars in thousands)

 

		Preferred Stock				Common Stock				Surplus				Accumulated Deficit				Accumulated Other Comprehensive Income (loss)				Total
Balance—December 31, 2012		$	9,342			$	3,144			$	26,230			$	(11,689	)		$	683			$	27,710
Preferred stock dividends			—				—				—				(240	)			—				(240	)
Net amortization on preferred stock			26				—				—				(26	)			—				—
Issuance of 3,475 shares of restricted common stock, net of forfeitures			—				4				(4	)			—				—				—
Issuance of 1,268,576 shares of common stock in private placement			—				1,268				5,304				—				—				6,572
Issuance of 1,915,942 shares of common stock in merger with Affinity Bancorp, Inc.			—				1,916				8,130				—				—				10,046
Cash in lieu of fractional shares for merger with Affinity Bancorp, Inc.			—				—				(1	)			—				—				(1	)
Net loss			—				—				—				(593	)			—				(593	)
Other comprehensive loss			—				—				—				—				(1,312	)			(1,312	)
Stock based compensation expense			—				—				65				—				—				65
Balance—June 30, 2013		$	9,368			$	6,332			$	39,724			$	(12,548	)		$	(629	)		$	42,247
Balance—December 31, 2013		$	9,395			$	6,439			$	39,780			$	(12,025	)		$	(1,197	)		$	42,392
Preferred stock dividends			—				—				—				(240	)			—				(240	)
Net amortization on preferred stock			8				—				—				(8	)			—				—
Forfeiture of 225 shares of restricted common stock			—				—				—				—				—				—
Net income			—				—				—				1,198				—				1,198
Other comprehensive income			—				—				—				—				1,104				1,104
Stock based compensation expense			—				—				127				—				—				127
Balance—June 30, 2014		$	9,403			$	6,439			$	39,907			$	(11,075	)		$	(93	)		$	44,581

See unaudited notes to consolidated financial statements.

 

5

---

Table of Contents

First Priority Financial Corp.

Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

 

		For the six months ended June 30,
		2014				2013
Cash Flows from Operating Activities
Net income (loss)		$	1,198			$	(593	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for loan losses			360				340
Provision for foreclosed asset losses			—				101
Depreciation and amortization			229				174
Net (accretion of discount)/amortization of premium on securities			(189	)			(131	)
Stock based compensation expense			127				65
Net (gains) losses on sales other real estate			(16	)			6
Net gain on disposal of premises and equipment			(7	)			—
Bank owned life insurance policy income			(42	)			—
Originations of loans held for sale			(350	)			(855	)
Proceeds from sale of loans held for sale			150				855
Increase in accrued interest receivable			19				31
Increase (decrease) in other assets			(37	)			543
Increase (decrease) in accrued interest payable			(38	)			(196	)
Decrease in other liabilities			(263	)			(68	)
Net Cash Provided by (Used in) Operating Activities			1,141				272
Cash Flows from Investing Activities
Net increase in loans			(12,345	)			(11,698	)
Purchase of loans			(15,639	)			—
Purchases of securities available for sale			(7,336	)			(23,077	)
(Purchase)/Redemption of restricted stock			(519	)			458
Proceeds from maturities or calls of securities available for sale			31,254				14,322
Proceeds from the sale of securities available for sale			—				1,867
Proceeds related to receivables for investment securities sold			—				33,630
Proceeds from the sale of other real estate owned			763				961
Net decrease of premises and equipment			(118	)			(26	)
Net purchase of bank owned life insurance			(3,000	)			—
Net cash received from acquisition			—				24,419
Net Cash (Used in) Provided by Investing Activities			(6,940	)			40,856
Cash Flows from Financing Activities
Net decrease in deposits			(3,510	)			(31,190	)
Net increase in short-term borrowings			12,617				8,000
Decrease in long-term debt			—				(16,358	)
Proceeds from issuance of common stock			—				6,572
Cash dividends paid on preferred stock			(240	)			(240	)
Net Cash Provided by (Used in) Financing Activities			8,867				(33,216	)
Net Increase in Cash and Cash Equivalents			3,068				7,912
Cash and Cash Equivalents—Beginning			11,248				11,016
Cash and Cash Equivalents—Ending		$	14,316			$	18,928
Supplementary Disclosures of Cash Flows Information
Noncash activity:
Trade date accounting for investment securities purchases		$	—			$	3,846
Transfer of available for sale securities to held to maturity securities		$	3,840			$	11,166
Transfer of loans receivable to other real estate owned		$	694			$	—
Cash paid for interest on deposits and borrowings		$	1,631			$	1,965

See unaudited notes to consolidated financial statements.

 

6

---

Table of Contents

First Priority Financial Corp.

Unaudited Notes to Consolidated Financial Statements

Note 1—Summary of Significant Accounting Policies

Organization and Nature of Operations

First Priority Financial Corp.

First Priority Financial Corp. (“First Priority”, the “Company”) was incorporated under the laws of the Commonwealth of Pennsylvania on February 13, 2007, for the purpose of becoming the holding company of First Priority Bank (the “Bank”) and had no prior operating history. On May 11, 2007, as a result of a reorganization and merger, First Priority Bank became a wholly-owned subsidiary of First Priority.

On February 28, 2013, First Priority and Affinity Bancorp, Inc. (“Affinity”), the holding company for Affinity Bank of PA (“Affinity Bank”), merged with and into First Priority. Total assets acquired as a result of the merger were $175.9 million, including $77.4 million in loans, and deposits of $150.9 million. Total incremental equity resulting from the transaction was $10.1 million. Under the terms of the merger agreement, shareholders of Affinity received 0.9813 newly issued shares of First Priority in exchange for each Affinity share. A total of 1,933,665 shares of First Priority common stock were issued in connection with the merger. In conjunction with the completion of the merger, the Company also issued 1,268,576 shares of First Priority common stock as part of a private placement offering that resulted in incremental net equity proceeds of $6.6 million.

First Priority provides banking services through First Priority Bank and does not engage in any activities other than banking and related activities. As of June 30, 2014, First Priority had total assets of $456.9 million and total shareholders’ equity of $44.6 million.

First Priority Bank

First Priority Bank is a state-chartered commercial banking institution which was incorporated under the laws of the Commonwealth of Pennsylvania on May 25, 2005. First Priority Bank’s deposits are insured by the FDIC up to the maximum amount permitted for all banks. As of June 30, 2014, First Priority Bank had total assets of $456.9 million, total loans of $362.8 million, total deposits of $354.6 million and total shareholder’s equity of $43.9 million.

First Priority Bank engages in a full service commercial and consumer banking business with strong private banking and individual wealth management services. First Priority Bank offers a variety of commercial, private banking and consumer loans, mortgage products and commercial real estate financing. First Priority Bank does not engage in sub-prime lending. The Company’s operations are significantly affected by prevailing economic conditions, competition, and the monetary, fiscal, and regulatory policies of governmental agencies. Lending activities are influenced by a number of factors, including the general credit needs of individuals and small and medium-sized businesses in the Company’s market area, competition, the current regulatory environment, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, competition, account maturities, and the level of personal income and savings in the market area.

First Priority Bank also offers certain financial planning and investment management services. These investment services are provided by First Priority Financial Services, a Division of First Priority Bank, through an agreement with a third party provider. In addition, various life insurance products are offered through First Priority Bank, and the Bank has also entered into solicitation agreements with several investment advisors to provide portfolio management services to customers of the Bank.

First Priority Bank currently seeks deposits and commercial and consumer banking relationships through its ten banking offices. The Bank provides deposit products that include checking, money market and savings accounts, and certificates of deposit as well as other deposit services, including cash management and electronic banking products and online account opening capabilities. The Bank obtains funding in the local community by providing excellent service and competitive rates to its customers and utilizes electronic and print media advertising to attract current and potential deposit customers. The Bank also uses brokered certificates of deposit as a cost effective funding alternative.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or all footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of these financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for First Priority Financial Corp. for the year ended December 31, 2013, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 28, 2014. The results of interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

7

---

Table of Contents

The accompanying unaudited consolidated financial statements consist of the parent company, First Priority and its consolidated wholly owned subsidiary, First Priority Bank. The consolidated balance sheets and related statements of operation of the Company are substantially the same as the consolidated balance sheets and related statements of operation of the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date that these financial statements were issued.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, stock-based compensation, impairment of goodwill, other than temporary impairment of investment assets, the valuation of deferred tax assets and other real estate.

Acquired Loans

Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.

Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments are accounted for as impaired loans under ASC 310-30. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require the Company to evaluate the need for an allowance for loan losses on these loans. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the non-accretable discount which the Company then reclassifies as an accretable discount that is recognized into interest income over the remaining life of the loans using the interest method.

Acquired loans that met the criteria for non-accrual of interest prior to acquisition may be considered performing upon acquisition, or in the future, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be non-accrual or non-performing and may accrue interest on these loans, including the impact of any accretable discount. For acquired loans that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and amortized over the life of the asset. Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans, however, the Company records a provision for loan losses only when the required allowance exceeds any remaining pooled discounts for loans evaluated collectively for impairment.

Allowance for Loan Losses

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments, totaling $35 thousand, represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’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 significant revision as more information becomes available.

 

8

---

Table of Contents

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, 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 pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

 

1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

 

2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.

 

3.	Nature and volume of the portfolio and terms of loans.

 

4.	Management team with experience, depth, and knowledge in banking and in many areas of lending. Each contributes to the sound credit culture and control within the Company.

 

5.	Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.

 

6.	The Company engages a third party to perform an independent review of the loan portfolio as a measure for quality and consistency in credit evaluation and credit decisions.

 

7.	Existence and effect of any concentrations of credit and changes in the level of such concentrations.

 

8.	Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

A majority of the Company’s loans are to business owners of many types. The Company makes commercial loans for real estate development and other business purposes required by our customers.

The Company’s credit policies determine advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral values such as real estate values, equipment, eligible accounts receivable and inventory. Individual loan advance rates may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets. Commercial real estate loans include long-term loans financing commercial properties. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans typically require a loan to value ratio of not greater than 80% and vary in terms.

Residential mortgages and home equity loans are secured by the borrower’s residential real estate in either a first or second lien position. Residential mortgages and home equity loans have varying loan rates depending on the financial condition of the borrower and the loan to value ratio. Residential mortgages have amortizations up to 30 years and home equity loans have maturities up to 10 years.

Other consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are secured.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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 and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real

 

9

---

Table of Contents

estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.

Acquired loans are recorded at acquisition date at their acquisition date fair values, and therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows expected from the acquired impaired loans after the date of acquisition, the Company records a provision for potential losses. During the three and six months ended June 30, 2014, the Company recorded a provision for loan losses totaling $130 thousand and $210 thousand for acquired impaired loans. There was no provision recorded for loan losses for acquired impaired loans for the three and six months ended June 30, 2013.

For acquired loans that are not deemed impaired at acquisition, credit discounts representing principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the acquisition date, the methods used to estimate the required allowance for loan losses for these loans is similar to originated loans, however, the Company records a provision for loan losses only when the required allowance exceeds any remaining unamortized general credit fair value adjustment for loans evaluated collectively for impairment.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Comprehensive Income (Loss)

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of total comprehensive income (loss). The Consolidated Statements of Comprehensive Income do not include the effects of income taxes due to the full valuation allowance on deferred tax assets as of June 30, 2014 and 2013, respectively.

 

Details about Accumulated Other Comprehensive Income Components		Amounts Reclassified from Accumulated Other Comprehensive Income								Affected Line Item in the Statement where Net Income is Presented
		June 30, 2014				June 30, 2013
		(Dollars in thousands)
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity		$	(25	)		$	(5	)		Interest Income
Total reclassification		$	(25	)		$	(5	)

Accumulated other comprehensive income (loss) as of June 30, 2014 and December 31, 2013 consisted of the following:

 

		June 30, 2014				December 31, 2013
		(Dollars in thousands)
Net unrealized loss on available for sale securities		$	(183	)		$	(1,449	)
Net unrealized holding gains on securities transferred between available for sale and held to maturity			90				252
Total		$	(93	)		$	(1,197	)

 

10

---

Table of Contents

Note 2—Merger with Affinity Bancorp, Inc.

On February 28, 2013, First Priority and Affinity Bancorp, Inc. completed a merger, pursuant to a definitive merger agreement dated May 23, 2012, whereby the companies agreed to merge their respective holding companies and bank subsidiaries. Under the terms of the merger agreement, shareholders of Affinity received 0.9813 newly issued shares of First Priority in exchange for each Affinity share. A total of 1,933,665 shares of First Priority common stock were issued in connection with the merger. The combination created a full-service community bank with ten offices serving the Berks, Bucks, Chester, and Montgomery County markets. The Company is headquartered in Malvern, PA.

The merger was accounted for using acquisition accounting, which required the Company to allocate the total consideration transferred to the assets acquired and liabilities assumed, based on their respective fair values at the merger date, with any remaining excess consideration being recorded as goodwill. The fair value of total assets acquired as a result of the merger totaled $174.4 million, which consisted of $77.4 million in loans, $33.3 million in securities available for sale, $24.4 million in cash and due from banks and $38.7 million in other assets, of which $33.6 million was related to receivables for investment securities sold prior to the merger, pending settlement. The transaction also resulted in a core deposit intangible asset of $582 thousand and goodwill of $1.5 million. The fair value of liabilities assumed aggregated $165.7 million, including $150.9 million of deposits and $14.4 million in long-term borrowings, of which the borrowings were subsequently paid off in the first quarter of 2013. The transaction added $10.1 million to First Priority’s equity based on the fair value of stock issued in the merger. The results of Affinity’s operations have been included in the Company’s consolidated financial statements prospectively from the date of the merger.

 

(In thousands, except share and per share data)		February 28, 2013
Purchase Price Consideration in Common Stock
Affinity common shares settled for stock			1,970,706
Exchange ratio			0.9813
First Priority shares issued			1,933,665
Fair value assigned to First Priority’s common shares		$	5.22
Acquisition cost of Affinity common shares exchanged for First Priority Stock—Total Acquisition cost						$	10,094
Acquisition cost of Consideration—fair value of Affinity Options Rolled over to First Priority Options							44
Total Acquisition cost						$	10,138
Identifiable assets:
Cash and due from banks		$	24,419
Securities available for sale			33,253
Loans and leases			77,359
Intangible assets			582
Other assets			38,738
Total identifiable assets							174,351
Liabilities:
Deposits		$	150,904
Long-term borrowings			14,358
Other liabilities			482
Total liabilities							165,744
Net goodwill resulting from merger						$	1,531

The acquired assets and assumed liabilities were measured at estimated fair values. In many cases, determining the fair value of the acquired assets and assumed liabilities required First Priority to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest, which required the utilization of significant estimates and judgment in accounting for the merger.

The estimated fair values of cash and due from banks, other assets and other liabilities approximate their stated value. The estimated fair values of the investment securities available for sale were calculated primarily using level 2 inputs. The prices for these instruments are obtained through an independent pricing service and are derived from market quotations for similar assets and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed the data and assumptions used in pricing the securities to ensure the highest level of significant inputs are derived from market observable data.

Real estate acquired through foreclosure, included in other assets, was primarily valued based on estimated or appraised collateral values.

 

11

---

Table of Contents

The most significant fair value determination related to the valuation of acquired loans. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors. The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration.

Affinity’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, Affinity’s loan portfolio without evidence of deterioration was recorded at a current fair value of $74.6 million. The Company utilized an interest rate loan fair value analysis, which resulted in a positive fair value adjustment of $1.6 million related to this portion of the acquired loans and a general credit fair value analysis which resulted in an offsetting $1.6 million reduction in the fair value.

To prepare the interest rate loan fair value analysis loans were assembled into groupings by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize.

A present value approach was utilized to calculate the interest rate fair value adjustment. The general credit risk fair value adjustment was calculated using a two part general credit fair value analysis: (1) expected lifetime losses, using an average of historical losses of the Company, Affinity and peer banks; and (2) an estimated fair value adjustment for qualitative factors related to general economic conditions and the risk related to lack of familiarity with the originator’s underwriting process.

Affinity’s loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were recorded at fair value and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a nonaccretable difference. Effectively at the acquisition date, the Company recorded $2.8 million of purchased credit-impaired loans subject to a nonaccretable discount difference of $1.6 million. The balance of purchased credit impaired loans at June 30, 2014 was $1.3 million, net of a remaining unamortized non-accretable discount of $1.1 million. The method of measuring carrying value of purchased loans differs from loans originated by the Company (“originated loans”), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount of $292 thousand, which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.

The following is a summary of the acquired impaired loans resulting from the merger with Affinity (dollars in thousands):

 

		Acquired Impaired Loans
Contractually required principal and interest at acquisition		$	5,577
Contractual cash flows not expected to be collected			2,441
Expected cash flows at acquisition			3,136
Interest component of expected cash flows			359
Basis in acquired loans at acquisition—estimated fair value		$	2,777

The following table presents the changes in accretable yield related to purchased-credit-impaired loans for the periods ended June 30, 2014 and 2013 (dollars in thousands):

 

		2014				2013
Accretable yield balance, beginning of period		$	56			$	—
Additions resulting from acquisition			—				258
Accretion to interest income			(171	)			(59	)
Reclassification from nonaccretable difference and disposals, net			146				(6	)
Accretable yield balance, end of period		$	31			$	193

The fair value of demand deposits, money market and savings deposits acquired through the merger with Affinity was assumed to be approximately the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued as the present value of the certificates expected contractual payments discounted at market rates for similar certificates.

Core deposit intangibles (CDI) represent the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. The CDI value represents the future economic benefit of the potential cost savings from acquiring Core Deposits as part of an acquisition compared to the cost of alternative funding sources and the alternative cost to grow a similar core deposit base. The core deposit intangible of $582 thousand is being amortized over an estimated useful life of approximately 10 years. Amortization expense was $49 thousand and $35 thousand for the six months ended June 30, 2014 and 2013, respectively.

 

12

---

Table of Contents

The following table shows amortization expense (in thousands) for the core deposit intangible for the next 5 years:

 

Remainder of 2014:		$	48
2015			86
2016			76
2017			65
2018			55

Management used specific market quotations from the FHLB to fair value long-term FHLB advances. These borrowings were subsequently paid off by the Company in the first quarter of 2013 at the recorded fair values.

In addition, the Company has determined, based on the analysis of available positive and negative evidence, that a valuation allowance should be recorded against deferred taxes of the Company. Therefore, the incremental net deferred tax assets resulting from the merger with Affinity, totaling $1.8 million, were fully reserved by a valuation allowance. Affinity had a Federal net operating loss carryforward (“NOL”) for tax purposes of $1.5 million, or a $497 thousand tax impact at the statutory federal income tax rate of 34%, which is subject to certain limitations and expires in 2032 if not fully utilized. The $497 thousand deferred tax asset related to the NOL is included in the $1.8 million net deferred tax asset discussed above.

In connection with the Affinity acquisition, First Priority incurred merger-related expenses in regards to professional fees, occupancy and equipment and other costs of integrating and conforming acquired operations with and into First Priority. Those expenses consisted largely of costs related to professional and consulting services, termination of Affinity’s core system contractual agreement and initial communication expenses to introduce First Priority to its new customers, printing and filing costs of completing the transaction and investment banking charges.

A summary of merger related costs included in the consolidated statements of income follows for the three and six months ended June 30, 2013. There were no merger costs recorded for the three or six months ended June 30, 2014. (Dollars in thousands):

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2013				2013
Accounting		$	9			$	26
Branch consolidation			103				103
Investment banking			—				350
Investor & customer document printing and filing			7				118
Legal			—				5
Purchase accounting consulting			50				50
System contract termination			—				314
System conversion/deconversion costs			244				244
		$	413			$	1,210

Note 3—Recently Issued Accounting Standards

In January 2014, the FASB issued ASU 2014-04, Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. Management does not believe the amendments will have a material impact on the Company’s Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. Management does not believe the amendments will have a material impact on the Company’s Consolidated Financial Statements.

 

13

---

Table of Contents

Note 4—Earnings (Loss) Per Common Share

Diluted earnings (loss) per common share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Proceeds assumed to have been received on such exercise or conversion, are assumed to be used to purchase shares of the Company’s common stock at the average market price during the period, as required by the “treasury stock method” of accounting for common stock equivalents. For purposes of calculating the basic and diluted earnings (loss) per share, the Company’s reported net income (loss) is adjusted for dividends on preferred stock and net accretion/amortization related to the issuance of preferred stock to determine the net income (loss) to common shareholders. For the period ended June 30, 2014 and 2013, diluted loss per share is the same as basic loss per share, as the effect of any common stock equivalent is antidilutive. For the period ended June 30, 2014 and 2013 there were 845 and 814 thousand common stock equivalent shares, respectively, all of which were antidilutive and therefore, excluded from earnings per share calculations.

The calculations of basic and diluted earnings (loss) per common share are presented below for the three and six months ended June 30, 2014 and 2013:

 

		For the three months ended June 30,								For the six months ended June 30,
		(In thousands, except per share information)								(In thousands, except per share information)
		2014				2013				2014				2013
Net income (loss)		$	597			$	55			$	1,198			$	(593	)
Less: preferred stock dividends			(120	)			(120	)			(240	)			(240	)
Less: net discount accretion on preferred stock			(1	)			(13	)			(8	)			(26	)
Income (loss) to common shareholders		$	476			$	(78	)		$	950			$	(859	)
Average basic common shares outstanding			6,439				6,328				6,439				5,290
Effect of dilutive stock options			—				—				—				—
Average number of common shares used to calculate diluted earnings per common share			6,439				6,328				6,439				5,290
Basic earnings (loss) per common share		$	0.07			$	(0.01	)		$	0.15			$	(0.16	)
Diluted earnings (loss) per common share		$	0.07			$	(0.01	)		$	0.15			$	(0.16	)

The amount of preferred stock dividends and the net accretion or amortization related to each series of preferred stock are presented below for the three and six months ended June 30, 2014 and 2013:

 

		For the three months ended June 30,								For the six months ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)								(Dollars in thousands)
Preferred dividends:
Preferred Series A		$	57			$	57			$	114			$	115
Preferred Series B			5				5				10				10
Preferred Series C			58				58				116				115
Total preferred dividends		$	120			$	120			$	240			$	240
Net accretion (amortization) on preferred stock:
Preferred Series A		$	—			$	(14	)		$	(9	)		$	(29	)
Preferred Series B			—				1				2				3
Preferred Series C			(1	)			—				(1	)			—
Total net accretion (amortization) on preferred stock		$	(1	)		$	(13	)		$	(8	)		$	(26	)

Note 5—Securities

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Available for sale securities are carried at fair value.

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

At March 31, 2014, the Company transferred securities with fair values of $3.7 million consisting of six obligations of states and political subdivisions and one corporate bond from available for sale securities to held to maturity securities. Net unrealized holding losses arising prior to the reclassification date as of March 31, 2014 totaled $137 thousand are reported as a separate line item within accumulated other comprehensive income. The balance of net unrealized holding gains, totaling $90 thousand as of June 30, 2014 and $252 thousand as of December 31, 2013, is being amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same transferred debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding loss reported in equity will offset the effect on the interest income of the accretion of the discount on these securities.

 

14

---

Table of Contents

The amortized cost, unrealized gains and losses, and the estimated fair value of the Company’s investment securities available for sale and held to maturity are as follows:

 

		June 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations		$	22,444			$	33			$	(263	)		$	22,214
Obligations of states and political subdivisions			4,936				1				(76	)			4,861
Federal agency mortgage-backed securities			23,667				246				(129	)			23,784
Federal agency collateralized mortgage obligations			640				4				(2	)			642
Other debt securities			501				3				—				504
Money market mutual fund			209				—				—				209
Total investment securities available for sale		$	52,397			$	287			$	(470	)		$	52,214
Held To Maturity:
Obligations of states and political subdivisions		$	13,975			$	91			$	(155	)		$	13,911
Other debt securities			480				20				—				500
Total held to maturity		$	14,455			$	111			$	(155	)		$	14,411
		December 31, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations		$	48,612			$	4			$	(555	)		$	48,061
Obligations of states and political subdivisions			8,321				—				(500	)			7,821
Federal agency mortgage-backed securities			20,908				57				(411	)			20,554
Federal agency collateralized mortgage obligations			758				6				(5	)			759
Other debt securities			1,252				3				(48	)			1,207
Money market mutual fund			234				—				—				234
Total investment securities available for sale		$	80,085			$	70			$	(1,519	)		$	78,636
Held To Maturity:
Obligations of states and political subdivisions		$	10,963			$	—			$	(695	)		$	10,268
Total held to maturity		$	10,963			$	—			$	(695	)		$	10,268

 

15

---

Table of Contents

Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The table below details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at June 30, 2014 and December 31, 2013.

 

		As of June 30, 2014
		Less than 12 Months												12 Months or longer												Total
		Fair Value				Unrealized Losses				Count				Fair Value				Unrealized Losses				Count				Fair Value				Unrealized Losses				Count
		(Dollars in thousands)
Available for Sale:
Obligations of U.S. government agencies and corporations		$	—			$	—				—			$	16,678			$	(263	)			15			$	16,678			$	(263	)			15
Obligations of states and political subdivisions			579				(4	)			1				4,017				(72	)			11				4,596				(76	)			12
Federal agency mortgage-backed securities			1,317				(2	)			1				8,055				(127	)			6				9,372				(129	)			7
Federal agency collateralized mortgage obligations			—				—				—				346				(2	)			1				346				(2	)			1
Total Available for Sale		$	1,896			$	(6	)			2			$	29,096			$	(464	)			33			$	30,992			$	(470	)			35
Held to Maturity:
Obligations of states and political subdivisions		$	—			$	—				—			$	7,924			$	(155	)			17			$	7,924			$	(155	)			17
Total Held to Maturity		$	—			$	—				—			$	7,924			$	(155	)			17			$	7,924			$	(155	)			17
		As of December 31, 2013
		Less than 12 Months												12 Months or longer												Total
		Fair Value				Unrealized Losses				Count				Fair Value				Unrealized Losses				Count				Fair Value				Unrealized Losses				Count
		(Dollars in thousands)
Available for Sale:
Obligations of U.S. government agencies and corporations		$	21,057			$	(555	)			18			$	—			$	—				—			$	21,057			$	(555	)			18
Obligations of states and political subdivisions			7,821				(500	)			19				—				—				—				7,821				(500	)			19
Federal agency mortgage-backed securities			12,772				(411	)			10				—				—				—				12,772				(411	)			10
Federal agency collateralized mortgage obligations			411				(5	)			1				—				—				—				411				(5	)			1
Other debt securities			702				(48	)			2				—				—				—				702				(48	)			2
Total Available for Sale		$	42,763			$	(1,519	)			50			$	—			$	—				—			$	42,763			$	(1,519	)			50
Held to Maturity:
Obligations of states and political subdivisions		$	9,488			$	(610	)			21			$	780			$	(85	)			2			$	10,268			$	(695	)			23
Total Held to Maturity		$	9,488			$	(610	)			21			$	780			$	(85	)			2			$	10,268			$	(695	)			23

As of June 30, 2014, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates, particularly given the minimal inherent credit risk associated with the issuers of these securities and that the unrealized losses in these portfolios are not the result of deteriorating credit within any investment category.

Securities issued by states and political subdivisions are all rated investment grade. Each holding is reviewed by quarterly for impairment by management and our investment advisor. All mortgage backed securities and collateralized mortgage obligations are issued by U.S. government sponsored agencies; there are no holdings of private label mortgage backed securities or securities backed by loans classified as “Alt-A” or “Subprime”.

Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature. The Company evaluates a variety of factors in concluding whether securities are other-than-temporarily impaired. These factors include, but are not limited to, the type and purpose of the bond, the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.). The Company does not intend to sell any of these securities and it is unlikely that it will be required to sell any of these securities before recovery. Management does not believe any individual unrealized loss as of June 30, 2014 represents an other-than-temporary impairment.

 

16

---

Table of Contents

There were no realized gains or losses for the three or six months ended June 30, 2014 and 2013.

Securities with an estimated fair value of $46.6 million and $44.3 million were pledged at June 30, 2014 and December 31, 2013, respectively, to secure public fund deposits. In addition, securities pledged to secure borrowings by the Bank totaled $88 thousand and $106 thousand as of June 30, 2014 and December 31, 2013, respectively.

The amortized cost and fair value of securities as of June 30, 2014 by contractual maturity are shown below. Certain of these investment securities have call features which allow the issuer to call the security prior to its maturity date at the issuer’s discretion.

 

		June 30, 2014								June 30, 2014
		Available for Sale Securities								Held to Maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)								(Dollars in thousands)
Due within one year		$	—			$	—			$	—			$	—
Due after one year through five years			19,231				19,119				485				482
Due after five years through ten years			12,651				12,550				1,023				996
Due after ten years			20,306				20,336				12,947				12,933
			52,188				52,005				14,455				14,411
Money market mutual fund			209				209				—				—
Total		$	52,397			$	52,214			$	14,455			$	14,411

Note 6—Loans Receivable and Related Allowance for Loan Losses

Loans receivable consist of the following at June 30, 2014 and December 31, 2013. For certain presentations, originated loans exclude loans acquired through the merger with Affinity consummated on February 28, 2013. As acquired loans are paid off or are refinanced or extended under First Priority’s credit underwriting process, they are no longer considered acquired loans, but instead are prospectively considered originated loans.

 

		June 30, 2014				December 31, 2013
		(Dollars in thousands)
Commercial:
Commercial and industrial		$	76,340			$	76,659
Commercial mortgage			160,381				149,492
Commercial construction			6,155				4,373
Total commercial			242,876				230,524
Residential mortgage loans			71,813				56,979
Consumer:
Home equity lines of credit			29,509				29,263
Other consumer loans			18,568				19,317
Total consumer			48,077				48,580
Total loans			362,766				336,083
Allowance for loan losses			(2,237	)			(2,273	)
Net deferred loan cost (fees)			23				(346	)
Total loans receivable, net		$	360,552			$	333,464
Originated loans		$	325,562			$	288,913
Acquired loans			37,204				47,170
Total loans		$	362,766			$	336,083

 

17

---

Table of Contents

The Company’s loans consist of credits to borrowers spread over a broad range of industrial classifications. The largest concentrations of loans are to lessors of nonresidential buildings and lessors of residential buildings and dwellings. As of June 30, 2014, these loans totaled $64.3 million and $45.4 million, respectively, or 17.7% and 12.5%, respectively, of the total loans outstanding. As of December 31, 2013, these same classifications of loans totaled $64.0 million and $42.7 million, respectively, or 19.1% and 12.7%, respectively, of the total loans outstanding at that time. These credits were subject to normal underwriting standards and did not present more than the normal amount of risk assumed by the Company’s other lending activities. Management believes this concentration does not pose abnormal risk when compared to the risk it assumes in other types of lending. The Company has no other concentration of loans which exceeds 10% of total loans.

The following tables summarize the activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2014 and 2013:

 

		For the three months ended June 30, 2014 Allowance for Loan Losses																				For the six months ended June 30, 2014 Allowance for Loan Losses
		(Dollars in thousands)																				(Dollars in thousands)
		Beginning Balance				Charge-offs				Recoveries				Provision for loan losses				Ending Balance				Beginning Balance				Charge-offs				Recoveries				Provision for loan losses				Ending Balance
Commercial and industrial		$	421			$	(137	)		$	6			$	220			$	510			$	445			$	(137	)		$	16			$	186			$	510
Commercial mortgage			477				(1	)			—				7				483				452				(75	)			—				106				483
Commercial construction			17				—				2				3				22				12				(50	)			2				58				22
Residential mortgage loans			150				(25	)			—				96				221				149				(25	)			—				97				221
Home equity lines of credit			123				(90	)			4				81				118				177				(90	)			8				23				118
Other consumer loans			50				—				4				12				66				67				(52	)			7				44				66
Unallocated			981				—				—				(164	)			817				971				—				—				(154	)			817
Total loans		$	2,219			$	(253	)		$	16			$	255			$	2,237			$	2,273			$	(429	)		$	33			$	360			$	2,237
Commercial and industrial		$	421			$	(37	)		$	1			$	125			$	510			$	445			$	(37	)		$	1			$	101			$	510
Commercial mortgage			477				—				—				6				483				452				(74	)			—				105				483
Commercial construction			17				—				—				5				22				12				—				—				10				22
Residential mortgage loans			150				—				—				71				221				149				—				—				72				221
Home equity lines of credit			123				(72	)			—				67				118				177				(72	)			—				13				118
Other consumer loans			50				—				1				15				66				67				(6	)			2				3				66
Unallocated			981				—				—				(164	)			817				971				—				—				(154	)			817
Total originated loans		$	2,219			$	(109	)		$	2			$	125			$	2,237			$	2,273			$	(189	)		$	3			$	150			$	2,237
Commercial and industrial		$	—			$	(100	)		$	5			$	95			$	—			$	—			$	(100	)		$	15			$	85			$	—
Commercial mortgage			—				(1	)			—				1				—				—				(1	)			—				1				—
Commercial construction			—				—				2				(2	)			—				—				(50	)			2				48				—
Residential mortgage loans			—				(25	)			—				25				—				—				(25	)			—				25				—
Home equity lines of credit			—				(18	)			4				14				—				—				(18	)			8				10				—
Other consumer loans			—				—				3				(3	)			—				—				(46	)			5				41				—
Unallocated			—				—				—				—				—				—				—				—				—				—
Total acquired loans		$	—			$	(144	)		$	14			$	130			$	—			$	—			$	(240	)		$	30			$	210			$	—
		For the three months ended June 30, 2013 Allowance for Loan Losses																				For the six months ended June 30, 2013 Allowance for Loan Losses
		(Dollars in thousands)																				(Dollars in thousands)
		Beginning Balance				Charge-offs				Recoveries				Provision for loan losses				Ending Balance				Beginning Balance				Charge-offs				Recoveries				Provision for loan losses				Ending Balance
Commercial and industrial		$	760			$	(285	)		$	8			$	(52	)		$	431			$	566			$	(339	)		$	8			$	196			$	431
Commercial mortgage			587				—				—				(198	)			389				559				—				—				(170	)			389
Commercial construction			26				—				—				4				30				31				—				—				(1	)			30
Residential mortgage loans			132				—				6				7				145				176				(8	)			7				(30	)			145
Home equity lines of credit			87				(246	)			—				339				180				89				(246	)			—				337				180
Other consumer loans			43				—				6				12				61				41				—				7				13				61
Unallocated			930				—				—				63				993				998				—				—				(5	)			993
Total loans		$	2,565			$	(531	)		$	20			$	175			$	2,229			$	2,460			$	(593	)		$	22			$	340			$	2,229
Commercial and industrial		$	760			$	(285	)		$	8			$	(52	)		$	431			$	566			$	(339	)		$	8			$	196			$	431
Commercial mortgage			587				—				—				(198	)			389				559				—				—				(170	)			389
Commercial construction			26				—				—				4				30				31				—				—				(1	)			30
Residential mortgage loans			132				—				6				7				145				176				(8	)			7				(30	)			145
Home equity lines of credit			87				(246	)			—				339				180				89				(246	)			—				337				180
Other consumer loans			43				—				6				12				61				41				—				7				13				61
Unallocated			930				—				—				63				993				998				—				—				(5	)			993
Total originated loans		$	2,565			$	(531	)		$	20			$	175			$	2,229			$	2,460			$	(593	)		$	22			$	340			$	2,229
Commercial and industrial		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Commercial mortgage			—				—				—				—				—				—				—				—				—				—
Commercial construction			—				—				—				—				—				—				—				—				—				—
Residential mortgage loans			—				—				—				—				—				—				—				—				—				—
Home equity lines of credit			—				—				—				—				—				—				—				—				—				—
Other consumer loans			—				—				—				—				—				—				—				—				—				—
Unallocated			—				—				—				—				—				—				—				—				—				—
Total acquired loans		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—

 

18

---

Table of Contents

The following tables present the balance in the allowance for loan losses at June 30, 2014 and December 31, 2013 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology:

 

		June 30, 2014
		Allowance for Loan Losses												Loans Receivables
		(Dollars in thousands)
		Ending Balance				Ending Balance Individually Evaluated for Impairment				Ending Balance Collectively Evaluated for Impairment				Ending Balance				Ending Balance Individually Evaluated for Impairment				Ending Balance Collectively Evaluated for Impairment
Commercial and industrial		$	510			$	141			$	369			$	76,340			$	1,609			$	74,731
Commercial mortgage			483				5				478				160,381				980				159,401
Commercial construction			22				—				22				6,155				239				5,916
Residential mortgage loans			221				—				221				71,813				247				71,566
Home equity lines of credit			118				12				106				29,509				32				29,477
Other consumer loans			66				—				66				18,568				367				18,201
Unallocated			817				—				817				—				—				—
Total loans		$	2,237			$	158			$	2,079			$	362,766			$	3,474			$	359,292
Commercial and industrial		$	510			$	141			$	369			$	70,131			$	814			$	69,317
Commercial mortgage			483				5				478				147,846				404				147,442
Commercial construction			22				—				22				5,916				—				5,916
Residential mortgage loans			221				—				221				65,404				—				65,404
Home equity lines of credit			118				12				106				22,982				32				22,950
Other consumer loans			66				—				66				13,283				108				13,175
Unallocated			817				—				817				—				—				—
Total originated loans		$	2,237			$	158			$	2,079			$	325,562			$	1,358			$	324,204
Commercial and industrial		$	—			$	—			$	—			$	6,209			$	795			$	5,414
Commercial mortgage			—				—				—				12,535				576				11,959
Commercial construction			—				—				—				239				239				—
Residential mortgage loans			—				—				—				6,409				247				6,162
Home equity lines of credit			—				—				—				6,527				—				6,527
Other consumer loans			—				—				—				5,285				259				5,026
Unallocated			—				—				—				—				—				—
Total acquired loans		$	—			$	—			$	—			$	37,204			$	2,116			$	35,088
		December 31, 2013
		Allowance for Loan Losses												Loans Receivables
		(Dollars in thousands)
		Ending Balance				Ending Balance Individually Evaluated for Impairment				Ending Balance Collectively Evaluated for Impairment				Ending Balance				Ending Balance Individually Evaluated for Impairment				Ending Balance Collectively Evaluated for Impairment
Commercial and industrial		$	445			$	93			$	352			$	76,659			$	1,822			$	74,837
Commercial mortgage			452				19				433				149,492				1,650				147,842
Commercial construction			12				—				12				4,373				440				3,933
Residential mortgage loans			149				—				149				56,979				247				56,732
Home equity lines of credit			177				—				177				29,263				—				29,263
Other consumer loans			67				—				67				19,317				259				19,058
Unallocated			971				—				971				—				—				—
Total loans		$	2,273			$	112			$	2,161			$	336,083			$	4,418			$	331,665
Commercial and industrial		$	445			$	93			$	352			$	68,755			$	820			$	67,935
Commercial mortgage			452				19				433				133,172				597				132,575
Commercial construction			12				—				12				3,933				—				3,933
Residential mortgage loans			149				—				149				49,533				—				49,533
Home equity lines of credit			177				—				177				20,796				—				20,796
Other consumer loans			67				—				67				12,724				49				12,675
Unallocated			971				—				971				—				—				—
Total originated loans		$	2,273			$	112			$	2,161			$	288,913			$	1,466			$	287,447
Commercial and industrial		$	—			$	—			$	—			$	7,904			$	1,002			$	6,902
Commercial mortgage			—				—				—				16,320				1,053				15,267
Commercial construction			—				—				—				440				440				—
Residential mortgage loans			—				—				—				7,446				247				7,199
Home equity lines of credit			—				—				—				8,467				—				8,467
Other consumer loans			—				—				—				6,593				210				6,383
Unallocated			—				—				—				—				—				—
Total acquired loans		$	—			$	—			$	—			$	47,170			$	2,952			$	44,218

 

19

---

Table of Contents

The following tables summarize information in regard to impaired loans by loan portfolio class as of June 30, 2014 and December 31, 2013 as well as for the periods then ended, respectively:

 

		June 30, 2014												December 31, 3013
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
		(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial		$	1,385			$	2,892			$	—			$	1,592			$	3,020			$	—
Commercial mortgage			938				1,191				—				1,136				1,465				—
Commercial construction			239				500				—				440				887				—
Residential mortgage loans			247				318				—				247				318				—
Home equity lines of credit			20				31				—				—				—				—
Other consumer loans			367				478				—				259				335				—
With an allowance recorded:
Commercial and industrial		$	224			$	229			$	141			$	230			$	230			$	93
Commercial mortgage			42				70				5				514				520				19
Commercial construction			—				—				—				—				—				—
Residential mortgage loans			—				—				—				—				—				—
Home equity lines of credit			12				12				12				—				—				—
Other consumer loans			—				—				—				—				—				—
Total:
Commercial and industrial		$	1,609			$	3,121			$	141			$	1,822			$	3,250			$	93
Commercial mortgage			980				1,261				5				1,650				1,985				19
Commercial construction			239				500				—				440				887				—
Residential mortgage loans			247				318				—				247				318				—
Home equity lines of credit			32				43				12				—				—				—
Other consumer loans			367				478				—				259				335				—
Total		$	3,474			$	5,721			$	158			$	4,418			$	6,775			$	112
With no related allowance recorded:
Originated loans		$	1,080			$	1,780			$	—			$	722			$	1,346			$	—
Acquired Loans			2,116				3,630				—				2,952				4,679				—
Total		$	3,196			$	5,410			$	—			$	3,674			$	6,025			$	—
With an allowance recorded:
Originated loans		$	278			$	311			$	158			$	744			$	750			$	112
Acquired Loans			—				—				—				—				—				—
Total		$	278			$	311			$	158			$	744			$	750			$	112
Total:
Originated loans		$	1,358			$	2,091			$	158			$	1,466			$	2,096			$	112
Acquired Loans			2,116				3,630				—				2,952				4,679				—
Total		$	3,474			$	5,721			$	158			$	4,418			$	6,775			$	112

 

20

---

Table of Contents

		Three Months ended June 30,																Six Months ended June 30,
		2014								2013								2014								2013
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
		(Dollars in thousands)																(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial		$	1,596			$	—			$	2,132			$	—			$	1,671			$	—			$	3,232			$	8
Commercial mortgage			1,014				—				1,132				—				981				—				886				—
Commercial construction			344				9				493				12				384				14				329				16
Residential mortgage loans			242				—				1,084				—				242				—				1,026				6
Home equity lines of credit			141				—				795				—				71				—				652				1
Other consumer loans			349				—				—				—				277				—				—				—
With an allowance recorded:
Commercial and industrial		$	184			$	—			$	873			$	11			$	129			$	—			$	908			$	23
Commercial mortgage			42				—				1,354				—				83				—				1,535				—
Commercial construction			—				—				531				6				—				—				547				12
Residential mortgage loans			—				—				—				—				—				—				44				—
Home equity lines of credit			12				—				—				—				21				—				—				—
Other consumer loans			—				—				—				—				—				—				—				—
Total:
Commercial and industrial		$	1,780			$	—			$	3,005			$	11			$	1,800			$	—			$	4,140			$	31
Commercial mortgage			1,056				—				2,486				—				1,064				—				2,421				—
Commercial construction			344				9				1,024				18				384				14				876				28
Residential mortgage loans			242				—				1,084				—				242				—				1,070				6
Home equity lines of credit			153				—				795				—				92				—				652				1
Other consumer loans			349				—				—				—				277				—				—				—
Total		$	3,924			$	9			$	8,394			$	29			$	3,859			$	14			$	9,159			$	66

 

21

---

Table of Contents

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2014 and December 31, 2013:

 

		June 30, 2014				December 31, 2013
		(Dollars in thousands)
Commercial and industrial		$	1,609			$	1,822
Commercial mortgage			980				1,650
Commercial construction			239				297
Residential mortgage loans			247				247
Home equity lines of credit			32				—
Other consumer loans			367				260
Total loans		$	3,474			$	4,276
Commercial and industrial		$	814			$	820
Commercial mortgage			404				597
Commercial construction			—				—
Residential mortgage loans			—				—
Home equity lines of credit			32				—
Other consumer loans			108				49
Total originated loans		$	1,358			$	1,466
Commercial and industrial		$	795			$	1,002
Commercial mortgage			576				1,053
Commercial construction			239				297
Residential mortgage loans			247				247
Home equity lines of credit			—				—
Other consumer loans			259				211
Total acquired loans		$	2,116			$	2,810

 

22

---

Table of Contents

The Bank’s policy for interest income recognition on nonaccrual loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. The Bank will not recognize income if these factors do not exist. Interest that would have been accrued on non-accruing loans under the original terms but was not recognized as interest income totaled $70 thousand and $143 thousand for the three and six months ended June 30, 2014 and $64 thousand and $125 thousand for the three and six months ended June 30, 2013, respectively.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2014 and December 31, 2013:

 

		June 30, 2014
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands)
Commercial:
Commercial and industrial		$	74,577			$	—			$	1,763			$	—			$	76,340
Commercial mortgage			158,373				385				1,623				—				160,381
Commercial construction			5,916				—				239				—				6,155
Residential mortgage loans			71,627				—				186				—				71,813
Consumer:
Home equity lines of credit			29,277				—				232				—				29,509
Other consumer loans			18,568				—				—				—				18,568
Total		$	358,338			$	385			$	4,043			$	—			$	362,766
Commercial:
Commercial and industrial		$	69,317			$	—			$	814			$	—			$	70,131
Commercial mortgage			147,064				378				404				—				147,846
Commercial construction			5,916				—				—				—				5,916
Residential mortgage loans			65,404				—				—				—				65,404
Consumer:
Home equity lines of credit			22,843				—				139				—				22,982
Other consumer loans			13,283				—				—				—				13,283
Total originated loans		$	323,827			$	378			$	1,357			$	—			$	325,562
Commercial:
Commercial and industrial		$	5,260			$	—			$	949			$	—			$	6,209
Commercial mortgage			11,309				7				1,219				—				12,535
Commercial construction			—				—				239				—				239
Residential mortgage loans			6,223				—				186				—				6,409
Consumer:
Home equity lines of credit			6,434				—				93				—				6,527
Other consumer loans			5,285				—				—				—				5,285
Total acquired loans		$	34,511			$	7			$	2,686			$	—			$	37,204

 

		December 31, 2013
		Pass				Special Mention				Substandard				Doubtful				Total
		(Dollars in thousands)
Commercial:
Commercial and industrial		$	73,959			$	379			$	2,321			$	—			$	76,659
Commercial mortgage			146,645				782				2,065				—				149,492
Commercial construction			3,933				—				440				—				4,373
Residential mortgage loans			56,863				—				116				—				56,979
Consumer:
Home equity lines of credit			29,067				—				196				—				29,263
Other consumer loans			19,268				—				49				—				19,317
Total		$	329,735			$	1,161			$	5,187			$	—			$	336,083
Commercial:
Commercial and industrial		$	67,556			$	379			$	820			$	—			$	68,755
Commercial mortgage			132,575				—				597				—				133,172
Commercial construction			3,933				—				—				—				3,933
Residential mortgage loans			49,533				—				—				—				49,533
Consumer:
Home equity lines of credit			20,796				—				—				—				20,796
Other consumer loans			12,675				—				49				—				12,724
Total originated loans		$	287,068			$	379			$	1,466			$	—			$	288,913
Commercial:
Commercial and industrial		$	6,403			$	—			$	1,501			$	—			$	7,904
Commercial mortgage			14,070				782				1,468				—				16,320
Commercial construction			—				—				440				—				440
Residential mortgage loans			7,330				—				116				—				7,446
Consumer:
Home equity lines of credit			8,271				—				196				—				8,467
Other consumer loans			6,593				—				—				—				6,593
Total acquired loans		$	42,667			$	782			$	3,721			$	—			$	47,170

 

23

---

Table of Contents

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2014 and December 31, 2013:

 

		June 30, 2014
		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivables
		(Dollars in thousands)
Commercial:
Commercial and industrial		$	—			$	—			$	1,103			$	1,103			$	75,237			$	76,340
Commercial mortgage			305				159				692				1,156				159,225				160,381
Commercial construction			—				—				—				—				6,155				6,155
Residential mortgage loans			—				—				247				247				71,566				71,813
Consumer:
Home equity lines of credit			—				—				32				32				29,477				29,509
Other consumer loans			1				101				227				329				18,239				18,568
Total		$	306			$	260			$	2,301			$	2,867			$	359,899			$	362,766
Commercial:
Commercial and industrial			—				—				619				619				69,512				70,131
Commercial mortgage			213				54				144				411				147,435				147,846
Commercial construction			—				—				—				—				5,916				5,916
Residential mortgage loans			—				—				—				—				65,404				65,404
Consumer:
Home equity lines of credit			—				—				32				32				22,950				22,982
Other consumer loans			1				—				—				1				13,282				13,283
Total originated loans		$	214			$	54			$	795			$	1,063			$	324,499			$	325,562
Commercial:
Commercial and industrial		$	—			$	—			$	484			$	484			$	5,725			$	6,209
Commercial mortgage			92				105				548				745				11,790				12,535
Commercial construction			—				—				—				—				239				239
Residential mortgage loans			—				—				247				247				6,162				6,409
Consumer:
Home equity lines of credit			—				—				—				—				6,527				6,527
Other consumer loans			—				101				227				328				4,957				5,285
Total acquired loans		$	92			$	206			$	1,506			$	1,804			$	35,400			$	37,204
		December 31, 2013
		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivables
		(Dollars in thousands)
Commercial:
Commercial and industrial		$	—			$	74			$	1,368			$	1,442			$	75,217			$	76,659
Commercial mortgage			—				—				1,511				1,511				147,981				149,492
Commercial construction			—				—				—				—				4,373				4,373
Residential mortgage loans			170				—				247				417				56,562				56,979
Consumer:
Home equity lines of credit			135				—				—				135				29,128				29,263
Other consumer loans			256				17				210				483				18,834				19,317
Total		$	561			$	91			$	3,336			$	3,988			$	332,095			$	336,083
Commercial:
Commercial and industrial		$	—			$	74			$	746			$	820			$	67,935			$	68,755
Commercial mortgage			—				—				707				707				132,465				133,172
Commercial construction			—				—				—				—				3,933				3,933
Residential mortgage loans			—				—				—				—				49,533				49,533
Consumer:
Home equity lines of credit			96				—				—				96				20,700				20,796
Other consumer loans			2				—				—				2				12,722				12,724
Total originated loans		$	98			$	74			$	1,453			$	1,625			$	287,288			$	288,913
Commercial:
Commercial and industrial		$	—			$	—			$	622			$	622			$	7,282			$	7,904
Commercial mortgage			—				—				804				804				15,516				16,320
Commercial construction			—				—				—				—				440				440
Residential mortgage loans			170				—				247				417				7,029				7,446
Consumer:
Home equity lines of credit			39				—				—				39				8,428				8,467
Other consumer loans			254				17				210				481				6,112				6,593
Total acquired loans		$	463			$	17			$	1,883			$	2,363			$	44,807			$	47,170

 

24

---

Table of Contents

As of June 30, 2014 and December 31, 2013, there were no loans greater than 90 days past due and still accruing.

The Bank may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (“TDR”). The Bank may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Bank’s allowance for loan losses.

The Bank identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

 

		For the three months ended June 30, 2014												For the six months ended June 30, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post- Modification Outstanding Recorded Investments				Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post- Modification Outstanding Recorded Investments
		(Dollars in thousands)
Troubled debt restructurings:
Commercial and industrial			1			$	29			$	29				1			$	29			$	29
Commercial mortgage			—				—				—				—				—				—
Commercial construction			—				—				—				—				—				—
Residential mortgage loans			—				—				—				—				—				—
Home equity lines of credit			1				31				20				1				31				20
Other consumer loans			2				110				108				2				110				108
Total			4			$	170			$	157				4			$	170			$	157

There were no troubled debt restructurings entered into by the Bank for the three and six months ended June 30, 2013.

As of June 30, 2014, two loans acquired through the Affinity merger are currently in default and classified as non-accrual, consisting of a residential mortgage loan with a current balance of $76 thousand and a commercial mortgage loan with an outstanding balance of $239 thousand.

As of June 30, 2013, two commercial loans classified as troubled debt restructurings with combined outstanding balances as of that date of $79 thousand were in default and remain classified as non-accrual status, one of which is paid current while the other remains in default as of June 30, 2014.

The following table reflects information regarding troubled debt restructuring entered into by the Bank for the year ended December 31, 2013:

 

		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post- Modification Outstanding Recorded Investments
						(Dollars in thousands)
Troubled debt restructurings:
Residential mortgage loans			1			$	76			$	76
Total			1			$	76			$	76

As of December 31, 2013 a residential mortgage loan acquired through the Affinity merger is currently in default and classified as non-accrual with a value of $76 thousand.

No other TDRs have subsequently defaulted.

 

25

---

Table of Contents

Note 7—Deposits

The components of deposits at June 30, 2014 and December 31, 2013 are as follows:

 

		June 30,				December 31,
		2014				2013
		(Dollars in thousands)
Demand, non-interest bearing		$	52,602			$	47,997
Demand, interest-bearing			37,464				51,690
Money market and savings accounts			96,272				102,624
Time, $100 and over			39,934				43,716
Time, other			127,451				111,393
		$	353,723			$	357,420

Included in time, other at June 30, 2014 and December 31, 2013 are brokered deposits of $59.8 million and $36.2 million, respectively.

At June 30, 2014, the scheduled maturities of time deposits were as follows:

 

		June 30, 2014
		(Dollars in thousands)
6/30/2015		$	60,521
6/30/2016			41,504
6/30/2017			43,526
6/30/2018			17,219
6/30/2019			4,501
Thereafter			114
		$	167,385

Note 8—Shareholders’ Equity

During the initial offering period in 2005, the Company sold 2,107,500 shares of common stock at $10.00 per share, which resulted in net proceeds of $21.0 million. As of February 29, 2008, in connection with the acquisition of Prestige Community Bank, First Priority issued an additional 976,137 shares of common stock, resulting in additional equity of $7.4 million.

On February 28, 2013, in conjunction with the merger with Affinity Bancorp, Inc. and under the terms of the merger agreement, shareholders of Affinity received 0.9813 newly issued shares of First Priority common stock in exchange for each Affinity share. A total of 1,933,665 shares of First Priority common stock were issued; resulting in incremental equity of $10.1 million due to the merger.

Also, on February 28, 2013 and in conjunction with the merger of Affinity Bancorp, Inc., First Priority issued 1,268,576 shares of common stock at an issuance price of $5.22 per share through a private placement resulting in total proceeds of $6.6 million, net of $50 thousand of related issuance costs.

Preferred Stock Outstanding

On February 20, 2009, as part of the Treasury’s TARP Capital Purchase Program, the Company issued 4,579 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $100 par value per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and a warrant (the “Warrant) to purchase 229 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $100 per share (the “Series B Preferred Stock”), for an aggregate purchase price of $4.58 million in cash, less $29 thousand in legal issuance costs. On December 18, 2009, the Company issued 4,596 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $100 par value per share, having a liquidation preference of $1,000 per share (the “Series C Preferred Stock”), for an aggregate purchase price of $4.60 million in cash, less $8 thousand in legal issuance costs.

 

26

---

Table of Contents

On February 8, 2013, the Treasury sold its entire holdings of the Company’s preferred stock to certain qualified or accredited institutional investors.

The Series A and Series B Preferred Stock will pay cumulative dividends at a rate of 9% per annum. The Series C Preferred Stock will pay cumulative dividends at a rate of 5% per annum. The Series A, B and C Preferred Stock have no maturity date and rank senior to common stock with respect to dividends and upon liquidation, dissolution, or winding up. The Company may redeem the Series A or Series C Preferred Stock, in whole or in part, at its liquidation preference plus accrued and unpaid dividends. The Company may redeem the Series B Preferred Stock only after all of Series A has been redeemed.

Note 9—Stock Compensation Program

In 2005, the Company adopted the 2005 Stock Compensation Program, which was amended at the Company’s annual meeting on April 23, 2009 as the 2009 Stock Compensation Program (the “Program”) and further amended effective March 18, 2010. The Program allows equity benefits to be awarded in the form of Incentive Stock Options, Compensatory Stock Options or Restricted Stock. The Program authorizes the Board of Directors to grant options up to an aggregate maximum of 1,207,957 shares to officers, other employees and directors of the Company, including 382,957 shares which were authorized for grant under this plan as a result of the merger with Affinity. Only employees of the Company will be eligible to receive Incentive Stock Options and such grants are subject to the limitations under Section 422 of the Internal Revenue Code.

All stock options granted under the Program fully vest in four years from the date of grant (or potentially earlier upon a change of control), excluding options issued in regards to the Company’s Severance Plan which vest only upon change in control, and terminate ten years from the date of the grant. The exercise price of the options granted is the fair value of a share of common stock at the time of the grant, with a minimum exercise price of $10 per share for shares issued prior to March 18, 2010. Effective March 18, 2010, the Company’s stock compensation program was amended to eliminate the minimum exercise price.

A summary of the status of the Program is presented below for the six months ended June 30, 2014:

 

		Shares				Weighted Average Exercise Price
Outstanding at beginning of period			850,649			$	6.96
Granted during period			—				—
Forfeited/cancelled during period			(981	)			11.21
Expired			(4,984	)			6.52
Outstanding at end of period (1)			844,684			$	6.96
Exercisable at end of period (1)			303,684			$	9.77

 

(1)	Included in options outstanding and exercisable at June 30, 2014 are 100,000 organizer options, with an exercise price of $10.00 per share, exchanged as part of the 2008 acquisition of Prestige Community Bank which were issued outside of the Program.

The weighted average remaining contractual life of all outstanding stock options and exercisable options at June 30, 2014 and 2013 was 6.51 years and 4.40 years, respectively. Options outstanding and exercisable options at June 30, 2014 had no intrinsic value.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted in the six months ended June 30, 2014.

The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Due to the Company’s lack of sufficient historical exercise data and the limited period of time for which shares have been issued, the “simplified” method is used to determine the expected life of options, calculated as the average of the sum of the vesting term and original contractual term for all periods presented. In valuing Affinity options, an expected life was calculated assuming all options with a three year expiration date expire at expiration date; otherwise, the expected expiration date is the average of three years and the expiration date. The expected volatility percentage is based on the average expected volatility of similar public financial institutions in the Company’s market area. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant.

As of June 30, 2014, there was $99 thousand of unrecognized compensation cost related to non-vested stock options granted after January 1, 2007, excluding those stock options issued in conjunction with the Company’s severance plan. That cost is expected to be recognized over a weighted average period of 1.07 years. There was no tax benefit recognized related to this stock-based compensation.

 

27

---

Table of Contents

Restricted Stock grants fully vest three years from the date of grant (or potentially earlier upon a change of control), subject to the recipient remaining an employee of the Company. Upon issuance of the shares, resale of the shares is restricted during the vesting period, during which the shares may not be sold, pledged, or otherwise disposed of. Prior to the vesting date and in the event the recipient terminates association with Company for any reasons other than death, disability or change of control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant. Restricted stock awards granted under the Plan were recorded at the date of the award based on the estimated fair value of the shares. As of June 30, 2014, there was $350 thousand of unrecognized compensation cost related to restricted stock, which will be amortized through December 19, 2016.

A summary of restricted stock award activity is presented below for the six months ended June 30, 2014:

 

		Shares
Outstanding unvested shares at beginning of period			113,774
Shares Granted during period			—
Shares Forfeited/cancelled during the period			(175	)
Outstanding unvested shares at end of period			113,599

Note 10—Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At June 30, 2014 and December 31, 2013, outstanding commitments to extend credit consisting of total unfunded commitments under lines of credit were $73.8 million and $77.7 million, respectively. In addition, as of June 30, 2014 and December 31, 2013, there were $416 thousand and $1.3 million of performance standby letters of credit outstanding, respectively, and $1.7 million and $1.3 million of financial standby letters of credit, respectively.

Commitments to extend credit 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. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

In addition, as of June 30, 2014 and December 31, 2013 the Bank pledged $199 thousand of deposit balances at a correspondent bank to support a $199 thousand letter of credit issued by the correspondent on behalf of a customer of the Bank. This transaction is fully secured by the customer through a pledge of the customer’s deposits at the Bank. Also, as of December 31, 2013, the Bank had outstanding a financial standby letter of credit, which was collateralized by a pledge of Bank assets at a correspondent bank totaling $512 thousand. This commitment was closed during the second quarter of 2014.

Note 11—Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s 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. Prompt corrective action provisions are not applicable to bank holding companies.

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 June 30, 2014, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

28

---

Table of Contents

The Bank’s capital amounts (dollars in thousands) and ratios at June 30, 2014 and December 31, 2013 are presented below:

 

Actual

Minimum Capital Requirement

To be Well Capitalized under Prompt Corrective Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2014

Total capital (to risk-weighted assets)

$

43,215

12.53

%

$

>27,600

>8.0

%

$

>34,500

>10.0

%

Tier 1 capital (to risk-weighted assets)

40,943

11.87

>13,800

>4.0

>20,700

>6.0

Tier 1 capital (to total assets)

40,943

9.49

>17,255

>4.0

>21,569

>5.0

December 31, 2013

Total capital (to risk-weighted assets)

$

42,194

12.90

%

$

>26,170

>8.0

%

$

>32,713

>10.0

%

Tier 1 capital (to risk-weighted assets)

39,886

12.19

>13,085

>4.0

>19,628

>6.0

Tier 1 capital (to total assets)

39,886

9.48

>16,833

>4.0

>21,041

>5.0

First Priority’s ability to pay cash dividends is dependent on receiving cash in the form of dividends from First Priority Bank. However, certain restrictions exist regarding the ability of First Priority Bank to transfer funds to First Priority in the form of cash dividends. All dividends are currently subject to prior approval of the Pennsylvania Department of Banking and Securities and the FDIC and are payable only from the undivided profits of First Priority Bank, with the exception of an exemption enacted by the Pennsylvania Department of Banking and Securities which allows the Bank to pay dividends related to the preferred stock originally issued under the U.S. Department of the Treasury’s Troubled Asset Relief Program—Capital Purchase Program. Additionally, any payment of dividends by First Priority, including dividends on the aforementioned preferred stock, requires prior approval of the Federal Reserve Bank when net income for the past four quarters is not sufficient to fund the dividend payments over that same period or when such payment would negatively impact capital adequacy of the Company.

The Company’s capital amounts and ratios are similar to those of the Bank.

Note 12—Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Bank’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of June 30, 2014 and December 31, 2013 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 period end.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with FASB ASC Topic 820—Fair Value Measurements, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in some instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

FASB ASC Topic 820 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 FASB ASC Topic 820 are as follows:

 

29

---

Table of Contents

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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2014 and December 31, 2013 are as follows:

 

Description		Fair Value				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
		(Dollars in thousands)
As of June 30, 2014:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations		$	22,214			$	—			$	22,214			$	—
Obligations of states and political subdivisions			4,861				—				4,861				—
Federal agency mortgage-backed securities			23,784				—				23,784				—
Federal agency collateralized mortgage obligations			642				—				642				—
Other debt securities			504				—				504				—
Money market mutual fund			209				209				—				—
Total assets measured at fair value on a recurring basis		$	52,214			$	209			$	52,005			$	—
As of December 31, 2013:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations		$	48,061			$	—			$	48,061			$	—
Obligations of states and political subdivisions			7,821				—				7,821				—
Federal agency mortgage-backed securities			20,554				—				20,554				—
Federal agency collateralized mortgage obligations			759				—				759				—
Other debt securities			1,207				—				1,207				—
Money market mutual fund			234				234				—				—
Total assets measured at fair value on a recurring basis		$	78,636			$	234			$	78,402			$	—

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2014 and December 31, 2013 are as follows:

 

Description		Fair Value				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
		(Dollars in thousands)
As of June 30, 2014:
Impaired loans		$	1,564			$	—			$	—			$	1,564
Repossessed assets			42				—				—				42
Other real estate owned			105				—				—				105
Total assets measured at fair value on a nonrecurring basis		$	1,711			$	—			$	—			$	1,711
As of December 31, 2013:
Impaired loans		$	1,794			$	—			$	—			$	1,794
Repossessed assets			75				—				—				75
Other real estate owned			181				—				—				181
Total assets measured at fair value on a nonrecurring basis		$	2,050			$	—			$	—			$	2,050

Management generally uses a discounted appraisal technique in valuing impaired assets, resulting in the discounting of the collateral values underlying each impaired asset. A discounted tax assessment rate has been applied for smaller assets to determine the discounted collateral value. All impaired loans are classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment.

 

30

---

Table of Contents

Quantitative information about Level 3 fair value measurements at June 30, 2014 is included in the table below:

 

		Fair Value				Valuation Techniques		Unobservable Inputs		Estimated Ratings (Weighted Average) (3)
		(Dollars in thousands)
Impaired loans		$	1,564			Appraisal of real estate collateral (1)		Appraisal adjustments (2)		0%-24% (4.31%)
						Valuation of business assets used as collateral (1)		Valuation adjustments (2)		25%-30%
								Liquidation expenses		5%-35% (8.30%)
Other real estate owned		$	105			Appraisal of collateral (1)		Appraisal adjustments (2)		None
								Liquidation expenses		7%-8% (7.79%)

Quantitative information about Level 3 fair value measurements at December 31, 2013 is included in the table below:

 

		Fair Value				Valuation Techniques		Unobservable Inputs		Estimated Ratings (Weighted Average) (3)
		(Dollars in thousands)
Impaired loans		$	1,794			Appraisal of real estate collateral (1)		Appraisal adjustments (2)		None
						Valuation of business assets used as collateral (1)		Valuation adjustments (2)		25%-30%
								Liquidation expenses		8%-17% (8.35%)
Other real estate owned		$	181			Appraisal of collateral (1)		Appraisal adjustments (2)		None
								Liquidation expenses		5%-10% (8.60%)

 

(1)	Fair Value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3)	The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.

Valuation of real estate collateral may be discounted based on the age of the existing appraisal. No discounts are taken for recent appraisals. Valuations related to business assets used as collateral are typically discounted more heavily due to the inherent level of uncertainty in determining the fair value of these types of assets. Liquidation costs relating to these assets are charged to expense.

Repossessed assets measured at fair value on a nonrecurring basis, consist of personal property, specifically manufactured housing, that has been acquired for debts previously contracted and are included in other assets on the balance sheet. Costs relating to these assets are charged to expense. The Company had $85 thousand and $75 thousand of repossessed assets as of June 30, 2014 and December 31, 2013, respectively.

Other real estate owned measured at fair value on a nonrecurring basis, consists of properties acquired as a result of accepting a deed in lieu of foreclosure, foreclosure or through other means related to collateral on Bank loans. Costs relating to the development or improvement of assets are capitalized and costs relating to holding the property are charged to expense. At June 30, 2014 and December 31, 2013, the fair value consists of other real estate owned balances of $433 thousand and $524 thousand, respectively, net of valuation allowance of $328 thousand, and $343 thousand, respectively. Fair value is generally determined based upon independent third-party appraisals of the property.

 

31

---

Table of Contents

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

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 June 30, 2014 and December 31, 2013:

Cash and Cash Equivalents

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. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments, if applicable.

Loans Receivable

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 or call dates, projected repayments and prepayments of principal.

Residential Mortgage Loans Held for Sale

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did not write down any loans held for sale during the six months ended June 30, 2014. There were no loans held for sale at December 31, 2013.

Impaired Loans

Impaired loans, which are included in loans receivable, are those that are accounted for under FASB ASC Topic 310, “Receivables”, in which the Company 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 of the impaired loans consists of the loan balances, net of any valuation allowance. As of June 30, 2014 the fair value of impaired originated loans consisted of loan balances of $306 thousand, net of valuation allowances of $158 thousand and partial charge-offs of $28 thousand; and loan balances of $1.4 million, net of partial charge-offs of $674 thousand. As of June 30, 2014, the fair value of impaired acquired loans consisted of loan balances of $1.1 million, net of partial charge-offs of $339 thousand. As of December 31, 2013 the fair value of impaired originated loans consisted of loan balances of $744 thousand, net of valuation allowances of $112 thousand; and loan balances of $798 thousand, net of partial charge-offs of $285 thousand. As of December 31, 2013, the fair value of impaired acquired loans consisted of loan balances of $837 thousand, net of partial charge-offs of $188 thousand.

Restricted Investment in Bank Stock

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable

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

 

32

---

Table of Contents

Deposit Liabilities

The fair values disclosed for demand deposits (interest and noninterest checking), money market and savings 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 to the maturities of the time deposits.

Short-Term Borrowings

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

Long-Term Debt

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 market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Financial Instruments

Fair values for the Company’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.

At June 30, 2014 and December 31, 2013, the estimated fair values of the Company’s financial instruments were as follows:

 

		June 30, 2014
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	14,316			$	14,316			$	14,316			$	—			$	—
Securities available for sale			52,214				52,214				209				52,005				—
Securities held to maturity			14,455				14,411				—				14,411				—
Residential mortgage loans held for sale			200				200				—				—				200
Loans receivable, net			360,552				368,557				—				—				368,557
Restricted stock			3,250				3,250				—				3,250				—
Accrued interest receivable			1,435				1,435				—				1,435				—
Liabilities:
Deposits			353,723				354,809				—				354,809				—
Short-term borrowings			46,242				46,242				—				46,242				—
Long-term debt			11,000				10,931				—				10,931				—
Accrued interest payable			274				274				—				274				—
Off-balance sheet credit related instruments:
Commitments to extend credit			—				—				—				—				—

 

		December 31, 2013
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	11,248			$	11,248			$	11,248			$	—			$	—
Securities available for sale			78,636				78,636				234				78,402				—
Securities held to maturity			10,963				10,268				—				10,268				—
Loans receivable, net			333,464				340,205				—				—				340,205
Restricted stock			2,731				2,731				—				2,731				—
Accrued interest receivable			1,454				1,454				—				1,454				—
Liabilities:
Deposits			357,420				358,636				—				358,636				—
Short-term borrowings			33,625				33,625				—				33,625				—
Long-term debt			11,000				10,884				—				10,884				—
Accrued interest payable			313				313				—				313				—
Off-balance sheet credit related instruments:
Commitments to extend credit			—				—				—				—				—

 

33

---

Table of Contents

Item 2.

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

The following discussion summarizes First Priority’s results of operations and highlights material changes for the three and six months ended June 30, 2014 and 2013, and its financial condition as of June 30, 2014 and December 31, 2013. This discussion is intended to provide additional information about the significant changes in the results of operations presented in the accompanying consolidated financial statements for First Priority and its wholly owned subsidiary, First Priority Bank. First Priority’s consolidated financial condition and results of operations consist essentially of First Priority Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future.

You should read this discussion and analysis in conjunction with the unaudited consolidated financial statements for the period ended June 30, 2014 included herein as well as with the audited consolidated financial statements and the accompanying footnotes for the year ended December 31, 2013, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

This discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as First Priority’s plans, objectives, expectations and intentions. Therefore, this analysis should be read in conjunction with the “Cautionary Statement Regarding Forward-Looking Statements” presented elsewhere in this document and the “Risk Factors” described in the Company’s Form 10-K for the period ended December 31, 2013.

Overview

The following table sets forth selected measures of First Priority’s financial position or performance for the dates or periods indicated (dollars in thousands).

 

		As of and for the six months ended				As of and for the years Ended December 31,
		June 30, 2014				2013				2012
Total revenue (1)		$	8,190			$	15,239			$	10,673
Net income			1,198				196				753
Total assets			456,895				446,088				275,146
Total loans receivable			362,789				335,737				244,275
Total deposits			353,723				357,420				233,043

 

(1)	Total revenue equals net interest income plus non-interest income

Like most financial institutions, First Priority derives the majority of its income from interest it receives on its interest-earning assets, such as loans and investments. First Priority’s primary source of funds for making these loans and investments is its deposits, on which it pays interest. Consequently, one of the key measures of First Priority’s success is its amount of net interest income, or the difference between the income on its average interest-earning assets and the expense on its average interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield First Priority earns on these average interest-earning assets and the rate it pays on its average interest-bearing liabilities, which is called its net interest spread.

There are risks inherent in all loans, and First Priority maintains an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. This allowance is maintained by charging a provision for loan losses against operating earnings. A detailed discussion of this process, as well as several tables describing the allowance for loan losses is included herein.

In addition to earning interest on its loans and investments, First Priority earns income through other sources, such as fees and other charges to its banking customers and income from providing wealth management services, as well as net gains or losses realized from the sale of assets. The various components of non-interest income, as well as non-interest expense, are described in this section.

Critical Accounting Policies

First Priority has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements.

Certain accounting policies involve significant judgments and assumptions by First Priority that have a material impact on the carrying value of certain assets and liabilities. First Priority considers these accounting policies to be critical accounting estimates. The judgment and assumptions used are based on historical experience and other factors, which First Priority believes to be reasonable under the circumstances and have been reasonably consistent with prior results. Because of the nature of the judgments and assumptions made, actual results could differ from these estimates, which could have a material impact on the carrying values of its assets and liabilities and its results of operations. Material estimates that are particularly susceptible to significant change in the near term relate to investment securities impairment evaluation, impairment of restricted investments in bank stocks, the valuation of acquired loans, the determination of the allowance for loan losses, valuation of other real estate owned, the analysis of potential impairment of goodwill, the valuation of deferred tax assets and accounting for stock-based compensation.

 

34

---

Table of Contents

Investment Securities Impairment Evaluation. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) 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. When a determination is made that an other-than-temporary impairment exists but the Company does not intend to sell the debt security and it is more likely than not that it will not be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. Management believes that there are no investment securities with other than-temporary impairment for each of the reporting periods presented.

Acquired Loans. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.

Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet.

Pools of loans are evaluated for loss exposure based upon historical loss rates in each category of loans and adjusted for qualitative factors. Management assigned each factor a value to reflect improving, stable or declining conditions based on its best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. 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 and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.

See the Allowance for Loan Losses sections related to Balance Sheet Review as of June 30, 2014 and December 31, 2013 for more information.

Other Real Estate Owned. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Any write-down, at or prior to the dates the real estate is considered foreclosed, is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.

Goodwill. Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired in accordance with the acquisition method of accounting. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company employs general industry practices in evaluating the fair value of its goodwill. Any impairment loss related to goodwill and other intangible assets is reflected as other non-interest expense in the statement of operations in the period in which the impairment is determined. No assurance can be given that future impairment tests will not result in a charge to earnings.

 

35

---

Table of Contents

Income Taxes. Deferred 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 basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company files a consolidated federal income tax return with the Bank.

The Company evaluates the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must commensurate with the extent to which it can be objectively verified.

When determining an estimate for a valuation allowance, the Company assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards as defined in paragraph 740- 10-30-18. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome. As a result of cumulative losses in the Company’s formative years and the uncertain nature of the current economic environment, the Company did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor.

The Company also considers tax planning strategies which could accelerate taxable income and allow the Company to take advantage of future deductible differences. The strategy must be prudent and feasible; however, the Company does not need to have specific plans to implement the strategy, but could be an opportunity that the Company could implement in order to take advantage of net operating loss carryforwards.

The Company determined that as of June 30, 2014 and December 31, 2013 a valuation allowance should be recorded as of each period presented. As of June 30, 2014, First Priority has a total net deferred tax asset of $4.9 million (before the valuation allowance) which is fully reserved through the valuation allowance for deferred taxes. Similarly, as of December 31, 2013, the Company had a total net deferred tax asset of $5.6 million (before the valuation allowance) which is also fully reserved through the related valuation allowance.

The most significant component of the Company’s unrecognized deferred tax asset balances relates to the Company’s net operating loss (“NOL”) carryforwards, including acquired NOLs, totaling $10.8 million and $11.8 million, as of June 30, 2014 and December 31, 2013, respectively. The NOL carryforward related to First Priority is $7.4 million and $8.3 million, respectively, or a $2.5 million and $2.8 million tax impact computed at the statutory federal income tax rate of 34%, respectively, as of June 30, 2014 and December 31, 2013, which expire in 2026 through 2033. These deferred tax assets are fully reserved but are available to offset future taxable income.

In regards to the acquisition of Prestige Community Bank in February, 2008, the Company acquired a NOL carryforward for tax purposes which totaled $2.0 million, or a $684 thousand tax impact at the statutory federal income tax rate of 34%, as of both June 30, 2014 and December 31, 2013, respectively, which is subject to certain limitations and expires in 2028 if not fully utilized. As the Company is able to utilize the acquired NOL, the impact of this reduction in the Company’s tax liability is recognized as a reduction of goodwill.

Also, related to the merger with Affinity, the Company acquired a NOL carryforward for tax purposes during 2013 which totaled $1.5 million, or a $497 thousand tax impact, which remained outstanding at both June 30, 2014 and December 31, 2013, and is subject to certain limitations and expires in 2032 if not fully utilized.

Stock Based Compensation. Compensation costs related to share-based payment transactions are recognized in the financial statements over the period that an employee provides service in exchange for the award. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on these management assumptions. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Due to the Company’s lack of sufficient historical exercise data and the limited period of time for which shares have been issued, the “simplified” method is used to determine the expected life of options, calculated as the average of the sum of the vesting term and original contractual term for all periods presented. The expected volatility percentage is based on the average expected volatility of similar public financial institutions in the Company’s market area. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant.

 

36

---

Table of Contents

Results of Operations

Income Statement Review

First Priority’s results of operations are affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense accrued on deposits and borrowed funds (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans; (3) non-interest income, consisting of income from wealth management services, fees and other charges to our banking customers, and net gains or losses realized from the sale of assets; (4) non-interest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes, including deferred taxes, when applicable. Each of these major elements is reviewed in more detail in the following discussion.

The results of Affinity’s operations are included in the Company’s consolidated financial statements prospectively from the date of the merger, February 28, 2013; therefore, four months of Affinity’s operating results are included in the first half of 2013.

Results of Operations Comparative Summary

Shown in the table below are the three and six month reported results of operations as well as the increase (decrease) for the respective periods.

 

		For the three months ended June 30,								Increase (decrease)				% Change				For the six months ended June 30,								Increase (decrease)				% Change
		2014				2013												2014				2013
Net interest income		$	3,993			$	3,853			$	140				3.6	%		$	7,755			$	6,750			$	1,005				14.9	%
Non-interest income			216				158				58				36.7	%			435				278				157				56.5	%
Total Revenue			4,209				4,011				198				4.9	%			8,190				7,028				1,162				16.5	%
Provision for loan losses			255				175				80				45.7	%			360				340				20				5.9	%
Non-interest expenses			3,350				3,781				(431	)			(11.4	)%			6,616				7,281				(665	)			(9.1	)%
Income (loss) before income tax expense			604				55				549								1,214				(593	)			1,807
Federal income tax expense			7				—				7								16				—				16
Net Income (loss)		$	597			$	55			$	542							$	1,198			$	(593	)		$	1,791
Preferred dividends, including net warrant amortization			121				133				(12	)							248				266				(18	)
Net Income (loss) to common shareholders		$	476			$	(78	)		$	554							$	950			$	(859	)		$	1,809
Income (loss) per common share:
Basic		$	0.07			$	(0.01	)		$	0.08							$	0.15			$	(0.16	)		$	0.31
Diluted		$	0.07			$	(0.01	)		$	0.08							$	0.15			$	(0.16	)		$	0.31

Net Interest Income

First Priority’s primary source of revenue is net interest income. Net interest income is determined by the average balances of interest earning assets and interest-bearing liabilities and the interest rates earned and paid on these balances. The amount of net interest income recorded by First Priority is affected by the rate, mix and amount of growth of interest-earning assets and interest- bearing liabilities, the amount of interest-earning assets as compared to the amount of interest-bearing liabilities, and by changes in interest rates earned and interest rates paid on these assets and liabilities.

 

37

---

Table of Contents

The following tables set forth, for the three and six month periods ended June 30, 2014 and 2013, information related to First Priority’s average balances, yields on average assets, and costs of average liabilities. Average balances are derived from the daily balances throughout the periods indicated and yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average loans are stated net of deferred costs. The net change in interest income and expense is presented for comparative purposes along with the percentage change amounts.

 

		For the Three Months Ended June 30,																								Net Change in Interest Income / Expenses
		2014												2013												$ Change				% Change
		Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate				2014 vs. 2013				2014 vs. 2013
		(Dollars in thousands)
Interest-earning assets:
Loans receivable		$	345,718			$	4,260				4.94	%		$	332,283			$	4,403				5.31	%		$	(143	)			(3.2	)%
Taxable investment securities			63,068				368				2.34	%			50,794				225				1.78	%			143				63.6	%
Nontaxable investment securities			2,601				27				4.05	%			2,847				29				4.10	%			(2	)			(6.9	)%
Total investment securities			65,669				395				2.41	%			53,641				254				1.90	%			141				55.5	%
Deposits with banks and other			6,044				31				2.09	%			10,109				18				0.70	%			13				72.2	%
Total interest earning assets			417,431				4,686				4.50	%			396,033				4,675				4.73	%			11				0.2	%
Non-interest-earning assets			16,755												16,350
TOTAL ASSETS		$	434,186											$	412,383
Interest-bearing liabilities:
Demand, interest-bearing		$	42,164				26				0.25	%		$	47,345				32				0.26	%		$	(6	)			(18.8	)%
Money market and savings			100,058				80				0.32	%			105,517				111				0.42	%			(31	)			(27.9	)%
Time deposits			153,266				538				1.41	%			164,294				647				1.58	%			(109	)			(16.8	)%
Borrowed funds			44,081				49				0.44	%			12,560				32				1.05	%			17				53.1	%
Total interest-bearing liabilities			339,569				693				0.82	%			329,716				822				1.00	%			(129	)			(15.7	)%
Non interest-bearing liabilities:
Demand, non-interest bearing deposits			48,949												37,222
Other liabilities			1,464												1,462
Shareholders’ equity			44,204												43,983
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	434,186											$	412,383
Net interest income/rate spread						$	3,993				3.68	%						$	3,853				3.73	%		$	140				3.6	%
Net interest margin											3.84	%											3.90	%

 

38

---

Table of Contents

		For the Six Months Ended June 30,																								Net Change in Interest Income / Expenses
		2014												2013												$ Change				% Change
		Average Balance				Interest Income/ Expense				Yield/ Rate				Average Balance				Interest Income/ Expense				Yield/ Rate				2014 vs. 2013				2014 vs. 2013
		(Dollars in thousands)
Interest-earning assets:
Loans receivable		$	340,159			$	8,321				4.93	%		$	303,543			$	7,891				5.24	%		$	430				5.4	%
Taxable investment securities			62,238				728				2.36	%			40,410				391				1.95	%			337				86.2	%
Nontaxable investment securities			2,650				54				4.07	%			2,657				56				4.25	%			(2	)			(3.6	)%
Total investment securities			64,888				782				2.43	%			43,067				447				2.09	%			335				74.9	%
Deposits with banks and other			6,535				57				1.77	%			10,223				27				0.52	%			30				111.1	%
Total interest earning assets			411,582				9,160				4.49	%			356,833				8,365				4.73	%			795				9.5	%
Non-interest-earning assets			16,001												14,917
TOTAL ASSETS		$	427,583											$	371,750
Interest-bearing liabilities:
Demand, interest-bearing		$	45,436				59				0.26	%		$	34,886				46				0.26	%		$	13				28.3	%
Money market and savings			101,191				169				0.34	%			90,329				189				0.42	%			(20	)			(10.6	)%
Time deposits			151,090				1,092				1.46	%			155,058				1,283				1.67	%			(191	)			(14.9	)%
Borrowed funds			37,008				85				0.46	%			15,267				97				1.28	%			(12	)			(12.4	)%
Total interest-bearing liabilities			334,725				1,405				0.85	%			295,540				1,615				1.10	%			(210	)			(13.0	)%
Non interest-bearing liabilities:
Demand, non-interest bearing deposits			47,519												34,291
Other liabilities			1,590												1,441
Shareholders’ equity			43,749												40,478
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	427,583											$	371,750
Net interest income/rate spread						$	7,755				3.64	%						$	6,750				3.63	%		$	1,005				14.9	%
Net interest margin											3.80	%											3.81	%

Analysis of Changes in Net Interest Income

Net interest income can also be analyzed in terms of the impact of changing interest rates and changing volume as shown in the Changes in Net Interest Income table below which sets forth the effect which varying levels of average interest-earning assets, interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.

 

		Changes in Net Interest Income												Changes in Net Interest Income
		For the Three Months Ended June 30, 2014 vs. 2013 Increase (Decrease) Due to Change In												For the Six Months Ended June 30, 2014 vs. 2013 Increase (Decrease) Due to Change In
		(Dollars in thousands)												(Dollars in thousands)
		Volume				Rate				Net Change				Volume				Rate				Net Change
Interest income:
Loans receivable		$	173			$	(316	)		$	(143	)		$	914			$	(484	)		$	430
Taxable investment securities			62				81				143				243				94				337
Nontaxable investment securities			(2	)			—				(2	)			—				(2	)			(2	)
Total investment securities			60				81				141				243				92				335
Deposits with banks and other			(9	)			22				13				(13	)			43				30
Total interest earning assets			224				(213	)			11				1,144				(349	)			795
Interest expense:
Demand, interest-bearing			(4	)			(2	)			(6	)			13				—				13
Money market and savings			(7	)			(24	)			(31	)			20				(40	)			(20	)
Time deposits			(42	)			(67	)			(109	)			(32	)			(159	)			(191	)
Borrowed funds			44				(27	)			17				78				(90	)			(12	)
Total interest bearing liabilities			(9	)			(120	)			(129	)			79				(289	)			(210	)
Change in net interest income		$	233			$	(93	)		$	140			$	1,065			$	(60	)		$	1,005

 

39

---

Table of Contents

For the three months ended June 30, 2014, net interest income increased 3.6%, or $140 thousand, to $3.99 million compared to $3.85 million for the same period in 2013. Net interest margin decreased 6 basis points from 3.90% for the second quarter of 2013 to 3.84% for the same period in 2014. Net interest spread, defined as the mathematical difference between the yield on average earning assets and the rate paid on average interest-bearing liabilities, decreased 5 basis points from 3.73% for the three months ended June 30, 2013 to 3.68% for the same period in 2014. When comparing these periods, incremental growth of balances accounted for an increase of $233 thousand while the change in our relative rate structure resulted in a decline in net interest income of $93 thousand.

Average interest earning assets for the current quarter of 2014 increased $21.4 million, or 5.4%, including increases in average loans of $13.4 million, or 4.0%, and average investment balances of $12.0 million, or 22.4%, when compared to the prior year quarter. This increased volume of average earning assets provided an additional $224 thousand in interest income, $173 thousand provided from incremental loan balances and $60 thousand from investment securities. The average yield on earning assets declined 23 basis points in the current quarter compared to the prior year three month period from 4.73% to 4.50%, which resulted in a decline of interest income between the periods of $213 thousand. Of this decline, $316 was related to lower yields on loans, which was partially offset by $81 thousand of additional income resulting from higher average investment rates. The decline of interest income related to lower yields on loans and total interest earning assets was partially offset by $138 thousand related to an acquired credit impaired loan which paid off during the quarter due to the sale of land used as collateral on the loan. This adjustment resulted in the amortization of the remaining fair value purchase discount on the loan and positively impacted the yield on earning assets and net interest margin by 13 basis points.

Average interest bearing liabilities increased $9.9 million, or 3.0%, when comparing the current quarter to the prior year quarter. During this time, short-term borrowed funds increased $31.5 million while overall deposit balances declined $21.6 million, with $11.0 of that decrease in time deposits. Due to the change in mix of balances, the incremental growth of interest bearing liabilities resulted in a slight overall decline of interest expense of $9 thousand. At the same time, the average rate on interest bearing liabilities declined 18 basis points from 1.00% in the second quarter of 2013 to 0.82% in the current quarter, which accounted for an additional decline in interest expense of $120 thousand due to the change in our relative rate structure.

For the six months ended June 30, 2014, net interest income increased 14.9%, or $1.01 million, to $7.76 million compared to $6.75 million for the same period in 2013. Net interest margin decreased slightly from 3.81% for the first six months of 2013 to 3.80% for the same period in 2014. Net interest spread increased slightly from 3.63% for the first six months of 2013 to 3.64% for the same period in 2014. When comparing these periods, incremental growth of balances accounted for an increase of $1.07 million while the change in our relative rate structure resulted in a slight decline in net interest income of $60 thousand.

Average interest earning assets for the first six months of 2014 increased $54.8 million, or 15.3%, including increases in average loans of $36.6 million, or 12.1%, and average investment balances of $21.8 million, or 50.7%, when compared to the prior year. This increased volume of average earning assets provided an additional $1.14 million in interest income, $914 thousand provided from incremental loan balances and $243 thousand from investment securities. The average yield on earning assets declined 24 basis points in the current year compared to the prior year six month period from 4.73% to 4.49%, which resulted in a decline of interest income between the periods of $349 thousand. Of this decline, $484 was related to lower yields on loans which was partially offset by $92 thousand of additional income resulting from higher average investment rates and $43 thousand resulting from deposits with other banks. Average interest bearing liabilities increased $39.2 million, or 13.3%, in 2014. During this time, borrowed funds increased $21.7 million while overall deposit balances increased $17.4 million, as interest bearing demand deposits increased $10.6 and money market and savings deposits increased $10.9 million. The incremental growth of interest bearing liabilities resulted in an increase of interest expense of $79 thousand. At the same time, the average rate on interest bearing liabilities declined 25 basis points from 1.10% for the first six months of 2013 to 0.85% in the current year, which accounted for a decline in interest expense of $289 thousand due to the change in our relative rate structure. The change in average balances when comparing the first six months of 2014 to 2013 was impacted by the acquisition of Affinity Bank effective February 28, 2013.

Provision for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against operations. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance as recoveries.

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 known or potential risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, the 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 significant revisions as more information becomes available or economic conditions change.

At the end of each quarter or more often, if necessary, First Priority analyzes the collectability of its loans and accordingly adjusts the loan loss allowance to an appropriate level. The allowance for loan losses covers estimated credit losses on individually evaluated loans that are determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan portfolio. For a description of the process for determining the adequacy of the allowance for loan losses, see the “Allowance for Loan Losses” section below.

 

40

---

Table of Contents

The provision for loan losses was $255 thousand and $360 thousand for the three and six months ended June 30, 2014 compared to $175 thousand and $340 thousand for the same periods ended June 30, 2013, respectively. The level of provision is impacted by the adequacy of the allowance as described above, including an analysis of impaired and non-performing loans, as well as by the level of incremental loan volume and net charge-offs of loans. Total loans increased $27.1 million and $22.7 million for the three and six months ended June 30, 2014, respectively. For the first six months of 2013, total loans grew $88.8 million, of which $77.4 million was related to loans acquired through the merger with Affinity, effective February 28, 2013, while loans grew $1.7 million in the second quarter of 2013. Net charge-offs for the six months ended June 30, 2014 and 2013, totaled $396 thousand and $571 thousand, respectively. The allowance for loan losses was $2.2 million and $2.3 million as of June 30, 2014 and December 31, 2013, respectively, which represented 0.62% and 0.68% of total loans outstanding at each respective date. Additionally, as of June 30, 2014 and December 31, 2013, the allowance for loan losses as a percentage of originated loans totaled 0.69% and 0.79%, respectively.

Acquired loans are initially recorded at acquisition date at their acquisition date fair values, and therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. As acquired loans are paid off or are refinanced or extended under First Priority’s credit underwriting process, they are no longer considered acquired loans, but instead are prospectively considered originated loans and therefore, are included as part of the calculation of the allowance for loan losses. To the extent there is a decrease in the present value of cash flows from acquired impaired loans after the date of acquisition, the Company records a provision for probable losses. During the three and six months ended June 30, 2014, the Company recorded a provision for loan losses totaling $130 thousand and $210 thousand, respectively, related to acquired loans. There were charge-offs recorded during these same respective periods totaling $100 thousand and $179 thousand related to loans that were initially considered credit impaired loans as of the acquisition date. Included in the current year, $150 thousand was related to revised appraisal values on a two separate commercial properties which serve as collateral on the outstanding loans, and $29 thousand related to a mortgage loan where the Bank has a second lien based on a revised estimate of the property’s fair value. Net charge-offs on non-credit impaired purchased loans totaled $31 thousand and $32 thousand for the three and six months ended June 30, 2014, respectively.

Non-Interest Income

Components of noninterest income are shown in the table below:

 

		For the three months ended June 30,								Net Change				% Change				For the six months ended June 30,								Net Change				% Change
		2014				2013				2014 vs. 2013				2014 vs. 2013				2014				2013				2014 vs. 2013				2014 vs. 2013
		(Dollars in thousands)																(Dollars in thousands)
Non-Interest Income
Wealth management fee income		$	104			$	56			$	48				85.7	%		$	227			$	115			$	112				97.4	%
Service charges on deposits			27				34				(7	)			(20.6	)			53				59				(6	)			(10.2	)
Other branch fees			50				43				7				16.3				99				66				33				50.0
Loan related fees			9				12				(3	)			(25.0	)			13				22				(9	)			(40.9	)
Bank owned life insurance income			25				—				25				100				42				—				42				100
Other			1				13				(12	)			(92.3	)			1				16				(15	)			(93.8	)
Total Non-Interest Income		$	216			$	158			$	58				36.7	%		$	435			$	278			$	157				56.5	%

Non-Interest Expenses

For the three months ended June 30, 2014, non-interest expenses were $3.35 million compared to $3.78 million for the same period in 2013, a decrease of $431 thousand, or 11.4%. For the six months ended June 30, 2014, non-interest expenses were $6.62 million compared to $7.28 million for the same period in 2013, a decrease of $665 thousand, or 9.1%. The following table sets forth information related to the various components of non-interest expenses for each respective period.

 

		For the three months ended June 30,								Net Change				% Change				For the six months ended June 30,								Net Change				% Change
		2014				2013				2014 vs. 2013				2014 vs. 2013				2014				2013				2014 vs. 2013				2014 vs. 2013
		(Dollars in thousands)																(Dollars in thousands)
Non-Interest Expenses
Salaries and employee benefits		$	1,743			$	1,801			$	(58	)			(3.2	)%		$	3,465			$	3,341			$	124				3.7	%
Occupancy and equipment			542				579				(37	)			(6.4	)			1,107				934				173				18.5
Data processing equipment and operations			208				242				(34	)			(14.0	)			440				411				29				7.1
Professional fees			209				208				1				0.5				426				354				72				20.3
Marketing, advertising and business development			113				74				39				52.7				143				110				33				30.0
FDIC insurance assessments			80				92				(12	)			(13.0	)			156				165				(9	)			(5.5	)
Pennsylvania bank shares tax expense			80				102				(22	)			(21.6	)			158				176				(18	)			(10.2	)
Other real estate owned costs			45				44				1				2.3				87				162				(75	)			(46.3	)
Other			330				226				104				46.0				634				418				216				51.7
			3,350				3,368				(18	)			(0.5	)%			6,616				6,071				545				9.0	%
Merger related costs			—				413				(413	)			(100.0	)			—				1,210				(1,210	)			(100.0	)
Total Non-Interest Expenses		$	3,350			$	3,781			$	(431	)			(11.4	)%		$	6,616			$	7,281			$	(665	)			(9.1	)%

 

41

---

Table of Contents

Highlights of significant non-interest expenses items for the second quarter, 2014 compared to the second quarter, 2013

 

•

Non-interest expenses decreased $18 thousand, or 0.5% in the three months ended June 30, 2014 compared to the second quarter of 2013, excluding merger related costs.

 

•

Salaries and employee benefits expenses included duplicative operational staffing costs during the second quarter of 2013 related to the acquisition of Affinity and operating two separate core banking systems prior to the system conversion and integration into one system and process in August of 2013.

 

•

Occupancy and equipment costs declined in the second quarter of 2014 compared to the prior year due to the elimination of one branch office which was subleased to another tenant and the renegotiation of another acquired branch lease. In addition, cost savings were achieved related to the consolidation of maintenance contracts under the combined organization.

 

•

Data processing equipment and operations included duplicative operating costs during the second quarter of 2013 related to operating two core banking systems prior to the system conversion.

 

•

Marketing, advertising and business development increased in the current quarter primarily related to advertising awareness campaigns initiated during the second quarter of 2014 including radio and billboard advertising campaigns.

 

•

FDIC insurance assessments and Pennsylvania bank shares tax expense decreased in the second quarter of 2014 compared to prior year. These expenses are primarily calculated based on asset size and equity levels of the Bank. In addition, the current year rate used to calculate the bank shares tax declined 36 basis point in 2014 compared the prior year.

 

•

Other expenses increased $104 thousand for the three months ended June 30, 2014. This increase is partially related to incremental operating costs due to the addition of Affinity, including public company filing fees of $9 thousand, postage expenses of $10 thousand, loan and deposit generation costs of $30 thousand and a valuation adjustment on a repossessed asset based on an updated appraisal of $32 thousand.

Six months ended June 30, 2014 compared to prior year

 

•

Non-interest expenses increased $545 thousand, or 9.0% in the six months ended June 30, 2014 compared to 2013, excluding merger related costs.

 

•

Salaries and employee benefits increased $124 thousand in the six months ended June 30, 2014 compared to 2013. Incremental staffing costs are included in the current year of approximately $275 thousand related to the timing of the acquisition of Affinity employees effective February 28, 2013; these incremental expenses are partially offset by duplicative operational staffing costs during the second quarter of 2013 in order to maintain two separate core banking systems prior to the system conversion in August of 2013. In addition, when comparing the first six months of 2014 to the same period in 2013, stock based compensation increased $80 thousand and wealth management commission increased $34 thousand while the accrual for bonus expense declined $76 thousand.

 

•

Occupancy and equipment includes costs related to the incremental branch offices of Affinity during the first quarter of 2013. Of this increase, $117 thousand related to incremental lease expense or depreciation of leased or owned facilities while building operating costs increased $76 thousand; partially offset by cost reductions of $20 thousand related to the consolidation of maintenance contracts under the combined organization.

 

•

Data processing equipment and operations increased $29 thousand primarily related to depreciation expense on updated computer equipment and other incremental data costs related to Affinity offices.

 

•

Professional fees increased $25 thousand related to accounting and audit fees, $47 thousand related to staff search fees, and other professional fees which increased $13 thousand. These increases were partially offset by lower legal fees of $11 thousand, primarily related to lower legal costs to resolve loan workout situations in the current year.

 

42

---

Table of Contents

•

Marketing, advertising and business development increased $33 thousand in the current year primarily related to incremental advertising awareness campaigns initiated during the second quarter of 2014 including radio and billboard advertising campaigns. 2013 included an awareness campaign related to the merger during the first quarter of 2013.

 

•

FDIC insurance assessments and Pennsylvania bank shares tax expense decreased in 2014 compared to the prior year. These expenses are primarily calculated based on asset size and equity levels of the Bank. In addition, the current year rate used to calculate the bank shares tax declined 36 basis point in 2014 compared the prior year.

 

•

Other real estate owned costs declined $75 thousand in 2014 compared to the prior year. These properties were acquired either through deeds in lieu of foreclosure or through other means on properties that were used as collateral for bank loans. Net gains on the sale of other real estate totaling $16 thousand was recorded during 2014 while a net loss of $6 thousand was charged to expense in 2013. Also, a charge to expense was also recorded related to fair value adjustments of properties held or sold totaling $96 thousand. In addition, there was $104 thousand of costs to acquire or maintain these properties during the holding period, net of rental income received during the six months of 2014 compared to $60 thousand recorded in the same period of 2013.

 

•

Other expenses increased $216 thousand for the six months ended June 30, 2014. This increase is partially related to incremental costs due to the addition of Affinity, including an increase in core deposit intangible amortization expense of $14 thousand, public company filing fees of $22 thousand, loan and deposit generation costs of $61 thousand, travel and entertainment costs of $20 thousand, directors fees of $16 thousand and postage expenses of $10 thousand. In addition, the Company incurred insurance claim costs of $25 thousand and a valuation adjustment on a repossessed asset based on an updated appraisal of $32 thousand.

Merger related costs

First Priority Bank recorded $413 thousand and $1.21 million in merger related costs during the three and six months ended June 30, 2013 for expenses paid or incurred related to the merger with Affinity. These expenses consisted largely of costs related to professional and consulting services, consolidating a branch office, termination of Affinity’s core system contractual agreement and conversion of systems and/or integration of operations, printing and filing costs of completing the transaction and investment banking charges. These are outlined in the table below:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2013				2013
		(Dollars in thousands)
Accounting		$	9			$	26
Branching consolidation			103				103
Investment banking			—				350
Investor & customer document printing and filing			7				118
Legal			—				5
Purchase accounting consulting			50				50
System contract termination			—				314
System conversion/deconversion costs			244				244
		$	413			$	1,210

Provision for Income Taxes

Management considers various factors in evaluating the need for a valuation allowance related to the Company’s net deferred tax asset, including but not limited to forecasted future earnings which management believes provides positive evidence to support the utilization of the deferred tax asset in the future and the negative evidence of accumulated operating losses that First Priority experienced during the Company’s start-up years. The Company determined that as of June 30, 2014 and December 31, 2013 a valuation allowance for deferred taxes of $4.9 million and $5.6 million should be recorded as of each period. Recording a valuation allowance does not have any impact on our liquidity, nor does it preclude us from using the tax losses, tax credits or other timing differences in the future. To the extent that we generate taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense which results. During the first six months of 2014, First Priority’s NOL was reduced by $912 thousand which was utilized to offset income tax expense of $310 thousand related to taxable income recorded during that same period. The remaining deferred tax asset valuation allowance may be reversed through income tax expense once the Company demonstrates a sustainable level of profitability and management makes the conclusion that it is more likely than not that the deferred tax asset will be utilized prior to expiration.

The company recorded $16 thousand of income tax expense in first six months of 2014 related to the payment of alternative minimum taxes, as required based on Internal Revenue Service tax guidelines. The payment of these taxes is expected to reverse in future periods as a timing difference if the Company records taxable earnings and is able to reverse the deferred tax valuation allowance; however, since the Company currently maintains a valuation allowance against its net deferred tax asset, the payment of these taxes is recorded as a tax expense in the statement of operations.

The most significant component of the Company’s unrecognized deferred tax asset balances relates to the Company’s NOL carryforwards, including acquired NOLs totaling $10.8 million as of June 30, 2014. First Priority has NOL carryforwards of approximately $7.4 million at June 30, 2014, which are available to reduce future federal income taxes until such time as the entire NOL is utilized.

 

43

---

Table of Contents

In addition, First Priority acquired a NOL for tax purposes related to the acquisition of Prestige Community Bank which totaled $2.0 million as of June 30, 2014, that is subject to certain limitations and expires in 2028 if not fully utilized. The impact of this reduction in First Priority’s tax liability will be recognized as a reduction of goodwill. In addition, a NOL carryforward of $1.5 million acquired in the merger with Affinity is available to reduce future federal income taxes. This NOL is also subject to certain limitations and expires in 2032 if not fully utilized.

Balance Sheet Review Overview

Total assets at June 30, 2014 were $456.9 million representing an increase of $10.8 million or 2.4% when compared to total assets of $446.1 million at December 31, 2013. Total assets consisted principally of loans outstanding of $362.8 million, investment securities of $66.7 million and cash and cash equivalents of $14.3 million at June 30, 2014, compared to loans outstanding of $335.7 million, investments securities of $89.6 million and cash and cash equivalents of $11.2 million at December 31, 2013.

Deposits totaled $353.7 million at June 30, 2014 compared to $357.4 million at December 31, 2013, a decrease of $3.7 million, or 1.0%. Of the total deposits at June 30, 2014, $186.3 million, or 52.7% of total deposits, are core deposits consisting of demand, money market and savings deposits.

Borrowings totaled $57.2 million at June 30, 2014 compared to $44.6 million at December 31, 2013, an increase of $12.6 million, or 28.3%, due to an increase in short-term borrowings.

Shareholders’ equity at June 30, 2014 was $44.6 million, representing an increase of $2.2 million from $42.4 million at December 31, 2013. The enhanced capital position is attributable to net income of $1.2 million for the six months ended June 30, 2014 and market volatility related to the investment securities portfolio resulting in a reduction of the unrealized losses totaling $1.1 million. These increases were partially offset by preferred dividends paid of $240 thousand.

Investments

The investment portfolio totaled $66.7 million at June 30, 2014, compared to $89.6 million at December 31, 2013, a decline of $22.9 million, or 25.6%. This decline primarily relates to overnight investments of $25 million purchased at December 31, 2013 for tax planning purposes. As of June 30, 2014 and December 31, 2013, investments totaling $52.2 million and $78.6 million, respectively, were classified as available for sale while $14.5 million and $11.0 million, respectively, were classified as held to maturity. Total investments accounted for 14.6% and 20.1% of total assets at each respective date.

At March 31, 2014, the Company transferred securities with fair values of $3.7 million consisting of six obligations of states and political subdivisions and one corporate bond from available for sale securities to held to maturity securities. Net unrealized holding losses arising prior to the reclassification date as of March 31, 2014 totaled $137 thousand, are reported as a separate line item within accumulated other comprehensive income. The balance of net unrealized holding gains, totaling $90 thousand as of June 30, 2014, is being amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same transferred debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding loss reported in equity will offset the effect on the interest income of the accretion of the discount on these securities. The transfer of securities from available for sale to held to maturity was completed in order to mitigate the volatility to common equity caused by sudden market fluctuations and to lock in a predictable earnings on these related securities.

Securities classified as available for sale are accounted for at fair value, with the difference between fair value and amortized cost reflected in the capital account as other comprehensive income or loss. The Company had net unrealized losses on available for sale securities totaling $183 thousand at June 30, 2014 compared to net unrealized losses totaling $1.5 million at December 31, 2013. Available for sale securities are securities that management intends to hold for an indefinite period of time or securities that may be sold in response to changes in interest rates, prepayment expectations, capital management and liquidity needs.

The total investment portfolio at June 30, 2014 was comprised of federal agency securities (33%), federal agency mortgage backed securities and agency collateralized mortgage obligations (37%), obligations of states and political subdivisions (28%, primarily federal taxable municipal securities), and corporate and other debt securities (2%). All investment securities were either government guaranteed, issued by a government agency or investment grade. First Priority had no investment securities deemed to have other than temporary impairment (“OTTI”) at June 30, 2014 or December 31, 2013 and recorded no OTTI charges during the six months ended June 30, 2014 or during the year ended December 31, 2013.

 

44

---

Table of Contents

The following table sets forth information about the contractual maturities and weighted average yields of investment securities at June 30, 2014. Actual maturities may differ from contractual maturities due to scheduled principal payments and unscheduled prepayments of mortgage backed securities and, where applicable, the ability of an issuer to call a security prior to the contractual maturity date.

 

		Securities Available for Sale As of June 30, 2014
		Within 1 year								After one but within five years								After five but within ten years								Over ten years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(Dollars in thousands)
U.S. Government agency securities		$	—				—			$	16,406				1.45	%		$	5,809				1.53	%		$	—				—			$	22,215				1.47	%
Obligations of states and political subdivisions			—				—				2,209				1.62	%			2,076				2.35	%			576				3.20	%			4,861				2.12	%
Federal agency mortgage backed securities			—				—				—				—				4,319				2.00	%			19,464				2.21	%			23,783				2.17	%
CMO’s			—				—				—				—				346				1.22	%			296				2.97	%			642				2.03	%
Other debt securities			—				—				504				0.85	%			—				—				—				—				504				0.85	%
Money market mutual fund			209				0.00	%			—				—				—				—				—				—				209				0.00	%
Total investments available for sale		$	209				0.00	%		$	19,119				1.46	%		$	12,550				1.82	%		$	20,336				2.25	%		$	52,214				1.85	%
		Securities Held to Maturity As of June 30, 2014
		Within 1 year								After one but within five years								After five but within ten years								Over ten years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(Dollars in thousands)
Obligations of states and political subdivisions		$	—				—			$	482				2.07	%		$	996				3.30	%		$	12,434				4.11	%		$	13,912				3.98	%
Other debt securities			—				—				—				—				—				—				499				4.37	%			499				4.37	%
Total investments held to maturity		$	—				—			$	482				—			$	996				3.30	%		$	12,933				4.12	%		$	14,411				3.93	%

 

45

---

Table of Contents

The amortized cost and fair value of First Priority’s investments, classified as available for sale or held to maturity, at June 30, 2014 and December 31, 2013 are shown in the following table:

 

		June 30, 2014								December 31, 2013
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(Dollars in thousands)								(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations		$	22,444			$	22,214			$	48,612			$	48,061
Obligations of states and political subdivisions			4,936				4,861				8,321				7,821
Federal agency mortgage-backed securities			23,667				23,784				20,908				20,554
Federal agency collateralized mortgage obligations			640				642				758				759
Other debt securities			501				504				1,252				1,207
Money market mutual fund			209				209				234				234
Total investment securities available for sale.		$	52,397			$	52,214			$	80,085			$	78,636
Held To Maturity:
Obligations of states and political subdivisions		$	13,975			$	13,911			$	10,963			$	10,268
Other debt securities			480				500				—				—
Total held to maturity		$	14,455			$	14,411			$	10,963			$	10,268

Restricted investments in bank stocks

Restricted investments in bank stocks represent the investment in the common stock of correspondent banks required in order to transact business with those banks. Investments in restricted stock are carried at cost.

At both June 30, 2014 and December 31, 2013, First Priority Bank held $110 thousand in common stock of Atlantic Central Bankers Bank, Camp Hill, Pennsylvania. Additionally, First Priority had investments in the common stock of the FHLB Bank of Pittsburgh totaling $3.14 million and $2.62 million as of June 30, 2014 and December 31, 2013, respectively. The increase in the investment is attributable to incremental borrowings advance from the FHLB during the first six months of 2014.

Loans

First Priority’s loan portfolio is the primary component of its assets. At June 30, 2014, total loans were $362.8 million, representing an increase of $27.1 million or 8.1% from total loans outstanding of $335.7 million at December 31, 2013. Included in the current year loan growth are $15.3 million of purchased residential real estate loans located within First Priority’s markets which were underwritten to the same standards as used for loans that the Company originates for its own portfolio.

The following table sets forth the classification of First Priority’s loan portfolio at June 30, 2014 and December 31, 2013.

 

		June 30, 2014								December 31, 2013
		Amount				Percent of total				Amount				Percent of total
Commercial & Industrial		$	76,340				21	%		$	76,659				23	%
Commercial Mortgage			160,381				44	%			149,492				45	%
Commercial Construction			6,155				2	%			4,373				1	%
Total Commercial			242,876				67	%			230,524				69	%
Residential Mortgage			71,813				20	%			56,979				17	%
Home Equity Lines			29,509				8	%			29,263				8	%
Other Consumer			18,568				5	%			19,317				6	%
Total Consumer			48,077				13	%			48,580				14	%
Total Loans			362,766				100	%			336,083				100	%
Net deferred loan costs (fees)			23				—				(346	)			—
Total		$	362,789				100	%		$	335,737				100	%

A majority of First Priority Bank’s loans are to business owners of many types. First Priority Bank makes commercial loans for real estate development and other business purposes required by its customer base.

First Priority Bank’s credit policies determine advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral values such as real estate values, equipment, eligible accounts receivable and inventory. Individual loan advance rates may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets. Commercial mortgage loans include loans to finance commercial real estate properties. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale or lease of the subject property. Commercial mortgage loans typically require a loan to value ratio of not greater than 80% and vary in terms.

 

46

---

Table of Contents

Residential mortgages and home equity loans are secured by the borrower’s residential real estate in either a first or second lien position. Pricing for residential mortgages and home equity loans is subject to market conditions, the applicant’s income and qualified credit bureau score and the collateral’s loan to value ratio. Residential mortgages have amortization terms up to but not longer than 30 years and home equity loans generally have maturities up to 10 years. Residential mortgages and home equity loans typically require a loan to value ratio of not greater than 80%.

Other consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are secured.

Commercial mortgage loans consist of loans originated for commercial purposes which are secured by nonfarm nonresidential properties, multifamily residential properties, or 1-4 family residential properties. As of June 30, 2014, commercial mortgage loans totaled $160.4 million consisting of $110.7 million of loans to finance commercial business properties, of which 58% are owner occupied, $12.6 million to finance, and are secured by, multifamily properties, $31.3 million secured by 1-4 family residential dwelling properties for business purposes, and $5.8 million for other purposes. In addition, as of June 30, 2014, loans to lessors of non-residential buildings totaled $64.3 million which is included in commercial mortgage loans; of this amount, $30.0 million, or 47% of these loans are related to owner occupied buildings.

As of December 31, 2013, commercial mortgage loans totaled $149.5 million consisting of $102.2 million of loans to finance commercial business properties, of which 56% are owner occupied, $9.4 million to finance, and are secured by, multifamily properties, $31.4 million secured by 1-4 family residential dwelling properties for business purposes, and $6.5 million for other purposes. In addition, as of December 31, 2013, loans to lessors of non-residential buildings totaled $64.0 million which is included in commercial mortgage loans; of this amount, $30.4 million, or 47.5% of these loans are related to owner occupied buildings.

The payment experience of certain non-owner occupied commercial mortgage loans may be dependent upon the successful operation of the real estate project. These risks can be significantly affected by supply and demand conditions in the market for office and retail space and for apartments and, as such, may be subject to a greater extent to adverse conditions in the economy. In dealing with these risk factors, First Priority generally limits itself to a real estate market or to borrowers with which First Priority has experience. First Priority generally concentrates on originating commercial real estate loans secured by properties located within its market area and many of First Priority’s commercial real estate loans are secured by owner-occupied property with personal guarantees of the debt.

Regulatory guidance exists whereby total construction, land development and other land loans should not exceed 100% of total risk based capital and further guidance whereby total construction, land development and other land loans combined with real estate loans secured by multifamily or nonresidential properties and loans to finance commercial real estate or construction loans (not secured by real estate) should not exceed 300% of total risk-based capital. First Priority Bank monitors these two ratios, which as of June 30, 2014, totaled 17% and 181% of total risk-based capital, respectively, both well within the regulatory suggested guidance.

Credit Quality

First Priority Bank’s written lending policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding, with additional credit department approval for the majority of new loan balances. The Loan Committee is comprised of senior members of management who oversee the loan approval process to monitor that proper standards are maintained.

The accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become 90 days past due or when management has serious doubts about further collectability 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 non-accrual 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 non-accrual loans is generally either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. 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 collectability of the total contractual principal and interest is no longer in doubt.

 

47

---

Table of Contents

The following table summarizes non-performing assets and performing troubled debt restructurings at the dates indicated.

 

		June 30,				December 31,
		2014				2013
		(Dollars in thousands)
Loans past due 90 days or more and still accruing interest		$	—			$	—
Non-accrual loans			3,474				4,276
Total non-performing loans (1)			3,474				4,276
Other real estate owned			861				914
Repossessed assets (2)			85				75
Total non-performing assets (3)			4,420				5,265
Performing troubled debt restructurings (4)			701				974
Total non-performing assets and performing troubled debt restructurings		$	5,121			$	6,239
Non-performing loans as a percentage of total loans			0.96	%			1.27	%
Non-performing assets as a percentage of total assets			0.97	%			1.18	%
Non-performing assets and performing troubled debt restructurings as a percentage of total assets			1.12	%			1.40	%
Ratio of allowance to non-performing loans at end of period			64	%			53	%
Ratio of allowance to non-performing assets at end of period			51	%			43	%
Allowance for loan losses as a percentage of total loans			0.62	%			0.68	%
Allowance for loan losses as a percentage of originated loans (5)			0.69	%			0.79	%
Allowance for loan losses as a percentage of originated non-performing loans (5)			165	%			155	%

 

(1)	Non-performing loans are comprised of (i) loans that have a non-accrual status; (ii) accruing loans that are 90 days or more past due and (iii) non-performing troubled debt restructured loans.

(2)	Repossessed assets include personal property, consisting of manufactured housing, which has been acquired for debts previously contracted.

(3)	Non-performing assets are comprised of non-performing loans, other real estate owned (assets acquired in foreclosure) and repossessed assets.

(4)	Performing troubled debt restructurings are accruing loans that have been restructured in troubled debt restructurings and are in compliance with their modified terms.

(5)

The allowance for loan losses as a percentage of originated loans excludes loans acquired in the merger with Affinity, which were recorded at acquisition date at their fair values, including a discount related to potential credit impairment for the acquired loans. Therefore, the acquired loans are excluded from the calculation of loan loss reserves as of the merger date. The carryover of an allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value.

Total non-performing loans were $3.5 million at June 30, 2014, a decline of $802 thousand from the $4.3 million at December 31, 2013. This decrease consisted of three loans which were transferred to other real estate owned with previously outstanding balances totaling $780 thousand, two loans which were partially charged-off totaling $150 thousand due to a decline in the collateral values, payments on loans received totaling $329 thousand; partially offset by additional loans reclassed to non-accrual status totaling $444 thousand. Total non-performing loans as a percentage of total loans at June 30, 2014 was 0.96%, down from 1.27% at December 31, 2013. Other real estate owned totaled $861 thousand at June 30, 2014 and $914 thousand at December 31, 2013, a decrease of $53 thousand. Repossessed assets totaled $85 thousand at June 30, 2014 compared to $75 thousand at December 31, 2013. Nonperforming assets totaled $4.4 million, or 0.97% of total assets, as of June 30, 2014, compared to $5.3 million, or 1.18% of total assets as of December 31, 2013.

While not considered non-performing, First Priority’s performing troubled debt restructurings are closely monitored as they consist of loans that have been modified where the borrower is experiencing financial difficulty. Troubled debt restructurings may be deemed to have a higher risk of loss than loans which have not been restructured. At June 30, 2014 and December 31, 2013, First Priority’s performing troubled debt restructurings totaled $701 thousand and $974 thousand, respectively. As of each period, there was a commercial loan relationship with balances of $701 thousand and $831 thousand, respectively, which was restructured in the first quarter of 2012 whereby the loan’s maturity date was extended at a current market rate and has remained current in regards to principal and interest due. As of December 31, 2013, a commercial loan relationship acquired through the merger with Affinity was also classified as a performing troubled debt restructuring, totaling $143 thousand, which was paid off in the second quarter of 2014 through liquidation of the underlying collateral.

 

48

---

Table of Contents

First Priority Bank’s management continues to monitor and explore potential options and remedial actions to recover First Priority Bank’s investment in non-performing loans. According to policy, First Priority Bank is required to maintain a specific reserve for impaired loans. See the “Allowance for Loan Losses” section below for further information.

First Priority Bank’s total delinquency amount is comprised of loans past due 30 to 89 days and still accruing plus the balance of nonperforming loans. As of June 30, 2014 and December 31, 2013, loans past due 30 to 89 days and still accruing totaled $504 thousand and $567 thousand, respectively, which when added to the non-performing loans for each period, resulted in a total delinquency ratio of 1.10% and 1.44%, respectively, of total loans outstanding.

Allowance for Loan Losses

The allowance for loan losses represents an amount that First Priority believes will be adequate to absorb estimated credit losses on loans that may become impaired. While First Priority applies the methodology discussed below in connection with the establishment of the allowance for loan losses, the allowance is subject to critical judgments on the part of management. Risks within the loan portfolio are analyzed on a continuous basis by the management of First Priority Bank, periodically analyzed by an external independent loan review function, and are also reviewed by the audit committee. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and appropriate allowances. In addition to the risk system, management further evaluates the risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management believes deserve recognition in establishing an appropriate allowance. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

First Priority uses a quantitative and qualitative method to allocating its allowance to the various loan categories. An unallocated component, which is maintained to cover uncertainties that could affect management’s estimate of probable losses, reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Additions to the allowance are made by provisions charged to expense, and the allowance is reduced by net charge-offs, which are loans judged to be uncollectible, less any recoveries on loans previously charged off. Although management attempts to maintain the allowance at an adequate level, future additions to the allowance may be required due to the growth of the loan portfolio, changes in asset quality, changes in market conditions and other factors. Additionally, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additional provisions based upon their judgment about information available to them at the time of their examination. Although management uses what it believes to be the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change.

Acquired loans are initially recorded on acquisition date at their acquisition date fair values, and therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows from the acquired impaired loans after the date of acquisition, the Company records a provision for potential losses. During the three and six months ended June 30, 2014, the Company recorded a provision for loan losses totaling $130 thousand and $210 thousand for acquired impaired loans and for the three and six months ended June 30, 2013 there were no provisions recorded for loan losses on acquired loans.

The Bank’s policy for interest income recognition on nonaccrual loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. The Bank will not recognize income if these factors do not exist. Interest that would have been accrued on non-accruing loans under the original terms but was not recognized as interest income totaled $70 thousand and $143 thousand for the three and six months ended June 30, 2014 and totaled $64 thousand and $125 thousand for the three and six months ended June 30, 2013, respectively.

Based on the information available as of June 30, 2014, management believes that the allowance for loan losses of $2.2 million is adequate as of that date.

 

49

---

Table of Contents

The following table sets forth a summary of the changes in the allowance for loan losses for the periods indicated:

 

		For the three months ended June 30,								For the six months ended June 30,
		2014				2013				2014				2013
		(Dollars in thousands)								(Dollars in thousands)
Balance at the beginning of period		$	2,219			$	2,565			$	2,273			$	2,460
Charge-offs:
Commercial and Industrial			137				285				137				339
Commercial Mortgage			1				—				75				—
Commercial Construction			—				—				50				—
Residential Mortgage Loans			25				—				25				8
Home equity lines of credit			90				246				90				246
Other consumer loans			—				—				52				—
Total loans charged off			253				531				429				593
Recoveries:
Commercial and Industrial			6				8				16				8
Commercial Mortgage			—				—				—				—
Commercial Construction			2				—				2				—
Residential Mortgage Loans			—				6				—				7
Home equity lines of credit			4				—				8				—
Other consumer			4				6				7				7
Total recoveries			16				20				33				22
Net loans charged off			237				511				396				571
Provision charged to operations			255				175				360				340
Balance at end of period		$	2,237			$	2,229			$	2,237			$	2,229
Average loans (1)		$	345,718			$	332,283			$	340,159			$	303,543
Ratio of net charge-offs during period to average loans outstanding during period (annualized) (1)			0.27	%			0.62	%			0.23	%			0.38	%
Allowance for loan losses as a percentage of total loans			0.62	%			0.67	%			0.62	%			0.67	%
Allowance for loan losses as a percentage of non-acquired loans			0.69	%			0.84	%			0.69	%			0.84	%

 

(1)	Includes non-accrual loans

The allowance for loan losses was $2.2 million at June 30, 2014 and $2.3 million at December 31, 2013, which represented 0.62% and 0.68% of total loans outstanding at each respective date. The allowance as a percentage of originated loans as of June 30, 2014 and December 31, 2013 was 0.69% and 0.79%, respectively. The allowance for loan losses as a percentage of originated loans excludes loans acquired in the merger with Affinity, which were recorded at acquisition date at their fair values, including a discount related to potential credit impairment for the acquired loans. Therefore, acquired loans are excluded from the calculation of the loan loss reserve as of the acquisition date. The carryover of an allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value. As discussed in Note 2 – “Merger with Affinity Bancorp, Inc.,” as of February 28, 2013, acquired loans without evidence of credit deterioration included a general credit fair value adjustment of $1.6 million while acquired credit impaired loans included a nonaccretable discount of $1.6 million representing a specific credit valuation adjustment.

As of June 30, 2014 and December 31, 2013, the unamortized portion of the general credit fair value adjustment totaled $650 thousand and $906 thousand, respectively, and the total specific credit market valuation adjustment totaled $1.1 million as of June 30, 2014 and $1.4 million as of December 31, 2013, inclusive of a remaining accretable discount totaling $31 thousand and $56 thousand, respectively. Additionally, as of June 30, 2014 and December 31, 2013 the combination of these remaining credit fair value adjustments related to acquired loans, totaling $1.8 million and $2.3 million, respectively, and the allowance for loan losses of $2.2 million and $2.3 million respectively, or a total of $4.0 million and $4.6 million, respectively, would equate to 1.10% and 1.36% of total loans outstanding as of each respective period. Net charge-offs for the Company totaled $396 thousand for the first six months of 2014 compared to $571 thousand for the same period in 2013.

 

50

---

Table of Contents

The following table sets forth the allocation of the allowance for loan losses by loan category. The specific allocations in any particular category may be reallocated in the future to reflect the then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.

 

		(In thousands except percentage data)
		June 30,								December 31,
		2014								2013
		Amount				Percent of total loans (1)				Amount				Percent of total loans (1)
Commercial and Industrial		$	510				21	%		$	445				23	%
Commercial Mortgage			483				44	%			452				45	%
Commercial Construction			22				2	%			12				1	%
Residential Mortgage Loans			221				20	%			149				17	%
Home Equity Lines of Credit			118				8	%			177				8	%
Other Consumer Loans			66				5	%			67				6	%
Total allocated			1,420				100	%			1,302				100	%
Unallocated			817								971
TOTAL		$	2,237							$	2,273

 

 

(1)	Represents loans outstanding in each category, as of the date shown, as a percentage of total loans outstanding

A specific allocation of the allowance for loan losses of $158 thousand has been provided on originated impaired loans of $1.4 million at June 30, 2014 compared to a specific allocation of $112 thousand related to $1.5 million of originated impaired loans at December 31, 2013.

The qualitative and quantitative analysis of the loan portfolio, after the effect of net charge-offs and the above mentioned specific allocation, resulted in the general portion of the allowance for loan losses totaling $1.3 million and $1.2 million as of June 30, 2014 and December 31, 2013, respectively.

Loan Concentrations

The Bank’s loans consist of credits to borrowers spread over a broad range of industrial classifications. The largest concentrations of loans are to lessors of nonresidential buildings and lessors of residential buildings and dwellings. As of June 30, 2014, these loans totaled $64.3 million and $45.4 million, respectively, or 17.7% and 12.5%, respectively, of the total loans outstanding. As of December 31, 2013, these same classifications of loans totaled $64.0 million and $42.7 million, respectively, or 19.1% and 12.7%, respectively, of the total loans outstanding. These credits were subject to normal underwriting standards and did not present more than the normal amount of risk assumed by the Bank’s other lending activities. Management believes this concentration does not pose abnormal risk when compared to the risk it assumes in other types of lending. The Bank has no other concentration of loans which exceeds 10% of total loans.

Deposits

Deposits represent the primary source of funding for earning assets. Deposits totaled $353.7 million at June 30, 2014 compared to $357.4 million at December 31, 2013, representing a decrease of $3.7 million or 1.0%. This decline in deposits relates to a decline in interest bearing demand accounts, money market and savings accounts totaling $20.6 million and retail time deposits of $11.3 million offset by an increase in non-interest bearing demand accounts of $4.6 million and $23.6 million in brokered time deposits.

It has been a strategic objective of First Priority to develop its core deposit base and to supplement core deposits with cost effective alternative funding sources. The merger with Affinity provided the opportunity to expand core deposits and enhance the mix of deposit sources. For the period ended June 30, 2014 compared to December 31, 2013, core deposits declined $16.0 million as transaction account balances declined $9.6 million, consisting of a decline in interest bearing transaction accounts of $14.2 million while non-interest bearing transaction accounts increased $4.6 million, and a decline in money market and savings accounts of $6.4 million when comparing these same periods.

First Priority attracts deposits by offering competitive products and interest rates on a broad spectrum of deposit products to customers in its local marketplace, generally through its retail branch system, and also through its internet banking platform. First

 

51

---

Table of Contents

Priority Bank supplements deposits raised locally with the issuance of brokered deposits when cost effective relative to local market pricing. At June 30, 2014 and December 31, 2013, brokered deposits totaled $59.8 million and $36.2 million, respectively. The guidelines governing First Priority Bank’s participation in the brokered CD market are included in First Priority Bank’s Asset Liability Management Policy, which is reviewed, revised and approved annually by the asset liability management committee and the board of directors. The FDIC places restrictions on a depository institution’s use of brokered deposits based on the bank’s capital classification. A well-capitalized institution may accept brokered deposits without FDIC restrictions. An adequately capitalized institution must obtain a waiver from the FDIC in order to accept brokered deposits, while an undercapitalized institution is prohibited by the FDIC from accepting brokered deposits. First Priority Bank is classified as well-capitalized under prompt corrective action provisions (see Note 11 – “Regulatory Matters” of the Notes to Unaudited Consolidated Financial Statements) and, therefore, may accept brokered deposits without FDIC restrictions.

The following table sets forth the average balance of First Priority’s deposits and the average rates paid on deposits for the periods presented.

 

		For the three months ended June 30,																For the six months ended June 30,
		2014								2013								2014								2013
		Average Balance				Rate				Average Balance				Rate				Average Balance				Rate				Average Balance				Rate
		(Dollars in thousands)																(Dollars in thousands)
Demand, non-interest bearing		$	48,949							$	37,222							$	47,519							$	34,291
Demand, interest-bearing			42,164				0.25	%			47,345				0.26	%			45,436				0.26	%			34,886				0.26	%
Money market and savings deposits			100,058				0.32	%			105,517				0.42	%			101,191				0.34	%			90,329				0.42	%
Time deposits			153,266				1.41	%			164,294				1.58	%			151,090				1.46	%			155,058				1.67	%
Total interest-bearing deposits			295,488				0.88	%			317,156				1.00	%			297,717				0.90	%			280,273				1.09	%
Total deposits		$	344,437							$	354,378							$	345,236							$	314,564

The maturity distribution of time deposits of $100,000 or more as of June 30, 2014, is as follows:

 

		(Dollars in thousands)
Three Months or Less		$	6,156
Over Three Through Six Months			3,727
Over Six Through Twelve Months			8,891
Over Twelve Months			21,160
TOTAL		$	39,934

Short-Term Borrowed Funds

At June 30, 2014, First Priority had short-term borrowings totaling $46.2 million, compared to $33.6 million at December 31, 2013. Short-term borrowings consisted of overnight or less than 30 day advances from the FHLB as of each of these periods. Advances from the FHLB at June 30, 2014 are collateralized by our investment in the common stock of the FHLB and by a blanket lien on selected mortgage loans within First Priority Bank’s loan portfolio.

The following table outlines First Priority’s various sources of short-term borrowed funds at or for each of the three months ended June 30, 2014 and 2013. The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at any month end during each of the periods shown.

 

		For the six months ended June 30,
		2014				2013
		(Dollars in thousands)
Federal funds purchased:
Balance at period end		$	—			$	—
Weighted average rate at period end			—				—
Maximum month-end balance		$	609			$	492
Average daily balance during the period		$	53			$	22
Weighted average rate during the period			0.51	%			0.51	%
FHLB short-term borrowings:
Balance at period end		$	46,242			$	8,000
Weighted average rate at period end			0.27	%			0.25	%
Maximum month-end balance		$	46,242			$	25,000
Average daily balance during the period		$	25,955			$	1,620
Weighted average rate during the period			0.28	%			0.25	%

 

52

---

Table of Contents

Long-Term Debt

Long-term debt totaled $11.0 million as of both June 30, 2014 and December 31, 2013, respectively. These borrowings consisted of advances from the FHLB with an average interest rate of 0.88% as of each of these dates and an average remaining life of 2.7 years and 3.2 years, respectively. Advances from the FHLB are collateralized by an investment in the common stock of the FHLB, by a specific pledge of First Priority Bank’s investment assets and by a blanket lien on selected mortgages within First Priority Bank’s loan portfolio. Balances of FHLB long-term debt averaged $11.0 million for the six months ended June 30, 2014 and $13.6 million during the same period in 2013 with an average rate of 0.89% for the first six months of 2014 and 1.41% for the same period in 2013. The maximum month end balance of these borrowings was $11.0 million and $26.0 million for the first six months of 2014 and 2013, respectively.

Capital Resources

Shareholders’ equity at June 30, 2014 was $44.6 million, representing an increase of $2.2 million from $42.4 million at December 31, 2013. The enhanced capital position is attributable to net income of $1.2 million for the six months ended June 30, 2014 and market volatility related to the investment securities portfolio resulting in a reduction of the net unrealized losses totaling $1.1 million. These increases were partially offset by preferred dividends paid of $240 thousand.

On February 20, 2009, First Priority issued 4,579 shares of First Priority’s Series A preferred stock and a warrant to purchase, on a net basis, 229 shares of First Priority’s Series B preferred stock, which was immediately exercised, for an aggregate purchase price of $4.6 million under the TARP CPP. On December 18, 2009, First Priority issued 4,596 shares of Series C preferred stock, $100.00 par value per share, having a liquidation preference of $1,000 per share, for an aggregate purchase price of $4.6 million.

First Priority Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Priority Bank’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Priority Bank must meet specific capital guidelines that involve quantitative measures of First Priority Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First Priority Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

First Priority Bank exceeds the minimum capital requirements established by regulatory agencies. Under the capital adequacy guidelines, capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity and qualifying preferred stock, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets plus trust preferred securities up to 25% of Tier 1 capital, with the excess being treated as Tier 2 capital. Tier 2 capital also consists of the allowance for loan losses, subject to certain limitations, and qualifying subordinated debt. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed inherent in the type of asset.

Quantitative measures established by regulation to ensure capital adequacy require First Priority Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets, known as the Tier 1 leverage ratio. Under the capital guidelines, First Priority Bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, First Priority Bank must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,” First Priority Bank must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

The following table sets forth First Priority Bank’s capital ratios at June 30, 2014 and December 31, 2013. For both periods, First Priority Bank was considered “well-capitalized” and met or exceeded its applicable regulatory requirements.

 

		To Be Considered "Well- Capitalized"				As of June 30, 2014				As of December 31, 2013
First Priority Bank:
Total risk-based capital			10.00	%			12.53	%			12.90	%
Tier 1 risk-based capital			6.00	%			11.87	%			12.19	%
Tier 1 leverage capital			5.00	%			9.49	%			9.48	%

 

53

---

Table of Contents

First Priority Bank’s total risk based capital ratio and its Tier 1 ratio declined during the period from December 31, 2013 to June 30, 2014 primarily due to a higher level of risk weighted assets primarily resulting from loan growth; partially offset by incremental regulatory capital resulting from earnings recorded during the current year.

In July 2013, the federal bank regulatory agencies adopted final rules to revise the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements are effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.

In December 2013, Federal banking regulators issued rules for complying with the Volcker Rule provision of the Dodd-Frank Act. The Bank does not engage in, and does not expect to engage in, any transactions that are considered “covered activities” as defined by the Volcker Rule. Therefore, the Bank does not have any additional compliance obligations under the Volcker Rule.

The Company and the Bank will continue to analyze these new rules and their effects on the business, operations and capital levels of the Company and the Bank.

Return on Average Equity and Assets

The following table shows the return on average assets (net income divided by total average assets), return on equity (net income divided by average equity), and the equity to assets ratio (average equity divided by total average assets) for the six months ended June 30, 2014 and 2013.

 

		At or for the six months ended June 30,
		2014				2013
Return on average assets			0.57	%			-0.32	%
Return on average equity			5.52	%			-2.95	%
Average equity to average assets ratio			10.23	%			10.89	%

Effect of Inflation and Changing Prices

The effect of relative purchasing power over time due to inflation has not been taken into effect in First Priority’s consolidated financial statements. Rather, the statements have been prepared on a historical cost basis in accordance with accounting principles generally accepted in the United States of America.

Unlike most industrial companies, the assets and liabilities of financial institutions, such as First Priority and First Priority Bank, are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on its performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. First Priority seeks to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

 

54

---

Table of Contents

Off-Balance Sheet Arrangements

Through the operations of First Priority Bank, First Priority has made contractual commitments to extend credit, in the ordinary course of its business activities, to meet the financing needs of customers. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized on the balance sheets. These commitments are legally binding agreements to lend money at predetermined interest rates for a specified period of time and generally have fixed expiration dates or other termination clauses. The same credit and collateral policies are used in making these commitments as for on-balance sheet instruments.

Commitments to extend credit 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. Each customer’s creditworthiness is evaluated on a case-by-case basis and collateral is obtained, if necessary, based on the credit evaluation of the borrower. The amount of collateral obtained, if deemed necessary by First Priority Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate accounts receivable, inventory and equipment.

At June 30, 2014 and December 31, 2013, outstanding commitments to extend credit consisting of total unfunded commitments under lines of credit were $73.8 million and $77.7 million, respectively. In addition, as of June 30, 2014 and December 31, 2013, there were $416 thousand and $1.3 million of performance standby letters of credit outstanding, respectively, and $1.7 million and $1.3 million of financial standby letters of credit, respectively. As of December 31, 2013, a pledge of a portion of the Bank’s investment securities was reserved as collateral related to one financial standby letter of credit issued through a correspondent bank for $512 thousand which is included in the amount reported above. This commitment was closed during the second quarter of 2014. First Priority believes that it has adequate sources of liquidity to fund commitments that may be drawn upon by borrowers.

In addition, as of June 30, 2014 and December 31, 2013 the Bank pledged $199 thousand of deposit balances at a correspondent bank to support a $199 thousand letter of credit issued by the correspondent on behalf of a customer of the Bank. This transaction is fully secured by the customer through a pledge of the customer’s deposits at the Bank.

First Priority is not involved in any other off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that could significantly impact earnings.

Liquidity

The objective of liquidity management is to assure that sufficient sources of funds are available, as needed and at a reasonable cost, to meet the ongoing and unexpected operational cash needs and commitments of First Priority and to take advantage of income producing opportunities as they arise. Sufficient liquidity must be available to meet the cash requirements of depositors wanting to withdraw funds and of borrowers wanting their credit needs met. Additionally, liquidity is needed to insure that First Priority has the ability to act at those times when profitable new lending and investment opportunities arise. While the desired level of liquidity may vary depending upon a variety of factors, it is a primary goal of First Priority to maintain adequate liquidity in all economic environments through active balance sheet management.

Liquidity management is the ongoing process of monitoring and managing First Priority’s sources and uses of funds. The primary sources of funds are deposits, scheduled amortization of loans outstanding, maturities and cash flow generated from the investment portfolio and funds provided by operations. Scheduled loan payments and investment maturities are relatively predictable sources of funds; however, deposit flows and loan prepayments are far less predictable and are influenced by the level of interest rates, economic conditions, local competition and customer preferences. Liquidity is also provided by unused lines of credit with correspondent banks and First Priority’s borrowing capacity at the FHLB. First Priority measures and monitors its liquidity position on an ongoing basis in order to better understand, predict and respond to balance sheet trends, unused borrowing capacity and liquidity needs. The liquidity position is managed on a daily basis as part of the daily settlement function and on an ongoing basis through the asset liability management function.

The key elements of First Priority’s liquidity planning process involve a primary focus on the development of a stable, core funding base; utilization of wholesale funding sources to supplement core funding; maintenance of an appropriate level of asset liquidity; management of the maturity structure of funding sources and of funding concentrations; and maintenance of borrowing facilities.

Wholesale funding sources utilized by First Priority Bank include brokered certificates of deposits, secured advances from the Federal Home Loan Bank of Pittsburgh, federal funds purchased and other secured borrowing facilities. At June 30, 2014, wholesale funding sources totaled $117.0 million and were comprised of $59.8 million of brokered certificates of deposit and $57.2 million of FHLB advances. At December 31, 2013, wholesale funding sources totaled $80.8 million and were comprised of $36.2 million of brokered certificates of deposit and $44.6 million of FHLB advances. Wholesale funding is generally used in managing the daily liquidity needs and when it is the most cost effective funding source available to First Priority. Management continually evaluates all available funding sources for cost and availability.

 

55

---

Table of Contents

An integral part of First Priority Bank’s balance sheet management strategy is to establish and maintain borrowing facilities with correspondent banks, for access to funding. Off balance sheet borrowing capacity provides the immediate availability of funds to meet short term financing needs without requiring the bank to maintain excess liquidity in its investment portfolio, which may have a negative impact on earnings. In today’s environment of historically low interest rates, it also provides the most effective longer term funding, in terms of the cost and structure. Long term borrowings from the FHLB cannot be called prior to maturity, which provides much greater protection against a rise in interest rates when compared to retail deposits which can be redeemed early by the depositor at lower than market rate penalties.

As of June 30, 2014 and December 31, 2013, First Priority Bank had a borrowing facility with a correspondent bank totaling $10 million, available for short-term limited purpose usage, of which $2 million is available unsecured. The remaining $8 million is a secured line of credit.

At June 30, 2014 and December 31, 2013, First Priority Bank had a total borrowing capacity with the FHLB of $119.6 million and $107 million, respectively, with advances outstanding against this capacity of $57.2 million and $44.6 million, respectively.

Short-term liquid assets held in interest-bearing deposit accounts with correspondent banks totaled $7.7 million at June 30, 2014 compared to $6.0 million at December 31, 2013.

Interest Rate Sensitivity

It is the responsibility of the board of directors and senior management to understand and control the interest rate risk exposures assumed by First Priority. The board has delegated authority to the asset liability management committee (“ALCO”) for the development of ALCO policies and for the management of the asset liability management function. The ALCO committee is comprised of senior management representing all primary functions of First Priority and meets monthly. ALCO has the responsibility for maintaining a level of interest rate risk exposures within board of director approved limits.

The primary objective of asset liability management is to optimize net interest income over time while maintaining a balance sheet mix that is prudent with respect to liquidity, capital adequacy and interest rate risk. The absolute level and volatility of interest rates can have a significant impact on the profitability of First Priority. Interest rate risk management is the process of identifying and controlling the potential adverse impact of interest rates movements on First Priority’s net interest income and on the fair value of its assets and liabilities.

One tool used to monitor interest rate risk is the measurement of its interest sensitivity “gap,” which is the positive or negative dollar difference between interest-earning assets and interest-bearing liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by changing the mix, pricing and repricing characteristics of its assets and liabilities, through management of its investment portfolio, loan and deposit product offerings, and through wholesale funding. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge interest rate risk and minimize the impact on net interest income of rising or falling interest rates. First Priority generally would benefit from increasing market rates of interest when it has an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when First Priority is liability-sensitive.

At June 30, 2014, First Priority was moderately liability sensitive at the one-year gap position, as it has more liabilities subject to repricing in the subsequent twelve month period than assets. It must be noted, however, that the gap analysis is not a precise indicator of First Priority’s exposure to changing interest rates. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally.

Furthermore, the results are influenced by management assumptions concerning the repricing characteristics of deposit products with no contractual maturities, the timing of the repricing of variable rate loans with interest rates currently fixed at interest rate floors, and prepayment speeds of loans and investments subject to prepayment prior to maturity. Additionally, net interest income performance may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest bearing liabilities.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Risk identification and management are essential elements for the successful management of First Priority. In the normal course of business, First Priority is subject to various types of risk, including interest rate, credit, and liquidity risk. First Priority controls and monitors these risks with policies, procedures, and various levels of managerial and board oversight. First Priority’s objective is to optimize profitability while managing and controlling risk within board approved policy limits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction, and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets and liabilities. First Priority uses its asset liability management policy to control and manage interest rate risk.

 

56

---

Table of Contents

Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as, the obligations to depositors and debt holders. First Priority uses its asset liability management policy and contingency funding plan to control and manage liquidity risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities, and entering into certain off-balance sheet loan funding commitments. First Priority’s primary credit risk occurs in the loan portfolio. First Priority uses its credit policy and disciplined approach to evaluating the adequacy of the allowance for loan losses to control and manage credit risk. First Priority’s investment policy limits the degree of the amount of credit risk that may be assumed in the investment portfolio. First Priority’s principal financial market risks are liquidity risks and exposures to interest rate movements.

 

Item 4.

Controls and Procedures

Under the supervision and with the participation of our management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of such period, these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a – 15(f) and 15d – 15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 

Item 1.

Legal Proceedings

A certain amount of litigation arises in the ordinary course of the business of First Priority and First Priority Bank. In the opinion of the management of First Priority, there are no proceedings pending to which First Priority or First Priority Bank is a party or to which their property is subject, that, if determined adversely to them, would be material in relation to First Priority’s shareholders’ equity or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of First Priority and First Priority Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against First Priority or First Priority Bank by governmental authorities.

 

Item 1A.

Risk Factors

Not Applicable

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

Not Applicable

 

Item 5.

Other Information

None.

 

57

---

Table of Contents

Item 6.

Exhibits

 

Exhibit No.		Title
3.1		Articles of Incorporation of First Priority Financial Corp. (incorporated by reference to Exhibit 3.1 to First Priority’s Registration Statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)
3.2		Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series A” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.3 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)
3.3		Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series B” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.4 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)
3.4		Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series C” of First Priority Financial Corp. (incorporated by reference to Exhibit 2.1 to First Priority’s Registration Statement No. 333-183118 on Form S-4 filed with the SEC on January 25, 2013)
3.5		Bylaws of First Priority Financial Corp. (incorporated by reference to Exhibit 3.2 to First Priority’s Registration Statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)
31.1		Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013, (iii) the Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and (v) the Condensed Notes to Consolidated Financial Statements.

 

58

---

Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

FIRST PRIORITY FINANCIAL CORP.
		(Registrant)
Dated: August 13, 2014				By		/s/ David E. Sparks
David E. Sparks,
Chairman and Chief Executive Officer
Dated: August 13, 2014				By		/s/ Mark J. Myers
Mark J. Myers,
Chief Financial Officer

 

59

---

Table of Contents

Exhibit Index

 

Exhibit No.		Title
3.1		Articles of Incorporation of First Priority Financial Corp. (incorporated by reference to Exhibit 3.1 to First Priority’s Registration Statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)
3.2		Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series A” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.3 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)
3.3		Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series B” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.4 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)
3.4		Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series C” of First Priority Financial Corp. (incorporated by reference to Exhibit 2.1 to First Priority’s Registration Statement No. 333-183118 on Form S-4 filed with the SEC on January 25, 2013)
3.5		Bylaws of First Priority Financial Corp. (incorporated by reference to Exhibit 3.2 to First Priority’s Registration Statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)
31.1		Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013, (iii) the Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and (v) the Condensed Notes to Consolidated Financial Statements.

 

60