UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 Or
 o
    
    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 333-147950
 First Priority Financial Corp.
  Pennsylvania
    
    20-8420347(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or
    
    Identification No.)organization)
 (Address, including zip code, of registrants principal executive offices)
 (Registrants telephone number, including area code)
 þ o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
 o þ




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FIRST PRIORITY FINANCIAL CORP.
 INDEX TO FORM 10-Q REPORT
 PageNo.Part I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2008 (unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Income   For the three months and nine months ended September 30, 2008 and 2007 (unaudited)
    
    
    4Consolidated Statements of Shareholders Equity  For the nine months ended September 30, 2008 and 2007 (unaudited)
    
    
    5Consolidated Statements of Cash Flows  For the nine months ended September 30, 2008 and 2007 (unaudited)
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    53Item 4T. Controls and Procedures
    
    
    53Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    54Item 1A. Risk Factors
    
    
    54Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 3. Defaults Upon Senior Securities
    
    
    54Item 4. Submission of Matters to a Vote of Security Holders
    
    
    54Item 5. Other Information
    
    
    54Item 6. Exhibits
    
    
    55
 2




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##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 First Priority Financial Corp.
 
 Consolidated Balance Sheets
 (In thousands, except per share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCash and due from banks
    
    $
    1,651
    
    
    $
    943Federal funds sold and securities purchased under agreements to resell
    
    
    19
    
    
    
    Interest bearing deposits in banks
    
    
    348
    
    
    
    Total cash and cash equivalents
    
    
    2,018
    
    
    
    943Securities available for sale (amortized cost: $29,926 and $45,015,
respectively)
    
    
    29,748
    
    
    
    45,026Loans receivable
    
    
    163,691
    
    
    
    105,207Less: allowance for loan losses
    
    
    1,709
    
    
    
    1,055Net Loans
    
    
    161,982
    
    
    
    104,152Restricted investments in bank stocks
    
    
    1,145
    
    
    
    50Premises and equipment, net
    
    
    1,366
    
    
    
    574Accrued interest receivable
    
    
    901
    
    
    
    545Goodwill
    
    
    1,194
    
    
    
    Other assets
    
    
    334
    
    
    
    321Total Assets
    
    $
    198,688
    
    
    $
    151,611Liabilities and Shareholders EquityLiabilitiesDeposits:Non-interest bearing
    
    $
    8,758
    
    
    $
    6,846Interest-bearing
    
    
    150,700
    
    
    
    109,459Total Deposits
    
    
    159,458
    
    
    
    116,305Short-term borrowings
    
    
    2,201
    
    
    
    18,097Long-term debt
    
    
    8,000
    
    
    
    390Accrued interest payable
    
    
    1,094
    
    
    
    858Other liabilities
    
    
    7,663
    
    
    
    641Total Liabilities
    
    
    178,416
    
    
    
    136,291Shareholders EquityPreferred stock, $100 par value; authorized 10,000 shares;
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $1 par value; authorized 10,000 shares;
3,123 and 2,108 shares issued and outstanding, respectively
    
    
    3,123
    
    
    
    2,108Surplus
    
    
    25,831
    
    
    
    18,982Accumulated deficit
    
    
    (8,504
    )
    
    
    (5,781
    )Accumulated other comprehensive income (loss)
    
    
    (178
    )
    
    
    11Total Shareholders Equity
    
    
    20,272
    
    
    
    15,320Total Liabilities and Shareholders Equity
    
    $
    198,688
    
    
    $
    151,611
 See notes to unaudited consolidated financial statements.
 3




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##### 



First Priority Financial Corp.
 
 Consolidated Statements of Income
 Unaudited (In thousands, except per share data)
 For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest IncomeLoans receivable, including fees
    
    $
    2,293
    
    
    $
    1,517
    
    
    $
    6,044
    
    
    $
    3,809Securities  taxable
    
    
    243
    
    
    
    98
    
    
    
    497
    
    
    
    415Interest bearing deposits and other
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    2Federal funds sold and securities
purchased under agreements to
resell
    
    
    6
    
    
    
    347
    
    
    
    232
    
    
    
    811Total Interest Income
    
    
    2,544
    
    
    
    1,962
    
    
    
    6,777
    
    
    
    5,037Interest ExpenseDeposits
    
    
    1,381
    
    
    
    1,220
    
    
    
    3,801
    
    
    
    3,012Short-term borrowings
    
    
    16
    
    
    
    2
    
    
    
    30
    
    
    
    11Other
    
    
    78
    
    
    
    5
    
    
    
    122
    
    
    
    5Total Interest Expense
    
    
    1,475
    
    
    
    1,227
    
    
    
    3,953
    
    
    
    3,028Net Interest Income
    
    
    1,069
    
    
    
    735
    
    
    
    2,824
    
    
    
    2,009Provision for Loan Losses
    
    
    127
    
    
    
    87
    
    
    
    520
    
    
    
    324Net Interest Income after
Provision for Loan Losses
    
    
    942
    
    
    
    648
    
    
    
    2,304
    
    
    
    1,685Non-Interest IncomeWealth management fee income
    
    
    47
    
    
    
    54
    
    
    
    136
    
    
    
    160Other
    
    
    39
    
    
    
    11
    
    
    
    100
    
    
    
    38Total Non-Interest Income
    
    
    86
    
    
    
    65
    
    
    
    236
    
    
    
    198Non-Interest ExpensesSalaries and employee benefits
    
    
    1,217
    
    
    
    808
    
    
    
    3,543
    
    
    
    2,394Occupancy and equipment
    
    
    200
    
    
    
    99
    
    
    
    505
    
    
    
    314Data processing equipment and operations
    
    
    90
    
    
    
    59
    
    
    
    254
    
    
    
    171Professional fees
    
    
    86
    
    
    
    90
    
    
    
    275
    
    
    
    321Marketing, advertising, and business
development
    
    
    61
    
    
    
    43
    
    
    
    156
    
    
    
    118FDIC insurance assessments
    
    
    30
    
    
    
    14
    
    
    
    83
    
    
    
    45Capital stock tax expense
    
    
    23
    
    
    
    12
    
    
    
    67
    
    
    
    35Merger integration costs
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    Other
    
    
    115
    
    
    
    86
    
    
    
    308
    
    
    
    251Total Non-Interest Expenses
    
    
    1,822
    
    
    
    1,211
    
    
    
    5,263
    
    
    
    3,649Net Loss
    
    $
    (794
    )
    
    $
    (498
    )
    
    $
    (2,723
    )
    
    $
    (1,766
    )Loss per shareBasic and diluted
    
    $
    (0.25
    )
    
    $
    (0.24
    )
    
    $
    (0.95
    )
    
    $
    (0.84
    )Weighted average shares outstandingBasic and diluted
    
    
    3,110
    
    
    
    2,108
    
    
    
    2,879
    
    
    
    2,108
 See notes to unaudited consolidated financial statements.
 4




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First Priority Financial Corp.
 
 Consolidated Statements of Shareholders Equity
 For the Nine Months Ended September 30, 2008 and 2007
 Unaudited (Dollars in thousands)
 AccumulatedOtherCommon
    
    
    
    
    
    
    Accumulated
    
    
    ComprehensiveStock
    
    
    Surplus
    
    
    Deficit
    
    
    Income (Loss)
    
    
    TotalBalance  December 31, 2006
    
    $
    2,108
    
    
    $
    18,934
    
    
    $
    (3,405
    )
    
    $
    1
    
    
    $
    17,638Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (1,766
    )
    
    
    
    
    
    
    (1,766
    )Net unrealized
holding
gain on
available for
sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Total
Comprehensive
Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,762
    )Stock options expense
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Balance  September 30,
2007
    
    $
    2,108
    
    
    $
    18,967
    
    
    $
    (5,171
    )
    
    $
    5
    
    
    $
    15,909Balance  December 31, 2007
    
    $
    2,108
    
    
    $
    18,982
    
    
    $
    (5,781
    )
    
    $
    11
    
    
    $
    15,320Issuance of common
stock for
acquisition of
Prestige Community
Bank (976,137
shares)
    
    
    976
    
    
    
    6,415
    
    
    
    
    
    
    
    
    
    
    
    7,391Issuance of common
stock for conversion
of subordinated
debentures (39,292
shares)
    
    
    39
    
    
    
    364
    
    
    
    
    
    
    
    
    
    
    
    403Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (2,723
    )
    
    
    
    
    
    
    (2,723
    )Net
unrealized
holding loss
on available
for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (189
    )
    
    
    (189
    )Total
Comprehensive
Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,912
    )Stock options expense
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    70Balance  September
30, 2008
    
    $
    3,123
    
    
    $
    25,831
    
    
    $
    (8,504
    )
    
    $
    (178
    )
    
    $
    20,272
 See notes to unaudited consolidated financial statements.
 5




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##### 



First Priority Financial Corp.
 
 Consolidated Statements of Cash Flows
 Unaudited (Dollars in thousands)
 For the nine months endedSeptember 30,2008
    
    
    2007Cash Flows from Operating ActivitiesNet loss
    
    $
    (2,723
    )
    
    $
    (1,766
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Provision for loan losses
    
    
    520
    
    
    
    324Depreciation and amortization
    
    
    163
    
    
    
    89Net accretion and amortization of securities discounts and premiums
    
    
    (2
    )
    
    
    (140
    )Stock based compensation expense
    
    
    70
    
    
    
    33Increase in accrued interest receivable
    
    
    (356
    )
    
    
    (232
    )(Increase) decrease in other assets
    
    
    38
    
    
    
    (80
    )Increase in accrued interest payable
    
    
    215
    
    
    
    533Increase (decrease) in other liabilities
    
    
    (813
    )
    
    
    1,995Net Cash Provided by (Used in) Operating Activities
    
    
    (2,888
    )
    
    
    756Cash Flows from Investing ActivitiesNet increase in loans
    
    
    (52,654
    )
    
    
    (38,590
    )Purchases of securities available for sale
    
    
    (62,032
    )
    
    
    (108,866
    )Purchase of restricted stock
    
    
    (1,095
    )
    
    
    Proceeds from maturities of securities available for sale
    
    
    84,122
    
    
    
    154,000Purchases of premises and equipment
    
    
    (148
    )
    
    
    (271
    )Net cash received from acquisition
    
    
    21,844
    
    
    
    Net Cash Provided by (Used in) Investing Activities
    
    
    (9,963
    )
    
    
    6,273Cash Flows from Financing ActivitiesNet increase in deposits
    
    
    22,305
    
    
    
    41,814Net decrease in short-term borrowings
    
    
    (16,379
    )
    
    
    (22,811
    )Proceeds from the issuance of long-term debt
    
    
    8,000
    
    
    
    380Net Cash Provided by Financing Activities
    
    
    13,926
    
    
    
    19,383Net Increase in Cash and Cash Equivalents
    
    
    1,075
    
    
    
    26,412Cash and Cash Equivalents  Beginning
    
    
    943
    
    
    
    1,984Cash and Cash Equivalents  Ending
    
    $
    2,018
    
    
    $
    28,396Supplementary Disclosures of Cash Flows InformationNoncash activity:Trade date accounting for investment securities purchases
    
    $
    7,000
    
    
    $
    Conversion of subordinated debentures to common stock
    
    $
    403
    
    
    $
    Cash paid during year for interest on deposits and borrowings
    
    $
    4,052
    
    
    $
    2,495
 See notes to unaudited consolidated financial statements.
 6




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Notes to Unaudited Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies
 Organization and Nature of Operations
 First Priority Financial Corp.
     7




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Note 1  Summary of Significant Accounting Policies (continued)
 First Priority Bank
    Basis of Presentation
   8




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Note 1  Summary of Significant Accounting Policies (continued)
  Goodwill
   Recent Accounting Pronouncements
 FASB Statement No. 141(R)
  FASB Statement No. 159
  9




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Note 1  Summary of Significant Accounting Policies (continued)
   FASB Statement No. 162
  FSP FAS 140-3
  FASB Staff Position (FSP) 157-3
 " Fair Value Measurements,
 10




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Note 1  Summary of Significant Accounting Policies (continued)
 FSP APB 14-1
  SAB 109
  SAB 110
  11




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Note 2  Acquisition of Prestige Community Bank
     12




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Note 2  Acquisition of Prestige Community Bank (continued)
 Balance Sheet AcquiredFebruary 29, 2008(Dollars in thousands)AssetsCash and cash equivalents
    
    $
    22,184Loans receivable
    
    
    5,830Less: allowance for loan losses
    
    
    150Net Loans
    
    
    5,680Other assets
    
    
    1,071Total Assets
    
    
    28,935LiabilitiesNon-interest bearing deposits
    
    
    1,379Interest-bearing deposits
    
    
    19,470Short-term borrowings
    
    
    483Other liabilities
    
    
    212Total Liabilities
    
    
    21,544Net Assets Acquired
    
    $
    7,391
  Pro Forma

Nine months endedSeptember 30, 2008(Dollars in thousands)Total revenue
    
    $
    3,051Net loss
    
    
    (3,319
    )Basic and diluted loss per share
    
    
    (1.07
    )
 13




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Note 2  Acquisition of Prestige Community Bank (continued)
      14




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Note 2  Acquisition of Prestige Community Bank (continued)
  (Dollars in thousands)Purchase Price:Net assets acquired
    
    $
    7,391Transaction costs
    
    
    320Total purchase price
    
    
    7,711Net Assets Acquired:Seller shareholders equity
    
    
    7,524Estimated adjustments to reflect assets acquired at fair value:Loans (2.5 years weighted average life)
    
    
    28Estimated amount allocated to liabilities assumed at fair value:Time deposits (0.4 year weighted average life)
    
    
    (161
    )Fair value of net assets acquired
    
    
    7,391Estimated adjustment for contract termination costs and other purchase
accounting adjustments
    
    
    874Goodwill Resulting from Acquisition
    
    $
    1,194
  Note 3  Stock Option Plan
  15




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Note 3  Stock Option Plan (continued)
     WeightedAverageExerciseShares
    
    
    PriceOutstanding at December 31, 2007
    
    
    421,000
    
    
    $
    10.00Granted during 2008
    
    
    52,950
    
    
    
    10.25Options exchanged  Prestige acquisition
    
    
    147,022
    
    
    
    10.00Forfeited/cancelled during period
    
    
    (81,222
    )
    
    
    10.00Outstanding at September 30, 2008
    
    
    539,750
    
    
    $
    10.02Exercisable at September 30, 2008
    
    
    117,000
    
    
    $
    10.00
  16




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Note 3  Stock Option Plan (continued)
  Granted in2008Dividend yield
    
    
    0.0
    %Expected life
    
    7 yearsExpected volatility
    
    
    25
    %Risk-free interest rate
    
    
    2.93
    %Weighted average fair value
    
    $
    3.46
    Note 4Earnings Per Share
   17




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Note 4Earnings Per Share (continued)
 For the three months
    
    For the nine monthsended September 30,
    
    ended September 30,2008
    
    2007
    
    2008
    
    2007(In thousands, except per share information)Basic and diluted loss per shareNet loss
    
    $
    (794
    )
    
    $
    (498
    )
    
    $
    (2,723
    )
    
    $
    (1,766
    )Weighted average common shares outstanding
    
    
    3,110
    
    
    
    2,108
    
    
    
    2,879
    
    
    
    2,108Basic and diluted loss per share
    
    $
    (0.25
    )
    
    $
    (0.24
    )
    
    $
    (0.95
    )
    
    $
    (0.84
    )
 Note 5  Financial Instruments with Off-Balance Sheet Risk
     Note 6  Short-Term Borrowings
  18




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##### 



Note 6  Short-Term Borrowings (continued)
    Note 7  Long-Term Debt
     19




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##### 



Note 8  Fair Value of Financial Instruments
       20




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##### 



Note 8  Fair Value of Financial Instruments (continued)
 Fair Value MeasurementsAt September 30, 2008, UsingQuoted Prices inActiveMarkets for
    
    
    Other
    
    
    SignificantFair Value
    
    
    Identical
    
    
    Observable
    
    
    UnobservableSeptember
    
    
    Assets
    
    
    Inputs
    
    
    Inputs30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available for Sale Securities
    
    $
    29,748
    
    
    $
    
    
    
    $
    29,748
    
    
    $
    Total Assets Measured at Fair Value
    
    $
    29,748
    
    
    $
    
    
    
    $
    29,748
    
    
    $
    
 Note 9  Subsequent Event
  21




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Forward-Looking Statements
   
    
    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;
 22




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##### 




    
    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; and
    
    First Prioritys success in managing the risks involved in the foregoing.
  Overview
   23




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##### 



24




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##### 



Critical Accounting Policies
      25




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##### 



Recently Issued Accounting Standards
  26




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##### 



Results of Operations
 Income Statement Review
  Summary
     27




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##### 



Net Interest Income
    28




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##### 



Average Balances, Income and Expenses, and Rates
 For the Three Months Ended September 30,2008
    
    
    2007Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate(Dollars in thousands)Interest-earning assets:Loans receivable
    
    $
    155,566
    
    
    $
    2,293
    
    
    
    5.86
    %
    
    $
    81,476
    
    
    $
    1,517
    
    
    
    7.39
    %Securities available for sale
    
    
    24,469
    
    
    
    243
    
    
    
    3.95
    %
    
    
    7,251
    
    
    
    98
    
    
    
    5.35
    %Federal funds sold
    
    
    1,364
    
    
    
    6
    
    
    
    1.94
    %
    
    
    26,996
    
    
    
    347
    
    
    
    5.11
    %Deposits with banks and other
    
    
    42
    
    
    
    2
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    6.73
    %Total interest earning assets
    
    
    181,441
    
    
    
    2,544
    
    
    
    5.58
    %
    
    
    115,728
    
    
    
    1,962
    
    
    
    6.73
    %Non-interest-earning assets
    
    
    4,544
    
    
    
    
    
    
    
    
    
    
    
    1,390TOTAL ASSETS
    
    $
    185,985
    
    
    
    
    
    
    
    
    
    
    $
    117,118Interest-bearing liabilities:Demand, interest-bearing
    
    $
    1,150
    
    
    
    4
    
    
    
    1.43
    %
    
    $
    871
    
    
    
    6
    
    
    
    2.58
    %Money market and savings
    
    
    34,411
    
    
    
    252
    
    
    
    2.92
    %
    
    
    45,474
    
    
    
    566
    
    
    
    4.94
    %Time deposits
    
    
    109,749
    
    
    
    1,125
    
    
    
    4.08
    %
    
    
    48,466
    
    
    
    648
    
    
    
    5.31
    %Borrowed funds
    
    
    10,888
    
    
    
    94
    
    
    
    3.40
    %
    
    
    517
    
    
    
    7
    
    
    
    5.26
    %Total interest-bearing liabilities
    
    
    156,198
    
    
    
    1,475
    
    
    
    3.76
    %
    
    
    95,328
    
    
    
    1,227
    
    
    
    5.11
    %Non interest-bearing liabilities:Demand, non-interest bearing
deposits
    
    
    7,377
    
    
    
    
    
    
    
    
    
    
    
    4,412Other liabilities
    
    
    1,775
    
    
    
    
    
    
    
    
    
    
    
    1,230Shareholders equity
    
    
    20,635
    
    
    
    
    
    
    
    
    
    
    
    16,148TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    185,985
    
    
    
    
    
    
    
    
    
    
    $
    117,118Net interest income/rate spread
    
    
    
    
    
    $
    1,069
    
    
    
    1.82
    %
    
    
    
    
    
    $
    735
    
    
    
    1.62
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.35
    %
    
    
    
    
    
    
    
    
    
    
    2.52
    %
   29




---



##### 



Average Balances, Income and Expenses, and Rates
 For the Nine months Ended September 30,2008
    
    
    2007Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate(Dollars in thousands)Interest-earning assets:Loans receivable
    
    $
    132,399
    
    
    $
    6,044
    
    
    
    6.10
    %
    
    $
    68,018
    
    
    $
    3,809
    
    
    
    7.49
    %Securities available for sale
    
    
    16,495
    
    
    
    497
    
    
    
    4.03
    %
    
    
    10,329
    
    
    
    415
    
    
    
    5.37
    %Federal funds sold
    
    
    11,107
    
    
    
    232
    
    
    
    2.80
    %
    
    
    20,880
    
    
    
    811
    
    
    
    5.20
    %Deposits with banks and other
    
    
    41
    
    
    
    4
    
    
    
    
    
    
    
    35
    
    
    
    2
    
    
    
    Total interest earning assets
    
    
    160,042
    
    
    
    6,777
    
    
    
    5.66
    %
    
    
    99,262
    
    
    
    5,037
    
    
    
    6.79
    %Non-interest-earning assets
    
    
    3,389
    
    
    
    
    
    
    
    
    
    
    
    1,301TOTAL ASSETS
    
    $
    163,431
    
    
    
    
    
    
    
    
    
    
    $
    100,563Interest-bearing liabilities:Demand, interest-bearing
    
    $
    1,130
    
    
    
    13
    
    
    
    1.56
    %
    
    $
    840
    
    
    
    14
    
    
    
    2.19
    %Money market and savings
    
    
    38,361
    
    
    
    850
    
    
    
    2.96
    %
    
    
    38,395
    
    
    
    1,428
    
    
    
    4.97
    %Time deposits
    
    
    89,826
    
    
    
    2,938
    
    
    
    4.37
    %
    
    
    39,607
    
    
    
    1,570
    
    
    
    5.30
    %Borrowed funds
    
    
    5,948
    
    
    
    152
    
    
    
    3.41
    %
    
    
    390
    
    
    
    16
    
    
    
    5.53
    %Total interest-bearing liabilities
    
    
    135,265
    
    
    
    3,953
    
    
    
    3.90
    %
    
    
    79,232
    
    
    
    3,028
    
    
    
    5.11
    %Non interest-bearing liabilities:Demand, non-interest bearing
deposits
    
    
    6,515
    
    
    
    
    
    
    
    
    
    
    
    3,674Other liabilities
    
    
    1,860
    
    
    
    
    
    
    
    
    
    
    
    887Shareholders equity
    
    
    19,791
    
    
    
    
    
    
    
    
    
    
    
    16,770TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    163,431
    
    
    
    
    
    
    
    
    
    
    $
    100,563Net interest income/rate spread
    
    
    
    
    
    $
    2,824
    
    
    
    1.76
    %
    
    
    
    
    
    $
    2,009
    
    
    
    1.68
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.36
    %
    
    
    
    
    
    
    
    
    
    
    2.71
    %
 30




---



##### 



Analysis of Changes in Net Interest Income
    31




---



##### 



Changes in Net Interest IncomeThree months ended September
    
    Nine months ended September 30,30, 2008 vs. September 30, 2007
    
    2008 vs. September 30, 2007Increase (Decrease)
    
    Increase (Decrease)Due to Change In
    
    Due to Change InNet
    
    
    
    
    
    
    
    
    
    NetVolume
    
    Rate
    
    Change
    
    Volume
    
    Rate
    
    Change(in thousands)
    
    (in thousands)Interest income:Loans receivable
    
    $
    1,142
    
    
    $
    (366
    )
    
    $
    776
    
    
    $
    3,052
    
    
    $
    (817
    )
    
    $
    2,235Securities available for sale
    
    
    177
    
    
    
    (32
    )
    
    
    145
    
    
    
    204
    
    
    
    (122
    )
    
    
    82Federal funds sold
    
    
    (206
    )
    
    
    (135
    )
    
    
    (341
    )
    
    
    (291
    )
    
    
    (288
    )
    
    
    (579
    )Deposits with banks and other
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    2Total interest earning assets
    
    
    1,114
    
    
    
    (532
    )
    
    
    582
    
    
    
    2,965
    
    
    
    (1,225
    )
    
    
    1,740Interest expense:Demand, interest-bearing
    
    
    1
    
    
    
    (3
    )
    
    
    (2
    )
    
    
    4
    
    
    
    (5
    )
    
    
    (1
    )Money market and savings
    
    
    (117
    )
    
    
    (197
    )
    
    
    (314
    )
    
    
    (1
    )
    
    
    (577
    )
    
    
    (578
    )Time deposits
    
    
    656
    
    
    
    (179
    )
    
    
    477
    
    
    
    1,687
    
    
    
    (319
    )
    
    
    1,368Borrowed funds
    
    
    90
    
    
    
    (3
    )
    
    
    87
    
    
    
    145
    
    
    
    (9
    )
    
    
    136Total interest bearing liabilities
    
    
    630
    
    
    
    (382
    )
    
    
    248
    
    
    
    1,835
    
    
    
    (910
    )
    
    
    925Change in net interest income
    
    $
    484
    
    
    $
    (150
    )
    
    $
    334
    
    
    $
    1,130
    
    
    $
    (315
    )
    
    $
    815
 Provision for Loan Losses
    32




---



##### 



Non-Interest Income
  For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Non-Interest IncomeWealth management fee income
    
    $
    47
    
    
    $
    54
    
    
    $
    136
    
    
    $
    160Service charges on deposits
    
    
    11
    
    
    
    3
    
    
    
    23
    
    
    
    9Other branch fees
    
    
    7
    
    
    
    3
    
    
    
    21
    
    
    
    9Loan related fees
    
    
    20
    
    
    
    4
    
    
    
    50
    
    
    
    12Other
    
    
    1
    
    
    
    1
    
    
    
    6
    
    
    
    8Total Non-Interest Income
    
    $
    86
    
    
    $
    65
    
    
    $
    236
    
    
    $
    198
  33




---



##### 



Non-Interest Expenses
   For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Non-Interest ExpensesSalaries and employee benefits
    
    $
    1,217
    
    
    $
    808
    
    
    $
    3,543
    
    
    $
    2,394Occupancy and equipment
    
    
    200
    
    
    
    99
    
    
    
    505
    
    
    
    314Data processing equipment and
operations
    
    
    90
    
    
    
    59
    
    
    
    254
    
    
    
    171Professional fees
    
    
    86
    
    
    
    90
    
    
    
    275
    
    
    
    321Marketing, advertising and
business development
    
    
    61
    
    
    
    43
    
    
    
    156
    
    
    
    118FDIC deposit insurance assessments
    
    
    30
    
    
    
    14
    
    
    
    83
    
    
    
    45Capital stock tax expense
    
    
    23
    
    
    
    12
    
    
    
    67
    
    
    
    35Merger integration costs
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    Other
    
    
    115
    
    
    
    86
    
    
    
    308
    
    
    
    251Total Non-Interest Expenses
    
    $
    1,822
    
    
    $
    1,211
    
    
    $
    5,263
    
    
    $
    3,649
  34




---



##### 



35




---



##### 



Provision for Income Taxes
  36




---



##### 



Financial Condition
 Balance Sheet Review
 Overview
    Investments
  37




---



##### 



As of September 30, 2008After one but
    
    After five butWithin 1 year
    
    within five years
    
    within ten years
    
    Over ten years
    
    TotalAmount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield(Dollars in thousands)U.S. Government
agency securities
    
    $
    4,984
    
    
    
    2.69
    %
    
    $
    13,005
    
    
    
    3.64
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    17,989
    
    
    
    3.37
    %Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936
    
    
    
    4.75
    %
    
    
    9,896
    
    
    
    5.07
    %
    
    
    10,832
    
    
    
    5.04
    %Other securities
    
    
    
    
    
    
    
    
    
    
    927
    
    
    
    4.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    927
    
    
    
    4.00
    %Total investments
available for sale
    
    $
    4,984
    
    
    
    2.69
    %
    
    $
    13,932
    
    
    
    3.66
    %
    
    $
    936
    
    
    
    4.75
    %
    
    $
    9,896
    
    
    
    5.07
    %
    
    $
    29,748
    
    
    
    4.00
    %
 As of December 31, 2007After one but
    
    After five butWithin 1 year
    
    within five years
    
    within ten years
    
    Over ten years
    
    TotalAmount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield(Dollars in thousands)U.S. Government
agency securities
    
    $
    38,995
    
    
    
    3.54
    %
    
    $
    2,003
    
    
    
    5.13
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    40,998
    
    
    
    3.62
    %Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028
    
    
    
    5.26
    %
    
    
    4,028
    
    
    
    5.26
    %Total investments
available for sale
    
    $
    38,995
    
    
    
    3.54
    %
    
    $
    2,003
    
    
    
    5.13
    %
    
    $
    
    
    
    
    
    
    
    $
    4,028
    
    
    
    5.26
    %
    
    $
    45,026
    
    
    
    3.76
    %
  September 30, 2008
    
    
    December 31, 2007Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value(Dollars in thousands)U.S. Government
agency securities
    
    $
    18,000
    
    
    $
    17,989
    
    
    $
    40,995
    
    
    $
    40,998Mortgage-backed
securities
    
    
    10,926
    
    
    
    10,832
    
    
    
    4,020
    
    
    
    4,028Other securities
    
    
    1,000
    
    
    
    927
    
    
    
    
    
    
    
    Total Investments
    
    $
    29,926
    
    
    $
    29,748
    
    
    $
    45,015
    
    
    $
    45,026
 Restricted investments in bank stocks
  38




---



##### 



Loans
   September 30, 2008
    
    December 31, 2007Percent
    
    
    
    
    
    PercentAmount
    
    of total
    
    Amount
    
    of total(Dollars in thousands)Commercial
    
    $
    45,887
    
    
    
    28
    %
    
    $
    33,506
    
    
    
    32
    %Commercial Real Estate
    
    
    46,548
    
    
    
    28
    %
    
    
    24,590
    
    
    
    23
    %Residential Real Estate
    
    
    37,105
    
    
    
    23
    %
    
    
    23,708
    
    
    
    23
    %Consumer
    
    
    34,117
    
    
    
    21
    %
    
    
    23,310
    
    
    
    22
    %Total Loans
    
    
    163,657
    
    
    
    100
    %
    
    
    105,114
    
    
    
    100
    %Net deferred loan costs
    
    
    34
    
    
    
    
    
    
    
    93
    
    
    
    Total
    
    $
    163,691
    
    
    
    100
    %
    
    $
    105,207
    
    
    
    100
    %
   39




---



##### 



At September 30, 2008Maturities of Outstanding LoansAfter 1 ButWithin 1
    
    Within 5
    
    After 5Year
    
    Years
    
    Years
    
    Total Loans(Dollars in thousands)Commercial
    
    $
    30,840
    
    
    $
    12,453
    
    
    $
    2,594
    
    
    $
    45,887Commercial Real Estate
    
    
    9,434
    
    
    
    24,912
    
    
    
    12,202
    
    
    
    46,548Residential Real Estate
    
    
    626
    
    
    
    11,300
    
    
    
    25,179
    
    
    
    37,105Consumer
    
    
    11,965
    
    
    
    5,975
    
    
    
    16,177
    
    
    
    34,117Total Loans
    
    $
    52,865
    
    
    $
    54,640
    
    
    $
    56,152
    
    
    $
    163,657Percentage composition of maturity
    
    
    32
    %
    
    
    34
    %
    
    
    34
    %
    
    
    100
    %Loans with fixed predetermined interest rates
    
    $
    6,986
    
    
    $
    39,763
    
    
    $
    8,720
    
    
    $
    55,469Loans with variable or floating interest rates
    
    
    45,879
    
    
    
    14,877
    
    
    
    47,432
    
    
    
    108,188Total Loans
    
    $
    52,865
    
    
    $
    54,640
    
    
    $
    56,152
    
    
    $
    163,657
 40




---



##### 



At December 31, 2007Maturities of Outstanding LoansAfter 1 ButWithin 1
    
    Within 5
    
    After 5Year
    
    Years
    
    Years
    
    Total Loans(Dollars in thousands)Commercial
    
    $
    21,387
    
    
    $
    12,069
    
    
    $
    50
    
    
    $
    33,506Commercial Real Estate
    
    
    3,371
    
    
    
    14,306
    
    
    
    6,913
    
    
    
    24,590Residential Real Estate
    
    
    832
    
    
    
    10,751
    
    
    
    12,125
    
    
    
    23,708Consumer
    
    
    8,478
    
    
    
    3,614
    
    
    
    11,218
    
    
    
    23,310Total Loans
    
    $
    34,068
    
    
    $
    40,740
    
    
    $
    30,306
    
    
    $
    105,114Percentage composition of maturity
    
    
    32
    %
    
    
    39
    %
    
    
    29
    %
    
    
    100
    %Loans with fixed predetermined interest rates
    
    $
    2,330
    
    
    $
    35,678
    
    
    $
    5,602
    
    
    $
    43,610Loans with variable or floating interest rates
    
    
    31,738
    
    
    
    5,062
    
    
    
    24,704
    
    
    
    61,504Total Loans
    
    $
    34,068
    
    
    $
    40,740
    
    
    $
    30,306
    
    
    $
    105,114
 Credit Quality
   41




---



##### 



September 30,
    
    
    December 31,
    
    
    September 30,2008
    
    
    2007
    
    
    2007(Dollars in thousands)Loans past due 90 days or more and still accruing
interest
    
    $
    
    
    
    $
    
    
    
    $
    Non-accrual loans
    
    
    709
    
    
    
    
    
    
    
    Total non-performing loans (1)
    
    
    709
    
    
    
    
    
    
    
    Other real estate owned
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets (2)
    
    $
    709
    
    
    $
    
    
    
    $
    Non-performing loans as a percentage of total loans
    
    
    0.43
    %
    
    
    
    
    
    
    Non-performing assets as a percentage of total
assets
    
    
    0.36
    %
    
    
    
    
    
    
    Ratio of allowance to non-performing loans at end
of period
    
    
    241
    %
    
    
    
    
    
    
    Ratio of allowance to non-performing assets at end
of period
    
    
    241
    %
    
    
    
    
    
    
    Allowance for loan losses as a percentage of total
loans
    
    
    1.04
    %
    
    
    1.00
    %
    
    
    1.07
    %
 
 (1)
    
    Non-performing loans are comprised of (i) loans that are on a non-accrual basis; (ii) accruing loans that are
90 days or more past due and (iii) restructured loans.(2)
    
    Non-performing assets are comprised of non-performing loans and other real estate owned (assets acquired in
foreclosure).   42




---



##### 



Allowance for Loan Losses
     43




---



##### 



For the three months
    
    
    For the nine monthsended September 30,
    
    
    ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at the beginning of period
    
    $
    1,582
    
    
    $
    871
    
    
    $
    1,055
    
    
    $
    634Charge-offs:Commercial
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    Net loans charged off
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    Acquired reserve in business
combination
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    Provision charged to operations
    
    
    127
    
    
    
    87
    
    
    
    520
    
    
    
    324Balance at end of period
    
    $
    1,709
    
    
    $
    958
    
    
    $
    1,709
    
    
    $
    958Average loans (1)
    
    $
    155,566
    
    
    $
    81,476
    
    
    $
    132,399
    
    
    $
    68,018Ratio of net charge-offs during
period to average loans
outstanding during period
(annualized) (1)
    
    
    
    
    
    
    
    
    
    
    0.02
    %
    
    
    Allowance for loan losses as a
percentage of total loans
    
    
    1.04
    %
    
    
    1.07
    %
    
    
    1.04
    %
    
    
    1.07
    %
 
 (1)
    
    Includes non-accrual loans  44




---



##### 



September 30, 2008
    
    
    December 31, 2007
    
    
    September 30, 2007Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofloans in
    
    
    
    
    
    
    loans in
    
    
    
    
    
    
    loans ineach
    
    
    
    
    
    
    each
    
    
    
    
    
    
    eachcategory to
    
    
    
    
    
    
    category to
    
    
    
    
    
    
    category toAmount
    
    
    total loans
    
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loans(Dollars in thousands)Commercial
    
    $
    588
    
    
    
    28
    %
    
    $
    94
    
    
    
    32
    %
    
    $
    71
    
    
    
    28
    %Commercial Real Estate
    
    
    243
    
    
    
    28
    %
    
    
    81
    
    
    
    23
    %
    
    
    65
    
    
    
    22
    %Residential Real Estate
    
    
    165
    
    
    
    23
    %
    
    
    43
    
    
    
    23
    %
    
    
    42
    
    
    
    26
    %Consumer
    
    
    56
    
    
    
    21
    %
    
    
    39
    
    
    
    22
    %
    
    
    36
    
    
    
    24
    %Total Allocated
    
    
    1,052
    
    
    
    100
    %
    
    
    257
    
    
    
    100
    %
    
    
    214
    
    
    
    100
    %Unallocated
    
    
    657
    
    
    
    
    
    
    
    798
    
    
    
    
    
    
    
    744Total
    
    $
    1,709
    
    
    
    
    
    
    $
    1,055
    
    
    
    
    
    
    $
    958
  Loan Concentrations
  Deposits
  45




---



##### 



September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Demand, non-interest bearing
    
    $
    8,758
    
    
    $
    6,846Demand, interest bearing
    
    
    863
    
    
    
    1,486Money market and savings deposits
    
    
    33,320
    
    
    
    45,403Time
    
    
    116,517
    
    
    
    62,570Total interest bearing deposits
    
    
    150,700
    
    
    
    109,459Total deposits
    
    $
    159,458
    
    
    $
    116,305
  September 30,2008(In thousands)Three Months or Less
    
    $
    7,897Over Three Through Nine months
    
    
    5,810Over Six Through Twelve Months
    
    
    8,371Over Twelve Months
    
    
    9,495Total time deposits of $100,000 or more
    
    $
    31,573
 46




---



##### 



Other Interest-Bearing Liabilities
 Short-Term Borrowed Funds
     Long-Term Debt
    47




---



##### 



Capital Resources
  Long-Term Debt
   48




---



##### 



To BeAs of
    
    As of
    
    ConsideredSeptember 30,
    
    December 31,
    
    Well-2008
    
    2007
    

CapitalizedFirst Priority Bank:Total risk-based capital ratio
    
    
    13.56
    %
    
    
    16.01
    %
    
    
    10.00
    %Tier 1 risk-based capital ratio
    
    
    12.43
    %
    
    
    14.98
    %
    
    
    6.00
    %Tier 1 leverage ratio
    
    
    10.26
    %
    
    
    12.30
    %
    
    
    8.00
    %
  49




---



##### 



Effect of Inflation and Changing Prices
  50




---



##### 



Off-Balance Sheet Arrangements
    Liquidity
  51




---



##### 



Contractual Obligations
    52




---



##### 



Payments Due by PeriodOver 1
    
    Over 2
    
    Over 3Within 1
    
    through 2
    
    through 3
    
    through 5
    
    Over 5Year
    
    Years
    
    Years
    
    Years
    
    Years
    
    Total(In thousands)Time deposits
    
    $
    80,524
    
    
    $
    12,775
    
    
    $
    17,041
    
    
    $
    6,177
    
    
    $
    
    
    
    $
    116,517Operating lease obligations
    
    
    459
    
    
    
    459
    
    
    
    459
    
    
    
    918
    
    
    
    2,832
    
    
    
    5,127Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    8,000Short-term borrowings
    
    
    2,201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,201Accrued interest payable
    
    
    1,094
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,094Total
    
    $
    84,278
    
    
    $
    13,234
    
    
    $
    17,500
    
    
    $
    15,095
    
    
    $
    2,832
    
    
    $
    132,939
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4T. Controls and Procedures
   53




---



##### 



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  54




---



##### 



Item 6. Exhibits.
 Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of First Priority Financial Corp.
(incorporated by reference to Exhibit 3.1 to the Companys
registration statement on Form S-4, SEC File No. 333-147950.)3.2
    
    Bylaws of First Priority Financial Corp. (incorporated by
reference to Exhibit 3.2 to the Companys registration
statement on Form S-4, SEC File No. 333-147950.)31.1
    
    Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
 55




---



##### 



SIGNATURES
  FIRST PRIORITY FINANCIAL CORP.
(Registrant)Date: November 13, 2008
    By:
    /s/ David E. SparksDavid E. Sparks,Chairman, President and Chief Executive Officer Date: November 13, 2008
    By:
    /s/ Lawrence E. DonatoLawrence E. Donato,Chief Financial Officer 56