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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 or
 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:
 
 FIRST PRIORITY FINANCIAL CORP.
  Pennsylvania
(State or other jurisdiction of 
incorporation or organization)
    
    20-8420347
(I.R.S. Employer Identification No.)
 
 
 
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act:
  
 Yes o No þ
 þ o
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ
   Class
    
    Number of SharesCommon Stock, $1.00 par value
    
    3,122,929
 DOCUMENTS INCORPORATED BY REFERENCE




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(ii)




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##### 



FIRST PRIORITY FINANCIAL CORP.

FORM 10-K

INDEX
 Page No.Part IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    11Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11Part IIItem 5. Market for Registrants Common Equity and Related
Stockholder Matters
    
    
    12Item 6. Selected Financial Data
    
    
    13Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
    
    
    47Item 8. Financial Statements and Supplementary Data
    
    
    48Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
    
    
    93Item 9A(T). Controls and Procedures
    
    
    93Item 9B. Other Information
    
    
    93Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    93Item 11. Executive Compensation
    
    
    93Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    94Item 13. Certain Relationships and Related Transactions, and
Director Independence
    
    
    94Item 14. Principal Accounting Fees and Services
    
    
    94Part IVItem 15. Exhibits, Financial Statement Schedules
    
    
    94Signatures
    
    
    97Exhibit 3.3Exhibit 3.4Exhibit 4.1Exhibit 10.6Exhibit 10.7Exhibit 21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   (iii)




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A CAUTION ABOUT 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;
 
    
    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;
 
  (iv)




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
    
    the nature, extent, and timing of governmental actions and reforms, including the rules
of participation for the Trouble Asset Relief Program (TARP) voluntary Capital Purchase
Program under the Emergency Economic Stabilization Act of 2008, which may be changed
unilaterally and retroactively by legislative or regulatory actions;
 
    
    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.
   (v)




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PART I
 
 Item 1. Business
 First Priority Financial Corp.
  First Priority Bank
     1




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Competition
      2




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Regulation
    Insurance of Deposits
   3




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Capital Adequacy Guidelines
        4




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Federal Home Loan Bank System
   Emergency Economic Stabilization Act of 2008
    5




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Financial Stability Plan
  American Recovery and Reinvestment Act of 2009
   
    
    limits on compensation incentives by senior executive officers;
 
    
    a requirement for recovery of any compensation paid based on inaccurate financial
information;
 
    
    a prohibition on golden parachute payments or severance payments to specified
officers or employees, which term is generally defined as any payment for departure
from a company for any reason;
 
    
    a prohibition on compensation plans that would encourage manipulation of reported
earnings to enhance the compensation of employees;
 
    
    a prohibition on bonus, retention award, or incentive compensation to designated
employees, except in the form of long-term restricted stock;
 
    
    a requirement that the board of directors adopt a luxury expenditures policy;
 
    
    a requirement that shareholders be permitted a separate nonbinding vote on executive
compensation;
 
    
    a requirement that the chief executive officer and the chief financial officer
provide a written certification of compliance with the standards, when established, to
the SEC.
  6




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Homeowner Affordability and Stability Plan
  Recent Developments
    7




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
    
    The incremental $4.6 million in capital immediately strengthens the Banks capital
position and will support approximately $50 million of additional lending capacity.
    
    The cost of the capital, which carries a blended dividend rate of 5.45%, or a
weighted average total cost of capital of 6.45% (assuming a five year amortization
period for the warrant preferred), is very favorable compared to traditional market
costs of similar instruments.
    
    The TARP capital is available at a time when there is limited or no availability of
capital on the open market and provides additional capital to support the continued
growth of the Companys balance sheet.
    Employees
  
 Item 1A. Risk Factors
   8




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First Priority is not yet profitable.
  First Priority may require additional capital to continue its growth.
  First Priority is exposed to risks in connection with the loans First Priority Bank makes.
  Changes in interest rates and First Priority Banks ability to successfully manage such changes may
impact the earnings of First Priority.
    9




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First Priority Bank faces intense competition in its market.
  First Priority is dependent on key individuals.
  An economic downturn, especially in southeastern Pennsylvania, could reduce First Prioritys
customer base, the level of deposits and demand for financial products such as loans.
     10




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First Priority is subject to extensive regulation that could limit or restrict First Prioritys
activities.
  There is no market for First Priority common stock.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   Square
    
    
    Owned /Office
    
    Office Location
    
    Footage
    
    
    LeasedMalvern 
Headquarters / Main
Office
    
    2 W. Liberty Blvd., Suite 104, Malvern, PA  19355
    
    
    8,929
    
    
    LeasedWyomissing
    
    1200 Broadcasting Rd., Suite 103, Wyomissing, PA 19610
    
    
    3,323
    
    
    LeasedNewtown
    
    104 Pheasant Run, Suite 130, Newtown, PA 18940
    
    
    3,600
    
    
    LeasedPlumstead
    
    5936 Easton Road, Pipersville, PA 18947
    
    
    2,655
    
    
    LeasedBlue Bell
    
    10 Sentry Parkway, Suite 100, Blue Bell, PA  19422
    
    
    2,575
    
    
    Leased
 
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   11




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Part II
 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters
     12




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Item 6. Selected Financial Data
   At or for theperiod fromMay 25, 2005(date ofAt or for years ended
    
    
    inception) toDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in thousands, except per share data)Selected Financial Data:Total assets
    
    $
    214,657
    
    
    $
    151,611
    
    
    $
    105,748
    
    
    $
    30,841Securities available for sale
    
    
    37,759
    
    
    
    45,026
    
    
    
    52,994
    
    
    
    29,987Loans receivable
    
    
    171,735
    
    
    
    105,207
    
    
    
    50,423
    
    
    
    111Allowance for loan losses
    
    
    1,777
    
    
    
    1,055
    
    
    
    634
    
    
    
    2Deposits
    
    
    169,459
    
    
    
    116,304
    
    
    
    64,417
    
    
    
    789Short-term borrowings
    
    
    13,178
    
    
    
    18,097
    
    
    
    22,965
    
    
    
    9,547Long-term debt
    
    
    8,000
    
    
    
    390
    
    
    
    
    
    
    
    Shareholders equity
    
    
    20,301
    
    
    
    15,320
    
    
    
    17,638
    
    
    
    20,050Common book value per share
    
    $
    6.50
    
    
    $
    7.27
    
    
    $
    8.37
    
    
    $
    9.51Selected Operating Data:Interest income
    
    $
    9,488
    
    
    $
    7,066
    
    
    $
    2,793
    
    
    $
    276Interest expense
    
    
    5,510
    
    
    
    4,293
    
    
    
    1,314
    
    
    
    5Net interest income
before provision for loan losses
    
    
    3,978
    
    
    
    2,773
    
    
    
    1,479
    
    
    
    271Provision for loan losses
    
    
    588
    
    
    
    421
    
    
    
    632
    
    
    
    2Net interest income
after provision for loan losses
    
    
    3,390
    
    
    
    2,352
    
    
    
    847
    
    
    
    269Non-interest income
    
    
    371
    
    
    
    265
    
    
    
    278
    
    
    
    Non-interest expense
    
    
    7,115
    
    
    
    4,993
    
    
    
    3,561
    
    
    
    1,238Net loss
    
    $
    (3,354
    )
    
    $
    (2,376
    )
    
    $
    (2,436
    )
    
    $
    (969
    )Loss per sharebasic and diluted
    
    $
    (1.14
    )
    
    $
    (1.13
    )
    
    $
    (1.16
    )
    
    $
    (0.46
    )Cash dividends per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Return on average assets
    
    
    -1.92
    %
    
    
    -2.23
    %
    
    
    -5.21
    %
    
    
    -34.60
    %Return on average shareholders equity
    
    
    -16.87
    %
    
    
    -14.40
    %
    
    
    -12.89
    %
    
    
    -35.99
    %Average equity to average assets
    
    
    11.40
    %
    
    
    15.46
    %
    
    
    40.45
    %
    
    
    96.13
    %Basic and diluted average common
shares outstanding
    
    
    2,940,040
    
    
    
    2,107,500
    
    
    
    2,107,500
    
    
    
    2,107,500
  13




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Overview
      14




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As of December 31,2005 and for theperiod fromMay 25, 2005(date ofAs of December 31,
    
    
    inception) toand for the years ended December 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in thousands)Total revenue (1)
    
    $
    4,349
    
    
    $
    3,038
    
    
    $
    1,757
    
    
    $
    271Net loss
    
    
    (3,354
    )
    
    
    (2,376
    )
    
    
    (2,436
    )
    
    
    (969
    )Total assets
    
    
    214,657
    
    
    
    151,611
    
    
    
    105,748
    
    
    
    30,841Total loans receivable
    
    
    171,735
    
    
    
    105,207
    
    
    
    50,423
    
    
    
    111Total deposits
    
    
    169,459
    
    
    
    116,304
    
    
    
    64,417
    
    
    
    789
 
 (1)
    
    Total revenue equals net interest income plus non-interest income. 
     15




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Critical Accounting Policies
       16




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Recently Issued Accounting Standards
   17




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Results of Operations
 Income Statement Review
  Summary
      18




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Net Interest Income
      19




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Average Balances, Income and Expenses, and Rates
 For the Year Ended December 31,2008
    
    
    2007
    
    
    2006Interest
    
    
    
    
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate(Dollars in thousands)Interest-earning assets:Loans receivable
    
    $
    141,293
    
    
    $
    8,408
    
    
    
    5.95
    %
    
    $
    74,149
    
    
    $
    5,471
    
    
    
    7.38
    %
    
    $
    21,197
    
    
    $
    1,576
    
    
    
    7.44
    %Securities available for sale
    
    
    20,982
    
    
    
    837
    
    
    
    3.99
    %
    
    
    9,353
    
    
    
    496
    
    
    
    5.30
    %
    
    
    11,070
    
    
    
    544
    
    
    
    4.91
    %Federal funds sold
    
    
    8,363
    
    
    
    233
    
    
    
    2.78
    %
    
    
    21,899
    
    
    
    1,097
    
    
    
    5.01
    %
    
    
    13,377
    
    
    
    671
    
    
    
    5.02
    %Deposits with banks and other
    
    
    42
    
    
    
    10
    
    
    
    
    
    
    
    26
    
    
    
    2
    
    
    
    
    
    
    
    17
    
    
    
    2
    
    
    
    Total interest earning assets
    
    
    170,680
    
    
    
    9,488
    
    
    
    5.56
    %
    
    
    105,427
    
    
    
    7,066
    
    
    
    6.70
    %
    
    
    45,661
    
    
    
    2,793
    
    
    
    6.12
    %Non-interest-earning assets
    
    
    3,707
    
    
    
    
    
    
    
    
    
    
    
    1,325
    
    
    
    
    
    
    
    
    
    
    
    1,056TOTAL ASSETS
    
    $
    174,387
    
    
    
    
    
    
    
    
    
    
    $
    106,752
    
    
    
    
    
    
    
    
    
    
    $
    46,717Interest-bearing liabilities:Demand, interest-bearing
    
    $
    1,190
    
    
    
    17
    
    
    
    1.47
    %
    
    $
    858
    
    
    
    20
    
    
    
    2.29
    %
    
    $
    388
    
    
    
    8
    
    
    
    2.13
    %Money market and savings
    
    
    37,258
    
    
    
    1,123
    
    
    
    3.01
    %
    
    
    39,816
    
    
    
    1,921
    
    
    
    4.82
    %
    
    
    17,442
    
    
    
    848
    
    
    
    4.86
    %Time deposits
    
    
    97,712
    
    
    
    4,111
    
    
    
    4.21
    %
    
    
    44,091
    
    
    
    2,326
    
    
    
    5.28
    %
    
    
    7,682
    
    
    
    401
    
    
    
    5.22
    %Borrowed funds
    
    
    9,629
    
    
    
    259
    
    
    
    2.69
    %
    
    
    477
    
    
    
    26
    
    
    
    5.38
    %
    
    
    954
    
    
    
    57
    
    
    
    5.94
    %Total interest-bearing
liabilities
    
    
    145,789
    
    
    
    5,510
    
    
    
    3.78
    %
    
    
    85,242
    
    
    
    4,293
    
    
    
    5.04
    %
    
    
    26,466
    
    
    
    1,314
    
    
    
    4.97
    %Non interest-bearing
liabilities:Demand, non-interest bearing
deposits
    
    
    6,908
    
    
    
    
    
    
    
    
    
    
    
    4,023
    
    
    
    
    
    
    
    
    
    
    
    996Other liabilities
    
    
    1,809
    
    
    
    
    
    
    
    
    
    
    
    984
    
    
    
    
    
    
    
    
    
    
    
    357Shareholders equity
    
    
    19,881
    
    
    
    
    
    
    
    
    
    
    
    16,503
    
    
    
    
    
    
    
    
    
    
    
    18,898TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    174,387
    
    
    
    
    
    
    
    
    
    
    $
    106,752
    
    
    
    
    
    
    
    
    
    
    $
    46,717Net interest income/rate
spread
    
    
    
    
    
    $
    3,978
    
    
    
    1.78
    %
    
    
    
    
    
    $
    2,773
    
    
    
    1.66
    %
    
    
    
    
    
    $
    1,479
    
    
    
    1.15
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.33
    %
    
    
    
    
    
    
    
    
    
    
    2.63
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %
    20




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Analysis of Changes in Net Interest Income
    21




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Changes in Net Interest IncomeYears ended
    
    
    Years endedDecember 31,
    
    
    December 31,2008 vs. 2007
    
    
    2007 vs. 2006Increase (Decrease)
    
    
    Increase (Decrease)Due to Change In
    
    
    Due to Change In(Dollars in thousands)Net
    
    
    
    
    
    
    
    
    
    
    NetVolume
    
    
    Rate
    
    
    Change
    
    
    Volume
    
    
    Rate
    
    
    ChangeInterest income:Loans receivable
    
    $
    4,169
    
    
    $
    (1,232
    )
    
    $
    2,937
    
    
    $
    3,908
    
    
    $
    (13
    )
    
    $
    3,895Securities available for sale
    
    
    489
    
    
    
    (148
    )
    
    
    341
    
    
    
    (89
    )
    
    
    41
    
    
    
    (48
    )Federal funds sold
    
    
    (503
    )
    
    
    (361
    )
    
    
    (864
    )
    
    
    427
    
    
    
    (1
    )
    
    
    426Deposits with banks and other
    
    
    2
    
    
    
    6
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Total interest earning assets
    
    
    4,157
    
    
    
    (1,735
    )
    
    
    2,422
    
    
    
    4,246
    
    
    
    27
    
    
    
    4,273Interest expense:Demand, interest-bearing
    
    
    6
    
    
    
    (9
    )
    
    
    (3
    )
    
    
    11
    
    
    
    1
    
    
    
    12Money market and savings
    
    
    (117
    )
    
    
    (681
    )
    
    
    (798
    )
    
    
    1,079
    
    
    
    (6
    )
    
    
    1,073Time deposits
    
    
    2,338
    
    
    
    (553
    )
    
    
    1,785
    
    
    
    1,921
    
    
    
    4
    
    
    
    1,925Borrowed funds
    
    
    252
    
    
    
    (19
    )
    
    
    233
    
    
    
    (26
    )
    
    
    (5
    )
    
    
    (31
    )Total interest bearing liabilities
    
    
    2,479
    
    
    
    (1,262
    )
    
    
    1,217
    
    
    
    2,985
    
    
    
    (6
    )
    
    
    2,979Change in net interest income
    
    $
    1,678
    
    
    $
    (473
    )
    
    $
    1,205
    
    
    $
    1,261
    
    
    $
    33
    
    
    $
    1,294
 Provision for Loan Losses
      22




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Non-Interest Income
  For the year endedDecember 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Non-Interest IncomeWealth management fee income
    
    $
    251
    
    
    $
    213
    
    
    $
    244Service charges on deposits
    
    
    38
    
    
    
    14
    
    
    
    3Other branch fees
    
    
    27
    
    
    
    13
    
    
    
    4Loan related fees
    
    
    49
    
    
    
    18
    
    
    
    11Other
    
    
    6
    
    
    
    7
    
    
    
    16Total Non-Interest Income
    
    $
    371
    
    
    $
    265
    
    
    $
    278
  23




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Non-Interest Expenses
  For the year endedDecember 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Non-Interest ExpensesSalaries and employee benefits
    
    $
    4,754
    
    
    $
    3,242
    
    
    $
    2,424Occupancy and equipment
    
    
    711
    
    
    
    412
    
    
    
    334Data processing equipment and operations
    
    
    346
    
    
    
    233
    
    
    
    162Professional fees
    
    
    395
    
    
    
    527
    
    
    
    222Marketing, advertising and business development
    
    
    193
    
    
    
    128
    
    
    
    204FDIC insurance assessments
    
    
    116
    
    
    
    65
    
    
    
    1Capital stock tax expense
    
    
    89
    
    
    
    46
    
    
    
    7Merger integration costs
    
    
    72
    
    
    
    
    
    
    
    Other
    
    
    439
    
    
    
    340
    
    
    
    207Total Non-Interest Expenses
    
    $
    7,115
    
    
    $
    4,993
    
    
    $
    3,561
        24




---



##### Table of Contents



25




---



##### Table of Contents



Provision for Income Taxes
   Financial Condition
 Balance Sheet Review
 Overview
     26




---



##### Table of Contents



Investments
   As of December 31, 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
    
    $
    15,026
    
    
    
    3.32
    %
    
    $
    6,068
    
    
    
    3.15
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    21,094
    
    
    
    3.27
    %Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    957
    
    
    
    4.75
    %
    
    
    14,745
    
    
    
    5.06
    %
    
    
    15,702
    
    
    
    5.04
    %Other securities
    
    
    
    
    
    
    
    
    
    
    963
    
    
    
    4.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    963
    
    
    
    4.00
    %Total investments
available for sale
    
    $
    15,026
    
    
    
    3.32
    %
    
    $
    7,031
    
    
    
    3.27
    %
    
    $
    957
    
    
    
    4.75
    %
    
    $
    14,745
    
    
    
    5.06
    %
    
    $
    37,759
    
    
    
    4.03
    %
  As of December 31,2008
    
    
    2007
    
    
    2006Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value(Dollars in thousands)U.S. Government
agency securities
    
    $
    21,000
    
    
    $
    21,094
    
    
    $
    40,995
    
    
    $
    40,998
    
    
    $
    52,993
    
    
    $
    52,994Mortgage-backed
securities
    
    
    15,302
    
    
    
    15,702
    
    
    
    4,020
    
    
    
    4,028
    
    
    
    
    
    
    
    Other securities
    
    
    1,000
    
    
    
    963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total investments
available for sale
    
    $
    37,302
    
    
    $
    37,759
    
    
    $
    45,015
    
    
    $
    45,026
    
    
    $
    52,993
    
    
    $
    52,994
  27




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##### Table of Contents



Restricted investments in bank stocks
  Loans
   As of December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in thousands)Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of total
    
    
    Amount
    
    
    of total
    
    
    Amount
    
    
    of total
    
    
    Amount
    
    
    of totalCommercial
    
    $
    47,729
    
    
    
    28
    %
    
    $
    33,506
    
    
    
    32
    %
    
    $
    14,138
    
    
    
    28
    %
    
    $
    
    
    
    
    Commercial Real Estate
    
    
    49,302
    
    
    
    29
    %
    
    
    24,590
    
    
    
    23
    %
    
    
    12,473
    
    
    
    25
    %
    
    
    
    
    
    
    Residential Real Estate
    
    
    39,460
    
    
    
    23
    %
    
    
    23,708
    
    
    
    23
    %
    
    
    9,014
    
    
    
    18
    %
    
    
    
    
    
    
    Consumer
    
    
    35,227
    
    
    
    20
    %
    
    
    23,310
    
    
    
    22
    %
    
    
    14,724
    
    
    
    29
    %
    
    
    111
    
    
    
    100
    %Total Loans
    
    
    171,718
    
    
    
    100
    %
    
    
    105,114
    
    
    
    100
    %
    
    
    50,349
    
    
    
    100
    %
    
    
    111
    
    
    
    100
    %Net deferred loan costs
    
    
    17
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    171,735
    
    
    
    100
    %
    
    $
    105,207
    
    
    
    100
    %
    
    $
    50,423
    
    
    
    100
    %
    
    $
    111
    
    
    
    100
    %
   28




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##### Table of Contents



At December 31, 2008Maturities of Outstanding LoansAfter 1 ButWithin 1
    
    
    Within 5
    
    
    After 5Year
    
    
    Years
    
    
    Years
    
    
    Total Loans(Dollars in thousands)Commercial
    
    $
    33,080
    
    
    $
    11,648
    
    
    $
    3,001
    
    
    $
    47,729Commercial Real Estate
    
    
    13,061
    
    
    
    24,328
    
    
    
    11,913
    
    
    
    49,302Residential Real Estate
    
    
    435
    
    
    
    11,505
    
    
    
    27,520
    
    
    
    39,460Consumer
    
    
    11,753
    
    
    
    6,084
    
    
    
    17,390
    
    
    
    35,227Total Loans
    
    $
    58,329
    
    
    $
    53,565
    
    
    $
    59,824
    
    
    $
    171,718Percentage composition of maturity
    
    
    34
    %
    
    
    32
    %
    
    
    34
    %
    
    
    100
    %Loans with fixed predetermined interest rates
    
    $
    6,727
    
    
    $
    40,394
    
    
    $
    8,985
    
    
    $
    56,106Loans with variable or floating interest rates
    
    
    51,602
    
    
    
    13,171
    
    
    
    50,839
    
    
    
    115,612Total Loans
    
    $
    58,329
    
    
    $
    53,565
    
    
    $
    59,824
    
    
    $
    171,718
  29




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##### Table of Contents



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
    30




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##### Table of Contents



December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(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
    
    
    0.41
    %
    
    
    
    
    
    
    
    
    
    
    Non-performing assets as a percentage of total
assets
    
    
    0.33
    %
    
    
    
    
    
    
    
    
    
    
    Ratio of allowance to non-performing loans at end
of period
    
    
    251
    %
    
    
    
    
    
    
    
    
    
    
    Ratio of allowance to non-performing assets at end
of period
    
    
    251
    %
    
    
    
    
    
    
    
    
    
    
    Allowance for loan losses as a percentage of total
loans
    
    
    1.03
    %
    
    
    1.00
    %
    
    
    1.26
    %
    
    
    1.80
    %
 (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) restructured loans.(2)
    
    Non-performing assets are comprised of non-performing loans and other real estate owned (assets acquired in foreclosure).  Allowance for loan losses
   31




---



##### Table of Contents



32




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##### Table of Contents



Period fromMay 25, 2005(date ofFor the year ended
    
    
    inception) toDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in thousands)Balance at the beginning of period
    
    $
    1,055
    
    
    $
    634
    
    
    $
    10
    
    
    $
    Charge-offs:Commercial
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    Net loans charged off
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    Acquired reserve in business
combination
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    Provision charged to operations
    
    
    588
    
    
    
    421
    
    
    
    632
    
    
    
    2Balance at end of period
    
    $
    1,777
    
    
    $
    1,055
    
    
    $
    634
    
    
    $
    2Average loans (1)
    
    $
    141,293
    
    
    $
    74,149
    
    
    $
    21,197
    
    
    $
    10Ratio of net charge-offs during
period to average loans
outstanding during period
(annualized) (1)
    
    
    0.01
    %
    
    
    
    
    
    
    
    
    
    
    Allowance for loan losses as a
percentage of total loans
    
    
    1.03
    %
    
    
    1.00
    %
    
    
    1.26
    %
    
    
    1.80
    %
 (1)
    
    Includes non-accrual loans.  As of December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(Dollars in thousands)Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of total
    
    
    
    
    
    
    of totalAmount
    
    
    loans (1)
    
    
    Amount
    
    
    loans (1)
    
    
    Amount
    
    
    loans (1)
    
    
    Amount
    
    
    loans (1)Commercial
    
    $
    572
    
    
    
    28
    %
    
    $
    94
    
    
    
    32
    %
    
    $
    106
    
    
    
    28
    %
    
    $
    
    
    
    
    Commercial Real Estate
    
    
    263
    
    
    
    29
    %
    
    
    81
    
    
    
    23
    %
    
    
    156
    
    
    
    25
    %
    
    
    
    
    
    
    Residential Real Estate
    
    
    179
    
    
    
    23
    %
    
    
    43
    
    
    
    23
    %
    
    
    18
    
    
    
    18
    %
    
    
    
    
    
    
    Consumer
    
    
    70
    
    
    
    20
    %
    
    
    39
    
    
    
    22
    %
    
    
    85
    
    
    
    29
    %
    
    
    
    
    
    
    100
    %Total Allocated
    
    
    1,084
    
    
    
    100
    %
    
    
    257
    
    
    
    100
    %
    
    
    365
    
    
    
    100
    %
    
    
    
    
    
    
    100
    %Unallocated
    
    
    693
    
    
    
    
    
    
    
    798
    
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    2Total
    
    $
    1,777
    
    
    
    
    
    
    $
    1,055
    
    
    
    
    
    
    $
    634
    
    
    
    
    
    
    $
    2
 
 (1)
    
    Represents loans outstanding in each category, as of the date shown, as a percentage of total loans outstanding.  33




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##### Table of Contents



Loan Concentrations
  Deposits
   For the year endedDecember 31,2008
    
    
    2007
    
    
    2006Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in thousands)Demand, non-interest bearing
    
    $
    6,908
    
    
    
    
    
    
    $
    4,023
    
    
    
    
    
    
    $
    996Demand, interest bearing
    
    
    1,190
    
    
    
    1.47
    %
    
    
    858
    
    
    
    2.29
    %
    
    
    388
    
    
    
    2.13
    %Money market and savings
deposits
    
    
    37,258
    
    
    
    3.01
    %
    
    
    39,816
    
    
    
    4.82
    %
    
    
    17,442
    
    
    
    4.86
    %Time deposits
    
    
    97,712
    
    
    
    4.21
    %
    
    
    44,091
    
    
    
    5.28
    %
    
    
    7,682
    
    
    
    5.22
    %Total interest-bearing deposits
    
    
    136,160
    
    
    
    3.86
    %
    
    
    84,765
    
    
    
    5.03
    %
    
    
    25,512
    
    
    
    4.93
    %Total deposits
    
    $
    143,068
    
    
    
    
    
    
    $
    88,788
    
    
    
    
    
    
    $
    26,508
   34




---



##### Table of Contents



December 31,2008(Dollars inthousands)Three Months or Less
    
    $
    7,452Over Three Through Six Months
    
    
    3,478Over Six Through Twelve Months
    
    
    11,077Over Twelve Months
    
    
    9,040TOTAL
    
    $
    31,047
 Other Interest-Bearing Liabilities
 Short-Term Borrowed Funds
   At or for the years endedDecember 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Federal funds purchased:Balance at year end
    
    $
    
    
    
    $
    3,014
    
    
    $
    4,968Weighted average rate at year end
    
    
    
    
    
    
    3.69
    %
    
    
    5.34
    %Maximum month end balance
    
    $
    4,027
    
    
    $
    6,492
    
    
    $
    6,619Average daily balance during the year
    
    $
    68
    
    
    $
    120
    
    
    $
    281Weighted average rate during the year
    
    
    2.39
    %
    
    
    5.42
    %
    
    
    5.10
    %Securities sold under agreements to repurchase:Balance at year end
    
    $
    290
    
    
    $
    85
    
    
    $
    6Weighted average rate at year end
    
    
    0.25
    %
    
    
    3.75
    %
    
    
    4.75
    %Maximum month end balance
    
    $
    5,020
    
    
    $
    247
    
    
    $
    51Average daily balance during the year
    
    $
    1,474
    
    
    $
    65
    
    
    $
    5Weighted average rate during the year
    
    
    1.46
    %
    
    
    4.67
    %
    
    
    4.75
    %Other short-term borrowings:Balance at year end
    
    $
    12,888
    
    
    $
    14,998
    
    
    $
    17,991Weighted average rate at year end
    
    
    0.64
    %
    
    
    5.50
    %
    
    
    6.31
    %Maximum month end balance
    
    $
    14,463
    
    
    $
    14,998
    
    
    $
    29,989Average daily balance during the year
    
    $
    3,173
    
    
    $
    90
    
    
    $
    668Weighted average rate during the year
    
    
    0.96
    %
    
    
    6.02
    %
    
    
    6.31
    %
  35




---



##### Table of Contents



Long-Term Debt
     36




---



##### Table of Contents



Capital Resources
 Long-Term Debt
       37




---



##### Table of Contents



To BeConsidered
    
    
    As of
    
    
    As of
    
    
    As ofWell-
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,Capitalized (1)
    
    
    2008 (2)
    
    
    2007
    
    
    2006First Priority Bank:Total risk-based capital
    
    
    10.00
    %
    
    
    12.56
    %
    
    
    16.01
    %
    
    
    31.20
    %Tier 1 risk-based capital
    
    
    6.00
    %
    
    
    11.45
    %
    
    
    14.98
    %
    
    
    30.12
    %Tier 1 leverage capital (1)
    
    
    5.00
    %
    
    
    8.93
    %
    
    
    12.30
    %
    
    
    24.08
    %
 
 (1)
    
    The Federal Deposit Insurance Corporation required the Bank to
maintain a ratio of Tier 1 leverage capital to total assets of at least 8%
during the first three years of operation. As of November 2008, upon
completion of the Banks initial three years of operations, the Banks Tier 1
leverage ratio requirement became 5% in order to be considered well
capitalized under prompt corrective action provisions.(2)
    
    Does not give effect to the incremental capital issued on February
20, 2009 pursuant to the TARP Capital Purchase Program totaling $4.6
million. See the Recent Developments section for more information.   38




---



##### Table of Contents



Return on Average Equity and Assets
  At or for theperiod fromMay 25, 2005(date ofAt or for the years ended
    
    
    inception) toDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005Return on average assets
    
    
    -1.92
    %
    
    
    -2.23
    %
    
    
    -5.21
    %
    
    
    -34.60
    %Return on average equity
    
    
    -16.87
    %
    
    
    -14.40
    %
    
    
    -12.89
    %
    
    
    -35.99
    %Average equity to average assets ratio
    
    
    11.40
    %
    
    
    15.46
    %
    
    
    40.45
    %
    
    
    96.13
    %
  39




---



##### Table of Contents



Effect of Inflation and Changing Prices
   Off-Balance Sheet Arrangements
     40




---



##### Table of Contents



Liquidity
       41




---



##### Table of Contents



Interest Rate Sensitivity
       42




---



##### Table of Contents



Interest Rate Sensitivity Report
As of December 31, 2008
(Dollars in thousands)
 1-90
    
    
    91-365
    
    
    1-5
    
    
    5 yearsdays
    
    
    days
    
    
    years
    
    
    and over
    
    
    TotalInterest-Sensitive AssetsFederal funds sold and deposits in banks
    
    $
    103
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    103Loans receivable
    
    
    69,660
    
    
    
    12,257
    
    
    
    52,053
    
    
    
    37,765
    
    
    
    171,735Investment securities available for sale
    
    
    14,176
    
    
    
    9,579
    
    
    
    11,634
    
    
    
    2,370
    
    
    
    37,759Total Interest Earning Assets
    
    $
    83,939
    
    
    $
    21,836
    
    
    $
    63,687
    
    
    $
    40,135
    
    
    $
    209,597Cumulative Total
    
    $
    83,939
    
    
    $
    105,775
    
    
    $
    169,462
    
    
    $
    209,597Interest-Sensitive LiabilitiesInterest-bearing demand
    
    $
    823
    
    
    $
    823
    
    
    $
    274
    
    
    $
    823
    
    
    $
    2,743Savings accounts
    
    
    56
    
    
    
    56
    
    
    
    19
    
    
    
    56
    
    
    
    187Money market accounts
    
    
    14,300
    
    
    
    5,363
    
    
    
    7,150
    
    
    
    8,938
    
    
    
    35,751Time deposits
    
    
    28,206
    
    
    
    58,013
    
    
    
    34,423
    
    
    
    
    
    
    
    120,642Borrowed funds
    
    
    13,178
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    21,178Total
    
    $
    56,563
    
    
    $
    64,255
    
    
    $
    49,866
    
    
    $
    9,817
    
    
    $
    180,501Cumulative Total
    
    $
    56,563
    
    
    $
    120,818
    
    
    $
    170,684
    
    
    $
    180,501Gap
    
    $
    27,376
    
    
    $
    (42,419
    )
    
    $
    13,821
    
    
    $
    30,318Cumulative gap
    
    $
    27,376
    
    
    $
    (15,043
    )
    
    $
    (1,222
    )
    
    $
    29,096Interest-sensitive
assets/interest-sensitive liabilities
(cumulative)
    
    
    1.5
    
    
    
    0.9
    
    
    
    1.0
    
    
    
    1.2Cumulative Gap/total earning assets
    
    
    13.1
    %
    
    
    -7.2
    %
    
    
    -0.6
    %
    
    
    13.9
    %
 Contractual Obligations
   43




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##### Table of Contents



Payments Due by PeriodOver 1
    
    
    Over 2
    
    
    Over 3Within 1
    
    
    through 2
    
    
    through 3
    
    
    through 5
    
    
    Over 5Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)Time deposits
    
    $
    86,219
    
    
    $
    10,220
    
    
    $
    16,447
    
    
    $
    7,756
    
    
    $
    
    
    
    $
    120,642Operating lease obligations
    
    
    507
    
    
    
    525
    
    
    
    525
    
    
    
    1,050
    
    
    
    3,125
    
    
    
    5,732Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    8,000Short-term borrowings
    
    
    13,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,178Accrued interest payable
    
    
    1,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,020Total
    
    $
    100,924
    
    
    $
    10,745
    
    
    $
    16,972
    
    
    $
    16,806
    
    
    $
    3,125
    
    
    $
    148,572
 Recent Developments
 De-registration as Public Company
  Issuance of Preferred Stock and Warrant  TARP Capital Purchase Program
   44




---



##### Table of Contents




    
    The incremental $4.6 million in capital immediately strengthens the Banks capital
position and will support approximately $50 million of additional lending capacity.
 
    
    The cost of the capital, which carries a blended dividend rate of 5.45%, or a
weighted average total cost of capital of 6.45% (assuming a five year amortization
period for the warrant preferred), is very favorable compared to traditional market
costs of similar instruments.
 
    
    The TARP capital is available at a time when there is limited or no availability of
capital on the open market and provides additional capital to support the continued
growth of the Companys balance sheet.
     45




---



##### Table of Contents



FDIC Adopts DIF Restoration Plan; Imposes Additional Emergency Assessment
   46




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
      47




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 INDEX TO FINANCIAL STATEMENTS
 Page No.Report of Independent Registered Public Accounting Firm
    
    
    49Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007
    
    
    50Consolidated Statements of Income for the years ended December 31, 2008,
2007 and 2006
    
    
    51Consolidated Statements of Shareholders Equity for the years ended
December 31, 2008, 2007 and 2006
    
    
    52Consolidated Statements of Cash Flows for the years ended December 31,
2008, 2007 and 2006
    
    
    53Notes to audited Consolidated Financial Statements as of and for the
years ended December 31, 2008, 2007 and 2006
    
    
    54
  48




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
  49




---



##### Table of Contents



First Priority Financial Corp.
 
 Consolidated Balance Sheets  (In thousands, except per share data)
 December 31,
    
    
    December 31,2008
    
    
    2007AssetsCash and due from banks
    
    $
    1,410
    
    
    $
    943Federal funds sold and securities purchased under agreements to resell
    
    
    77
    
    
    
    Interest bearing deposits in banks
    
    
    26
    
    
    
    Total cash and cash equivalents
    
    
    1,513
    
    
    
    943Securities available for sale (amortized cost: $37,302 and $45,015,
respectively)
    
    
    37,759
    
    
    
    45,026Loans receivable
    
    
    171,735
    
    
    
    105,207Less: allowance for loan losses
    
    
    1,777
    
    
    
    1,055Net Loans
    
    
    169,958
    
    
    
    104,152Restricted investments in bank stocks
    
    
    1,737
    
    
    
    50Premises and equipment, net
    
    
    1,311
    
    
    
    574Accrued interest receivable
    
    
    815
    
    
    
    545Goodwill
    
    
    1,194
    
    
    
    Other assets
    
    
    370
    
    
    
    321Total Assets
    
    $
    214,657
    
    
    $
    151,611Liabilities and Shareholders EquityLiabilitiesDeposits:Non-interest bearing
    
    $
    10,136
    
    
    $
    6,846Interest-bearing
    
    
    159,323
    
    
    
    109,458Total Deposits
    
    
    169,459
    
    
    
    116,304Short-term borrowings
    
    
    13,178
    
    
    
    18,097Long-term debt
    
    
    8,000
    
    
    
    390Accrued interest payable
    
    
    1,020
    
    
    
    858Other liabilities
    
    
    2,699
    
    
    
    642Total Liabilities
    
    
    194,356
    
    
    
    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
    
    
    25,856
    
    
    
    18,982Accumulated deficit
    
    
    (9,135
    )
    
    
    (5,781
    )Accumulated other comprehensive income
    
    
    457
    
    
    
    11Total Shareholders Equity
    
    
    20,301
    
    
    
    15,320Total Liabilities and Shareholders Equity
    
    $
    214,657
    
    
    $
    151,611
 See notes to consolidated financial statements.
  50




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##### Table of Contents



First Priority Financial Corp.
 
 Consolidated Statements of Income  (In thousands, except per share data)
 For the year endedDecember 31,2008
    
    
    2007
    
    
    2006Interest IncomeLoans receivable, including fees
    
    $
    8,408
    
    
    $
    5,471
    
    
    $
    1,576Securities  taxable
    
    
    837
    
    
    
    496
    
    
    
    544Interest bearing deposits and other
    
    
    10
    
    
    
    2
    
    
    
    2Federal funds sold and securities
purchased under agreements to
resell
    
    
    233
    
    
    
    1,097
    
    
    
    671Total Interest Income
    
    
    9,488
    
    
    
    7,066
    
    
    
    2,793Interest ExpenseDeposits
    
    
    5,251
    
    
    
    4,267
    
    
    
    1,257Short-term borrowings
    
    
    54
    
    
    
    15
    
    
    
    57Other
    
    
    205
    
    
    
    11
    
    
    
    Total Interest Expense
    
    
    5,510
    
    
    
    4,293
    
    
    
    1,314Net Interest Income
    
    
    3,978
    
    
    
    2,773
    
    
    
    1,479Provision for Loan Losses
    
    
    588
    
    
    
    421
    
    
    
    632Net Interest Income after
Provision for Loan Losses
    
    
    3,390
    
    
    
    2,352
    
    
    
    847Non-Interest IncomeWealth management fee income
    
    
    251
    
    
    
    213
    
    
    
    244Other
    
    
    120
    
    
    
    52
    
    
    
    34Total Non-Interest Income
    
    
    371
    
    
    
    265
    
    
    
    278Non-Interest ExpensesSalaries and employee benefits
    
    
    4,754
    
    
    
    3,242
    
    
    
    2,424Occupancy and equipment
    
    
    711
    
    
    
    412
    
    
    
    334Data processing equipment and operations
    
    
    346
    
    
    
    233
    
    
    
    162Professional fees
    
    
    395
    
    
    
    527
    
    
    
    222Marketing, advertising, and business
development
    
    
    193
    
    
    
    128
    
    
    
    204FDIC insurance assessments
    
    
    116
    
    
    
    65
    
    
    
    1Capital stock tax expense
    
    
    89
    
    
    
    46
    
    
    
    7Merger integration costs
    
    
    72
    
    
    
    
    
    
    
    Other
    
    
    439
    
    
    
    340
    
    
    
    207Total Non-Interest Expenses
    
    
    7,115
    
    
    
    4,993
    
    
    
    3,561Net Loss
    
    $
    (3,354
    )
    
    $
    (2,376
    )
    
    $
    (2,436
    )Loss per shareBasic and diluted
    
    $
    (1.14
    )
    
    $
    (1.13
    )
    
    $
    (1.16
    )Weighted average shares outstandingBasic and diluted
    
    
    2,940
    
    
    
    2,108
    
    
    
    2,108
 See notes to consolidated financial statements.
  51




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##### Table of Contents



First Priority Financial Corp.
 
 Consolidated Statements of Shareholders Equity
 For the Years Ended December 31, 2008, 2007 and 2006  (Dollars in thousands)
 AccumulatedOtherCommon
    
    
    
    
    
    
    Accumulated
    
    
    ComprehensiveStock
    
    
    Surplus
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance  December 31, 2005
    
    $
    2,108
    
    
    $
    18,911
    
    
    $
    (969
    )
    
    $
    
    
    
    $
    20,050Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (2,436
    )
    
    
    
    
    
    
    (2,436
    )Net unrealized holding
gain on available for
sale securities
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,435
    )Stock options expense
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23Balance  December 31, 2006
    
    
    2,108
    
    
    
    18,934
    
    
    
    (3,405
    )
    
    
    1
    
    
    
    17,638Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (2,376
    )
    
    
    
    
    
    
    (2,376
    )Net unrealized holding
gain on available for
sale securities
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,366
    )Stock options expense
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48Balance  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
    
    
    
    
    
    
    
    
    
    
    (3,354
    )
    
    
    
    
    
    
    (3,354
    )Net unrealized holding
gain on available for
sale securities
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    446
    
    
    
    446Total Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,908
    )Stock options expense
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    95Balance  December 31, 2008
    
    $
    3,123
    
    
    $
    25,856
    
    
    $
    (9,135
    )
    
    $
    457
    
    
    $
    20,301
 See notes to consolidated financial statements.
  52




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##### Table of Contents



First Priority Financial Corp.
 
 Consolidated Statements of Cash Flows
 (Dollars in thousands)
 For the year endedDecember 31,2008
    
    
    2007
    
    
    2006Cash Flows from Operating ActivitiesNet loss
    
    $
    (3,354
    )
    
    $
    (2,376
    )
    
    $
    (2,436
    )Adjustments to reconcile net loss to net cash used in operating
activities:Provision for loan losses
    
    
    588
    
    
    
    421
    
    
    
    632Depreciation and amortization
    
    
    223
    
    
    
    123
    
    
    
    84Net (accretion) and amortization of securities
(discounts) and premiums
    
    
    1
    
    
    
    (143
    )
    
    
    (272
    )Stock based compensation expense
    
    
    95
    
    
    
    48
    
    
    
    23Increase in accrued interest receivable
    
    
    (270
    )
    
    
    (225
    )
    
    
    (320
    )(Increase) decrease in other assets
    
    
    1
    
    
    
    (134
    )
    
    
    (58
    )Increase in accrued interest payable
    
    
    128
    
    
    
    576
    
    
    
    279Increase (decrease) in other liabilities
    
    
    (777
    )
    
    
    195
    
    
    
    (5
    )Other
    
    
    13
    
    
    
    10
    
    
    
    Net Cash Used in Operating Activities
    
    
    (3,352
    )
    
    
    (1,505
    )
    
    
    (2,073
    )Cash Flows from Investing ActivitiesNet increase in loans
    
    
    (60,698
    )
    
    
    (54,784
    )
    
    
    (50,313
    )Purchases of securities available for sale
    
    
    (82,773
    )
    
    
    (151,879
    )
    
    
    (268,234
    )Purchase of restricted stock
    
    
    (1,687
    )
    
    
    
    
    
    
    Proceeds from maturities of securities available for sale
    
    
    92,486
    
    
    
    160,000
    
    
    
    245,500Purchases of premises and equipment
    
    
    (153
    )
    
    
    (273
    )
    
    
    (80
    )Net cash received from acquisition
    
    
    21,844
    
    
    
    
    
    
    
    Net Cash Used in Investing Activities
    
    
    (30,981
    )
    
    
    (46,936
    )
    
    
    (73,127
    )Cash Flows from Financing ActivitiesNet increase in deposits
    
    
    32,305
    
    
    
    51,888
    
    
    
    63,628Net (decrease) increase in short-term borrowings
    
    
    (5,402
    )
    
    
    (4,868
    )
    
    
    13,418Proceeds from the issuance of long-term debt
    
    
    8,000
    
    
    
    380
    
    
    
    Net Cash Provided by Financing Activities
    
    
    34,903
    
    
    
    47,400
    
    
    
    77,046Net Increase (Decrease) in Cash and Cash
Equivalents
    
    
    570
    
    
    
    (1,041
    )
    
    
    1,846Cash and Cash Equivalents  Beginning
    
    
    943
    
    
    
    1,984
    
    
    
    138Cash and Cash Equivalents  Ending
    
    $
    1,513
    
    
    $
    943
    
    
    $
    1,984Supplementary Disclosures of Cash Flows InformationNoncash activity:Trade date accounting for investment securities purchases
    
    $
    2,000
    
    
    $
    
    
    
    $
    Conversion of subordinated debentures to common stock
    
    $
    403
    
    
    $
    
    
    
    $
    Cash paid during year for interest on deposits and borrowings
    
    $
    5,485
    
    
    $
    3,717
    
    
    $
    1,035
 See notes to consolidated financial statements.
  53




---



##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1  Summary of Significant Accounting Policies
 Organization and Nature of Operations
 First Priority Financial Corp.
      54




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 First Priority Bank
     Basis of Presentation
    55




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Estimates
  Significant Group Concentrations of Credit Risk
   Presentation of Cash Flows
  Securities
   56




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
     Restricted Investments in Bank Stocks
  Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend
to or Finance Activities of Others
  57




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
   Loans Receivable
    Residential Mortgage Loans Held for Sale
   58




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Loan Fees
  Allowance for Loan Losses
      59




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
   Transfers of Financial Assets
  Earnings Per Share
  Premises and Equipment
   60




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 Goodwill
  Advertising Costs
  Income Taxes
  Stock Options
 Accounting for Stock Issued to Employees Accounting for Stock Based Compensation Share Based Payment
  61




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
  Comprehensive Income
   Off-Balance Sheet Financial Instruments
  Recent Accounting Pronouncements
 FASB Statement No. 141(R)
   62




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 FASB Statement No. 159
  FASB Statement No. 162
  FSP FAS 140-3
   63




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 FASB Staff Position (FSP) 157-3
 Fair Value Measurements,
 FSP APB 14-1
  SAB 110
   64




---



##### Table of Contents



Note 1  Summary of Significant Accounting Policies (continued)
 International Financial Reporting Standards
  Note 2  Acquisition of Prestige Community Bank
      65




---



##### Table of Contents



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
  UnauditedPro FormaYear endedDecember 31, 2008(Dollars in thousands,except per share data)Total revenue
    
    $
    4,340Net loss
    
    
    (3,950
    )Basic and diluted loss per share
    
    
    (1.27
    )
  66




---



##### Table of Contents



Note 2  Acquisition of Prestige Community Bank (continued)
       67




---



##### Table of Contents



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
    
    
    7,391Adjustment for contract termination costs and other purchase accounting
adjustments
    
    
    874Goodwill Resulting from Acquisition
    
    $
    1,194
  Note 3  Restrictions on Cash and Due From Banks
   68




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##### Table of Contents



Note 4  Securities Available for Sale
  December 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Dollars in thousands)Available for saleObligations of U.S. government agencies
and corporations
    
    $
    21,000
    
    
    $
    94
    
    
    $
    
    
    
    $
    21,094Mortgage-backed securities
    
    
    15,302
    
    
    
    400
    
    
    
    
    
    
    
    15,702Other securities
    
    
    1,000
    
    
    
    
    
    
    
    (37
    )
    
    
    963Total investment securities available for sale
    
    $
    37,302
    
    
    $
    494
    
    
    $
    (37
    )
    
    $
    37,759
 December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Dollars in thousands)Available for saleObligations of U.S. government agencies
and corporations
    
    $
    40,995
    
    
    $
    3
    
    
    $
    
    
    
    $
    40,998Mortgage-backed securities
    
    
    4,020
    
    
    
    8
    
    
    
    
    
    
    
    4,028Total investment securities available for sale
    
    $
    45,015
    
    
    $
    11
    
    
    $
    
    
    
    $
    45,026
    December 31, 2008Available for Sale SecuritiesAmortizedCost
    
    
    Fair Value(Dollars in thousands)Due within one year
    
    $
    15,000
    
    
    $
    15,026Due after one year through five years
    
    
    7,000
    
    
    
    7,03122,000
    
    
    
    22,057Mortgage-backed securities
    
    
    15,302
    
    
    
    15,702Total
    
    $
    37,302
    
    
    $
    37,759
  69




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##### Table of Contents



Note 5  Loans Receivable
  2008
    
    
    2007(Dollars in thousands)Commercial
    
    $
    47,729
    
    
    $
    33,506Commercial real estate
    
    
    49,302
    
    
    
    24,590Residential real estate
    
    
    39,460
    
    
    
    23,708Home equity lines of credit
    
    
    15,220
    
    
    
    10,419Consumer
    
    
    20,007
    
    
    
    12,891Total Loans
    
    
    171,718
    
    
    
    105,114Allowance for loan losses
    
    
    (1,777
    )
    
    
    (1,055
    )Net deferred loan costs
    
    
    17
    
    
    
    93Net Loans
    
    $
    169,958
    
    
    $
    104,152
   Note 6  Transactions with Executive Officers, Directors and Principal Shareholders
   70




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##### Table of Contents



Note 6  Transactions with Executive Officers, Directors and Principal Shareholders (continued)
  For the year endedDecember 31,2008
    
    
    2007(Dollars in thousands)Balance , beginning of period
    
    $
    633
    
    
    $
    494New loans (1)
    
    
    5,830
    
    
    
    176Repayments and other reductions
    
    
    (2,396
    )
    
    
    (37
    )Balance, December 31
    
    $
    4,067
    
    
    $
    633
 (1)
    
    Included as a component of new loans is $3.5 million
related to new directors from the acquisition of Prestige and the
addition of a new executive officer.  Note 7  Allowance for Loan Losses
  2008
    
    
    2007
    
    
    2006(Dollars in thousands)Balance, beginning of year
    
    $
    1,055
    
    
    $
    634
    
    
    $
    2Provision for loan losses
    
    
    588
    
    
    
    421
    
    
    
    632Reserve from Prestige Community Bank acquisition
    
    
    150
    
    
    
    
    
    
    
    Loans charged off
    
    
    (16
    )
    
    
    
    
    
    
    Balance, end of year
    
    $
    1,777
    
    
    $
    1,055
    
    
    $
    634
    71




---



##### Table of Contents



Note 8  Premises and Equipment
  2008
    
    
    2007(Dollars in thousands)Leasehold improvements
    
    $
    887
    
    
    $
    249Furniture, fixtures and equipment
    
    
    619
    
    
    
    319Automobile
    
    
    21
    
    
    
    21Computer equipment and data
processing software
    
    
    256
    
    
    
    2031,783
    
    
    
    792Accumulated depreciation
    
    
    (472
    )
    
    
    (218
    )$
    1,311
    
    
    $
    574
  Note 9  Deposits
  2008
    
    
    2007(Dollars in thousands)Demand, non-interest bearing
    
    $
    10,136
    
    
    $
    6,846Demand, interest-bearing
    
    
    2,743
    
    
    
    1,485Money market and savings accounts
    
    
    35,938
    
    
    
    45,403Time, $100,000 and over
    
    
    31,047
    
    
    
    21,627Time, other
    
    
    89,595
    
    
    
    40,943$
    169,459
    
    
    $
    116,304
   2008(Dollars in thousands)2009
    
    $
    86,2192010
    
    
    10,2202011
    
    
    16,4472012
    
    
    3,5712013
    
    
    4,185$
    120,642
  72




---



##### Table of Contents



Note 10  Short-Term Borrowings
      73




---



##### Table of Contents



Note 10  Short-Term Borrowings (continued)
  At or for the years endedDecember 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Federal funds purchased:Balance at year end
    
    $
    
    
    
    $
    3,014
    
    
    $
    4,968Weighted average rate at year end
    
    
    
    
    
    
    3.69
    %
    
    
    5.34
    %Maximum month end balance
    
    $
    4,027
    
    
    $
    6,492
    
    
    $
    6,619Average daily balance during the year
    
    $
    68
    
    
    $
    120
    
    
    $
    281Weighted average rate during the year
    
    
    2.39
    %
    
    
    5.42
    %
    
    
    5.10
    %Securities sold under agreements to repurchase:Balance at year end
    
    $
    290
    
    
    $
    85
    
    
    $
    6Weighted average rate at year end
    
    
    0.25
    %
    
    
    3.75
    %
    
    
    4.75
    %Maximum month end balance
    
    $
    5,020
    
    
    $
    247
    
    
    $
    51Average daily balance during the year
    
    $
    1,474
    
    
    $
    65
    
    
    $
    5Weighted average rate during the year
    
    
    1.46
    %
    
    
    4.67
    %
    
    
    4.75
    %Other short-term borrowings:Balance at year end
    
    $
    12,888
    
    
    $
    14,998
    
    
    $
    17,991Weighted average rate at year end
    
    
    0.64
    %
    
    
    5.50
    %
    
    
    6.31
    %Maximum month end balance
    
    $
    14,463
    
    
    $
    14,998
    
    
    $
    29,989Average daily balance during the year
    
    $
    3,173
    
    
    $
    90
    
    
    $
    668Weighted average rate during the year
    
    
    0.96
    %
    
    
    6.02
    %
    
    
    6.31
    %
  Note 11  Long-Term Debt
   74




---



##### Table of Contents



Note 11  Long-Term Debt (continued)
  WeightedBalance
    
    
    Average Rate(Dollars in thousands)2012
    
    $
    6,000
    
    
    
    4.09
    %2013
    
    
    2,000
    
    
    
    4.05
    %$
    8,000
    
    
    
    4.08
    %
  Note 12  Lease Commitments
  MinimumLeasePayments(Dollars in thousands)2009
    
    $
    5072010
    
    
    5252011
    
    
    5252012
    
    
    5252013
    
    
    525Thereafter
    
    
    3,125$
    5,732
  75




---



##### Table of Contents



Note 12  Lease Commitments (continued)
    Note 13  Change in Control Agreements
   Note 14  Shareholders Equity
   76




---



##### Table of Contents



Note 14  Shareholders Equity (continued)
  Note 15  Stock Compensation Program
    For the Periods Ended December 31,2008
    
    
    2007
    
    
    2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    421,000
    
    
    $
    10.00
    
    
    
    411,400
    
    
    $
    10.00
    
    
    
    381,500
    
    
    $
    10.00Granted during year
    
    
    72,950
    
    
    
    10.25
    
    
    
    22,000
    
    
    
    10.00
    
    
    
    55,400
    
    
    
    10.00Options exchanged  Prestige
acquisition (1)
    
    
    147,022
    
    
    
    10.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/cancelled during year
    
    
    (86,222
    )
    
    
    10.02
    
    
    
    (12,400
    )
    
    
    10.00
    
    
    
    (25,500
    )
    
    
    10.00Outstanding at end of year (1)
    
    
    554,750
    
    
    $
    10.03
    
    
    
    421,000
    
    
    $
    10.00
    
    
    
    411,400
    
    
    $
    10.00Exercisable at end of year (1)
    
    
    117,500
    
    
    $
    10.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (1)
    
    Included in the options exchanged for the Prestige acquisition are 100,000
organizer options issued outside of the 2005 Stock Compensation Program. These
options are both outstanding and exercisable at December 31, 2008 at the weighted
average exercise price of $10.00 per share  77




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##### Table of Contents



Note 15  Stock Compensation Program (continued)
   2008
    
    
    2007
    
    
    2006Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life
    
    
    7 years
    
    
    
    7 years
    
    
    
    7 yearsExpected volatility
    
    
    26
    %
    
    
    25
    %
    
    
    25
    %Risk-free interest rate
    
    
    2.67
    %
    
    
    4.68
    %
    
    
    4.85
    %Weighted average fair value
    
    $
    2.75
    
    
    $
    3.87
    
    
    $
    3.92
      78




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##### Table of Contents



Note 16  Deferred Compensation Plan
     Note 17  Federal Income Taxes
   79




---



##### Table of Contents



Note 17  Federal Income Taxes (continued)
  2008
    
    
    2007(Dollars in thousands)Deferred tax assets:Allowance for loan losses
    
    $
    503
    
    
    $
    305Organization and start-up costs
    
    
    223
    
    
    
    242Net operating loss carryforwards
    
    
    2,458
    
    
    
    1,451Purchase accounting adjustments
    
    
    684
    
    
    
    Contribution carryforward
    
    
    7
    
    
    
    5Non-qualified stock option expense
    
    
    40
    
    
    
    17Other
    
    
    24
    
    
    
    23,939
    
    
    
    2,022Valuation allowance
    
    
    (3,583
    )
    
    
    (1,930
    )Total Deferred Tax Assets, Net of Valuation Allowance
    
    
    356
    
    
    
    92Deferred tax liabilities:Unrealized gain on available for sale securities
    
    
    156
    
    
    
    4Discount accretion
    
    
    2
    
    
    
    1Property and equipment
    
    
    44
    
    
    
    30Cash basis conversions
    
    
    152
    
    
    
    57Other
    
    
    2
    
    
    
    356
    
    
    
    92Net Deferred Tax Asset
    
    $
    
    
    
    $
    
    80




---



##### Table of Contents



Note 17  Federal Income Taxes (continued)
   Note 18Earnings Per Share
   For the year endedDecember 31,2008
    
    
    2007
    
    
    2006(In thousands, except per share information)Basic and diluted loss per shareNet loss
    
    $
    (3,354
    )
    
    $
    (2,376
    )
    
    $
    (2,436
    )Weighted average common shares outstanding
    
    
    2,940
    
    
    
    2,108
    
    
    
    2,108Basic and diluted loss per share
    
    $
    (1.14
    )
    
    $
    (1.13
    )
    
    $
    (1.16
    )
 Note 19  Financial Instruments with Off-Balance Sheet Risk
   81




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##### Table of Contents



Note 19  Financial Instruments with Off-Balance Sheet Risk (continued)
     Note 20  Regulatory Matters
    82




---



##### Table of Contents



Note 20  Regulatory Matters (continued)
   To be WellMinimum
    
    
    Capitalized underCapital
    
    
    Prompt CorrectiveActual
    
    
    Requirement
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)December 31, 2008Total capital (to risk-weighted assets)
    
    $
    20,179
    
    
    
    12.56
    %
    
    $
    312,856
    
    
    
    38.0
    %
    
    $
    316,069
    
    
    
    310.0
    %Tier 1 capital (to risk-weighted assets)
    
    
    18,393
    
    
    
    11.45
    
    
    
    36,428
    
    
    
    34.0
    
    
    
    39,642
    
    
    
    36.0Tier 1 capital (to total assets)
    
    
    18,393
    
    
    
    8.93
    
    
    
    38,235
    
    
    
    34.0
    
    
    
    310,294
    
    
    
    35.0December 31, 2007Total capital (to risk-weighted assets)
    
    $
    16,441
    
    
    
    16.01
    %
    
    $
    38,217
    
    
    
    38.0
    %
    
    $
    310,271
    
    
    
    310.0
    %Tier 1 capital (to risk-weighted assets)
    
    
    15,381
    
    
    
    14.98
    
    
    
    34,108
    
    
    
    34.0
    
    
    
    36,163
    
    
    
    36.0Tier 1 capital (to total assets)
    
    
    15,381
    
    
    
    12.30
    
    
    
    310,000
    
    
    
    38.0
    
    
    
    310,000
    
    
    
    38.0
    83




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##### Table of Contents



Note 20  Regulatory Matters (continued)
  Note 21  Fair Value Measurements and Fair Values of Financial Instruments
  Fair
Value Measurements
 Effective Date of FASB Statement No.
157 Determining the Fair Value of a Financial Asset
When the Market for that Asset is Not Active
  84




---



##### Table of Contents



Note 21  Fair Value Measurements and Fair Values of Financial Instruments (continued)
  Level 1
 Level 2
 Level 3
   (Level 1)Quoted Prices
    
    
    (Level 2)in Active
    
    
    Significant
    
    
    (Level 3)Markets for
    
    
    Other
    
    
    SignificantDecember 31,
    
    
    Identical
    
    
    Observable
    
    
    UnobservableDescription
    
    2008
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(Dollars in thousands)Securities available for sale
    
    $
    37,759
    
    
    $
    
    
    
    $
    37,759
    
    
    $
    
  (Level 1)Quoted Prices
    
    
    (Level 2)in Active
    
    
    Significant
    
    
    (Level 3)Markets for
    
    
    Other
    
    
    SignificantDecember 31,

    
    
    Identical
    
    
    Observable
    
    
    UnobservableDescription
    
    2008
    
    
    Assets
    
    
    Inputs
    
    
    Inputs(Dollars in thousands)Impaired loans
    
    $
    639
    
    
    $
    
    
    
    $
    
    
    
    $
    639
   85




---



##### Table of Contents



Note 21  Fair Value Measurements and Fair Values of Financial Instruments (continued)
  Cash and Cash Equivalents
  Securities
  Loans Receivable
  Impaired Loans
 Accounting by
Creditors for Impairment of a Loan ,
  86




---



##### Table of Contents



Note 21  Fair Value Measurements and Fair Values of Financial Instruments (continued)
 Restricted Investment in Bank Stock
  Accrued Interest Receivable and Payable
  Deposit Liabilities
  Short-Term Borrowings
  Long-Term Debt
  Off-Balance Sheet Financial Instruments
   87




---



##### Table of Contents



Note 21  Fair Value Measurements and Fair Values of Financial Instruments (continued)
  December 31,2008
    
    
    2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(Dollars in thousands)Assets:Cash and cash equivalents
    
    $
    1,513
    
    
    $
    1,513
    
    
    $
    943
    
    
    $
    943Securities available for sale
    
    
    37,759
    
    
    
    37,759
    
    
    
    45,026
    
    
    
    45,026Loans receivable, net
    
    
    169,958
    
    
    
    173,055
    
    
    
    104,152
    
    
    
    105,125Restricted stock
    
    
    1,737
    
    
    
    1,737
    
    
    
    50
    
    
    
    50Accrued interest receivable
    
    
    815
    
    
    
    815
    
    
    
    545
    
    
    
    545Liabilities:Deposits
    
    
    169,459
    
    
    
    171,630
    
    
    
    116,304
    
    
    
    116,529Short-term borrowings
    
    
    13,178
    
    
    
    13,178
    
    
    
    18,097
    
    
    
    18,097Long-term debt
    
    
    8,000
    
    
    
    8,416
    
    
    
    390
    
    
    
    391Accrued interest payable
    
    
    1,020
    
    
    
    1,020
    
    
    
    858
    
    
    
    858Off-balance sheet credit related instruments:Commitments to extend credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  88




---



##### Table of Contents



Note 22  Parent Company Only Financial Information
  CONDENSED BALANCE SHEETS
 December 31,2008
    
    
    2007(Dollars in thousands)AssetsCash and cash equivalents
    
    $
    259
    
    
    $
    190Investment in subsidiary
    
    
    20,043
    
    
    
    15,391Other investments
    
    
    25
    
    
    
    25Other assets
    
    
    
    
    
    
    105Total assets
    
    $
    20,327
    
    
    $
    15,711Liabilities and shareholders equitySubordinated debt
    
    $
    
    
    
    $
    390Other liabilities
    
    
    26
    
    
    
    1Total liabilities
    
    
    26
    
    
    
    391Shareholders equity
    
    
    20,301
    
    
    
    15,320Total liabilities and shareholders equity
    
    $
    20,327
    
    
    $
    15,711
 CONDENSED INCOME STATEMENTS
 For the periodMay 11, 2007For the year
    
    
    throughended December
    
    
    December 31,31, 2008
    
    
    2007(Dollars in thousands)Interest from subsidiary
    
    $
    6
    
    
    $
    6Total income
    
    
    6
    
    
    
    6Interest on subordinated debt
    
    
    12
    
    
    
    11Non-interest expenses
    
    
    68
    
    
    
    67Total expenses
    
    
    80
    
    
    
    78Loss before equity in undistributed net loss of subsidiary
    
    
    (74
    )
    
    
    (72
    )Equity in undistributed net loss of subsidiary
    
    
    (3,280
    )
    
    
    (1,428
    )Net loss
    
    $
    (3,354
    )
    
    $
    (1,500
    )
  89




---



##### Table of Contents



Note 22  Parent Company Only Financial Information (continued)
 CONDENSED STATEMENTS OF CASH FLOWS
 For the periodFor the year
    
    
    May 11, 2007ended
    
    
    throughDecember 31,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Operating activities:Net loss
    
    $
    (3,354
    )
    
    $
    (1,500
    )Adjustments to reconcile net loss to net cash provided by (used
in)
operating activities:Equity in undistributed net loss of subsidiary
    
    
    3,280
    
    
    
    1,428Interest accrued on debt converted to equity
    
    
    13
    
    
    
    10Net (increase) decrease in other assets
    
    
    105
    
    
    
    (104
    )Net increase in other liabilities
    
    
    25
    
    
    
    1Net cash provided by (used in) operating activities
    
    
    69
    
    
    
    (165
    )Investing activities:Purchase of investment securities available for sale
    
    
    
    
    
    
    (25
    )Net cash used in investing activities
    
    
    
    
    
    
    (25
    )Financing activities:Proceeds from long-term subordinated debt
    
    
    
    
    
    
    380Net cash provided by financing activities
    
    
    
    
    
    
    380Net increase in cash and cash equivalents
    
    
    69
    
    
    
    190Cash and cash equivalents at beginning of the period
    
    
    190
    
    
    
    Cash and cash equivalents at end of the period
    
    $
    259
    
    
    $
    190Supplementary disclosures of cash flows informationNoncash activity:Conversion of subordinated debentures to common stock
    
    $
    403
    
    
    $
    
  90




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##### Table of Contents



Note 23  Subsequent Events
 De-registration as Public Company
  Issuance of Preferred Stock and Warrant Preferred  TARP Capital Purchase Program
     91




---



##### Table of Contents



Note 23  Subsequent Events (continued)
    92




---



##### Table of Contents



Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A(T). Controls and Procedures
   
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
   93




---



##### Table of Contents



Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  
 Item 15. Exhibits, Financial Statement Schedules
            94




---



##### Table of Contents



EXHIBIT INDEX
 2.1
    
    
    Agreement and Plan of Merger, dated as of October 19, 2007, by and among First
Priority Financial Corp., First Priority Bank and Prestige Community Bank (incorporated
by reference to Annex A to registration statement No. 333-147950 on Form S-4 filed with
the Securities and Exchange Commission on December 7, 2007) (schedules are omitted;
First Priority Financial Corp. agrees to furnish copies of such schedules upon request)3.1
    
    
    Articles of Incorporation of First Priority Financial Corp. (incorporated by
reference to registration statement No. 333-147950 on Form S-4 filed with the
Securities and Exchange Commission on December 7, 2007)3.2
    
    
    Bylaws of First Priority Financial Corp. (incorporated by reference to
registration statement No. 333-147950 on Form S-4 filed with the Securities and
Exchange Commission on December 7, 2007)3.3
    
    

Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock,
Series A of First Priority Financial Corp. (filed herewith)3.4
    
    

Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock,
Series B of First Priority Financial Corp. (filed herewith)4.1
    
    
    Warrant, dated February 20, 2009, to purchase Series B Preferred Stock of First
Priority Financial Corp. (filed herewith)10.1
    
    
    First Priority Stock Compensation Program (incorporated by reference to
registration statement No. 333-147950 on Form S-4 filed with the Securities and
Exchange Commission on December 7, 2007)10.2
    
    
    Change in Control Agreement between First Priority Bank and David E. Sparks
(incorporated by reference to registration statement No. 333-147950 on Form S-4 filed
with the Securities and Exchange Commission on December 7, 2007)10.3
    
    
    Change in Control Agreement between First Priority Bank and Lawrence E. Donato
(incorporated by reference to registration statement No. 333-147950 on Form S-4 filed
with the Securities and Exchange Commission on December 7, 2007)10.4
    
    
    Change in Control Agreement between First Priority Bank and Mary Ann Messmer
(incorporated by reference to registration statement No. 333-147950 on Form S-4 filed
with the Securities and Exchange Commission on December 7, 2007)10.5
    
    
    First Priority Financial Corp. Deferred Compensation Plan (incorporated by
reference to the Report on Form 8-K filed with the Securities and Exchange Commission
on December 16, 2008)
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10.6
    
    
    Letter Agreement, including Securities Purchase Agreement, dated February 20,
2009, between First Priority Financial Corp. and the United States Department of the
Treasury (filed herewith)10.7
    
    
    Form of Letter Agreement, dated February 20, 2009, between First Priority
Financial Corp. and certain of its executive officers relating to executive
compensation limitations under the United States Treasury Departments Capital Purchase
Program (filed herewith)21
    
    
    Subsidiaries of the Registrant (filed herewith)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 Executive Officer in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002, (filed herewith)
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SIGNATURES
  FIRST PRIORITY FINANCIAL CORP.
(Registrant)/s/ David E. Sparks,Chairman, President and Chief Executive Officer SIGNATURE
    
    TITLE
    
    DATE/s/ David E. Sparks
    
    Chairman, Chief
Executive Officer and
Director
    
    March 17, 2009(Principal Executive Officer)/s/ Lawrence E. Donato
    
    Chief Financial Officer
and Director
    
    March 17, 2009(Principal Financial and
Accounting Officer)/s/ Howard R. Berlin
    
    Director
    
    March 17, 2009/s/ John K. Desmond, Jr.
    
    Director
    
    March 17, 2009/s/ Robert J. Fairbaugh
    
    Director
    
    March 17, 2009/s/ Mary Ann Messmer
    
    Director
    
    March 17, 2009/s/ Alan P. Novak
    
    Director
    
    March 17, 2009/s/ Mel A. Shaftel
    
    Director
    
    March 17, 2009/s/ Vincent P. Small, Jr.
    
    Director
    
    March 17, 2009/s/ Patrick M. Smith
    
    Director
    
    March 17, 2009/s/ Christopher E. Spinieo
    
    Director
    
    March 17, 2009/s/ Michael G. Wade
    
    Director
    
    March 17, 2009/s/ Richard M. Wesselt
    
    Director
    
    March 17, 2009/s/ William L. Wetty
    
    Director
    
    March 17, 2009/s/ Samuel J. Worthington, Jr.
    
    Director
    
    March 17, 2009
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EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    
    Agreement and Plan of Merger, dated as of October 19, 2007, by and among First
Priority Financial Corp., First Priority Bank and Prestige Community Bank (incorporated
by reference to Annex A to registration statement No. 333-147950 on Form S-4 filed with
the Securities and Exchange Commission on December 7, 2007) (schedules are omitted;
First Priority Financial Corp. agrees to furnish copies of such schedules
upon request)3.1
    
    
    Articles of Incorporation of First Priority Financial Corp. (incorporated by
reference to registration statement No. 333-147950 on Form S-4 filed with the
Securities and Exchange Commission on December 7, 2007)3.2
    
    
    Bylaws of First Priority Financial Corp. (incorporated by reference to
registration statement No. 333-147950 on Form S-4 filed with the Securities and
Exchange Commission on December 7, 2007)3.3
    
    

Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock,
Series A of First Priority Financial Corp. (filed herewith)3.4
    
    

Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock,
Series B of First Priority Financial Corp. (filed herewith)4.1
    
    
    Warrant, dated February 20, 2009, to purchase Series B Preferred Stock of First
Priority Financial Corp. (filed herewith)10.1
    
    
    First Priority Stock Compensation Program (incorporated by reference to
registration statementNo. 333-147950 on Form S-4 filed with the Securities and
Exchange Commission on December 7, 2007)10.2
    
    
    Change in Control Agreement between First Priority Bank and David E. Sparks
(incorporated by reference to registration statement No. 333-147950 on Form S-4 filed
with the Securities and Exchange Commission on December 7, 2007)10.3
    
    
    Change in Control Agreement between First Priority Bank and Lawrence E. Donato
(incorporated by reference to registration statement No. 333-147950 on Form S-4 filed
with the Securities and Exchange Commission on December 7, 2007)10.4
    
    
    Change in Control Agreement between First Priority Bank and Mary Ann Messmer
(incorporated by reference to registration statement No. 333-147950 on Form S-4 filed
with the Securities and Exchange Commission on December 7, 2007)
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ExhibitNumber
    
    Description10.5
    
    
    First Priority Financial Corp. Deferred Compensation Plan (incorporated by
reference to the Report on Form 8-K filed with the Securities and Exchange Commission
on December 16, 2008)10.6
    
    
    Letter Agreement, including Securities Purchase Agreement, dated February 20,
2009, between First Priority Financial Corp. and the United States Department of the
Treasury (filed herewith)10.7
    
    
    Form of Letter Agreement, dated February 20, 2009, between First Priority
Financial Corp. and certain of its executive officers relating to executive
compensation limitations under the United States Treasury Departments Capital Purchase
Program (filed herewith)21
    
    
    Subsidiaries of the Registrant (filed herewith)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 Executive Officer in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002, (filed herewith)
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BOARD OF DIRECTORS OF FIRST PRIORITY FINANCIAL CORP
 David E. SparksChairman & Chief 
Executive Officer of
First Priority
Financial Corp. and
Chairman and Chief 
Executive Officer of 
First Priority Bank
    
    Howard R. BerlinPrivate Investor:
Retired Partner,
Managing Director &
Portfolio Manager
of Neuberger
Berman, LLC
    
    John K. Desmond, Jr.Owner & Operator of
The Desmond Great
Valley Hotel
in Malvern, PA and
The Desmond Hotel in
Albany, NY
    
    Lawrence E. DonatoChief Financial
Officer of First
Priority Financial
Corp. and Chief
Operating Officer of
First Priority BankRobert J. FairbaughCertified Public
    
    Mary Ann MessmerPresident of
    
    Alan P. NovakAttorney at Conrad,
    
    Mel A. ShaftelPrivate Investor:Accountant & Owner
of Dunlap &
Associate, PC
    
    First
Priority Bank
    
    OBrien, Gellman and
Rohn; and President,
Novak Strategic
Advisors
    
    Retired Vice Chairman
of Lehman BrothersVincent P. Small, Jr.Private Investor: 
Certified Public 
Accountant & Retired 
Partner of 
Pricewaterhouse 
Coopers
    
    Patrick M. SmithCertified Public
Accountant &
Partner of
Rosenberg, Smith,
Cooney and
Migliore, P.C.
    
    Christopher E. SpinieoPresident & Owner of
Spinieo, Inc.
    
    Michael G. WadeOwner & President of
Knights Abstract, Inc.Richard M. WesseltOwner & President of 
Wesselt Capital 
Group
    
    William L. WettyPrivate Investor:
Founder and Former
President & Chief
Executive Officer
of A&L Handles, Inc
    
    S. James Worthington,
Jr.An Owner of the
Newtown Athletic Club
in Newtown, PA
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##### Table of Contents



CORPORATE OFFICE
 www.fpbk.com
 BANKING LOCATIONS
  Malvern Office
    
    Wyomissing Office
    
    Newtown Office2 West Liberty Boulevard
    
    1200 Broadcasting Rd.
    
    104 Pheasant RunSuite 104
    
    Suite 103
    
    Suite 130Malvern, PA 19355
    
    Wyomissing, PA 19610
    
    Newtown, PA 18940(610) 280-7100
    
    (610) 375-6054
    
    (215) 867-2401Plumstead Office
    
    Blue Bell Office5936 Easton Road
    
    10 Sentry Parkway, Suite 100Pipersville, PA 18947
    
    Blue Bell, PA 19422(267) 362-1200
    
    (610) 940-2635
 OFFICERS
 First Priority Financial Corp.
    
    First Priority BankDavid E. Sparks,Chairman, President & Chief Executive
Officer
    
    David E. SparksChairman & Chief Executive OfficerLawrence E. Donato,Chief Financial Officer
    
    Lawrence E. Donato,Managing Director, Chief Operating OfficerMark J. Myers,Chief Accounting Officer/Controller
    
    Alice D. Flaherty,Managing Director, TreasurerMary Ann Messmer,Managing Director, PresidentMatthew L. Miller,Managing Director, Chief Information OfficerThomas M. Miller,Managing Director, Chief Lending OfficerMark J. Myers,
Managing Director, Chief Financial Officer