Item 1.
Business.
First Priority Financial Corp.
First Priority Financial Corp. (“First Priority”, the “Company”) was incorporated under the laws of the Commonwealth of Pennsylvania on February 13, 2007, for the purpose of becoming the holding company of First Priority Bank (the “Bank”) and had no prior operating history. On May 11, 2007, as a result of a reorganization and merger, First Priority Bank became a wholly-owned subsidiary of First Priority.
On February 28, 2013, First Priority and Affinity Bancorp, Inc. (“Affinity”), the holding company for Affinity Bank of PA (“Affinity Bank”), merged with and into First Priority. The fair value of total assets acquired as a result of the merger were $174.4 million, including $77.4 million in loans, and deposits of $150.9 million. Total incremental equity resulting from the transaction was $10.1 million. A total of 1,933,665 shares of First Priority common stock were issued in connection with the merger. In conjunction with the completion of the merger, the Company also issued 1,268,576 shares of First Priority common stock as part of a private placement offering resulting in incremental net equity proceeds of $6.6 million.
First Priority provides banking services through First Priority Bank and does not engage in any activities other than banking and related activities. As of December 31, 2014, First Priority had total assets of $492.3 million and total shareholders’ equity of $50.2 million.
First Priority Bank
First Priority Bank is a state-chartered commercial banking institution which was incorporated under the laws of the Commonwealth of Pennsylvania on May 25, 2005. First Priority Bank’s deposits are insured by the FDIC up to the maximum amount permitted for all banks. As of December 31, 2014, First Priority Bank had total assets of $492.1 million, total loans of $375.2 million, total deposits of $378.9 million and total shareholder’s equity of $49.4 million.
First Priority Bank engages in a full service commercial and consumer banking business with strong private banking and individual wealth management services. First Priority Bank offers a variety of commercial, private banking, and consumer loans, mortgage products and commercial real estate financing. First Priority Bank does not engage in sub-prime lending. The Company’s operations are significantly affected by prevailing economic conditions, competition, and the monetary, fiscal, and regulatory policies of governmental agencies. Lending activities are influenced by a number of factors, including the general credit needs of individuals and small and medium-sized businesses in the Company’s market area, competition, the current regulatory environment, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, competition, account maturities, and the level of personal income and savings in the market area.
First Priority Bank also offers certain financial planning and investment management services. These investment services are provided by First Priority Financial Services, a Division of First Priority Bank, through an agreement with a third party provider. In addition, various life insurance products are offered through First Priority Bank, and the Bank has also entered into solicitation agreements with several investment advisors to provide portfolio management services to customers of the Bank.
First Priority Bank currently seeks deposits and commercial and consumer banking relationships through its ten banking offices. The Bank provides deposit products that include checking, money market and savings accounts, and certificates of deposit as well as other deposit services, including cash management and electronic banking products and online account opening capabilities. The Bank obtains funding in the local community by providing excellent service and competitive rates to its customers and utilizes electronic and print media advertising to attract current and potential deposit customers. The Bank also uses brokered certificates of deposit as a cost effective funding alternative.
At December 31, 2014, First Priority had 70 full time employees and 8 part time employees. None of such employees is covered by a collective bargaining agreement, and First Priority believes that it enjoys good relations with its personnel.
Supervision and Regulation
The Company is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”), and to supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Bank is also subject to the supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as its primary federal regulator and as the
insurer of the Bank’s deposits. The Bank is also regulated and examined by the Pennsylvania Department of Banking and Securities (the “Department”).
The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. The BHCA requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require approval of the Department.
A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5% of the voting shares of any company engaged in nonbanking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB’s risk-based capital guidelines. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets. Currently, the required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, less certain intangible assets. The remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, 45% of net unrealized gains on marketable equity securities, and a limited amount of the general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio, under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% to 5%. The Bank is subject to similar capital requirements adopted by the FDIC.
In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements became effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.
Dividends
Federal and state laws impose limitations on the payment of dividends by the Bank. The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by the Banks to their additional paid-in capital.
In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment of dividends by the Banks if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the Banks.
Under Pennsylvania law, the Company may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as they become due in the usual course of business and, after giving effect to the dividend, the total assets of the Company would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time of
distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the dividend.
It is also the policy of the FRB that a bank holding company generally only pay dividends on common stock out of net income available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with a bank holding company’s capital needs, asset quality, and overall financial condition. In the current financial and economic environment, the FRB has indicated that bank holding companies should carefully review their dividend policy and has discouraged dividend pay-out ratios at the 100% level unless both asset quality and capital are very strong. A bank holding company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.
Regulation of the Bank
The Bank is regulated by the FDIC and the Department. The laws that such agencies enforce limit the specific types of businesses in which the Bank may engage, and the products and services that the Bank may offer to customers. Generally, these limitations are designed to protect the insurance fund of the FDIC and/or the customers of the Bank, and not the Bank or its shareholders. From time to time, various types of new federal and state legislation have been proposed that could result in additional regulation of, and restrictions of, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Some of the major regulatory provisions that affect the business of the Bank are discussed briefly below.
Prompt Corrective Action
The FDIC has specified the levels at which an insured institution will be considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized” category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent institution and liability for civil money damages for failure to fulfill its commitment on that guarantee; and (2) the placement of a hold on increases in assets, number of branches, or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions, the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.
Deposit Insurance
The Bank’s deposits are insured up to $250,000 per depositor by the FDIC. The FDIC maintains the Deposit Insurance Fund (the “DIF”) by assessing depository institutions an insurance premium.
Beginning with the second quarter of 2011, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the assessment base that the FDIC uses to calculate assessment premiums became a bank’s average assets minus average tangible equity. Assessment rates range from a low of 2.5 basis points to a high of 45 basis points, per $100 of assets.
The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the DIF to achieve a reserve ratio of 1.35% of insurance fund insured deposits by September 2020. In addition, the FDIC has established a “designated reserve ratio” of 2.0%, a target ratio that, until it is achieved, will not likely result in the FDIC reducing assessment rates. In attempting to achieve the mandated 1.35% ratio, the FDIC is required to implement assessment formulas that charge banks over $10 billion in asset size more than banks under that size. Those new formulas began in the second quarter of 2011, but did not affect the Bank. Under the Dodd-Frank Act, the FDIC is authorized to make reimbursements from the insurance fund to banks if the reserve ratio exceeds 1.50%, but the FDIC has adopted the “designated reserve ratio” of 2.0% and has announced that any reimbursements from the fund are indefinitely suspended.
Other Legislation
The Dodd-Frank Act was enacted in July 2010. This law has affected bank regulatory structure and the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.
Certain provisions of the Dodd-Frank Act have and will continue to impact the Company. For example, effective July 21, 2011, a provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. This significant change affects competition for deposits and could have an adverse impact on the Company’s interest expense.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Under the Dodd-Frank Act, the assessment base will no longer be an institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.
Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital; however, trust preferred securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) after May 19, 2010, will no longer count as Tier 1 capital. Trust preferred securities still will be entitled to be treated as Tier 2 capital.
The Dodd-Frank Act requires publicly traded companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” arrangements, and may allow greater access by shareholders to the company’s proxy material by authorizing the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
At this time, it is difficult to predict the long-term impact of the Dodd-Frank Act rules and regulations on community banks. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control, and ethics standards for accounting firms. In response to the legislation, the national securities exchanges have adopted new rules relating to certain matters, including the independence of members of a company’s audit committee as a condition to listing or continued listing.
Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations. The Company cannot predict how any new legislation, or new rules adopted by federal or state banking agencies, may affect the business of the Company and its subsidiaries in the future. Given that the financial industry remains under stress and severe scrutiny, and given that the U.S. economy has not yet fully recovered to pre-crisis levels of activity, the Company expects that there will be significant legislation and regulatory actions that may materially affect the banking industry for the foreseeable future.
Environmental Laws
Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental cleanup costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing cleanup costs, and liability to the institution for cleanup costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. The Company is not aware of any borrower who is currently subject to any environmental investigation or cleanup proceeding that is likely to have a material adverse effect on the financial condition or results of operations of the Company.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments, and deposits through its open market operations in the United States Government securities and through its regulation of, among other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Item 1A.
Item 1A. Risk Factors.
Not applicable.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
The principal executive offices of First Priority and First Priority Bank, and the full-service main office of First Priority Bank, are located in an office building in Malvern, Pennsylvania. First Priority Bank currently has offices located in Chester, Berks, Bucks and Montgomery Counties, Pennsylvania, at the following locations:
Office
Office Location
Square
Footage
Owned /
Leased
Malvern-Headquarters /Main Office
2 W. Liberty Blvd., Malvern, PA 19355
11,775
Leased
Blue Bell
10 Sentry Parkway, Suite 100, Blue Bell, PA 19422
2,575
Leased
Exeter
4541 Perkiomen Avenue, Reading, PA 19606
2,931
Owned(1)
Muhlenberg
4200 N. 5th Street Highway, Temple, PA 19560
3,000
Owned(1)
Newtown
104 Pheasant Run, Suite 130, Newtown, PA 18940
3,600
Leased
Plumstead
5936 Easton Road, Pipersville, PA 18947
2,655
Leased
Reading
29 N. 6th Street, Reading, PA, 19601
1,173
Leased
Sinking Spring
3101 Shillington Rd., Sinking Spring, PA 19608
3,000
Leased
Towamencin
1758 Allentown Road, Lansdale, PA 19446
3,000
Leased
Wyomissing
1310 Broadcasting Rd., Wyomissing, PA 19610
9,602
Leased
(1)
The buildings located at the Exeter and Muhlenberg locations are owned; but are located on leased real estate. Upon expiration or termination of the lease the buildings will become property of the landlord.
On January 28, 2015, after receiving all required regulatory approvals, First Priority informed customers of its Reading Office that the office will be closing on or about April 30, 2015 and that customer accounts will be reassigned to the Wyomissing Office.
Item 3.
Item 3. Legal Proceedings.
A certain amount of litigation arises in the ordinary course of the business of First Priority and First Priority Bank. In the opinion of the management of First Priority, there are no proceedings pending to which First Priority or First Priority Bank is a party or to which any of their property is subject, that, if determined adversely to them, would be material in relation to First Priority’s shareholders’ equity or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of First Priority and First Priority Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against First Priority or First Priority Bank by governmental authorities.
Item 4.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
The common stock of First Priority has not historically traded on a national securities exchange, listing service, or similar trading platform for listing or quotation of securities, and there has been no active or liquid public trading market for First Priority common stock. To First Priority’s knowledge, only infrequent trades have occurred during 2014 and 2013. On February 28, 2013, First Priority completed a private placement of 1,268,576 shares of its common stock at a price of $5.22 per share. Such price may not reflect actual current market values. Effective March 12, 2015, First Priority common stock began trading on the OTCQX marketplace, under the symbol FPBK.
First Priority has never paid a dividend on its common stock, and no assurance can be given that dividends will be declared on First Priority common stock in the foreseeable future. First Priority has no significant source of cash flow other than dividends from First Priority Bank. First Priority’s ability to pay dividends is subject to restrictions under both Federal and state banking laws which limit its ability to pay dividends. For a description of such restrictions see “Business-Supervision and Regulation” under Item 1 of Part I.
The information required with respect to securities authorized for issuance under First Priority’s compensation plans is set forth in “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”, and incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data.
The following table provides historical consolidated summary financial data for First Priority. The data at or for the five years ended December 31, 2014, as presented below, is derived from First Priority’s audited financial statements for the periods then ended, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto, contained elsewhere herein.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion summarizes First Priority’s results of operations and highlights material changes for the years ended December 31, 2014 and 2013, and its financial condition as of December 31, 2014 and 2013. This discussion is intended to provide additional information about the significant changes in the results of operations presented in the accompanying consolidated financial statements, contained in this document, for First Priority and its wholly owned subsidiary, First Priority Bank. First Priority’s consolidated financial condition and results of operations consist essentially of First Priority Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future. This discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as First Priority’s plans, objectives, expectations and intentions.
Readers should note that many factors, some of which are discussed elsewhere in this report, could affect the future financial results of First Priority and could cause those results to differ materially from those expressed or implied in the forward-looking statements contained in this document.
Overview
The following table sets forth selected measures of First Priority’s financial position or performance for the dates or periods indicated (dollars in thousands).
_____________________
(1)
Total revenue equals net interest income plus non-interest income.
Like most financial institutions, First Priority derives the majority of its income from interest it receives on its interest-earning assets, such as loans and investments. First Priority’s primary source of funds for making these loans and investments is its deposits, on which it pays interest. Consequently, one of the key measures of First Priority’s success is its amount of net interest income, or the difference between the income on its average interest-earning assets and the expense on its average interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield First Priority earns on these average interest-earning assets and the rate it pays on its average interest-bearing liabilities, which is called its net interest spread.
There are risks inherent in all loans, and First Priority maintains an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. This allowance is maintained by charging a provision for loan losses against operating earnings. A detailed discussion of this process, as well as several tables describing the allowance for loan losses is included herein.
In addition to earning interest on its loans and investments, First Priority earns income through other sources, such as fees and other charges to its banking customers and income from providing wealth management services, as well as net gains or losses realized from the sale of assets. The various components of non-interest income, as well as non-interest expense, are described in this section.
Critical Accounting Policies
First Priority has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements. First Priority’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements.
Certain accounting policies involve significant judgments and assumptions by First Priority that have a material impact on the carrying value of certain assets and liabilities. First Priority considers these accounting policies to be critical accounting estimates. The judgment and assumptions used are based on historical experience and other factors, which First Priority believes to be reasonable under the circumstances and have been reasonably consistent with prior results. Because of the nature of the judgments and assumptions made, actual results could differ from these estimates, which could have a material impact on the carrying values of its assets and liabilities and its results of operations. Material estimates that are particularly susceptible to significant change in the near term relate to investment securities impairment evaluation, the valuation of acquired loans, the determination of the allowance for loan
losses, valuation of other real estate owned, the analysis of potential impairment of goodwill, the valuation of deferred tax assets and accounting for stock-based compensation.
Investment Securities Impairment Evaluation. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. When a determination is made that an other-than-temporary impairment exists but the Company does not intend to sell the debt security and it is more likely than not that it will not be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. Management believes that there are no investment securities with other-than-temporary impairment for each of the reporting periods presented.
Acquired Loans. Fair values for acquired loans are based on a discounted cash flow methodology that involves significant assumptions and judgments as to estimate of credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.
Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans.
Pools of loans are evaluated for loss exposure based upon historical loss rates in each category of loans and adjusted for qualitative factors. Management assigned each factor a value to reflect improving, stable or declining conditions based on its best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
See the Allowance for Loan Losses sections related to Balance Sheet Review as of December 31, 2014 and December 31, 2013 for more information.
Other Real Estate Owned. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Any write-down, at or prior to the dates the real estate is considered foreclosed, is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.
Goodwill. Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired in accordance with the acquisition method of accounting. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment.
Income Taxes. Deferred taxes are provided on the liability method whereby deferred tax assets (DTA) are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company files a consolidated federal income tax return with the Bank.
If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
When determining the continuing need for a valuation allowance, the Company assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards, as defined by Accounting Standards Codification (“ASC”) Topic 740-10-30-18. This guidance related to when a valuation allowance on the DTA should be maintained, generally provides that the valuation allowance should be reversed, when in the judgment of management, it is more likely than not that the DTA will be realized. Management has determined that the DTA will be realized and has reversed the valuation allowance.
Stock Based Compensation. Compensation costs related to share-based payment transactions are recognized in the financial statements over the period that an employee provides service in exchange for the award. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on management’s assumption.
Results of Operations
Income Statement Review
First Priority’s results of operations are affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense accrued on deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans; (3) non-interest income, consisting of income from wealth management services, fees and other charges to our banking customers, and net gains or losses realized from the sale of assets; (4) non-interest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes, including deferred taxes, when applicable. Each of these major elements is reviewed in more detail in the following discussion.
Results of Operations Comparative Summary
The results of Affinity’s operations are included in the Company’s consolidated financial statements prospectively from the date of the merger, February 28, 2013.
Shown in the table below are the reported results of operations as well as the increase (decrease) for the respective periods.
Summary
For the year ended December 31, 2014, First Priority reported net income of $6.93 million compared to $196 thousand for the year ended December 31, 2013. Reported results are before preferred dividends and net warrant amortization, totaling $579 thousand and $532 thousand for the years ended December 31, 2014 and 2013, respectively. The resulting income to common shareholders, after the preferred dividends and amortization, was $6.35 million, or $0.98 per basic and fully diluted common share for the year ended December 31, 2014, compared to a net loss of $336 thousand, or $0.06 per basic and fully diluted common share, on this same basis for the year ended December 31, 2013.
First Priority’s reported consolidated net income for the year ended December 31, 2014 includes an income tax benefit totaling $4.50 million related primarily to the reversal of the valuation allowance on deferred taxes, based management’s judgment that it is
more likely than not that the Company’s deferred tax asset will be realized. Included in the results for the year ended December 31, 2013 are $1.53 million of merger related costs resulting from the merger with Affinity.
Net Interest Income
First Priority’s primary source of revenue is net interest income. Net interest income is determined by the average balances of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid on these balances. The amount of net interest income recorded by First Priority is affected by the rate, mix and amount of growth of interest-earning assets and interest-bearing liabilities, the amount of interest-earning assets as compared to the amount of interest-bearing liabilities, and by changes in interest rates earned and interest rates paid on these assets and liabilities.
The following table sets forth, for the years ended December 31, 2014 and 2013, information related to First Priority’s average balances, yields on average assets, and costs of average liabilities. Average balances are derived from the daily balances throughout the periods indicated and yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average loans are stated net of deferred costs. The net dollar amounts and percentage changes of interest income and expense are presented for comparative purposes.
Analysis of Changes in Net Interest Income
Net interest income can also be analyzed in terms of the impact of changing interest rates and changing volume as shown in the Changes in Net Interest Income table below which sets forth the effect which varying levels of average interest-earning assets, interest-bearing liabilities and the applicable yields and rates have had on changes in net interest income for the periods presented.
For the year ended December 31, 2014, net interest income increased 8.8%, or $1.28 million, to $15.78 million compared to $14.50 million for the same period in 2013. Net interest margin declined 11 basis points from 3.81% for the year ended December 31, 2013 to 3.70% for the same period in 2014. Net interest spread, defined as the mathematical difference between the yield on average earning assets and the rate paid on average interest bearing liabilities, declined 8 basis points from 3.63% for the year ended December 31, 2013 to 3.55% for the same period in 2014. When comparing these periods, incremental growth of balances accounted for an increase of $1.76 million while the change in our relative rate structure resulted in a decline in net interest income of $482 thousand.
Average interest earning assets for the year ended December 31, 2014 increased $45.9 million, or 12.1%, including increases in average loans of $37.3 million, or 11.7%, and average investment balances of $11.6 million, or 21.9%, when compared to the prior year. This increased volume of average earning assets provided an additional $2.07 million in interest income, $1.83 million provided from incremental loan balances and $238 thousand from investment securities including deposits with banks. The average yield on earning assets declined 26 basis points in the current year compared to the prior year from 4.63% to 4.37%, which resulted in a decline of interest income between the periods of $1.07 million. Of this decline, $1.29 million was related to lower yields on loans which was partially offset by $115 thousand of additional income resulting from higher average rates on investment securities and $100 thousand resulting from deposits with other banks and other investment income, including an increase of $84 thousand related to dividends paid on FHLB restricted stock outstanding during the period.
Average interest bearing liabilities increased $34.8 million, or 11.1%, in 2014. During this time, borrowed funds increased $21.6 million while overall deposit balances increased $13.1 million, as interest bearing demand deposits decreased $600 thousand, money market and savings deposits increased $1.3 million and time deposits grew $12.5 million. The incremental growth of interest bearing liabilities resulted in an increase of interest expense of $314 thousand. At the same time, the average rate on interest bearing liabilities declined 18 basis points from 1.00% for the year ended December 31, 2013 to 0.82% in the current year, which accounted for a decline in interest expense of $591 thousand due to the change in our relative rate structure.
Provision for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against operations. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance as recoveries.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on known or potential risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, the composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available or economic conditions change.
At the end of each quarter or more often, if necessary, First Priority analyzes the collectability of its loans and accordingly adjusts the loan loss allowance to an appropriate level. The allowance for loan losses covers estimated credit losses on individually evaluated loans that are determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan portfolio. For a description of the process for determining the adequacy of the allowance for loan losses, see the “Allowance for Loan Losses” section below.
The provision for loan losses was $1.13 million in 2014 compared to $645 thousand for 2013. The level of provision is impacted by the adequacy of the allowance as described above, including an analysis of impaired and non-performing loans, as well as by the level of incremental loan volume and net charge-offs of loans. Total loans increased $39.5 million during the year ended December 31, 2014 and $91.5 million during 2013, of which $77.4 million was related to loans acquired through the merger with Affinity, effective February 28, 2013. Net charge-offs for the years ended December 31, 2014 and 2013, totaled $1.09 million and $832 thousand, respectively. Included in the current year was a charge-off of $513 thousand related to a previously identified non-performing commercial line of credit, secured by a second lien on a residential property, with respect to which the Bank received an updated appraisal value and first lienholder position indicating a shortfall in the collateral position. The allowance for loan losses was $2.3 million as of both December 31, 2014 and 2013, respectively, which represented 0.62% and 0.68% of total loans outstanding at each respective date.
Acquired loans are initially recorded at acquisition date at their acquisition date fair values, and therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. As acquired loans are paid off or are refinanced or extended under First Priority’s credit underwriting process, they are no longer considered acquired loans, but instead are prospectively considered originated loans and therefore, are included as part of the calculation of the allowance for loan losses. To the extent there is a decrease in the present value of cash flows from acquired impaired loans after the date of acquisition, the Company records a provision for loan losses. During the year ended December 31, 2014, the Company recorded a provision for loan losses totaling $425 thousand related to acquired loans. There were net charge-offs recorded during 2014 totaling $250 thousand related to loans that were initially considered credit impaired loans as of the acquisition date, including $184 thousand related to revised appraisal values on a two separate commercial properties which serve as collateral on the outstanding loans, $29 thousand related to a mortgage loan where the Bank has a second lien based on a revised estimate of the property’s fair value, $27 thousand related to a complete loan charge-off based on a second position lien and updated balances of the first lienholder’s position and $10 thousand based on updated terms of a revised forbearance agreement. Net charge-offs on non-credit impaired purchased loans totaled $175 thousand for the year ended December 31, 2014.
Non-Interest Income
For the year ended December 31, 2014, non-interest income totaled $1.01 million compared to $739 thousand for the same period in 2013. Non-interest income increased $268 thousand, or 36.3% in 2014 from 2013. Non-interest income is comprised of wealth management fees which are principally non-recurring commissions and fees related to the sale of insurance products and annuities, service charges on deposit accounts, income resulting from the investment in bank owned life insurance during 2014, and other fees which First Priority Bank collects from its banking customers. Included in the current year, there were $51 thousand in gains from the sale of investment securities available for sale while no gains were realized in 2013.
Components of non-interest income are shown in the table below:
Non-Interest Expenses
Non-interest expenses were $13.23 million in 2014 compared to $14.37 million for the same period in the prior year, a decrease of $1.14 million, or 7.9%. The following table sets forth information related to the various components of non-interest expenses for each respective period.
Highlights of significant non-interest expenses items for the year ended, 2014 compared to the year ended, 2013
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Non-interest expenses increased $396 thousand, or 3.1% for the year ended December 31, 2014 compared to the 2013, excluding merger related costs.
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Salaries and employee benefits increased $235 thousand for the year ended December 31, 2014 compared to the prior year. Additional staffing costs are included in the current year of approximately $275 thousand related to the timing of the acquisition of Affinity employees effective February 28, 2013; these incremental expenses are partially offset by duplicative operational staffing costs during 2013 in order to maintain two separate core banking systems prior to the system conversion in August of 2013. In addition, when comparing 2014 to 2013, stock based compensation increased $155 thousand and wealth management commission increased $34 thousand while the overall cost of benefits declined $58 thousand and the accrual for bonus expense decreased $172 thousand.
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Occupancy and equipment includes costs related to the addition of Affinity branch offices during the first quarter of 2013. Of this increase, $38 thousand related to incremental lease expense or depreciation of leased or owned facilities while building operating costs increased $79 thousand; partially offset by cost reductions of $20 thousand related to the consolidation of maintenance contracts under the combined organization.
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Data processing equipment and operations decreased $19 thousand primarily related to a reduction of processing costs of $79 thousand, partially offset by increased depreciation expense of $33 thousand on updated computer equipment and other accumulated data costs totaling $22 thousand related to Affinity offices.
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Professional fees increased $56 thousand related to staff search fees of $93 thousand to enhance staffing experience levels with a focus on expanding the Berks County market. Additionally, increases in accounting and audit fees of $29 thousand and other professional fees of $13 thousand were offset by declines in consulting fees of $41 thousand and legal fees of $40 thousand.
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Marketing, advertising and business development increased $79 thousand in the current year primarily related to advertising awareness campaigns initiated during 2014, including radio and billboard advertising campaigns. While in 2013, there was an awareness campaign related to the merger during the first quarter of 2013.
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FDIC insurance assessments and Pennsylvania bank shares tax expense decreased in 2014 compared to the prior year. These expenses are primarily calculated based on asset size and equity levels of the Bank; however offsetting these increases due to size, the current year rate used to calculate the bank shares tax declined 36 basis point in 2014 compared to the prior year.
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Other real estate owned costs declined $181 thousand in 2014 compared to the prior year. These properties were acquired either through deeds in lieu of foreclosure or through other means on properties that were used as collateral for bank loans. Net gains on the sale of other real estate totaling $29 thousand were recorded during 2014 while a net loss of $3 thousand was charged to expense in 2013. Also, a charge to expense was also recorded related to fair value adjustments of properties held or sold totaling $8 thousand and $136 thousand for the years ended December 31, 2014 and 2013, respectively. In addition, there was $187 thousand of costs to acquire or maintain these properties during the holding period, net of rental income received during the nine months of 2014 compared to $208 thousand recorded in the same period of 2013.
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Other expenses increased $204 thousand for the year ended December 31, 2014 compared to the prior year. This increase is partially related to additional costs due to the addition of Affinity, including an increase in core deposit intangible amortization expense of $9 thousand, public company filing fees of $17 thousand, loan and deposit generation costs of $78 thousand, and director’s fees of $32 thousand. In addition, the Company incurred insurance claim costs of $25 thousand and a valuation adjustment on a repossessed asset based on an updated appraisal of $44 thousand.
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First Priority Bank recorded $1.53 million in merger related costs during the year ended December 31, 2013 related to expenses paid or incurred to complete the merger with Affinity. These expenses consisted largely of costs for professional and consulting services, consolidating a branch office, termination of Affinity’s core system contractual agreement and conversion of systems and/or integration of operations, printing and filing costs of completing the transaction and investment banking charges.
Provision for Income Taxes
Based on the analysis of available positive and negative evidence, as of September 30, 2014, First Priority made a determination that, in its judgment, the valuation allowance related to net deferred tax assets should be reversed in its entirety to establish the deferred tax positions on the balance sheet of the Company. In making this judgment, management has made the determination that it is more likely than not that the deferred tax asset will be realized. As of this date, the valuation allowance on net deferred tax assets totaled $4.8 million. In connection with reversing the valuation allowance, the Company recognized a tax benefit in the Statement of
Operations of $4.5 million for the year ended December 31, 2014. Going forward, the Company will record current tax expense in its Statement of Operations and report earnings of the Company to its shareholders and regulators on an after tax basis.
As of December 31, 2013, the Company determined that a valuation allowance for total deferred taxes of $5.6 million should be recorded. The Company recorded $33 thousand of income tax expense for the year ended December 31, 2013 related to the payment of alternative minimum taxes, as required based on Internal Revenue Service tax guidelines.
The most significant component of the Company’s deferred tax asset balances relates to the Company’s net operating loss (“NOL”) carryforwards totaling $10.8 million as of December 31, 2014, including acquired NOLs. First Priority currently has NOL carryforwards of $7.9 million at December 31, 2014, which expire in 2026 through 2033; such NOL carryforwards, however, are available prior to expiration to reduce future federal income taxes until such time as the entire NOL is utilized.
First Priority acquired a NOL for tax purposes related to the acquisition of Prestige Community Bank which totaled $2.0 million as of December 31, 2014, that is subject to certain limitations and expires in 2028 if not fully utilized. In addition, a NOL carryforward balance of $940 thousand resulting from the merger with Affinity remains available to reduce future federal income taxes as of December 31, 2014. This NOL is also subject to certain limitations and expires in 2032 if not fully utilized.
Financial Condition as of December 31, 2014 and December 31, 2013
Balance Sheet Review
Total assets at December 31, 2014 were $492.3 million, representing an increase of $46.2 million, or 10.4%, when compared to total assets of $446.1 million at December 31, 2013. Total assets at December 31, 2014 consisted principally of loans outstanding of $375.2 million, investment securities of $91.5 million and cash and cash equivalents of $7.9 million. At December 31, 2013, total assets consisted primarily of loans outstanding of $335.7 million, investment securities of $89.6 million and cash and cash equivalents of $11.2 million.
Deposits totaled $378.2 million at December 31, 2014 compared to $357.4 million at December 31, 2013, an increase of $20.8 million, or 5.8%. Of the total deposits at December 31, 2014, $185.1 million, or 49% of total deposits, are core deposits consisting of demand, money market and savings deposits.
Borrowings totaled $62.5 million at December 31, 2014 compared to $44.6 million at December 31, 2013, an increase of $17.8 million, or 40.0%, due to an increase in short-term borrowings.
Shareholders’ equity at December 31, 2014 was $50.2 million, representing an increase of $7.8 million from $42.4 million at December 31, 2013. The enhanced capital position is attributable to net income of $6.9 million for the year ended December 31, 2014 including a net tax benefit of $4.5 million, primarily related to the reversal of the valuation allowance on deferred tax assets, market volatility related to the investment securities portfolio resulting in a reduction of the unrealized losses totaling $1.2 million and the reclassification of stock compensation expense of $273 thousand. These increases were partially offset by preferred dividends paid of $571 thousand.
Investments
First Priority’s total investment portfolio was $91.5 million at December 31, 2014, compared to $89.6 million at December 31, 2013, an increase of $1.9 million, or 2.1%. As of December 31, 2014 and 2013, investments totaling $75.6 million and $78.6 million, respectively, were classified as available for sale while $16.0 million and $11.0 million, respectively, were classified as held to maturity. Total investments accounted for 18.6% and 20.1% of total assets at each respective date.
At March 31, 2014, the Company transferred securities with fair values of $3.7 million consisting of six obligations of states and political subdivisions and one corporate bond from available for sale securities to held to maturity securities. These transfers were made primarily to reduce the volatility related to changes in interest rates and the resulting impact to the equity capital. Net unrealized holding losses arising prior to the reclassification date as of March 31, 2014 totaled $137 thousand and are reported as a separate line item within accumulated other comprehensive income (loss). The balance of net unrealized holding gains, totaling $51 thousand as of December 31, 2014, is being amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same transferred debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding loss reported in equity will offset the effect on the interest income of the accretion of the discount on these securities.
Securities classified as available for sale are accounted for at fair value, with the difference between fair value and amortized cost reflected in the capital account as other comprehensive income or loss. Due to market fluctuations which occurred during 2014 and 2013, the Company had net unrealized losses on available for sale securities totaling $86 thousand and $1.5 million at December 31, 2014 and 2013, respectively. Available for sale securities are securities that management intends to hold for an indefinite period of time or securities that may be sold in response to changes in interest rates, prepayment expectations, capital management and liquidity needs.
The total investment portfolio at December 31, 2014 was comprised of federal agency securities (54%), federal agency mortgage backed securities and agency collateralized mortgage obligations (22%), obligations of states and political subdivisions (22%), primarily federal taxable municipal securities, and corporate and other debt securities (2%). All investment securities were either government guaranteed, issued by a government agency or investment grade. First Priority had no investment securities deemed to have other than temporary impairment (“OTTI”) at December 31, 2014 or 2013, respectively, and recorded no OTTI charges during either of the years ended December 31, 2014 or 2013.
The following table sets forth information about the contractual maturities and weighted average yields of investment securities at December 31, 2014. Actual maturities may differ from contractual maturities due to scheduled principal payments and unscheduled prepayments of mortgage backed securities and, where applicable, the ability of an issuer to call a security prior to the contractual maturity date.
The amortized cost and fair value of First Priority’s investments, classified as available for sale or held to maturity as of each of the three years ended December 31, 2014, 2013 and 2012 are shown in the following table:
Restricted investments in bank stocks
Restricted investments in bank stocks represent the investment in the common stock of correspondent banks required in order to transact business with those banks. Investments in restricted stock are carried at cost.
At both December 31, 2014 and 2013, First Priority Bank held $110 thousand in each respective period in common stock of Atlantic Community Bankers Bank, Camp Hill, Pennsylvania. Additionally, First Priority had investments in the common stock of the FHLB Bank of Pittsburgh totaling $2.87 million and $2.62 million as of December 31, 2014 and 2013, respectively. The increase in investments is attributable to the incremental investment required to support increased borrowings.
Loans
First Priority’s loan portfolio is the primary component of its assets. At December 31, 2014, total loans were $375.2 million, representing an increase of $39.5 million or 11.8% from total loans outstanding of $335.7 million at December 31, 2013. Included in the current year loan growth are $15.3 million of purchased residential real estate loans located within First Priority’s markets which were underwritten to the same standards as used for loans that the Company originates for its own portfolio. The following table sets forth the classification of First Priority’s loan portfolio for each of the five years ended December 31, 2014:
Commercial mortgage loans consist of loans originated for commercial purposes which are secured by nonfarm nonresidential properties, multifamily residential properties, or 1-4 family residential properties. As of December 31, 2014, commercial mortgage loans totaled $169.0 million consisting of $115.8 million of loans to finance commercial business properties, of which 60% are owner occupied, $15.4 million to finance, and are secured by, multifamily properties, $31.4 million secured by 1-4 family residential dwelling properties for business purposes, and $6.4 million for other purposes. In addition, as of December 31, 2014, loans to lessors of non-residential buildings totaled $69.5 million, which is included in commercial mortgage loans; of this amount, $33.7 million, or 48% of these loans are related to owner occupied buildings.
As of December 31, 2013, total commercial mortgage loans of $149.5 million consisting of $102.2 million of loans to finance commercial business properties, of which 56% are owner occupied, $9.4 million to finance, and are secured by, multifamily properties, $31.4 million secured by 1-4 family residential dwelling properties for business purposes, and $6.5 million for other purposes. In addition, as of December 31, 2013, loans to lessors of non-residential buildings totaled $64.0 million, which is included in commercial mortgage loans; of this amount, $30.4 million, or 47.5% of these loans are related to owner occupied buildings.
The payment experience of certain non-owner occupied commercial mortgage loans may be dependent upon the successful operation of the real estate project. These risks can be significantly affected by supply and demand conditions in the market for office and retail space and for apartments and, as such, may be subject to a greater extent to adverse conditions in the economy. In dealing with these risk factors, First Priority generally limits itself to a real estate market or to borrowers with which First Priority has experience. First Priority generally concentrates on originating commercial real estate loans secured by properties located within its market area and many of First Priority’s commercial real estate loans are secured by owner-occupied property with personal guarantees of the debt.
Regulatory guidance exists whereby total construction, land development and other land loans should not exceed 100% of total risk-based capital and further guidance whereby total construction, land development and other land loans combined with real estate loans secured by multifamily or nonresidential properties and loans to finance commercial real estate or construction loans (not secured by real estate) should not exceed 300% of total risk-based capital. First Priority Bank monitors these two ratios, which as of December 31, 2014, totaled 25% and 187% of total risk-based capital, respectively, both well within the regulatory suggested guidance.
The information in the following tables is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.
The following tables summarize the loan maturity distribution by type and related interest rate characteristics as of December 31, 2014 and 2013.
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(1)
Includes loans that reprice immediately with market index rates (floating) and loans that will reprice at a specified future date during the life of the loan (adjustable).
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(1)
Includes loans that reprice immediately with market index rates (floating) and loans that will reprice at a specified future date during the life of the loan (adjustable).
Credit Quality
First Priority Bank’s written lending policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding, with additional credit department approval for the majority of new loan balances. The Loan Committee is comprised of senior members of management who oversee the loan approval process to monitor that proper standards are maintained.
The following table summarizes non-performing assets and performing troubled debt restructurings which were in accruing status at the dates indicated.
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(1)
Non-performing loans are comprised of (i) loans that have a non-accrual status; (ii) accruing loans that are 90 days or more past due and (iii) non-performing troubled debt restructured loans.
(2)
Repossessed assets include personal property, consisting of manufactured housing, which has been acquired for debts previously contracted.
(3)
Non-performing assets are comprised of non-performing loans, other real estate owned (assets acquired in foreclosure) and repossessed assets.
(4)
Performing troubled debt restructurings are accruing loans that have been restructured in troubled debt restructurings and are in compliance with their modified terms.
Total non-performing loans were $4.6 million at December 31, 2014, an increase of $278 thousand from the $4.3 million at December 31, 2013. This increase was impacted by the addition of loans reclassified to non-accrual status totaling $3.1 million; partially offset by a decline in non-performing loans balances consisting of five loans which were transferred to other real estate owned with previously outstanding balances totaling $1.0 million, loans which were partially or fully charged-off totaling $569 thousand due to a decline in the collateral values, a decline related to loans restructured as performing troubled debt restructurings totaling $711 thousand and payments and other activity on existing non-performing loans totaling $516 thousand. Included in the $3.1 million of loan balances reclassified as non-performing during 2014 is a single commercial loan relationship totaling $2.4 million which was issued in conjunction with the Small Business Administration (“SBA”) program and is partially guaranteed by the SBA. Total non-performing loans as a percentage of total loans at December 31, 2014 was 1.21%, down from 1.27% at December 31, 2013. Other real estate owned totaled $1.3 million at December 31, 2014 and $914 thousand at December 31, 2013, an increase of $343 thousand. Repossessed assets totaled $42 thousand at December 31, 2014 compared to $75 thousand at December 31, 2013. Non-performing assets totaled $5.9 million, or 1.19% of total assets, as of December 31, 2014, compared to $5.3 million, or 1.18% of total assets as of December 31, 2013.
While not considered non-performing, First Priority’s performing troubled debt restructurings are closely monitored as they consist of loans that have been modified where the borrower is experiencing financial difficulty. Troubled debt restructurings may be deemed to have a higher risk of loss than loans which have not been restructured. At December 31, 2014 and 2013, First Priority’s performing troubled debt restructurings totaled $2.1 million and $974 thousand, respectively. During 2014, the Company restructured a commercial loan, which had previously made payments as agreed under a forbearance agreement, as a troubled debt restructured loan totaling $1.3 million based on negotiated market terms. In addition, two consumer loans totaling $185 thousand were also reclassified as troubled debt restructurings in 2014. As of each period, there was also a commercial loan relationship with balances of $658 thousand and $831 thousand, respectively, which was restructured in the first quarter of 2012 whereby the loan’s maturity date was extended at a current market rate and has remained current in regards to principal and interest due. As of December 31, 2013, a commercial loan relationship acquired through the merger with Affinity was also classified as a performing troubled debt
restructuring, totaling $143 thousand, which was paid off in the second quarter of 2014 through liquidation of the underlying collateral.
First Priority Bank’s management continues to monitor and explore potential options and remedial actions to recover First Priority Bank’s investment in non-performing loans. According to policy, First Priority Bank is required to maintain a specific reserve for impaired loans. See the “Allowance for Loan Losses” section below for further information.
First Priority Bank’s total delinquency amount is comprised of loans past due 30 to 89 days and still accruing plus the balance of non-performing loans. As of December 31, 2014 and 2013, loans past due 30 to 89 days and still accruing totaled $986 thousand and $567 thousand, respectively, which when added to the non-performing loans for each period, resulted in a total delinquency ratio of 1.48% and 1.44%, respectively, of total loans outstanding.
Allowance for loan losses
The allowance for loan losses represents an amount that First Priority believes will be adequate to absorb estimated credit losses on loans that may become impaired. While First Priority applies the methodology discussed below in connection with the establishment of the allowance for loan losses, the allowance is subject to critical judgments on the part of management. Risks within the loan portfolio are analyzed on a continuous basis by the management of First Priority Bank, periodically analyzed by an external independent loan review function, and are also reviewed by the audit committee. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and appropriate allowances. In addition to the risk system, management further evaluates the risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management believes deserve recognition in establishing an appropriate allowance. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.
First Priority uses a quantitative and qualitative method to allocating its allowance to the various loan categories. An unallocated component, which is maintained to cover uncertainties that could affect management’s estimate of probable losses, reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Additions to the allowance are made by provisions charged to expense, and the allowance is reduced by net charge-offs, which are loans judged to be uncollectible, less any recoveries on loans previously charged off. Although management attempts to maintain the allowance at an adequate level, future additions to the allowance may be required due to the growth of the loan portfolio, changes in asset quality, changes in market conditions and other factors. Additionally, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additional provisions based upon their judgment about information available to them at the time of their examination. Although management uses what it believes to be the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short term change.
Acquired loans are initially recorded on acquisition date at their acquisition date fair values, and therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows from the acquired impaired loans after the date of acquisition, the Company records a provision for potential losses. For the year ended December 31, 2014, the Company recorded a provision for loan losses totaling $425 thousand related to acquired loans consisting of $250 thousand for acquired impaired loans and $175 thousand related to non-credit impaired purchased loans.
Based on the information available as of December 31, 2014, management believes that the allowance for loan losses of $2.3 million is adequate as of that date.
The following table sets forth a summary of the changes in the allowance for loan losses for the periods indicated:
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(1)
Includes non-accrual loans
The allowance for loan losses was $2.3 million at both December 31, 2014 and 2013, which represented 0.62% and 0.68% of total loans outstanding at each respective date. As of December 31, 2014 and 2013, the unamortized portion of the general credit fair value adjustment totaled $509 thousand and $906 thousand, respectively, and the total specific credit market valuation adjustment totaled $443 thousand and $1.4 million as of December 31, 2014 and 2013, respectively. As of December 31, 2014 there is no remaining accretable discount while as of December 31, 2013, the remaining accretable discount totaled $56 thousand. Additionally, as of December 31, 2014 and 2013 the combination of these remaining credit fair value adjustments related to acquired loans, totaling $953 thousand and $2.3 million, respectively, and the allowance for loan losses of $2.3 million and $2.3 million, respectively, or a total of $3.3 million and $4.6 million, respectively, would equate to 0.87% and 1.36% of total loans outstanding as of each respective period. Net charge-offs for the Company totaled $1.1 million for the year ended December 31, 2014, compared to $832 thousand for the same period in 2013.
The following table sets forth the allocation of the allowance for loan losses by loan category. The specific allocations in any particular category may be reallocated in the future to reflect the then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.
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(1)
Represents loans outstanding in each category, as of the date shown, as a percentage of total loans outstanding.
A specific allocation of the allowance for loan losses of $166 thousand has been provided on impaired loans of $6.6 million, of which $5.2 million are considered originated impaired loans as of December 31, 2014. As of December 31, 2013, a specific allocation of the allowance for loan losses of $112 thousand was provided for related to $4.4 million of impaired loans, of which $1.5 million were considered originated impaired loans.
The qualitative and quantitative analysis of the loan portfolio, after the effect of net charge-offs and the above mentioned specific allocation, resulted in the general portion of the allowance for loan losses totaling $1.6 million and $1.2 million as of December 31, 2014 and 2013, respectively.
Loan Concentrations
The Company’s loans consist of credits to borrowers spread over a broad range of industrial classifications. The largest concentrations of loans are to lessors of nonresidential buildings and lessors of residential buildings and dwellings. As of December 31, 2014, these loans totaled $69.5 million and $54.7 million, respectively, or 18.5% and 14.6%, respectively, of the total loans outstanding. As of December 31, 2013, these same classifications of loans totaled $64.0 million and $42.7 million, respectively, or 19.1% and 12.7%, respectively, of the total loans outstanding. These credits were subject to normal underwriting standards and did not present more than the normal amount of risk assumed by the Company’s other lending activities. Management believes this concentration does not pose abnormal risk when compared to the risk it assumes in other types of lending. The Company has no other concentration of loans which exceeds 10% of total loans.
Deposits
Deposits represent the primary source of funding for earning assets. Deposits totaled $378.2 million at December 31, 2014 compared to $357.4 million at December 31, 2013, representing an increase of $20.8 million, or 5.8%. This increase in deposits relates to an increase in time deposits of $38.0 million, primarily brokered time deposits, and an increase in non-interest bearing demand deposits of $1.5 million; partially offset by a decline in interest bearing demand accounts of $17.5 million, primarily due to a reduction in municipal related deposits, and money market and savings accounts totaling $1.2 million.
It has been a strategic objective of First Priority to develop its core deposit base and to supplement core deposits with cost effective alternative funding sources. The merger with Affinity provided the opportunity to expand core deposits and enhance the mix of deposit sources.
First Priority attracts deposits by offering competitive products and interest rates on a broad spectrum of deposit products to customers in its local marketplace, generally through its retail branch system, and also through its internet banking platform. First Priority Bank supplements deposits raised locally with the issuance of brokered deposits when cost effective relative to local market pricing. At December 31, 2014 and December 31, 2013, brokered deposits totaled $74.6 million and $36.2 million, respectively. The guidelines governing First Priority Bank’s participation in the brokered CD market are included in First Priority Bank’s Asset Liability Management Policy, which is reviewed, revised and approved annually by the asset liability management committee and the board of directors. The FDIC places restrictions on a depository institution’s use of brokered deposits based on the bank’s capital classification. A well-capitalized institution may accept brokered deposits without FDIC restrictions. An adequately capitalized institution must
obtain a waiver from the FDIC in order to accept brokered deposits, while an undercapitalized institution is prohibited by the FDIC from accepting brokered deposits. First Priority Bank is classified as well-capitalized under prompt corrective action provisions (see Note 18 - “Regulatory Matters” of the Notes to Consolidated Financial Statements) and, therefore, may accept brokered deposits without FDIC restrictions.
The following table sets forth the average balance of First Priority’s deposits and the average rates paid on deposits for the three years ended December 31, 2014.
The maturity distribution of time deposits of $100,000 or more as of December 31, 2014, is as follows:
December 31,
(Dollars in thousands)
Three Months or Less..............................
$ 4,743
Over Three Through Six Months............
4,883
Over Six Through Twelve Months.........
6,185
Over Twelve Months................................
35,137
TOTAL.....................................................
$ 50,948
Short-Term Borrowed Funds
At December 31, 2014, First Priority had short-term borrowings totaling $51.5 million, compared to $33.6 million at December 31, 2013. Short-term borrowings consisted of overnight or less than 30 day advances from the FHLB as of each of these periods. Advances from the FHLB at December 31, 2014 are collateralized by our investment in the common stock of the FHLB, by a specific pledge of First Priority Bank’s investment assets and by a blanket lien on qualifying mortgage loans within First Priority Bank’s loan portfolio.
The following table outlines First Priority’s various sources of short-term borrowed funds at or for each of the years ended December 31, 2014 and 2013. The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at any month-end during each of the periods shown.
Long-Term Debt
Long term debt totaled $11.0 million at both December 31, 2014 and 2013, respectively. These borrowings consisted of advances from the FHLB with an average interest rate of 0.88% at each of these dates, respectively, and an average remaining life of 2.2 years and 3.2 years, respectively. Advances from the FHLB are collateralized by an investment in the common stock of the FHLB, by a specific pledge of First Priority Bank’s investment assets and by a blanket lien on qualifying mortgages within First Priority Bank’s loan portfolio. Balances of FHLB long-term debt averaged $11.0 million for the year ended December 31, 2014 and $12.3 million during the same period in 2013 with an average rate of 0.89% in 2014 and 1.18% for the same period in 2013. The maximum month end balance of these borrowings was $11.0 million and $26.0 million for the year ended December 31, 2014 and 2013, respectively.
Capital Resources
Shareholders’ equity at December 31, 2014 was $50.2 million, representing an increase of $7.8 million from $42.4 million at December 31, 2013. The enhanced capital position is attributable to net income of $6.9 million for the year ended December 31, 2014 including a net tax benefit of $4.5 million, primarily related to the reversal of the valuation allowance on deferred tax assets, market volatility related to the investment securities portfolio resulting in a reduction of the unrealized losses totaling $1.2 million and the reclassification of stock compensation expense of $273 thousand. These increases were partially offset by preferred dividends paid of $571 thousand.
On February 20, 2009, First Priority issued 4,579 shares of First Priority’s Series A preferred stock and a warrant to purchase, on a net basis, 229 shares of First Priority’s Series B preferred stock, which was immediately exercised, for an aggregate purchase price of $4.6 million under the TARP CPP. On December 18, 2009, First Priority issued 4,596 shares of Series C preferred stock, $100.00 par value per share, having a liquidation preference of $1,000 per share, for an aggregate purchase price of $4.6 million.
First Priority Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Priority Bank’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Priority Bank must meet specific capital guidelines that involve quantitative measures of First Priority Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First Priority Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.
First Priority Bank exceeds the minimum capital requirements established by regulatory agencies. Under the capital adequacy guidelines, capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity and qualifying preferred stock, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets plus trust preferred securities up to 25% of Tier 1 capital, with the excess being treated as Tier 2 capital. Tier 2 capital also consists of the allowance for loan losses, subject to certain
limitations, and qualifying subordinated debt. In determining the amount of risk-weighted assets, all assets, including certain off balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed inherent in the type of asset.
Quantitative measures established by regulation to ensure capital adequacy require First Priority Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets, known as the Tier 1 leverage ratio. Under the capital guidelines, First Priority Bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, First Priority Bank must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,” First Priority Bank must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.
The following table sets forth First Priority Bank’s capital ratios for the three years ended December 31, 2014. For each period, First Priority Bank was considered “well-capitalized” and met or exceeded its applicable regulatory requirements.
To Be Considered "Well-Capitalized"
As of December 31, 2014
As of December 31, 2013
As of December 31, 2012
First Priority Bank:
Total risk-based capital
10.00%
12.87%
12.90%
12.48%
Tier 1 risk-based capital
6.00%
12.20%
12.19%
11.39%
Tier 1 leverage capital
5.00%
9.34%
9.48%
9.40%
First Priority Bank’s total risk based capital ratio and tier 1 leverage capital ratio declined during the period from December 31, 2013 to December 31, 2014 primarily due to a higher level of risk weighted assets primarily resulting from loan growth; partially offset by incremental regulatory capital resulting from earnings recorded during the current year.
The July 2013 the federal bank regulatory agencies adopted final rules to revise the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements became effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.
In December 2013, Federal banking regulators issued rules for complying with the Volcker Rule provision of the Dodd-Frank Act. The Bank does not engage in, and does not expect to engage in, any transactions that are considered “covered activities” as defined by the Volcker Rule. Therefore, the Bank does not have any additional compliance obligations under the Volcker Rule.
The Company and the Bank will continue to analyze these new rules and their effects on the business, operations and capital levels of the Company and the Bank.
Return on Average Equity and Assets
The following table shows the return on average assets (net income divided by total average assets), return on equity (net income divided by average equity), and the equity to assets ratio (average equity divided by total average assets) for each of the five years ended December 31, 2014.
Effect of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has not been taken into effect in First Priority’s consolidated financial statements. Rather, the statements have been prepared on a historical cost basis in accordance with accounting principles generally accepted in the United States of America.
Unlike most industrial companies, the assets and liabilities of financial institutions, such as First Priority and First Priority Bank, are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on its performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. First Priority seeks to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
Off-Balance Sheet Arrangements
Through the operations of First Priority Bank, First Priority has made contractual commitments to extend credit, in the ordinary course of its business activities, to meet the financing needs of customers. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized on the balance sheets. These commitments are legally binding agreements to lend money at predetermined interest rates for a specified period of time and generally have fixed expiration dates or other termination clauses. The same credit and collateral policies are used in making these commitments as for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis and collateral is obtained, if necessary, based on the credit evaluation of the borrower. The amount of collateral obtained, if deemed necessary by First Priority Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
At December 31, 2014 and December 31, 2013, outstanding commitments to extend credit consisting of unfunded commitments under lines of credit were $83.2 million and $77.7 million, respectively. In addition, as of each of these dates, there were $349 thousand and $1.3 million of performance standby letters of credit outstanding, respectively, and $1.1 million and $1.3 million of financial standby letters of credit as of each respective date. As of December 31, 2013, a pledge of a portion of the Bank’s investment securities was reserved as collateral related to one financial standby letter of credit issued through a correspondent bank for $512 thousand which is included in the amount reported above. This commitment was closed during the second quarter of 2014.
In addition, as of December 31, 2014 and December 31, 2013 the Bank pledged $149 thousand and $199 thousand, respectively, of deposit balances at a correspondent bank to support a letter of credit with balances of $149 thousand and $199 thousand, respectively, issued by the correspondent on behalf of a customer of the Bank. This transaction is fully secured by the customer through a pledge of the customer’s deposits at the Bank.
First Priority is not involved in any other off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that could significantly impact earnings. First Priority believes that it has adequate sources of liquidity to fund commitments that may be drawn upon by borrowers.
Liquidity
The objective of liquidity management is to assure that sufficient sources of funds are available, as needed and at a reasonable cost, to meet the ongoing and unexpected operational cash needs and commitments of First Priority and to take advantage of income producing opportunities as they arise. Sufficient liquidity must be available to meet the cash requirements of depositors wanting to withdraw funds and of borrowers wanting their credit needs met. Additionally, liquidity is needed to insure that First Priority has the ability to act at those times when profitable new lending and investment opportunities arise. While the desired level of liquidity may vary depending upon a variety of factors, it is a primary goal of First Priority to maintain adequate liquidity in all economic environments through active balance sheet management.
Liquidity management is the ongoing process of monitoring and managing First Priority’s sources and uses of funds. The primary sources of funds are deposits, scheduled amortization of loans outstanding, maturities and cash flow generated from the investment portfolio and funds provided by operations. Scheduled loan payments and investment maturities are relatively predictable sources of funds; however, deposit flows and loan prepayments are far less predictable and are influenced by the level of interest rates,
economic conditions, local competition and customer preferences. Liquidity is also provided by unused lines of credit with correspondent banks and First Priority’s borrowing capacity at the FHLB. First Priority measures and monitors its liquidity position on an ongoing basis in order to better understand, predict and respond to balance sheet trends, unused borrowing capacity and liquidity needs. The liquidity position is managed on a daily basis as part of the daily settlement function and on an ongoing basis through the asset liability management function.
The key elements of First Priority’s liquidity planning process involve a primary focus on the development of a stable core funding base; utilization of wholesale funding sources to supplement core funding; maintenance of an appropriate level of asset liquidity; management of the maturity structure of funding sources and of funding concentrations; and maintenance of borrowing facilities.
Wholesale funding sources utilized by First Priority Bank include brokered certificates of deposits, secured advances from the Federal Home Loan Bank of Pittsburgh, federal funds purchased and other secured borrowing facilities. At December 31, 2014, wholesale funding sources totaled $137.1 million and were comprised of $74.6 million of brokered certificates of deposit and $62.5 million of FHLB advances. At December 31, 2013, wholesale funding sources totaled $80.8 million and were comprised of $36.2 million of brokered certificates of deposit and $44.6 million FHLB advances. Wholesale funding is generally used in managing the daily liquidity needs and when it is the most cost effective funding source available to First Priority. Management continually evaluates all available funding sources for cost and availability.
An integral part of First Priority Bank’s balance sheet management strategy is to establish and maintain borrowing facilities with correspondent banks, for access to funding. Off balance sheet borrowing capacity provides the immediate availability of funds to meet short term financing needs without requiring the bank to maintain excess liquidity in its investment portfolio, which may have a negative impact on earnings. In today’s environment of historically low interest rates, it also provides the most effective longer term funding, in terms of the cost and structure. Long term borrowings from the FHLB cannot be called prior to maturity, which provides much greater protection against a rise in interest rates when compared to retail deposits which can be redeemed early by the depositor at lower than market rate penalties.
As of December 31, 2014 and December 31, 2013, First Priority Bank had a borrowing facility with a correspondent bank totaling $10 million, available for short-term limited purpose usage, of which $2 million is available unsecured. The remaining $8 million is a secured line of credit.
At December 31, 2014 and December 31, 2013, First Priority Bank had a total borrowing capacity with the FHLB of $144 million and $107 million, respectively, with advances outstanding against this capacity of $62.5 million and $44.6 million, respectively.
Short-term liquid assets held in interest-bearing deposit accounts with correspondent banks totaled $2.8 million at December 31, 2014 compared to $6.0 million at December 31, 2013.
Interest Rate Sensitivity
It is the responsibility of the board of directors and senior management to understand and control the interest rate risk exposures assumed by First Priority. The board has delegated authority to the asset liability management committee (“ALCO”) for the development of ALCO policies and for the management of the asset liability management function. The ALCO committee is comprised of senior management representing all primary functions of First Priority and meets monthly. ALCO has the responsibility for maintaining a level of interest rate risk exposures within board of director approved limits.
The primary objective of asset liability management is to optimize net interest income over time while maintaining a balance sheet mix that is prudent with respect to liquidity, capital adequacy and interest rate risk. The absolute level and volatility of interest rates can have a significant impact on the profitability of First Priority. Interest rate risk management is the process of identifying and controlling the potential adverse impact of interest rates movements on First Priority’s net interest income and on the fair value of its assets and liabilities.
One tool used to monitor interest rate risk is the measurement of its interest sensitivity “gap,” which is the positive or negative dollar difference between interest-earning assets and interest-bearing liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by changing the mix, pricing and repricing characteristics of assets and liabilities, through management of its investment portfolio, loan and deposit product offerings, and through wholesale funding. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge interest rate risk and minimize the impact on net interest income of rising or falling interest rates. First Priority generally would benefit from increasing market rates of
interest when it has an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when First Priority is liability-sensitive.
At December 31, 2014, First Priority was liability sensitive at the one-year gap position, as it has more liabilities subject to repricing in the subsequent twelve month period than assets. It must be noted, however, that the gap analysis is not a precise indicator of First Priority’s exposure to changing interest rates. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. Furthermore, the results are influenced by management assumptions concerning the repricing characteristics of deposit products with no contractual maturities, the timing of the repricing of variable rate loans with interest rates currently fixed at interest rate floors, and prepayment speeds of loans and investments subject to prepayment prior to maturity. Additionally, net interest income performance may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of interest earning assets and interest-bearing liabilities.
The Company’s interest rate sensitivity at December 31, 2014, as measured by the repricing characteristics of interest sensitive assets and interest sensitive liabilities, is presented in the following table. As noted above, the table presents data at a single point in time and includes significant management assumptions.
Contractual Obligations
First Priority Bank utilizes a variety of deposit products and short-term borrowings to supplement its supply of lendable funds, to assist in meeting deposit withdrawal requirements, and to fund growth of interest-earning assets in excess of traditional deposit growth. Brokered certificates of deposit, borrowings from the FHLB, borrowings under correspondent bank lines of credit and repurchase agreements serve as the primary sources of such funds.
Obligations under non-cancelable operating lease agreements are payable over several years with the longest obligation expiring in 2029. Management does not believe that any existing non-cancelable operating lease agreements are likely to materially impact First Priority’s financial condition or results of operations in an adverse way.
The following table provides payments due by period for contractual obligations as of December 31, 2014.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
PAGE
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014 and 2013
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements as of and for the years ended December 31, 2014 and 2013
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
First Priority Financial Corp.
Malvern, Pennsylvania
We have audited the accompanying consolidated balance sheets of First Priority Financial Corp. (the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Priority Financial Corp. at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
BDO USA, LLP
Philadelphia, Pennsylvania
March 27, 2015
First Priority Financial Corp.
Consolidated Balance Sheets
(In thousands, except share and per share data)
See notes to consolidated financial statements.
First Priority Financial Corp.
Consolidated Statements of Operations
(In thousands, except per share data)
See notes to consolidated financial statements.
First Priority Financial Corp.
Consolidated Statements of Comprehensive Income (loss)
(In thousands)
See notes to consolidated financial statements.
First Priority Financial Corp.
Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2014 and 2013
(Dollars in thousands)
See notes to consolidated financial statements.
First Priority Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)
See notes to consolidated financial statements.
First Priority Financial Corp.
Notes to Consolidated Financial Statements
Note 1-Summary of Significant Accounting Policies
Organization and Nature of Operations
First Priority Financial Corp. First Priority Financial Corp. (“First Priority”, the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania on February 13, 2007. On May 11, 2007, as a result of a reorganization and merger First Priority Bank (the “Bank”) became a wholly-owned subsidiary of First Priority. First Priority, primarily through the Bank serves residents and businesses in the Delaware Valley with branches in Berks, Bucks, Chester and Montgomery counties in Pennsylvania. The Bank, which has 10 retail branch office locations, is a locally managed community bank providing commercial banking products, primarily loans and deposits, is headquartered in Malvern, PA.
First Priority provides banking services through First Priority Bank and does not engage in any activities other than banking and related activities. As of December 31, 2014, First Priority had total assets of $492.3 million and total shareholders’ equity of $50.2 million.
First Priority Bank
First Priority Bank is a state-chartered commercial banking institution which was incorporated under the laws of the Commonwealth of Pennsylvania on May 25, 2005. First Priority Bank’s deposits are insured by the FDIC up to the maximum amount permitted for all banks. As of December 31, 2014, First Priority Bank had total assets of $492.1 million, total loans of $375.2 million, total deposits of $378.9 million and total shareholder’s equity of $49.4 million.
First Priority Bank engages in a full service commercial and consumer banking business with strong private banking and individual wealth management services. First Priority Bank offers a variety of consumer, private banking and commercial loans, mortgage products and commercial real estate financing. The Company’s operations are significantly affected by prevailing economic conditions, competition, and the monetary, fiscal, and regulatory policies of governmental agencies. Lending activities are influenced by a number of factors, including the general credit needs of individuals and small and medium-sized businesses in the Company’s market area, competition, the current regulatory environment, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, competition, account maturities, and the level of personal income and savings in the market area.
First Priority Bank also offers certain financial planning and investment management services. These investment services are provided by First Priority Financial Services, a Division of First Priority Bank, through an agreement with a third party provider. In addition, various life insurance products are offered through First Priority Bank, and the Bank has also entered into solicitation agreements with several investment advisors to provide portfolio management services to customers of the Bank.
First Priority Bank currently seeks deposits and commercial and private banking relationships through its ten banking offices. The Bank provides deposit products that include checking, money market and savings accounts, and certificates of deposit as well as other deposit services, including cash management and electronic banking products and online account opening capabilities. The Bank obtains funding in the local community by providing excellent service and competitive rates to its customers and utilizes electronic and print media advertising to attract current and potential deposit customers. The Bank also uses brokered certificates of deposit as a cost effective funding alternative.
Basis of Presentation
The accompanying consolidated financial statements consist of the Company and the Company’s wholly owned consolidated subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
These statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Subsequent Events
The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, stock-based compensation, impairment of goodwill, impairment of investments, the valuation of deferred tax assets and the valuation of other real estate owned.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within the western and northwestern suburbs surrounding Philadelphia. Note 5 of the Notes to Consolidated Financial Statements discusses the types of securities in which the Company currently invests. Note 6 discusses the types of lending in which the Company engages. Although the Company intends to have a diversified loan portfolio, its debtors’ ability to honor their contracts will be influenced by the region’s economy. The Company does not have any significant concentrations to any one customer; Note 6 discusses lending concentrations to any one particular industry.
The Company’s investment portfolio consists principally of obligations of the United States and its agencies and obligations of states and political subdivisions. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places deposits in correspondent accounts and, on occasion, sells Federal funds to qualified financial institutions. Management believes credit risk associated with correspondent accounts and with Federal funds sold is not significant. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal funds sold and short-term money market securities. Generally, Federal funds are purchased or sold for one day periods. Short-term investments are generally purchased with a maturity date of less than three months.
The Company is required to maintain cash reserves that are considered restrictions on cash and cash equivalents which consist of required reserves with the Federal Reserve Bank, related to our deposit liabilities. At December 31, 2014 and 2013, these reserve balances were $1.3 million and $2.6 million, respectively.
Securities
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Available for sale securities are carried at fair value.
Unrealized gains and losses on available for sale investment securities are reported as increases or decreases in other comprehensive income as a component of shareholders’ equity. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the term of each security. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements, or anticipated movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.
Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed by a method which approximates the interest method over the terms of the securities. Transfer of securities into held to maturity from available for sale are made at fair value at the date of transfer. The unrealized gain/loss at date of transfer is retained in other comprehensive income, and in the current value of the held to maturity securities. Such amounts are amortized over the remaining life of the security.
In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. When a determination is made that an other-than-temporary impairment exists but the Company does not intend to sell the debt security and it is more likely than not that it will not be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
Restricted Investments in Bank Stocks
Restricted investments in bank stocks, which represents the required investment in the common stock of correspondent banks, are carried at cost and consists of stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank.
Federal law requires a member institution of the FHLB to hold FHLB stock according to a predetermined formula. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) by the interest method based on the contractual terms of the related loans, or if the commitment expires unexercised, recognized in income upon expiration.
The loans receivable portfolio is segmented into commercial, residential mortgage loans and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial construction and commercial mortgage loans. Consumer loans consist of home equity lines of credit and all other consumer loans.
The accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans is generally either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
Acquired Loans
Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.
Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments are accounted for as impaired loans under ASC 310-30. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require the Company to evaluate the need for an allowance for loan losses on these loans. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the non-accretable discount which the Company then reclassifies as an accretable discount that is recognized into interest income over the remaining life of the loans using the interest method.
Acquired loans that met the criteria for non-accrual of interest prior to acquisition may be considered performing upon acquisition, or in the future, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be non-accrual or non-performing and may accrue interest on these loans, including the impact of any accretable discount. For acquired loans that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and amortized over the life of the asset. Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans, however, the Company records a provision for loan losses only when the required allowance exceeds any remaining pooled discounts for loans evaluated collectively for impairment.
Allowance for Loan Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments, totaling $35 thousand, represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the
repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:
1.
Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
2.
National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
3.
Nature and volume of the portfolio and terms of loans.
4.
Management team with experience, depth, and knowledge in banking and in many areas of lending. Each contributes to the sound credit culture and control within the Company.
5.
Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.
6.
The Company engages a third party to perform an independent review of the loan portfolio as a measure for quality and consistency in credit evaluation and credit decisions.
7.
Existence and effect of any concentrations of credit and changes in the level of such concentrations.
8.
Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
A majority of the Company’s loans are to business owners of many types. The Company makes commercial loans for real estate development and other business purposes required by our customers.
The Company’s credit policies determine advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral values such as real estate values, equipment, eligible accounts receivable and inventory. Individual loan advance rates may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets. Commercial real estate loans include long-term loans financing commercial properties. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans typically require a loan to value ratio of not greater than 80% and vary in terms.
Residential mortgages and home equity loans are secured by the borrower’s residential real estate in either a first or second lien position. Residential mortgages and home equity loans have varying loan rates depending on the financial condition of the borrower and the loan to value ratio. Residential mortgages have amortizations up to 30 years and home equity loans have maturities of no more than 15 years. Residential mortgages and home equity loans typically require a loan to value ratio of not greater than 80%.
Other consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are secured.
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Acquired loans are recorded at acquisition date at their acquisition date fair values, and therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows expected from the acquired impaired loans after the date of acquisition, the Company records a provision for loan losses. During the year ended December 31, 2014, the Company recorded no provision for loan losses for acquired impaired loans. During the year ended December 31, 2013, the Company recorded a provision for loan losses totaling $119 thousand for acquired impaired loans.
For acquired loans that are not deemed impaired at acquisition, credit discounts representing principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the acquisition date, the methods used to estimate the required allowance for loan losses for these loans is similar to originated loans, however, the Company records a provision for loan losses only when the required allowance exceeds any remaining unamortized general credit fair value adjustment for loans evaluated collectively for impairment.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Troubled Debt Restructurings
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring may be modified by means of extending the maturity date of the loan, reducing the interest rate on the loan to a rate which is below market, a combination of rate adjustments and maturity extensions, or by other means including covenant modifications, forbearances or other concessions. Generally, interest is not accrued on loans that were non-accrual prior to the troubled debt restructuring until they have performed in accordance with the modified terms for a period of at least six months; however, non-accrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired. Management evaluates the allowance for loan losses with respect to troubled debt restructurings under the same policy and guidelines as all other performing loans are evaluated with respect to the allowance for loan losses.
Transfers of Financial Assets
Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and generally are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Any write-down, at or prior to the dates the real estate is considered foreclosed, is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are generally carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance (write-downs) are included in other non-interest expenses. Any gain or loss upon the sale of real estate owned is reflected in operations as incurred.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Premises and equipment in an acquisition or merger are recorded on acquisition date at fair value. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 20 years beginning when the assets are placed in service. Buildings are depreciated from 15 to 20 years, leasehold improvements are depreciated from 3 to 15 years, furniture, fixtures and equipment are depreciated from 5 to 10 years, automobiles are depreciated from 3 to 10 years and computer equipment and data processing software are depreciated from 2 to 7 years. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred. Leasehold improvements are amortized over the term of the lease or estimated useful lives, whichever is shorter.
Bank Owned Life Insurance
The Bank invests in bank owned life insurance (“BOLI”) policies that provide earnings to help cover the cost of employee benefit plans. The Bank is the owner of the life insurance policies it purchased directly on the lives of certain officers of the Bank. These policies were issued as split dollar life insurance policies which provide for a portion of the death benefit to be paid to the beneficiaries of the officer while employed by the Bank or through change in control provisions. The policies are carried on the Company’s consolidated balance sheet at their cash surrender value and are subject to regulatory capital requirements. The determination of the cash surrender value includes a full evaluation of the contractual terms of each policy. Additionally, the Company periodically reviews the creditworthiness of the insurance company that has underwritten the policies. Earnings accruing to the Company are derived from the general account investments of the insurance companies. Increases in the net cash surrender value of BOLI policies and insurance proceeds received are not taxable and are recorded in non-interest income in the consolidated statement of income.
Employee Benefit Plans
The Company’s 401(k) plan allows eligible participants to set aside a certain percentage of their salaries before taxes. The Company may elect to match employee contributions up to a specified percentage of their respective salaries in an amount determined by the Board of Directors. In addition, during 2013, the Company also sponsored a SIMPLE IRA defined contribution retirement plan for all eligible former Affinity Bank employees. The Company matched a portion of an employee’s annual compensation, as required by the plan. The Company terminated the SIMPLE IRA plan as of December 31, 2013 and former participants in the SIMPLE IRA plan were eligible to elect participation in the Company’s 401(K) plan beginning January 1, 2014. The Company’s total matching contributions
related to these plans resulted in expenses of $130 thousand and $107 thousand for the years ended December 31, 2014 and 2013, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired in accordance with the acquisition method of accounting. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company employs general industry practices in evaluating the fair value of its goodwill. Any impairment loss related to goodwill and other intangible assets is reflected as other non-interest expense in the statement of income in the period in which the impairment is determined. No assurance can be given that future impairment tests will not result in a charge to earnings.
Core deposit and other intangible assets acquired in acquisitions are identified, recognized and amortized based upon the estimated economic benefits received.
Segment Information
First Priority has one reportable segment, Community Banking. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. Lending activities are dependent upon the ability of the Company to fund itself with deposits and borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Income Taxes
Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company files a consolidated federal income tax return with the Bank.
The Company evaluates the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
When determining the potential for a valuation allowance, the Company assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards as defined in paragraph 740-10-30-18. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.
The Company also considers tax planning strategies which could accelerate taxable income and allow the Company to take advantage of future deductible differences. The strategy must be prudent and feasible; however, the Company does not need to have specific plans to implement the strategy, but could be an opportunity that the Company could implement in order to take advantage of net operating loss carryforwards.
The Company adopted guidance on accounting for uncertainty in income taxes as presented in FASB ASC 740-10. A tax position is recognized as a benefit at the largest amount that is more-likely-than not to be sustained in a tax examination based solely on its merits. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained. Under the threshold guidelines, the Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would result in recognition of a liability for unrecognized tax benefits as of December 31, 2014 and December 31, 2013.
Earnings Per Common Share
Basic earnings per common share exclude dilution and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per common share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Proceeds assumed to have been received on such exercise or conversion, are assumed to be used to purchase shares of the Company’s common stock at the average market price during the period, as required by the “treasury stock method” of accounting. The effects of securities or other contracts to issue common stock are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.
Stock Options and Restricted Stock Grants
Compensation costs related to share-based payment transactions are recognized in the financial statements over the period that an employee provides service in exchange for the award. For the years ended December 31, 2014 and 2013, compensation expense related to outstanding stock options and restricted stock grants totaled $273 thousand and $136 thousand, respectively, which is included in salaries and employee benefits in the accompanying consolidated statements of operations. There was no tax benefit recognized related to this stock-based compensation.
Comprehensive Income (Loss)
Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of total comprehensive income (loss). During the year ended December 31, 2014, the Company reversed the full valuation allowance on deferred tax assets and therefore, the Consolidated Statement of Comprehensive Income as of this date is presented net of the effect of income taxes. The Consolidated Statement of Comprehensive Income as of December 31, 2013 does not include the effects of income taxes due to the full valuation allowance on deferred tax assets.
Details about Accumulated Other Comprehensive Income (Loss) Components
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Affected Line Item in the Statement where Net Income is Presented
December 31,
(Dollars in thousands)
Sale of investment securities available-for-sale
$
(51
)
$
-
Gains on sale of investment securities
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity
(39
)
(41
)
Interest income on taxable securities
Tax effect
(9
)
-
Federal income tax expense
Total reclassification
$
(99
)
$
(41
)
Accumulated other comprehensive loss at December 31, 2014 and 2013 consisted of the following:
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.
Note 2-Merger with Affinity Bancorp, Inc.
On February 28, 2013, First Priority and Affinity Bancorp, Inc. completed a merger, pursuant to a definitive merger agreement dated May 23, 2012, whereby the companies agreed to merge their respective holding companies and bank subsidiaries. Under the terms of
the merger agreement, shareholders of Affinity received 0.9813 newly issued shares of First Priority in exchange for each Affinity share. A total of 1,933,665 shares of First Priority common stock were issued in connection with the merger.
The merger was accounted for using acquisition accounting, which required the Company to allocate the total consideration transferred to the assets acquired and liabilities assumed, based on their respective fair values at the merger date, with any remaining excess consideration being recorded as goodwill. The fair value of total assets acquired as a result of the merger totaled $174.4 million, as displayed in the table below. The transaction also resulted in a core deposit intangible asset of $582 thousand and goodwill of $1.5 million. The transaction added $10.1 million to First Priority’s equity based on the fair value of stock issued in the acquisition. The results of Affinity’s operations have been included in the Company’s consolidated financial statements prospectively from the date of the merger.
The acquired assets and assumed liabilities were measured at estimated fair values. In many cases, determining the fair value of the acquired assets and assumed liabilities required First Priority to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest, which required the utilization of significant estimates and judgment in accounting for the acquisition.
The estimated fair values of cash and due from banks, other assets and other liabilities approximate their stated value. The estimated fair values of the investment securities available for sale were calculated primarily using level 2 inputs. The prices for these instruments are obtained through an independent pricing service and are derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed the data and assumptions used in pricing the securities to ensure the highest level of significant inputs are derived from market observable data.
Real estate acquired through foreclosure, included in other assets, was primarily valued based on estimated or appraised collateral values.
The most significant fair value determination related to the valuation of acquired loans. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors. The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration.
Affinity’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, Affinity’s loan portfolio without evidence of deterioration was recorded at a current fair value of $74.6 million. The Company utilized an interest rate loan fair value analysis, which resulted in a positive fair value adjustment of $1.6 million related to this portion of the acquired loans and a general credit fair value analysis which resulted in an offsetting $1.6 million reduction in the fair value.
To prepare the interest rate loan fair value analysis loans were assembled into groupings by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize.
A present value approach was utilized to calculate the interest rate fair value adjustment. The general credit risk fair value adjustment was calculated using a two part general credit fair value analysis: (1) expected lifetime losses, using an average of historical losses of the Company, Affinity and peer banks; and (2) an estimated fair value adjustment for qualitative factors related to general economic conditions and the risk related to lack of familiarity with the originator’s underwriting process.
Affinity’s loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were recorded at fair value and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a nonaccretable difference. Effectively at the acquisition date, the Company recorded $2.8 million of purchased credit-impaired loans subject to a nonaccretable discount difference of $1.6 million. The balance of purchased credit impaired loans at December 31, 2014 was $602 thousand, net of a remaining unamortized non accretable discount of $443 thousand. The method of measuring carrying value of purchased loans differs from loans originated by the Company (“originated loans”), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.
The following is a summary of the acquired impaired loans resulting from the merger with Affinity (dollars in thousands):
Acquired Impaired Loans
Contractually required principal and interest at acquisition...
$ 5,577
Contractual cash flows not expected to be collected...............
2,441
Expected cash flows at acquisition.............................................
3,136
Interest component of expected cash flows..............................
Basis is acquired loans at acquisition-estimated fair value.....
$ 2,777
The fair value of demand deposits, money market and savings deposits acquired through the merger with Affinity was assumed to be approximately the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued as the present value of the certificates expected contractual payments discounted at market rates for similar certificates.
Core deposit intangibles (CDI) represent the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. The CDI value represents the future economic benefit of the potential cost savings from acquiring Core Deposits as part of an acquisition compared to the cost of alternative funding sources and the alternative cost to grow a similar core deposit base. The core deposit intangible of $582 thousand is being amortized over an estimated useful life of approximately 10 years. Amortization expense was $97 thousand and $88 thousand for the years ended December 31, 2014 and 2013, respectively.
The following table shows amortization expense for the core deposit intangible for the next 5 years:
In thousands
2015...............
$ 86
2016...............
2017...............
2018...............
2019...............
Management used specific market quotations from the FHLB to fair value long-term FHLB advances. These borrowings were subsequently paid off by the Company in the first quarter of 2013 at the recorded fair values.
The incremental net deferred tax assets resulting from the merger with Affinity, totaling $1.8 million, were fully reserved by a valuation allowance. Affinity had a Federal net operating loss carryforward (“NOL”) for tax purposes of $1.5 million, or a $497 thousand tax impact at the statutory federal income tax rate of 34%, which is subject to certain limitations and expires in 2032 if not fully utilized. The $497 thousand deferred tax asset related to the NOL is included in the $1.8 million net deferred tax asset discussed above.
In connection with the Affinity acquisition, First Priority incurred merger-related expenses in regards to personnel, professional fees, occupancy and equipment and other costs of integrating and conforming acquired operations with and into First Priority. Those expenses consisted largely of costs related to professional and consulting services, consolidating a branch office, termination of Affinity’s core system contractual agreement and conversion of systems and/or integration of operations, initial communication expenses to introduce First Priority to its new customers, printing and filing costs of completing the transaction and investment banking charges.
A summary of merger related costs included in the consolidated statements of operations follows (dollars in thousands):
For the Year Ended December 31, 2013
Accounting.....................................................................
$ 26
Branch consolidation.....................................................
Investment banking.......................................................
Investor & customer document printing and filing…...
Legal ............................................................................
Purchase accounting consulting....................................
Salaries and employee benefits.....................................
System contract termination..........................................
System conversion/deconversion costs.........................
$ 1,534
Pro Forma Condensed Combined Financial Information
If the merger between First Priority and Affinity had been completed on January 1, 2013, unaudited pro forma total revenue, consisting of net interest income plus non-interest income for the year ended December 31, 2013 would have been $17.02 million and net loss would have been $2.43 million. These amounts do not include merger related expenses. Supplemental pro forma earnings for 2013 were adjusted to exclude $1.53 million of merger related costs incurred in the year ended December 31, 2013. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with Affinity at the beginning of 2013. Cost savings are also not reflected in the unaudited pro forma amounts for the periods presented, respectively. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.
Note 3-Recently Issued Accounting Standards
In January 2014, the FASB issued ASU 2014-04, Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. With the adoption of ASU 2014-04 we do not expect to have a significant impact on the Company’s Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The amendments are
effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. With the adoption of ASU 2014-09 we do not expect to have a significant impact on the Company’s Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this update require a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal plus interest) expected to be recovered from the guarantor. The guidance becomes effective for us on January 1, 2015, and we do not expect this to have a significant impact on our financial statements.
Note 4-Earnings (Loss) Per Common Share
Diluted earnings (loss) per common share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Proceeds assumed to have been received on such exercise or conversion, are assumed to be used to purchase shares of the Company’s common stock at the average market price during the period, as required by the “treasury stock method” of accounting for common stock equivalents. For purposes of calculating the basic and diluted earnings (loss) per share, the Company’s reported net income (loss) is adjusted for dividends on preferred stock and net accretion/amortization related to the issuance of preferred stock to determine the net income (loss) to common shareholders. For the year ended December 31, 2013 diluted loss per share is the same as basic loss per share, as the effect of any common stock equivalent is antidilutive. For the year ended December 31, 2013 there were 851 thousand common stock equivalent shares, all of which were antidilutive and therefore, excluded from earnings per share calculations.
The calculations of basic and diluted earnings (loss) per common share are presented below for the years ended December 31, 2014 and 2013:
The amount of preferred stock dividends and the net accretion or amortization related to each series of preferred stock is presented below for the years ended December 31, 2014 and 2013:
Note 5-Securities
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Available for sale securities are carried at fair value.
Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed by a method which approximates the interest method over the term of the securities.
At March 31, 2014, the Company transferred securities with fair values of $3.7 million consisting of six obligations of states and political subdivisions and one corporate bond from available for sale securities to held to maturity securities. Net unrealized holding losses arising prior to the reclassification date as of March 31, 2014 totaled $137 thousand are reported as a separate line item within accumulated other comprehensive income. The balance of net unrealized holding gains, totaling $51 thousand as of December 31, 2014 and $252 thousand as of December 31, 2013, is being amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same transferred debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding loss reported in equity will offset the effect on the interest income of the accretion of the discount on these securities.
The amortized cost, unrealized gains and losses, and the fair value of the Company’s investment securities available for sale and held to maturity are as follows for the periods presented:
Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The table below details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at December 31, 2014 and 2013.
As of December 31, 2014, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the minimal inherent credit risk associated with the issuers of these securities and that the unrealized losses in these portfolios are not the result of deteriorating credit within any investment category.
Securities issued by states and political subdivisions are all rated investment grade. Each holding is reviewed quarterly for impairment by management and our third party investment advisor. All mortgage backed securities and collateralized mortgage obligations are issued by U.S. government sponsored agencies; there are no holdings of private label mortgage backed securities or securities backed by loans classified as “Alt-A” or “Subprime”.
Although the fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature. The Company evaluates a variety of factors in concluding whether securities are other-than-temporarily impaired. These factors include, but are not limited to, the type and purpose of the bond, the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.). The Company does not intend to sell any of these securities and it is unlikely that it will be required to sell any of these securities before recovery. Management does not believe any individual unrealized loss on individual securities, as of December 31, 2014 represents other than temporary impairment.
For the year ended December 31, 2014 gross gains of $51 thousand were realized from the sale of available for sale securities. There were no realized gains or losses for the year ended December 31, 2013.
Securities with an estimated fair value of $32.6 million and $44.3 million were pledged at December 31, 2014 and 2013, respectively, to secure public fund deposits. In addition, securities pledged to secure borrowings by the Bank totaled $89 thousand and $106 thousand as of December 31, 2014 and December 31, 2013, respectively.
The amortized cost and fair value of securities as of December 31, 2014 by contractual maturity are shown below. Certain of these investment securities have call features which allow the issuer to call the security prior to its maturity date at the issuer’s discretion.
Note 6-Loans Receivable and Related Allowance for Loan Losses
Loans receivable consist of the following at December 31, 2014 and 2013.
First Priority has acquired various loans through the acquisition of Affinity for which there was, at acquisition, evidence of deterioration of credit quality since origination, and for which it was probable that all contractually required payments would not be collected. The carrying amounts of the acquired impaired loans included in the loan balances above are summarized as follows:
The following table presents the changes in accretable yield related to purchased-credit-impaired loans for the years ended December 31, 2014 and 2013 (dollars in thousands):
The Company’s loans consist of credits to borrowers spread over a broad range of industrial classifications. The largest concentrations of loans are to lessors of nonresidential buildings and lessors of residential buildings and dwellings. As of December 31, 2014, these loans totaled $69.5 million and $54.7 million, respectively, or 18.5% and 14.6%, respectively, of the total loans outstanding. As of December 31, 2013, these same classifications of loans totaled $64.0 million and $42.7 million, respectively, or 19.1% and 12.7%, respectively, of the total loans outstanding at that time. These credits were subject to normal underwriting standards and did not present more than the normal amount of risk assumed by the Company’s other lending activities. The Company has no other concentration of loans which exceeds 10% of total loans.
The following tables summarize the activity in the allowance for loan losses by loan class for the years ended December 31, 2014 and 2013:
The following tables present the balance in the allowance for loan losses at December 31, 2014 and 2013 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology:
The following tables summarize information in regard to impaired loans by loan portfolio class as of December 31, 2014 and 2013 as well as for the years then ended, respectively:
The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2014 and 2013:
The Company’s policy for interest income recognition on nonaccrual loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. The Company will not recognize income if these factors do not exist. Interest that would have been accrued on non-accruing loans under the original terms but was not recognized as interest income totaled $379 thousand and $301 thousand for the years ended December 31, 2014 and 2013, respectively.
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2014 and 2013:
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of December 31, 2014 and 2013:
As of December 31,2014, there was one residential mortgage loan totaling $70 thousand which was greater than 90 days past due and still accruing interest which has subsequently been paid current. As of December 31, 2013, there were no loans greater than 90 days past due and still accruing interest.
The Company may grant a concession or modification for economic or legal reasons related to a borrower’s declining financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.
The Company identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.
The following tables reflect information regarding troubled debt restructurings entered into by the Company for each of the periods ended December 31, 2014 and 2013:
As of December 31, 2014 and December 31, 2013, a residential mortgage loan with a current balance of $76 thousand, acquired through the Affinity merger, has remained in default and classified as non-accrual. Additionally as of each respective date two commercial loans classified as troubled debt restructurings with combined outstanding balances totaling $78 thousand were in default and remain classified as non-accrual status.
Note 7-Transactions with Executive Officers, Directors and Principal Shareholders
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal shareholders, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and do not involve more than the normal risk of collectability. Activity of these loans is as follows:
Deposits of related parties totaled $9.0 million and $9.1 million at December 31, 2014 and 2013, respectively.
Note 8-Premises and Equipment
The components of premises and equipment at December 31, 2014 and 2013 are as follows:
Depreciation expense for the years ended December 31, 2014 and 2013 was $484 thousand and $420 thousand, respectively.
Note 9-Deposits
The components of deposits at December 31, 2014 and 2013 are as follows:
Included in time, other at December 31, 2014 and 2013 are brokered deposits of $74.6 million, and $36.2 million, respectively.
At December 31, 2014, the scheduled maturities of time deposits are as follows:
Note 10-Borrowings
As of December 31, 2014 and 2013, the Company had a borrowing facility with a correspondent bank totaling $10 million, of which $2 million is available unsecured. The remaining $8 million is a secured line of credit with security provided, when utilized, by a pledge of the Company’s investment assets.
First Priority Bank became a member of FHLB in March 2008. Advances are collateralized by restricted investments in FHLB bank stock totaling $2.9 million and $2.6 million at December 31, 2014 and 2013, respectively, by a specific pledge of First Priority Bank’s investment assets and by a blanket lien on First Priority Bank’s loan portfolio. At December 31, 2014 and 2013, respectively, First Priority Bank had borrowing capacity with the FHLB, estimated at $144 million and $107 million, respectively, with advances outstanding as of those dates of $62.5 million and $44.6 million, respectively. Investment securities with a carrying value of $89 thousand and $106 thousand were specifically pledged as collateral to secure FHLB borrowings at December 31, 2014 and 2013, respectively.
Short-Term Borrowings
At December 31, 2014 and 2013, First Priority had short-term borrowings totaling $51.5 million and $33.6 million, respectively, consisting of overnight or less than 30 day advances from the FHLB. Advances from the FHLB at December 31, 2014 are collateralized by our investment in the common stock of the FHLB and by a blanket lien on selected mortgage loans within First Priority Bank’s portfolio.
The following table outlines First Priority’s various sources of short-term borrowed funds at or for the years ended December 31, 2014 and 2013. The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at any month-end during each of the years shown.
The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at any month end during each of the periods shown.
Long-Term Debt
Long-term debt, consisting of FHLB advances, totaled $11.0 million as of both December 31, 2014 and 2013, respectively. Average balances outstanding totaled $11.0 million and $12.3 million, respectively, with an average cost of 0.89% and 1.18%, respectively, for the years ended December 31, 2014 and 2013. Advances are made pursuant to several different credit programs offered from time to time by the FHLB.
At December 31, 2014, scheduled maturities of long-term borrowings with the FHLB are as follows:
Note 11-Lease Commitments
Pursuant to the terms of non-cancellable lease agreements in effect at December 31, 2014, pertaining to premises, future minimum lease payments by year and in the aggregate, under these lease agreements, are as follows:
The minimum lease payments shown above include payments for the entire initial term. One lease agreement included above contains an option for the Company to cancel the lease midway through the initial lease period for an incremental fee. One lease contains pre-determined rental costs for the initial ten years of the lease, including an initial five year renewal option, based on management’s original expectations for this location. All other option periods for which the Company has an option to extend the lease beyond initial periods have not been included as part of the minimum lease payments.
Lease expense for all leases for the years ended December 31, 2014 and 2013 was $1.28 million and $1.24 million, respectively.
Additionally, the Wyomissing office of the Bank was closed and consolidated into the Wyomissing office acquired through the merger with Affinity. The lease on the closed Wyomissing office will expire on January 31, 2017. In January 2014, the Company signed a sublease agreement which provides for future rental payments through the end of the existing lease.
Note 12-Severance and Employment Agreements
During 2013, management and the Board of Directors took a series of steps to reduce the potential liability underlying the change-in-control agreements which had been in place since the Company’s inception in 2005. These steps included a voluntary exchange of those contracts and stock options issued at previous dates for inclusion in a new First Priority Bank Severance Plan (the “Severance Plan”) and the issuance of new stock options. Accordingly, on December 19, 2013, the board of directors of the Company approved restructured change in control arrangements to replace the previously executed change in control agreements between the Company and participating senior officers. The result of these steps significantly reduces the Company’s liability in the event of a change in control.
In each case, the previously executed change in control agreement between the senior officer and the Company, which generally provided for 12 to 24 months of severance payments in the event of involuntary termination of employment or resignation for specified events of “good reason” following a change in control, was terminated with the consent of each senior officer. In lieu of the change in control agreements, each senior officer will instead participate in the Bank’s Severance Plan, which is a broad-based severance plan applicable to certain employees of the Company and the Bank. Each senior officer will receive a severance benefit equal to continued base salary, as defined, for a period ranging between six and eighteen months in the event that the officer’s employment is terminated within one year following a “change in control” as a result of a work force reduction or job elimination.
In addition, each senior officer also received a grant of stock options under the Company’s existing Stock Compensation Program. Such options, which vest only upon a change in control of the Company, will remain outstanding for a period of ten years, expiring as of December 19, 2023, at an exercise price of $5.25. These newly issued options, totaling 355,000 were generally granted to replace 315,000 previously granted options, which had exercise prices of either $10.00 or $10.25 per share and which the Company and each senior officer mutually agreed to terminate.
On December 19, 2013, as part of the Company’s long-term incentive compensation program, each senior officer also received a grant of restricted stock under the Company’s Stock Compensation Program, totaling 89,500 shares in aggregate, which vest three years from the grant date or earlier upon a change in control of the Company.
The Company has an employment agreement with its president, who does not participate in the previously mentioned Severance Plan. The employment agreement provides for a three year term that is automatically renewed on each anniversary date of the agreement for an additional year unless either party gives notice to the other of non-renewal at least 60 days prior to such anniversary date. The agreement provides for a base salary and benefits commensurate with other First Priority executive officers, including health insurance, vacation, use of a company vehicle, supplemental life insurance and disability coverage, among other things. The agreement can be terminated for “cause” as defined in the agreement. If First Priority were to terminate its president’s employment without cause, or if the president were to terminate his employment for “good reason”, as defined, including but not limited to, change in control of First Priority, he will be entitled to receive post termination benefits as follows: an amount equal to three (3) times the sum of (i) the highest salary paid to him in the year of termination or prior two calendar years and (ii) the highest bonus paid to him in one of the three calendar years prior to termination and (iii) an adjustment for benefits.
On February 20 and December 18, 2009, the Company issued preferred stock to the U.S. Department of the Treasury (“Treasury”) under the “Troubled Asset Relief Program-Capital Purchase Program” which placed limitations on executive payments which effectively eliminates any payments under these change in control agreements during the period that the Treasury holds any equity securities of the Company acquired through this program. Subsequently, on February 8, 2013, the Treasury sold its entire holdings of the Company’s preferred stock, which eliminates these previously placed limitations on executive payments. Note 13 discusses the issuance and subsequent transfer of ownership of the preferred stock under this program.
Note 13-Shareholders’ Equity
During the initial offering period in 2005, the Company sold 2,107,500 shares of common stock at $10.00 per share, which resulted in net proceeds of $21.0 million. As of February 29, 2008, in connection with the acquisition of Prestige Community Bank, First Priority issued an additional 976,137 shares of common stock, resulting in additional equity of $7.4 million.
On February 28, 2013, in conjunction with the merger with Affinity Bancorp, Inc., shareholders of Affinity received 0.9813 newly issued shares of First Priority common stock in exchange for each Affinity share. A total of 1,933,665 shares of First Priority common stock were issued; resulting in incremental equity of $10.1 million due to the merger.
Also, on February 28, 2013 and in conjunction with the merger of Affinity Bancorp, Inc., First Priority issued 1,268,576 shares of common stock at an issuance price of $5.22 per share through a private placement resulting in total proceeds of $6.6 million, net of $50 thousand of related issuance costs.
Preferred Stock Outstanding
On February 20, 2009, as part of the Treasury’s TARP Capital Purchase Program, the Company issued 4,579 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $100 par value per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and a warrant (the “Warrant) to purchase, on a net basis, 229 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $100 per share (the “Series B Preferred Stock”), which was immediately exercised, for an aggregate purchase price of $4.58 million in cash, less $29 thousand in legal issuance costs. On December 18, 2009, the Company issued 4,596 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $100 par value per share, having a liquidation preference of $1,000 per share (the “Series C Preferred Stock”), for an aggregate purchase price of $4.60 million in cash, less $8 thousand in legal issuance costs.
On February 8, 2013, the Treasury sold its entire holdings of the Company’s preferred stock to certain qualified or accredited institutional investors.
The Series A and Series B Preferred Stock will pay cumulative dividends at a rate of 9% per annum. The Series C Preferred Stock will pay cumulative dividends at a rate of 5% per annum until February 15, 2015 and at a rate of 9% per annum thereafter. The Series A, B and C Preferred Stock have no maturity date and rank senior to common stock with respect to dividends and upon liquidation, dissolution, or winding up. The Company may redeem the Series A or Series C Preferred Stock, in whole or in part, at its liquidation preference plus accrued and unpaid dividends. The Company may redeem the Series B Preferred Stock only after all of Series A has been redeemed.
Note 14-Deferred Compensation Plan
In December 2008, the Company adopted a Deferred Compensation Plan for the benefit of a select group of executives of the Company, eligibility as determined by the Board of Directors. The Plan was an unfunded arrangement which became effective January 1, 2009. The Plan was subject to annual renewal by the Board of Directors and was terminated effective close of business December 31, 2009.
On December 31, 2009, the Company issued 20,302 shares of restricted common stock based on a conversion price of $10 per share. During 2010, 1,003 of these shares were forfeited, related to a salary deferral of $10 thousand which was also forfeited under the plan, resulting in 19,299 remaining shares outstanding under this plan as of December 31, 2014 and 2013, respectively. These shares are restricted and subject to the vesting requirements as defined within the Plan.
The restricted stock issued as part of this plan will vest on December 31, 2015, or upon a Change of Control as determined by the Plan, and the related stock compensation costs are being amortized over this vesting period.
Note 15-Stock Compensation Program
In 2005, the Company adopted the 2005 Stock Compensation Program, which was amended at the Company’s annual meeting on April 23, 2009 as the 2009 Stock Compensation Program (the “Program”) and further amended effective March 18, 2010. The Program allows equity benefits to be awarded in the form of Incentive Stock Options, Compensatory Stock Options or Restricted Stock. The Program authorizes the Board of Directors to grant options up to an aggregate maximum of 1,207,957 shares to officers, other employees and directors of the Company, including 382,957 shares which were authorized for grant under this plan as a result of
the merger with Affinity. Only employees of the Company will be eligible to receive Incentive Stock Options and such grants are subject to the limitations under Section 422 of the Internal Revenue Code.
All stock options granted under the Program fully vest in four years from the date of grant (or potentially earlier upon a change of control), excluding options issued in regards to the Company’s Severance Plan which vest only upon change in control, and terminate ten years from the date of the grant. The exercise price of the options granted is the fair value of a share of common stock at the time of the grant, with a minimum exercise price of $10 per share for shares issued prior to March 18, 2010. Effective March 18, 2010, the Company’s stock compensation program was amended to eliminate the minimum exercise price. As of December 31, 2014 and 2013, 7,175 shares and 4,975 shares, respectively, of restricted common stock were outstanding to non-management employees throughout the Company under the Stock Compensation Program.
A summary of the status of the Program is presented below:
(1)Included in options outstanding and exercisable at year end are 100,000 organizer options, with an exercise price of $10.00 per share, exchanged as part of the 2008 acquisition of Prestige which were issued outside of the Program.
The weighted average remaining contractual lives of all outstanding stock options and exercisable options at December 31, 2014 and 2013 were 6.15 years and 2.41 years, respectively and 6.96 years and 4.99 years, respectively. The aggregate intrinsic value of options outstanding was $229 thousand as of December 31, 2014 and there is no aggregate intrinsic value of exercisable options as of this same date.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions, excluding those issued as part of the merger with Affinity:
Dividend yield..................................
0.0%
0.0%
Expected life.....................................
7 years
5 years
Expected volatility...........................
32%
33%
Risk-free interest rate......................
2.08%
1.67%
Weighted average fair value..........
$ 2.14
$ 1.62
Under the terms of the merger agreement with Affinity, each Affinity option became fully vested and was exchanged for a grant of 0.9813 FPFC options, with an adjusted exercise price to reflect the exchange ratio and maintains the same expiration date as the original option. As of December 31, 2014, 90,763 of these options remain outstanding with an average exercise price of $9.20 and a remaining contractual term of 2.6 years.
These options were valued at the date of the merger at $44 thousand based on the following weighted average assumptions:
Dividend yield........................................
0.0%
Expected life............................................
2.6 years
Expected volatility.................................
33%
Risk-free interest rate............................
0.38%
Weighted average fair value................
$ 0.36
FPFC stock price at date of issuance..
$ 5.22
The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Due to the Company’s lack of sufficient historical exercise data and the limited period of time for which shares have been issued, the “simplified” method is used to determine the expected life of options, calculated as the average of the sum of the vesting term and original contractual term for all periods presented
As of December 31, 2014, there was $121 thousand of unrecognized compensation cost related to non-vested stock options granted after January 1, 2007, excluding those stock options issued in conjunction with the severance plan (see note 12). That cost is expected to be recognized over a weighted average period of 2.21years. There was no tax benefit recognized related to this stock-based compensation. There are 355,000 stock options issued in connection with the termination of the previously executed change in control agreements and the adoption of the severance plan with $576 thousand of unrecognized compensation cost which will only be recognized if a change in control occurs, based on the options which remain outstanding and are probable to vest at that time.
Restricted stock grants fully vest three years from the date of grant (or potentially earlier upon a change of control), subject to the recipient remaining an employee of the Company. Upon issuance of the shares, resale of the shares is restricted during the vesting period, during which the shares may not be sold, pledged, or otherwise disposed of. Prior to the vesting date and in the event the recipient terminates association with Company for any reasons other than death, disability or change of control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant. Compensation expense related to restricted stock awards granted under the Plan was recorded at the date of the award based on the estimated fair value of the shares. As of December 31, 2014, there was $312 thousand of unrecognized compensation cost related to restricted stock, which will be amortized through July 17, 2017.
A summary of restricted stock award activity is presented below for the years presented:
Note 16-Federal Income Taxes
Deferred tax assets (“DTA”) are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. When determining the need for a valuation allowance, the Company assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards, as defined by Accounting Standards Codification (“ASC”) Topic 740-10-30-18. This guidance related to when a valuation allowance on the DTA should be maintained, generally provides that the valuation allowance should be reversed, when in the judgment of management, it is more likely than not that the DTA will be realized.
As of September 30, 2014, First Priority made a determination that, in its judgment, a valuation allowance related to net deferred tax assets is no longer required and should be reversed in its entirety to establish the deferred tax positions on the balance sheet of the Company. In making this judgment, management has made the determination that it is more likely than not that the deferred tax asset will be realized as required.
During the historical three year period ended December 31, 2014, First Priority has recorded cumulative pre-tax earnings totaling $3.4 million, and exclusive of cumulative non-recurring merger related costs totaling $2.0 million, which are not reflective of ongoing operations of the Company, cumulative pre-tax earnings of $5.4 million over this same period. Furthermore, excluding merger related costs, First Priority recorded a profit in each of the prior fourteen quarters ended December 31, 2014. These results constitute positive evidence that allows First Priority to overcome the accounting criteria that “cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome” when determining if a valuation allowance should be maintained.
Additionally, the Company’s management projects future taxable income sufficient to utilize the net deferred tax asset within a reasonable timeframe which meets the second component of the criteria required in order to reverse the valuation allowance, once established. This criteria is also derived from ASC 740-10 which states that “future taxable income exclusive of temporary differences and carryforwards” constitutes positive evidence that needs to be considered when evaluating the need for a valuation allowance on the DTA.
When evaluating the Company’s deferred tax asset and related valuation allowance, management considered the four sources of taxable income identified in ASC Topic 740-10-30-18 including:
●
Future reversals of existing taxable temporary differences.
●
Taxable income in prior carryback year(s) if carryback is permitted under the tax law.
●
Tax-planning strategies (see paragraph 740-10-30-19) that would, if necessary, be implemented
●
Future taxable income exclusive of reversing temporary differences and carryforwards
Additionally, the Company also considers tax planning strategies which could accelerate taxable income and allow the Company to take advantage of future deductible differences. A qualified tax-planning strategy is an action that (a) is prudent and feasible; (b) a company ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and (c) would result in the realization of deferred tax assets.
Based on the analysis of available positive and negative evidence, the Company determined that the valuation allowance on net deferred tax assets, totaling $4.8 million as of September 30, 2014, was reversed and the net DTA is currently reported on the balance sheet of First Priority. In connection with reversing the valuation allowance, the Company has recorded current tax expense in its statement of operations and has reported earnings of the Company to its shareholders and regulators on an after tax basis.
The components of the net deferred tax asset at December 31, 2014 and 2013 are as follows:
The most significant component of the Company’s deferred tax asset balances relates to the Company’s net operating loss (“NOL”) carryforwards, including acquired NOLs, totaling $10.8 million as of December 31, 2014. First Priority currently has NOL carryforwards of $7.9 million at December 31, 2014, which expire in 2026 through 2033; such NOL carryforwards, however, are available prior to expiration to reduce future federal income taxes until such time as the entire NOL is utilized.
First Priority acquired a NOL for tax purposes related to the acquisition of Prestige Community Bank which totaled $2.0 million as of December 31, 2014, that is subject to certain limitations and expires in 2027 through 2028 if not fully utilized. In addition, a NOL carryforward balance of $940 thousand resulting from the merger with Affinity remains available to reduce future federal income taxes as of December 31, 2014. These NOL carryforwards are also subject to certain limitations and expires in 2026 through 2032 if not fully utilized.
The following table presents the Federal income tax (benefit) expense for the years ended December 31, 2014 and 2013.
Reconciliation of the statutory federal income tax (benefit) expense computed at 34% to the income tax expense (benefit) included in the consolidated statements of income is as follows:
For the period ended December 31, 2013, the Company recorded current federal income tax expense of $33 thousand related to the alternative minimum tax calculation. In addition, the Company recorded $33 thousand of deferred federal income tax expense for the period ended December 31, 2013 which was fully reserved by the valuation allowance.
The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before income taxes. Penalties are recorded in other expenses, net, and interest paid or received is recorded in interest expense or interest income, respectively, in the consolidated statement of income. As of December 31, 2014 and 2013, there was no interest or penalties accrued for the Company. With limited exception, tax years prior to 2011 are closed to examination by Federal and State taxing authorities.
Note 17-Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
At December 31, 2014 and 2013, outstanding commitments to extend credit consisting of total unfunded commitments under lines of credit were $83.2 million and $77.7 million, respectively. In addition, as of each of these dates, there were $349 thousand and $1.3 million of performance standby letters of credit outstanding, respectively, and $1.1 million and $1.3 million of financial standby letters of credit as of each respective period.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include residential or commercial real estate, accounts receivable, inventory and equipment.
In addition, as of December 31, 2014 and 2013, the Bank pledged $149 thousand and $199 thousand, respectively, of deposit balances at a correspondent bank to support a letter of credit with balances of $149 thousand and $199 thousand, respectively, issued by the correspondent on behalf of a customer of the Bank. This transaction is fully secured by the customer through a pledge of the customer’s deposits at the Bank. Also, as of December 31, 2013, the Bank had outstanding a financial standby letter of credit, which was collateralized by a pledge of Bank assets at a correspondent bank totaling $512 thousand. This commitment was closed during the second quarter of 2014.
Note 18-Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2014, that the Company and the Bank meet all capital adequacy requirements to which it is subject.
The Bank’s capital amounts and ratios at December 31, 2014 and 2013 are presented below:
First Priority’s ability to pay cash dividends is dependent on receiving cash in the form of dividends from First Priority Bank. However, certain restrictions exist regarding the ability of First Priority Bank to transfer funds to First Priority in the form of cash dividends. All dividends are currently subject to prior approval of the Pennsylvania Department of Banking and Securities and the FDIC and are payable only from the undivided profits of First Priority Bank, with the exception of an exemption enacted by the Pennsylvania Department of Banking and Securities which allows the Bank to pay dividends related to preferred stock originally issued under the U.S. Department of the Treasury’s Troubled Asset Relief Program-Capital Purchase Program. Additionally, any payment of dividends by First Priority, including dividends on the aforementioned preferred stock, requires prior approval of the
Federal Reserve Bank when net income for the past four quarters is not sufficient to fund the dividend payments over that same period or when such payment would negatively impact capital adequacy of the Company.
The Company’s capital amounts and ratios are similar to those of the Bank.
Note 19-Fair Value Measurements and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of the Bank’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of December 31, 2014 and 2013 and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with FASB ASC Topic 820 - Fair Value Measurements, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in some instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2014 and 2013 are as follows:
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2014 and 2013 are as follows:
Management generally uses a discounted appraisal technique in valuing impaired assets, resulting in the discounting of the collateral values underlying each impaired asset. A discounted tax assessment rate has been applied for smaller assets to determine the discounted collateral value. All impaired loans are classified as Level 3 in the fair value hierarchy. Collateral may be real estate and / or business assets. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment.
Quantitative information about Level 3 fair value measurements at December 31, 2014 is included in the table below:
Fair Value
Valuation Techniques
Unobservable Inputs
Estimated Ratings (Weighted Average) (3)
(Dollars in thousands)
Impaired loans
$ 2,205
Appraisal of real estate collateral (1)
Appraisal adjustments(2)
0%-5% (0.12%)
Valuation of business assets used as collateral(1)
Valuation adjustments(2)
25%-30%
Liquidation expenses
8% (8.00%)
Repossessed assets
$ 42
Appraisal of collateral(1)
Valuation adjustments(2)
7%
Liquidation expenses
8%
Other real estate owned
$ 105
Appraisal of collateral(1)
Appraisal adjustments(2)
None
Liquidation expenses
7%-8% (7.79%)
Quantitative information about Level 3 fair value measurements at December 31, 2013 is included in the table below:
Fair Value
Valuation Techniques
Unobservable Inputs
Estimated Ratings (Weighted Average) (3)
(Dollars in thousands)
Impaired loans
$ 1,794
Appraisal of real estate collateral (1)
Appraisal adjustments(2)
None
Valuation of business assets used as collateral(1)
Valuation adjustments(2)
25%-30%
Liquidation expenses
8%-17% (8.35%)
Repossessed assets
$ 75
Appraisal of collateral(1)
Valuation adjustments(2)
10%
Liquidation expenses
8%
Other real estate owned
$ 181
Appraisal of collateral(1)
Appraisal adjustments(2)
None
Liquidation expenses
5%-10% (8.60%)
(1)
Fair Value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3)
The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.
Valuation of real estate collateral may be discounted based on the age of the existing appraisal. No discounts are taken for recent appraisals. Valuations related to business assets used as collateral are typically discounted more heavily due to the inherent level of uncertainty in determining the fair value of these types of assets. Liquidation costs relating to these assets are charged to expense.
Repossessed assets measured at fair value on a nonrecurring basis consist of personal property, specifically manufactured housing, that has been acquired for debts previously contracted and are included in other assets on the balance sheet. Costs relating to these assets are charged to expense. The Company had $42 thousand and $75 thousand of repossessed assets as of December 31, 2014 and 2013, respectively.
Other real estate owned measured at fair value on a nonrecurring basis consists of properties acquired as a result of accepting a deed in lieu of foreclosure, foreclosure or through other means related to collateral on Bank loans. Costs relating to the development or improvement of assets are capitalized and costs relating to holding the property are charged to expense. At December 31, 2014 and 2013, the fair value consists of other real estate owned balances of $433 thousand and $524 thousand, respectively, net of valuation allowances of $328 thousand, and $343 thousand, respectively. Fair value is generally determined based upon independent third-party appraisals of the property.
Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2014 and 2013:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.
Securities
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Loans Receivable
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.
Impaired Loans
Impaired loans, which are included in loans receivable, are those that are accounted for under FASB ASC Topic 310, “Receivables”, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is
significant to the fair value measurements. The fair value of the impaired loans consists of the loan balances, net of any valuation allowance. As of December 31, 2014 the fair value of impaired loans consisted of loan balances with an allowance recorded of $542 thousand, net of valuation allowances of $166 thousand and partial charge-offs of $28 thousand; and loan balances with no related allowance recorded of $2.9 million, net of partial charge-offs of $1.1 million. As of December 31, 2013 the fair value of impaired loans consisted of loan balances with an allowance recorded of $744 thousand, net of valuation allowances of $112 thousand; and loan balances with no related allowance recorded of $1.6 million, net of partial charge-offs of $473 thousand.
Restricted Investment in Bank Stock
The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.
Deposit Liabilities
The fair values disclosed for demand deposits (interest and noninterest checking), money market and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market to the maturities of the time deposits.
Short-Term Borrowings
The carrying amounts of short-term borrowings approximate their fair values.
Long-Term Debt
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
Off-Balance Sheet Financial Instruments
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
At December 31, 2014 and 2013, the estimated fair values of the Company’s financial instruments were as follows:
Note 20-Parent Company Only Financial Information
Condensed financial statements of First Priority Financial Corp. follow:
CONDENSED BALANCE SHEETS
CONDENSED INCOME STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended
December 31,
(Dollars in thousands)
Operating activities:
Net income...............................................................................................................................
$ 6,925
$ 196
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net (income) loss of subsidiary..............................................
(6,293)
Deferred income tax benefit..............................................................................................
(238)
-
Net increase in other assets..............................................................................................
(16)
(11)
Net increase (decrease) in other liabilities......................................................................
(32)
Net cash provided by operating activities.................................................................
Investing activities:
Equity infusion to subsidiary...........................................................................................
-
(5,750)
Net cash used in investing activities..........................................................................
-
(5,750)
Financing activities:
Cash dividends declared on preferred stock..................................................................
(571)
(479)
Proceeds from issuance of common stock.....................................................................
-
6,572
Cash in lieu of fractional shares for merger with Affinity Bancorp............................
-
(1)
Cash paid to subsidary for expenses paid on behalf of acquired company..............
-
(82)
Net cash provided by (used in) financing activities.................................................
(571)
6,010
Net increase (decrease) in cash....................................................................................
(225)
Cash and cash equivalents at beginning of the period....................................................
Cash and cash equivalents at end of period......................................................................
$ 586
$ 811
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed with the objective of providing reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”). In designing and evaluating our disclosure controls and procedures, our management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.
An evaluation was performed by our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and made known to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in Internal Controls.
There have been no changes in First Priority’s internal control over financial reporting identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, First Priority’s internal control over financial reporting.
(c) Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this evaluation under the framework in Internal Control-Integrated Framework, we have concluded that the internal control over financial reporting was effective as of December 31, 2014.
Because of its inherent limitations, internal control over the financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth as to each of the directors, his or her age, principal occupation and business experience, the period during which he or she has served as a director of First Priority, or an affiliate or predecessor, and other business relationships. There are no family relationships between any of the listed persons.
Name and Principal Occupation
Age
Director
Since (13)
Directorships in Public Cos.
and Registered Investment Cos.
Frank Sabatucci
Owner of Sabatucci Wealth Strategies, LLC. President of North Temple Builders, Inc.(1)
None
Mel A. Shaftel
Private Investor (2)
None
Vincent P. Small, Jr.
Private Investor and Business Consultant (3)
None
William L. Wetty
Private Investor and retired founder and President of
A&L Handles, Inc. (4)
None
Irvin Cohen
Private Investor and former Chairman, CEO and President of Construction Fasteners, Inc., an international manufacturing company. (5)
None
Barry L. Myers
An owner and director of GES, Inc., a national environmental consulting company. Former Chairman, CEO and President of B.L. Myers Bros., Inc., a water well drilling company until December 2001. (6)
None
David E. Sparks
Chairman and CEO of First Priority Financial Corp. and Chairman of First Priority Bank (7)
None
Patrick M. Smith
Certified Public Accountant & Partner of Rosenberg, Smith, Cooney and Migliore, P.C. (8)
None
Steven A. Ehrlich
President of First Priority Financial Corp. and President and CEO of First Priority Bank (9)
None
Jerome I. Marcus
Private Investor and former Medical Director and CEO of Omega Medical Laboratories (10)
None
Alan P. Novak
Attorney, Conrad O’Brien PC and
President, Novak Strategic Advisors (11)
None
Samuel J. Worthington, Jr.
Business owner in Newtown, PA (12)
None
________________
(1)
Mr. Sabatucci was a director of Affinity Bancorp, Inc. (“ABI”) since 2009 and Affinity Bank of Pennsylvania (“AB”) since its founding in 2002. Mr. Sabatucci is the owner of Sabatucci Wealth Strategies, LLC, a wealth management firm. Mr. Sabatucci is also President of North Temple Builders, Inc., a land development and construction company and Secretary of the Muhlenberg Township Planning Commission.
(2)
Mr. Shaftel served as a director of First Priority Financial Corp. (“FPFC”) since its formation in 2007, and has been a founding director of First Priority Bank since its inception in 2005. Mr. Shaftel has been a private investor since 2004. He was Managing Director of Rosetta Group, an investment management and financial advisory firm, from 1998 through 2003 and a member of the board of directors of Millennium Bank from 1998 until 2004. Mr. Shaftel was a Vice Chairman of Lehman Brothers until his retirement in 1997.
(3)
Mr. Small served as a director of FPFC since its formation in 2007, and has been a founding director of First Priority Bank since its inception in 2005. Mr. Small retired as a partner from PricewaterhouseCoopers in 1999. He served as a member of the board of directors of Millennium Bank from 2002 to 2004 and as a member of the board of directors of Harleysville National Corporation from 2004 to 2005.
(4)
Mr. Wetty served as a director of FPFC since its formation in 2007, and has been a founding director of First Priority Bank since its inception in 2005. Mr. Wetty founded A&L Handles, Inc., Pottstown, Pennsylvania and served as the company’s owner, President and Chief Executive Officer until its sale and his retirement in 2002.
(5)
Mr. Cohen was a director of ABI since 2009 and AB since its’ founding in 2002. He served as Chairman, CEO and President of Construction Fasteners, Inc. until January 2002 when he sold the company.
(6)
Mr. Myers was a director of ABI since 2009 and AB since its’ founding in 2002. He served as Chairman, CEO and President of B.L. Myers Bros., Inc. until December 2001 when he sold the company.
(7)
Mr. Sparks has served as a director of FPFC since its formation in 2007, and was the founder and has been a director of First Priority Bank since its inception in 2005. Mr. Sparks has served as Chairman, President and CEO of FPFC from its inception in 2007. Mr. Sparks also has served as Chairman and CEO of First Priority Bank from its inception in 2005. Effective with the merger of FPFC and ABI on February 28, 2013, Mr. Sparks became Chairman and CEO of FPFC and Chairman of First Priority Bank. Mr. Sparks was the Founder, Chairman and CEO of Millennium Bank from 1998 to 2004.
(8)
Mr. Smith has been a partner in the certified public accounting firm of Rosenberg, Smith, Cooney and Migliore, P.C. since 1991. Mr. Smith has been a director of First Priority Bank since 2008 and previously served as a director of First Priority from March 17, 2009 until the merger of ABI in 2013. Mr. Smith was appointed by the board of directors of First Priority on January 29, 2015 to serve out the vacated board position upon the resignation of Ms. Karen Tarte on January 19, 2015.
(9)
Mr. Ehrlich served as Chairman, CEO and President of ABI and AB since their founding in 2009 and 2002, respectively. He currently serves on the board of the Wilson School District in Berks County, Pennsylvania.
(10)
Dr. Marcus served as a director of ABI and AB since February 1, 2012. He was the Medical Director and CEO of Omega Medical Laboratories until January 2005, when he sold the business. Dr. Marcus is on the board of directors of the Berks Medical Society.
(11)
Mr. Novak has been a director of FPFC since its formation in 2007 and a director of First Priority Bank since 2006. Mr. Novak has been an attorney with the law firm of Conrad O’Brien since 1994. Mr. Novak has also served as President of Novak Strategic Advisors since 2001. Mr. Novak was Chairman of the Republican State Committee of Pennsylvania from 1996 to 2005.
(12)
Mr. Worthington has been a director of FPFC and First Priority Bank since 2008. Mr. Worthington is an owner of the Newtown Athletic Club in Newtown, Pennsylvania, a facility specializing in providing health and recreation services to its members. In 2001, the Newtown Athletic Club became a partner in Healthquest of Flemington, New Jersey, which specializes in providing health and recreation services. Mr. Worthington is also a partner in the Horsham Athletic Club in Horsham, Pennsylvania.
Item 11.
Item 11. Executive Compensation.
The following table sets forth certain information with respect to our named executive officers for the last three fiscal years. The compensation committee establishes the salaries for these executive officers.
Year
Salary
($)
Bonus(3)
($)
Stock
Awards(4)
($)
Option
Awards(4)
($)
Non-Equity
Incentive
Plan
Compensation
($)
Nonqualified
Deferred Compensation
Earnings
($)
All
Other
Compensation(6)
($)
Total
($)
David E. Sparks, Chairman, and Chief Executive Officer (1)
$243,269
$225,000
$218,269
$0
$25,000(7)
$0
$25,860
$4,860
$14,580
$14,447
$14,447
$14,763
None
None
None
$0
$0
$0
$17,545
$17,056
$74,524(5)
$301,121
$286,363
$322,136
Steven A. Ehrlich, President (1)(2)
$225,000
$186,058
$0
$7,219
$0
$0
None
None
None
None
$0
$0
$45,978
$32,667
$270,978
$225,944
Lawrence E. Donato, Executive Vice President and Chief Risk Officer(1)
$187,792
$181,800
$180,777
$0
$13,681
$11,534
$19,970
$2,430
$7,289
$8,668
$8,668
$8,984
None
None
None
$0
$0
$0
$13,843
$11,634
$38,741(5)
$230,273
$218,213
$247,325
Mary Ann Messmer, Executive Vice President(1)
$187,792
$181,800
$180,777
$0
$10,908
$11,534
$19,231
$1,604
$4,811
$8,668
$8,668
$8,984
None
None
None
$0
$0
$0
$14,404
$13,488
$31,368(5)
$230,095
$216,468
$237,474
Mark J. Myers, Chief Financial Officer (1)
$171,212
$165,000
$163,654
$0
$9,900
$10,441
$17,899
$971
$2,917
$5,779
$5,779
$5,779
None
None
None
$0
$0
$0
$11,734
$11,130
$21,945(5)
$206,624
$192,780
$204,736
(1)
Mr. Sparks is also the Chairman of First Priority Bank. Mr. Ehrlich is also President and Chief Executive Officer of First Priority Bank. Mr. Donato is also Executive Vice President and Chief Operating Officer of First Priority Bank. Ms. Messmer is also Executive Vice President of First Priority Bank. Mr. Myers is also Chief Financial Officer of First Priority Bank.
(2)
Prior to the Merger, Mr. Ehrlich was Chairman, President and Chief Executive Officer of Affinity Bancorp, Inc. and AB and assumed his positions with the Company and First Priority Bank effective March 1, 2013. Accordingly, Mr. Ehrlich received no compensation from First Priority or First Priority Bank prior to March 1, 2013. Mr. Ehrlich’s compensation with the Company is paid under an employment agreement which became effective with the Merger. Mr. Ehrlich’s base salary is currently $225,000. See “Mr. Ehrlich’s Employment Agreement” below.
(3)
The amounts reported represent specific performance awards approved by the compensation committee under the companywide incentive plan.
(4)
The amounts reported in this column reflect the expense, which is amortized through the vesting periods, for awards of restricted stock and stock options granted to the named executive.
(5)
Includes deferred compensation paid in 2012 related to compensation deferred in 2009 under the 2009 deferred compensation plan in amounts of $54,275 for Mr. Sparks; $27,138 for Mr. Donato; $17,911 for Ms. Messmer; and $10,855 for Mr. Myers. See “Nonqualified Defined Contribution and Other Deferred Compensation Plans” below.
(6)
Includes for Mr. Sparks, a car allowance or car lease payments of $7,164 for 2014, $9,075 for 2013 and $8,400 for 2012 for business use of his vehicle; for Mr. Donato, a car allowance for business use of his vehicle of $6,000 for each of the three years; for Ms. Messmer, a car allowance for business use of her vehicle of $7,800 for each of the three years; for Mr. Myers, a car allowance for business use of his vehicle of $6,000 for each of the three years. Mr. Ehrlich’s Employment Agreement provides for a car allowance that for 2104 amounted to $25,875 and $19,405 for 2013. Includes the expense of a club membership used for business generation for Mr. Sparks in the amount of $1,150 for 2014, $1,000 for 2013 and $5,300 for 2012 and 2011 and for Mr. Ehrlich in the amount of $9,268 for 2014 and $5,555 for 2013. The Bank’s 401(k) matching contribution amounts for Messrs. Sparks, Ehrlich, Donato and Myers and Ms. Messmer in 2014 were $7,012, $7,291, $5,816, $5,317 and $5,868, respectively, and for Messrs, Sparks, Donato and Myers and Ms. Messmer in 2013 were $6,981, $5,634, $5,130 and $5,688, respectively, and in 2012 were $6,548, $5,603, $5,090 and $5,652, respectively. The Bank’s matching contribution under the AB Simple IRA Plan for Mr. Ehrlich was $5,867 in 2013. Includes $1,840 premium on a life insurance policy for Mr. Ehrlich of which his estate is the beneficiary.
(7)
Mr. Sparks’ 2013 bonus was recorded in the proxy, but was not paid.
Outstanding Equity Awards at Fiscal Year End - 2014
________________
(1)
Options and restricted stock granted on December 19, 2013 as part of the restructured change in control arrangements. See “Restructured Change In Control Arrangements” below. Market value per share of the restricted stock is $4.20 which is based off the tangible book value per share at September 30, 2013.
(2)
Participation in a companywide restricted stock grant on June 30, 2013 which vest after three years of continuous employment. Market value per share is based on June 30, 2013 book value per share of $5.19.
(3)
Participation in a companywide restricted stock grant on July 17, 2014 which vest after three years of continuous employment. Market value per share is based on June 30, 2014 book value per share of $5.32.
(4)
Restricted stock granted with the payment of the 2009 deferred compensation plan. Stock is restricted until 12/31/15. See “Nonqualified Defined Contribution and Other Deferred Compensation Plans” below. Market value per share is based on the year end book value at grant date of $5.81 per share.
(5)
Mr. Ehrlich’s options were originally issued by ABI and became fully vested with the merger of ABI and the Company.
Option Exercises and Stock Vested - 2014
The named executive officers did not exercise any stock options during the year ended December 31, 2014.
Pension Benefits
The named executive officers participate in First Priority Bank’s 401(k) Plan that provides for a 50% match on the first 6% of the employees’ contribution to the plan. In 2014, the Bank’s match for Messrs. Sparks, Ehrlich, Donato and Myers and Ms. Messmer was $7,012 $7,291, $5,816, $5,317 and $5,868, respectively.
Restructured Change in Control Arrangements
During 2013, management and the Board of Directors took a series of steps to reduce the potential liability underlying the change-in-control agreements which had been in place since the Company’s inception in 2005. These steps included a voluntary exchange of those contracts of all officers holding change in control contracts and stock options issued at previous dates for a new change-of-control severance plan and new stock options. The result of these steps significantly reduces the Company’s liability in the event of a change in control.
Accordingly, on December 19, 2013, the board of directors of the Company approved restructured change in control arrangements to replace the previously executed change in control agreements between the Company and its named executive officers: David E. Sparks, Lawrence E. Donato, Mary Ann Messmer and Mark J. Myers along with other participating senior management personnel.
In each case, the previously executed change in control agreement between the named executive officer and the Company, which generally provided for 24 months of severance payments in the event of involuntary termination of employment or resignation for specified events of “good reason” following a change in control, was terminated with the consent of the executive officer. In lieu of the change in control agreements, each of the named executive officers will instead participate in the Bank’s Severance Plan (the “Severance Plan”). Under the Severance Plan, which is a broad-based severance plan applicable to certain employees of the Company and the Bank, each executive will receive a severance benefit equal to continued base salary, as defined, for a period of twelve months (18 months in the case of Mr. Myers) in the event that the executive’s employment is terminated within one year following a “change in control” as a result of a work force reduction or job elimination.
In connection with the termination of the previously executed change in control agreements and the adoption of the new Severance Plan, the named executive officers received a grant of stock options under the Company’s existing Stock Compensation Program. Such options, which vest only upon a change in control of the Company, are exercisable for a period of ten years at an exercise price of $5.25 in the following amounts: Mr. Sparks - 60,000 shares; Mr. Donato - 45,000 shares; Ms. Messmer - 45,000 shares; and Mr. Myers - 40,000 shares. Such options were granted to replace previously granted options, in equal amounts for Messrs. Sparks, Donato and Ms. Messmer and 15,000 for Mr. Myers, which the Company and each executive mutually agreed to terminate and which had exercise prices of either $10.00 or $10.25 per share.
On December 19, 2013, as part of the Company’s long-term incentive compensation program, each named executive officer also received a grant of restricted stock under the Company’s Stock Compensation Program, which vests three years from the grant date or earlier upon a change in control of the Company, in the following amounts: Mr. Sparks - 15,000 shares; Mr. Donato - 12,500 shares; Ms. Messmer 12,500 shares; and Mr. Myers - 12,000 shares.
Nonqualified Defined Contribution and Other Deferred Compensation Plans
On December 11, 2008, the board of directors approved a deferred compensation plan, which became effective on January 1, 2009. The plan is administered by the compensation committee. For participation in the plan, Messrs. Sparks, Donato, Myers and Ms. Messmer were granted restricted stock. The restricted stock vests on December 31, 2015.
Upon achieving defined profitability on December 31, 2012, voluntarily deferred 2009 salary plus interest was paid on that date to Messrs. Sparks, Donato, Myers and Ms. Messmer, in the amounts of $54,275, $27,138, $10,855 and $17,911, respectively.
The deferred compensation plan was discontinued after 2009; accordingly no further deferrals have been or will be made under the deferred compensation plan since that time.
Mr. Ehrlich’s Employment Agreement
As a condition to consummation of the Merger, Mr. Ehrlich entered into an employment agreement with First Priority. The employment agreement provides that Mr. Ehrlich serves as the President of First Priority as well as the President and Chief Executive Officer of First Priority Bank. The agreement has a term of three years that is automatically renewed on each anniversary date of the agreement for an additional year unless either party gives notice to the other of non-renewal at least 60 days prior to such anniversary date. The agreement provides Mr. Ehrlich with a base salary of $225,000, as adjusted effective January 1, 2013 by the ABI board of directors, and benefits commensurate with other First Priority executive officers, including health insurance, five weeks of vacation, use of a company vehicle, supplemental life insurance and disability coverage, among other things. Under the agreement, Mr. Ehrlich’s employment can be terminated for “cause” as defined in the agreement.
If First Priority were to terminate Mr. Ehrlich’s employment without cause, or if Mr. Ehrlich were to terminate his employment for “good reason”, as defined, including but not limited to, a change in control of First Priority, he will be entitled to receive post termination benefits as follows: an amount equal to three (3) times the sum of (i) the highest salary paid to him in the year of termination or prior two calendar years; (ii) the highest bonus paid to him in one of the three calendar years prior to termination; and (iii) an adjustment for benefits.
Compensation of Directors
Name
Fees Earned Or Paid In Cash
($) (1) (2)
Stock Awards
($)
Option Awards
(1)
All Other Compensation
($)
Total
Irvin Cohen
$5,000
-
-
-
$5,000
Jerome I. Marcus
$5,000
-
-
-
$5,000
Barry L. Myers
$5,000
-
-
-
$5,000
Alan P. Novak
$5,000
-
-
-
$5,000
Frank Sabatucci
$5,000
-
-
$5,000
Mel A. Shaftel
$5,000
-
-
-
$5,000
Patrick M. Smith
$5,000
-
-
-
$5,000
Vincent P. Small, Jr.
$5,000
-
-
-
$5,000
Karen G. Tarte
$5,000
-
-
-
$5,000
William L. Wetty
$5,000
-
-
-
$5,000
The following table sets forth a summary of the compensation that the Company paid to its non-employee directors in 2014.
_______________________
(1)
For their service on the First Priority board of directors from the date of the 2014 annual shareholders’ meeting to the 2015 annual shareholders’ meeting, all non-employee directors of the Company and of the Bank were compensated with a retainer fee of $5,000. Mr. Worthington did not receive a retainer fee as he was on a leave of absence.
(2)
Mr. Michael G. Wade serves on the board of directors of First Priority Bank and received a $5,000 retainer fee for 2014. In addition, Mr. John K. Desmond who served on the board of directors of First Priority Bank until his death in August, 2014 received a $5,000 retainer fee.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
In 2005, the Company adopted the 2005 Stock Compensation Program, which was amended at the Company’s annual meeting on April 23, 2009 as the 2009 Stock Compensation Program (the “Program”) and further amended effective March 18, 2010. The Program allows equity benefits to be awarded in the form of Incentive Stock Options, Compensatory Stock Options or Restricted Stock. The following table provides the total number of stock awards outstanding, including the weighted average exercise price of stock options, as of December 31, 2014.
_____________
(1)
Included in stock options outstanding are 355,000 stock options issued in connection with the Company’s Severance Plan, which will only vest if a change in control occurs.
(2)
The number of securities available for future issuance can be in the form of stock options or restricted stock grants.
The following table sets forth information concerning the number of shares of common stock beneficially owned, as of March 20, 2015, by each present director, nominee for director, and each executive officer named in the Summary Compensation Table appearing below (the “named executive officers”). The mailing address of each person is c/o First Priority, 2 West Liberty Boulevard, Suite 104, Malvern, Pennsylvania 19355.
______________________________
* Less than 1%
(1)
Shares are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares the power to vote or dispose of the shares, whether or not he or she has any economic interest in the shares. Unless otherwise indicated, the named beneficial owner has sole voting and investment power with respect to the shares. Also includes shares the holder has the right to acquire within sixty (60) days of March 20, 2015, and therefore amounts shown include options to acquire First Priority common stock that are exercisable on or before May 19, 2015. As of the date of this proxy statement, the number of shares represented by vested options which have been granted to all directors and named executive officers as a group totaled 209,244.
(2)
Includes a total of 9,000 options granted during 2005 to each non-employee director and 9,000 options granted to Mr. Novak in 2006 under First Priority’s 2005 Stock Compensation Program (the “2005 Program”). All options granted under the 2005 Program were granted at an exercise price of $10.00 per share, vested in full four years from the date of grant and terminate ten years from the date of grant (December 22, 2015, except for Mr. Novak whose options terminate March 23, 2016). In addition, includes a total of 1,000 options granted on December 11, 2008 to each non-employee director at an exercise price of $10.25 per share, which vested in full four years from the date of grant and will terminate ten years from the date of grant.
(3)
Mr. Donato’s beneficial ownership includes 82,171 shares of common stock owned jointly with his wife and 12,685 shares of common stock owned by his adult children with respect to which Mr. Donato does not exercise voting or investment power.
Ms. Messmer’s beneficial ownership includes 5,000 shares of common stock held jointly with her husband and 5,000 shares held in the name of her husband.
Mr. Shaftel’s beneficial ownership includes 43,312 shares of common stock owned by trusts in which Mr. Shaftel shares voting and investment power.
Mr. Smith’s beneficial ownership includes 5,000 shares of common stock held jointly with his wife.
Mr. Sparks’ beneficial ownership includes 75,100 shares of common stock owned by his wife and 1,150 shares of common stock owned by his adult children with respect to which Mr. Sparks does not exercise voting and investment power.
Mr. Spinieo’s beneficial ownership includes 2,662 shares of common stock held in the name of his wife.
Mr. Wade’s beneficial ownership includes 10,000 shares of common stock held jointly with his wife.
Mr. Wetty’s beneficial ownership includes 123,642 shares of common stock owned jointly with his wife.
(4)
Beneficial ownership for Mr. Smith, Mr. Spinieo, Mr. Wade and Mr. Worthington includes 2,500, 10,000, 2,500 and 15,000, respectively, vested options with an exercise price of $10.00 per share that expire October 18, 2017, issued to former directors of Prestige Community Bank as a grant for their contribution to Prestige Community Bank’s at-risk organizing capital.
(5)
The number of shares beneficially owned includes options issued to former directors of Affinity Bancorp, Inc. which became fully vested upon the change of control effective with the merger into First Priority Financial Corp. Mr. Cohen - 1,227 options; Mr. Ehrlich - 50,563 options; Mr. B. Myers - 1,227 options; and Mr. Sabatucci - 1,227 options.
(6)
Includes the following number of shares of restricted stock granted on December 31, 2009, pursuant to the Company’s 2009 Deferred Compensation Plan: Mr. Sparks - 5,019 shares; Mr. Donato - 2,509 shares; Ms. Messmer - 1,656 shares; and Mr. Myers - 1,003 shares. The restricted shares will become 100% vested on December 31, 2015, as defined in the plan, provided that the individual remains employed with the Company until the vesting date, subject to certain exceptions set forth in the plan, such as termination without cause. The restricted shares become fully vested upon a change of control. The individuals exercise voting power over the restricted shares, but do not have investment power until the restriction is removed. See “Nonqualified Defined Contribution and Other Deferred Compensation Plans” below.
(7)
Includes the following number of shares of restricted stock granted on December 19, 2013, pursuant to the Company’s Stock Compensation Program and issued in connection with the mutual release of existing change-of-control contracts: Mr. Sparks - 15,000 shares; Mr. Donato - 12,500 shares; Ms. Messmer - 12,500 shares; and Mr. Myers - 12,000 shares. The restricted shares will become 100% vested on December 19, 2016, provided that the individual remains employed with the Company until the vesting date, subject to certain exceptions, such as termination without cause or retirement after the age of 66. The restricted shares become fully vested upon a change of control. The individuals exercise voting power over the restricted shares, but do not have investment power until the restriction is removed.
(8)
Includes the following number of options which were granted May 6, 2011 at an exercise price of $5.58 and become fully vested on May 6, 2015: Mr. Sparks - 25,000 options; Mr. Donato - 15,000 options; Ms. Messmer - 15,000 options; Mr. M. Myers - 10,000 options; Mr. Novak - 1,000 options; Mr. Shaftel - 5,500 options; Mr. Small - 5,500 options; Mr. Smith - 2,000 options; Mr. Wetty - 2,000 options.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Parties
Certain directors and executive officers of First Priority, and their associates, were customers of and had transactions with First Priority Bank in the ordinary course of business during the fiscal year ended December 31, 2014. Similar transactions may be expected to take place in the future. Such transactions included the purchase of certificates of deposit and extensions of credit in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risks of collectability or present other unfavorable features. It is expected that any other transactions with directors and officers and their associates in the future will be conducted on the same basis. The aggregate extensions of credit to all such persons, as a group, totaled $5,608,000 at December 31, 2014.
Board and Committees
The board of directors held nine (9) meetings in 2014. The board of directors maintains an audit and governance committee, a compensation committee, and a nominating committee.
The membership of the compensation committee consists of Messrs. Novak (Chairman), Marcus, B. Myers, Shaftel, and Small. Each of the members of the Compensation Committee is “independent” as determined under the NASDAQ listing standards. In determining the independence of members of the Compensation Committee, the Board considers all factors specifically relevant to determining whether the director has a relationship to the Company that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including (i) the source of the directors’ compensation, including any consulting, advisory or other compensation fees; and (ii) any affiliate relationship between the director and the Company or any of its subsidiaries. The compensation committee operates under a written charter. The committee’s criteria
for determining executive compensation are discussed below in the Compensation Discussion and Analysis section. Messrs. Sparks and Ehrlich serve as ex-officio members of the compensation committee.
The nominating committee consists of Messrs. Wetty (Chairman), Sparks and Ehrlich and met once during 2014. The nominating committee does not operate under a written charter. The nominating committee develops and recommends criteria for the selection of director nominees to the board, including, but not limited to diversity, age, skills, experience, and time availability (including consideration of the number of other boards on which the proposed director sits) in the context of the needs of the board and First Priority and such other criteria as the committee determines to be relevant at the time. The committee has the power to apply these criteria in connection with the identification of individuals to be board members, as well as to apply the standards for independence imposed by NASDAQ and all applicable federal laws in connection with this identification process. The nominating committee considers potential candidates recommended by its members, management and others, including shareholders. The nominating committee applies the same criteria for evaluating the qualifications of directors proposed or nominated by shareholders as it applies to director nominees proposed or nominated by board members or other parties.
The audit and governance committee consists of Messrs. Small (Chairman), Cohen, Sabatucci, Shaftel and Smith. The audit and governance committee operates under a written charter. Messrs. Small and Smith have been designated the “audit governance committee financial experts,” and meet the qualifications to serve as such under the NASDAQ listing standards.
Effective January 30, 2014, the board of directors formed a Strategic Finance Committee consisting of Messrs. Shaftel (Chairman), Cohen, Small and Sparks. The committee does not operate under a written charter. The committee’s responsibility is to evaluate capital structure and financing opportunities, capital market activities and strategic opportunities which may be identified by the Company.
During 2014, all current directors attended at least 75% of the aggregate number of board and committee meetings on which each director served except for Mr. Worthington who is on a leave of absence due to personal reasons and who has elected not to stand for re-election as a director when his term expires at the May 5, 2015 annual meeting of shareholders.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee is or has been an officer or employee of the Company or the Bank. Also, during 2014, none of First Priority’s executive officers served as a member of the compensation committee of another entity, one of whose executive officers served on First Priority’s compensation committee.
Item 14.
Item 14. Principal Accounting Fees and Services.
Fees of Independent Registered Public Accounting Firm
The following table sets forth the aggregate fees billed to the Company by BDO USA, LLP for the fiscal years ended December 31, 2014 and December 31, 2013.
December 31, 2014
Audit Fees
$
126,170
Audit-Related Fees
$
-
Tax Fees
$
18,000
All Other Fees
$
-
December 31, 2013
Audit Fees
$
98,640
Audit-Related Fees
$
-
Tax Fees
$
-
All Other Fees
$
-
Audit fees include audit fees related to the audit of the Company’s annual consolidated financial statements, quarterly reviews, and related expenses. Tax fees include the preparation of the Company’s tax return. All fees paid to BDO USA, LLP were pre-approved by the audit and governance committee.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a) Exhibits. The following is a list of Exhibits to this Annual Report on Form 10-K.
Exhibit
No.
Description
3.1(i)
Articles of Incorporation of First Priority Financial Corp. (incorporated by reference to Exhibit 3.1 to First Priority’s registration statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)
3.1(ii)
Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series A” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.3 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)
3.1(iii)
Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series B” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.4 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)
3.1(iv)
Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series C” of First Priority Financial Corp. (incorporated by reference to Exhibit 2.1 to First Priority’s Registration Statement No. 333-183118 on Form S-4 filed with the SEC on January 25, 2013)
3.2
Bylaws of First Priority Financial Corp. (incorporated by reference to Exhibit 3.2 to First Priority’s registration statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)
10.1*
Form of First Priority Bank Severance Plan (incorporated by reference to Exhibit 10.1 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 28, 2014)
10.2*
Employment Agreement between First Priority Financial Corp. and Steven A. Ehrich (incorporated by reference to Exhibit 10.2 to First Priority’s Registration Statement No. 333-183118 on Form S-4 filed with the SEC on January 25, 2013)
10.3*
First Priority Financial Corp. Stock Compensation Program
11.1
Statements re-computation of per share earnings (see Note 3 to First Priority’s Audited Consolidated Financial Statements filed herewith)
21.1
Subsidiaries of First Priority Financial Corp. (incorporated by reference to Exhibit 21.1 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 28, 2014)
31.1
Certification of David E. Sparks, Chairman and Chief Executive Officer of First Priority Financial Corp., pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Mark J. Myers, Chief Financial Officer of First Priority Financial Corp., pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of David E. Sparks, Chairman and Chief Executive Officer of First Priority Financial Corp., pursuant to 18 United States Code § 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Mark J. Myers, Chief Financial Officer of First Priority Financial Corp., pursuant to 18 United States Code § 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
*
Denotes a compensation plan or agreement
**
A certification furnished pursuant to this item will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (15 U.S.C. § 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
First Priority Financial Corp.
March 27, 2015
By: /s/ David E. Sparks
David E. Sparks,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on the date indicated:
Signature
Title
Date
/s/ David E. Sparks
Chairman and Chief Executive Officer
March 27, 2015
David E. Sparks
(Principal Executive Officer) and Director
/s/ Mark J. Myers
Chief Financial Officer (Principal
March 27, 2015
Mark J. Myers
Financial and Accounting Officer)
/s/ Steven A. Ehrlich
President and Director
March 27, 2015
Steven A. Ehrlich
/s/ Irvin Cohen
Director
March 27, 2015
Irvin Cohen
/s/ Jerome I. Marcus
Director
March 27, 2015
Jerome I. Marcus
/s/ Barry L. Myers
Director
March 27, 2015
Barry L. Myers
/s/ Alan P. Novak
Director
March 27, 2015
Alan P. Novak
/s/ Frank Sabatucci
Director
March 27, 2015
Frank Sabatucci
/s/ Mel A. Shaftel
Director
March 27, 2015
Mel A. Shaftel
/s/ Vincent P. Small Jr.
Director
March 27, 2015
Vincent P. Small Jr.
/s/ Patrick M. Smith
Director
March 27, 2015
Patrick M. Smith
/s/ William L. Wetty
Director
March 27, 2015
William L. Wetty
Director
March 27, 2015
Samuel J. Worthington Jr.