First Priority Financial 10Q 2015 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the Quarterly Period Ended March 31, 2015

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Transition Period from to

Commission File Number No. 333-183118

FIRST PRIORITY FINANCIAL CORP.

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

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

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

Title of Each Class		Number of Shares Outstanding as of May 11, 2015
Common Stock, $1.00 Par Value		6,441,669 Outstanding Shares

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51
PART II—OTHER INFORMATION		52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

·	inflation, interest rate, market, and monetary fluctuations;

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

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

·	the occurrence of adverse changes in the securities markets;

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

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

·	regulatory or judicial proceedings;

·	changes in asset quality;

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

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

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

PART I

Item 1. Financial Statements.

First Priority Financial Corp.

Consolidated Balance Sheets

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

	March 31, 2015			December 31, 2014
Assets
Cash and due from banks	$	4,595		$	5,038
Interest-bearing deposits in banks		16,360			2,828
Total cash and cash equivalents		20,955			7,866
Securities available for sale, at fair value (amortized cost: $44,909 and $75,643, respectively)		45,217			75,557
Securities held to maturity, at amortized cost (fair value: $16,601 and $16,544, respectively)		15,777			15,956
Loans receivable		372,469			375,222
Less: allowance for loan losses		2,377			2,313
Net loans		370,092			372,909
Restricted investments in bank stocks		1,873			2,984
Premises and equipment, net		2,331			2,369
Bank owned life insurance		3,115			3,093
Accrued interest receivable		1,465			1,511
Other real estate owned		1,361			1,257
Deferred tax asset, net		4,207			4,541
Goodwill		2,725			2,725
Intangible assets with finite lives, net		374			397
Other assets		1,775			1,146
Total Assets	$	471,267		$	492,311
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	49,542		$	49,462
Interest-bearing		331,393			328,747
Total deposits		380,935			378,209
Short-term borrowings		27,000			51,472
Long-term debt		11,000			11,000
Accrued interest payable		441			356
Other liabilities		1,100			1,063
Total Liabilities		420,476			442,100
Commitments and contingencies (Note 9)		—			—
Shareholders’ Equity
Preferred stock, $100 par value; authorized 10,000,000 shares; liquidation value: $1,000 per share:
Series A: 9%; 4,579 shares issued and outstanding; liquidation value: $4,579		4,579			4,579
Series B: 9%; 229 shares issued and outstanding; liquidation value: $229		229			229
Series C: 9%; 4,596 shares issued and outstanding; liquidation value: $4,596		4,596			4,596
Common stock, $1 par value; authorized 10,000,000 shares; issued and outstanding: 2015: 6,446,819; 2014: 6,447,019		6,447			6,447
Surplus		40,123			40,045
Accumulated deficit		(5,428	)		(5,679	)
Accumulated other comprehensive income (loss)		245			(6	)
Total Shareholders’ Equity		50,791			50,211
Total Liabilities and Shareholders’ Equity	$	471,267		$	492,311

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

	For the three months ended March 31,
	2015		2014
Interest Income
Loans receivable, including fees	$	4,187	$	4,061
Securities—taxable		348		360
Securities—exempt from federal taxes		25		27
Interest bearing deposits and other		94		26
Total Interest Income		4,654		4,474
Interest Expense
Deposits		726		676
Short-term borrowings		16		12
Long-term debt		24		24
Total Interest Expense		766		712
Net Interest Income		3,888		3,762
Provision for Loan Losses		120		105
Net Interest Income after Provision for Loan Losses		3,768		3,657
Non-Interest Income
Wealth management fee income		90		123
Bank owned life insurance income		21		17
Other		95		79
Total Non-Interest Income		206		219
Non-Interest Expenses
Salaries and employee benefits		1,852		1,722
Occupancy and equipment		545		565
Data processing equipment and operations		220		232
Professional fees		181		217
Marketing, advertising, and business development		30		30
FDIC insurance assessments		89		76
Pennsylvania bank shares tax expense		93		78
Other real estate owned		59		42
Other		283		304
Total Non-Interest Expenses		3,352		3,266
Income before Income Tax Expense		622		610
Federal Income Tax Expense		205		9
Net Income	$	417	$	601
Preferred dividends, including net amortization		166		127
Income to Common Shareholders	$	251	$	474
Income per common share:
Basic	$	0.04	$	0.07
Diluted	$	0.04	$	0.07
Weighted average common shares outstanding
Basic		6,447		6,439
Diluted		6,494		6,439

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

	For the three months ended March 31,
	2015			2014
Net income	$	417		$	601
Other comprehensive income:
Securities available for sale:
Change in unrealized gain on securities available for sale		394			776
Tax effect		(134	)		-
Net unrealized gains arising during the period		260			776
Net unrealized holding gains (losses) on securities transferred between available for sale and held to maturity:
Reclassification adjustment for net unrealized holding gains (losses) on securities transferred		—			(137	)
Amortization of net unrealized holding gains (losses) to income during the period		(13	)		(14	)
Tax effect		4			-
Net unrealized holding gains (losses) on securities transferred during the period		(9	)		(151	)
Total other comprehensive income		251			625
Total comprehensive income	$	668		$	1,226

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31, 2015 and 2014

(Unaudited, dollars in thousands)

	Preferred Stock		Common Stock		Surplus		Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
Balance – January 1, 2014	$	9,395	$	6,439	$	39,780	$	(12,025	)	$	(1,197	)	$	42,392
Preferred stock dividends		—		—		—		(120	)		—			(120	)
Net amortization on preferred stock		7		—		—		(7	)		—			—
Net Income		—		—		—		601			—			601
Other comprehensive income		—		—		—		—			625			625
Stock based compensation expense		—		—		64		—			—			64
Balance—March 31, 2014	$	9,402	$	6,439	$	39,844	$	(11,551	)	$	(572	)	$	43,562
Balance – December 31, 2014	$	9,404	$	6,447	$	40,045	$	(5,679	)	$	(6	)	$	50,211
Preferred stock dividends		—		—		—		(166	)		—			(166	)
Net income		—		—		—		417			—			417
Other comprehensive income		—		—		—		—			251			251
Stock based compensation expense		—		—		78		—			—			78
Balance—March 31, 2015	$	9,404	$	6,447	$	40,123	$	(5,428	)	$	245		$	50,791

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

	For the three months ended March 31,
	2015			2014
Cash Flows from Operating Activities
Net income	$	417		$	601
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		120			105
Provision for other real estate owned		27			—
Depreciation and amortization		102			112
Net amortization (accretion) of discount securities		56			(44	)
Stock based compensation expense		78			64
Net (gain) loss on sale of other real estate		3			(18	)
Bank owned life insurance policy income		(21	)		(17	)
Originations of loans held for sale		(1,050	)		—
Proceeds from sale of loans held for sale		1,050			—
Deferred federal income tax expense		205			—
Decrease in accrued interest receivable		45			7
Increase in other assets		(628	)		(87	)
Increase in accrued interest payable		86			49
Increase (decrease) in other liabilities		36			(193	)
Net Cash Provided by Operating Activities		526			579
Cash Flows from Investing Activities
Net repayments (originations) in loans		2,439			(5,174	)
Purchases of securities available for sale		(60	)		(958	)
Redemption of restricted stock		1,111			371
Proceeds from maturities or calls of securities available for sale		30,906			29,231
Proceeds from the sale of other real estate owned		95			510
Purchases of premises and equipment		(73	)		(126	)
Net purchase of bank owned life insurance		—			(3,000	)
Net Cash Provided by Investing Activities		34,418			20,854
Cash Flows from Financing Activities
Net increase (decrease) in deposits		2,783			(10,783	)
Net decrease in short-term borrowings		(24,472	)		(11,325	)
Cash dividends paid on preferred stock		(166	)		(120	)
Net Cash Used in Financing Activities		(21,855	)		(22,228	)
Net Increase (Decrease) in Cash and Cash Equivalents		13,089			(795	)
Cash and Cash Equivalents—Beginning		7,866			11,248
Cash and Cash Equivalents—Ending	$	20,955		$	10,453
Supplementary Disclosures of Cash Flows Information
Noncash activity:
Trade date accounting for investment securities purchases	$	—		$	6,045
Transfer of available for sale securities to held to maturity securities	$	—		$	3,840
Transfer of loans receivable to other real estate owned	$	230			694
Cash paid for interest on deposits and borrowings	$	738		$	760

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Notes to Unaudited 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 as of March 31, 2015, is a locally managed community bank providing commercial banking products, primarily loans and deposits, 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 March 31, 2015, First Priority had total assets of $471.3 million and total shareholders’ equity of $50.8 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 March 31, 2015, First Priority Bank had total assets of $471.0 million, total loans of $372.5 million, total deposits of $381.8 million and total shareholder’s equity of $50.0 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 unaudited 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 instructions to Form 10-Q, and therefore, do not include information or all footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of these financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for First Priority Financial Corp. for the year ended December 31, 2014, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on

March 27, 2015. The results of interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these unaudited 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.

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 three months ended March 31, 2015, the Company recorded a provision for loan losses totaling $42 thousand for acquired impaired loans. During the three months ended March 31, 2014, the Company recorded a provision for loan losses totaling $92 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.

Comprehensive Income

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. 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 for the three months ended March 31, 2015 is presented net of the effect of income taxes. The Consolidated Statement of Comprehensive Income for the three months ended March 31, 2014 does not include the effects of income taxes due to the full valuation allowance on deferred tax assets.

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Statement where Net Income is Presented
	March 31,			March 31,
	2015			2014
	(Dollars in thousands)
Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity	$	(13	)	$	(14	)	Interest Income
Tax effect		4			-		Federal Income Tax Expense
Total reclassification	$	(9	)	$	(14	)

Accumulated other comprehensive income as of March 31, 2015 and December 31, 2014 consisted of the following:

	March 31,		December 31,
	2015		2014
	(Dollars in thousands)
Net unrealized gain (loss) on available for sale securities	$	203	$	(57	)
Net unrealized holding gains on securities transferred between available for sale and held to maturity		42		51
Total	$	245	$	(6	)

Note 2—Recently Issued Accounting Standards

In January 2014, the FASB issued ASU 2014-04, Receivable (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU 2014-04 did not 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, 2018. Early adoption is permitted. Management does not believe the adoption of ASU 2014-09 will 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) Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. 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 was effective on January 1, 2015, and did not have a significant impact on our financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) guidance which amends existing standards regarding the evaluation of certain legal entities and their consolidation in the financial statements. The amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and eliminate the presumption that a general partner should consolidate a limited partnership. The amendments also affect the consolidation analysis of reporting entities that are involved with variable interest entities and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The guidance becomes effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We are evaluating the impact of this guidance on our financial statements.

Note 3—Earnings Per Common Share

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 for common stock equivalents. For purposes of calculating the basic and diluted earnings per share, the Company’s reported net income is adjusted for dividends on preferred stock and net accretion/amortization related to the issuance of preferred stock to determine the net income to common shareholders.

For the three month period ended March 31, 2014 there were 845 thousand common stock equivalent shares, all of which were antidilutive, and therefore, excluded from earnings per share calculations. As a result, diluted earnings per share for this period were the same as basic earnings per share.

The calculations of basic and diluted earnings per common share are presented below for the three months ended March 31, 2015 and 2014:

	For the three months ended March 31,
	(In thousands, except per share information)
	2015			2014
Net income	$	417		$	601
Less: preferred stock dividends		(166	)		(120	)
Less: net discount accretion on preferred stock		—			(7	)
Income to common shareholders	$	251		$	474
Average basic common shares outstanding		6,447			6,439
Effect of dilutive stock options		47			—
Average number of common shares used to calculate diluted earnings per common share		6,494			6,439
Basic earnings per common share	$	0.04		$	0.07
Diluted earnings per common share	$	0.04		$	0.07

The amount of preferred stock dividends and the net accretion or amortization related to each series of preferred stock are presented below for the three months ended March 31, 2015 and 2014:

	For the three months ended March 31,
	2015		2014
	(Dollars in thousands)
Preferred dividends:
Preferred Series A	$	103	$	57
Preferred Series B		5		5
Preferred Series C		58		58
Total preferred dividends	$	166	$	120

Net accretion (amortization) on preferred stock:
Preferred Series A	$	—	$	(9	)
Preferred Series B		—		2
Preferred Series C		—		-
Total net accretion (amortization) on preferred stock	$	—	$	(7	)

Note 4—Securities

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

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

The Company previously transferred investment securities from available for sale to held to maturity securities. Due to these transfers, securities classified as held to maturity have net unrealized holding gains, totaling $64 thousand as of March 31, 2015 and $77 thousand as of December 31, 2014, which are 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:

	March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations	$	19,454	$	30	$	(28	)	$	19,456
Obligations of states and political subdivisions		4,885		49		—			4,934
Federal agency mortgage-backed securities		19,507		288		(34	)		19,761
Federal agency collateralized mortgage obligations		478		2		—			480
Other debt securities		500		1		—			501
Money market mutual fund		85		—		—			85
Total investment securities available for sale	$	44,909	$	370	$	(62	)	$	45,217

Held To Maturity:
Obligations of states and political subdivisions	$	15,296	$	776	$	—	$	16,072
Other debt securities		481		48		—		529
Total investment securities held to maturity	$	15,777	$	824	$	—	$	16,601

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations	$	49,451	$	21	$	(196	)	$	49,276
Obligations of states and political subdivisions		4,902		8		(39	)		4,871
Federal agency mortgage-backed securities		20,233		192		(74	)		20,351
Federal agency collateralized mortgage obligations		532		2		(2	)		532
Other debt securities		500		2		-			502
Money market mutual fund		25		—		—			25
Total investment securities available for sale	$	75,643	$	225	$	(311	)	$	75,557

Held To Maturity:
Obligations of states and political subdivisions	$	15,475	$	564	$	(12	)	$	16,027
Other debt securities		481		36		—			517
Total investment securities held to maturity	$	15,956	$	600	$	(12	)	$	16,544

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 March 31, 2015 and December 31, 2014.

	As of March 31, 2015
	Less than 12 Months						12 Months or longer							Total
	Fair Value		Unrealized Losses		Count		Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count
	(Dollars in thousands)
Available for Sale:
Obligations of U.S. government agencies and corporations	$	—	$	—		—	$	9,945	$	(28	)		9	$	9,945	$	(28	)		9
Obligations of states and political subdivisions		—		—		—		5,742		(34	)		4		5,742		(34	)		4
Total Available for Sale	$	—	$	—		—	$	15,687	$	(62	)		13	$	15,687	$	(62	)		13

	As of December 31, 2014
	Less than 12 Months							12 Months or longer							Total
	Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count
	(Dollars in thousands)
Available for Sale:
Obligations of U.S. government agencies and corporations	$	30,000	$	-			1	$	16,753	$	(196	)		15	$	46,753	$	(196	)		16
Obligations of states and political subdivisions		576		(1	)		1		3,076		(38	)		8		3,652		(39	)		9
Federal agency mortgage-backed securities		-		-			-		5,882		(74	)		4		5,882		(74	)		4
Federal agency collateralized mortgage obligations		-		-			-		296		(2	)		1		296		(2	)		1
Total Available for Sale	$	30,576	$	(1	)		2	$	26,007	$	(310	)		28	$	56,583	$	(311	)		30
Held to Maturity:
Obligations of states and political subdivisions	$	-	$	-			-	$	1,481	$	(12	)		3	$	1,481	$	(12	)		3
Total Held to Maturity	$	-	$	-			-	$	1,481	$	(12	)		3	$	1,481	$	(12	)		3

As of March 31, 2015, 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 March 31, 2015, represents other than temporary impairment.

There were no realized gains or losses for the three months ended March 31, 2015 and 2014.

Securities with an estimated fair value of $32.1 million and $32.6 million were pledged at March 31, 2015 and December 31, 2014, respectively, to secure public fund deposits. In addition, securities pledged to secure borrowings by the Bank totaled $87 thousand and $89 thousand as of March 31, 2015 and December 31, 2014, respectively.

The amortized cost and fair value of securities as of March 31, 2015 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.

	March 31, 2015				March 31, 2015
	Available for Sale Securities				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due within one year	$	500	$	501	$	—	$	—
Due after one year through five years		19,300		19,323		393		397
Due after five years through ten years		4,458		4,475		1,296		1,334
Due after ten years		581		592		14,088		14,870
		24,839		24,891		15,777		16,601
Federal agency collateralized mortgage obligations		478		480		—		—
Federal agency mortgage-backed securities		19,507		19,761		—		—
Money market mutual fund		85		85		—		—
Total	$	44,909	$	45,217	$	15,777	$	16,601

Note 5—Loans Receivable and Related Allowance for Loan Losses

Loans receivable consist of the following at March 31, 2015 and December 31, 2014.

	March 31,			December 31,
	2015			2014
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	75,055		$	75,412
Commercial mortgage		169,002			168,969
Commercial construction		7,713			6,497
Total commercial		251,770			250,878
Residential mortgage loans		78,929			80,134
Consumer:
Home equity lines of credit		26,265			27,902
Other consumer loans		15,581			16,378
Total consumer		41,846			44,280
Total loans		372,545			375,292
Allowance for loan losses		(2,377	)		(2,313	)
Net deferred loan cost (fees)		(76	)		(70	)
Total loans receivable, net	$	370,092		$	372,909

First Priority 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:

	March 31,		December 31,
	2015		2014
	(Dollars in thousands)
Commercial and industrial	$	699	$	699
Commercial mortgage		282		284
Residential mortgage loans		135		186
Total unpaid principal balance	$	1,116	$	1,169
Net recorded investment	$	547	$	602

The following table presents the changes in accretable yield related to acquired credit-impaired loans for the three months ended March 31, 2014 (dollars in thousands). There was no remaining accretable yield for the three months ended March 31, 2015:

	2014
Accretable yield balance, beginning of period	$	56
Additions resulting from acquisition		-
Accretion to interest income		(24	)
Reclassification from nonaccretable difference and disposals, net		13
Accretable yield balance, end of period	$	45

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 March 31, 2015, these loans totaled $69.2 million and $54.3 million, respectively, or 18.5% and 14.6%, respectively, of the total loans outstanding. As of December 31, 2014, these same classifications of loans totaled $69.5 million and $54.7 million, respectively, or 18.5% and 14.6%, 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 three months ended March 31, 2015 and 2014:

	For the three months ended
	March 31, 2015
	Allowance for Loan Losses
	(Dollars in thousands)
	Beginning Balance		Charge-offs			Recoveries		Provision for loan losses			Ending Balance
Commercial and industrial	$	788	$	(16	)	$	5	$	(32	)	$	745
Commercial mortgage		468		(11	)		—		50			507
Commercial construction		26		—			—		8			34
Residential mortgage loans		159		(28	)		—		32			163
Home equity lines of credit		270		(12	)		4		(41	)		221
Other consumer loans		87		(2	)		4		(23	)		66
Unallocated		515		—			—		126			641
Total loans	$	2,313	$	(69	)	$	13	$	120		$	2,377

	For the three months ended
	March 31, 2014
	Allowance for Loan Losses
	(Dollars in thousands)
	Beginning Balance		Charge-offs			Recoveries		Provision for loan losses			Ending Balance
Commercial and industrial	$	445	$	—		$	10	$	(34	)	$	421
Commercial mortgage		452		(74	)		—		99			477
Commercial construction		12		(50	)		—		55			17
Residential mortgage loans		149		-			—		1			150
Home equity lines of credit		177		-			4		(58	)		123
Other consumer loans		67		(52	)		3		32			50
Unallocated		971		—			—		10			981
Total loans	$	2,273	$	(176	)	$	17	$	105		$	2,219

The following tables present the balance in the allowance for loan losses at March 31, 2015 and December 31, 2014 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:

	March 31, 2015
	Allowance for Loan Losses						Loans Receivables
	(Dollars in thousands)
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment		Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Commercial and industrial	$	745	$	140	$	605	$	75,055	$	2,099	$	72,956
Commercial mortgage		507		—		507		169,002		3,551		165,451
Commercial construction		34		—		34		7,713		—		7,713
Residential mortgage loans		163		—		163		78,929		237		78,692
Home equity lines of credit		221		—		221		26,265		100		26,165
Other consumer loans		66		—		66		15,581		313		15,268
Unallocated		641		—		641		—		—		—
Total loans	$	2,377	$	140	$	2,237	$	372,545	$	6,300	$	366,245

	December 31, 2014
	Allowance for Loan Losses						Loans Receivables
	(Dollars in thousands)
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment		Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Commercial and industrial	$	788	$	147	$	641	$	75,412	$	2,131	$	73,281
Commercial mortgage		468		5		463		168,969		3,660		165,309
Commercial construction		26		—		26		6,497		-		6,497
Residential mortgage loans		159		—		159		80,134		347		79,787
Home equity lines of credit		270		12		258		27,902		113		27,789
Other consumer loans		87		2		85		16,378		364		16,014
Unallocated		515		—		515		—		—		—
Total loans	$	2,313	$	166	$	2,147	$	375,292	$	6,615	$	368,677

The following tables summarize information in regard to impaired loans by loan portfolio class as of March 31, 2015 and December 31, 2014 as well as for the three month periods then ended, respectively:

	March 31, 2015						December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,228	$	1,700	$	—	$	1,840	$	2,290	$	—
Commercial mortgage		3,551		3,813		—		3,618		3,928		—
Commercial construction		—		—		—		-		-		—
Residential mortgage loans		237		330		—		347		426		—
Home equity lines of credit		100		100		—		101		101		—
Other consumer loans		313		337		—		196		215		—
With an allowance recorded:
Commercial and industrial	$	871	$	882	$	140	$	291	$	301	$	147
Commercial mortgage		—		—		—		42		70		5
Commercial construction		—		—		—		—		—		—
Residential mortgage loans		—		—		—		—		—		—
Home equity lines of credit		—		—		—		12		12		12
Other consumer loans		—		—		—		168		168		2
Total:
Commercial and industrial	$	2,099	$	2,582	$	140	$	2,131	$	2,591	$	147
Commercial mortgage		3,551		3,813		—		3,660		3,998		5
Commercial construction		—		—		—		-		-		—
Residential mortgage loans		237		330		—		347		426		—
Home equity lines of credit		100		100		—		113		113		12
Other consumer loans		313		337		—		364		383		2
Total	$	6,300	$	7,162	$	140	$	6,615	$	7,511	$	166

	Three Months ended March 31,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,239	$	9	$	1,747	$	—
Commercial mortgage		3,573		15		948		—
Commercial construction		—		—		425		5
Residential mortgage loans		232		—		242		—
Home equity lines of credit		100		1		-		—
Other consumer loans		332		2		204		—
With an allowance recorded:
Commercial and industrial	$	875	$	—	$	74	$	—
Commercial mortgage		—		—		125		—
Commercial construction		—		—		-		—
Residential mortgage loans		—		—		—		—
Home equity lines of credit		—		—		31		—
Other consumer loans		—		—		—		—
Total:
Commercial and industrial	$	2,114	$	9	$	1,821	$	—
Commercial mortgage		3,573		15		1,073		—
Commercial construction		—		—		425		5
Residential mortgage loans		232		—		242		—
Home equity lines of credit		100		1		31		—
Other consumer loans		332		2		204		—
Total	$	6,351	$	27	$	3,796	$	5

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2015 and December 31, 2014:

	March 31, 2015		December 31, 2014
	(Dollars in thousands)
Commercial and industrial	$	1,463	$	1,474
Commercial mortgage		2,266		2,370
Residential mortgage loans		237		347
Home equity lines of credit		18		31
Other consumer loans		213		262
Total loans	$	4,197	$	4,484

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 $60 thousand for the three months ended March 31, 2015 and $73 thousand for the three months ended March 31, 2014, 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 March 31, 2015 and December 31, 2014:

	March 31, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	71,751	$	1,145	$	2,159	$	—	$	75,055
Commercial mortgage		164,281		518		4,203		—		169,002
Commercial construction		7,713		—		—		—		7,713
Residential mortgage loans		78,692		—		237		—		78,929
Consumer:
Home equity lines of credit		26,247		—		18		—		26,265
Other consumer loans		15,368		—		213		—		15,581
Total	$	364,052	$	1,663	$	6,830	$	—	$	372,545

	December 31, 2014
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	73,498	$	-	$	1,914	$	—	$	75,412
Commercial mortgage		163,899		745		4,325		—		168,969
Commercial construction		6,497		—		-		—		6,497
Residential mortgage loans		79,787		—		347		—		80,134
Consumer:
Home equity lines of credit		27,871		—		31		—		27,902
Other consumer loans		16,116		—		262		—		16,378
Total	$	367,668	$	745	$	6,879	$	—	$	375,292

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 March 31, 2015 and December 31, 2014:

	March 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivables
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	5	$	—	$	1,253	$	1,258	$	73,797	$	75,055
Commercial mortgage		106		—		2,266		2,372		166,630		169,002
Commercial construction		—		—		—		—		7,713		7,713
Residential mortgage loans		1,250		—		202		1,452		77,477		78,929
Consumer:								—
Home equity lines of credit		55		—		—		55		26,210		26,265
Other consumer loans		106		60		166		332		15,249		15,581
Total	$	1,522	$	60	$	3,887	$	5,469	$	367,076	$	372,545

	December 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivables
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	70	$	102	$	1,260	$	1,432	$	73,980	$	75,412
Commercial mortgage		310		15		2,355		2,680		166,289		168,969
Commercial construction		—		—		—		—		6,497		6,497
Residential mortgage loans		478		—		312		790		79,344		80,134
Consumer:
Home equity lines of credit		-		—		12		12		27,890		27,902
Other consumer loans		31		66		214		311		16,067		16,378
Total	$	889	$	183	$	4,153	$	5,225	$	370,067	$	375,292

As of March 31, 2015, there were no loans 90 days past due and still accruing interest. 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.

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 table reflect information regarding troubled debt restructurings entered into by the Company for the three month period ended March 31, 2015. This mortgage loan, related to land, was in default and was restructured under the terms of a forbearance agreement whereby a concession was made in regards to the interest rate and the amortization period was extended. There were no troubled debt restructurings entered into by the Company for the three months ended March 31, 2014.

	For the three months ended March 31, 2015
	Number of Contracts		Pre- Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments
	(Dollars in thousands)
Troubled debt restructurings:
Residential mortgage loans		1	$	35	$	35
Total		1	$	35	$	35

The following table reflects information regarding troubled debt restructuring entered into by the Bank for the year ended December 31, 2014:

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments
	(Dollars in thousands)
Troubled debt restructurings:
Commercial and industrial		1	$	28	$	28
Commercial mortgage		1		1,292		1,292
Home equity lines of credit		2		112		102
Other consumer loans		3		170		158
Total		7	$	1,602	$	1,580

As of March 31, 2015 and December 31, 2014, a residential mortgage loan with a current balance of $76 thousand, acquired through the Affinity merger, has remained in default and is classified as non-accrual. Additionally two commercial loans classified as troubled debt restructurings with combined outstanding balances totaling $64 thousand as of March 31, 2015 were in default and remain classified as non-accrual status.

No other TDRs have subsequently defaulted.

As of March 31, 2014, two loans acquired through the Affinity merger were in default and classified as non-accrual consisting of a residential mortgage loan with a current balance of $76 thousand and a commercial mortgage loan with an outstanding balance of $243 thousand.

The carrying amount of foreclosed residential real estate properties held was $305 thousand as of March 31, 2015. Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $612 thousand as of March 31, 2015.

Note 6—Deposits

The components of deposits at March 31, 2015 and December 31, 2014 are as follows:

	March 31,		December 31,
	2015		2014
	(Dollars in thousands)
Demand, non-interest bearing	$	49,542	$	49,462
Demand, interest-bearing		34,762		34,186
Money market and savings accounts		98,966		101,486
Time, $100 and over		51,421		50,948
Time, other		146,244		142,127
	$	380,935	$	378,209

Included in time, other at March 31, 2015 and December 31, 2014 are brokered deposits of $81.6 million and $74.6 million, respectively.

At March 31, 2015, the scheduled maturities of time deposits were as follows:

	(Dollars in thousands)
3/31/2016	$	47,422
3/31/2017		78,952
3/31/2018		59,672
3/31/2019		5,718
3/31/2020		5,893
Thereafter		8
	$	197,665

Note 7—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 8—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 March 31, 2015 and December 31, 2014, 6,975 shares and 7,175 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 for the three months ended March 31, 2015:

	Shares			Weighted Average Exercise Price
Outstanding at beginning of period		866,613		$	6.89
Granted during period		—			—
Forfeited/cancelled during period		(98	)		11.21
Expired		(34,348	)		8.97
Outstanding at end of period (1)		832,167			6.80
Exercisable at end of period (1)		262,667		$	9.87

(1)	Included in options outstanding and exercisable at March 31, 2015 are 100,000 organizer options, with an exercise price of $10.00 per share, exchanged as part of the 2008 acquisition of Prestige Community Bank which were issued outside of the Program.

The weighted average remaining contractual lives of all outstanding stock options and exercisable options at March 31, 2015 and December 31, 2014 were 6.15 years and 2.46 years, respectively and 6.15 years and 2.41 years, respectively. The aggregate intrinsic value of options outstanding was $313 thousand as of March 31, 2015 while the aggregate intrinsic value of exercisable options was $0 thousand as of this same date.

As of March 31, 2015, there was $84 thousand of unrecognized compensation cost related to non-vested stock options granted after January 1, 2007, excluding those stock options issued in conjunction with the Company’s severance plan. That cost is expected to be recognized over a weighted average period of 2.58 years. 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 March 31, 2015, there was $270 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 three months ended March 31, 2015:

	Shares
Outstanding unvested shares at beginning of period		121,874
Shares Granted during period		—
Shares Forfeited/cancelled during the period		(200	)
Vested Shares during this period		(1,575	)
Outstanding unvested shares at end of period		120,099

Note 9—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.

thousand and $349 thousand of performance standby letters of credit outstanding, respectively, and $935 thousand and $1.1 million, respectively, of financial standby letters of credit as of each respective period.

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 March 31, 2015 and December 31, 2014 the Bank pledged $149 thousand as of each respective period of deposit balances at a correspondent bank to support a letter of credit with a balance of $149 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.

Note 10—Regulatory Matters

The Dodd-Frank Act required the FRB to establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depositary subsidiaries. The federal banking agencies approved rules that implemented the Dodd-Frank requirements and certain other regulatory capital reforms 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. These rules (i) introduced a new capital ratio pursuant to the prompt corrective action provisions, the common equity tier 1 capital to risk rated assets ratio, (ii) increased the adequately capitalized and well capitalized thresholds for the Tier 1 risk based capital ratios to 6% and 8% respectively, (iii) changed the treatment of certain capital components for determining Tier 1 and Tier 2 capital, and (iv) changed the risk weighting of certain assets and off balance sheet items in determining risk weighted assets. The new risk based capital rules became effective January 1, 2015.

Under the revised capital guidelines, First Priority Bank’s minimum capital to risk-adjusted assets requirements consist of 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”). In addition, First Priority Bank must maintain a minimum Tier 1 leverage ratio of at least 4.0% (5.0% to be considered “well capitalized”). The new minimum capital requirements became effective on January 1, 2015.

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 capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.

The Bank’s capital amounts (dollars in thousands) and ratios at March 31, 2015 and December 31, 2014 are presented below:

Actual

Minimum Capital Requirement

To be Well Capitalized under Prompt Corrective Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

March 31, 2015

Total capital (to risk-weighted assets)

47,793

13.17

29,031

>8.0

>36,289

>10.0

Tier 1 capital (to risk-weighted assets)

45,381

12.51

>21,773

>6.0

>29,031

>8.0

Tier 1 common equity capital (to risk-weighted assets)

45,381

12.51

>16,330

>4.5

>23,588

>6.5

Tier 1 capital (to total assets)

45,381

9.97

>18,208

>4.0

>22,760

>5.0

December 31, 2014

Total capital (to risk-weighted assets)

45,327

12.87

>28,177

>8.0

>35,221

>10.0

Tier 1 capital (to risk-weighted assets)

42,979

12.20

>14,088

>4.0

>21,132

>6.0

Tier 1 capital (to total assets)

42,979

9.34

>18,410

>4.0

>23,012

>5.0

First Priority’s ability to pay cash dividends is dependent on receiving cash in the form of dividends from First Priority Bank. However, certain restrictions exist regarding the ability of First Priority Bank to transfer funds to First Priority in the form of cash dividends. All dividends are currently subject to prior approval of the Pennsylvania Department of Banking and Securities and the

FDIC and are payable only from the undivided profits of First Priority Bank, with the exception of an exemption enacted by the Pennsylvania Department of Banking and Securities which allows the Bank to pay dividends related to the preferred stock originally issued under the U.S. Department of the Treasury’s Troubled Asset Relief Program—Capital Purchase Program. Additionally, First Priority has met the requirement of obtaining prior approval from the Federal Reserve Bank on any payment of dividends, including dividends on the aforementioned preferred stock, 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.

Note 11—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 March 31, 2015 and December 31, 2014 and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

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

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

FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

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). Management utilizes inputs that it believes a market participant would use.

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 March 31, 2015 and December 31, 2014 are as follows:

Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Siginificant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
As of March 31, 2015:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations	$	19,456	$	—	$	19,456	$	—
Obligations of states and political subdivisions		4,934		—		4,934		—
Federal agency mortgage-backed securities		19,761		—		19,761		—
Federal agency collateralized mortgage obligations		480		—		480		—
Other debt securities		501		—		501		—
Money market mutual fund		85		85		—		—
Total assets measured at fair value on a recurring basis	$	45,217	$	85	$	45,132	$	—
As of December 31, 2014:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations	$	49,276	$	—	$	49,276	$	—
Obligations of states and political subdivisions		4,871		—		4,871		—
Federal agency mortgage-backed securities		20,351		—		20,351		—
Federal agency collateralized mortgage obligations		532		—		532		—
Other debt securities		502		—		502		—
Money market mutual fund		25		25		—		—
Total assets measured at fair value on a recurring basis	$	75,557	$	25	$	75,532	$	—

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2015 and December 31, 2014 are as follows:

Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Siginificant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
As of March 31, 2015:
Impaired loans	$	3,027	$	—	$	—	$	3,027
Repossessed assets		42		—		—		42
Other real estate owned		105		—		—		105
Total assets measured at fair value on a nonrecurring basis	$	3,174	$	—	$	—	$	3,174
As of December 31, 2014:
Impaired loans	$	2,205	$	—	$	—	$	2,205
Repossessed assets		42		—		—		42
Other real estate owned		105		—		—		105
Total assets measured at fair value on a nonrecurring basis	$	2,352	$	—	$	—	$	2,352

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 March 31, 2015 is included in the table below:

	Fair Value		Valuation Techniques	Unobservable Inputs	Estimated Ratings (Weighted Average) (3)
	(Dollars in thousands)
Impaired loans	$	3,027	Appraisal of real estate collateral (1)	Appraisal adjustments(2)	0%-50% (2.04%)
			Valuation of business assets used as collateral(1)	Valuation adjustments(2)	25%-30%
				Liquidation expenses	2%-8% (5.31%)
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, 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%)

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

(2)	Appraisals are 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 of repossessed assets as of both March 31, 2015 and December 31, 2014, 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 both March 31, 2015 and December 31, 2014, the fair value consists of other real estate owned balances of $433 thousand, net of valuation allowances of $328 thousand. 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 March 31, 2015 and December 31, 2014:

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.

Residential Mortgage Loans Held for Sale

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did not write down any loans held for sale during the three months ended March 31, 2015. There were no loans held for sale at December 31, 2014.

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 March 31, 2015 the fair value of impaired loans consisted of loan balances with an allowance recorded of $871 thousand, net of valuation allowances of $140 thousand; and loan balances with no related allowance recorded of $3.3 million, net of partial charge-offs of $1.0 million. 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.

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 March 31, 2015 and December 31, 2014, the estimated fair values of the Company’s financial instruments were as follows:

	March 31, 2015
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	20,955	$	20,955	$	20,955	$	—	$	—
Securities available for sale		45,217		45,217		85		45,132		—
Securities held to maturity		15,777		16,601		—		16,601		—
Loans receivable, net		370,092		377,651		—		—		377,651
Restricted stock		1,873		1,873		—		1,873		—
Accrued interest receivable		1,465		1,465		—		1,465		—

Liabilities:
Deposits		380,935		382,275		—		382,275		—
Short-term borrowings		27,000		27,000		—		27,000		—
Long-term debt		11,000		10,992		—		10,992		—
Accrued interest payable		441		441		—		441		—

Off-balance sheet credit related instruments:
Commitments to extend credit		—		—		—		—		—

	December 31, 2014
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	7,866	$	7,866	$	7,866	$	—	$	—
Securities available for sale		75,557		75,557		25		75,532		—
Securities held to maturity		15,956		16,544		—		16,544		—
Loans receivable, net		372,909		380,257		—		—		380,257
Restricted stock		2,984		2,984		—		2,984		—
Accrued interest receivable		1,511		1,511		—		1,511		—

Liabilities:
Deposits		378,209		379,203		—		379,203		—
Short-term borrowings		51,472		51,472		—		51,472		—
Long-term debt		11,000		10,936		—		10,936		—
Accrued interest payable		356		356		—		356		—

Off-balance sheet credit related instruments:
Commitments to extend credit		—		—		—		—		—

Item 2.

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

The following discussion summarizes First Priority’s results of operations and highlights material changes for the three months ended March 31, 2015 and 2014, and its financial condition as of March 31, 2015 and December 31, 2014. This discussion is intended to provide additional information about the significant changes in the results of operations presented in the accompanying consolidated financial statements for First Priority and its wholly owned subsidiary, First Priority Bank. First Priority’s consolidated financial condition and results of operations consist essentially of First Priority Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future.

You should read this discussion and analysis in conjunction with the unaudited consolidated financial statements for the period ended March 31, 2015 included herein as well as with the audited consolidated financial statements and the accompanying footnotes for the year ended December 31, 2014, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

This discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as First Priority’s plans, objectives, expectations and intentions. Therefore, this analysis should be read in conjunction with the “Cautionary Statement Regarding Forward-Looking Statements” presented elsewhere in this document and the “Risk Factors” described in the Company’s Form 10-K for the period ended December 31, 2014.

Overview

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

	As of and for the three months ended March 31,
	2015	2014
Total revenue (1)	$ 4,094	$ 3,981
Net income	417	601
Total assets	471,267	430,951
Total loans receivable	372,469	340,083
Total deposits	380,935	346,540

(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, Judgements and Estimates

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 included in the Company’s Form 10-K as of December 31, 2014, filed with the Securities and Exchange Commission.

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 loans acquired in business acquisitions are based on a discounted cash flow methodology that involves significant assumptions and judgments as to estimates 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.

Impairment is measured on a loan by loan basis 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 section related to Balance Sheet Review as of March 31, 2015 and December 31, 2014 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, net operating loss carryforwards 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 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.

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

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

	For the three months ended March 31,				Increase (decrease)			% Change
	2015		2014
	(Dollars in thousands)
Net interest income	$	3,888	$	3,762	$	126			3.3	%
Non-interest income		206		219		(13	)		(5.9	)%
Total Revenue		4,094		3,981		113			2.8	%
Provision for loan losses		120		105		15			14.3	%
Non-interest expenses		3,352		3,266		86			2.6	%
Income before income tax expense		622		610		12
Federal income tax expense		205		9		196
Net Income	$	417	$	601	$	(184	)
Preferred dividends, including net amortization		166		127		39
Net Income to common shareholders	$	251	$	474	$	(223	)
Income per common share:
Basic	$	0.04	$	0.07	$	(0.03	)
Diluted	$	0.04	$	0.07	$	(0.03	)

Summary

For the three months ended March 31, 2015, First Priority reported consolidated income before income taxes of $622 thousand compared to $610 thousand for the first quarter of 2014 and $601 thousand for the quarter ended December 31, 2014. Net income for the three months ended March 31, 2015 totaled $417 thousand, or $0.04 per basic and diluted common share after preferred dividends totaling $166 thousand. Comparatively, net income totaled $601 thousand in the first quarter of 2014, or $0.07 per basic and diluted common share, after preferred dividends and net warrant amortization totaling $127 thousand. As of March 31, 2014, the Company had not yet recorded its net deferred tax assets through the reversal of the valuation allowance against the net deferred tax asset and accordingly, reported results did not include the impact of current income tax expense as a component of operating earnings.

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 tables set forth, for the three month periods ended March 31, 2015 and 2014, 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.

	For the Three Months Ended March 31,														Net Change in Interest Income / Expenses
	2015							2014							$ Change			% Change
	Average Balance		Interest Income/ Expense		Yield/ Rate			Average Balance		Interest Income/ Expense		Yield/ Rate			2015 vs. 2014			2015 vs. 2014
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	371,256	$	4,187		4.57	%	$	334,539	$	4,061		4.92	%	$	126			3.1	%
Taxable investment securities		61,371		348		2.30	%		61,399		360		2.38	%		(12	)		(3.3	)%
Nontaxable investment securities		2,445		25		4.11	%		2,700		27		4.09	%		(2	)		(7.4	)%
Total investment securities		63,816		373		2.37	%		64,099		387		2.45	%		(14	)		(3.6	)%
Deposits with banks and other		4,355		94		8.78	%		7,031		26		1.49	%		68			261.5	%
Total interest earning assets		439,427		4,654		4.29	%		405,669		4,474		4.47	%		180			4.0	%
Non-interest-earning assets		20,500							15,238
TOTAL ASSETS	$	459,927						$	420,907
Interest-bearing liabilities:
Demand, interest-bearing	$	33,127		19		0.23	%	$	48,743		33		0.27	%	$	(14	)		(42.4	)%
Money market and savings		102,125		74		0.30	%		102,337		89		0.35	%		(15	)		(16.9	)%
Time deposits		195,220		633		1.31	%		148,889		554		1.51	%		79			14.3	%
Borrowed funds		31,050		40		0.52	%		29,857		36		0.50	%		4			11.1	%
Total interest-bearing liabilities		361,522		766		0.86	%		329,826		712		0.88	%		54			7.6	%
Non interest-bearing liabilities:
Demand, non interest-bearing deposits		46,222							46,075
Other liabilities		1,590							1,717
Shareholders’ equity		50,593							43,289
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	459,927						$	420,907
Net interest income/rate spread			$	3,888		3.43	%			$	3,762		3.59	%	$	126			3.3	%
Net interest margin						3.59	%						3.76	%

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.

	Changes in Net Interest Income
	For the Three Months Ended
	March 31, 2015 vs. 2014
	Increase (Decrease)
	Due to Change In
	(Dollars in thousands)
	Volume	Rate	Net Change
Interest income:
Loans receivable	$ 427	$ (301)	$ 126
Taxable investment securities	—	(12)	(12)
Nontaxable investment securities	(2)	—	(2)
Total investment securities	(2)	(12)	(14)
Deposits with banks and other	(13)	81	68
Total interest earning assets	412	(232)	180
Interest expense:
Demand, interest-bearing	(9)	(5)	(14)
Money market and savings	—	(15)	(15)
Time deposits	157	(78)	79
Borrowed funds	2	2	4
Total interest bearing liabilities	150	(96)	54
Change in net interest income	$ 262	$ (136)	$ 126

For the three months ended March 31, 2015, net interest income increased 3.3%, or $126 thousand, to $3.9 million compared to $3.8 million for the same period in 2014. Net interest margin decreased 17 basis points from 3.76% for the first quarter of 2014 to 3.59% for the same period in 2015. Net interest spread, defined as the mathematical difference between the yield on average earning assets and the rate paid on average interest-bearing liabilities, decreased 16 basis points from 3.59% for the three months ended March 31, 2014 to 3.43% for the same period in 2015. When comparing these periods, incremental growth of balances accounted for an increase of $262 thousand while the change in our relative rate structure resulted in a decline in net interest income of $136 thousand.

Average interest earning assets for the current quarter of 2015 increased $33.8 million, or 8.3%, including increases in average loans of $36.7 million, or 11.0%, and a decrease in average investment balances of $283 thousand, or 0.4%, when compared to the prior year quarter. This increased volume of average earning assets provided an additional $412 thousand in interest income, with $427 thousand provided from incremental loan balances. The average yield on earning assets declined 18 basis points in the current quarter compared to the prior year three month period from 4.47% to 4.29% which resulted in a rate related decline of interest income of $232 thousand between the periods. Of this decline, $301 thousand was related to lower yields on loans, which was partially offset by $81 thousand of additional income resulting from deposits with banks, including a special annual dividend of $66 thousand paid by FHLB Bank of Pittsburgh based on its 2014 results.

Average interest bearing liabilities increased $31.7 million, or 9.6%, when comparing the current quarter to the prior year quarter. During this time, overall deposit balances increased $30.5 million, consisting of an increase in time deposits, primarily from brokered time deposits, which grew by $46.3 million, partially offset by a decrease in interest bearing deposits of $15.6 million and money market and savings deposits of $0.2 million. Due to the change in mix of balances, the incremental growth of interest bearing liabilities resulted in an overall increase in interest expense of $150 thousand. At the same time, the average rate on interest bearing liabilities declined 2 basis points from 0.88% in the first quarter of 2014 to 0.86% in the current quarter, which accounted for a rate related decline in interest expense of $96 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 $120 thousand for the three months ended March 31, 2015 compared to $105 thousand for the same period ended March 31, 2014, respectively. The level of provision is impacted by management’s 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 declined by $2.7 million for the three months ended March 31, 2015, compared to an increase of $4.3 million during the first quarter of 2014. Net charge-offs for the three months ended March 31, 2015 and 2014, totaled $56 thousand and $159 thousand, respectively. The allowance for loan losses was $2.4 million at March 31, 2015 and $2.3 million at December 31, 2014, respectively, which represented 0.64% and 0.62% 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 three months ended March 31, 2015, the Company recorded a provision for loan losses totaling $42 thousand related to acquired loans. There were charge-offs recorded during the same period totaling $8 thousand on loans that were initially considered credit impaired loans as of the acquisition date and net charge-offs on non-credit impaired purchased loans totaling $34 thousand.

Non-Interest Income

For the three months ended March 31, 2015, non-interest income totaled $206 thousand compared to $219 thousand for the same period in 2014. 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, and other fees which First Priority Bank collects from its banking customers. Included in the three months ended March 31, 2014, there was $52 thousand of wealth management fees related to the Company’s investment in bank owned life insurance policies.

Components of noninterest income are shown in the table below:

	For the three months ended				Net Change			% Change
	March 31,				2015 vs.			2015 vs.
	2015		2014		2014			2014
	(Dollars in thousands)
Non-Interest Income
Wealth management fee income	$	90	$	123	$	(33	)		(26.8	)	%
Service charges on deposits		35		26		9			34.6
Other branch fees		42		49		(7	)		(14.3	)
Loan related fees		9		4		5			125.0
Bank owned life insurance income		21		17		4			23.5
Other		9		-		9			100.0
Total Non-Interest Income	$	206	$	219	$	(13	)		(5.9	)	%

Non-Interest Expenses

For the three months ended March 31, 2015, non-interest expenses were $3.35 million compared to $3.27 million for the same period in 2014, a increase of $86 thousand, or 2.6%. The following table sets forth information related to the various components of non-interest expenses for each respective period.

	For the three months ended				Net Change			% Change
	March 31,				2015 vs.			2015 vs.
	2015		2014		2014			2014
	(Dollars in thousands)
Non-Interest Expenses
Salaries and employee benefits	$	1,852	$	1,722	$	130			7.5		%
Occupancy and equipment		545		565		(20	)		(3.5	)
Data processing equipment and operations		220		232		(12	)		(5.2	)
Professional fees		181		217		(36	)		(16.6	)
Marketing, advertising and business development		30		30		-			-
FDIC insurance assessments		89		76		13			17.1
Pennsylvania bank shares tax expense		93		78		15			19.2
Other real estate owned costs		59		42		17			40.5
Other		283		304		(21	)		(6.9	)
Total Non-Interest Expenses	$	3,352	$	3,266	$	86			2.6		%

Highlights of significant non-interest expenses items for the first quarter, 2015 compared to the first quarter, 2014

·	Salaries and employee benefits increased $130 thousand, or 7.5% in the three months ended March 31, 2015 compared to the first quarter of 2014, primarily reflecting incremental staffing costs related to enhancing business development opportunities in the Berks County market.

·	Occupancy and equipment costs declined slightly in the first quarter of 2015 compared to the prior year due to lower costs resulting from the renegotiation of a branch lease and lower equipment depreciation and maintenance costs.

·	Data processing equipment and operations costs decreased by $12 thousand, or 5.2% primarily due to core processing costs.

·	Professional fees decreased $36 thousand primarily related to staff search fees of $32 thousand paid in 2014 to enhance overall staffing experience levels related to business development staff, with a focus on expanding the Berks County market.

·	FDIC insurance assessments and Pennsylvania bank shares tax expense increased in the current quarter compared to prior year. These expenses are primarily calculated based on asset size and equity levels of the Bank.

·	Other expenses decreased $21 thousand for the three months ended March 31, 2015 compared to the prior year. This decrease is primarily related to an insurance claim cost incurred of $25 thousand in the first quarter of 2014.

Provision for Income Taxes

Income tax expense recorded in the three months ended March 31, 2015 totaled $205 thousand compared to $9 thousand for the first three months of 2014. This increase is primarily a result of reversing the valuation allowance on net deferred tax assets (“DTA”) during the third quarter of 2014, which established the net DTA position which resulted in recording an income tax benefit of $4.7 million for the three months ended September 30, 2014, on the balance sheet of the Company. In making this judgment, management made the determination that it is more likely than not that the deferred tax asset will be realized. Prospectively, 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. The Company’s effective tax rate for the first three months of 2015 was 33.0% which approximates the expected effective tax rate going forward.

The Company’s net operating loss (“NOL”) carryforwards totaled $10.2 million as of March 31, 2015, including acquired NOLs. First Priority had NOL carryforwards of $7.8 million at March 31, 2015, which expire in 2027 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 initially totaled $2.0 million, with a remaining balance of $1.7 million at March 31, 2015, which is subject to certain limitations and expires in 2027 through 2028 if not fully utilized. In addition, an initial NOL carryforward balance of $940 thousand was recorded resulting from the

merger with Affinity, of which $782 thousand remains available to reduce future federal income taxes as of March 31, 2015. This NOL is also subject to certain limitations and expires in 2027 through 2032 if not fully utilized.

Financial Condition as of March 31, 2015 and December 31, 2014

Balance Sheet Review

			Net Change	% Change
	March 31,	December 31,	2015 vs.	2015 vs.
	2015	2014	2014	2014
	(Dollars in thousands)
Assets
Cash and cash equivalents	$ 20,955	$ 7,866	$ 13,089	166.4%
Investment securities	60,994	91,513	(30,519)	-33.3%
Loans	372,469	375,222	(2,753)	-0.7%
Total earning assets	454,418	474,601	(20,183)	-4.3%

Allowance for loan losses	(2,377)	(2,313)	(64)	2.8%
Restricted investments in bank stocks	1,873	2,984	(1,111)	-37.2%
Premises and equipment, net	2,331	2,369	(38)	-1.6%
Bank owned life insurance	3,115	3,093	22	0.7%
Other real estate owned	1,361	1,257	104	8.3%
Deferred income tax assets, net	4,207	4,541	(334)	-7.4%
Goodwill and other identifiable intangibles	3,099	3,122	(23)	-0.7%
Other assets	3,240	2,657	583	21.9%
Total assets	$ 471,267	$ 492,311	$ (21,044)	-4.3%

Liabilities
Deposits	$ 380,935	$ 378,209	$ 2,726	0.7%
Borrowed funds	38,000	62,472	(24,472)	-39.2%
Other liabilities	1,541	1,419	122	8.6%
Total liabilities	420,476	442,100	(21,624)	-4.9%
Equity
Total shareholders' equity	50,791	50,211	580	1.2%
Total liabilities and shareholders' equity	$ 471,267	$ 492,311	$ (21,044)	-4.3%

Total assets at March 31, 2015 were $471.3 million representing a decrease of $21.0 million or 4.3% when compared to total assets of $492.3 million at December 31, 2014. This decrease resulted primarily from the maturity of a short-term investment security totaling $30 million which also resulted in a corresponding reduction in short-term borrowings. Total assets at March 31, 2015 consisted of loans outstanding of $372.5 million, investment securities of $61.0 million and cash and cash equivalents of $21.0 million. At December 31, 2014, total assets consisted primarily of loans outstanding of $375.2 million, investments securities of $91.5 million and cash and cash equivalents of $7.9 million.

Deposits totaled $380.9 million at March 31, 2015 compared to $378.2 million at December 31, 2014, an increase of $2.7 million, or 0.7%. Of the total deposits at March 31, 2015, $183.3 million, or 48.1% of total deposits, are core deposits consisting of demand, money market and savings deposits.

Borrowings totaled $38.0 million at March 31, 2015 compared to $62.5 million at December 31, 2014, a decrease of $24.5 million, or 39.2%, which resulted primarily from applying the proceeds of a $30 million investment maturity to pay down short-term borrowings.

Shareholders’ equity at March 31, 2015 was $50.8 million, representing an increase of $580 thousand from $50.2 million at December 31, 2014.

Investments

The investment portfolio totaled $61.0 million at March 31, 2015, compared to $91.5 million at December 31, 2014, a decline of $30.5 million, or 33.3%. This decline primarily relates to overnight investments of $30 million purchased at December 31, 2014 for tax planning purposes which matured in early January 2015. As of March 31, 2015 and December 31, 2014, investments totaling $45.2

million and $75.5 million, respectively, were classified as available for sale while $15.8 million and $16.0 million, respectively, were classified as held to maturity. Total investments accounted for 12.9% and 18.6% of total assets at each respective date.

The Company previously transferred investment securities from available for sale to held to maturity securities. Due to these transfers securities classified as held to maturity have net unrealized holding gains, totaling $64 thousand as of March 31, 2015, which are 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 debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding gains reported in equity will offset the effect on interest income of the accretion of the discount on these securities. The transfer of securities from available for sale to held to maturity was completed in order to mitigate the volatility to common equity caused by sudden market fluctuations and to lock in a predictable earnings on these related securities.

Securities classified as available for sale are accounted for at fair value, with the difference between fair value and amortized cost reflected in the capital account as other comprehensive income or loss. The Company had net unrealized gains on available for sale securities totaling $308 thousand at March 31, 2015 compared to net unrealized losses totaling $86 thousand at December 31, 2014. 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 March 31, 2015 was comprised of federal agency securities (31%), federal agency mortgage backed securities and federal agency collateralized mortgage obligations (33%), obligations of states and political subdivisions (34%), 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 March 31, 2015 or December 31, 2014 and recorded no OTTI charges during the three months ended March 31, 2015, or during the year ended December 31, 2014.

	Securities Available for Sale, at Fair Value
	As of March 31, 2015
	Within 1 year					After one but within five years					After five but within ten years					Over ten years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
U.S. Government agency securities	$	—	—			$	16,485		1.38	%	$	2,971		1.67	%	$	—	—			$	19,456		1.42	%
Obligations of states and political subdivisions		—	—				2,837		1.66	%		1,504		2.57	%		593		3.20	%		4,934		2.12	%
Federal agency mortgage backed securities		—	—				—	—				3,766		1.99	%		15,995		2.15	%		19,761		2.12	%
Federal agency collateralized mortgage obligations		—	—				—	—				276		1.18	%		204		2.03	%		480		1.54	%
Other debt securities		501		0.85	%		—	—				—	—				—	—				501		0.85	%
Money market mutual fund		85		0.00	%		—	—				—	—				—	—				85		0.00	%
Total investments available for sale	$	586		0.73	%	$	19,322		1.43	%	$	8,517		1.95	%	$	16,792		2.19	%	$	45,217		1.80	%


	Securities Held to Maturity, at Amortized Cost
	As of March 31, 2015
	Within 1 year					After one but within five years					After five but within ten years					Over ten years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Obligations of states and political subdivisions	$	—		—		$	393		5.80	%	$	1,296		3.80	%	$	13,607		4.43	%	$	15,296		4.41	%
Other debt securities		—	—				—	—				—	—				481		4.37	%		481		4.37	%
Total investments held to maturity	$	—		—		$	393		5.80	%	$	1,296		3.80	%	$	14,088		4.43	%	$	15,777		4.41	%

The following table sets forth information about the contractual maturities and weighted average yields of investment securities at March 31, 2015. 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, at March 31, 2015 and December 31, 2014 are shown in the following table:

	March 31, 2015				December 31, 2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations	$	19,454	$	19,456	$	49,451	$	49,276
Obligations of states and political subdivisions		4,885		4,934		4,902		4,871
Federal agency mortgage-backed securities		19,507		19,761		20,233		20,351
Federal agency collateralized mortgage obligations		478		480		532		532
Other debt securities		500		501		500		502
Money market mutual fund		85		85		25		25
Total investment securities available for sale	$	44,909	$	45,217	$	75,643	$	75,557
Held To Maturity:
Obligations of states and political subdivisions	$	15,296	$	16,072	$	15,475	$	16,027
Other debt securities		481		529		481		517
Total held to maturity	$	15,777	$	16,601	$	15,956	$	16,544

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 March 31, 2015 and December 31, 2014, First Priority Bank held $110 thousand 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 $1.76 million and $2.87 million as of March 31, 2015 and December 31, 2014, respectively. The decrease in the investment is attributable to a payback of outstanding borrowings at the FHLB during the first three months of 2015.

Loans

First Priority’s loan portfolio is the primary component of its assets. At March 31, 2015, total loans were $372.5 million, representing a decrease of $2.7 million or 0.7% from total loans outstanding of $375.2 million at December 31, 2014. The decrease in the current quarter resulted from unscheduled prepayments or payoff of loans which totaled approximately $11 million in the quarter compared to new loan generation of approximately $8 million. The following table sets forth the classification of First Priority’s loan portfolio at March 31, 2015 and December 31, 2014.

	March 31, 2015						December 31, 2014
	Amount			Percent of total			Amount			Percent of total
Commercial & Industrial	$	75,055			20	%	$	75,412			20	%
Commercial Mortgage		169,002			46	%		168,969			45	%
Commercial Construction		7,713			2	%		6,497			2	%
Total Commercial		251,770			68	%		250,878			67	%
Residential Mortgage		78,929			21	%		80,134			21	%
Home Equity Lines		26,265			7	%		27,902			8	%
Other Consumer		15,581			4	%		16,378			4	%
Total Consumer		41,846			11	%		44,280			12	%
Total Loans		372,545			100	%		375,292			100	%
Net deferred loan (fees) or costs		(76	)		—			(70	)		—
Total	$	372,469			100	%	$	375,222			100	%

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 March 31, 2015, commercial mortgage loans

totaled $169.0 million consisting of $115.4 million of loans to finance commercial business properties, of which 60% are owner occupied, $16.5 million to finance, and are secured by, multifamily properties, $34.3 million secured by 1-4 family residential dwelling properties for business purposes, and $2.8 million for other purposes. In addition, as of March 31, 2015, loans to lessors of non-residential buildings totaled $69.2 million, which is included in commercial mortgage loans; of this amount, $34.0 million, or 49% of these loans are related to owner occupied buildings.

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.

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 March 31, 2015, totaled 29% and 189% of total risk-based capital, respectively, both well within the regulatory suggested guidance.

Credit Quality

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

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

	March 31,	December 31,
	2015	2014
	(Dollars in thousands)
Loans past due 90 days or more and still accruing interest	$ —	$ 70
Non-accrual loans	4,197	4,484
Total non-performing loans (1)	4,197	4,554
Other real estate owned	1,361	1,257
Repossessed assets (2)	42	42
Total non-performing assets (3)	5,600	5,853
Performing troubled debt restructurings (4)	2,103	2,132
Total non-performing assets and performing troubled debt restructurings	$ 7,703	$ 7,985
Non-performing loans as a percentage of total loans	1.13%	1.21%
Non-performing assets as a percentage of total assets	1.19%	1.19%
Non-performing assets and performing troubled debt restructurings as a percentage of total assets	1.63%	1.62%
Ratio of allowance to non-performing loans at end of period	57%	51%
Ratio of allowance to non-performing assets at end of period	42%	40%
Allowance for loan losses as a percentage of total loans	0.64%	0.62%

(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 $4.2 million at March 31, 2015, a decline of $357 thousand from the $4.6 million at December 31, 2014. This decrease consisted of two loans totaling $186 thousand which were restored to performing based on improving financial positions of the borrowers while another loan of $70 thousand, previously reported as past due 90 days or more, was paid current within the quarter. Two loan relationships totaling $230 thousand were transferred to other real estate owned while charge-offs in the quarter totaled $69 thousand. Additionally, there were two new non-performing loans identified in the quarter totaling $222 thousand, one of which has subsequently refinanced and was paid off. Total non-performing loans as a percentage of total loans at March 31, 2015 was 1.13%, down from 1.21% at December 31, 2014. Other real estate owned totaled $1.4 million at March 31, 2015 and $1.3 million at December 31, 2014, an increase of $104 thousand. Repossessed assets totaled $42 thousand at March 31, 2015 and December 31, 2014. Nonperforming assets totaled $5.6 million, or 1.19% of total assets, as of March 31, 2015, compared to $5.9 million, or 1.19% of total assets as of December 31, 2014.

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 March 31, 2015 and December 31, 2014, First Priority’s performing troubled debt restructurings totaled $2.1 million as of each period, respectively.

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

First Priority Bank’s total delinquency amount is comprised of loans past due 30 to 89 days and still accruing plus the balance of nonperforming loans. As of March 31, 2015 and December 31, 2014, loans past due 30 to 89 days and still accruing totaled $1.5 million and $986 thousand, respectively, which when added to the non-performing loans for each period, resulted in a total delinquency ratio of 1.54% and 1.48%, respectively, of total loans outstanding. The increase in past due loans is primarily the result of a single residential mortgage loan of $751 thousand with sufficient collateral value.

Allowance for Loan Losses

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

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

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

Acquired loans are initially recorded on acquisition date at their acquisition date fair values, and therefore, are excluded from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows from the acquired impaired loans after the date of acquisition, the Company records a provision for potential losses. During the three months ended March 31, 2015, the Company recorded a provision for loan losses totaling $42 thousand related to acquired loans consisting of $8 thousand for acquired impaired loans and $34 thousand related to non-credit impaired purchased loans.

Based on the information available as of March 31, 2015, management believes that the allowance for loan losses of $2.4 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:

	For the three months ended
	March 31,
	2015			2014
	(Dollars in thousands)
Balance at the beginning of period	$	2,313		$	2,273
Charge-offs:
Commercial and Industrial		16			—
Commercial Mortgage		11			74
Commercial Construction		—			50
Residential Mortgage Loans		28			—
Home equity lines of credit		12			-
Other consumer loans		2			52
Total loans charged off		69			176
Recoveries:
Commercial and Industrial		5			10
Home equity lines of credit		4			4
Other consumer		4			3
Total recoveries		13			17
Net loans charged off		56			159
Provision charged to operations		120			105
Balance at end of period	$	2,377		$	2,219
Average loans (1)	$	371,256		$	334,539

Ratio of net charge-offs during period to average loans outstanding during period (annualized) (1)		0.06	%		0.19	%
Allowance for loan losses as a percentage of total loans		0.64	%		0.65	%

(1)	Includes non-accrual loans

The allowance for loan losses was $2.4 million and $2.3 million at March 31, 2015 and December 31, 2014, respectively, which represented 0.64% and 0.62% of total loans outstanding at each respective date. As of March 31, 2015 and December 31, 2014, the unamortized portion of the general credit fair value adjustment totaled $418 thousand and $509 thousand, respectively, and the total specific credit market valuation adjustment totaled $429 thousand as of March 31, 2015 and $443 thousand as of December 31, 2014. Additionally, as of March 31, 2015 and December 31, 2014 the combination of these remaining credit fair value adjustments related to acquired loans, totaling $847 thousand and $952 thousand, respectively, and the allowance for loan losses of $2.4 million and $2.3 million respectively, or a total of $3.2 million and $3.3 million, respectively, would equate to 0.87% of total loans outstanding as of each respective period. Net charge-offs for the Company totaled $56 thousand for the first three months of 2015 compared to $159 thousand for the same period in 2014.

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

	(In thousands except percentage data)
	March 31,					December 31,
	2015					2014
	Amount		Percent of total loans (1)			Amount		Percent of total loans (1)

Commercial and Industrial	$	745		20	%	$	788		20	%
Commercial Mortgage		507		46	%		468		45	%
Commercial Construction		34		2	%		26		2	%
Residential Mortgage Loans		163		21	%		159		21	%
Home Equity Lines of Credit		221		7	%		270		8	%
Other Consumer Loans		66		4	%		87		4	%
Total Allocated		1,736		100	%		1,798		100	%
Unallocated		641					515
TOTAL	$	2,377				$	2,313

(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 $140 thousand has been provided on impaired loans of $6.3 million at March 31, 2015 compared to a specific allocation of $166 thousand related to $6.6 million of originated impaired loans at December 31, 2014.

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 as of both March 31, 2015 and December 31, 2014, 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 March 31, 2015, these loans totaled $69.2 million and $54.3 million, respectively, or 18.5% and 14.6%, respectively, of the total loans outstanding. As of December 31, 2014, these same classifications of loans totaled $69.5 million and $54.7 million, respectively, or 18.5% and 14.6%, 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 $380.9 million at March 31, 2015 compared to $378.2 million at December 31, 2014, representing an increase of $2.7 million or 0.7%. This increase in total deposits consisted of an increase in time deposits of $4.6 million, primarily related to brokered time deposits, which generally provide a lower cost compared to those issued in the retail market, and small increases in demand and savings deposits totaling $1.2 million, partially offset by a reduction in money market deposit accounts of $3.1 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.

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 March 31, 2015 and December 31, 2014, brokered deposits totaled $81.6 million and $74.6 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 10 – “Regulatory Matters” of the Notes to Unaudited Consolidated Financial Statements) and, therefore, may accept brokered deposits without FDIC restrictions.

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

	For the three months ended March 31,
	2015					2014
	Average Balance		Rate			Average Balance		Rate
	(Dollars in thousands)
Demand, non-interest bearing	$	46,222				$	46,075
Demand, interest-bearing		33,127		0.23	%		48,743		0.27	%
Money market and savings deposits		102,125		0.30	%		102,337		0.35	%
Time deposits		195,220		1.31	%		148,889		1.51	%
Total interest-bearing deposits		330,472		0.89	%		299,969		0.91	%
Total deposits	$	376,694				$	346,044

The maturity distribution of time deposits of $100,000 or more as of March 31, 2015, is as follows:

	March 31,
	2015
Three Months or Less	$	5,411
Over Three Through Six Months		4,530
Over Six Through Twelve Months		4,306
Over Twelve Months		37,174
TOTAL	$	51,421

Short-Term Borrowed Funds

At March 31, 2015, First Priority had short-term borrowings totaling $27.0 million, compared to $51.5 million at December 31, 2014. Short-term borrowings consisted of overnight or less than 30 day advances from the FHLB as of each of these periods. The decline in short-term borrowings resulted primarily due to the maturity of a short term investment security of $30 million, whereby the proceeds were used to pay down borrowings. Advances from the FHLB at March 31, 2015 are collateralized by our investment in the common stock of the FHLB and by a blanket lien on qualifying mortgages within First Priority Bank’s loan portfolio.

The following table outlines First Priority’s various sources of short-term borrowed funds at or for each of the three months ended March 31, 2015 and 2014. The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at any month-end during each of the periods shown.

	For the three months ended March 31,
	2015			2014
	(Dollars in thousands)
Federal funds purchased:
Balance at period end	$	—		$	—
Weighted average rate at period end		—			—
Maximum month-end balance	$	—		$	609
Average daily balance during the period	$	94		$	64
Weighted average rate during the period		0.51	%		0.51	%
FHLB short-term borrowings:
Balance at period end	$	27,000		$	22,300
Weighted average rate at period end		0.32	%		0.25	%
Maximum month-end balance	$	27,000		$	26,850
Average daily balance during the period	$	19,956		$	18,793
Weighted average rate during the period		0.31	%		0.27	%

Long-Term Debt

Long-term debt totaled $11.0 million as of both March 31, 2015 and December 31, 2014, respectively. These borrowings consisted of advances from the FHLB with an average interest rate of 0.88% as of each of these dates and an average remaining life of 2.0 years and 2.2 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 each of the three months ended March 31, 2015 and 2014, respectively, with an average rate of 0.89% for each of these respective periods. The maximum month-end balance of these borrowings was $11.0 million for the first three months of 2015 and 2014, respectively.

Capital Resources

Shareholders’ equity at March 31, 2015 was $50.8 million, representing an increase of $580 thousand from $50.2 million at December 31, 2014. The enhanced capital position is attributable to net income of $417 thousand for the three months ended March 31, 2015, stock based compensation costs of $78 thousand and market volatility related to the investment securities portfolio resulting in a net change in net unrealized gains (losses) totaling $251 thousand. These increases were partially offset by preferred dividends paid of $166 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. First Priority currently meets the definition of “small bank holding company” under the FRB’s regulations, and thus is not subject to any capital requirements.

The following table sets forth First Priority Bank’s capital ratios at March 31, 2015 and December 31, 2014. For both periods, First Priority Bank was considered “well-capitalized” and met or exceeded its applicable regulatory requirements.

	To Be Considered "Well-Capitalized"			As of March 31, 2015			As of December 31, 2014
First Priority Bank:
Total risk-based capital		10.00	%		13.17	%		12.87	%
Tier 1 risk-based capital		8.00	%		12.51	%		12.20	%
Tier 1 common equity capital		6.50	%		12.51	%		12.20	%
Tier 1 leverage capital		5.00	%		9.97	%		9.34	%

The capital ratios above reflect the new capital requirements under "Basel III" effective during the first quarter of 2015. As of March 31, 2015, the Bank and the Company were in compliance with the new requirements. See Note 10 - Regulatory Matters for additional discussion regarding regulatory capital requirements.

Return on Average Equity and Assets

The following table shows the return on average assets (net income divided by total average assets), return on equity (net income divided by average equity), and the equity to assets ratio (average equity divided by total average assets) for the three months ended March 31, 2015 and 2014.

	At or for the three months ended
	March 31,
	2015	2014
Return on average assets................................	0.37%	0.58%
Return on average equity................................	3.34%	5.63%
Average equity to average assets ratio........	11.00%	10.28%

The decline between the reported periods was primarily related to income tax expense totaling $205 thousand for the three months ended March 31, 2015 compared to $9 thousand for the first three months of 2014. As of March 31, 2014, the Company had not yet recorded its net deferred tax assets, and therefore did not include the impact of current income tax expense as a component of net income.

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 March 31, 2015 and December 31, 2014, outstanding commitments to extend credit consisting of total unfunded commitments under lines of credit were $80.7 million and $83.2 million, respectively. In addition, as of March 31, 2015 and December 31, 2014, there were $495 thousand and $349 thousand of performance standby letters of credit outstanding, respectively, and $935 thousand and $1.1 million of financial standby letters of credit as of each respective date.

In addition, as of March 31, 2015 and December 31, 2014 the Bank pledged $149 thousand of deposit balances at a correspondent bank to support a letter of credit with a balance of $149 thousand at each respective date, 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 March 31, 2015, wholesale funding sources totaled $119.6 million and were comprised of $81.6 million of brokered certificates of deposit and $38.0 million of FHLB advances. 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. 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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, First Priority Bank had a total borrowing capacity with the FHLB of $146 million and $144 million, respectively, with advances outstanding against this capacity of $38.0 million and $62.5 million, respectively.

Short-term liquid assets held in interest-bearing deposit accounts with correspondent banks totaled $16.4 million at March 31, 2015 compared to $2.8 million at December 31, 2014.

Interest Rate Sensitivity

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

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

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

At March 31, 2015, 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

Item 4. Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit
No.

Title

3.1

Articles of Incorporation of First Priority Financial Corp. (incorporated by reference to Exhibit 3.1 to First Priority’s Registration Statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)

3.2

Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series A” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.3 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)

3.3

Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series B” of First Priority Financial Corp. (incorporated by reference to Exhibit 3.4 to First Priority’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 24, 2009)

3.4

Certificate of Designations for the “Fixed Rate Cumulative Perpetual Preferred Stock, Series C” of First Priority Financial Corp. (incorporated by reference to Exhibit 2.1 to First Priority’s Registration Statement No. 333-183118 on Form S-4 filed with the SEC on January 25, 2013)

3.5

Bylaws of First Priority Financial Corp. (incorporated by reference to Exhibit 3.2 to First Priority’s Registration Statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)

31.1

Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (ii) the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2015 and 2014, (iii) the Consolidated Statements of Changes in Equity for the three months ended March 31, 2015 and 2014, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014, and (v) the Notes to Consolidated Financial Statements.

SIGNATURES

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

		FIRST PRIORITY FINANCIAL CORP.
		(Registrant)
Dated: May 14, 2015	By	/s/ David E. Sparks
		David E. Sparks,
		Chairman and Chief Executive Officer
Dated: May 14, 2015	By	/s/ Mark J. Myers
		Mark J. Myers,
		Chief Financial Officer

Exhibit Index

Exhibit

No.

Title

3.1

3.2

3.3

3.4

3.5

Bylaws of First Priority Financial Corp. (incorporated by reference to Exhibit 3.2 to First Priority’s Registration Statement No. 333-147950 on Form S-4 filed with the SEC on December 7, 2007)

31.1

Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

101

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Litigous
Readability	H.S. sophomore Bad

First Priority Financial Inactive 10-Q2015 Q1 Quarterly report

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