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Section 1: 10-K (10-K)

fpbk-10k_20171231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission file number 333-183118

 

First Priority Financial Corp.

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

 

20-8420347

(State or other jurisdiction

of Incorporation)

 

(IRS 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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act:    Yes      No  

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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            

The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates based on number of shares outstanding as of February 28, 2018 and the last known trade as of June 30, 2017 is $41,081,000.

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

 

Title of Each Class

 

Number of Shares Outstanding as of March 16, 2018

Common Stock, $1.00 par value

 

6,646,469 (Outstanding Shares)

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 


FIRST PRIORITY FINANCIAL CORP.

TABLE OF CONTENTS

 

 

  

Page

 

 

PART I

  

 

 

 

Item 1. Business

  

1

 

 

Item 1A. Risk Factors

  

5

 

 

Item 1B. Unresolved Staff Comments

  

5

 

 

Item 2. Properties

  

5

 

 

Item 3. Legal Proceedings

  

5

 

 

Item 4. Mine Safety Disclosures

  

5

 

 

PART II

  

 

 

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

  

6

 

 

Item 6. Selected Financial Data

  

8

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

9

    

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  

33

    

 

Item 8. Financial Statements and Supplementary Data

  

34

 

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  

80

 

 

Item 9A. Controls and Procedures

  

80

 

 

Item 9B. Other Information

  

80

 

 

PART III

  

 

 

 

Item 10. Directors, Executive Officers and Corporate Governance

  

81

 

 

Item 11. Executive Compensation

  

83

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

  

86

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

  

88

 

 

Item 14. Principal Accounting Fees and Services

  

89

 

 

PART IV

  

 

 

 

Item 15. Exhibits, Financial Statement Schedules

  

90

 

 

Signatures

  

91

 

 

 

i

 


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 First Priority 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. This includes statements regarding the planned merger of First Priority with and into Mid Penn Bancorp, Inc. (“Mid Penn”) with Mid Penn as the surviving corporation (the “Merger”).  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;

 

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer;

 

regulatory or judicial proceedings;

 

changes in asset quality;  

 

the ability to obtain requisite approvals and satisfy other closing conditions to complete the Merger in a timely manner; and

 

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 annual report or the date of any document incorporated by reference in this annual report.

 

 

ii


 

PART I

Item 1.  Business.

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, headquartered in Malvern, PA, has seven retail branch office locations and one loan production office and is a locally managed community bank providing commercial banking products, primarily loans and deposits.  Additionally on February 26, 2018, the Bank opened its eighth retail branch office in West Chester, Chester County, Pennsylvania.  First Priority provides banking services through the Bank and does not engage in any business other than banking and related activities.

On January 16, 2018, Mid Penn Bancorp, Inc. (“Mid Penn”) (NASDAQ: MPB), headquartered in Millersburg, Pennsylvania, and First Priority jointly announced the signing of a definitive merger agreement pursuant to which Mid Penn will acquire First Priority in an all-stock transaction.  The merger, unanimously approved by both boards of directors, will create a community banking franchise with approximately $2.2 billion in assets, $1.8 billion in deposits and $1.6 billion in loans. Under the terms of the merger agreement, shareholders of First Priority common stock will receive 0.3481 shares of Mid Penn common stock for each share of First Priority common stock they own. The merger is subject to customary closing conditions, including the receipt of regulatory and shareholder approvals.  The merger is expected to close in the third quarter of 2018. Following completion of the merger, First Priority Bank will be merged with and into Mid Penn Bank and will operate as “First Priority Bank, a division of Mid Penn Bank.”

First Priority Bank

The Bank is a state-chartered commercial banking institution which was incorporated under the laws of the Commonwealth of Pennsylvania on May 25, 2005. The Bank’s deposits are insured by the FDIC up to the maximum amount permitted for all banks.

The Bank engages in a full service commercial and consumer banking business with strong private banking and individual wealth management services. The 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.

The 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 third party providers. In addition, the Bank has entered into solicitation agreements with several investment advisors to provide portfolio management services to customers of the Bank.

The Bank currently seeks deposits and commercial and private banking relationships through its 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, electronic banking and mobile products as well as online account opening capabilities. The Bank obtains funding in the local community by providing excellent service and competitive rates to its customers and utilizes various advertising to attract current and potential deposit customers. The Bank also uses brokered certificates of deposit as a cost effective funding alternative.

At December 31, 2017, First Priority had 69 full time equivalent employees consisting of 66 full time employees and 6 part-time employees. None of such employees is covered by a collective bargaining agreement, and First Priority believes that it enjoys good relations with its personnel.

Supervision and Regulation

The Company is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”), and to supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Bank is also

 

1


 

subject to the supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as its primary federal regulator and as the insurer of the Bank’s deposits. The Bank is also regulated and examined by the Pennsylvania Department of Banking and Securities (the “Department”).

The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. The BHCA requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require approval of the Department.

A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5% of the voting shares of any company engaged in nonbanking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Bank holding companies are required to comply with the FRB’s risk-based capital guidelines. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets. Currently, the required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, less certain intangible assets. The remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, 45% of net unrealized gains on marketable equity securities, and a limited amount of the general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.

In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio, under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% to 5%. The Bank is subject to similar capital requirements adopted by the FDIC.

In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements became effective on January 1, 2015. The capital contribution buffer requirements are being phased in over a three-year period beginning January 1, 2016 and was 0.625% in 2016, 1.25% during 2017 and is 1.875% in 2018.

Dividends

Federal and state laws impose limitations on the payment of dividends by the Bank. The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by the Banks to their additional paid-in capital.

In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment of dividends by the banks if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banks.

 

2


 

Under Pennsylvania law, the Company may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as they become due in the usual course of business and, after giving effect to the dividend, the total assets of the Company would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the dividend.

It is also the policy of the FRB that a bank holding company generally only pay dividends on common stock out of net income available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with a bank holding company’s capital needs, asset quality, and overall financial condition. In the current financial and economic environment, the FRB has indicated that bank holding companies should carefully review their dividend policy and has discouraged dividend pay-out ratios at the 100% level unless both asset quality and capital are very strong. A bank holding company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.

Regulation of the Bank

The Bank is regulated by the FDIC and the Department. The laws that such agencies enforce limit the specific types of businesses in which the Bank may engage, and the products and services that the Bank may offer to customers. Generally, these limitations are designed to protect the insurance fund of the FDIC and/or the customers of the Bank, and not the Bank or its shareholders. From time to time, various types of new federal and state legislation have been proposed that could result in additional regulation of, and restrictions of, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Some of the major regulatory provisions that affect the business of the Bank are discussed briefly below.

Prompt Corrective Action

The FDIC has specified the levels at which an insured institution will be considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized” category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent institution and liability for civil money damages for failure to fulfill its commitment on that guarantee; and (2) the placement of a hold on increases in assets, number of branches, or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions, the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.

Deposit Insurance

The Bank’s deposits are insured up to $250,000 per related ownership category, as defined by the FDIC.  The FDIC maintains the Deposit Insurance Fund (the “DIF”) by assessing depository institutions an insurance premium.

Beginning with the second quarter of 2011, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the assessment base that the FDIC uses to calculate assessment premiums became a bank’s average assets minus average tangible equity.  Assessment rates range from a low of 2.5 basis points to a high of 45 basis points, per $100 of assets.

The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the DIF to achieve a reserve ratio of 1.35% of insurance fund insured deposits by September 2020. In addition, the FDIC has established a “designated reserve ratio” of 2.0%, a target ratio that, until it is achieved, will not likely result in the FDIC reducing assessment rates. In attempting to achieve the mandated 1.35% ratio, the FDIC is required to implement assessment formulas that charge banks over $10 billion in asset size more than banks under that size. Those new formulas began in the second quarter of 2011, but did not affect the Bank. Under the Dodd-Frank Act, the FDIC is authorized to make reimbursements from the insurance fund to banks if the reserve ratio exceeds 1.50%, but the FDIC has adopted the “designated reserve ratio” of 2.0% and has announced that any reimbursements from the fund are indefinitely suspended.

 

3


 

Other Legislation

The Dodd-Frank Act was enacted in July 2010. This law has affected bank regulatory structure and the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. 

Certain provisions of the Dodd-Frank Act have and will continue to impact the Company. For example, effective July 21, 2011, a provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. This significant change affects competition for deposits and could have an adverse impact on the Company’s interest expense.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Under the Dodd-Frank Act, the assessment base will no longer be an institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.

Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital; however, trust preferred securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) after May 19, 2010, will no longer count as Tier 1 capital. Trust preferred securities still will be entitled to be treated as Tier 2 capital.

The Dodd-Frank Act requires publicly traded companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” arrangements, and may allow greater access by shareholders to the company’s proxy material by authorizing the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control, and ethics standards for accounting firms. In response to the legislation, the national securities exchanges have adopted new rules relating to certain matters, including the independence of members of a company’s audit committee as a condition to listing or continued listing.

Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations. The Company cannot predict how any new legislation, or new rules adopted by federal or state banking agencies, may affect the business of the Company and its subsidiaries in the future. Given that the financial industry remains under stress and severe scrutiny, the Company expects that there will be significant legislation and regulatory actions that may materially affect the banking industry for the foreseeable future.

 

4


 

Environmental Laws

Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental cleanup costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing cleanup costs, and liability to the institution for cleanup costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. The Company is not aware of any borrower who is currently subject to any environmental investigation or cleanup proceeding that is likely to have a material adverse effect on the financial condition or results of operations of the Company.

Effect of Government Monetary Policies

The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments, and deposits through its open market operations in the United States Government securities and through its regulation of, among other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

Item 1A. Risk Factors.

Not applicable.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The principal executive offices of First Priority and First Priority Bank, and the full-service main office of First Priority Bank, are located in an office building in Malvern, Pennsylvania. First Priority Bank currently has offices located in Chester, Berks, Bucks and Montgomery Counties, Pennsylvania, at the following locations:

 

Office

  

Office Location

  

Square
Footage

  

Owned /
Leased

Malvern—Headquarters /Main Office

  

2 W. Liberty Blvd., Malvern, PA 19355

  

11,775

  

Leased

Bala Cynwyd-(loan production office)

 

33 Rock Hill Rd., Suite 100, Bala Cynwyd, PA 19004

 

1,625

 

Leased

Blue Bell

  

10 Sentry Parkway, Suite 100, Blue Bell, PA 19422

  

2,575

  

Leased

Exeter

  

4541 Perkiomen Avenue, Reading, PA 19606

  

2,931

  

Owned(1)

Muhlenberg

  

4200 N. 5th Street Highway, Temple, PA 19560

  

3,000

  

Owned(1)

Newtown

  

104 Pheasant Run, Suite 130, Newtown, PA 18940

  

3,600

  

Leased

Sinking Spring

  

3101 Shillington Rd., Sinking Spring, PA 19608

  

3,000

  

Leased

West Chester

 

237 E. Gay St., West Chester, PA 19380

 

5,551

 

Leased

Wyomissing

  

1310 Broadcasting Rd., Wyomissing, PA 19610

  

9,602

  

Leased

(1)

The buildings located at the Exeter and Muhlenberg locations are owned; but are located on leased real estate. Upon expiration or termination of the lease, the buildings will become property of the landlord.

Item 3. Legal Proceedings.

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

Item 4. Mine Safety Disclosures.

Not Applicable.

 

5


 

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

(a)

Market Price of and Dividends on Registrant’s Common Equity

First Priority’s common stock began trading on March 12, 2015 on the OTCQX marketplace, under the symbol FPBK.  Before March 12, 2015 First Priority had not historically traded on a national securities exchange, listing service, or similar trading platform for listing or quotation of securities, and there had been no active or liquid public trading market for First Priority common stock.

There were approximately 485 shareholders of record who owned 6.6 million shares of common stock outstanding at March 16, 2018.  High and low sales prices are set forth in the following tables:

 

 

2017

 

High

 

Low

First quarter

$8.00

 

$6.45

Second quarter

8.07

 

7.85

Third quarter

8.10

 

7.90

Fourth quarter

8.90

 

7.95

 

 

 

 

 

2016

 

High

 

Low

First quarter

$6.05

 

$5.30

Second quarter

6.40

 

5.75

Third quarter

6.00

 

5.75

Fourth quarter

6.64

 

5.85

First Priority has never paid a dividend on its common stock, and no assurance can be given that dividends will be declared on First Priority common stock in the foreseeable future. First Priority has no significant source of cash flow other than dividends from First Priority Bank. First Priority’s ability to pay dividends is subject to restrictions under both Federal and state banking laws which limit its ability to pay dividends. For a description of such restrictions see “Business-Supervision and Regulation” under Item 1 of Part I.

The information required with respect to securities authorized for issuance under First Priority’s compensation plans is set forth in “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”, and incorporated herein by reference.

The Company has a shareholder approved 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 a combination of options and restricted stock, 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 the Program as a result of the merger with Affinity Bancorp, Inc. (“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.  The number of shares of common stock available for issuance under the Program is subject to adjustment, as described in the Program.  This includes, in the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the stock, substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Program, in the number and option price of shares subject to outstanding options granted under the Program and in the number and price of shares subject to other awards, as described in the Program.

 

6


 

The following table sets forth information regarding outstanding options and shares under equity compensation plans at December 31, 2017:

 

(a)

 

 

(b)

 

 

(c)

 

Program Category

Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights

 

 

Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights

 

 

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))

 

Equity compensation program approved by security holders

 

807,870

 

 

$

5.84

 

 

 

147,288

 

Equity compensation program not approved by security holders

 

-

 

 

 

-

 

 

 

-

 

Total

 

807,870

 

 

$

5.84

 

 

 

147,288

 

(b)

Recent Sales of Unregistered Securities

None.

(c)

Purchases of Equity Securities by First Priority and Affiliated Purchasers

None.

 

7


 

Item 6. Selected Financial Data.

The following table provides historical consolidated summary financial data for First Priority. The data at or for the five years ended December 31, 2017, as presented below, is derived from First Priority’s audited financial statements for the periods then ended, and should be read in conjunction with the Consolidated Financial Statements and Notes thereto, contained elsewhere herein.

 

 

 

At or for the Year Ended December 31,

 

(In thousands, except per share data)

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Selected Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

609,942

 

 

$

597,795

 

 

$

546,540

 

 

$

492,311

 

 

$

446,088

 

Securities available for sale

 

 

52,373

 

 

 

70,560

 

 

 

94,704

 

 

 

75,557

 

 

 

78,636

 

Securities held to maturity

 

 

18,665

 

 

 

19,043

 

 

 

19,886

 

 

 

15,956

 

 

 

10,963

 

Loans receivable

 

 

518,927

 

 

 

488,243

 

 

 

409,153

 

 

 

375,222

 

 

 

335,737

 

Allowance for loan losses

 

 

3,405

 

 

 

3,330

 

 

 

2,795

 

 

 

2,313

 

 

 

2,273

 

Deposits

 

 

523,150

 

 

 

467,688

 

 

 

408,687

 

 

 

378,209

 

 

 

357,420

 

Federal Home Loan Bank of Pittsburgh advances

 

 

24,625

 

 

 

68,164

 

 

 

74,725

 

 

 

62,472

 

 

 

44,625

 

Subordinated debt

 

 

9,231

 

 

 

9,207

 

 

 

9,201

 

 

 

-

 

 

 

-

 

Shareholders' equity (1)

 

 

50,496

 

 

 

48,046

 

 

 

52,091

 

 

 

50,211

 

 

 

42,392

 

Book value per common share

 

$

7.16

 

 

$

6.84

 

 

$

6.58

 

 

$

6.33

 

 

$

5.12

 

Tangible book value per common share (2)

 

$

6.72

 

 

$

6.38

 

 

$

6.11

 

 

$

5.85

 

 

$

4.62

 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

24,053

 

 

$

21,246

 

 

$

19,510

 

 

$

18,647

 

 

$

17,649

 

Interest expense

 

 

5,849

 

 

 

4,530

 

 

 

3,325

 

 

 

2,872

 

 

 

3,149

 

Net interest income before provision for loan losses

 

 

18,204

 

 

 

16,716

 

 

 

16,185

 

 

 

15,775

 

 

 

14,500

 

Provision for loan losses

 

 

385

 

 

 

710

 

 

 

610

 

 

 

1,132

 

 

 

645

 

Net interest income after provision for loan losses

 

 

17,819

 

 

 

16,006

 

 

 

15,575

 

 

 

14,643

 

 

 

13,855

 

Non-interest income

 

 

1,041

 

 

 

1,545

 

 

 

1,155

 

 

 

1,007

 

 

 

739

 

Merger related costs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,534

 

Non-interest expense

 

 

14,401

 

 

 

14,123

 

 

 

13,683

 

 

 

13,227

 

 

 

12,831

 

Income before tax (benefit) expense

 

 

4,459

 

 

 

3,428

 

 

 

3,047

 

 

 

2,423

 

 

 

229

 

Income tax (benefit) expense (3)

 

 

2,001

 

 

 

1,128

 

 

 

935

 

 

 

(4,502

)

 

 

33

 

Net income

 

$

2,458

 

 

$

2,300

 

 

$

2,112

 

 

$

6,925

 

 

$

196

 

Preferred stock dividends, including net amortization

 

 

306

 

 

 

407

 

 

 

801

 

 

 

579

 

 

 

532

 

Income (loss) to common shareholders

 

$

2,152

 

 

$

1,893

 

 

$

1,311

 

 

$

6,346

 

 

$

(336

)

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

 

$

0.29

 

 

$

0.20

 

 

$

0.98

 

 

$

(0.06

)

Diluted

 

$

0.32

 

 

$

0.29

 

 

$

0.20

 

 

$

0.98

 

 

$

(0.06

)

Cash dividends per common share

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Return on average assets

 

 

0.43

%

 

 

0.44

%

 

 

0.44

%

 

 

1.56

%

 

 

0.05

%

Return on average shareholders' equity

 

 

4.92

%

 

 

4.81

%

 

 

4.11

%

 

 

15.16

%

 

 

0.47

%

Average equity to average assets

 

 

8.66

%

 

 

9.20

%

 

 

10.64

%

 

 

10.28

%

 

 

10.50

%

 

(1)

For the year ended December 31, 2016, Shareholders’ Equity reflects a $6 million redemption of preferred stock; See Note 13, “Shareholders’ Equity” of the Notes to Consolidated Financial Statements.

(2)

See the discussion below entitled “GAAP versus Non-GAAP Presentation”.

(3)

For the year ended December 31, 2017, income tax expense included a non-recurring non-cash reduction in the value of First Priority’s net deferred tax asset (“DTA”) which resulted in a charge of $571 thousand as a result of the Tax Cuts and Jobs Act, enacted on December 22, 2017, which lowered the Company’s future maximum corporate tax rate from 34 percent to 21 percent.  For the year ended December 31, 2014 an income tax benefit of $4.5 million resulted from the reversal of the valuation allowance on net deferred tax assets.

 

8


 

GAAP versus Non-GAAP Presentation – The Corporation supplements its traditional GAAP measurements with an additional Non-GAAP measurement, Tangible Book Value Per Common Share.  As a result of prior merger transactions, intangible assets, consisting of goodwill and core deposit intangibles, were created. The Non-GAAP disclosures are intended to eliminate the effects of the intangible assets and allow for better comparisons to periods when such assets did not exist.  However, not all companies use the same calculation methods for the same non-GAAP measurements and therefore may not be comparable. The following table shows the adjustments made between the GAAP and NON-GAAP measurements for Tangible Book Value Per Share:

 

 

For the year ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

(Dollars in thousands, except shares and per share data)

 

 

 

 

 

 

 

 

Shareholders' Equity

 

$

50,496

 

 

$

48,046

 

Less: Preferred Stock Issued and Outstanding

 

 

3,404

 

 

 

3,404

 

Less: Goodwill

 

 

2,725

 

 

 

2,725

 

Less: Intangible Assets with Finite Lives, Net

 

 

169

 

 

 

235

 

Tangible Equity

 

$

44,198

 

 

$

41,682

 

 

 

 

 

 

 

 

 

 

Common Shares Issued and Outstanding

 

 

6,577,969

 

 

 

6,529,719

 

 

 

 

 

 

 

 

 

 

Tangible Book Value per Common Share

 

$

6.72

 

 

$

6.38

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion summarizes First Priority’s results of operations for the years ended December 31, 2017 and 2016, and its financial condition as of December 31, 2017 and 2016 and highlights material changes. This discussion is intended to provide additional information about the significant changes in the results of operations presented in the accompanying consolidated financial statements, contained in this document, for First Priority and its wholly owned subsidiary, First Priority Bank. First Priority’s consolidated financial condition and results of operations consist essentially of the Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future. This discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as First Priority’s plans, objectives, expectations and intentions.

Readers should note that many factors, some of which are discussed elsewhere in this report, could affect the future financial results of First Priority and could cause those results to differ materially from those expressed or implied in the forward-looking statements contained in this document.

Overview

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

 

 

 

As of December 31, and for the year ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Total revenue (1)

 

$

19,245

 

 

$

18,261

 

 

$

17,340

 

 

$

16,782

 

 

$

15,239

 

Net income (2)

 

 

2,458

 

 

 

2,300

 

 

 

2,112

 

 

 

6,925

 

 

 

196

 

Total assets

 

 

609,942

 

 

 

597,795

 

 

 

546,540

 

 

 

492,311

 

 

 

446,088

 

Total loans receivable

 

 

518,927

 

 

 

488,243

 

 

 

409,153

 

 

 

375,222

 

 

 

335,737

 

Total deposits

 

 

523,150

 

 

 

467,688

 

 

 

408,687

 

 

 

378,209

 

 

 

357,420

 

_____________________                                    

 

(1)

Total revenue equals net interest income plus non-interest income.

 

(2)

Net income in 2017 includes a non-recurring charge of $571 thousand to income tax expense to reduce the value of First Priority’s net deferred tax asset as a result of the Tax Cuts and Jobs Act, enacted on December 22, 2017, which lowered the Company’s future maximum corporate tax rate from 34 percent to 21 percent.  Net income in 2014 includes an income tax benefit of $4.50 million which resulted from the reversal of the valuation allowance on the Company’s net deferred tax assets.

 

9


 

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, Judgments 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.

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, valuation of acquired loans, the determination of the allowance for loan losses, valuation of other real estate owned, 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 which resulted from bank acquisitions are based on a discounted cash flow methodology that involves significant assumptions and judgments as to estimate of credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.

Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans.

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

 

10


 

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

Impairment is measured on a loan by loan basis 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 December 31, 2017 and December 31, 2016 for more information.

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

Goodwill. Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired in accordance with the acquisition method of accounting. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment.

Income Taxes. Deferred taxes are provided on the liability method whereby deferred tax assets (“DTA”) are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company files a consolidated federal income tax return with the Bank.

 If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.

When determining the need for a valuation allowance, the Company assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards, as defined by Accounting Standards Codification (“ASC”) Topic 740-10-30-18. This guidance related to when a valuation allowance on the DTA should be maintained, generally provides that the valuation allowance should be reversed, when in the judgment of management, it is more likely than not that the DTA will be realized.  Management has determined that the DTA will be realized and does not maintain a valuation allowance.

Stock Based Compensation. Compensation costs related to share-based payment transactions are recognized in the financial statements over the period that an employee provides service in exchange for the award. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on management’s assumptions.  The value of restricted stock awards is determined based on the estimated fair value of the shares at the date of the award.

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.

 

11


 

Results of Operations Comparative Summary

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

 

 

For the year ended December 31,

 

 

Increase (decrease)

 

% Change

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

18,204

 

 

$

16,716

 

 

$

1,488

 

 

8.9

%

Non-interest income

 

 

1,041

 

 

 

1,545

 

 

 

(504

)

 

(32.6

)%

Total Revenue

 

 

19,245

 

 

 

18,261

 

 

 

984

 

 

5.4

%

Provision for loan losses

 

 

385

 

 

 

710

 

 

 

(325

)

 

(45.8

)%

Non-interest expenses

 

 

14,401

 

 

 

14,123

 

 

 

278

 

 

2.0

%

Income before income tax expense

 

 

4,459

 

 

 

3,428

 

 

 

1,031

 

 

30.1

%

Income tax expense

 

 

2,001

 

 

 

1,128

 

 

 

873

 

 

77.4

%

Net Income

 

$

2,458

 

 

$

2,300

 

 

$

158

 

 

6.9

%

Preferred dividends, including net warrant amortization

 

 

306

 

 

 

407

 

 

 

(101

)

 

(24.8

)%

Income to common shareholders

 

$

2,152

 

 

$

1,893

 

 

$

259

 

 

13.7

%

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

 

$

0.29

 

 

$

0.04

 

 

13.8

%

Diluted

 

$

0.32

 

 

$

0.29

 

 

$

0.03

 

 

10.3

%

Summary

For the year ended December 31, 2017, First Priority’s consolidated net income increased 6.9% to $2.46 million, or $0.33 per basic common share and $0.32 per fully diluted common share versus $2.30 million, or $0.29 per basic and fully diluted common share for the same period in 2016.  For the year ended December 31, 2017, income before income taxes totaled $4.46 million, a 30.1% increase over $3.43 million recorded in 2016, while income to common shareholders, after preferred dividends, totaled $2.15 million, a 13.7% increase over $1.89 million reported in the prior year.

The earnings in 2017 were negatively impacted by a non-recurring non-cash reduction in the value of First Priority’s net deferred tax asset (“DTA”) which resulted in a charge of $571 thousand which is included in the provision for income tax expense. This income tax adjustment was a result of the Tax Cuts and Jobs Act, enacted on December 22, 2017, which lowered First Priority’s future maximum corporate tax rate from 34 percent to 21 percent. Although this reduced rate will provide tax savings in future periods, this charge was required to write-down First Priority’s DTA, which was previously valued based upon the projection of a 34 percent future tax rate.  

Adjusted 2017 net income, when excluding the $571 thousand charge to reduce the value of the DTA, would have been $3.03 million or $0.42 per basic common share and $0.40 per fully diluted common share, representing a 31.7% increase in 2017 earnings compared to 2016’s full-year net income of $2.30 million, or $0.29 per basic and fully diluted common share. There were no unusual tax charges recorded during 2016.

Management believes that calculating earnings per share excluding the impact of the adjustment of the deferred tax asset provides important supplemental information in evaluating First Priority’s operating results because this non-recurring charge is not incurred as a result of ongoing operations. However, reporting earnings in this manner constitutes reporting financial information determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). Income tax effects of non-GAAP adjustments are calculated using the applicable statutory tax rate for the jurisdictions in which the charges (benefits) are incurred, while taking into consideration any valuation allowances or non-deductible portions of the non-GAAP adjustments. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of First Priority’s results and financial condition as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Management believes that this non-GAAP supplemental information will be helpful in understanding First Priority’s ongoing operating results. This supplemental presentation should not be construed as an inference that First Priority’s future results will be unaffected by similar adjustments to be determined in accordance with GAAP.

 

12


 

The following table provides a reconciliation of earnings and earnings per share adjusted for the exclusion of this non-recurring adjustment:

 

 

For the year ended

 

 

 

December 31,

 

(Unaudited, in thousands, except per share data)

 

2017

 

 

2016

 

Net income

 

$

2,458

 

 

$

2,300

 

Plus: adjustment of deferred tax asset

 

 

571

 

 

 

-

 

Net income excluding non-recurring expenses

 

$

3,029

 

 

$

2,300

 

Preferred dividends

 

 

306

 

 

 

407

 

Income to common shareholders excluding non-recurring expenses

 

$

2,723

 

 

$

1,893

 

 

 

 

 

 

 

 

 

 

Adjusted basic earnings per common share

 

$

0.42

 

 

$

0.29

 

Adjusted diluted earnings per common share

 

$

0.40

 

 

$

0.29

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

6,559

 

 

 

6,514

 

Diluted

 

 

6,785

 

 

 

6,570

 

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.

 

13


 

The following table sets forth, for the years ended December 31, 2017 and 2016, information related to First Priority’s average balances, yields on average assets, and costs of average liabilities. Average balances are derived from the daily balances throughout the periods indicated and yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average loans are stated net of deferred costs. The net dollar amounts and percentage changes of interest income and expense are presented for comparative purposes.

Analysis of Changes in Net Interest Income

 

For the Year Ended December 31,

 

 

Net Change in Interest Income / Expenses

 

 

2017

 

 

2016

 

 

$ Change

 

 

% Change

 

 

Average Balance

 

 

Interest Income/  Expense

 

 

Yield/ Rate

 

 

Average Balance

 

 

Interest Income/  Expense

 

 

Yield/ Rate

 

 

2017 vs. 2016

 

 

2017 vs. 2016

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

494,051

 

 

$

22,074

 

 

 

4.47

%

 

$

438,867

 

 

$

19,570

 

 

 

4.46

%

 

$

2,504

 

 

 

12.8

%

Taxable investment securities

 

43,330

 

 

 

1,199

 

 

 

2.77

%

 

 

45,045

 

 

 

1,150

 

 

 

2.55

%

 

 

49

 

 

 

4.3

%

Nontaxable investment securities

 

14,403

 

 

 

579

 

 

 

4.02

%

 

 

9,985

 

 

 

408

 

 

 

4.09

%

 

 

171

 

 

 

41.9

%

Total investment securities

 

57,733

 

 

 

1,778

 

 

 

3.08

%

 

 

55,030

 

 

 

1,558

 

 

 

2.83

%

 

 

220

 

 

 

14.1

%

Deposits with banks and other (1)

 

8,346

 

 

 

201

 

 

 

2.41

%

 

 

6,624

 

 

 

118

 

 

 

1.79

%

 

 

83

 

 

 

70.3

%

Total interest-earning assets

 

560,130

 

 

 

24,053

 

 

 

4.29

%

 

 

500,521

 

 

 

21,246

 

 

 

4.24

%

 

 

2,807

 

 

 

13.2

%

Non-interest-earning assets (1)

 

16,690

 

 

 

 

 

 

 

 

 

 

 

18,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

576,820

 

 

 

 

 

 

 

 

 

 

$

519,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand, interest-bearing

$

39,333

 

 

$

156

 

 

 

0.40

%

 

$

48,758

 

 

$

161

 

 

 

0.33

%

 

$

(5

)

 

 

(3.1

)%

Money market and savings

 

120,782

 

 

 

922

 

 

 

0.76

%

 

 

100,620

 

 

 

520

 

 

 

0.52

%

 

 

402

 

 

 

77.3

%

Time deposits

 

255,376

 

 

 

3,635

 

 

 

1.42

%

 

 

220,436

 

 

 

2,866

 

 

 

1.30

%

 

 

769

 

 

 

26.8

%

FHLB advances and other borrowings

 

37,392

 

 

 

447

 

 

 

1.20

%

 

 

36,600

 

 

 

295

 

 

 

0.81

%

 

 

152

 

 

 

51.5

%

Subordinated debt

 

9,218

 

 

 

689

 

 

 

7.48

%

 

 

9,196

 

 

 

688

 

 

 

7.48

%

 

 

1

 

 

 

0.1

%

Total interest-bearing liabilities

 

462,101

 

 

 

5,849

 

 

 

1.27

%

 

 

415,610

 

 

 

4,530

 

 

 

1.09

%

 

 

1,319

 

 

 

29.1

%

Non interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand, non-interest bearing deposits

 

62,703

 

 

 

 

 

 

 

 

 

 

 

54,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

2,050

 

 

 

 

 

 

 

 

 

 

 

1,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

49,966

 

 

 

 

 

 

 

 

 

 

 

47,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

576,820

 

 

 

 

 

 

 

 

 

 

$