10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

or

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

For the transition period from                      to                     

Commission File Number:

FIRST PRIORITY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization) 20-8420347
(I.R.S. Employer Identification No.)

2 West Liberty Boulevard, Suite 104
Malvern, Pennsylvania 19355
(Address of principal executive offices)

(610) 280-7100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None	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 o No þ

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

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the last sale price of common stock as of June 30, 2008 ($10.25), was $32,010,022.

The number of shares outstanding of each of the registrant’s classes of common stock, as of March 17, 2009, was as follows:

Class	Number of Shares
Common Stock, $1.00 par value	3,122,929

DOCUMENTS INCORPORATED BY REFERENCE

No documents are incorporated by reference into this Annual Report on Form 10-K.

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(ii)

FIRST PRIORITY FINANCIAL CORP.

FORM 10-K

INDEX

	Page No.
Part I
Item 1. Business		1
Item 1A. Risk Factors		8
Item 1B. Unresolved Staff Comments		11
Item 2. Properties		11
Item 3. Legal Proceedings		11
Item 4. Submission of Matters to a Vote of Security Holders		11
Part II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters		12
Item 6. Selected Financial Data		13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		47
Item 8. Financial Statements and Supplementary Data		48
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		93
Item 9A(T). Controls and Procedures		93
Item 9B. Other Information		93
Part III
Item 10. Directors, Executive Officers and Corporate Governance		93
Item 11. Executive Compensation		93
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		94
Item 13. Certain Relationships and Related Transactions, and Director Independence		94
Item 14. Principal Accounting Fees and Services		94
Part IV
Item 15. Exhibits, Financial Statement Schedules		94
Signatures		97
Exhibit 3.3
Exhibit 3.4
Exhibit 4.1
Exhibit 10.6
Exhibit 10.7
Exhibit 21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

(iii)

A CAUTION ABOUT FORWARD-LOOKING STATEMENTS

This document and the documents incorporated by reference into this document contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. 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 events.

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;

(iv)

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

• the occurrence of adverse changes in the securities markets;

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

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

• regulatory or judicial proceedings;

• changes in asset quality; and

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

The effects of these factors are difficult to predict. New factors emerge from time to time and we can not 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.

(v)

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PART I

Item 1. Business

First Priority Financial Corp.

First Priority Financial Corp. (“First Priority”, the “Company”) was incorporated under the laws of the Commonwealth of Pennsylvania on February 13, 2007, for the purpose of becoming the holding company of First Priority Bank (the “Bank”) and had no prior operating history. On May 11, 2007, as a result of a reorganization and merger where each outstanding share of First Priority Bank common stock and each outstanding warrant to acquire a share of First Priority Bank common stock were converted into one share of First Priority common stock and one warrant to acquire First Priority common stock, First Priority Bank became a wholly-owned subsidiary of First Priority. On February 29, 2008, First Priority acquired Prestige Community Bank (“Prestige”) and Prestige merged with and into the Bank. First Priority provides banking services through First Priority Bank and does not engage in any activities other than banking and related activities. As of December 31, 2008, First Priority had total assets of $214.7 million, total deposits of $169.5 million and total shareholders’ equity of $20.3 million. First Priority’s principal executive offices are located at 2 West Liberty Boulevard, Suite 104, Malvern, Pennsylvania 19355. Its telephone number is (610) 280-7100.

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. As of December 31, 2008, First Priority Bank had total assets of $214.6 million, total loans of $171.7 million, total deposits of $169.8 million and total shareholder’s equity of $20.0 million.

First Priority Bank’s administrative headquarters and full service main office are located at 2 West Liberty Boulevard, Suite 104, Malvern, PA 19355. The main telephone number is (610) 280-7100.

First Priority Bank engages in full service commercial and consumer banking business with strong private banking and individual financial management capabilities. The Bank offers a variety of consumer, private banking, commercial loan and mortgage products, commercial real estate financing, as well as business and personal deposit products, financial planning and investment management services, consisting of fixed and variable rate annuities, mutual funds, and asset allocation. These investment services are provided by First Priority Financial Services, a Division of First Priority Bank, through an agreement with a third party provider. Various life insurance products are offered through First Priority Bank. In addition, the Bank has entered into solicitation agreements with several investment advisors to provide portfolio management services for introduced customers of the Bank. First Priority Bank provides its banking and wealth management services from each of its branch locations.

1

The ability to originate loans and build a sound, growing loan portfolio is critically important to the success of First Priority Bank. The Bank provides highly customized loan products offered with excellent service and expertise with a goal of timely responsiveness within the market. The Bank delivers these products and quality services through a staff of highly experienced, sophisticated lenders who are properly supported in the marketplace by seasoned decision makers. The Bank seeks out highly capable relationship lenders with large and loyal followings who are searching for a work environment and culture which will enable them to differentiate themselves from the competition by providing true relationship banking based upon a deep understanding of client needs, personal service, prompt decision making and customized banking solutions.

First Priority Bank seeks deposits through its banking offices and commercial relationships. The Bank provides a select group of deposit products that include checking, money market and savings accounts, and certificates of deposit. The Bank funds itself in the local community by providing excellent service and competitive rates to its customers. The Bank obtains deposit accounts through electronic and print media advertising and uses the brokered market when it is advantageous for funding purposes. At December 31, 2008, the Bank had total brokered certificates of deposits of $32.6 million, which represented approximately 19% of total deposits. A well-capitalized bank may accept brokered deposits without FDIC restrictions. At December 31, 2008, First Priority Bank has the requisite capital levels to qualify as “well capitalized.” See Regulation — “Capital Adequacy Guidelines.”

Competition

First Priority Bank competes with other financial institutions for deposit and loan business. Competitors include other commercial banks, savings banks, saving and loan associations, insurance companies, securities brokerage firms, credit unions, financial companies, mutual funds, money market funds, and certain government agencies. Financial institutions compete mostly on the quality of services rendered, interest rates offered on deposit accounts, interest charged on loans, service charges, the convenience of banking facilities, location and hours of operation and, in the case of loans to larger commercial borrowers, relative lending limits.

Many of these competitors are significantly larger than First Priority Bank and have significantly greater financial resources, personnel and locations from which to conduct business. In addition, the Bank is subject to regulation while certain competitors are not. Non-regulated companies face relatively few barriers for entry into the financial services industry.

The Bank’s larger competitors have greater name recognition and greater financial resources than First Priority Bank to finance wide-ranging advertising campaigns. The Bank utilizes media advertising, directors’ referrals, advisory board referrals and employee calling programs to attract prospective customers. The Bank competes for business principally on the basis of high quality, personal service to customers, customer access to the Bank’s decision-makers and competitive interest rates and fees. The Bank strives to provide the best possible access to its banking services by exploring innovative delivery vehicles, such as Internet banking, remote merchant deposit and commercial deposit courier service. As a small, independent, community-based bank, the Bank has hired high quality experienced employees seeking greater responsibility than may be granted by a larger employer and the ability to provide better service from a smaller, more responsive bank.

First Priority Bank believes that it is able to compete favorably with its competitors because it provides responsive personalized services through management’s knowledge and awareness of its market area, customers and businesses.

2

Regulation

Set forth below is a brief description of certain laws that relate to the regulation of First Priority and First Priority Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

First Priority Bank operates in a highly regulated industry. This regulation and supervision establishes a comprehensive framework of activities in which a bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors and not shareholders of First Priority. As a Pennsylvania state-chartered commercial bank, First Priority Bank is subject to the regulation, supervision, and control of the Pennsylvania Department of Banking. As an FDIC insured institution, the Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The regulations of the FDIC and the Pennsylvania Department of Banking affect virtually all activities of First Priority Bank, including the minimum level of capital the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions, the amount of reserves for deposits the Bank must maintain, loans and investments the Bank may make, acceptable collateral that may be taken, consumer protection laws and various other matters. First Priority Bank’s deposit accounts are insured up to the maximum legal limits by the FDIC. The Bank is not a member of the Federal Reserve System.

Any change in applicable statutory and regulatory requirements, whether by the Pennsylvania Department of Banking, the FDIC or the United States Congress, could have a material adverse impact on First Priority Bank and its operations. The adoption of regulations or the enactment of laws that restrict the operations of the Bank or impose burdensome requirements upon it could reduce its profitability and could impair the value of the Bank’s franchise, which could hurt the trading price of First Priority’s stock.

Insurance of Deposits. First Priority Bank’s deposits are insured by the FDIC up to the maximum amount permitted for all banks. The FDIC has a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule effective January 1, 2007, the FDIC assigns each depository institution to one of four risk groups based on capital levels and other supervisory standards, including examination reports, statistical analyses and other information relevant to measuring the risk posed by the institution. Institutions that meet the definition of “well-capitalized” and otherwise have no supervisory issues would be grouped in the category that pays the lowest deposit insurance rates. As of December 31, 2008, First Priority Bank was well-capitalized for purposes of calculating insurance assessments, and was in the lowest risk assessment group.

On February 27, 2009, the Board of Directors of the FDIC adopted an interim (proposed) rule to impose an emergency one-time special assessment on all banks at a proposed rate of 20 basis points to restore the Deposit Insurance Fund (the “DIF”) to an acceptable level. Comments on the interim rule are due 30 days from date of issuance. This special assessment is in addition to a previously planned increase in premiums. In addition, the FDIC approved a DIF restoration plan which will further increase base assessment rates for banks in all risk categories beginning April 1, 2009, and adjusts premiums for new factors, including use of brokered deposits by “fast growing” banks and secured liabilities, including Federal Home Loan Bank advances. The potential incremental cost of the proposed special assessment combined with ongoing assessment rate increases, will exceed $400 thousand for First Priority Bank in 2009, based on deposit liabilities reported as of December 31, 2008.

3

Capital Adequacy Guidelines. First Priority Bank is subject to risk-based capital guidelines promulgated by the FDIC that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under the guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The 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 4% of the total capital is required to be “Tier I Capital,” consisting of common shareholders’ equity and qualifying preferred stock, less certain goodwill items and other intangible assets. The remainder (“Tier II Capital”) may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt and intermediate-term preferred stock up to 50% of Tier I capital. Total capital is the sum of Tier I and Tier II capital less reciprocal holdings of other banking organizations, capital instruments, investments in unconsolidated subsidiaries, and any other deductions as determined by the FDIC (determined on a case-by-case basis or as a matter of policy after formal rule-making).

In addition to the risk-based capital guidelines, the FDIC has adopted a minimum Tier I capital (leverage) ratio, under which a bank must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other banks are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum.

The Bank issues brokered certificates of deposits to provide a significant source of funding for the Bank. The FDIC places restrictions on banks in regards to issuing brokered deposits based on the bank’s level of capital. 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.

At December 31, 2008, First Priority Bank had the requisite capital levels to qualify as “well capitalized.” On a consolidated basis, First Priority is exempt from the risk-based capital guidelines. First Priority qualifies for exemption under the provisions of the “Small Bank Holding Company Policy Statement” of the Board of Governors of the Federal Reserve System which exempts holding companies with total assets of less than $500 million that meet certain eligibility criteria from the risk based capital requirements.

First Priority is required to obtain prior approval of the Federal Reserve Board before acquiring control, directly or indirectly, of more than five percent of the voting shares or substantially all of the assets of any institution, including another bank.

As a bank holding company, First Priority is subject to regulation of the Federal Reserve Board. The Company is prohibited from engaging in or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking, managing, or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether these activities offer benefits to the public that outweigh any possible adverse effects.

4

Further, under the Bank Holding Company Act and the Federal Reserve Board’s regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or services. The so-called “anti-tie-in” provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to its bank holding company or to any other subsidiary of its bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. At December 31, 2008, the Bank had $20.9 million in FHLB advances.

As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the FHLB. At December 31, 2008, the Bank had $1.7 million in stock of the FHLB which was in compliance with this requirement. In December 2008, the FHLB notified member banks that it was suspending dividend payments and the repurchase of capital stock. See Note 1 of the Notes to Consolidated Financial Statements — “Restricted Investments in Bank Stocks.”

Emergency Economic Stabilization Act of 2008

The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. EESA enables the federal government, under terms and conditions to be developed by the Secretary of the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. EESA includes, among other provisions: (a) the $700 billion Troubled Assets Relief Program (“TARP”), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC.

Under the TARP, the United States Department of Treasury (the “Treasury”) authorized a voluntary Capital Purchase Program (“CPP”) to purchase up to $250 billion of senior preferred shares of qualifying financial institutions. This program was created to stabilize the financial system by directly infusing capital into healthy, viable institutions, thereby increasing their capacity to lend to U.S. businesses and consumers and support the U.S. economy. As described below, on February 20, 2009, the Company issued to Treasury, 4,579 shares of the Company’s Series A Preferred Stock and a warrant to purchase, on a net basis, 229 shares of the Company’s Series B Preferred Stock for an aggregate purchase price of $4.6 million under the TARP Capital Purchase Program (see Note 23 of the Notes to Consolidated Financial Statements). Companies participating in the TARP Capital Purchase Program were required to adopt certain standards relating to executive compensation. The terms of the TARP Capital Purchase Program also limit certain uses of capital by the issuer, including with respect to repurchases of securities and increases in dividends.

5

Financial Stability Plan

On February 10, 2009, the Financial Stability Plan (“FSP”) was announced by the Treasury. The FSP is a comprehensive set of measures intended to bolster the financial system. The core elements of the FSP include making bank capital injections, creating a public-private investment fund to buy troubled assets, establishing guidelines for loan modification programs and expanding the Federal Reserve lending program. Treasury has indicated more details regarding the FSP are to be announced on a newly created government website, FinancialStability.gov.

American Recovery and Reinvestment Act of 2009

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. ARRA is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn brought about by the subprime mortgage crisis and the resulting credit crunch. The bill includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, healthcare, and infrastructure, including the energy structure. The new law also includes certain noneconomic recovery related items, including a limitation on executive compensation in federally aided financial institutions, including institutions, such as the Company, that had previously received an investment by Treasury under the TARP Capital Purchase Program.

Under ARRA, an institution that either will receive funds or which had previously received funds under TARP, will be subject to certain restrictions and standards throughout the period in which any obligation arising under TARP remains outstanding (except for the time during which the federal government holds only warrants to purchase common stock of the issuer). The following summarizes the significant requirements of ARRA, which are to be included in standards to be established by Treasury:

• limits on compensation incentives by senior executive officers;

• a requirement for recovery of any compensation paid based on inaccurate financial information;

• a prohibition on “golden parachute payments” or severance payments to specified officers or employees, which term is generally defined as any payment for departure from a company for any reason;

• a prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of employees;

• a prohibition on bonus, retention award, or incentive compensation to designated employees, except in the form of long-term restricted stock;

• a requirement that the board of directors adopt a luxury expenditures policy;

• a requirement that shareholders be permitted a separate nonbinding vote on executive compensation;

• a requirement that the chief executive officer and the chief financial officer provide a written certification of compliance with the standards, when established, to the SEC.

6

Under ARRA, subject to consultation with the appropriate federal banking agency, Treasury is required to permit a recipient of TARP funds to repay any amounts previously provided to or invested in the recipient by Treasury without regard to whether the institution has replaced the funds from any other source or to any waiting period. Treasury has confirmed that recipients of funds under the Capital Purchase Program may repay them irrespective of funding dates notwithstanding the terms of the original transaction documents.

Homeowner Affordability and Stability Plan

On February 18, 2009, the Homeowner Affordability and Stability Plan (“HASP”) was announced by the President. HASP is intended to support a recovery in the housing market and ensure that workers can continue to pay off their mortgages by providing access to low-cost refinancing for responsible homeowners suffering from falling home prices, implementing a $75 billion homeowner stability initiative to prevent foreclosure and help responsible families stay in their homes, and supporting low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac. We continue to monitor these developments and assess their potential impact on the business of the Company and the Bank.

Recent Developments

On January 30, 2009, the Company filed a Form 15 with the Securities and Exchange Commission (“SEC”), “Certification and Notice of Termination of Registration under Section 12(g) of the Securities and Exchange Act of 1934 or Suspension of Duty to File Reports under Section 13 and 15(D) of the Securities and Exchange Act of 1934,” whereby First Priority Financial Corp. de-registered as a public filer and, therefore, eliminated future requirements to file reports with the SEC, on a prospective basis. This election is allowed by the SEC for a public company who became a public filer due to filing a registration statement to issue incremental shares if the Company’s total number of shareholders of record is less than 300 shareholders at the end of the year in which the registration statement was initially filed.

On February 20, 2009, First Priority entered into a Letter Agreement with the Treasury (the “Purchase Agreement”) as part of the Treasury’s TARP Capital Purchase Program, pursuant to which the Company issued and sold, and the Treasury agreed to purchase, (i) 4,579 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $100.00 par value per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant) to purchase, on a net basis, up to 229 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $100 per share (the “Series B Preferred Stock”), with an exercise price of $100.00 per share, for an aggregate purchase price of $4.6 million in cash. The Company entered into a side letter agreement with Treasury, dated February 20, 2009, which, among other things, clarified that to the extent the terms of any of the Purchase Agreement, the Warrant or the terms of the Series A Preferred Stock or the Series B Preferred Stock are inconsistent with the ARRA, as it may be amended from time to time, or any rule or regulation promulgated thereunder, the ARRA and such rules and regulations shall control. On February 20, 2009, the Treasury immediately exercised the Warrant, on a cashless basis, which resulted in the issuance of the 229 shares of the Series B Preferred Stock. The issuance and sale of the Series A Preferred Stock, the Warrant and the Series B Preferred Stock was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

7

The transaction, which closed on February 20, 2009, resulted in additional Tier 1 Capital of $4.6 million. Participation in the TARP Capital Purchase Program is voluntary and benefits the Company based on the following:

• The incremental $4.6 million in capital immediately strengthens the Bank’s capital position and will support approximately $50 million of additional lending capacity.

• The cost of the capital, which carries a blended dividend rate of 5.45%, or a weighted average total cost of capital of 6.45% (assuming a five year amortization period for the warrant preferred), is very favorable compared to traditional market costs of similar instruments.

• The TARP capital is available at a time when there is limited or no availability of capital on the open market and provides additional capital to support the continued growth of the Company’s balance sheet.

The Series A Preferred Stock will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Series B Preferred Stock will pay cumulative dividends at a rate of 9% per annum. Both Series A and B 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 Preferred Stock, in whole or in part, at its liquidation preference plus accrued and unpaid dividends at any time as permitted by the ARRA and the rules and regulations promulgated thereunder. The Series B Preferred Stock may not be redeemed until all of the Series A Preferred Stock has been redeemed.

The Purchase Agreement, pursuant to which the preferred shares were sold, contains limitations on the payment of dividends on the common stock and on the Company’s ability to repurchase its common stock, and subjects the Company to certain of the executive compensation limitations included in EESA. As a condition to the closing of the transaction, each of the Company’s Senior Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”) executed a waiver (the “Waiver”) voluntarily waiving any claim against the Treasury or the Company for any changes to such Senior Executive Officer’s compensation or benefits that are required to comply with the regulation issued by the Treasury under the TARP Capital Purchase Plan and acknowledging that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements (including so-called “golden parachute” agreements) (collectively, “Benefit Plans”) as they relate to the period the Treasury holds any equity securities of the Company acquired through the TARP Capital Purchase Plan. The Company has also effected changes to its Benefits Plans as may be necessary to comply with the executive compensation provisions of EESA. These restrictions will cease when the Treasury ceases to own any debt or preferred securities of the Company acquired pursuant to the Purchase Agreement.

Employees

At December 31, 2008, First Priority had 41 full-time and 2 part-time employees.

Item 1A. Risk Factors

First Priority is a smaller reporting company and therefore is not required to provide the information required by this item. However, First Priority has voluntarily provided the following risk factors.

8

Our business, financial condition, and results of operations could be harmed by any of the following risks, or other risks that have not been identified or which we believe are immaterial or unlikely. Shareholders should carefully consider the risks described below in conjunction with the other information in this Annual Report and the information incorporated by reference in this Annual Report, including our consolidated financial statements and related notes.

First Priority is not yet profitable.

First Priority commenced operations in November 2005 and has not yet achieved profitability.

First Priority may require additional capital to continue its growth.

First Priority believes that it must continue growing in order to achieve economies of scale and ultimately profitable operations. This growth may require additional capital over and above current capital levels, including the incremental capital provided through the TARP Capital Purchase Program. There can be no assurance that additional capital will be obtained.

First Priority is exposed to risks in connection with the loans First Priority Bank makes.

A significant source of risk for First Priority arises from the possibility that losses will be incurred because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. Risks within the loan portfolio are analyzed on a continuous basis by First Priority Bank, by an external independent loan review function, and 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 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 for loan losses. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are realized in the periods in which they become known and may adversely affect First Priority’s results of operations in the future.

Changes in interest rates and First Priority Bank’s ability to successfully manage such changes may impact the earnings of First Priority.

First Priority’s profitability depends in large part on the net interest income of First Priority Bank, which is the difference between interest income from interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Exposure to interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and value of financial instruments. First Priority Bank’s net interest income will be adversely affected if the market interest rate changes such that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions.

The Federal Reserve has made significant changes in interest rates during the last few years. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective, which could adversely affect our financial condition and results of operations.

9

First Priority Bank faces intense competition in its market.

First Priority Bank is a small banking institution. The banking business is highly competitive. First Priority Bank faces substantial immediate competition and potential future competition both in attracting deposits and in originating loans. First Priority Bank competes with local, regional and national commercial banks, savings banks, and savings and loan associations, the majority of which have assets, capital, and lending limits larger than those of First Priority Bank. Other competitors include money market funds, mutual funds, mortgage bankers, insurance companies, stock brokerage firms, regulated small loan companies, credit unions, and issuers of commercial paper and other securities. First Priority Bank’s larger competitors have a much larger branch and ATM network, greater name recognition, and greater financial resources than First Priority Bank has and can finance wide-ranging advertising campaigns.

First Priority is dependent on key individuals.

First Priority’s success depends in part on our continued ability to attract and retain experienced relationship managers, as well as other key executive management personnel. The unexpected loss of the services of several such key personnel could adversely affect First Priority’s growth strategy and prospects to the extent First Priority is unable to replace such personnel. Restrictions on production bonuses and exposure to the clawback provisions incorporated in the recently enacted Economic Stimulus Bill may place smaller community banks, such as First Priority Bank, at a disadvantage in attracting and retaining experienced relationship managers.

An economic downturn, especially in southeastern Pennsylvania, could reduce First Priority’s customer base, the level of deposits and demand for financial products such as loans.

First Priority Bank’s operations are concentrated in southeastern Pennsylvania. Deterioration in economic conditions in the market area or a general decline in economic conditions may adversely affect the quality of the loan portfolio and the demand for products and services, and accordingly, First Priority’s results of operations.

The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, during an extended downtown in the economy, customers’ desires to borrow may also be reduced which could lead to slower than anticipated growth of the Bank’s loan portfolio.

Deposit levels may also be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

10

First Priority is subject to extensive regulation that could limit or restrict First Priority’s activities.

First Priority and First Priority Bank are subject to extensive regulation, supervision and examination by certain state and Federal agencies including the Pennsylvania State Department of Banking, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System. Our compliance with these regulations is costly and restricts certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. First Priority must also meet regulatory capital requirements. If First Priority fails to meet these capital and other regulatory requirements, First Priority’s financial condition, liquidity, and results of operations would be materially and adversely affected. Failure to remain “well capitalized” and “well managed” for regulatory purposes could affect customer confidence, our ability to grow, our cost of funds and FDIC insurance, our ability to pay dividends on common stock, and our ability to make acquisitions.

There is no market for First Priority common stock.

First Priority shareholders do not currently have a liquid market in which to sell their common stock and it is very unlikely that a liquid market for First Priority common stock will develop in the near future. Moreover, First Priority has no current plan to apply to have its common stock listed on any exchange or on the over the counter market.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

First Priority and First Priority Bank do not own any real estate and currently do not expect to own any real estate in the future.

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 located in Malvern, Pennsylvania. First Priority Bank leases office space in each of the following locations:

		Square		Owned /
Office	Office Location	Footage		Leased
Malvern — Headquarters / Main Office	2 W. Liberty Blvd., Suite 104, Malvern, PA 19355		8,929	Leased
Wyomissing	1200 Broadcasting Rd., Suite 103, Wyomissing, PA 19610		3,323	Leased
Newtown	104 Pheasant Run, Suite 130, Newtown, PA 18940		3,600	Leased
Plumstead	5936 Easton Road, Pipersville, PA 18947		2,655	Leased
Blue Bell	10 Sentry Parkway, Suite 100, Blue Bell, PA 19422		2,575	Leased

Item 3. Legal Proceedings

First Priority has not, since its organization, been a party to any legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of holders of First Priority common stock during the fourth quarter of 2008.

11

Part II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

There is no liquid market for First Priority common stock outstanding and it is very unlikely that a liquid market for First Priority common stock will develop in the near future. Moreover, First Priority has no current plan to apply to have its common stock listed on any exchange or on the over the counter market.

At March 17, 2009, there were 246 shareholders of record.

All of our outstanding shares of common stock are entitled to share equally in dividends from funds legally available therefore, when, as and if declared by the Board of Directors. To date, we have not paid cash dividends on our common stock. The Purchase Agreement that First Priority executed on February 20, 2009 as part of the TARP Capital Purchase Program requires consent from the Treasury for payment of any dividends on common stock until the third anniversary from the date of issuance of the Series A and Series B Preferred Stock to the Treasury, unless the Series A and Series B preferred stock is redeemed in whole. After the third anniversary and prior to the tenth anniversary, the Treasury’s consent shall be required for any increase in aggregate of common dividends per share greater than 3% per annum. In addition, First Priority has a deficit and will not be able to pay a dividend on the its common stock until it has accumulated retained earnings.

12

Item 6. Selected Financial Data

First Priority is a smaller reporting company and therefore is not required to provide the information required by this item. However, First Priority has voluntarily provided the following selected financial data.

The following table shows certain historical consolidated summary financial data for First Priority. The information relating to First Priority was derived from the consolidated financial statements of First Priority for the period from May 25, 2005 (date of inception) to December 31, 2005, and for the years ended December 31, 2008, 2007 and 2006. First Priority commenced operations in November 2005.

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

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

The following is management’s discussion and analysis of the significant changes in the results of operations presented in its 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 almost entirely of First Priority Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative, of similar performance in the future.

This discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as First Priority’s plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-K should be read as applying to all statements wherever they appear including in this Management’s Discussion and Analysis.

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

First Priority was formed May 11, 2007, to be the holding company for First Priority Bank pursuant to a reorganization and merger agreement. As part of the reorganization and merger, each outstanding share of First Priority Bank common stock and each outstanding warrant to acquire a share of First Priority Bank common stock were converted into one share of First Priority common stock and one warrant to acquire one share of First Priority common stock and, as a result, First Priority Bank became a wholly-owned subsidiary of First Priority. Accordingly, the consolidated results of operations and financial condition as well as descriptions of balance sheet and income statement items prior to May 11, 2007 represent those of First Priority Bank, and consolidated results of operations and financial condition and descriptions of balance sheet and income statement items after May 11, 2007 represent the consolidated results of First Priority.

The consolidated balance sheets and related income statements of First Priority are substantially the same as the balance sheets and income statements of the Bank except for the issuance of convertible debentures by First Priority totaling $380 thousand in June and July 2007. Effective August 1, 2008, the Company elected to convert the $403 thousand outstanding balance of debentures, including accrued interest to date, into 39,292 shares of the Company’s common stock, based on the conversion price of $10.25 per share, as described in the “long-term debt” section below.

Effective at the close of business on February 29, 2008, First Priority completed its acquisition of Prestige Community Bank (“Prestige”), a newly formed de novo bank headquartered in Newtown, Bucks County, Pennsylvania. Prestige, with $28.9 million in total assets, $5.8 million in loans and $20.8 million in deposits as of February 29, 2008, merged into the Bank.

First Priority issued 976,137 shares of common stock and 195,227 warrants to purchase 195,227 shares of its common stock at a price of $12.50 per share, expiring in October 2012, in the acquisition which resulted in incremental capital to First Priority of $7.4 million. The acquisition has been accounted for using the purchase method of accounting which requires that the Company’s financial statements include Prestige’s results of operations beginning March 1, 2008.

14

The acquisition of Prestige expanded the Bank’s branch network into Bucks County, Pennsylvania, with offices in Newtown and Pipersville. The Bank now serves customers in Chester, Berks, and Bucks Counties in Pennsylvania, with a fifth office expected to open for business in the first quarter of 2009 in Blue Bell, Montgomery County, Pennsylvania.

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

										As of December 31,
										2005 and for the
										period from
										May 25, 2005
										(date of
	As of December 31,									inception) to
	and for the years ended December 31,									December 31,
	2008			2007			2006			2005
				(Dollars in thousands)
Total revenue (1)	$	4,349		$	3,038		$	1,757		$	271
Net loss		(3,354	)		(2,376	)		(2,436	)		(969	)
Total assets		214,657			151,611			105,748			30,841
Total loans receivable		171,735			105,207			50,423			111
Total deposits		169,459			116,304			64,417			789

(1) Total revenue equals net interest income plus non-interest income.

Although First Priority Bank was formed on May 25, 2005, it did not receive its certificate of authority to operate as a bank until November 14, 2005. Accordingly, the results of operations and financial position of the Company, as of December 31, 2005 and for the period from May 25, 2005 (date of inception) to December 31, 2005, reflects that commencement of operations did not occur until late 2005.

As is the case with most de-novo banks, growth of the balance sheet in the early years of the organization is typically more evident and more pronounced, when comparing to previous periods, than with a more mature organization. Therefore, there are material changes in the results of operations and the financial position of the Company when comparing financial results between the periods reported which reflects this growth.

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 interest-earning assets and the expense on its interest-bearing liabilities, such as deposits and borrowings, which is called the net interest income. Another key measure is the spread between the yield First Priority earns on these interest-earning assets and the rate it pays on its 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.

15

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 customers and income from wealth management services. The various components of non-interest income, as well as non-interest expense, are described in the following discussion.

Critical Accounting Policies

First Priority has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements. First Priority’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements.

Certain accounting policies involve significant judgments and assumptions by First Priority that have a material impact on the carrying value of certain assets and liabilities. First Priority considers these accounting policies to be critical accounting policies. The judgment and assumptions used are based on historical experience and other factors, which First Priority believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of its assets and liabilities and its results of operations.

The following is a summary of the policies First Priority recognizes as involving critical accounting estimates: Allowance for Loan Losses, Stock-Based Compensation, Unrealized Gains and Losses on Securities Available for Sale, Goodwill and Deferred Income Taxes.

Allowance for Loan Losses. First Priority maintains an allowance for loan losses at a level management believes is sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires significant estimates by management. Consideration is given to a variety of factors in establishing these estimates including historical losses, current and anticipated economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, the strength of the present value of future cash flows and other relevant factors. These factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required which may adversely affect First Priority’s results of operations in the future.

Stock-Based Compensation. First Priority recognizes compensation expense for stock options in accordance with SFAS No. 123 (revised 2004, “Share-Based Payment” (SFAS No. 123(R)) adopted at January 1, 2006 under the prospective application method of transition. As a result, options granted prior to January 1, 2006 will generally not be subject to expense. The expense related to options granted after January 1, 2006 is generally measured based on the fair value of the option at the grant date, with compensation expense recognized over the service period, which is usually the vesting period. First Priority utilizes the Black-Scholes option-pricing model (as used under SFAS No. 123(R)) to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. First Priority’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested.

16

Unrealized Gains and Losses on Securities Available for Sale. First Priority receives estimated fair values of debt securities from independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Debt securities available for sale are comprised of U.S. government agency securities, federal agency mortgage-backed securities, and other debt securities. First Priority uses various indicators in determining whether a security is other than temporarily impaired, including for equity securities, if the market value is below its cost for an extended period of time with low expectation of recovery or, for debt securities, when it is probable that the contractual interest and principal will not be collected. The debt securities are monitored for changes in credit ratings because adverse changes in credit ratings could indicate a change in the estimated cash flows of the underlying collateral or issuer. As of December 31, 2008, the unrealized losses associated with securities that management has the ability and intent to hold until maturity or market recovery were not considered to be other than temporary, because the unrealized losses were related to changes in interest rates and did not affect the expected cash flows of the underlying collateral or issuer. As of December 31, 2007, there were no unrealized losses associated with securities.

Goodwill. First Priority recognizes goodwill in accordance with the purchase method of accounting. Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired. 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, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company employs general industry practices in evaluating the fair value of its goodwill. Any impairment loss related to goodwill and other intangible assets is reflected as other non-interest expense in the statement of income in the period in which the impairment is determined.

Deferred Income Taxes. First Priority provides for deferred income taxes on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and net operating loss carryforwards and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Recently Issued Accounting Standards

Refer to Note 1 of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting standards.

17

Results of Operations

Income Statement Review

The Company’s net loss is affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid 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, primarily income from wealth management services and also fees and other charges to our banking customers; (4) non-interest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes, when applicable. Each of these major elements is reviewed in more detail in the following discussion.

Summary

For the year ended December 31, 2008, First Priority reported a net loss of $3.35 million, or $1.14 per basic and diluted share based on average shares outstanding of 2,940,040, compared to a net loss of $2.38 million, or $1.13 per basic and diluted share for the year ended December 31, 2007 based on average shares of 2,107,500. The increase in average shares in the current year from the prior year resulted from the issuance of 976,137 shares for the acquisition of Prestige on February 29, 2008 and the issuance of 39,292 shares related to convertible debentures on August 1, 2008. The consolidated operating results of First Priority include the acquisition of Prestige beginning March 1, 2008. The net loss for the year ended December 31, 2006 was $2.44 million, or $1.16 per basic and diluted share, based on averages shares of 2,107,500.

Total revenue for the year ended December 31, 2008 was $4.35 million, compared to $3.04 million in 2007, as net interest income in 2008 was $3.98 million and non-interest income was $371 thousand. The provision for loan losses was $588 thousand in 2008 compared to $421 thousand in the prior year while operating expenses totaled $7.12 million in the current year compared to $4.99 million in 2007. Total revenue for 2006 was $1.76 million offset by a provision for loan losses of $632 thousand and operating expenses of $3.56 million.

The incremental loss in 2008 of $978 thousand, when compared to 2007, resulted from an increase in operating expenses of $2.1 million, partially offset by an increase in total revenue of $1.3 million between these periods. Although the acquisition of Prestige significantly strengthened the Bank’s capital position and broadened its funding capabilities, the acquisition had a negative impact on operating results in 2008 as Prestige, a newly formed de novo bank, was still in the early stage of its development. Incremental direct operating expenses of approximately $1.18 million, including $72 thousand of one time merger integration costs, are included in First Priority’s 2008 results, related to the acquisition of Prestige, which was included in the Company’s ongoing financial results beginning March 1, 2008. In addition, the current year also includes incremental costs related to business development efforts as well as the infrastructure necessary to support loan and deposit growth achieved by the Bank during 2008.

Net interest margin averaged 2.33% during 2008 compared to 2.63% in 2007. Total average earning assets increased $65.3 million to $170.7 million in 2008 compared to $105.4 million for 2007 while average total interest bearing liabilities increased $60.6 million to $145.8 million in the current year compared to $85.2 million in the prior year. At the same time, however, deteriorating economic conditions experienced during 2008 were very challenging for all banks as credit market dysfunction and competition for deposits adversely impacted the Bank’s cost of funds and net interest margin.

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The recorded net loss for 2007 was relatively constant in comparison to 2006 results. Net interest income, however, increased $1.29 million, or 87.5%, in 2007 to $2.77 million from $1.48 million in 2006. Offsetting the positive impact of the increase in net interest income, operating expenses increased $1.43 million, or 40.2%, between the same periods. Included in these reported losses for the years ended December 31, 2007 and 2006 are expenses related to the reorganization of First Priority Bank into a holding company form of ownership totaling $95 thousand and $12 thousand, respectively, and expenses related to the opening of the Wyomissing office of $43 thousand and $11 thousand, respectively. Additionally, the Company incurred costs in 2007 associated with the recruitment and expansion of the lending staff of $116 thousand and legal and accounting costs incurred to explore potential opportunities to expand and diversify First Priority’s revenue base totaling $62 thousand.

Net Interest Income

First Priority’s primary source of revenue is net interest income. Net interest income is determined by the 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 the Company is affected by the rate 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.

Net interest income increased 43.5%, or $1.2 million, in 2008 to $3.98 million from $2.77 million in 2007. The increase in net interest income resulted from growth of interest earning assets of 62.0% from $105.4 million in 2007 to $170.7 million in 2008, primarily loans. In order to fund the growth in assets, average interest bearing liabilities increased $60.6 million, or 71.1% in 2008 to $145.8 million from $85.2 million in 2007. Partially offsetting the positive impact resulting from the growth in balances; however, is a decline in net interest margin from 2.63% to 2.33% between these same periods caused by the deteriorating economic conditions and increased deposit competition among banks as the Federal Reserve lowered short-term interest rates.

In 2007, First Priority’s net interest income increased $1.29 million to $2.77 million from $1.48 million for the same period in 2006. The increase in net interest income was primarily due to the growth of interest earning assets of 131% from $45.7 million in 2006 to $105.4 million in 2007, due to growth of the loan portfolio. Average interest bearing liabilities increased $58.7 million to $85.2 million in 2007 from $26.5 million in 2006.

The following table sets forth, for the years ended December 31, 2008, 2007, and 2006 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. There was one non-accrual loan relationship during 2008, which totaled $709 thousand at December 31, 2008 and averaged $710 thousand for the year. During 2008, interest accrued on this non-accruing relationship but not recognized as interest income totaled $61 thousand.

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Average Balances, Income and Expenses, and Rates

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

As mentioned above, total earning assets increased $65.3 million in 2008 compared to the prior year, driven by an increase in average loans of $67.1 million, or 90.6%. Funding for the growth in loans was provided by an increase in non-interest bearing deposits of $2.9 million, growth of interest bearing liabilities of $60.5 million, comprised primarily of an increase in time deposits of $53.6 million and borrowed funds of $9.2 million, and an increase in average equity of $3.4 million, primarily due to the acquisition of Prestige.

Net interest margin averaged 2.33% in 2008, a decline of 30 basis points from 2.63% in 2007. Short-term interest rates, as measured by the overnight federal funds rate determined by the Federal Open Market Committee, averaged 5.05% during 2007. This rate, however, declined to only 25 basis points by the end of 2008, creating an average for 2008 of 2.09%, or a decline of 296 basis points between the two years. The average yield on First Priority’s earning assets declined 114 basis points from 6.70% in 2007 to 5.56% in 2008, as the yield on loans decreased 143 basis points and the yield on investments declined 131 basis points. The rate on the Bank’s interest bearing liabilities declined 126 basis points during this same time, which resulted in an increase in the net interest spread of 12 basis points to 1.78% for 2007, compared to 1.66% for 2008. The increase in net interest spread is due to additional volume of loans which generally earn a higher average rate of interest than investments or overnight funds. However, since a portion of the Bank’s earning assets are funded by equity and other non-interest bearing balances, which are not sensitive to interest rate changes, the negative impact to both net interest income and net interest margin is larger when rates decline, since the reduction of interest income on earning assets will be higher than the reduction of interest expense on interest-bearing liabilities based on the proportionate balances within each category.

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In 2007, net interest margin of 2.63% declined 61 basis points from 3.24% in 2006. This decline was primarily attributable to the growth achieved in earning assets, primarily loans, which was funded by higher costing deposit accounts, and the competitive and market pressures on the overall deposit rate structure. As the balance sheet grew, the overall positive impact on net interest margin of equity and other non-interest bearing funds became smaller. The yield on earning assets increased 58 basis points from 6.12% in 2006 to 6.70% in 2007 which is related to the growth within the loan portfolio. Average loans increased by $52.9 million from $21.2 million in 2006 to $74.1 million in 2007 with funding to support this growth primarily provided through growth in higher costing money market accounts of $22.4 million and growth in time deposit balances of $36.4 million in 2007 when compared to the prior year. Net interest spread was 1.66% for 2007, compared to 1.15% for 2006. The increase in net interest spread is due to additional volume of loans which generally earn a higher average rate of interest than other types of earning assets.

Analysis of Changes in Net Interest Income

Net interest income also can 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, total net interest income increased $1.21 million in 2008 compared to 2007, of which incremental growth of balances accounted for an increase of $1.68 million with an offsetting decline in net interest income related to changes in the rate structure of $473 thousand. The increased volume of earning assets provided an additional $4.16 million in interest income, primarily related to loan growth, while increased deposits to fund that growth resulted in higher interest expense of $2.48 million when comparing 2008 to 2007. Changes related to lower yields on interest earning assets had a negative impact of $1.74 million on net interest income while lower rates on interest-bearing liabilities had an impact of reducing interest expense by $1.26 million for these same periods.

When comparing net interest income in 2007 to 2006, the increase of $1.29 million is almost entirely due to changes related to volume. Higher levels of earning asset balances provided an additional $4.25 million in interest income, primarily related to loan growth, while increased deposits to fund that growth resulted in higher interest expense of $2.99 million. Changes in rate structure had a positive impact on net interest income of approximately $33 thousand for these same periods.

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The following table sets forth the effect which varying levels of interest-earning assets, interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.

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

Provision for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses will be 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 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 revisions as more information becomes available.

At the end of each quarter or more often, if necessary, First Priority analyzes the collectibility 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 $588 thousand, $421 thousand and $632 thousand for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, one loan relationship was on non-accrual with an outstanding balance of $709 thousand. The increase in the provision of $167 thousand for 2008 compared to the prior year is due to additional loan volume between the periods and an additional provision in 2008 related to the aforementioned loan relationship placed on non-accrual status.

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During 2007, First Priority adopted a quantitative and qualitative method to allocating its allowance to the various loan categories based on specific criteria and employed a similar methodology in determining the provision. The reduction in the provision for loan losses in 2007 when compared to 2006 was primarily due to the loan portfolio mix and the type of loans booked during 2007 when applied to this qualitative and quantitative methodology in determining the provision. Of the $54.8 million net increase in loans during 2007, 60% of this increase was secured primarily by real estate, including residential mortgages, home equity loans and commercial real estate, none of which would be considered sub-prime loans. Net loan growth during 2006 was $50.3 million.

The allowance as a percentage of loans was 1.03% at December 31, 2008 compared to 1.00% at December 31, 2007. Management continues to review and evaluate the allowance for loan losses based on the performance of the loan portfolio.

Non-Interest Income

Non-interest income totaled $371 thousand in 2008 compared to $265 thousand for 2007 and $278 thousand recorded for 2006. 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, and other fees which the Bank collects from its banking customers.

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

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Non-Interest Expenses

Non-interest expenses were $7.12 million in 2008 compared to $4.99 million in 2007 and $3.56 million in 2006. The following table sets forth information related to the various components of non-interest expenses for each respective period.

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

Non-interest expenses increased $2.12 million, or 42.5%, in 2008 compared to 2007 which includes incremental direct operating expenses of approximately $1.18 million, including $72 thousand of one time merger integration costs, related to the acquisition of Prestige, which was included in the Company’s ongoing financial results beginning March 1, 2008. In addition, the current year also includes incremental costs related to business development efforts as well as the infrastructure necessary to support loan and deposit growth achieved by the Bank during 2008.

Salaries and employee benefits totaled $4.75 million for 2008 compared to $3.24 million in 2007, an increase of $1.51 million, or 46.6%. This increase reflects an incremental $760 thousand related to acquisition of Prestige and additional costs for business development efforts and to support loan and deposit growth generated during 2008.

Occupancy and equipment expenses were $711 thousand in 2008 compared to $412 thousand for the prior year, an increase of $299 thousand, or 72.6%, entirely related to the two additional offices in Newtown and Plumstead through Prestige.

Data processing expenses increased by $113 thousand, or 48.5%, in 2008 to $346 thousand compared to $233 thousand for the same period in 2007, related to the increased cost of outsourced processing resulting from increased banking customer activity.

Professional fees decreased $132 thousand, or 25.0%, to $395 thousand in 2008 from $527 thousand in the prior year. 2007 included one-time human resource consulting and search fees of $119 thousand, legal fees related to the formation of the bank holding company of $95 thousand, and legal and accounting costs of $62 thousand to explore opportunities to expand and diversify the Company’s revenue. 2008 includes $51 thousand in incremental legal and audit costs related to becoming a public company, $24 thousand in legal costs related to non-accrual loans, an increase of $30 thousand between the two periods related to other miscellaneous corporate legal costs, and $25 thousand in consulting fees related to strategic initiatives.

Direct marketing, advertising and business development costs increased $65 thousand, from $128 thousand to $193 thousand, when comparing 2007 and 2008, respectively, primarily related to additional advertising costs to promote deposit products and business promotion expense to develop the First Priority name within the Bucks County market.

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FDIC insurance assessment expense increased $51 thousand, or 78.5%, from $65 thousand to $116 thousand when comparing 2008 to the prior year. This assessment is calculated based on the amount and type of deposits an institution maintains. The increase in cost is attributed to First Priority’s growth in its deposit base.

Capital stock tax expense was $89 thousand in 2008 compared to $46 thousand in 2007. This tax is calculated based on the reported level of equity, adjusted for exclusions and other adjustments.

Merger integration costs, totaling $72 thousand, were recorded in 2008 primarily related to one-time system conversion costs to integrate Prestige onto First Priority’s core banking system.

All other expenses increased $99 thousand to $439 thousand for the year ended December 31, 2008 from $340 thousand for the same period in 2007, an increase of 29.1%. Contributing to this increase are additional expenses related to filing requirements of the Securities and Exchange Commission as well as increased loan origination expenses, correspondent bank charges and other administrative expenses such as postage, telephone, and travel and entertainment expenses.

When comparing 2007 to 2006, non-interest expenses increased $1.43 million, or 40.2%, which includes significant increases in staffing costs and professional fees, costs incurred related to the reorganization of First Priority Bank into a holding company form of ownership, expenses related to the opening of the Wyomissing office, and costs incurred to explore potential opportunities to expand and diversify the Company’s revenue base.

Salaries and employee benefits increased $818 thousand, or 33.7% in 2007 compared to 2006, reflecting additional staff during the Bank’s initial years of operations to support asset growth, along with the opening of the Wyomissing office. Occupancy and equipment expenses increased $78 thousand, or 23.4%, due to the incremental lease cost and furniture and equipment related to the Wyomissing office. Data processing expenses increased by $71 thousand, or 43.8%, in 2007 compared to 2006 primarily related to higher outsourced processing costs. Professional fees increased $305 thousand, or 137.4%, between these same periods, including human resource consulting and search fees of $116 thousand, legal fees to form the bank holding company of $83 thousand, legal and accounting costs to explore opportunities to expand and diversify the Company’s revenue base totaling $62 thousand, and an increase in other audit and accounting fees of $46 thousand. Marketing, advertising and business development costs decreased $76 thousand in 2007, primarily related to marketing costs incurred in 2006 to promote the initial opening of the Bank.

All other expenses increased $236 thousand in 2007 compared to 2006. Contributing to this increase are additional expenses related to regulatory agency assessments and filing fees totaling $82 thousand, loan and deposit generation expenses of $51 thousand, Pennsylvania bank shares tax expense totaling $39 thousand, and other administrative expenses such as supplies, contributions and memberships totaling $62 thousand.

Management continues to focus on the importance of expense awareness and controlling operating expenses in order to achieve profitability; however, management remains committed to retaining key asset generation and operational staff and maintaining excellent customer service. Proper implementation and management of these items will assist in achieving our goals of continued asset growth, efficient operations, and the achievement of profitability.

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Provision for Income Taxes

There is no provision for income taxes for each of the years ended December 31, 2008, 2007, or 2006 due to the net operating losses incurred. Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. To satisfy the “more likely than not” criteria required to reduce the valuation allowance, First Priority would need to become profitable and demonstrate that a consistent positive trend of profitability is sustainable.

The Company has net operating loss (“NOL”) carryforwards available for federal income tax purposes of approximately $7.2 million at December 31, 2008, which expire in 2025 through 2028.

Financial Condition

Balance Sheet Review

Overview

As of December 31, 2008, First Priority had total assets of $214.7 million, an increase of 41.6% over total assets of $151.6 million on December 31, 2007. Total assets at December 31, 2008, consisted primarily of loans outstanding of $171.7 million and investment securities available for sale of $37.8 million. At December 31, 2007, total assets consisted principally of loans outstanding of $105.2 million and investment securities available for sale of $45.0 million. The Company maintained restricted investments in bank stocks of $1.74 million at December 31, 2008, consisting primarily of stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) calculated based on a formula in correlation to the Bank’s outstanding debt to the FHLB. Premises and equipment were $1.31 million, an increase of $737 thousand during 2008, principally resulting from the addition of the two Prestige branches. Goodwill of $1.19 million was also recorded in connection with the acquisition during the first quarter of 2008.

Total deposits at December 31, 2008, were $169.5 million compared to $116.3 million at December 31, 2007, an increase of $53.2 million or 45.7%. Deposits consisted principally of money market accounts and certificates of deposit, which at December 31, 2008 were $35.9 million and $120.6 million, respectively, compared to $45.4 million and $62.6 million at December 31, 2007, respectively. Short-term borrowings were $13.2 million at December 31, 2008 compared to $18.1 million at December 31, 2007 while long-term debt was $8.0 million at the end of 2008 compared to $390 thousand at December 31, 2007.

Other liabilities were $2.7 million as of December 31, 2008 compared to $642 thousand at December 31, 2007. The increase of $2.1 million was due to $2.0 million of investment securities purchased with a trade date prior to December 31, 2008 which did not settle until January 2009.

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Investments

On December 31, 2008, and 2007, First Priority’s investment securities portfolio of $37.8 million, and $45.0 million, respectively, represented approximately 18% and 30%, respectively, of total interest-earning assets. As of December 31, 2008, First Priority was invested in U.S. Government agency securities, Federal agency mortgage-backed securities and corporate bonds, all of which were rated AAA, were highly marketable, and were classified as available for sale with an amortized cost of $37.3 million for an unrealized gain of $457 thousand. As of December 31, 2007, all investments were in U.S. Government agency securities and Federal agency mortgage-backed securities, were rated AAA, were highly marketable, and were classified as available for sale with an amortized cost of $45.0 million for an unrealized gain of $11 thousand. At December 31, 2007, First Priority increased its investment portfolio by $18.1 million in short-term U.S. Government agency securities as part of a tax planning program instituted to lower the impact of the Pennsylvania Bank Shares tax. These investments were funded by incremental short-term borrowings.

The following table sets forth information about the maturities and weighted yields on First Priority’s investment securities as of December 31, 2008.

	As of December 31, 2008
						After one but					After five but
	Within 1 year					within five years					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	$	15,026		3.32	%	$	6,068		3.15	%	$	—		—		$	—		—		$	21,094		3.27	%
Mortgage-backed securities		—		—			—		—			957		4.75	%		14,745		5.06	%		15,702		5.04	%
Other securities		—		—			963		4.00	%		—		—			—		—			963		4.00	%
Total investments available for sale	$	15,026		3.32	%	$	7,031		3.27	%	$	957		4.75	%	$	14,745		5.06	%	$	37,759		4.03	%

The amortized cost and fair value of First Priority’s investments (all available for sale) as of each of the three years ended December 31, 2008, 2007 and 2006 are shown in the following table:

	As of December 31,
	2008				2007				2006
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
	(Dollars in thousands)
U.S. Government agency securities	$	21,000	$	21,094	$	40,995	$	40,998	$	52,993	$	52,994
Mortgage-backed securities		15,302		15,702		4,020		4,028		—		—
Other securities		1,000		963		—		—		—		—
Total investments available for sale	$	37,302	$	37,759	$	45,015	$	45,026	$	52,993	$	52,994

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Restricted investments in bank stocks

Restricted investments in bank stocks represent required investments in the common stock of correspondent banks. As of each of the two years ended December 31, 2008 the Bank had an investment of $50 thousand of the common stock of Atlantic Central Bankers’ Bank, Camp Hill, Pennsylvania, which is carried at cost. In addition, the Bank is also required to maintain an investment in the stock of the FHLB according to a predetermined formula as set forth in the FHLB’s Capital Plan. This required investment in FHLB stock fluctuates in proportion to the Bank’s outstanding debt to the FHLB and is also carried at cost. As debt is repaid, stock held in excess of the minimum requirement is periodically adjusted and refunded. The Bank became a member of the FHLB in March 2008. At December 31, 2008, the investment in FHLB stock totaled $1.7 million. In December 2008, the FHLB notified member banks that it was suspending dividend payments and the repurchase of capital stock. See Note 1 of the Notes to Consolidated Financial Statements — “Restricted Investments in Bank Stocks.”

Loans

First Priority’s loan portfolio is the primary component of its assets. At December 31, 2008, total loans were $171.7 million, an increase of $66.5 million, or 63.2%, from $105.2 million at December 31, 2007. Included in the loan balances at December 31, 2007 was a short-term commercial loan made to Prestige which was used for that bank’s year-end tax planning program. This loan was paid off in early January, 2008. The overall growth in the loan portfolio in 2008 is partially due to the acquisition of Prestige, which had $5.8 million in loans at February 29, 2008, the effective date of the acquisition.

The following table sets forth the classification of First Priority’s loan portfolio for each of the four years ended December 31, 2008.

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

Commercial loans are made for the purpose of providing working capital, financing the purchase of equipment or inventory, and for other business purposes. Real estate loans consist of loans secured by commercial or residential real property and loans for the construction of commercial or residential property. Consumer loans are made for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property.

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Due to the length of time First Priority’s portfolio has existed, the current mix of the loan portfolio may not be indicative of the ongoing portfolio mix. First Priority does not generally originate traditional long-term residential mortgages. Generally, First Priority limits the loan-to-value ratio on loans it makes to 80% and attempts to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral.

Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience of such loans is typically 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. In addition, many of First Priority’s commercial real estate loans are secured by owner-occupied property with personal guarantees for the debt.

The information in the following tables is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

The following tables summarize the loan maturity distribution by type and related interest rate characteristics as of December 31, 2008 and 2007.

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

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

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 independent credit department approval for the majority of new loan balances. The Credit Policy Committee is comprised of senior members of management who oversee the loan approval process to monitor that proper standards are maintained.

The accrual of interest on loans is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on non-accrual loans is generally either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

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The following table summarizes loan delinquency and other non-performing assets at the dates indicated.

	December 31,
	2008			2007			2006			2005
	(Dollars in thousands)
Loans past due 90 days or more and still accruing interest	$	—		$	—		$	—		$	—
Non-accrual loans		709			—			—			—
Total non-performing loans (1)		709			—			—			—
Other real estate owned		—			—			—			—
Total non-performing assets (2)	$	709		$	—		$	—		$	—
Non-performing loans as a percentage of total loans		0.41	%		—			—			—
Non-performing assets as a percentage of total assets		0.33	%		—			—			—
Ratio of allowance to non-performing loans at end of period		251	%		—			—			—
Ratio of allowance to non-performing assets at end of period		251	%		—			—			—
Allowance for loan losses as a percentage of total loans		1.03	%		1.00	%		1.26	%		1.80	%

(1)	Non-performing loans are comprised of (i) loans that have a non-accrual status; (ii) accruing loans that are 90 days or more past due and (iii) restructured loans.
(2)	Non-performing assets are comprised of non-performing loans and other real estate owned (assets acquired in foreclosure).

Asset quality remains acceptable compared to the industry’s averages. Non-accrual loans totaled $709 thousand at December 31, 2008 which represents 0.41% of total loans outstanding. The balance of non-accrual loans is the result of a single loan relationship which was categorized as impaired during the first quarter of 2008. The Bank’s management continues to monitor and explore potential options and remedial actions to recover the Bank’s investment in these loans. According to policy, the Bank is required to maintain a specific reserve for impaired loans. See the Allowance for Loan Losses section below for further information. There were no restructured loans or loans past due 90 days or more at December 31, 2008. The Bank’s total delinquency amount, comprised of loans past due 30 days or more and still accruing of $1.4 million plus the balance of non-accrual loans, totaled $2.1 million, or 1.22% of total loans outstanding as of December 31, 2008. As of December 31, 2007, 2006, or 2005, there were no charged-off loans, non-accrual loans, restructured loans, or loans past due 90 days or more.

Allowance for loan losses

The allowance for loan losses represents an amount that First Priority believes will be adequate to absorb estimated probable credit losses on existing 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 First Priority Bank, by an external independent loan review function, and 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 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.

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During 2007, First Priority adopted 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. The Bank is a relatively new banking organization with little operating history and relatively new credits; accordingly, at this time, a relatively larger portion of the allowance is unallocated to specific loans or loan categories.

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 impaired, 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.

As of December 31, 2008, the Bank had one non-accrual loan relationship totaling $709 thousand, which represents 0.41% of total loans outstanding and 0.33% of total assets, and included a specific reserve within the allowance for loan losses of $70 thousand. Loans charged off during 2008 were $16 thousand, comprised of unpaid interest accrued in prior years for loans placed on non-accrual status during the current year, according to the Bank’s policy. The Bank’s policy for interest income recognition on nonaccrual loans is to recognize income under a cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. The Bank will not recognize income if these factors do not exist. During 2008, interest accrued on non-accruing loans and not recognized as interest income totaled $61 thousand.

Based on the information available as of December 31, 2008, management believes that the allowance for loan losses of $1.78 million is adequate.

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The following table sets forth a summary of the changes in the allowance for loan losses for the periods indicated:

										Period from
										May 25, 2005
										(date of
	For the year ended									inception) to
	December 31,									December 31,
	2008			2007			2006			2005
	(Dollars in thousands)
Balance at the beginning of period	$	1,055		$	634		$	10		$	—
Charge-offs:
Commercial		1			—			—			—
Commercial real estate		15			—			—			—
Net loans charged off		16			—			—			—
Acquired reserve in business combination		150			—			—			—
Provision charged to operations		588			421			632			2
Balance at end of period	$	1,777		$	1,055		$	634		$	2
Average loans (1)	$	141,293		$	74,149		$	21,197		$	10
Ratio of net charge-offs during period to average loans outstanding during period (annualized) (1)		0.01	%		—			—			—
Allowance for loan losses as a percentage of total loans		1.03	%		1.00	%		1.26	%		1.80	%

(1) Includes non-accrual loans.

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 then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.

	As of December 31,
	2008					2007					2006					2005
	(Dollars in thousands)
			Percent					Percent					Percent					Percent
			of total					of total					of total					of total
	Amount		loans (1)			Amount		loans (1)			Amount		loans (1)			Amount		loans (1)
Commercial	$	572		28	%	$	94		32	%	$	106		28	%	$	—		—
Commercial Real Estate		263		29	%		81		23	%		156		25	%		—		—
Residential Real Estate		179		23	%		43		23	%		18		18	%		—		—
Consumer		70		20	%		39		22	%		85		29	%		—		100	%
Total Allocated		1,084		100	%		257		100	%		365		100	%		—		100	%
Unallocated		693					798					269					2
Total	$	1,777				$	1,055				$	634				$	2

(1) Represents loans outstanding in each category, as of the date shown, as a percentage of total loans outstanding.

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Loan Concentrations

First Priority’s loans consist of credits to borrowers spread over a broad range of industrial classifications. First Priority’s largest concentration of loans is to lessors of residential buildings and dwellings. These loans totaled $23.6 million at December 31, 2008, or 13.7% of the total loans outstanding. These credits were subject to First Priority’s normal underwriting standards and did not present more than the normal amount of risk assumed by First Priority’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. First Priority has no other concentration of loans which exceeds 10% of total loans.

Deposits

First Priority’s primary source of funds for loans and investments is its deposits. First Priority attracts deposits by offering competitive interest rates on all deposit products. First Priority supplements deposits raised in the local market with brokered certificates of deposit. At December 31, 2008 and 2007, First Priority had $32.6 million and $9.1 million, respectively, in brokered certificates of deposits. The guidelines governing First Priority’s participation in brokered CD programs are included in its Asset Liability Management Policy, which is reviewed, revised and approved annually by the asset liability management committee and the board of directors.

The following table sets forth the average balance of First Priority’s deposits and the average rates paid on deposits for the years ended December 31, 2008, 2007, and 2006.

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

Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for First Priority’s loan portfolio and other interest-earning assets. First Priority’s core deposits were $138.4 million and $94.7 million as of December 31, 2008, and December 31, 2007, respectively.

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The maturity distribution of time deposits of $100,000 or more as of December 31, 2008, is as follows:

	December 31,
	2008
	(Dollars in
	thousands)
Three Months or Less	$	7,452
Over Three Through Six Months		3,478
Over Six Through Twelve Months		11,077
Over Twelve Months		9,040
TOTAL	$	31,047

Other Interest-Bearing Liabilities

Short-Term Borrowed Funds

The Company’s short-term borrowings generally consist of Federal funds purchased, securities sold under repurchase agreements and other secured borrowings from correspondent banks. These borrowings generally represent overnight borrowings.

The following table outlines First Priority’s various sources of short-term borrowed funds at or for each of the years ended December 31, 2008, 2007, and 2006. The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at any month ended during each of the periods shown.

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

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At December 31, 2007, First Priority used short-term borrowed funds to purchase $18.1 million of short-term U.S. Government securities as part of a tax-planning strategy to reduce the Pennsylvania bank shares tax.

As of December 31, 2008 and 2007, the Company had a borrowing facility with a correspondent bank totaling $10 million, of which $2 million is available unsecured. The remaining $8 million is a secured line of credit with security provided by a pledge of Company investment assets. As of December 31, 2007, the Company also had a borrowing facility for $20 million which would be secured by a pledge of Company investment assets. All secured facilities are available for short-term limited purpose usage.

In addition, as of December 31, 2008, the Bank’s maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh (“FHLB”), calculated using a pre-determined formula based on outstanding balances of collateral eligible loans and investments, was $112 million. FHLB advances outstanding at this same date were $20.9 million. As a relatively new banking organization, however, the Bank is required to deliver physical collateral to support any borrowings from the FHLB. Based on margin requirements and the level of collateral available to satisfy delivery requirements, the Bank estimates its excess borrowing capacity with the FHLB to be approximately $50 million at December 31, 2008.

Long-Term Debt

Long-term debt at December 31, 2008 consisted of FHLB advances totaling $8.0 million with a weighted average interest rate of 4.08% and a weighted average life of 3.7 years. First Priority Bank became a member of FHLB in March 2008. The advances are collateralized by $1.7 million of restricted investments in FHLB bank stock, certain residential mortgage loans, and mortgage backed securities. Advances are made pursuant to several different credit programs offered from time to time by the FHLB. The average balance outstanding of the FHLB borrowings was $4.7 million for the year ended December 31, 2008 with an average rate of 4.13%. The maximum month end balance of these borrowings during 2008 was $8.0 million.

As of December 31, 2007, long-term debt of $390 thousand consisted of convertible subordinated debentures (“Debentures”) issued in June and July 2007. The Company issued the 5.30% debentures due June 21, 2012, to provide operating capital within the parent company. The Company’s directors and management were the purchasers of the Debentures. The Notes provided that the Debentures would automatically convert into shares of the Company’s common stock, $1.00 par value per share (“Common Stock”), immediately prior to the consummation of a Qualified Offering, as defined by the Debenture. In addition, both payee and maker of the Debenture had the right to convert the Debentures into Common Stock after one year from issuance. Effective August 1, 2008, the Company elected to convert the $403 thousand outstanding balance of Debentures, including accrued interest to date, into 39,292 shares of the Company’s Common Stock, based on the conversion price of $10.25 per share.

The average balance outstanding of these Debentures was $228 thousand with an average rate of 5.30%, and $201 thousand with an average rate of 5.30%, for the years ended December 31, 2008 and 2007, respectively. The maximum month end balance of these debentures during 2007 was $403 thousand, which includes principal plus capitalized interest.

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Capital Resources

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 well as 421,500 warrants to purchase one share of common stock at a price of $12.50 which expire five years from the date of issuance. As of February 29, 2008, in connection with the acquisition of Prestige, an additional 976,137 shares of common stock, and warrants to purchase 195,227 shares of its common stock at a price of $12.50 per share, which expire in October of 2012, were issued resulting in additional equity of $7.4 million. Also, as described in the “Long-Term Debt” section above, effective August 1, 2008, 39,292 shares of common stock were issued in regards to the convertible debentures which the Company elected to convert, resulting in additional equity of $403 thousand.

The Pennsylvania Department of Banking, in issuing its charter to the Bank, required an allocation of its initial capital to an Expense Fund in the amount of $750 thousand to defray anticipated initial losses. Accordingly, $750 thousand of the Bank’s surplus is reserved for this purpose until the Bank becomes profitable.

Total shareholders’ equity amounted to $20.3 million and $15.3 million on December 31, 2008 and 2007, respectively. The increase of $5.0 million during 2008 resulted from the additional equity described above of $7.4 million due to the acquisition and $403 thousand from the convertible debt, offset by the net loss recorded of $3.4 million during the year. The net unrealized gain on securities available for sale, recorded to reflect the aggregate net change in the fair value of available for sale securities increased equity by $446 thousand during the year to $457 thousand at December 31, 2008.

First Priority uses securities available for sale to pledge as collateral to secure certain deposits and for other purposes required or permitted by law, including collateral for certain short-term borrowings. See the “Liquidity” section for a more detailed discussion on available liquidity sources. First Priority currently expects that it will have sufficient cash flow to fund ongoing operations.

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, 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.

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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 which is known as the Tier 1 leverage ratio. In addition, The Federal Deposit Insurance Corporation required the Bank to maintain a ratio of Tier 1 leverage capital to total assets of at least 8% during the first three years of operation. As of November 2008, upon completion of the Bank’s initial three years of operations, the Bank’s Tier 1 leverage ratio requirement became 5% in order to be considered well capitalized as required under prompt corrective action provisions.

Under the capital guidelines, First Priority Bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, First Priority Bank must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,” First Priority Bank must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

Brokered certificates of deposits, which are used by the Bank as a funding alternative, were $32.6 million, and $9.1 million, at December 31, 2008 and 2007, respectively. The FDIC places restrictions on banks in regards to issuing brokered deposits based on the bank’s level of capital. 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 was formed May 11, 2007 under an agreement of reorganization and merger which provided that First Priority Bank become a wholly-owned subsidiary of First Priority. The following table sets forth the Bank’s capital ratios for each of the three years ended December 31, 2008. For all periods, First Priority Bank was considered “well-capitalized” and First Priority met or exceeded its applicable regulatory requirements.

	To Be
	Considered			As of			As of			As of
	“Well-			December 31,			December 31,			December 31,
	Capitalized” (1)			2008 (2)			2007			2006
First Priority Bank:
Total risk-based capital		10.00	%		12.56	%		16.01	%		31.20	%
Tier 1 risk-based capital		6.00	%		11.45	%		14.98	%		30.12	%
Tier 1 leverage capital (1)		5.00	%		8.93	%		12.30	%		24.08	%

(1)

The Federal Deposit Insurance Corporation required the Bank to maintain a ratio of Tier 1 leverage capital to total assets of at least 8% during the first three years of operation. As of November 2008, upon completion of the Bank’s initial three years of operations, the Bank’s Tier 1 leverage ratio requirement became 5% in order to be considered well capitalized under prompt corrective action provisions.

(2)

Does not give effect to the incremental capital issued on February 20, 2009 pursuant to the TARP Capital Purchase Program totaling $4.6 million. See the “Recent Developments” section for more information.

First Priority is exempt from the risk-based capital guidelines as it qualifies for an exemption under the provisions of the “Small Bank Holding Company Policy Statement” of the Board of Governors of the Federal Reserve System which exempts holding companies with total assets of less than $500 million that meet certain eligibility criteria from the risk-based capital requirements.

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The decrease in First Priority Bank’s capital ratios from December 31, 2007, to December 31, 2008, is primarily due to the growth of the balance sheet resulting in increased risk-weighted assets and average total assets at December 31, 2008.

At the close of business on February 29, 2008, First Priority consummated its acquisition of Prestige, as provided by the Agreement and Plan of Merger dated October 19, 2007. The acquisition resulted in incremental capital for First Priority, after merger costs and other adjustments, of $7.4 million, which was used for general corporate purposes of First Priority Bank, including, among other things, to provide additional capital to support asset growth and the expansion of First Priority Bank’s market presence.

Since their inception, neither First Priority nor First Priority Bank has paid cash dividends on its common stock. 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 the FDIC and are payable only from the undivided profits of First Priority Bank, with the exception recently enacted by the Pennsylvania Department of Banking which will allow the Bank to pay dividends related to the issuance of preferred stock under the Treasury’s TARP Capital Purchase Program. Since the Bank has not yet achieved profitability; however, as of December 31, 2008, neither First Priority nor the Bank have undivided profits from which to pay cash dividends to the common shareholders.

In addition, the Purchase Agreement that First Priority executed on February 20, 2009 as part of the TARP Capital Purchase Program requires consent from the Treasury for payment of any dividends on common stock until the third anniversary from the date of issuance of the Series A and Series B Preferred Stock to the Treasury, unless the Series A and Series B preferred stock is redeemed in whole. After the third anniversary and prior to the tenth anniversary, the Treasury’s consent shall be required for any increase in aggregate of common dividends per share greater than 3% per annum.

Return on Average Equity and Assets

The following table shows the return on average assets (net income divided by total average assets), return on equity (net income divided by average equity), and the equity to assets ratio (average equity divided by total average assets) for each of the three years ended December 31, 2008 and for the period from May 25, 2005 (date of inception) to December 31, 2005.

										At or for the
										period from
										May 25, 2005
										(date of
	At or for the years ended									inception) to
	December 31,									December 31,
	2008			2007			2006			2005
Return on average assets		-1.92	%		-2.23	%		-5.21	%		-34.60	%
Return on average equity		-16.87	%		-14.40	%		-12.89	%		-35.99	%
Average equity to average assets ratio		11.40	%		15.46	%		40.45	%		96.13	%

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The ratios shown above reflect the results of First Priority during its initial years of operation. If First Priority reduces its reported net operating loss and moves closer to profitability, these ratios will become a more meaningful way to measure performance. During the periods stated, First Priority has experienced growth of its balance sheet, primarily due to the increase in the loan portfolio. The Company obtained an increase in its equity position through shares issued in the Prestige acquisition and due to the convertible debt, with a reduction in equity due to the current net loss position.

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 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 in 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 the 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.

As of December 31, 2008, 2007 and 2006, First Priority had issued commitments to extend credit of $36.6 million, $26.1 million, and $17.4 million, respectively, through various types of commercial and consumer lending arrangements, of which the majority is at variable rates of interest. First Priority believes that it has adequate sources of liquidity to fund commitments that may be drawn upon by borrowers. In addition, as of December 31, 2008, the Bank pledged investment securities with a market value of $252 thousand as collateral with a correspondent bank for a $199 thousand letter of credit issued on behalf of a customer of the Bank. This transaction is fully secured by the customer through a pledge of deposits.

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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.

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/or 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 strong 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 loan principal, maturities of investment securities and funds provided by operations. While scheduled loan payments and investment maturities are relatively predictable sources of funds, deposit flows and loan prepayments are far less predictable and are influenced by general interest rates, economic conditions and competition. First Priority measures and monitors its liquidity position on a frequent basis in order to better understand, predict and respond to balance sheet trends. The liquidity analysis encompasses a review of anticipated changes in loan balances, investments securities, core deposits and borrowed funds over a three month, six month and one year period.

As an integral part of its balance sheet management strategy, the Bank’s goal has been to establish off-balance sheet overnight borrowing facilities with correspondent banks to meet the short-term liquidity needs of its ongoing banking operations. This off-balance sheet borrowing capacity provides immediate availability for short-term funding requirements, and therefore, serves the same purpose as excess funding actually held on the balance sheet of the Company as overnight investments; however, does not typically have the same negative impact on current earnings due to the higher cost of obtaining those funds.

As of December 31, 2008, the Bank’s maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh (“FHLB”), calculated using a pre-determined formula based on outstanding balances of collateral eligible loans and investments, was $112 million. FHLB advances outstanding at this same date were $20.9 million. As a relatively new banking organization, however, the Bank is required to deliver physical collateral to support any borrowings from the FHLB. Based on margin requirements and the level of collateral available to satisfy delivery requirements, the Bank estimates its excess borrowing capacity with the FHLB to be approximately $50 million at December 31, 2008.

First Priority also maintains certain additional short-term borrowing facilities that can also be accessed for incremental funding. As of each of the three years ended December 31, 2008 the Company had a borrowing facility with a correspondent bank totaling $10 million, of which $2 million is available unsecured. The remaining $8 million is a secured line of credit with security provided by a pledge of Company investment assets. As of December 31, 2007, the Company also had a borrowing facility for $20 million which would be secured by a pledge of Company investment assets. All secured facilities are available for short-term limited purpose usage.

41

As of December 31, 2008 and 2007, First Priority’s on balance sheet liquid assets, consisting of cash and due from banks, interest bearing deposits of other banks, Federal funds sold and unencumbered short-term Federal agency discount notes, totaled $1.5 million, and $19.7 million, respectively, representing 0.7% and 13.07% of total assets.

Interest Rate Sensitivity

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. Interest rate risk addresses the potential adverse impact of interest rates movements on First Priority’s net interest income.

Market risk is the risk of loss from adverse changes in market prices and rates that principally arise from interest rate risk inherent in First Priority’s lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not normally arise in the normal course of First Priority’s business. First Priority actively monitors and manages its interest rate risk exposure.

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 repricing assets or liabilities, selling securities available for sale, or replacing an asset or liability at maturity. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the 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.

As of December 31, 2008, First Priority was liability sensitive over a one-year time frame. However, gap analysis is not a precise indicator of the interest sensitivity position. This 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. For example, assumptions are made concerning the repricing characteristics of deposit products with no contractual maturities. Net interest income 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.

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, or more frequently as needed. The ALCO has the responsibility for maintaining a level of interest rate risk exposures within board approved limits.

42

The following table sets forth information regarding First Priority’s interest rate sensitivity as of December 31, 2008, for each of the time intervals indicated. The information in the table may not be indicative of First Priority’s interest rate sensitivity position at other points in time. In addition, management makes assumptions concerning the repricing characteristics of deposit products with no contractual maturities and the maturity distribution indicated in the table may differ from the contractual maturities of interest-earning assets due to consideration of prepayment speeds under various interest rate change scenarios in the application of interest rate sensitivity methods described above.

Interest Rate Sensitivity Report
As of December 31, 2008
(Dollars in thousands)

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

Contractual Obligations

The Bank utilizes a variety of deposit products and short-term borrowings to supplement its supply of lendable funds, to assist in meeting deposit withdrawal requirements, and to fund growth of interest-earning assets in excess of traditional deposit growth. Brokered certificates of deposit, correspondent bank lines of credit, and repurchase agreements serve as the primary sources of such funds.

43

Obligations under non-cancelable operating lease agreements are payable over several years with the longest obligation expiring in 2027. Management does not believe that any existing non-cancelable operating lease agreements are likely to materially impact the Company’s financial condition or results of operations in an adverse way.

The following table provides payments due by period for obligations under long-term borrowings and operating lease obligations as of December 31, 2008.

	Payments Due by Period
			Over 1		Over 2		Over 3
	Within 1		through 2		through 3		through 5		Over 5
	Year		Years		Years		Years		Years		Total
	(Dollars in thousands)
Time deposits	$	86,219	$	10,220	$	16,447	$	7,756	$	—	$	120,642
Operating lease obligations		507		525		525		1,050		3,125		5,732
Long-term debt		—		—		—		8,000		—		8,000
Short-term borrowings		13,178		—		—		—		—		13,178
Accrued interest payable		1,020		—		—		—		—		1,020
Total	$	100,924	$	10,745	$	16,972	$	16,806	$	3,125	$	148,572

Recent Developments

De-registration as Public Company

On January 30, 2009, the Company filed a Form 15 with the Securities and Exchange Commission (“SEC”), “Certification and Notice of Termination of Registration under Section 12(g) of the Securities and Exchange Act of 1934 or Suspension of Duty to File Reports under Section 13 and 15(D) of the Securities and Exchange Act of 1934,” whereby First Priority Financial Corp. de-registered as a public filer and, therefore, eliminates ongoing future requirements to file reports with the SEC, on a prospective basis. This election is allowed by the SEC for a public company who became a public filer due to filing a registration statement to issue incremental shares if the Company’s total number of shareholders of record is less than 300 shareholders at the end of the year in which the registration statement was initially filed.

Issuance of Preferred Stock and Warrant — TARP Capital Purchase Program

On February 20, 2009, First Priority entered into a Letter Agreement with the Treasury (the “Purchase Agreement”) as part of the Treasury’s TARP Capital Purchase Program, pursuant to which the Company issued and sold, and the Treasury agreed to purchase, (i) 4,579 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $100.00 par value per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant) to purchase, on a net basis, up to 229 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $100 per share (the “Series B Preferred Stock”), with an exercise price of $100.00 per share, for an aggregate purchase price of $4.6 million in cash.

44

The Company entered into a side letter agreement with Treasury, dated February 20, 2009, which, among other things, clarified that to the extent the terms of any of the Purchase Agreement, the Warrant or the terms of the Series A Preferred Stock or the Series B Preferred Stock are inconsistent with the ARRA, as it may be amended from time to time, or any rule or regulation promulgated thereunder, the ARRA and such rules and regulations shall control. On February 20, 2009, the Treasury immediately exercised the Warrant, on a cashless basis, which resulted in the issuance of the 229 shares of the Series B Preferred Stock.

The transaction, which closed on February 20, 2009, resulted in additional Tier 1 Capital of $4.6 million. Participation in the TARP Capital Purchase Program is voluntary and benefits the Company based on the following:

• The incremental $4.6 million in capital immediately strengthens the Bank’s capital position and will support approximately $50 million of additional lending capacity.

• The cost of the capital, which carries a blended dividend rate of 5.45%, or a weighted average total cost of capital of 6.45% (assuming a five year amortization period for the warrant preferred), is very favorable compared to traditional market costs of similar instruments.

• The TARP capital is available at a time when there is limited or no availability of capital on the open market and provides additional capital to support the continued growth of the Company’s balance sheet.

The Series A Preferred Stock will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Series B Preferred Stock will pay cumulative dividends at a rate of 9% per annum. Both Series A and B 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 Preferred Stock, in whole or in part, at its liquidation preference plus accrued and unpaid dividends at any time as permitted by the ARRA and the rules and regulations promulgated thereunder. The Series B Preferred Stock may not be redeemed until all of the Series A Preferred Stock has been redeemed.

The Purchase Agreement, pursuant to which the preferred shares were sold, contains limitations on the payment of dividends on the common stock and on the Company’s ability to repurchase its common stock, and subjects the Company to certain of the executive compensation limitations included in EESA. As a condition to the closing of the transaction, each of the Company’s Senior Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”) executed a waiver (the “Waiver”) voluntarily waiving any claim against the Treasury or the Company for any changes to such Senior Executive Officer’s compensation or benefits that are required to comply with the regulation issued by the Treasury under the TARP Capital Purchase Plan and acknowledging that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements (including so-called “golden parachute” agreements) (collectively, “Benefit Plans”) as they relate to the period the Treasury holds any equity securities of the Company acquired through the TARP Capital Purchase Plan. The Company has also effected changes to its Benefits Plans as may be necessary to comply with the executive compensation provisions of EESA. These restrictions will cease when the Treasury ceases to own any debt or preferred securities of the Company acquired pursuant to the Purchase Agreement.

45

The description of the Purchase Agreement contained or incorporated herein is a summary and is qualified in its entirety by reference to the full text of the Securities Purchase Agreement attached as an exhibit hereto and incorporated herein by reference.

FDIC Adopts DIF Restoration Plan; Imposes Additional Emergency Assessment

On February 27, 2009, the Board of Directors of the FDIC adopted an interim (proposed) rule to impose an emergency one-time special assessment on all banks at a proposed rate of 20 basis points to restore the Deposit Insurance Fund (the “DIF”) to an acceptable level. Comments on the interim rule are due 30 days from date of issuance. This special assessment is in addition to a previously planned increase in premiums. In addition, the FDIC approved a DIF restoration plan which will further increase base assessment rates for banks in all risk categories beginning April 1, 2009, and adjusts premiums for new factors, including use of brokered deposits by “fast growing” banks and secured liabilities, including Federal Home Loan Bank advances. The potential incremental cost of the proposed special assessment combined with ongoing assessment rate increases, will exceed $400 thousand for First Priority Bank in 2009, based on deposit liabilities reported as of December 31, 2008.

46

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

First Priority is a smaller reporting company and therefore is not required to provide the information required by this item. However, First Priority has voluntarily provided the following disclosures concerning 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 strictly limits 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 rates.

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

	Page No.
Report of Independent Registered Public Accounting Firm		49
Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007		50
Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006		51
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006		52
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		53
Notes to audited Consolidated Financial Statements as of and for the years ended December 31, 2008, 2007 and 2006		54

48

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
First Priority Financial Corp.
Malvern, Pennsylvania

We have audited the accompanying consolidated balance sheets of First Priority Financial Corp. and its subsidiary (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Priority Financial Corp. and its subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ BEARD MILLER COMPANY LLP

Beard Miller Company LLP
Reading, Pennsylvania
March 20, 2009

49

First Priority Financial Corp.

Consolidated Balance Sheets
(In thousands, except per share data)

	December 31,			December 31,
	2008			2007
Assets
Cash and due from banks	$	1,410		$	943
Federal funds sold and securities purchased under agreements to resell		77			—
Interest bearing deposits in banks		26			—
Total cash and cash equivalents		1,513			943
Securities available for sale (amortized cost: $37,302 and $45,015, respectively)		37,759			45,026
Loans receivable		171,735			105,207
Less: allowance for loan losses		1,777			1,055
Net Loans		169,958			104,152
Restricted investments in bank stocks		1,737			50
Premises and equipment, net		1,311			574
Accrued interest receivable		815			545
Goodwill		1,194			—
Other assets		370			321
Total Assets	$	214,657		$	151,611
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	10,136		$	6,846
Interest-bearing		159,323			109,458
Total Deposits		169,459			116,304
Short-term borrowings		13,178			18,097
Long-term debt		8,000			390
Accrued interest payable		1,020			858
Other liabilities		2,699			642
Total Liabilities		194,356			136,291
Shareholders’ Equity
Preferred stock, $100 par value; authorized 10,000 shares; no shares issued or outstanding		—			—
Common stock, $1 par value; authorized 10,000 shares; 3,123 and 2,108 shares issued and outstanding, respectively		3,123			2,108
Surplus		25,856			18,982
Accumulated deficit		(9,135	)		(5,781	)
Accumulated other comprehensive income		457			11
Total Shareholders’ Equity		20,301			15,320
Total Liabilities and Shareholders’ Equity	$	214,657		$	151,611

See notes to consolidated financial statements.

50

First Priority Financial Corp.

Consolidated Statements of Income
(In thousands, except per share data)

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

See notes to consolidated financial statements.

51

First Priority Financial Corp.

Consolidated Statements of Shareholders’ Equity

For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)

								Accumulated
								Other
	Common				Accumulated			Comprehensive
	Stock		Surplus		Deficit			Income		Total
Balance — December 31, 2005	$	2,108	$	18,911	$	(969	)	$	—	$	20,050
Comprehensive loss:
Net loss		—		—		(2,436	)		—		(2,436	)
Net unrealized holding gain on available for sale securities arising during the period		—		—		—			1		1
Total Comprehensive Loss											(2,435	)
Stock options expense		—		23		—			—		23
Balance — December 31, 2006		2,108		18,934		(3,405	)		1		17,638
Comprehensive loss:
Net loss		—		—		(2,376	)		—		(2,376	)
Net unrealized holding gain on available for sale securities arising during the period		—		—		—			10		10
Total Comprehensive Loss											(2,366	)
Stock options expense		—		48		—			—		48
Balance — December 31, 2007		2,108		18,982		(5,781	)		11		15,320
Issuance of common stock for acquisition of Prestige Community Bank (976,137 shares)		976		6,415		—			—		7,391
Issuance of common stock for conversion of subordinated debentures (39,292 shares)		39		364		—			—		403
Comprehensive loss:
Net loss		—		—		(3,354	)		—		(3,354	)
Net unrealized holding gain on available for sale securities arising during the period		—		—		—			446		446
Total Comprehensive Loss											(2,908	)
Stock options expense		—		95		—			—		95
Balance — December 31, 2008	$	3,123	$	25,856	$	(9,135	)	$	457	$	20,301

See notes to consolidated financial statements.

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First Priority Financial Corp.

Consolidated Statements of Cash Flows

(Dollars in thousands)

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

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies

Organization and Nature of Operations

First Priority Financial Corp.

First Priority Financial Corp. (“First Priority”, the “Company”) was formed May 11, 2007. On February 20, 2007, First Priority Bank’s Board of Directors approved an agreement of reorganization and merger, dated as of February 20, 2007 which was subsequently approved by regulators and the shareholders of First Priority Bank (the “Bank”) at the Bank’s annual meeting on April 17, 2007. The reorganization agreement provided that the Bank become a wholly-owned subsidiary of the Company, a Pennsylvania corporation formed by the Bank for the purpose of becoming a holding company for the Bank, and as such, the Company is subject to the rules and regulations of the Federal Reserve Board. Accordingly, the financial information relating to the periods prior to May 11, 2007 are reported under the name of First Priority Financial Corp.

Under the reorganization agreement, each outstanding share of the Bank’s common stock and warrant to acquire the Bank’s common stock was converted into one share of the Company’s common stock and one warrant to acquire the Company’s common stock. The former holders of the Bank’s common stock and warrants became the holders of all of the outstanding shares and warrants of the holding company common stock. Following the reorganization, the Bank continued its operations at the same location, with the same management, and subject to all the rights, obligations and liabilities of the Bank existing immediately prior to the reorganization. The Company’s assets consist principally of its investment in the Bank and the primary activities are conducted through the Bank.

The Company’s revenue is dependent primarily on net interest income, which is the difference between the interest income earned on loans, investments, and other earning assets and the interest paid on deposits and other interest bearing liabilities. Total revenue is also affected by non-interest income which is primarily derived from asset management related fees, service charges and other fees.

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 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.

54

Note 1 — Summary of Significant Accounting Policies (continued)

First Priority Bank

The Bank was incorporated on May 25, 2005 under the laws of the Commonwealth of Pennsylvania and is a Pennsylvania chartered, FDIC insured bank. The Bank commenced operations on November 14, 2005 and is a full service commercial bank providing personal and business lending, deposit products and wealth management services. As a state chartered bank, the Bank is subject to regulation of the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. The Bank serves customers in southeastern Pennsylvania.

In March 2007, the Bank opened its second full-service office which is located in Wyomissing, Pennsylvania serving customers in the Berks County market.

Effective February 29, 2008, the Company completed its acquisition of Prestige Community Bank (“Prestige”), a de novo bank headquartered in Newtown, Bucks County, Pennsylvania, with offices in Newtown and Pipersville, Pennsylvania. The acquisition has been accounted for using the purchase method of accounting which requires that the financial statements include activity of Prestige beginning March 1, 2008. See Note 2 of the Notes to Consolidated Financial Statements for more information on the acquisition.

On November 7, 2008, First Priority Bank signed an operating lease to open a full-service office located in Blue Bell, Pennsylvania. The Bank intends to open this office during the first quarter of 2009, serving customers in Montgomery County, Pennsylvania.

Basis of Presentation

The accompanying consolidated financial statements for the years ended December 31, 2008 and 2007, consist of the Bank’s financial statements prior to the formation of the Company on May 11, 2007. The consolidated balance sheets and related statements of income of the Company are substantially the same as the balance sheets and statements of income of the Bank. The consolidated results of operations and financial condition presented for those periods after the date of reorganization, May 11, 2007, include consolidated financial results for the Company which includes the Bank. All significant inter-company accounts and transactions have been eliminated in consolidation.

These statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

55

Note 1 — Summary of Significant Accounting Policies (continued)

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 restricted stock and the valuation of deferred tax assets.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are anticipated to be with customers located within the western and northwestern suburbs surrounding Philadelphia. Note 4 of the Notes to Consolidated Financial Statements discusses the types of securities that the Company currently invests in. Note 5 of the Notes to Consolidated Financial Statements discusses the types of lending that the Company engages in. Although the Company intends to have a diversified loan portfolio, its debtors’ ability to honor their contracts will be influenced by the region’s economy. The Company does not have any significant concentrations to any one customer; Note 5 of the Notes to Consolidated Financial Statements discusses lending concentrations to any one particular industry.

The Company’s investment portfolio consists principally of obligations of the United States and its agencies. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places deposits in correspondent accounts and sells Federal funds to qualified financial institutions. Management believes credit risk associated with correspondent accounts and with Federal funds sold is not significant. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

Presentation of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal funds sold and short-term money market securities. Generally, Federal funds are purchased or sold for one day periods. Short-term investments are generally purchased with a maturity date of less than three months.

Securities

The Company accounts for securities under Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity 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.

56

Note 1 — Summary of Significant Accounting Policies (continued)

Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.

Unrealized gains and losses are reported as increases or decreases in other comprehensive income as a component of shareholders’ equity. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the term of each security.

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. At December 31, 2008 and 2007, the Company had no securities classified as held to maturity.

The Company follows Financial Accounting Standards Board (“FASB”) FSP FAS Nos. 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether the impairment is other than temporary, and on measuring such impairment loss. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. 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.

Restricted Investments in Bank Stocks

Restricted investments in bank stocks, which represents the required investment in the common stock of correspondent banks, are carried at cost and consists of stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Central Bankers Bank. Federal law requires a member institution of the FHLB to hold FHLB stock according to a predetermined formula. In December 2008, the FHLB notified member banks that it was suspending dividend payments and the repurchase of capital stock.

Management evaluates the restricted stock for impairment in accordance with Statement of Position (“SOP”) 01-06, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.

57

Note 1 — Summary of Significant Accounting Policies (continued)

The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes no impairment charge is necessary related to the FHLB restricted stock as of December 31, 2008.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company will generally amortize these amounts over the contractual life of the loan.

The accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans is generally either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal.

Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Residential Mortgage Loans Held for Sale

Mortgage loans originated for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations. The Company obtains commitments from the secondary market investors prior to closing of the loans; therefore, no gains or losses are recognized when the loans are sold. The Company receives origination fees from the secondary market investors. At December 31, 2008 and 2007, there were no residential mortgage loans held for sale.

58

Note 1 — Summary of Significant Accounting Policies (continued)

Loan Fees

Loan origination fees and direct costs of loan originations are deferred and recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. Loan commitment fees are deferred and recognized as an adjustment of yield over the related loan’s life, or if the commitment expires unexercised, recognized in income upon expiration.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses will be 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 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 revisions as more information becomes available.

The allowance will consist of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. 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. As the Bank is a relatively new banking organization with little operating history and relatively new credits, a relatively larger portion of the allowance is unallocated to specific loans or loan categories.

A loan is considered impaired when, based on current information and events, it is probable that the Bank 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.

59

Note 1 — Summary of Significant Accounting Policies (continued)

The Company accounts for impaired loans under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures.” Impairment is measured on a loan by loan basis for commercial and construction loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, impairment is based on the fair value of the collateral when foreclosure is probable. If the recorded investment in impaired loans exceeds the measure of estimated fair value, a specific allowance is established as a component of the allowance for loan losses.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and home equity loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Transfers of Financial Assets

Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Earnings Per Share

The Company follows the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings per share exclude dilution and are computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Proceeds assumed to have been received on such exercise or conversion, are assumed to be used to purchase shares of the Company’s common stock at the average market price during the period, as required by the “treasury stock method” of accounting. The effects of securities or other contracts to issue common stock are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 10 years. Leasehold improvements are amortized over the term of the lease or estimated useful lives, whichever is shorter.

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Note 1 — Summary of Significant Accounting Policies (continued)

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 purchase 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, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company employs general industry practices in evaluating the fair value of its goodwill. Any impairment loss related to goodwill and other intangible assets is reflected as other non-interest expense in the statement of income in the period in which the impairment is determined. No assurance can be given that future impairment tests will not result in a charge to earnings. The balance of goodwill at December 31, 2008 is $1.19 million, all of which resulted from the acquisition of Prestige effective February 29, 2008, as described in Note 2 below.

Advertising Costs

The Company follows the policy of charging the costs of advertising to expense as incurred.

Income Taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and net operating loss carryforwards and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Stock Options

Prior to January 1, 2006, stock options awarded under the Company’s stock compensation program were accounted for under the recognition and measurement provisions of APB Opinion No. 25 (Opinion 25), “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock Based Compensation.” No stock-based employee compensation cost was recognized in the Company’s consolidated statements of income for options granted on, or prior to, December 31, 2005, as all options granted under the program had an exercise price equal to the market value of the underlying common stock on the date of the grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share Based Payment.” Statement No. 123(R) replaces Statement No. 123, supersedes APB Opinion No. 25 and requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award.

61

Note 1 — Summary of Significant Accounting Policies (continued)

Statement No. 123(R) requires that companies that utilized the minimum value method under Statement No. 123 adopt the new fair value accounting prospectively for new or modified grants on or after January 1, 2006. Prospective adoption means that awards granted in earlier fiscal years continue to be accounted for using the existing accounting, typically APB Opinion No. 25. For the years ended December 31, 2008, 2007 and 2006, there were stock options granted and the related compensation expense of $95 thousand, $48 thousand and $23 thousand, respectively, is included in salaries and employee benefits in the accompanying consolidated statements of income. There was no tax benefit recognized related to this stock-based compensation. Therefore, as a result of adopting Statement No. 123(R), the Company’s net loss for the years ended December 31, 2008, 2007 and 2006 was $95 thousand, $48 thousand and $23 thousand, respectively, higher than if the Company had continued to account for share-based compensation under APB Opinion No. 25.

Comprehensive Income

GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Accumulated other comprehensive income as of December 31, 2008 and 2007 of $457 thousand and $11 thousand, respectively, consisted solely of net unrealized holding gains on available for sale securities.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.

Recent Accounting Pronouncements

FASB Statement No. 141(R)

In December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 141 (R) “Business Combinations.” This Statement establishes principles and requirements as to how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines the information to be disclosed that will enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations completed beginning January 1, 2009.

62

Note 1 — Summary of Significant Accounting Policies (continued)

FASB Statement No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not elected the fair value option for any financial assets or liabilities at December 31, 2008.

FASB Statement No. 162

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

FSP FAS 140-3

In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked” transaction. The FSP includes a “rebuttable presumption” that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption is not allowed. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

63

Note 1 — Summary of Significant Accounting Policies (continued)

FASB Staff Position (FSP) 157-3

In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS No. 157 (SFAS 157), “Fair Value Measurements,” in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to our December 31, 2008 financial statements. The application of the provisions of FSP 157-3 did not materially affect our results of operations or financial condition as of and for the periods ended December 31, 2008.

FSP APB 14-1

In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized. The FSP requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense. The FSP requires retrospective application to the terms of instruments as they existed for all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is not permitted. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

SAB 110

Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff of the SEC regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. SAB 110 is effective January 1, 2008. The Company has used the “simplified” method to determine the expected life of options issued as part of determining the fair value of option grants.

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Note 1 — Summary of Significant Accounting Policies (continued)

International Financial Reporting Standards

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

Note 2 — Acquisition of Prestige Community Bank

Effective at the close of business on February 29, 2008, First Priority completed its acquisition of Prestige, a de novo bank headquartered in Newtown, Bucks County, Pennsylvania. Prestige, with $28.9 million in total assets, $5.8 million in loans and $20.8 million in deposits as of February 29, 2008, merged into the Bank. The acquisition expanded the Bank’s branch network into Bucks County, Pennsylvania, with offices in Newtown and Pipersville.

In connection with the merger, four directors of Prestige were appointed to the First Priority Board of Directors. The former Prestige directors will be compensated on the same or similar terms under which current non-management directors are compensated for their services. The former Prestige directors have loans and other extensions of credit with the Bank which are on substantially the same terms (including interest rate and collateral), as the terms prevailing at the time for comparable banking transactions with other persons who are not affiliates and who are not subject to Regulation O.

The acquisition was consummated pursuant to the Agreement and Plan of Merger, dated as of October 19, 2007, by and among First Priority, First Priority Bank, and Prestige (the “Purchase Agreement”). Under the Purchase Agreement, the Company acquired 100% of the outstanding shares of Prestige which was merged with and into the Bank, the wholly owned subsidiary of the Company. Prestige shareholders received one share of common stock and one warrant to acquire a share of First Priority for each share of common stock and each warrant to acquire a share of Prestige outstanding immediately prior to the closing of the transaction. In the merger transaction, First Priority issued 976,137 shares of common stock, and warrants to purchase 195,227 shares of its common stock at a price of $12.50 per share, which expire in October of 2012.

The acquisition has been accounted for using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations,” which requires that the Company’s financial statements include Prestige’s results of operation beginning March 1, 2008. The following table summarizes the fair values of Prestige’s assets acquired and liabilities assumed at the date of acquisition.

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Note 2 — Acquisition of Prestige Community Bank (continued)

	Balance Sheet Acquired
	February 29, 2008
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	22,184
Loans receivable		5,830
Less: allowance for loan losses		150
Net Loans		5,680
Other assets		1,071
Total Assets		28,935
Liabilities
Non-interest bearing deposits		1,379
Interest-bearing deposits		19,470
Short-term borrowings		483
Other liabilities		212
Total Liabilities		21,544
Net Assets Acquired	$	7,391

The following pro forma combined results of operations for the year ended December 31, 2008, give effect to the acquisition as if the merger had been completed on January 1, 2008. The pro forma results show the combination of Prestige’s results into First Priority’s consolidated statement of income. While adjustments have been made for the estimated effect of purchase accounting, the pro forma results do not reflect the actual results that the combined company would have achieved had the combination occurred at the beginning of the period. Since Prestige did not open for business until October, 2007, there are no pro forma results presented for the years ended December 31, 2007 and 2006.

	Unaudited
	Pro Forma
	Year ended
	December 31, 2008
	(Dollars in thousands,
	except per share data)
Total revenue	$	4,340
Net loss		(3,950	)
Basic and diluted loss per share		(1.27	)

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Note 2 — Acquisition of Prestige Community Bank (continued)

In accordance with SFAS No. 141, “Business Combinations,” the consideration paid in an acquisition should be determined by either determining: (1) the value of the actual consideration paid, i.e., the value of the Company’s common stock, or (2) the value of what was received, i.e., the fair value of the net assets of Prestige. The determination of which methodology to use is based upon which is more clearly evident, and thus, provides a value that is considered more reliable.

Management has determined that the most appropriate methodology to determine the consideration paid in this transaction is to determine the fair value of the net assets acquired for the following reasons: (1) the common stock of the Company is closely held and at the time of the acquisition, was not traded on any open market and, therefore, a value for the stock was not readily determinable or considered reliable, and (2) as a de novo and relatively new organization, the net assets of Prestige were recently acquired and it was relatively simple to determine a fair value at the instrument level.

Goodwill of $1.19 million was recorded in connection with the acquisition of Prestige. The Company currently has one reporting segment, banking, which is used to evaluate potential impairment of goodwill.

Goodwill related to the merger with Prestige is not deductible for tax purposes. Due to the net operating losses previously incurred by the Company, deferred tax assets are reduced by a valuation allowance until such time as, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will be realized. Therefore, no deferred tax component has been recorded related to this transaction.

Prestige has a net operating loss (“NOL”) for tax purposes which will carry forward for the benefit of First Priority in future years. As of February 29, 2008, the NOL for Prestige was $2.0 million. As it becomes evident that the Company will be able to utilize the NOL for Prestige, it would be recognized going forward. Section 382 of the Internal Revenue Code applies a limitation as to how much of the carryforward NOL can be used in any one year and must be utilized within a specified period (20 years). As the Company is able to utilize the NOL of Prestige in future periods, the impact of this reduction in the Company’s tax liability would be recorded as a reduction of goodwill.

67

Note 2 — Acquisition of Prestige Community Bank (continued)

The following table provides the calculation of the goodwill.

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

The fair value of certain assets (fixed rate loans) and certain liabilities (fixed rate time deposits) was determined using a discounted cash flow analysis and applying a discount rate which uses assumptions that marketplace participants would use in estimating fair values. In other instances, the Company assumed that the historical book value of certain assets and liabilities represented a reasonable proxy of fair value. Since Prestige was a de novo banking operation which, at time of merger, had been open for only four and one-half months, it was assumed that there was no core deposit intangible related to the acquisition due to the limited time of existence and the limited “stability” of the deposit base of Prestige. The Company determined that there were no other categories of identifiable intangible assets arising from the Prestige acquisition. The Company also determined that there were no material purchase accounting adjustments needed with respect to SOP 03-03, “Accounting for Certain Loans and Debt Securities Acquired in a Transfer.”

Note 3 — Restrictions on Cash and Due From Banks

As of December 31, 2008 and 2007, the Company did not need to maintain reserves (in the form of deposits with the Federal Reserve Bank or a correspondent bank on behalf of the Federal Reserve Bank) to satisfy federal regulatory requirements.

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Note 4 — Securities Available for Sale

The amortized cost, unrealized gains and losses, and the estimated fair value of the Company’s investment securities available for sale are as follows:

	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(Dollars in thousands)
Available for sale
Obligations of U.S. government agencies and corporations	$	21,000	$	94	$	—		$	21,094
Mortgage-backed securities		15,302		400		—			15,702
Other securities		1,000		—		(37	)		963
Total investment securities available for sale	$	37,302	$	494	$	(37	)	$	37,759

	December 31, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in thousands)
Available for sale
Obligations of U.S. government agencies and corporations	$	40,995	$	3	$	—	$	40,998
Mortgage-backed securities		4,020		8		—		4,028
Total investment securities available for sale	$	45,015	$	11	$	—	$	45,026

There were no individual securities in a continuous unrealized loss position for twelve months or longer as of December 31, 2008 and 2007.

Securities with a carrying value of $22.2 million and $16.4 million at December 31, 2008 and 2007, respectively, were pledged to secure repurchase agreements, secured borrowings, and a letter of credit.

The amortized cost and fair value of securities as of December 31, 2008 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.

	December 31, 2008
	Available for Sale Securities
	Amortized
	Cost		Fair Value
	(Dollars in thousands)
Due within one year	$	15,000	$	15,026
Due after one year through five years		7,000		7,031
		22,000		22,057
Mortgage-backed securities		15,302		15,702
Total	$	37,302	$	37,759

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Note 5 — Loans Receivable

Loans receivable consist of the following at December 31, 2008 and 2007:

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

Approximately 68% of total loans were variable or adjustable interest rate loans at December 31, 2008 with the remaining 32% comprised of loans with fixed predetermined interest rates.

The Bank’s loans consist of credits to borrowers spread over a broad range of industrial classifications. The largest concentration of loans is to lessors of residential buildings and dwellings. These loans totaled $23.6 million at December 31, 2008, or 13.7% 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 Bank’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 Bank has no other concentration of loans which exceeds 10% of total loans.

Note 6 — Transactions with Executive Officers, Directors and Principal Shareholders

The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal shareholders, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others and do not involve more than the normal risk of collectibility.

70

Note 6 — Transactions with Executive Officers, Directors and Principal Shareholders (continued)

Activity of these loans is as follows:

	For the year ended
	December 31,
	2008			2007
	(Dollars in thousands)
Balance , beginning of period	$	633		$	494
New loans (1)		5,830			176
Repayments and other reductions		(2,396	)		(37	)
Balance, December 31	$	4,067		$	633

(1) Included as a component of new loans is $3.5 million related to new directors from the acquisition of Prestige and the addition of a new executive officer.

Deposits of related parties totaled $7.9 million and $4.6 million at December 31, 2008 and 2007, respectively.

Note 7 — Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007		2006
	(Dollars in thousands)
Balance, beginning of year	$	1,055		$	634	$	2
Provision for loan losses		588			421		632
Reserve from Prestige Community Bank acquisition		150			—		—
Loans charged off		(16	)		—		—
Balance, end of year	$	1,777		$	1,055	$	634

As of December 31, 2008, the Company had one non-accrual and impaired loan relationship which totaled $709 thousand, and included a specific reserve within the allowance for loan losses of $70 thousand. There were no restructured loans or loans past due 90 days or more at December 31, 2008. The Bank’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 Bank. The Bank will not recognize income if these factors do not exist. During 2008, interest accrued on non-accruing loans and not recognized as interest income totaled $61 thousand.

As of December 31, 2007 and 2006, there were no restructured loans, non-accrual loans or loans past due 90 days or more.

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Note 8 — Premises and Equipment

The components of premises and equipment at December 31, 2008 and 2007 are as follows:

	2008			2007
	(Dollars in thousands)
Leasehold improvements	$	887		$	249
Furniture, fixtures and equipment		619			319
Automobile		21			21
Computer equipment and data processing software		256			203
		1,783			792
Accumulated depreciation		(472	)		(218	)
	$	1,311		$	574

Depreciation expense for the years ended December 31, 2008, 2007, and 2006 was $223 thousand, $123 thousand and $84 thousand, respectively.

Note 9 — Deposits

The components of deposits at December 31, 2008 and 2007 are as follows:

	2008		2007
	(Dollars in thousands)
Demand, non-interest bearing	$	10,136	$	6,846
Demand, interest-bearing		2,743		1,485
Money market and savings accounts		35,938		45,403
Time, $100,000 and over		31,047		21,627
Time, other		89,595		40,943
	$	169,459	$	116,304

Included in time, other at December 31, 2008 and 2007 are brokered deposits of $32.6 million, and $9.1 million, respectively.

At December 31, 2008, the scheduled maturities of time deposits are as follows:

	2008
	(Dollars in thousands)
2009	$	86,219
2010		10,220
2011		16,447
2012		3,571
2013		4,185
	$	120,642

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Note 10 — Short-Term Borrowings

At December 31, 2008 and 2007, the Company had total short-term borrowings of $13.2 million and $18.1 million, respectively. The Company’s short-term borrowings generally consist of Federal funds purchased, securities sold under repurchase agreements and other secured borrowings from correspondent banks. These borrowings generally represent overnight borrowings.

As of December 31, 2008 and 2007, the Company had a borrowing facility with a correspondent bank totaling $10 million, of which $2 million is available unsecured. The remaining $8 million is a secured line of credit with security provided, when utilized, by a pledge of the Company’s investment assets. As of December 31, 2007, the Company also had a borrowing facility for $20 million which would also be secured by a pledge of the Company’s investment assets. All secured facilities are available for short-term limited purpose usage.

In addition, as of December 31, 2008, the Bank’s maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh (“FHLB”), calculated using a pre-determined formula based on outstanding balances of collateral eligible loans and investments, was $112 million. FHLB advances outstanding at this same date were $20.9 million. As a relatively new banking organization, however, the Bank is required to deliver physical collateral to support any borrowings from the FHLB. Based on margin requirements and the level of collateral available to satisfy delivery requirements, the Bank estimates its excess borrowing capacity with the FHLB to be approximately $50 million at December 31, 2008.

Short-term borrowings outstanding as of December 31, 2008 consisted of $12.9 million of secured overnight borrowings with the Federal Home Loan Bank of Pittsburgh (“FHLB”) and $0.3 million outstanding under customer repurchase agreements. Investment securities pledged as collateral to secure these borrowings totaled $13.9 million. At December 31, 2007, short-term borrowings consisted of $2.0 million of unsecured borrowings and $16.0 million of secured borrowings under lines of credit with correspondent banks, secured by collateral pledged of $16.3 million, and $0.1 million outstanding under customer repurchase agreements.

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Note 10 — Short-Term Borrowings (continued)

A summary of short-term borrowings at or for the years ended December 31, 2008, 2007, and 2006 follows:

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

The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at any month ended during each of the periods shown.

Note 11 — Long-Term Debt

Long-term debt, consisting of FHLB advances, totaled $8.0 million at December 31, 2008 with a weighted average interest rate of 4.08%. First Priority Bank became a member of FHLB in March 2008. Advances are collateralized by $1.7 million of restricted investments in FHLB bank stock, certain residential mortgage loans, and mortgage backed securities. Advances are made pursuant to several different credit programs offered from time to time by the FHLB. Investment securities pledged as collateral to secure these borrowings totaled $8.4 million at December 31, 2008.

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Note 11 — Long-Term Debt (continued)

At December 31, 2008, scheduled maturities of long-term borrowings with the FHLB are as follows:

			Weighted
	Balance		Average Rate
	(Dollars in thousands)
2012	$	6,000		4.09	%
2013		2,000		4.05	%
	$	8,000		4.08	%

As of December 31, 2007, long-term debt of $390 thousand consisted of convertible subordinated debentures (“Debentures”) issued in June and July 2007. The Company issued the 5.30% debentures due June 21, 2012, to provide operating capital within the bank holding company. The Company’s directors and management were the purchasers of the Debentures. The Notes provided that the Debentures would automatically convert into shares of the Company’s common stock, $1.00 par value per share (“Common Stock”), immediately prior to the consummation of a Qualified Offering, as defined by the Debenture. In addition, both payee and maker of the Debenture had the right to convert the Debentures into Common Stock after one year from issuance. Effective August 1, 2008, the Company elected to convert the $403 thousand outstanding balance of Debentures, including capitalized interest, into 39,292 shares of the Company’s Common Stock, based on the conversion price of $10.25 per share.

Note 12 — Lease Commitments

Pursuant to the terms of lease agreements in effect at December 31, 2008, pertaining to premises, future minimum lease payments by year and in the aggregate, under these lease agreements, are as follows:

	Minimum
	Lease
	Payments
	(Dollars in thousands)
2009	$	507
2010		525
2011		525
2012		525
2013		525
Thereafter		3,125
	$	5,732

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Note 12 — Lease Commitments (continued)

The minimum lease payments shown above include payments for the entire initial term of two lease agreements, both of which contain options for the Company to cancel the lease midway through the initial lease periods for an incremental fee. Option periods for which the Company has an option to extend the lease beyond initial periods have not been included in the minimum lease payments shown above.

Lease expense for all leases for the years ended December 31, 2008, 2007, and 2006 was $426 thousand, $238 thousand, and $198 thousand, respectively.

On November 7, 2008, First Priority Bank signed an operating lease to rent 2,575 square feet at 10 Sentry Parkway, Suite 100, Blue Bell, Pennsylvania. The Bank intends to open its fifth market-service office at this location during the first quarter of 2009, serving customers in Montgomery County, Pennsylvania. The initial lease term is 127 months, with total operating lease payments of approximately $758 thousand during this initial term, and includes two successive five year renewal options.

Note 13 — Change in Control Agreements

The Company has entered into change of control agreements with its Chief Executive Officer and other senior officers. Upon resignation after a change in the control of the Company, as defined in the agreements, the individuals will receive monetary compensation in the amount set forth in the agreements. The agreements will automatically renew each year unless written notice electing not to renew is given by the Company or individual.

On February 20, 2009, the Company issued preferred stock to the U.S. Department of the Treasury under the “Troubled Asset Relief Program — Capital Purchase Program” which placed limitations on executive payments which effectively eliminates any payments under these change in control agreements during the period that the Treasury holds any equity securities of the Company acquired through this program. Note 23 discusses the issuance of the preferred stock under this program.

Note 14 — 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 well as 421,500 warrants to purchase one share of common stock at a price of $12.50 which expire five years from the date of issuance. As of February 29, 2008, in connection with the acquisition of Prestige, an additional 976,137 shares of common stock, and warrants to purchase 195,227 shares of its common stock at a price of $12.50 per share, which expire in October of 2012, were issued resulting in additional equity of $7.4 million. As described in Note 11 above, effective August 1, 2008, 39,292 shares common stock were issued in regards to the convertible debentures which the Company elected to convert, resulting in additional equity of $403 thousand.

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Note 14 — Shareholders’ Equity (continued)

The Pennsylvania Department of Banking, in issuing its charter to the Bank, required an allocation of its initial capital to an Expense Fund in the amount of $750 thousand to defray anticipated initial losses. Accordingly, $750 thousand of the Bank’s surplus is reserved for this purpose until the Bank becomes profitable.

Note 15 — Stock Compensation Program

In 2005, the Company adopted the 2005 Stock Compensation Program (the “Program”), which the Company is planning to amend in connection with its upcoming annual meeting on April 23, 2009. 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 of 20% of the common stock outstanding to a maximum of 624,586 shares to officers, other employees and directors of the Company. 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 options granted under the Program vest in four years and terminate ten years from the date of the grant. The exercise price of the options granted shall be the fair market value of a share of common stock at the time of the grant, but not less than $10 per share. Restrictive Stock grants will be subject to five year vesting requirements.

A summary of the status of the Company’s 2005 Stock Compensation Program is presented below:

	For the Periods Ended December 31,
	2008					2007					2006
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		421,000		$	10.00		411,400		$	10.00		381,500		$	10.00
Granted during year		72,950			10.25		22,000			10.00		55,400			10.00
Options exchanged — Prestige acquisition (1)		147,022			10.00		—			—		—			—
Forfeited/cancelled during year		(86,222	)		10.02		(12,400	)		10.00		(25,500	)		10.00
Outstanding at end of year (1)		554,750		$	10.03		421,000		$	10.00		411,400		$	10.00
Exercisable at end of year (1)		117,500		$	10.00		—			—		—			—

(1) Included in the options exchanged for the Prestige acquisition are 100,000 organizer options issued outside of the 2005 Stock Compensation Program. These options are both outstanding and exercisable at December 31, 2008 at the weighted average exercise price of $10.00 per share

77

Note 15 — Stock Compensation Program (continued)

The weighted average remaining contractual life of the outstanding stock options at December 31, 2008 is 7.76 years. The aggregate intrinsic value of options outstanding was $-0- as of December 31, 2008.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2008			2007			2006
Dividend yield		0.0	%		0.0	%		0.0	%
Expected life		7 years			7 years			7 years
Expected volatility		26	%		25	%		25	%
Risk-free interest rate		2.67	%		4.68	%		4.85	%
Weighted average fair value	$	2.75		$	3.87		$	3.92

The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Due to the Company’s lack of sufficient historical exercise data and the limited period of time for which shares have been issued, the “simplified” method is used to determine the expected life of options, calculated as the average of the sum of the vesting term and original contractual term for all periods presented. The expected volatility percentage is based on the average expected volatility of similar public financial institutions in the Company’s market area.

The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share Based Payment.” Statement No. 123(R) replaces Statement No. 123, supersedes APB Opinion No. 25 and requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. Statement No. 123(R) requires companies that utilized the minimum value method under Statement No. 123 adopt the new fair value accounting prospectively for new or modified grants on or after January 1, 2006.

Prospective adoption means that awards granted in earlier fiscal years continue to be accounted for using the existing accounting, typically APB Opinion No. 25. For stock options granted beginning January 1, 2006, the related compensation expense is included in salaries and employee benefits in the accompanying consolidated statements of income. There was no tax benefit recognized related to this stock-based compensation. As of December 31, 2008, there was $271 thousand of unrecognized compensation cost related to nonvested stock options granted after January 1, 2006. That cost is expected to be recognized over a weighted average period of 2.8 years.

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Note 16 — Deferred Compensation Plan

In December 2008, the Company adopted a Deferred Compensation Plan for the benefit of a select group of executives of the Company, eligibility of which is determined by the Board of Directors. The Plan is an unfunded arrangement which became effective January 1, 2009 and is subject to annual renewal by the Board of Directors.

Annually, prior to December 31, each eligible plan participant must make an election which defines the Participant’s voluntary election deferral amount for the following Plan Year. The Participant’s annual salary will be reduced for that Plan Year by the amount of the deferral amount, which will be paid to the Participant in the future, plus interest, upon the Company reaching the Profitability Date, which is defined within the Plan as follows: the Company must (1) report three quarters of profitability during the Plan Year, and (2) report a full year profitability in the current Plan Year.

At the end of each Plan Year, the Company credits to each Participant’s Company Contribution Account a number of shares of Restricted Stock equal to 100% of the amount of Deferrals for the Plan Year divided by the greater of: (1) the current market value of the Company’s common stock at the end of the Plan year or (2) $10. The Participant will become 100% vested in this restricted stock upon: (1) the Company reaching the Profitability Date, as defined above and (2) continued employment until the later of the three year anniversary of the Profitability Date or the five year anniversary of the date on which contributions were made.

Change in Control provisions exist by which both the Participant’s Deferral and the Company Contribution will become fully vested immediately upon a change of control of the Company, as defined in the agreements. For the 2009 Plan Year, the Board of Directors designated twelve executives of the Company eligible to participate in the Plan. All twelve of these executives elected to participate in the plan resulting in a total salary deferral for the 2009 Plan Year of $203 thousand.

Note 17 — Federal Income Taxes

There is no provision for income taxes for the years ended December 31, 2008, 2007, and 2006 due to the net operating losses incurred.

79

Note 17 — Federal Income Taxes (continued)

The components of the net deferred tax asset at December 31, 2008 and 2007 are as follows:

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

The Company has net operating loss (‘NOL”) carryforwards available for federal income tax purposes of approximately $7.2 million at December 31, 2008, which expire in 2025 through 2028. In addition, the Company also acquired a NOL for tax purposes related to the acquisition of Prestige totaling $2.0 million which will carry forward for the benefit of First Priority in future years. As it becomes evident that the Company will be able to utilize the NOL for Prestige, it would be recognized going forward. Section 382 of the Internal Revenue Code applies a limitation as to how much of the carryforward NOL can be used in any one year and must be utilized within a specified period (20 years). As the Company is able to utilize the NOL of Prestige in future periods, the impact of this reduction in the Company’s tax liability would be recorded as a reduction of goodwill.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

80

Note 17 — Federal Income Taxes (continued)

As required by FIN 48, which clarifies Statement 109, “Accounting for Income Taxes,” the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. FIN 48 had no impact on the reported consolidated results of operations or financial condition.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before income taxes. Penalties are recorded in other expenses, net, and interest paid or received is recorded in interest expense or interest income, respectively, in the consolidated statement of income. As of December 31, 2008, there was no interest or penalties accrued for the Company. The Company is subject to examination by U.S. Federal taxing authorities for the years ended December 31, 2008, 2007, and 2006, and for all state income taxes through December 31, 2008.

Note 18—Earnings Per Share

The calculations of basic earnings per share and diluted earnings per share are presented below. All weighted average shares, actual shares and per share information in the consolidated financial statements have been adjusted retroactively for the effect of stock dividends and splits, if applicable. See Note 1 of the consolidated financial statements for a discussion on the calculation of earnings per share.

Options to purchase 554,750, 421,000, and 411,400 shares of common stock outstanding at December 31, 2008, 2007 and 2006, respectively, and warrants to purchase common stock were not included in dilutive earnings per share since their exercise price exceeded the fair value of the related common stock.

	For the year ended
	December 31,
	2008			2007			2006
	(In thousands, except per share information)
Basic and diluted loss per share
Net loss	$	(3,354	)	$	(2,376	)	$	(2,436	)
Weighted average common shares outstanding		2,940			2,108			2,108
Basic and diluted loss per share	$	(1.14	)	$	(1.13	)	$	(1.16	)

Note 19 — 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.

81

Note 19 — Financial Instruments with Off-Balance Sheet Risk (continued)

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At December 31, 2008 and 2007, outstanding commitments to extend credit consisting of total unfunded commitments under lines of credit were $36.6 million and $26.1 million, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

In addition, as of December 31, 2008, the Bank has pledged investment securities with a market value of $252 thousand as collateral with a correspondent bank for a $199 thousand letter of credit issued on behalf of a customer of the Bank. This transaction is fully secured by the customer through a pledge of deposits.

Note 20 — Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2008, that the Company and the Bank meet all capital adequacy requirements to which it is subject.

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Note 20 — Regulatory Matters (continued)

The Federal Deposit Insurance Corporation required the Bank to maintain a ratio of Tier 1 leverage capital to total assets of at least 8% during the first three years of operation. As of November 2008, upon completion of the Bank’s initial three years of operations, the Bank’s Tier 1 leverage ratio requirement became 5% in order to be considered well capitalized under prompt corrective action provisions Under these guidelines, the Bank is considered well capitalized as of December 31, 2008 and 2007.

The Bank’s actual capital amounts and ratios at December 31, 2008 and 2007 are presented below:

To be Well

Minimum

Capitalized under

Capital

Prompt Corrective

Actual

Requirement

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

December 31, 2008

Total capital (to risk-weighted assets)

$

20,179

12.56

%

$

³12,856

³8.0

%

$

³16,069

³10.0

%

Tier 1 capital (to risk-weighted assets)

18,393

11.45

³6,428

³4.0

³9,642

³6.0

Tier 1 capital (to total assets)

18,393

8.93

³8,235

³4.0

³10,294

³5.0

December 31, 2007

Total capital (to risk-weighted assets)

$

16,441

16.01

%

$

³8,217

³8.0

%

$

³10,271

³10.0

%

Tier 1 capital (to risk-weighted assets)

15,381

14.98

³4,108

³4.0

³6,163

³6.0

Tier 1 capital (to total assets)

15,381

12.30

³10,000

³8.0

³10,000

³8.0

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 the FDIC and are payable only from the undivided profits of First Priority Bank, with the exception recently enacted by the Pennsylvania Department of Banking which will allow the Bank to pay dividends related to the issuance of preferred stock under the U.S. Department of the Treasury’s Troubled Asset Relief Program — Capital Purchase Program. Since the Bank has not yet achieved profitability; however, as of December 31, 2008, neither First Priority nor the Bank have undivided profits from which to pay cash dividends to the common shareholders. Note 23 discusses the issuance of the preferred stock under the Capital Purchase Program.

The Federal Reserve Board approved a final rule in February 2007 that expands the definition of a small bank holding company (“BHC”) under the Board’s Small Bank Holding Company Policy Statement and the Board’s risk-based and leverage capital guidelines for bank holding companies. In its revisions to the Policy Statement, the Federal Reserve Board has raised the small BHC asset size threshold from $150 million to $500 million and amended the related qualitative criteria for determining eligibility as a small BHC for the purposes of the policy statement and the capital guidelines.

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Note 20 — Regulatory Matters (continued)

The policy statement facilitates the transfer of ownership of small community banks by permitting debt levels at small BHC’s that are higher than what would typically be permitted for larger BHC’s. Because small BHC’s may, consistent with the policy statement, operate at a level of leverage that generally is inconsistent with the capital guidelines, the capital guidelines provide an exemption for small BHC’s. Based on the ruling, First Priority Financial Corp. meets the eligibility criteria of a small BHC and is exempt from regulatory capital requirements administered by the federal banking agencies.

Note 21 — 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 their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The Company adopted SFAS 157 effective for its fiscal year beginning January 1, 2008.

In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. As such, the Corporation only partially adopted the provisions of SFAS 157, and will begin to account and report for non-financial assets and liabilities in 2009. In October 2008, the FASB issued FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP 157-3”), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the Corporation’s December 31, 2008 consolidated financial statements. The adoption of SFAS 157 and FSP 157-3 had no impact on the amounts reported in the financial statements.

84

Note 21 — Fair Value Measurements and Fair Values of Financial Instruments (continued)

SFAS 157 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 SFAS 157 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2008 are as follows:

			(Level 1)
			Quoted Prices		(Level 2)
			in Active		Significant		(Level 3)
			Markets for		Other		Significant
	December 31,		Identical		Observable		Unobservable
Description	2008		Assets		Inputs		Inputs
	(Dollars in thousands)
Securities available for sale	$	37,759	$	—	$	37,759	$	—

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2008 are as follows:

			(Level 1)
			Quoted Prices		(Level 2)
			in Active		Significant		(Level 3)
			Markets for		Other		Significant
	December 31,		Identical		Observable		Unobservable
Description	2008		Assets		Inputs		Inputs
			(Dollars in thousands)
Impaired loans	$	639	$	—	$	—	$	639

As discussed above, the Company has delayed its disclosure requirements of non-financial assets and liabilities.

85

Note 21 — Fair Value Measurements and Fair Values of Financial Instruments (continued)

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2008 and 2007:

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. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

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. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans

Impaired loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”), 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 consists of the loan balances of $709 thousand, net of a valuation allowance of $70 thousand. Additional provisions for loan losses of $55 thousand were recorded during the year ended December 31, 2008.

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Note 21 — Fair Value Measurements and Fair Values of Financial Instruments (continued)

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 (e.g., 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 on certificates to the monthly maturities on 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.

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Note 21 — Fair Value Measurements and Fair Values of Financial Instruments (continued)

At December 31, 2008 and 2007, the estimated fair values of the Company’s financial instruments were as follows:

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

88

Note 22 — Parent Company Only Financial Information

Condensed financial statements of First Priority Financial Corp. follow:

CONDENSED BALANCE SHEETS

	December 31,
	2008		2007
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	259	$	190
Investment in subsidiary		20,043		15,391
Other investments		25		25
Other assets		—		105
Total assets	$	20,327	$	15,711
Liabilities and shareholders’ equity
Subordinated debt	$	—	$	390
Other liabilities		26		1
Total liabilities		26		391
Shareholders’ equity		20,301		15,320
Total liabilities and shareholders’ equity	$	20,327	$	15,711

CONDENSED INCOME STATEMENTS

				For the period
				May 11, 2007
	For the year			through
	ended December			December 31,
	31, 2008			2007
	(Dollars in thousands)
Interest from subsidiary	$	6		$	6
Total income		6			6
Interest on subordinated debt		12			11
Non-interest expenses		68			67
Total expenses		80			78
Loss before equity in undistributed net loss of subsidiary		(74	)		(72	)
Equity in undistributed net loss of subsidiary		(3,280	)		(1,428	)
Net loss	$	(3,354	)	$	(1,500	)

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Note 22 — Parent Company Only Financial Information (continued)

CONDENSED STATEMENTS OF CASH FLOWS

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

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Note 23 — Subsequent Events

De-registration as Public Company

On January 30, 2009, the Company filed a Form 15 with the Securities and Exchange Commission (“SEC”), “Certification and Notice of Termination of Registration under Section 12(g) of the Securities and Exchange Act of 1934 or Suspension of Duty to File Reports under Section 13 and 15(D) of the Securities and Exchange Act of 1934,” whereby First Priority Financial Corp. de-registered as a public filer and, therefore, eliminated future requirements to file reports with the SEC, on a prospective basis. This election is allowed by the SEC for a public company who became a public filer due to filing a registration statement to issue incremental shares if the Company’s total number of shareholders of record is less than 300 shareholders at the end of the year in which the registration statement was initially filed.

Issuance of Preferred Stock and Warrant Preferred — TARP Capital Purchase Program

On February 20, 2009, First Priority entered into a Letter Agreement with the Treasury (the “Purchase Agreement”) as part of the Treasury’s TARP Capital Purchase Program, pursuant to which the Company issued and sold, and the Treasury agreed to purchase, (i) 4,579 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $100.00 par value per share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant) to purchase, on a net basis, up to 229 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $100 per share (the “Series B Preferred Stock”), with an exercise price of $100.00 per share, for an aggregate purchase price of $4.58 million in cash. The Company entered into a side letter agreement with Treasury, dated February 20, 2009, which, among other things, clarified that to the extent the terms of any of the Purchase Agreement, the Warrant or the terms of the Series A Preferred Stock or the Series B Preferred Stock are inconsistent with the ARRA, as it may be amended from time to time, or any rule or regulation promulgated thereunder, the ARRA and such rules and regulations shall control. On February 20, 2009, the Treasury immediately exercised the Warrant, on a cashless basis, which resulted in the issuance of the 229 shares of the Series B Preferred Stock.

The transaction, which closed on February 20, 2009, resulted in additional Tier 1 Capital of $4.6 million which immediately strengthens the Bank’s capital position and will support approximately $50 million of additional lending capacity.

The issuance and sale of the Series A Preferred Stock, the Warrant and the Series B Preferred Stock was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Series A Preferred Stock will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Series B Preferred Stock will pay cumulative dividends at a rate of 9% per annum. Both Series A and B 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 Preferred Stock, in whole or in part, at its liquidation preference plus accrued and unpaid dividends at any time as permitted by the ARRA and the rules and regulations promulgated thereunder. The Series B Preferred Stock may not be redeemed until all of the Series A Preferred Stock has been redeemed.

91

Note 23 — Subsequent Events (continued)

The Purchase Agreement, pursuant to which the preferred shares were sold, contains limitations on the payment of dividends on the common stock and on the Company’s ability to repurchase its common stock, and subjects the Company to certain of the executive compensation limitations included in EESA. As a condition to the closing of the transaction, each of the Company’s Senior Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”) executed a waiver (the “Waiver”) voluntarily waiving any claim against the Treasury or the Company for any changes to such Senior Executive Officer’s compensation or benefits that are required to comply with the regulation issued by the Treasury under the TARP Capital Purchase Plan and acknowledging that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements (including so-called “golden parachute” agreements) (collectively, “Benefit Plans”) as they relate to the period the Treasury holds any equity securities of the Company acquired through the TARP Capital Purchase Plan. The Company has also effected changes to its Benefits Plans as may be necessary to comply with the executive compensation provisions of EESA. These restrictions will cease when the Treasury ceases to own any debt or preferred securities of the Company acquired pursuant to the Purchase Agreement.

The description of the Purchase Agreement contained or incorporated herein is a summary and is qualified in its entirety by reference to the full text of the Securities Purchase Agreement attached as an exhibit hereto and incorporated herein by reference.

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

None.

Item 9A(T). Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2008 (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes to the Company’s disclosure controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Exchange Act Rule 13a-15(e) defines “disclosure controls and procedures” as controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

In accordance with General Instruction G(3) to Form 10-K, the information required by this Item will be filed as an amendment to this Form 10-K not later than 120 days after the fiscal year covered by the Form 10-K.

Item 11. Executive Compensation

In accordance with General Instruction G(3) to Form 10-K, the information required by this Item will be filed as an amendment to this Form 10-K not later than 120 days after the fiscal year covered by the Form 10-K.

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

In accordance with General Instruction G(3) to Form 10-K, the information required by this Item will be filed as an amendment to this Form 10-K not later than 120 days after the fiscal year covered by the Form 10-K.

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

In accordance with General Instruction G(3) to Form 10-K, the information required by this Item will be filed as an amendment to this Form 10-K not later than 120 days after the fiscal year covered by the Form 10-K.

Item 14. Principal Accounting Fees and Services

In accordance with General Instruction G(3) to Form 10-K, the information required by this Item will be filed as an amendment to this Form 10-K not later than 120 days after the fiscal year covered by the Form 10-K.

Item 15. Exhibits, Financial Statement Schedules

(a) The following documents are filed as part of this report (see Part II, Item 8, “Financial Statements and Supplementary Data”):

(1) Financial Statements:

(a) Consolidated Balance Sheets as of December 31, 2008 and 2007

(b) Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006

(c) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007, and 2006

(d) Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006

(e) Notes to Consolidated Financial Statements

(f) Report of Independent Registered Public Accounting Firm

(2) Financial Statement Schedules are not applicable

(3) The exhibits listed on the Exhibit Index at the end of this Report are filed with or incorporated as part of this Report (as indicated in connection with each Exhibit).

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EXHIBIT INDEX

2.1	Agreement and Plan of Merger, dated as of October 19, 2007, by and among First Priority Financial Corp., First Priority Bank and Prestige Community Bank (incorporated by reference to Annex A to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007) (schedules are omitted; First Priority Financial Corp. agrees to furnish copies of such schedules upon request)
3.1	Articles of Incorporation of First Priority Financial Corp. (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
3.2	Bylaws of First Priority Financial Corp. (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
3.3	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of First Priority Financial Corp. (filed herewith)
3.4	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series B of First Priority Financial Corp. (filed herewith)
4.1	Warrant, dated February 20, 2009, to purchase Series B Preferred Stock of First Priority Financial Corp. (filed herewith)
10.1	First Priority Stock Compensation Program (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
10.2	Change in Control Agreement between First Priority Bank and David E. Sparks (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
10.3	Change in Control Agreement between First Priority Bank and Lawrence E. Donato (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
10.4	Change in Control Agreement between First Priority Bank and Mary Ann Messmer (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
10.5	First Priority Financial Corp. Deferred Compensation Plan (incorporated by reference to the Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2008)

95

10.6	Letter Agreement, including Securities Purchase Agreement, dated February 20, 2009, between First Priority Financial Corp. and the United States Department of the Treasury (filed herewith)
10.7	Form of Letter Agreement, dated February 20, 2009, between First Priority Financial Corp. and certain of its executive officers relating to executive compensation limitations under the United States Treasury Department’s Capital Purchase Program (filed herewith)
21	Subsidiaries of the Registrant (filed herewith)
31.1	Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)
31.2	Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)
32.1	Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)
32.2	Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST PRIORITY FINANCIAL CORP.
(Registrant)
 

/s/ David E. Sparks,  

Chairman, President and Chief Executive Officer 

SIGNATURE	TITLE	DATE
/s/ David E. Sparks	Chairman, Chief Executive Officer and Director	March 17, 2009
	(Principal Executive Officer)
/s/ Lawrence E. Donato	Chief Financial Officer and Director	March 17, 2009
	(Principal Financial and Accounting Officer)
/s/ Howard R. Berlin	Director	March 17, 2009
/s/ John K. Desmond, Jr.	Director	March 17, 2009
/s/ Robert J. Fairbaugh	Director	March 17, 2009
/s/ Mary Ann Messmer	Director	March 17, 2009
/s/ Alan P. Novak	Director	March 17, 2009
/s/ Mel A. Shaftel	Director	March 17, 2009
/s/ Vincent P. Small, Jr.	Director	March 17, 2009
/s/ Patrick M. Smith	Director	March 17, 2009
/s/ Christopher E. Spinieo	Director	March 17, 2009
/s/ Michael G. Wade	Director	March 17, 2009
/s/ Richard M. Wesselt	Director	March 17, 2009
/s/ William L. Wetty	Director	March 17, 2009
/s/ Samuel J. Worthington, Jr.	Director	March 17, 2009

97

EXHIBIT INDEX

Exhibit
Number		Description
	2.1	Agreement and Plan of Merger, dated as of October 19, 2007, by and among First Priority Financial Corp., First Priority Bank and Prestige Community Bank (incorporated by reference to Annex A to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007) (schedules are omitted; First Priority Financial Corp. agrees to furnish copies of such schedules upon request)
	3.1	Articles of Incorporation of First Priority Financial Corp. (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
	3.2	Bylaws of First Priority Financial Corp. (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
	3.3	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of First Priority Financial Corp. (filed herewith)
	3.4	Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series B of First Priority Financial Corp. (filed herewith)
	4.1	Warrant, dated February 20, 2009, to purchase Series B Preferred Stock of First Priority Financial Corp. (filed herewith)
	10.1	First Priority Stock Compensation Program (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
	10.2	Change in Control Agreement between First Priority Bank and David E. Sparks (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
	10.3	Change in Control Agreement between First Priority Bank and Lawrence E. Donato (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)
	10.4	Change in Control Agreement between First Priority Bank and Mary Ann Messmer (incorporated by reference to registration statement No. 333-147950 on Form S-4 filed with the Securities and Exchange Commission on December 7, 2007)

98

Exhibit
Number		Description
	10.5	First Priority Financial Corp. Deferred Compensation Plan (incorporated by reference to the Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2008)
	10.6	Letter Agreement, including Securities Purchase Agreement, dated February 20, 2009, between First Priority Financial Corp. and the United States Department of the Treasury (filed herewith)
	10.7	Form of Letter Agreement, dated February 20, 2009, between First Priority Financial Corp. and certain of its executive officers relating to executive compensation limitations under the United States Treasury Department’s Capital Purchase Program (filed herewith)
	21	Subsidiaries of the Registrant (filed herewith)
	31.1	Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)
	31.2	Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)
	32.1	Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)
	32.2	Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)

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BOARD OF DIRECTORS OF FIRST PRIORITY FINANCIAL CORP

David E. Sparks Chairman & Chief Executive Officer of First Priority Financial Corp. and Chairman and Chief Executive Officer of First Priority Bank	Howard R. Berlin Private Investor: Retired Partner, Managing Director & Portfolio Manager of Neuberger Berman, LLC	John K. Desmond, Jr. Owner & Operator of The Desmond Great Valley Hotel in Malvern, PA and The Desmond Hotel in Albany, NY	Lawrence E. Donato Chief Financial Officer of First Priority Financial Corp. and Chief Operating Officer of First Priority Bank
Robert J. Fairbaugh Certified Public	Mary Ann Messmer President of	Alan P. Novak Attorney at Conrad,	Mel A. Shaftel Private Investor:
Accountant & Owner of Dunlap & Associate, PC	First Priority Bank	O’Brien, Gellman and Rohn; and President, Novak Strategic Advisors	Retired Vice Chairman of Lehman Brothers
Vincent P. Small, Jr. Private Investor: Certified Public Accountant & Retired Partner of Pricewaterhouse Coopers	Patrick M. Smith Certified Public Accountant & Partner of Rosenberg, Smith, Cooney and Migliore, P.C.	Christopher E. Spinieo President & Owner of Spinieo, Inc.	Michael G. Wade Owner & President of Knights Abstract, Inc.
Richard M. Wesselt Owner & President of Wesselt Capital Group	William L. Wetty Private Investor: Founder and Former President & Chief Executive Officer of A&L Handles, Inc	S. James Worthington, Jr. An Owner of the Newtown Athletic Club in Newtown, PA

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CORPORATE OFFICE

The corporate office of First Priority Financial Corp. is located at 2 West Liberty Boulevard, Suite 104, Malvern, Pennsylvania 19355. Our Company’s website is www.fpbk.com and its phone number is (610)280-7100.

BANKING LOCATIONS

First Priority Bank operates banking branches at the locations listed below:

Malvern Office	Wyomissing Office	Newtown Office
2 West Liberty Boulevard	1200 Broadcasting Rd.	104 Pheasant Run
Suite 104	Suite 103	Suite 130
Malvern, PA 19355	Wyomissing, PA 19610	Newtown, PA 18940
(610) 280-7100	(610) 375-6054	(215) 867-2401
Plumstead Office	Blue Bell Office
5936 Easton Road	10 Sentry Parkway, Suite 100
Pipersville, PA 18947	Blue Bell, PA 19422
(267) 362-1200	(610) 940-2635

OFFICERS

First Priority Financial Corp.	First Priority Bank
David E. Sparks, Chairman, President & Chief Executive Officer	David E. Sparks Chairman & Chief Executive Officer
Lawrence E. Donato, Chief Financial Officer	Lawrence E. Donato, Managing Director, Chief Operating Officer
Mark J. Myers, Chief Accounting Officer/Controller	Alice D. Flaherty, Managing Director, Treasurer
	Mary Ann Messmer, Managing Director, President
	Matthew L. Miller, Managing Director, Chief Information Officer
	Thomas M. Miller, Managing Director, Chief Lending Officer
	Mark J. Myers, Managing Director, Chief Financial Officer

EX-3.3

Exhibit 3.3

CERTIFICATE OF DESIGNATIONS

OF

FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A

OF

FIRST PRIORITY FINANCIAL CORP.

First Priority Financial Corp., a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the “Issuer”), in accordance with the provisions of Section 1522 of the Pennsylvania Business Corporation Law of 1998 thereof, does hereby certify:

The board of directors of the Issuer (the “Board of Directors”) or an applicable committee of the Board of Directors, in accordance with the articles of incorporation and bylaws of the Issuer and applicable law, adopted the following resolution on February 18, 2009 creating a series of 4,579 shares of Preferred Stock of the Issuer designated as “Fixed Rate Cumulative Perpetual Preferred Stock, Series A”.

RESOLVED, that pursuant to the provisions of the articles of incorporation and the bylaws of the Issuer and applicable law, a series of Preferred Stock, par value $100.00 per share, of the Issuer be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Part 1. Designation and Number of Shares. There is hereby created out of the authorized and unissued shares of preferred stock of the Issuer a series of preferred stock designated as the “Fixed Rate Cumulative Perpetual Preferred Stock, Series A” (the “Designated Preferred Stock”). The authorized number of shares of Designated Preferred Stock shall be 4,579.

Part 2. Standard Provisions. The Standard Provisions contained in Schedule A attached hereto are incorporated herein by reference in their entirety and shall be deemed to be a part of this Certificate of Designations to the same extent as if such provisions had been set forth in full herein.

Part 3. Definitions. The following terms are used in this Certificate of Designations (including the Standard Provisions in Schedule A hereto) as defined below:

(a) “Common Stock” means the common stock, par value $1.00 per share, of the Issuer.

(b) “Dividend Payment Date” means February 15, May 15, August 15 and November 15 of each year.

(c) “Junior Stock” means the Common Stock and any other class or series of stock of the Issuer the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer.

(d) “Liquidation Amount” means $1,000 per share of Designated Preferred Stock.

(e) “Minimum Amount” means $1,144,750.

(f) “Parity Stock” means any class or series of stock of the Issuer (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

(g) “Signing Date” means the Original Issue Date.

Part 4. Certain Voting Matters. Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, First Priority Financial Corp. has caused this Certificate of Designations to be signed by David E. Sparks, its Chief Executive Officer, this 18th day of February.

FIRST PRIORITY FINANCIAL CORP.
By:	/s/ David E. Sparks
	Name:	David E. Sparks
	Title:	Chief Executive Officer

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Schedule A

STANDARD PROVISIONS

Section 1. General Matters. Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Issuer.

Section 2. Standard Definitions. As used herein with respect to Designated Preferred Stock:

(a) “Applicable Dividend Rate” means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum.

(b) “Appropriate Federal Banking Agency” means the “appropriate Federal banking agency” with respect to the Issuer as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.

(c) “Business Combination” means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Issuer’s stockholders.

(d) “Business Day” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

(e) “Bylaws” means the bylaws of the Issuer, as they may be amended from time to time.

(f) “Certificate of Designations” means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.

(g) “Charter” means the Issuer’s certificate or articles of incorporation, articles of association, or similar organizational document.

(h) “Dividend Period” has the meaning set forth in Section 3(a).

(i) “Dividend Record Date” has the meaning set forth in Section 3(a).

(j) “Liquidation Preference” has the meaning set forth in Section 4(a).

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(k) “Original Issue Date” means the date on which shares of Designated Preferred Stock are first issued.

(l) “Preferred Director” has the meaning set forth in Section 7(b).

(m) “Preferred Stock” means any and all series of preferred stock of the Issuer, including the Designated Preferred Stock.

(n) “Qualified Equity Offering” means the sale and issuance for cash by the Issuer to persons other than the Issuer or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Issuer at the time of issuance under the applicable risk-based capital guidelines of the Issuer’s Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to November 17, 2008).

(o) “Standard Provisions” mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.

(p) “Successor Preferred Stock” has the meaning set forth in Section 5(a).

(q) “Voting Parity Stock” means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.

Section 3. Dividends.

(a) Rate. Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a rate per annum equal to the Applicable Dividend Rate on (i) the Liquidation Amount per share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date (i.e., no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but excluding, the next Dividend Payment Date is a “Dividend Period”, provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date.

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Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month.

Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Issuer on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a “Dividend Record Date”). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day.

Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).

(b) Priority of Dividends. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock, and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased, redeemed or otherwise acquired for consideration by the Issuer or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice; (ii) the acquisition by the Issuer or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Issuer or any of its subsidiaries), including as trustees or custodians; and (iii) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case, solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock.

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When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other. If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Issuer will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date.

Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.

Section 4. Liquidation Rights.

(a) Voluntary or Involuntary Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the Issuer, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Issuer or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Issuer, subject to the rights of any creditors of the Issuer, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Issuer ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the “Liquidation Preference”).

(b) Partial Payment. If in any distribution described in Section 4(a) above the assets of the Issuer or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Issuer ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.

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(c) Residual Distributions. If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Issuer ranking equally with Designated Preferred Stock as to such distribution has been paid in full, the holders of other stock of the Issuer shall be entitled to receive all remaining assets of the Issuer (or proceeds thereof) according to their respective rights and preferences.

(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 4, the merger or consolidation of the Issuer with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Issuer, shall not constitute a liquidation, dissolution or winding up of the Issuer.

Section 5. Redemption.

(a) Optional Redemption. Except as provided below, the Designated Preferred Stock may not be redeemed prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date. On or after the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Issuer, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, out of funds legally available therefor, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption.

Notwithstanding the foregoing, prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Issuer, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption; provided that (x) the Issuer (or any successor by Business Combination) has received aggregate gross proceeds of not less than the Minimum Amount (plus the “Minimum Amount” as defined in the relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the “Successor Preferred Stock”) in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Issuer (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor).

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The redemption price for any shares of Designated Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Issuer or its agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the Dividend Record Date for a Dividend Period shall not be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3 above.

(b) No Sinking Fund. The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.

(c) Notice of Redemption. Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Issuer. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any other similar facility, notice of redemption may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility. Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.

(d) Partial Redemption. In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.

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(e) Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Issuer, in trust for the pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Issuer, after which time the holders of the shares so called for redemption shall look only to the Issuer for payment of the redemption price of such shares.

(f) Status of Redeemed Shares. Shares of Designated Preferred Stock that are redeemed, repurchased or otherwise acquired by the Issuer shall revert to authorized but unissued shares of Preferred Stock (provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).

Section 6. Conversion. Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.

Section 7. Voting Rights.

(a) General. The holders of Designated Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by law.

(b) Preferred Stock Directors. Whenever, at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly Dividend Periods or more, whether or not consecutive, the authorized number of directors of the Issuer shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (hereinafter the “Preferred Directors” and each a “Preferred Director”) to fill such newly created directorships at the Issuer’s next annual meeting of stockholders (or at a special meeting called for that purpose prior to such next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been declared and paid in full at which time such right shall terminate with respect to the Designated Preferred Stock, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned; provided that it shall be a qualification for election for any Preferred Director that the election of such Preferred Director shall not cause the Issuer to violate any corporate governance requirements of any securities exchange or other trading facility on which securities of the Issuer may then be listed or traded that listed or traded companies must have a majority of independent directors. Upon any termination of the right of the holders of shares of Designated Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the Preferred Directors shall cease to be qualified as directors, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the holders a majority of the shares of Designated Preferred Stock at the time outstanding voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.

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(c) Class Voting Rights as to Particular Matters. So long as any shares of Designated Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the vote or consent of the holders of at least 66 2/3% of the shares of Designated Preferred Stock at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:

(i) Authorization of Senior Stock. Any amendment or alteration of the Certificate of Designations for the Designated Preferred Stock or the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Issuer ranking senior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Issuer;

(ii) Amendment of Designated Preferred Stock. Any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter (including, unless no vote on such merger or consolidation is required by Section 7(c)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Designated Preferred Stock; or

(iii) Share Exchanges, Reclassifications, Mergers and Consolidations. Any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the Issuer with another corporation or other entity, unless in each case (x) the shares of Designated Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Issuer is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Designated Preferred Stock immediately prior to such consummation, taken as a whole;

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provided, however, that for all purposes of this Section 7(c), any increase in the amount of the authorized Preferred Stock, including any increase in the authorized amount of Designated Preferred Stock necessary to satisfy preemptive or similar rights granted by the Issuer to other persons prior to the Signing Date, or the creation and issuance, or an increase in the authorized or issued amount, whether pursuant to preemptive or similar rights or otherwise, of any other series of Preferred Stock, or any securities convertible into or exchangeable or exercisable for any other series of Preferred Stock, ranking equally with and/or junior to Designated Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and the distribution of assets upon liquidation, dissolution or winding up of the Issuer will not be deemed to adversely affect the rights, preferences, privileges or voting powers, and shall not require the affirmative vote or consent of, the holders of outstanding shares of the Designated Preferred Stock.

(d) Changes after Provision for Redemption. No vote or consent of the holders of Designated Preferred Stock shall be required pursuant to Section 7(c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of the Designated Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5 above.

(e) Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Designated Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which Designated Preferred Stock is listed or traded at the time.

Section 8. Record Holders. To the fullest extent permitted by applicable law, the Issuer and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Issuer nor such transfer agent shall be affected by any notice to the contrary.

Section 9. Notices. All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.

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Section 10. No Preemptive Rights. No share of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Issuer, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.

Section 11. Replacement Certificates. The Issuer shall replace any mutilated certificate at the holder’s expense upon surrender of that certificate to the Issuer. The Issuer shall replace certificates that become destroyed, stolen or lost at the holder’s expense upon delivery to the Issuer of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Issuer.

Section 12. Other Rights. The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.

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EX-3.4

Exhibit 3.4

CERTIFICATE OF DESIGNATIONS

OF

FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES B

OF

FIRST PRIORITY FINANCIAL CORP.

First Priority Financial Corp., a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the “Issuer”), in accordance with the provisions of Section 1522(b) of the Pennsylvania Business Corporation Law of 1988 thereof, does hereby certify:

The board of directors of the Issuer (the “Board of Directors”) or an applicable committee of the Board of Directors, in accordance with the articles of incorporation and bylaws of the Issuer and applicable law, adopted the following resolution on February 20, 2009 creating a series of 229 shares of Preferred Stock of the Issuer designated as “Fixed Rate Cumulative Perpetual Preferred Stock, Series B”.

RESOLVED, that pursuant to the provisions of the articles of incorporation and the bylaws of the Issuer and applicable law, a series of Preferred Stock, par value $100.00 per share, of the Issuer be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Part 1. Designation and Number of Shares. There is hereby created out of the authorized and unissued shares of preferred stock of the Issuer a series of preferred stock designated as the “Fixed Rate Cumulative Perpetual Preferred Stock, Series B” (the “Designated Preferred Stock”). The authorized number of shares of Designated Preferred Stock shall be 229.

Part 2. Standard Provisions. The Standard Provisions contained in Schedule A attached hereto are incorporated herein by reference in their entirety and shall be deemed to be a part of this Certificate of Designations to the same extent as if such provisions had been set forth in full herein.

Part 3. Definitions. The following terms are used in this Certificate of Designations (including the Standard Provisions in Schedule A hereto) as defined below:

(a) “Common Stock” means the common stock, par value $1.00 per share, of the Issuer.

(b) “Dividend Payment Date” means February 15, May 15, August 15 and November 15 of each year.

(c) “Junior Stock” means the Common Stock and any other class or series of stock of the Issuer the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer.

(d) “Liquidation Amount” means $1,000 per share of Designated Preferred Stock.

(e) “Minimum Amount” means $57,250.00.

(f) “Parity Stock” means any class or series of stock of the Issuer (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer (in each case without regard to whether dividends accrue cumulatively or non-cumulatively). Without limiting the foregoing, Parity Stock shall include the Issuer’s UST Preferred Stock.

(g) “Signing Date” means the Original Issue Date.

(h) “UST Preferred Stock” means the Issuer’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A.

Part 4. Certain Voting Matters. Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, First Priority Financial Corp. has caused this Certificate of Designations to be signed by David E. Sparks, its President and Chief Executive Officer, this 18th day of February 2009.

FIRST PRIORITY FINANCIAL CORP.
By:	/s/ David E. Sparks
	Name:	David E. Sparks
	Title:	President and Chief Executive Officer

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Schedule A

STANDARD PROVISIONS

Section 1. General Matters. Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Issuer.

Section 2. Standard Definitions. As used herein with respect to Designated Preferred Stock:

(a) “Appropriate Federal Banking Agency” means the “appropriate Federal banking agency” with respect to the Issuer as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.

(b) “Business Combination” means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Issuer’s stockholders.

(c) “Business Day” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

(d) “Bylaws” means the bylaws of the Issuer, as they may be amended from time to time.

(e) “Certificate of Designations” means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.

(f) “Charter” means the Issuer’s certificate or articles of incorporation, articles of association, or similar organizational document.

(g) “Dividend Period” has the meaning set forth in Section 3(a).

(h) “Dividend Record Date” has the meaning set forth in Section 3(a).

(i) “Liquidation Preference” has the meaning set forth in Section 4(a).

(j) “Original Issue Date” means the date on which shares of Designated Preferred Stock are first issued.

(k) “Preferred Director” has the meaning set forth in Section 7(b).

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(l) “Preferred Stock” means any and all series of preferred stock of the Issuer, including the Designated Preferred Stock.

(m) “Qualified Equity Offering” means the sale and issuance for cash by the Issuer to persons other than the Issuer or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Issuer at the time of issuance under the applicable risk-based capital guidelines of the Issuer’s Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to November 17, 2008).

(n) “Standard Provisions” mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.

(o) “Successor Preferred Stock” has the meaning set forth in Section 5(a).

(p) “Voting Parity Stock” means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.

Section 3. Dividends.

(a) Rate. Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a per annum rate of 9.0% on (i) the Liquidation Amount per share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date (i.e., no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but excluding, the next Dividend Payment Date is a “Dividend Period”, provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date.

Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month.

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Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Issuer on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a “Dividend Record Date”). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day.

Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).

(b) Priority of Dividends. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock, and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased, redeemed or otherwise acquired for consideration by the Issuer or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice; (ii) the acquisition by the Issuer or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Issuer or any of its subsidiaries), including as trustees or custodians; and (iii) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case, solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock.

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When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other. If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Issuer will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date.

Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.

Section 4. Liquidation Rights.

(a) Voluntary or Involuntary Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the Issuer, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Issuer or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Issuer, subject to the rights of any creditors of the Issuer, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Issuer ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the “Liquidation Preference”).

(b) Partial Payment. If in any distribution described in Section 4(a) above the assets of the Issuer or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Issuer ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.

(c) Residual Distributions. If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Issuer ranking equally with Designated Preferred Stock as to such distribution has been paid in full, the holders of other stock of the Issuer shall be entitled to receive all remaining assets of the Issuer (or proceeds thereof) according to their respective rights and preferences.

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(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 4, the merger or consolidation of the Issuer with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Issuer, shall not constitute a liquidation, dissolution or winding up of the Issuer.

Section 5. Redemption.

(a) Optional Redemption. Except as provided below, the Designated Preferred Stock may not be redeemed prior to the later of (i) first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date; and (ii) the date on which all outstanding shares of UST Preferred Stock have been redeemed, repurchased or otherwise acquired by the Issuer. On or after the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Issuer, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, out of funds legally available therefor, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption.

Notwithstanding the foregoing, prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Issuer, at its option, subject to the approval of the Appropriate Federal Banking Agency and subject to the requirement that all outstanding shares of UST Preferred Stock shall previously have been redeemed, repurchased or otherwise acquired by the Issuer, may redeem, in whole or in part, at any time and from time to time, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption; provided that (x) the Issuer (or any successor by Business Combination) has received aggregate gross proceeds of not less than the Minimum Amount (plus the “Minimum Amount” as defined in the relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the “Successor Preferred Stock”) in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Issuer (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor).

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The redemption price for any shares of Designated Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Issuer or its agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the Dividend Record Date for a Dividend Period shall not be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3 above.

(b) No Sinking Fund. The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.

(c) Notice of Redemption. Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Issuer. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any other similar facility, notice of redemption may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility. Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.

(d) Partial Redemption. In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.

(e) Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Issuer, in trust for the pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Issuer, after which time the holders of the shares so called for redemption shall look only to the Issuer for payment of the redemption price of such shares.

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(f) Status of Redeemed Shares. Shares of Designated Preferred Stock that are redeemed, repurchased or otherwise acquired by the Issuer shall revert to authorized but unissued shares of Preferred Stock (provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).

Section 6. Conversion. Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.

Section 7. Voting Rights.

(a) General. The holders of Designated Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by law.

(b) Preferred Stock Directors. Whenever, at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly Dividend Periods or more, whether or not consecutive, the authorized number of directors of the Issuer shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (hereinafter the “Preferred Directors” and each a “Preferred Director”) to fill such newly created directorships at the Issuer’s next annual meeting of stockholders (or at a special meeting called for that purpose prior to such next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been declared and paid in full at which time such right shall terminate with respect to the Designated Preferred Stock, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned; provided that it shall be a qualification for election for any Preferred Director that the election of such Preferred Director shall not cause the Issuer to violate any corporate governance requirements of any securities exchange or other trading facility on which securities of the Issuer may then be listed or traded that listed or traded companies must have a majority of independent directors. Upon any termination of the right of the holders of shares of Designated Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the Preferred Directors shall cease to be qualified as directors, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the holders a majority of the shares of Designated Preferred Stock at the time outstanding voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.

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(c) Class Voting Rights as to Particular Matters. So long as any shares of Designated Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the vote or consent of the holders of at least 66 2/3% of the shares of Designated Preferred Stock at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:

(i) Authorization of Senior Stock. Any amendment or alteration of the Certificate of Designations for the Designated Preferred Stock or the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Issuer ranking senior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Issuer;

(ii) Amendment of Designated Preferred Stock. Any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter (including, unless no vote on such merger or consolidation is required by Section 7(c)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Designated Preferred Stock; or

(iii) Share Exchanges, Reclassifications, Mergers and Consolidations. Any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the Issuer with another corporation or other entity, unless in each case (x) the shares of Designated Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Issuer is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Designated Preferred Stock immediately prior to such consummation, taken as a whole;

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provided, however, that for all purposes of this Section 7(c), any increase in the amount of the authorized Preferred Stock, including any increase in the authorized amount of Designated Preferred Stock necessary to satisfy preemptive or similar rights granted by the Issuer to other persons prior to the Signing Date, or the creation and issuance, or an increase in the authorized or issued amount, whether pursuant to preemptive or similar rights or otherwise, of any other series of Preferred Stock, or any securities convertible into or exchangeable or exercisable for any other series of Preferred Stock, ranking equally with and/or junior to Designated Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and the distribution of assets upon liquidation, dissolution or winding up of the Issuer will not be deemed to adversely affect the rights, preferences, privileges or voting powers, and shall not require the affirmative vote or consent of, the holders of outstanding shares of the Designated Preferred Stock.

(d) Changes after Provision for Redemption. No vote or consent of the holders of Designated Preferred Stock shall be required pursuant to Section 7(c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of the Designated Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5 above.

(e) Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Designated Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which Designated Preferred Stock is listed or traded at the time.

Section 8. Record Holders. To the fullest extent permitted by applicable law, the Issuer and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Issuer nor such transfer agent shall be affected by any notice to the contrary.

Section 9. Notices. All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.

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Section 10. No Preemptive Rights. No share of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Issuer, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.

Section 11. Replacement Certificates. The Issuer shall replace any mutilated certificate at the holder’s expense upon surrender of that certificate to the Issuer. The Issuer shall replace certificates that become destroyed, stolen or lost at the holder’s expense upon delivery to the Issuer of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Issuer.

Section 12. Other Rights. The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.

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EX-4.1

Exhibit 4.1

WARRANT TO PURCHASE PREFERRED STOCK

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. THIS INSTRUMENT IS ISSUED SUBJECT TO THE RESTRICTIONS ON TRANSFER AND OTHER PROVISIONS OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE ISSUER OF THESE SECURITIES AND THE INVESTOR REFERRED TO THEREIN, A COPY OF WHICH IS ON FILE WITH THE ISSUER. THE SECURITIES REPRESENTED BY THIS INSTRUMENT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH SAID AGREEMENT. ANY SALE OR OTHER TRANSFER NOT IN COMPLIANCE WITH SAID AGREEMENT WILL BE VOID.

WARRANT
to purchase
254.44444
Shares of Preferred Stock

of First Priority Financial Corp.

Issue Date: February 20, 2009

1. Definitions. Unless the context otherwise requires, when used herein the following terms shall have the meanings indicated.

“Board of Directors” means the board of directors of the Company, including any duly authorized committee thereof.

“business day” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

“Charter” means, with respect to any Person, its certificate or articles of incorporation, articles of association, or similar organizational document.

“Company” means the Person whose name, corporate or other organizational form and jurisdiction of organization is set forth in Item 1 of Schedule A hereto.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

“Exercise Price” means the amount set forth in Item 2 of Schedule A hereto.

“Expiration Time” has the meaning set forth in Section 3.

“Issue Date” means the date set forth in Item 3 of Schedule A hereto. “Liquidation Amount” means the amount set forth in Item 4 of Schedule A hereto.

“Original Warrantholder” means the United States Department of the Treasury. Any actions specified to be taken by the Original Warrantholder hereunder may only be taken by such Person and not by any other Warrantholder.

“Person” has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

“Preferred Stock” means the series of perpetual preferred stock set forth in Item 5 of Schedule A hereto.

“Purchase Agreement” means the Securities Purchase Agreement — Standard Terms incorporated into the Letter Agreement, dated as of the date set forth in Item 6 of Schedule A hereto, as amended from time to time, between the Company and the United States Department of the Treasury (the “Letter Agreement”), including all annexes and schedules thereto.

“Regulatory Approvals” with respect to the Warrantholder, means, to the extent applicable and required to permit the Warrantholder to exercise this Warrant for shares of Preferred Stock and to own such Preferred Stock without the Warrantholder being in violation of applicable law, rule or regulation, the receipt of any necessary approvals and authorizations of, filings and registrations with, notifications to, or expiration or termination of any applicable waiting period under, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.

“SEC” means the U.S. Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

“Shares” has the meaning set forth in Section 2. “Warrantholder” has the meaning set forth in Section 2.

“Warrant” means this Warrant, issued pursuant to the Purchase Agreement.

2. Number of Shares; Exercise Price. This certifies that, for value received, the United States Department of the Treasury or its permitted assigns (the “Warrantholder”) is entitled, upon the terms and subject to the conditions hereinafter set forth, to acquire from the Company, in whole or in part, after the receipt of all applicable Regulatory Approvals, if any, up to an aggregate of the number of fully paid and nonassessable shares of Preferred Stock set forth in Item 7 of Schedule A hereto (the “Shares”), at a purchase price per share of Preferred Stock equal to the Exercise Price.

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3. Exercise of Warrant; Term. Subject to Section 2, to the extent permitted by applicable laws and regulations, the right to purchase the Shares represented by this Warrant is exercisable, in whole or in part by the Warrantholder, at any time or from time to time after the execution and delivery of this Warrant by the Company on the date hereof, but in no event later than 5:00 p.m., New York City time on the tenth anniversary of the Issue Date (the “Expiration Time”), by (A) the surrender of this Warrant and Notice of Exercise annexed hereto, duly completed and executed on behalf of the Warrantholder, at the principal executive office of the Company located at the address set forth in Item 8 of Schedule A hereto (or such other office or agency of the Company in the United States as it may designate by notice in writing to the Warrantholder at the address of the Warrantholder appearing on the books of the Company), and (B) payment of the Exercise Price for the Shares thereby purchased, by having the Company withhold, from the shares of Preferred Stock that would otherwise be delivered to the Warrantholder upon such exercise, shares of Preferred Stock issuable upon exercise of the Warrant with an aggregate Liquidation Amount equal in value to the aggregate Exercise Price as to which this Warrant is so exercised.

If the Warrantholder does not exercise this Warrant in its entirety, the Warrantholder will be entitled to receive from the Company within a reasonable time, and in any event not exceeding three business days, a new warrant in substantially identical form for the purchase of that number of Shares equal to the difference between the number of Shares subject to this Warrant and the number of Shares as to which this Warrant is so exercised. Notwithstanding anything in this Warrant to the contrary, the Warrantholder hereby acknowledges and agrees that its exercise of this Warrant for Shares is subject to the condition that the Warrantholder will have first received any applicable Regulatory Approvals.

4. Issuance of Shares; Authorization. Certificates for Shares issued upon exercise of this Warrant will be issued in such name or names as the Warrantholder may designate and will be delivered to such named Person or Persons within a reasonable time, not to exceed three business days after the date on which this Warrant has been duly exercised in accordance with the terms of this Warrant. The Company hereby represents and warrants that any Shares issued upon the exercise of this Warrant in accordance with the provisions of Section 3 will be duly and validly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges (other than liens or charges created by the Warrantholder, income and franchise taxes incurred in connection with the exercise of the Warrant or taxes in respect of any transfer occurring contemporaneously therewith). The Company agrees that the Shares so issued will be deemed to have been issued to the Warrantholder as of the close of business on the date on which this Warrant and payment of the Exercise Price are delivered to the Company in accordance with the terms of this Warrant, notwithstanding that the stock transfer books of the Company may then be closed or certificates representing such Shares may not be actually delivered on such date. The Company will at all times reserve and keep available, out of its authorized but unissued preferred stock, solely for the purpose of providing for the exercise of this Warrant, the aggregate number of shares of Preferred Stock then issuable upon exercise of this Warrant at any time. The Company will use reasonable best efforts to ensure that the Shares may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange on which the Shares are listed or traded.

5. No Rights as Stockholders; Transfer Books. This Warrant does not entitle the Warrantholder to any voting rights or other rights as a stockholder of the Company prior to the date of exercise hereof. The Company will at no time close its transfer books against transfer of this Warrant in any manner which interferes with the timely exercise of this Warrant.

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6. Charges, Taxes and Expenses. Issuance of certificates for Shares to the Warrantholder upon the exercise of this Warrant shall be made without charge to the Warrantholder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company.

7. Transfer/Assignment.

(A) Subject to compliance with clause (B) of this Section 7, this Warrant and all rights hereunder are transferable, in whole or in part, upon the books of the Company by the registered holder hereof in person or by duly authorized attorney, and a new warrant shall be made and delivered by the Company, of the same tenor and date as this Warrant but registered in the name of one or more transferees, upon surrender of this Warrant, duly endorsed, to the office or agency of the Company described in Section 3. All expenses (other than stock transfer taxes) and other charges payable in connection with the preparation, execution and delivery of the new warrants pursuant to this Section 7 shall be paid by the Company.

(B) The transfer of the Warrant and the Shares issued upon exercise of the Warrant are subject to the restrictions set forth in Section 4.4 of the Purchase Agreement. If and for so long as required by the Purchase Agreement, this Warrant shall contain the legends as set forth in Section 4.2(a) of the Purchase Agreement.

8. Exchange and Registry of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Warrantholder to the Company, for a new warrant or warrants of like tenor and representing the right to purchase the same aggregate number of Shares. The Company shall maintain a registry showing the name and address of the Warrantholder as the registered holder of this Warrant. This Warrant may be surrendered for exchange or exercise in accordance with its terms, at the office of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry.

9. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in the case of any such loss, theft or destruction, upon receipt of a bond, indemnity or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company shall make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of Shares as provided for in such lost, stolen, destroyed or mutilated Warrant.

10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a business day, then such action may be taken or such right may be exercised on the next succeeding day that is a business day.

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11. Rule 144 Information. The Company covenants that it will use its reasonable best efforts to timely file all reports and other documents required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations promulgated by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Warrantholder, make publicly available such information as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will use reasonable best efforts to take such further action as any Warrantholder may reasonably request, in each case to the extent required from time to time to enable such holder to, if permitted by the terms of this Warrant and the Purchase Agreement, sell this Warrant without registration under the Securities Act within the limitation of the exemptions provided by (A) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (B) any successor rule or regulation hereafter adopted by the SEC. Upon the written request of any Warrantholder, the Company will deliver to such Warrantholder a written statement that it has complied with such requirements.

12. Adjustments and Other Rights. For so long as the Original Warrantholder holds this Warrant or any portion thereof, if any event occurs that, in the good faith judgment of the Board of Directors of the Company, would require adjustment of the Exercise Price or number of Shares into which this Warrant is exercisable in order to fairly and adequately protect the purchase rights of the Warrants in accordance with the essential intent and principles of the Purchase Agreement and this Warrant, then the Board of Directors shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of the Board of Directors, to protect such purchase rights as aforesaid.

Whenever the Exercise Price or the number of Shares into which this Warrant is exercisable shall be adjusted as provided in this Section 12, the Company shall forthwith file at the principal office of the Company a statement showing in reasonable detail the facts requiring such adjustment and the Exercise Price that shall be in effect and the number of Shares into which this Warrant shall be exercisable after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each Warrantholder at the address appearing in the Company’s records.

13. No Impairment. The Company will not, by amendment of its Charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrantholder.

14. Governing Law. This Warrant will be governed by and construed in accordance with the federal law of the United States if and to the extent such law is applicable, and otherwise in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. Each of the Company and the Warrantholder agrees (a) to submit to the exclusive jurisdiction and venue of the United States District Court for the District of Columbia for any civil action, suit or proceeding arising out of or relating to this Warrant or the transactions contemplated hereby, and (b) that notice may be served upon the Company at the address in Section 17 below and upon the Warrantholder at the address for the Warrantholder set forth in the registry maintained by the Company pursuant to Section 8 hereof. To the extent permitted by applicable law, each of the Company and the Warrantholder hereby unconditionally waives trial by jury in any civil legal action or proceeding relating to the Warrant or the transactions contemplated hereby or thereby.

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15. Binding Effect. This Warrant shall be binding upon any successors or assigns of the Company.

16. Amendments. This Warrant may be amended and the observance of any term of this Warrant may be waived only with the written consent of the Company and the Warrantholder.

17. Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt, or (b) on the second business day following the date of dispatch if delivered by a recognized next day courier service. All notices hereunder shall be delivered as set forth in Item 9 of Schedule A hereto, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.

18. Entire Agreement. This Warrant, the forms attached hereto and Schedule A hereto (the terms of which are incorporated by reference herein), and the Letter Agreement (including all documents incorporated therein), contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or undertakings with respect thereto.

[Remainder of page intentionally left blank]

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Form of Notice of Exercise

Date:                                         

TO: First Priority Financial Corp.

RE: Election to Purchase Preferred Stock

The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby agrees to subscribe for and purchase such number of shares of Preferred Stock covered by the Warrant such that after giving effect to an exercise pursuant to Section 3(B) of the Warrant, the undersigned will receive the net number of shares of Preferred Stock set forth below. The undersigned, in accordance with Section 3 of the Warrant, hereby agrees to pay the aggregate Exercise Price for such shares of Preferred Stock in the manner set forth in Section 3(B) of the Warrant.

Number of Shares of Preferred Stock:¹                                         

The undersigned agrees that it is exercising the attached Warrant in full and that, upon receipt by the undersigned of the number of shares of Preferred Stock set forth above, such Warrant shall be deemed to be cancelled and surrendered to the Company.

Holder:

By:
	Name:
	Title:

1. Number of shares to be received by the undersigned upon exercise of the attached Warrant pursuant to Section 3(B) thereof.

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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by a duly authorized officer.

Dated: February 20, 2009

COMPANY: FIRST PRIORITY FINANCIAL CORP.
By:	/s/ David E. Sparks
	Name:	David E. Sparks
	Title:	Chairman, President and Chief Executive Officer
Attest:
By:	/s/ Lawrence E. Donato
	Name:	Lawrence E. Donato
	Title:	Chief Financial Officer

[Signature Page to Warrant]

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SCHEDULE A

Item 1

Name: First Priority Financial Corp.
Corporate or other organizational form: Business corporation
Jurisdiction of organization: Commonwealth of Pennsylvania

Item 2

Exercise Price: $100.00

Item 3

Issue Date: February 20, 2009

Item 4

Liquidation Amount: $1,000.00 per share

Item 5

Series of Perpetual Preferred Stock: Fixed Rate Cumulative Perpetual Preferred Stock, Series B

Item 6

Date of Letter Agreement between the Company and the United States Department of the Treasury: February 20, 2009

Item 7

Number of shares of Preferred Stock: 254.44444

Item 8

Company’s address:

First Priority Financial Corp.
2 West Liberty Boulevard, Suite 104
Malvern, Pennsylvania 19355

Item 9

Notice information:

If to the Company:

First Priority Financial Corp.
2 West Liberty Boulevard, Suite 104
Malvern, Pennsylvania 19355
Attn: Lawrence E. Donato, Chief Financial Officer
Facsimile: (484) 527-4037

with a copy to:

Stevens & Lee
111 North Sixth Street
Reading, Pennsylvania 19603
Attention: Sunjeet S. Gill, Esquire
Facsimile: (610) 371-1228

If to the Warrantholder:

United States Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 2312
Washington, D.C. 20220
Attention: Assistant General Counsel (Banking and Finance)
Facsimile: (202) 622-1974

EX-10.6

Exhibit 10.6

United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Dear Ladies and Gentlemen:

The company set forth on the signature page hereto (the “Company”) intends to issue in a private placement the number of shares of a series of its preferred stock set forth on Schedule A hereto (the “Preferred Shares”) and a warrant to purchase the number of shares of a series of its preferred stock set forth on Schedule A hereto (the “Warrant” and, together with the Preferred Shares, the “Purchased Securities”) and the United States Department of the Treasury (the “Investor”) intends to purchase from the Company the Purchased Securities.

The purpose of this letter agreement is to confirm the terms and conditions of the purchase by the Investor of the Purchased Securities. Except to the extent supplemented or superseded by the terms set forth herein or in the Schedules hereto, the provisions contained in the Securities Purchase Agreement — Standard Terms attached hereto as Exhibit A (the “Securities Purchase Agreement”) are incorporated by reference herein. Terms that are defined in the Securities Purchase Agreement are used in this letter agreement as so defined. In the event of any inconsistency between this letter agreement and the Securities Purchase Agreement, the terms of this letter agreement shall govern.

Each of the Company and the Investor hereby confirms its agreement with the other party with respect to the issuance by the Company of the Purchased Securities and the purchase by the Investor of the Purchased Securities pursuant to this letter agreement and the Securities Purchase Agreement on the terms specified on Schedule A hereto.

This letter agreement (including the Schedules hereto), the Securities Purchase Agreement (including the Annexes thereto), the Disclosure Schedules and the Warrant constitute the entire agreement, and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties, with respect to the subject matter hereof. This letter agreement constitutes the “Letter Agreement” referred to in the Securities Purchase Agreement.

This letter agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement. Executed signature pages to this letter agreement may be delivered by facsimile and such facsimiles will be deemed as sufficient as if actual signature pages had been delivered.

* * *

In witness whereof, this letter agreement has been duly executed and delivered by the duly authorized representatives of the parties hereto as of the date written below.

UNITED STATES DEPARTMENT OF THE TREASURY
By:	/s/ Neil Kashkari
	Name:	Neil Kashkari
	Title:	Interim Assistant Secretary For Financial Stability
COMPANY: FIRST PRIORITY FINANCIAL CORP.
By:	/s/ David E. Sparks
	Name:	David E. Sparks
	Title:	Chief Executive Officer

Date: February 20, 2009

[Signature Page to Letter Agreement]

EXHIBIT A

(Non-Exchange-Traded QFIs, excluding S Corps
and Mutual Organizations)

SECURITIES PURCHASE AGREEMENT

STANDARD TERMS

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TABLE OF CONTENTS

	Page
Article I
Purchase; Closing
1.1 Purchase		1
1.2 Closing		2
1.3 Interpretation		4
Article II
Representations and Warranties
2.1 Disclosure		4
2.2 Representations and Warranties of the Company		5
Article III
Covenants
3.1 Commercially Reasonable Efforts		13
3.2 Expenses		13
3.3 Sufficiency of Authorized Warrant Preferred Stock; Exchange Listing		13
3.4 Certain Notifications Until Closing		14
3.5 Access, Information and Confidentiality		14
Article IV
Additional Agreements
4.1 Purchase for Investment		15
4.2 Legends		16
4.3 Certain Transactions		17
4.4 Transfer of Purchased Securities and Warrant Shares; Restrictions on Exercise of the Warrant		17
4.5 Registration Rights		18
4.6 Depositary Shares		29
4.7 Restriction on Dividends and Repurchases		30
4.8 Executive Compensation		32
4.9 Related Party Transactions		32
4.10 Bank and Thrift Holding Company Status		32
4.11 Predominantly Financial		32

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	Page
Article V
Miscellaneous
5.1 Termination		33
5.2 Survival of Representations and Warranties		33
5.3 Amendment		33
5.4 Waiver of Conditions		33
5.5 Governing Law: Submission to Jurisdiction, Etc.		34
5.6 Notices		34
5.7 Definitions		34
5.8 Assignment		35
5.9 Severability		35
5.10 No Third Party Beneficiaries		35

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LIST OF ANNEXES

ANNEX A:	FORM OF CERTIFICATE OF DESIGNATIONS FOR PREFERRED STOCK
ANNEX B:	FORM OF CERTIFICATE OF DESIGNATIONS FOR WARRANT PREFERRED STOCK
ANNEX C:	FORM OF WAIVER
ANNEX D:	FORM OF OPINION
ANNEX E:	FORM OF WARRANT

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INDEX OF DEFINED TERMS

	Location of
Term	Definition
Affiliate	5.7(b)
Agreement	Recitals
Appropriate Federal Banking Agency	2.2(s)
Bank Holding Company	4.10
Bankruptcy Exceptions	2.2(d)
Benefit Plans	1.2(d)(iv)
Board of Directors	2.2(f)
Business Combination	5.8
business day	1.3
Capitalization Date	2.2(b)
Certificates of Designations	1.2(d)(iii)
Charter	1.2(d)(iii)
Closing	1.2(a)
Closing Date	1.2(a)
Code	2.2(n)
Common Stock	2.2(b)
Company	Recitals
Company Financial Statements	2.2(h)
Company Material Adverse Effect	2.1(b)
Company Reports	2.2(i)(i)
Company Subsidiary; Company Subsidiaries	2.2(e)(ii)
control; controlled by; under common control with	5.7(b)
Controlled Group	2.2(n)
CPP	Recitals
Disclosure Schedule	2.1(a)
EESA	1.2(d)(iv)
ERISA	2.2(n)
Exchange Act	4.4
Federal Reserve	4.10
GAAP	2.1(b)
Governmental Entities	1.2(c)
Holder	4.5(l)(i)
Holders’ Counsel	4.5(l)(ii)
Indemnitee	4.5(h)(i)
Information	3.5(c)
Investor	Recitals
Junior Stock	4.7(f)
knowledge of the Company; Company’s knowledge	5.7(c)
Letter Agreement	Recitals
officers	5.7(c)
Parity Stock	4.7(f)

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	Location of
Term	Definition
Pending Underwritten Offering	4.5(m)
Permitted Repurchases	4.7(c)
Piggyback Registration	4.5(b)(iv)
Plan	2.2(n)
Preferred Shares	Recitals
Preferred Stock	Recitals
Previously Disclosed	2.1(c)
Proprietary Rights	2.2(u)
Purchase	Recitals
Purchase Price	1.1
Purchased Securities	Recitals
register; registered; registration	4.5(l)(iii)
Registrable Securities	4.5(l)(iv)
Registration Expenses	4.5(l)(v)
Regulatory Agreement	2.2(s)
Rule 144; Rule 144A; Rule 159A; Rule 405; Rule 415	4.5(l)(vi)
Savings and Loan Holding Company	4.10
Schedules	Recitals
SEC	2.2(k)
Securities Act	2.2(a)
Selling Expenses	4.5(l)(vii)
Senior Executive Officers	4.8
Shelf Registration Statement	4.5(b)(ii)
Signing Date	2.1(b)
Special Registration	4.5(j)
subsidiary	5.7(a)
Tax; Taxes	2.2(o)
Transfer	4.4
Warrant	Recitals
Warrant Preferred Stock	Recitals
Warrant Shares	2.2(d)

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SECURITIES PURCHASE AGREEMENT — STANDARD TERMS

Recitals:

WHEREAS, the United States Department of the Treasury (the “Investor”) may from time to time agree to purchase shares of preferred stock and warrants from eligible financial institutions which elect to participate in the Troubled Asset Relief Program Capital Purchase Program (“CPP”);

WHEREAS, an eligible financial institution electing to participate in the CPP and issue securities to the Investor (referred to herein as the “Company”) shall enter into a letter agreement (the “Letter Agreement”) with the Investor which incorporates this Securities Purchase Agreement — Standard Terms;

WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy;

WHEREAS, the Company agrees to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market;

WHEREAS, the Company intends to issue in a private placement the number of shares of the series of its Preferred Stock (“Preferred Stock”) set forth on Schedule A to the Letter Agreement (the “Preferred Shares”) and a warrant to purchase the number of shares of the series of its Preferred Stock (“Warrant Preferred Stock”) set forth on Schedule A to the Letter Agreement (the “Warrant” and, together with the Preferred Shares, the “Purchased Securities”) and the Investor intends to purchase (the “Purchase”) from the Company the Purchased Securities; and

WHEREAS, the Purchase will be governed by this Securities Purchase Agreement — Standard Terms and the Letter Agreement, including the schedules thereto (the “Schedules”), specifying additional terms of the Purchase. This Securities Purchase Agreement — Standard Terms (including the Annexes hereto) and the Letter Agreement (including the Schedules thereto) are together referred to as this “Agreement”. All references in this Securities Purchase Agreement — Standard Terms to “Schedules” are to the Schedules attached to the Letter Agreement.

NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:

Article I
Purchase; Closing

1.1 Purchase. On the terms and subject to the conditions set forth in this Agreement, the Company agrees to sell to the Investor, and the Investor agrees to purchase from the Company, at the Closing (as hereinafter defined), the Purchased Securities for the price set forth on Schedule A (the “Purchase Price”).

1.2 Closing.

(a) On the terms and subject to the conditions set forth in this Agreement, the closing of the Purchase (the “Closing”) will take place at the location specified in Schedule A, at the time and on the date set forth in Schedule A or as soon as practicable thereafter, or at such other place, time and date as shall be agreed between the Company and the Investor. The time and date on which the Closing occurs is referred to in this Agreement as the “Closing Date”.

(b) Subject to the fulfillment or waiver of the conditions to the Closing in this Section 1.2, at the Closing the Company will deliver the Preferred Shares and the Warrant, in each case as evidenced by one or more certificates dated the Closing Date and bearing appropriate legends as hereinafter provided for, in exchange for payment in full of the Purchase Price by wire transfer of immediately available United States funds to a bank account designated by the Company on Schedule A.

(c) The respective obligations of each of the Investor and the Company to consummate the Purchase are subject to the fulfillment (or waiver by the Investor and the Company, as applicable) prior to the Closing of the conditions that (i) any approvals or authorizations of all United States and other governmental, regulatory or judicial authorities (collectively, “Governmental Entities”) required for the consummation of the Purchase shall have been obtained or made in form and substance reasonably satisfactory to each party and shall be in full force and effect and all waiting periods required by United States and other applicable law, if any, shall have expired and (ii) no provision of any applicable United States or other law and no judgment, injunction, order or decree of any Governmental Entity shall prohibit the purchase and sale of the Purchased Securities as contemplated by this Agreement.

(d) The obligation of the Investor to consummate the Purchase is also subject to the fulfillment (or waiver by the Investor) at or prior to the Closing of each of the following conditions:

(i) (A) the representations and warranties of the Company set forth in (x) Section 2.2(g) of this Agreement shall be true and correct in all respects as though made on and as of the Closing Date, (y) Sections 2.2(a) through (f) shall be true and correct in all material respects as though made on and as of the Closing Date (other than representations and warranties that by their terms speak as of another date, which representations and warranties shall be true and correct in all material respects as of such other date) and (z) Sections 2.2(h) through (v) (disregarding all qualifications or limitations set forth in such representations and warranties as to “materiality”, “Company Material Adverse Effect” and words of similar import) shall be true and correct as though made on and as of the Closing Date (other than representations and warranties that by their terms speak as of another date, which representations and warranties shall be true and correct as of such other date), except to the extent that the failure of such representations and warranties referred to in this Section 1.2(d)(i)(A)(z) to be so true and correct, individually or in the aggregate, does not have and would not reasonably be expected to have a Company Material Adverse Effect and (B) the Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing;

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(ii) the Investor shall have received a certificate signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Section 1.2(d)(i) have been satisfied;

(iii) the Company shall have duly adopted and filed with the Secretary of State of its jurisdiction of organization or other applicable Governmental Entity the amendments to its certificate or articles of incorporation, articles of association, or similar organizational document (“Charter”) in substantially the forms attached hereto as Annex A and Annex B (the “Certificates of Designations”) and such filing shall have been accepted;

(iv) (A) the Company shall have effected such changes to its compensation, bonus, incentive and other benefit plans, arrangements and agreements (including golden parachute, severance and employment agreements) (collectively, “Benefit Plans”) with respect to its Senior Executive Officers (and to the extent necessary for such changes to be legally enforceable, each of its Senior Executive Officers shall have duly consented in writing to such changes), as may be necessary, during the period that the Investor owns any debt or equity securities of the Company acquired pursuant to this Agreement or the Warrant, in order to comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (“EESA”) as implemented by guidance or regulation thereunder that has been issued and is in effect as of the Closing Date, and (B) the Investor shall have received a certificate signed on behalf of the Company by a senior executive officer certifying to the effect that the condition set forth in Section 1.2(d)(iv)(A) has been satisfied;

(v) each of the Company’s Senior Executive Officers shall have delivered to the Investor a written waiver in the form attached hereto as Annex C releasing the Investor from any claims that such Senior Executive Officers may otherwise have as a result of the issuance, on or prior to the Closing Date, of any regulations which require the modification of, and the agreement of the Company hereunder to modify, the terms of any Benefit Plans with respect to its Senior Executive Officers to eliminate any provisions of such Benefit Plans that would not be in compliance with the requirements of Section 111(b) of the EESA as implemented by guidance or regulation thereunder that has been issued and is in effect as of the Closing Date;

(vi) the Company shall have delivered to the Investor a written opinion from counsel to the Company (which may be internal counsel), addressed to the Investor and dated as of the Closing Date, in substantially the form attached hereto as Annex D;

(vii) the Company shall have delivered certificates in proper form or, with the prior consent of the Investor, evidence of shares in book-entry form, evidencing the Preferred Shares to Investor or its designee(s); and

(viii) the Company shall have duly executed the Warrant in substantially the form attached hereto as Annex E and delivered such executed Warrant to the Investor or its designee(s).

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1.3 Interpretation. When a reference is made in this Agreement to “Recitals,” “Articles,” “Sections,” or “Annexes” such reference shall be to a Recital, Article or Section of, or Annex to, this Securities Purchase Agreement — Standard Terms, and a reference to “Schedules” shall be to a Schedule to the Letter Agreement, in each case, unless otherwise indicated. The terms defined in the singular have a comparable meaning when used in the plural, and vice versa. References to “herein”, “hereof”, “hereunder” and the like refer to this Agreement as a whole and not to any particular section or provision, unless the context requires otherwise. The table of contents and headings contained in this Agreement are for reference purposes only and are not part of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed followed by the words “without limitation.” No rule of construction against the draftsperson shall be applied in connection with the interpretation or enforcement of this Agreement, as this Agreement is the product of negotiation between sophisticated parties advised by counsel. All references to “$” or “dollars” mean the lawful currency of the United States of America. Except as expressly stated in this Agreement, all references to any statute, rule or regulation are to the statute, rule or regulation as amended, modified, supplemented or replaced from time to time (and, in the case of statutes, include any rules and regulations promulgated under the statute) and to any section of any statute, rule or regulation include any successor to the section. References to a “business day” shall mean any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

Article II
Representations and Warranties

2.1 Disclosure.

(a) On or prior to the Signing Date, the Company delivered to the Investor a schedule (“Disclosure Schedule”) setting forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more representations or warranties contained in Section 2.2.

(b) “Company Material Adverse Effect” means a material adverse effect on (i) the business, results of operation or financial condition of the Company and its consolidated subsidiaries taken as a whole; provided, however, that Company Material Adverse Effect shall not be deemed to include the effects of (A) changes after the date of the Letter Agreement (the “Signing Date”) in general business, economic or market conditions (including changes generally in prevailing interest rates, credit availability and liquidity, currency exchange rates and price levels or trading volumes in the United States or foreign securities or credit markets), or any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism, in each case generally affecting the industries in which the Company and its subsidiaries operate, (B) changes or proposed changes after the Signing Date in generally accepted accounting principles in the United States (“GAAP”) or regulatory accounting requirements, or authoritative interpretations thereof, or (C) changes or proposed changes after the Signing Date in securities, banking and other laws of general applicability or related policies or interpretations of Governmental Entities (in the case of each of these clauses (A), (B) and (C), other than changes or occurrences to the extent that such changes or occurrences have or would reasonably be expected to have a materially disproportionate adverse effect on the Company and its consolidated subsidiaries taken as a whole relative to comparable U.S. banking or financial services organizations); or (ii) the ability of the Company to consummate the Purchase and other transactions contemplated by this Agreement and the Warrant and perform its obligations hereunder or thereunder on a timely basis.

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(c) “Previously Disclosed” means information set forth on the Disclosure Schedule, provided, however, that disclosure in any section of such Disclosure Schedule shall apply only to the indicated section of this Agreement except to the extent that it is reasonably apparent from the face of such disclosure that such disclosure is relevant to another section of this Agreement.

2.2 Representations and Warranties of the Company. Except as Previously Disclosed, the Company represents and warrants to the Investor that as of the Signing Date and as of the Closing Date (or such other date specified herein):

(a) Organization, Authority and Significant Subsidiaries. The Company has been duly incorporated and is validly existing and in good standing under the laws of its jurisdiction of organization, with the necessary power and authority to own its properties and conduct its business in all material respects as currently conducted, and except as has not, individually or in the aggregate, had and would not reasonably be expected to have a Company Material Adverse Effect, has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification; each subsidiary of the Company that would be considered a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X under the Securities Act of 1933 (the “Securities Act”), has been duly organized and is validly existing in good standing under the laws of its jurisdiction of organization. The Charter and bylaws of the Company, copies of which have been provided to the Investor prior to the Signing Date, are true, complete and correct copies of such documents as in full force and effect as of the Signing Date.

(b) Capitalization. The authorized capital stock of the Company, and the outstanding capital stock of the Company (including securities convertible into, or exercisable or exchangeable for, capital stock of the Company) as of the most recent fiscal month-end preceding the Signing Date (the “Capitalization Date”) is set forth on Schedule B. The outstanding shares of capital stock of the Company have been duly authorized and are validly issued and outstanding, fully paid and nonassessable, and subject to no preemptive rights (and were not issued in violation of any preemptive rights). As of the Signing Date, the Company does not have outstanding any securities or other obligations providing the holder the right to acquire its Common Stock (“Common Stock”) that is not reserved for issuance as specified on Schedule B, and the Company has not made any other commitment to authorize, issue or sell any Common Stock. Since the Capitalization Date, the Company has not issued any shares of Common Stock, other than (i) shares issued upon the exercise of stock options or delivered under other equity-based awards or other convertible securities or warrants which were issued and outstanding on the Capitalization Date and disclosed on Schedule B and (ii) shares disclosed on Schedule B. Each holder of 5% or more of any class of capital stock of the Company and such holder’s primary address are set forth on Schedule B.

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(c) Preferred Shares. The Preferred Shares have been duly and validly authorized, and, when issued and delivered pursuant to this Agreement, such Preferred Shares will be duly and validly issued and fully paid and non-assessable, will not be issued in violation of any preemptive rights, and will rank pari passu with or senior to all other series or classes of Preferred Stock, whether or not issued or outstanding, with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company.

(d) The Warrant and Warrant Shares. The Warrant has been duly authorized and, when executed and delivered as contemplated hereby, will constitute a valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether such enforceability is considered in a proceeding at law or in equity (“Bankruptcy Exceptions”). The shares of Warrant Preferred Stock issuable upon exercise of the Warrant (the “Warrant Shares”) have been duly authorized and reserved for issuance upon exercise of the Warrant and when so issued in accordance with the terms of the Warrant will be validly issued, fully paid and non-assessable, and will rank pari passu with or senior to all other series or classes of Preferred Stock, whether or not issued or outstanding, with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company.

(e) Authorization, Enforceability.

(i) The Company has the corporate power and authority to execute and deliver this Agreement and the Warrant and to carry out its obligations hereunder and thereunder (which includes the issuance of the Preferred Shares, Warrant and Warrant Shares). The execution, delivery and performance by the Company of this Agreement and the Warrant and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company and its stockholders, and no further approval or authorization is required on the part of the Company. This Agreement is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to the Bankruptcy Exceptions.

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(ii) The execution, delivery and performance by the Company of this Agreement and the Warrant and the consummation of the transactions contemplated hereby and thereby and compliance by the Company with the provisions hereof and thereof, will not (A) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any subsidiary of the Company (each a “Company Subsidiary” and, collectively, the “Company Subsidiaries”) under any of the terms, conditions or provisions of (i) its organizational documents or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any Company Subsidiary is a party or by which it or any Company Subsidiary may be bound, or to which the Company or any Company Subsidiary or any of the properties or assets of the Company or any Company Subsidiary may be subject, or (B) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or any Company Subsidiary or any of their respective properties or assets except, in the case of clauses (A)(ii) and (B), for those occurrences that, individually or in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect.

(iii) Other than the filing of the Certificates of Designations with the Secretary of State of its jurisdiction of organization or other applicable Governmental Entity, such filings and approvals as are required to be made or obtained under any state “blue sky” laws and such as have been made or obtained, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Company in connection with the consummation by the Company of the Purchase except for any such notices, filings, exemptions, reviews, authorizations, consents and approvals the failure of which to make or obtain would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

(f) Anti-takeover Provisions and Rights Plan. The Board of Directors of the Company (the “Board of Directors”) has taken all necessary action to ensure that the transactions contemplated by this Agreement and the Warrant and the consummation of the transactions contemplated hereby and thereby, including the exercise of the Warrant in accordance with its terms, will be exempt from any anti-takeover or similar provisions of the Company’s Charter and bylaws, and any other provisions of any applicable “moratorium”, “control share”, “fair price”, “interested stockholder” or other anti-takeover laws and regulations of any jurisdiction.

(g) No Company Material Adverse Effect. Since the last day of the last completed fiscal period for which financial statements are included in the Company Financial Statements (as defined below), no fact, circumstance, event, change, occurrence, condition or development has occurred that, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect.

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(h) Company Financial Statements. The Company has Previously Disclosed each of the consolidated financial statements of the Company and its consolidated subsidiaries for each of the last three completed fiscal years of the Company (which shall be audited to the extent audited financial statements are available prior to the Signing Date) and each completed quarterly period since the last completed fiscal year (collectively the “Company Financial Statements”). The Company Financial Statements present fairly in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the dates indicated therein and the consolidated results of their operations for the periods specified therein; and except as stated therein, such financial statements (A) were prepared in conformity with GAAP applied on a consistent basis (except as may be noted therein) and (B) have been prepared from, and are in accordance with, the books and records of the Company and the Company Subsidiaries.

(i) Reports.

(i) Since December 31, 2006, the Company and each Company Subsidiary has filed all reports, registrations, documents, filings, statements and submissions, together with any amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the “Company Reports”) and has paid all fees and assessments due and payable in connection therewith, except, in each case, as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. As of their respective dates of filing, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities.

(ii) The records, systems, controls, data and information of the Company and the Company Subsidiaries are recorded, stored, maintained and operated under means (including any electronic, mechanical or photographic process, whether computerized or not) that are under the exclusive ownership and direct control of the Company or the Company Subsidiaries or their accountants (including all means of access thereto and therefrom), except for any non-exclusive ownership and non-direct control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls described below in this Section 2.2(i)(ii). The Company (A) has implemented and maintains adequate disclosure controls and procedures to ensure that material information relating to the Company, including the consolidated Company Subsidiaries, is made known to the chief executive officer and the chief financial officer of the Company by others within those entities, and (B) has disclosed, based on its most recent evaluation prior to the Signing Date, to the Company’s outside auditors and the audit committee of the Board of Directors (x) any significant deficiencies and material weaknesses in the design or operation of internal controls that are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and (y) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

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(j) No Undisclosed Liabilities. Neither the Company nor any of the Company Subsidiaries has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected or reserved against in the Company Financial Statements to the extent required to be so reflected or reserved against in accordance with GAAP, except for (A) liabilities that have arisen since the last fiscal year end in the ordinary and usual course of business and consistent with past practice and (B) liabilities that, individually or in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect.

(k) Offering of Securities. Neither the Company nor any person acting on its behalf has taken any action (including any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Purchased Securities under the Securities Act, and the rules and regulations of the Securities and Exchange Commission (the “SEC”) promulgated thereunder), which might subject the offering, issuance or sale of any of the Purchased Securities to Investor pursuant to this Agreement to the registration requirements of the Securities Act.

(l) Litigation and Other Proceedings. Except (i) as set forth on Schedule C or (ii) as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, there is no (A) pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or any Company Subsidiary or to which any of their assets are subject nor is the Company or any Company Subsidiary subject to any order, judgment or decree or (B) unresolved violation, criticism or exception by any Governmental Entity with respect to any report or relating to any examinations or inspections of the Company or any Company Subsidiaries.

(m) Compliance with Laws. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, the Company and the Company Subsidiaries have all permits, licenses, franchises, authorizations, orders and approvals of, and have made all filings, applications and registrations with, Governmental Entities that are required in order to permit them to own or lease their properties and assets and to carry on their business as presently conducted and that are material to the business of the Company or such Company Subsidiary. Except as set forth on Schedule D, the Company and the Company Subsidiaries have complied in all respects and are not in default or violation of, and none of them is, to the knowledge of the Company, under investigation with respect to or, to the knowledge of the Company, have been threatened to be charged with or given notice of any violation of, any applicable domestic (federal, state or local) or foreign law, statute, ordinance, license, rule, regulation, policy or guideline, order, demand, writ, injunction, decree or judgment of any Governmental Entity, other than such noncompliance, defaults or violations that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. Except for statutory or regulatory restrictions of general application or as set forth on Schedule D, no Governmental Entity has placed any restriction on the business or properties of the Company or any Company Subsidiary that would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

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(n) Employee Benefit Matters. Except as would not reasonably be expected to have, either individually or in the aggregate, a Company Material Adverse Effect: (A) each “employee benefit plan” (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) providing benefits to any current or former employee, officer or director of the Company or any member of its “Controlled Group” (defined as any organization which is a member of a controlled group of corporations within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the “Code”)) that is sponsored, maintained or contributed to by the Company or any member of its Controlled Group and for which the Company or any member of its Controlled Group would have any liability, whether actual or contingent (each, a “Plan”) has been maintained in compliance with its terms and with the requirements of all applicable statutes, rules and regulations, including ERISA and the Code; (B) with respect to each Plan subject to Title IV of ERISA (including, for purposes of this clause (B), any plan subject to Title IV of ERISA that the Company or any member of its Controlled Group previously maintained or contributed to in the six years prior to the Signing Date), (1) no “reportable event” (within the meaning of Section 4043(c) of ERISA), other than a reportable event for which the notice period referred to in Section 4043(c) of ERISA has been waived, has occurred in the three years prior to the Signing Date or is reasonably expected to occur, (2) no “accumulated funding deficiency” (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, has occurred in the three years prior to the Signing Date or is reasonably expected to occur, (3) the fair market value of the assets under each Plan exceeds the present value of all benefits accrued under such Plan (determined based on the assumptions used to fund such Plan) and (4) neither the Company nor any member of its Controlled Group has incurred in the six years prior to the Signing Date, or reasonably expects to incur, any liability under Title IV of ERISA (other than contributions to the Plan or premiums to the PBGC in the ordinary course and without default) in respect of a Plan (including any Plan that is a “multiemployer plan”, within the meaning of Section 4001(c)(3) of ERISA); and (C) each Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service with respect to its qualified status that has not been revoked, or such a determination letter has been timely applied for but not received by the Signing Date, and nothing has occurred, whether by action or by failure to act, which could reasonably be expected to cause the loss, revocation or denial of such qualified status or favorable determination letter.

(o) Taxes. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, (i) the Company and the Company Subsidiaries have filed all federal, state, local and foreign income and franchise Tax returns required to be filed through the Signing Date, subject to permitted extensions, and have paid all Taxes due thereon, and (ii) no Tax deficiency has been determined adversely to the Company or any of the Company Subsidiaries, nor does the Company have any knowledge of any Tax deficiencies. “Tax” or “Taxes” means any federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add on minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any Governmental Entity.

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(p) Properties and Leases. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, the Company and the Company Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances, claims and defects that would affect the value thereof or interfere with the use made or to be made thereof by them. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, the Company and the Company Subsidiaries hold all leased real or personal property under valid and enforceable leases with no exceptions that would interfere with the use made or to be made thereof by them.

(q) Environmental Liability. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect:

(i) there is no legal, administrative, or other proceeding, claim or action of any nature seeking to impose, or that would reasonably be expected to result in the imposition of, on the Company or any Company Subsidiary, any liability relating to the release of hazardous substances as defined under any local, state or federal environmental statute, regulation or ordinance, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, pending or, to the Company’s knowledge, threatened against the Company or any Company Subsidiary;

(ii) to the Company’s knowledge, there is no reasonable basis for any such proceeding, claim or action; and

(iii) neither the Company nor any Company Subsidiary is subject to any agreement, order, judgment or decree by or with any court, Governmental Entity or third party imposing any such environmental liability.

(r) Risk Management Instruments. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, all derivative instruments, including, swaps, caps, floors and option agreements, whether entered into for the Company’s own account, or for the account of one or more of the Company Subsidiaries or its or their customers, were entered into (i) only in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies and (iii) with counterparties believed to be financially responsible at the time; and each of such instruments constitutes the valid and legally binding obligation of the Company or one of the Company Subsidiaries, enforceable in accordance with its terms, except as may be limited by the Bankruptcy Exceptions. Neither the Company or the Company Subsidiaries, nor, to the knowledge of the Company, any other party thereto, is in breach of any of its obligations under any such agreement or arrangement other than such breaches that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

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(s) Agreements with Regulatory Agencies. Except as set forth on Schedule E, neither the Company nor any Company Subsidiary is subject to any material cease-and-desist or other similar order or enforcement action issued by, or is a party to any material written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2006, has adopted any board resolutions at the request of, any Governmental Entity (other than the Appropriate Federal Banking Agencies with jurisdiction over the Company and the Company Subsidiaries) that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies or procedures, its internal controls, its management or its operations or business (each item in this sentence, a “Regulatory Agreement”), nor has the Company or any Company Subsidiary been advised since December 31, 2006 by any such Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. The Company and each Company Subsidiary are in compliance in all material respects with each Regulatory Agreement to which it is party or subject, and neither the Company nor any Company Subsidiary has received any notice from any Governmental Entity indicating that either the Company or any Company Subsidiary is not in compliance in all material respects with any such Regulatory Agreement. “Appropriate Federal Banking Agency” means the “appropriate Federal banking agency” with respect to the Company or such Company Subsidiaries, as applicable, as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)).

(t) Insurance. The Company and the Company Subsidiaries are insured with reputable insurers against such risks and in such amounts as the management of the Company reasonably has determined to be prudent and consistent with industry practice. The Company and the Company Subsidiaries are in material compliance with their insurance policies and are not in default under any of the material terms thereof, each such policy is outstanding and in full force and effect, all premiums and other payments due under any material policy have been paid, and all claims thereunder have been filed in due and timely fashion, except, in each case, as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

(u) Intellectual Property. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, (i) the Company and each Company Subsidiary owns or otherwise has the right to use, all intellectual property rights, including all trademarks, trade dress, trade names, service marks, domain names, patents, inventions, trade secrets, know-how, works of authorship and copyrights therein, that are used in the conduct of their existing businesses and all rights relating to the plans, design and specifications of any of its branch facilities (“Proprietary Rights”) free and clear of all liens and any claims of ownership by current or former employees, contractors, designers or others and (ii) neither the Company nor any of the Company Subsidiaries is materially infringing, diluting, misappropriating or violating, nor has the Company or any or the Company Subsidiaries received any written (or, to the knowledge of the Company, oral) communications alleging that any of them has materially infringed, diluted, misappropriated or violated, any of the Proprietary Rights owned by any other person. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, to the Company’s knowledge, no other person is infringing, diluting, misappropriating or violating, nor has the Company or any or the Company Subsidiaries sent any written communications since January 1, 2006 alleging that any person has infringed, diluted, misappropriated or violated, any of the Proprietary Rights owned by the Company and the Company Subsidiaries.

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(v) Brokers and Finders. No broker, finder or investment banker is entitled to any financial advisory, brokerage, finder’s or other fee or commission in connection with this Agreement or the Warrant or the transactions contemplated hereby or thereby based upon arrangements made by or on behalf of the Company or any Company Subsidiary for which the Investor could have any liability.

Article III
Covenants

3.1 Commercially Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the parties will use its commercially reasonable efforts in good faith to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or desirable, or advisable under applicable laws, so as to permit consummation of the Purchase as promptly as practicable and otherwise to enable consummation of the transactions contemplated hereby and shall use commercially reasonable efforts to cooperate with the other party to that end.

3.2 Expenses. Unless otherwise provided in this Agreement or the Warrant, each of the parties hereto will bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated under this Agreement and the Warrant, including fees and expenses of its own financial or other consultants, investment bankers, accountants and counsel.

3.3 Sufficiency of Authorized Warrant Preferred Stock; Exchange Listing.

(a) During the period from the Closing Date until the date on which the Warrant has been fully exercised, the Company shall at all times have reserved for issuance, free of preemptive or similar rights, a sufficient number of authorized and unissued Warrant Shares to effectuate such exercise.

(b) If the Company lists its Common Stock on any national securities exchange, the Company shall, if requested by the Investor, promptly use its reasonable best efforts to cause the Preferred Shares and Warrant Shares to be approved for listing on a national securities exchange as promptly as practicable following such request.

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3.4 Certain Notifications Until Closing. From the Signing Date until the Closing, the Company shall promptly notify the Investor of (i) any fact, event or circumstance of which it is aware and which would reasonably be expected to cause any representation or warranty of the Company contained in this Agreement to be untrue or inaccurate in any material respect or to cause any covenant or agreement of the Company contained in this Agreement not to be complied with or satisfied in any material respect and (ii) except as Previously Disclosed, any fact, circumstance, event, change, occurrence, condition or development of which the Company is aware and which, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect; provided, however, that delivery of any notice pursuant to this Section 3.4 shall not limit or affect any rights of or remedies available to the Investor; provided, further, that a failure to comply with this Section 3.4 shall not constitute a breach of this Agreement or the failure of any condition set forth in Section 1.2 to be satisfied unless the underlying Company Material Adverse Effect or material breach would independently result in the failure of a condition set forth in Section 1.2 to be satisfied.

3.5 Access, Information and Confidentiality.

(a) From the Signing Date until the date when the Investor holds an amount of Preferred Shares having an aggregate liquidation value of less than 10% of the Purchase Price, the Company will permit the Investor and its agents, consultants, contractors and advisors (x) acting through the Appropriate Federal Banking Agency, or otherwise to the extent necessary to evaluate, manage, or transfer its investment in the Company, to examine the corporate books and make copies thereof and to discuss the affairs, finances and accounts of the Company and the Company Subsidiaries with the principal officers of the Company, all upon reasonable notice and at such reasonable times and as often as the Investor may reasonably request and (y) to review any information material to the Investor’s investment in the Company provided by the Company to its Appropriate Federal Banking Agency. Any investigation pursuant to this Section 3.5 shall be conducted during normal business hours and in such manner as not to interfere unreasonably with the conduct of the business of the Company, and nothing herein shall require the Company or any Company Subsidiary to disclose any information to the Investor to the extent (i) prohibited by applicable law or regulation, or (ii) that such disclosure would reasonably be expected to cause a violation of any agreement to which the Company or any Company Subsidiary is a party or would cause a risk of a loss of privilege to the Company or any Company Subsidiary (provided that the Company shall use commercially reasonable efforts to make appropriate substitute disclosure arrangements under circumstances where the restrictions in this clause (ii) apply).

(b) From the Signing Date until the date on which all of the Preferred Shares and Warrant Shares have been redeemed in whole, the Company will deliver, or will cause to be delivered, to the Investor:

(i) as soon as available after the end of each fiscal year of the Company, and in any event within 90 days thereafter, a consolidated balance sheet of the Company as of the end of such fiscal year, and consolidated statements of income, retained earnings and cash flows of the Company for such year, in each case prepared in accordance with GAAP and setting forth in each case in comparative form the figures for the previous fiscal year of the Company, and which shall be audited to the extent audited financial statements are available; and

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(ii) as soon as available after the end of the first, second and third quarterly periods in each fiscal year of the Company, a copy of any quarterly reports provided to other stockholders of the Company or Company management.

(c) The Investor will use reasonable best efforts to hold, and will use reasonable best efforts to cause its agents, consultants, contractors and advisors to hold, in confidence all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, “Information”) concerning the Company furnished or made available to it by the Company or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (i) previously known by such party on a non-confidential basis, (ii) in the public domain through no fault of such party or (iii) later lawfully acquired from other sources by the party to which it was furnished (and without violation of any other confidentiality obligation)); provided that nothing herein shall prevent the Investor from disclosing any Information to the extent required by applicable laws or regulations or by any subpoena or similar legal process.

(d) The Investor’s information rights pursuant to Section 3.5(b) may be assigned by the Investor to a transferee or assignee of the Purchased Securities or the Warrant Shares or with a liquidation preference or, in the case of the Warrant, the liquidation preference of the underlying shares of Warrant Preferred Stock, no less than an amount equal to 2% of the initial aggregate liquidation preference of the Preferred Shares.

Article IV
Additional Agreements

4.1 Purchase for Investment. The Investor acknowledges that the Purchased Securities and the Warrant Shares have not been registered under the Securities Act or under any state securities laws. The Investor (a) is acquiring the Purchased Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute them to any person in violation of the Securities Act or any applicable U.S. state securities laws, (b) will not sell or otherwise dispose of any of the Purchased Securities or the Warrant Shares, except in compliance with the registration requirements or exemption provisions of the Securities Act and any applicable U.S. state securities laws, and (c) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of the Purchase and of making an informed investment decision.

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4.2 Legends.

(a) The Investor agrees that all certificates or other instruments representing the Warrant will bear a legend substantially to the following effect:

“THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.

THIS INSTRUMENT IS ISSUED SUBJECT TO THE RESTRICTIONS ON TRANSFER AND OTHER PROVISIONS OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE ISSUER OF THESE SECURITIES AND THE INVESTOR REFERRED TO THEREIN, A COPY OF WHICH IS ON FILE WITH THE ISSUER. THE SECURITIES REPRESENTED BY THIS INSTRUMENT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH SAID AGREEMENT. ANY SALE OR OTHER TRANSFER NOT IN COMPLIANCE WITH SAID AGREEMENT WILL BE VOID.”

(b) In addition, the Investor agrees that all certificates or other instruments representing the Preferred Shares and the Warrant Shares will bear a legend substantially to the following effect:

“THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. EACH PURCHASER OF THE SECURITIES REPRESENTED BY THIS INSTRUMENT IS NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. ANY TRANSFEREE OF THE SECURITIES REPRESENTED BY THIS INSTRUMENT BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER THE SECURITIES REPRESENTED BY THIS INSTRUMENT EXCEPT (A) PURSUANT TO A REGISTRATION STATEMENT WHICH IS THEN EFFECTIVE UNDER THE SECURITIES ACT, (B) FOR SO LONG AS THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO THE ISSUER OR (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.

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THIS INSTRUMENT IS ISSUED SUBJECT TO THE RESTRICTIONS ON TRANSFER AND OTHER PROVISIONS OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE ISSUER OF THESE SECURITIES AND THE INVESTOR REFERRED TO THEREIN, A COPY OF WHICH IS ON FILE WITH THE ISSUER. THE SECURITIES REPRESENTED BY THIS INSTRUMENT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH SAID AGREEMENT. ANY SALE OR OTHER TRANSFER NOT IN COMPLIANCE WITH SAID AGREEMENT WILL BE VOID.”

(c) In the event that any Purchased Securities or Warrant Shares (i) become registered under the Securities Act or (ii) are eligible to be transferred without restriction in accordance with Rule 144 or another exemption from registration under the Securities Act (other than Rule 144A), the Company shall issue new certificates or other instruments representing such Purchased Securities or Warrant Shares, which shall not contain the applicable legends in Sections 4.2(a) and (b) above; provided that the Investor surrenders to the Company the previously issued certificates or other instruments.

4.3 Certain Transactions. The Company will not merge or consolidate with, or sell, transfer or lease all or substantially all of its property or assets to, any other party unless the successor, transferee or lessee party (or its ultimate parent entity), as the case may be (if not the Company), expressly assumes the due and punctual performance and observance of each and every covenant, agreement and condition of this Agreement to be performed and observed by the Company.

4.4 Transfer of Purchased Securities and Warrant Shares; Restrictions on Exercise of the Warrant. Subject to compliance with applicable securities laws, the Investor shall be permitted to transfer, sell, assign or otherwise dispose of (“Transfer”) all or a portion of the Purchased Securities or Warrant Shares at any time, and the Company shall take all steps as may be reasonably requested by the Investor to facilitate the Transfer of the Purchased Securities and the Warrant Shares; provided that the Investor shall not Transfer any Purchased Securities or Warrant Shares if such transfer would require the Company to be subject to the periodic reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). In furtherance of the foregoing, the Company shall provide reasonable cooperation to facilitate any Transfers of the Purchased Securities or Warrant Shares, including, as is reasonable under the circumstances, by furnishing such information concerning the Company and its business as a proposed transferee may reasonably request (including such information as is required by Section 4.5(k)) and making management of the Company reasonably available to respond to questions of a proposed transferee in accordance with customary practice, subject in all cases to the proposed transferee agreeing to a customary confidentiality agreement.

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4.5 Registration Rights.

(a) Unless and until the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall have no obligation to comply with the provisions of this Section 4.5 (other than Section 4.5(b)(iv)-(vi)); provided that the Company covenants and agrees that it shall comply with this Section 4.5 as soon as practicable after the date that it becomes subject to such reporting requirements.

(b) Registration.

(i) Subject to the terms and conditions of this Agreement, the Company covenants and agrees that as promptly as practicable after the date that the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act (and in any event no later than 30 days thereafter), the Company shall prepare and file with the SEC a Shelf Registration Statement covering all Registrable Securities (or otherwise designate an existing Shelf Registration Statement filed with the SEC to cover the Registrable Securities), and, to the extent the Shelf Registration Statement has not theretofore been declared effective or is not automatically effective upon such filing, the Company shall use reasonable best efforts to cause such Shelf Registration Statement to be declared or become effective and to keep such Shelf Registration Statement continuously effective and in compliance with the Securities Act and usable for resale of such Registrable Securities for a period from the date of its initial effectiveness until such time as there are no Registrable Securities remaining (including by refiling such Shelf Registration Statement (or a new Shelf Registration Statement) if the initial Shelf Registration Statement expires). Notwithstanding the foregoing, if the Company is not eligible to file a registration statement on Form S-3, then the Company shall not be obligated to file a Shelf Registration Statement unless and until requested to do so in writing by the Investor.

(ii) Any registration pursuant to Section 4.5(b)(i) shall be effected by means of a shelf registration on an appropriate form under Rule 415 under the Securities Act (a “Shelf Registration Statement”). If the Investor or any other Holder intends to distribute any Registrable Securities by means of an underwritten offering it shall promptly so advise the Company and the Company shall take all reasonable steps to facilitate such distribution, including the actions required pursuant to Section 4.5(d); provided that the Company shall not be required to facilitate an underwritten offering of Registrable Securities unless the expected gross proceeds from such offering exceed (i) 2% of the initial aggregate liquidation preference of the Preferred Shares if such initial aggregate liquidation preference is less than $2 billion and (ii) $200 million if the initial aggregate liquidation preference of the Preferred Shares is equal to or greater than $2 billion. The lead underwriters in any such distribution shall be selected by the Holders of a majority of the Registrable Securities to be distributed; provided that to the extent appropriate and permitted under applicable law, such Holders shall consider the qualifications of any broker-dealer Affiliate of the Company in selecting the lead underwriters in any such distribution.

(iii) The Company shall not be required to effect a registration (including a resale of Registrable Securities from an effective Shelf Registration Statement) or an underwritten offering pursuant to Section 4.5(b): (A) with respect to securities that are not Registrable Securities; or (B) if the Company has notified the Investor and all other Holders that in the good faith judgment of the Board of Directors, it would be materially detrimental to the Company or its securityholders for such registration or underwritten offering to be effected at such time, in which event the Company shall have the right to defer such registration for a period of not more than 45 days after receipt of the request of the Investor or any other Holder; provided that such right to delay a registration or underwritten offering shall be exercised by the Company (1) only if the Company has generally exercised (or is concurrently exercising) similar black-out rights against holders of similar securities that have registration rights and (2) not more than three times in any 12-month period and not more than 90 days in the aggregate in any 12-month period.

(iv) If during any period when an effective Shelf Registration Statement is not available, the Company proposes to register any of its equity securities, other than a registration pursuant to Section 4.5(b)(i) or a Special Registration, and the registration form to be filed may be used for the registration or qualification for distribution of Registrable Securities, the Company will give prompt written notice to the Investor and all other Holders of its intention to effect such a registration (but in no event less than ten days prior to the anticipated filing date) and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten business days after the date of the Company’s notice (a “Piggyback Registration”). Any such person that has made such a written request may withdraw its Registrable Securities from such Piggyback Registration by giving written notice to the Company and the managing underwriter, if any, on or before the fifth business day prior to the planned effective date of such Piggyback Registration. The Company may terminate or withdraw any registration under this Section 4.5(b)(iv) prior to the effectiveness of such registration, whether or not Investor or any other Holders have elected to include Registrable Securities in such registration.

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(v) If the registration referred to in Section 4.5(b)(iv) is proposed to be underwritten, the Company will so advise Investor and all other Holders as a part of the written notice given pursuant to Section 4.5(b)(iv). In such event, the right of Investor and all other Holders to registration pursuant to Section 4.5(b) will be conditioned upon such persons’ participation in such underwriting and the inclusion of such person’s Registrable Securities in the underwriting if such securities are of the same class of securities as the securities to be offered in the underwritten offering, and each such person will (together with the Company and the other persons distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company; provided that the Investor (as opposed to other Holders) shall not be required to indemnify any person in connection with any registration. If any participating person disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriters and the Investor (if the Investor is participating in the underwriting).

(vi) If either (x) the Company grants “piggyback” registration rights to one or more third parties to include their securities in an underwritten offering under the Shelf Registration Statement pursuant to Section 4.5(b)(ii) or (y) a Piggyback Registration under Section 4.5(b)(iv) relates to an underwritten offering on behalf of the Company, and in either case the managing underwriters advise the Company that in their reasonable opinion the number of securities requested to be included in such offering exceeds the number which can be sold without adversely affecting the marketability of such offering (including an adverse effect on the per share offering price), the Company will include in such offering only such number of securities that in the reasonable opinion of such managing underwriters can be sold without adversely affecting the marketability of the offering (including an adverse effect on the per share offering price), which securities will be so included in the following order of priority: (A) first, in the case of a Piggyback Registration under Section 4.5(b)(iv), the securities the Company proposes to sell, (B) then the Registrable Securities of the Investor and all other Holders who have requested inclusion of Registrable Securities pursuant to Section 4.5(b)(ii) or Section 4.5(b)(iv), as applicable, pro rata on the basis of the aggregate number of such securities or shares owned by each such person and (C) lastly, any other securities of the Company that have been requested to be so included, subject to the terms of this Agreement; provided, however, that if the Company has, prior to the Signing Date, entered into an agreement with respect to its securities that is inconsistent with the order of priority contemplated hereby then it shall apply the order of priority in such conflicting agreement to the extent that it would otherwise result in a breach under such agreement.

(c) Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance hereunder shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder shall be borne by the holders of the securities so registered pro rata on the basis of the aggregate offering or sale price of the securities so registered.

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(d) Obligations of the Company. Whenever required to effect the registration of any Registrable Securities or facilitate the distribution of Registrable Securities pursuant to an effective Shelf Registration Statement, the Company shall, as expeditiously as reasonably practicable:

(i) Prepare and file with the SEC a prospectus supplement or post-effective amendment with respect to a proposed offering of Registrable Securities pursuant to an effective registration statement, subject to Section 4.5(d), keep such registration statement effective and keep such prospectus supplement current until the securities described therein are no longer Registrable Securities.

(ii) Prepare and file with the SEC such amendments and supplements to the applicable registration statement and the prospectus or prospectus supplement used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement.

(iii) Furnish to the Holders and any underwriters such number of copies of the applicable registration statement and each such amendment and supplement thereto (including in each case all exhibits) and of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned or to be distributed by them.

(iv) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders or any managing underwriter(s), to keep such registration or qualification in effect for so long as such registration statement remains in effect, and to take any other action which may be reasonably necessary to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such Holder; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(v) Notify each Holder of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the applicable prospectus, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing.

(vi) Give written notice to the Holders:

(A) when any registration statement filed pursuant to Section 4.5(a) or any amendment thereto has been filed with the SEC (except for any amendment effected by the filing of a document with the SEC pursuant to the Exchange Act) and when such registration statement or any post-effective amendment thereto has become effective;

(B) of any request by the SEC for amendments or supplements to any registration statement or the prospectus included therein or for additional information;

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(C) of the issuance by the SEC of any stop order suspending the effectiveness of any registration statement or the initiation of any proceedings for that purpose;

(D) of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the applicable Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;

(E) of the happening of any event that requires the Company to make changes in any effective registration statement or the prospectus related to the registration statement in order to make the statements therein not misleading (which notice shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made); and

(F) if at any time the representations and warranties of the Company contained in any underwriting agreement contemplated by Section 4.5(d)(x) cease to be true and correct.

(vii) Use its reasonable best efforts to prevent the issuance or obtain the withdrawal of any order suspending the effectiveness of any registration statement referred to in Section 4.5(d)(vi)(C) at the earliest practicable time.

(viii) Upon the occurrence of any event contemplated by Section 4.5(d)(v) or 4.5(d)(vi)(E), promptly prepare a post-effective amendment to such registration statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to the Holders and any underwriters, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with Section 4.5(d)(vi)(E) to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Holders and any underwriters shall suspend use of such prospectus and use their reasonable best efforts to return to the Company all copies of such prospectus (at the Company’s expense) other than permanent file copies then in such Holders’ or underwriters’ possession. The total number of days that any such suspension may be in effect in any 12-month period shall not exceed 90 days.

(ix) Use reasonable best efforts to procure the cooperation of the Company’s transfer agent in settling any offering or sale of Registrable Securities, including with respect to the transfer of physical stock certificates into book-entry form in accordance with any procedures reasonably requested by the Holders or any managing underwriter(s).

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(x) If an underwritten offering is requested pursuant to Section 4.5(b)(ii), enter into an underwriting agreement in customary form, scope and substance and take all such other actions reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith or by the managing underwriter(s), if any, to expedite or facilitate the underwritten disposition of such Registrable Securities, and in connection therewith in any underwritten offering (including making members of management and executives of the Company available to participate in “road shows”, similar sales events and other marketing activities), (A) make such representations and warranties to the Holders that are selling stockholders and the managing underwriter(s), if any, with respect to the business of the Company and its subsidiaries, and the Shelf Registration Statement, prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in customary form, substance and scope, and, if true, confirm the same if and when requested, (B) use its reasonable best efforts to furnish the underwriters with opinions of counsel to the Company, addressed to the managing underwriter(s), if any, covering the matters customarily covered in such opinions requested in underwritten offerings, (C) use its reasonable best efforts to obtain “cold comfort” letters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any business acquired by the Company for which financial statements and financial data are included in the Shelf Registration Statement) who have certified the financial statements included in such Shelf Registration Statement, addressed to each of the managing underwriter(s), if any, such letters to be in customary form and covering matters of the type customarily covered in “cold comfort” letters, (D) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures customary in underwritten offerings (provided that the Investor shall not be obligated to provide any indemnity), and (E) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith, their counsel and the managing underwriter(s), if any, to evidence the continued validity of the representations and warranties made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company.

(xi) Make available for inspection by a representative of Holders that are selling stockholders, the managing underwriter(s), if any, and any attorneys or accountants retained by such Holders or managing underwriter(s), at the offices where normally kept, during reasonable business hours, financial and other records, pertinent corporate documents and properties of the Company, and cause the officers, directors and employees of the Company to supply all information in each case reasonably requested (and of the type customarily provided in connection with due diligence conducted in connection with a registered public offering of securities) by any such representative, managing underwriter(s), attorney or accountant in connection with such Shelf Registration Statement.

(xii) Use reasonable best efforts to cause all such Registrable Securities to be listed on each national securities exchange on which similar securities issued by the Company are then listed or, if no similar securities issued by the Company are then listed on any national securities exchange, use its reasonable best efforts to cause all such Registrable Securities to be listed on such securities exchange as the Investor may
designate.

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(xiii) If requested by Holders of a majority of the Registrable Securities being registered and/or sold in connection therewith, or the managing underwriter(s), if any, promptly include in a prospectus supplement or amendment such information as the Holders of a majority of the Registrable Securities being registered and/or sold in connection therewith or managing underwriter(s), if any, may reasonably request in order to permit the intended method of distribution of such securities and make all required filings of such prospectus supplement or such amendment as soon as practicable after the Company has received such request.

(xiv) Timely provide to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.

(e) Suspension of Sales. Upon receipt of written notice from the Company that a registration statement, prospectus or prospectus supplement contains or may contain an untrue statement of a material fact or omits or may omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that circumstances exist that make inadvisable use of such registration statement, prospectus or prospectus supplement, the Investor and each Holder of Registrable Securities shall forthwith discontinue disposition of Registrable Securities until the Investor and/or Holder has received copies of a supplemented or amended prospectus or prospectus supplement, or until the Investor and/or such Holder is advised in writing by the Company that the use of the prospectus and, if applicable, prospectus supplement may be resumed, and, if so directed by the Company, the Investor and/or such Holder shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in the Investor and/or such Holder’s possession, of the prospectus and, if applicable, prospectus supplement covering such Registrable Securities current at the time of receipt of such notice. The total number of days that any such suspension may be in effect in any 12-month period shall not exceed 90 days.

(f) Termination of Registration Rights. A Holder’s registration rights as to any securities held by such Holder (and its Affiliates, partners, members and former members) shall not be available unless such securities are Registrable Securities.

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(g) Furnishing Information.

(i) Neither the Investor nor any Holder shall use any free writing prospectus (as defined in Rule 405) in connection with the sale of Registrable Securities without the prior written consent of the Company.

(ii) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 4.5(d) that Investor and/or the selling Holders and the underwriters, if any, shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registered offering of their Registrable Securities.

(h) Indemnification.

(i) The Company agrees to indemnify each Holder and, if a Holder is a person other than an individual, such Holder’s officers, directors, employees, agents, representatives and Affiliates, and each Person, if any, that controls a Holder within the meaning of the Securities Act (each, an “Indemnitee”), against any and all losses, claims, damages, actions, liabilities, costs and expenses (including reasonable fees, expenses and disbursements of attorneys and other professionals incurred in connection with investigating, defending, settling, compromising or paying any such losses, claims, damages, actions, liabilities, costs and expenses), joint or several, arising out of or based upon any untrue statement or alleged untrue statement of material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto or any documents incorporated therein by reference or contained in any free writing prospectus (as such term is defined in Rule 405) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto); or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, that the Company shall not be liable to such Indemnitee in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon (A) an untrue statement or omission made in such registration statement, including any such preliminary prospectus or final prospectus contained therein or any such amendments or supplements thereto or contained in any free writing prospectus (as such term is defined in Rule 405) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto), in reliance upon and in conformity with information regarding such Indemnitee or its plan of distribution or ownership interests which was furnished in writing to the Company by such Indemnitee for use in connection with such registration statement, including any such preliminary prospectus or final prospectus contained therein or any such amendments or supplements thereto, or (B) offers or sales effected by or on behalf of such Indemnitee “by means of” (as defined in Rule 159A) a “free writing prospectus” (as defined in Rule 405) that was not authorized in writing by the Company.

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(ii) If the indemnification provided for in Section 4.5(h)(i) is unavailable to an Indemnitee with respect to any losses, claims, damages, actions, liabilities, costs or expenses referred to therein or is insufficient to hold the Indemnitee harmless as contemplated therein, then the Company, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, actions, liabilities, costs or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnitee, on the one hand, and the Company, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, actions, liabilities, costs or expenses as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnitee, on the other hand, shall be determined by reference to, among other factors, whether the untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company or by the Indemnitee and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; the Company and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 4.5(h)(ii) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 4.5(h)(i). No Indemnitee guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from the Company if the Company was not guilty of such fraudulent misrepresentation.

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(i) Assignment of Registration Rights. The rights of the Investor to registration of Registrable Securities pursuant to Section 4.5(b) may be assigned by the Investor to a transferee or assignee of Registrable Securities with a liquidation preference or, in the case of the Warrant, the liquidation preference of the underlying shares of Warrant Preferred Stock, no less than an amount equal to (i) 2% of the initial aggregate liquidation preference of the Preferred Shares if such initial aggregate liquidation preference is less than $2 billion and (ii) $200 million if the initial aggregate liquidation preference of the Preferred Shares is equal to or greater than $2 billion; provided, however, the transferor shall, within ten days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the number and type of Registrable Securities that are being assigned.

(j) Clear Market. With respect to any underwritten offering of Registrable Securities by the Investor or other Holders pursuant to this Section 4.5, the Company agrees not to effect (other than pursuant to such registration or pursuant to a Special Registration) any public sale or distribution, or to file any Shelf Registration Statement (other than such registration or a Special Registration) covering any preferred stock of the Company or any securities convertible into or exchangeable or exercisable for preferred stock of the Company, during the period not to exceed ten days prior and 60 days following the effective date of such offering or such longer period up to 90 days as may be requested by the managing underwriter for such underwritten offering. The Company also agrees to cause such of its directors and senior executive officers to execute and deliver customary lock-up agreements in such form and for such time period up to 90 days as may be requested by the managing underwriter. “Special Registration” means the registration of (A) equity securities and/or options or other rights in respect thereof solely registered on Form S4 or Form S-8 (or successor form) or (B) shares of equity securities and/or options or other rights in respect thereof to be offered to directors, members of management, employees, consultants, customers, lenders or vendors of the Company or Company Subsidiaries or in connection with dividend reinvestment plans.

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(k) Rule 144; Rule 144A. With a view to making available to the Investor and Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its reasonable best efforts to:

(i) make and keep public information available, as those terms are understood and defined in Rule 144(c)(1) or any similar or analogous rule promulgated under the Securities Act, at all times after the Signing Date;

(ii) (A) file with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act, and (B) if at any time the Company is not required to file such reports, make available, upon the request of any Holder, such information necessary to permit sales pursuant to Rule 144A (including the information required by Rule 144A(d)(4) under the Securities Act);

(iii) so long as the Investor or a Holder owns any Registrable Securities, furnish to the Investor or such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of Rule 144 under the Securities Act, and of the Exchange Act; a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as the Investor or Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities to the public without registration; and

(iv) take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act.

(l) As used in this Section 4.5, the following terms shall have the following respective meanings:

(i) “Holder” means the Investor and any other holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 4.5(h) hereof.

(ii) “Holders’ Counsel” means one counsel for the selling Holders chosen by Holders holding a majority interest in the Registrable Securities being registered.

(iii) “Register,” “registered,” and “registration” shall refer to a registration effected by preparing and (A) filing a registration statement or amendment thereto in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such registration statement or amendment thereto or (B) filing a prospectus and/or prospectus supplement in respect of an appropriate effective registration statement on Form S-3.

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(iv) “Registrable Securities” means (A) all Preferred Shares, (B) the Warrant (subject to Section 4.5(q)) and (C) any equity securities issued or issuable directly or indirectly with respect to the securities referred to in the foregoing clauses (A) or (B) by way of conversion, exercise or exchange thereof, including the Warrant Shares, or share dividend or share split or in connection with a combination of shares, recapitalization, reclassification, merger, amalgamation, arrangement, consolidation or other reorganization, provided that, once issued, such securities will not be Registrable Securities when (1) they are sold pursuant to an effective registration statement under the Securities Act, (2) except as provided below in Section 4.5(p), they may be sold pursuant to Rule 144 without limitation thereunder on volume or manner of sale, (3) they shall have ceased to be outstanding or (4) they have been sold in a private transaction in which the transferor’s rights under this Agreement are not assigned to the transferee of the securities. No Registrable Securities may be registered under more than one registration statement at any one time.

(v) “Registration Expenses” mean all expenses incurred by the Company in effecting any registration pursuant to this Agreement (whether or not any registration or prospectus becomes effective or final) or otherwise complying with its obligations under this Section 4.5, including all registration, filing and listing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, expenses incurred in connection with any “road show”, the reasonable fees and disbursements of Holders’ Counsel, and expenses of the Company’s independent accountants in connection with any regular or special reviews or audits incident to or required by any such registration, but shall not include Selling Expenses.

(vi) “Rule 144”, “Rule 144A”, “Rule 159A”, “Rule 405” and “Rule 415” mean, in each case, such rule promulgated under the Securities Act (or any successor provision), as the same shall be amended from time to time.

(vii) “Selling Expenses” mean all discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder (other than the fees and disbursements of Holders’ Counsel included in Registration Expenses).

(m) At any time, any holder of Securities (including any Holder) may elect to forfeit its rights set forth in this Section 4.5 from that date forward; provided, that a Holder forfeiting such rights shall nonetheless be entitled to participate under Section 4.5(b)(iv) — (vi) in any Pending Underwritten Offering to the same extent that such Holder would have been entitled to if the holder had not withdrawn; and provided, further, that no such forfeiture shall terminate a Holder’s rights or obligations under Section 4.5(g) with respect to any prior registration or Pending Underwritten Offering. “Pending Underwritten Offering” means, with respect to any Holder forfeiting its rights pursuant to this Section 4.5(m), any underwritten offering of Registrable Securities in which such Holder has advised the Company of its intent to register its Registrable Securities either pursuant to Section 4.5(b)(ii) or 4.5(b)(iv) prior to the date of such Holder’s forfeiture.

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(n) Specific Performance. The parties hereto acknowledge that there would be no adequate remedy at law if the Company fails to perform any of its obligations under this Section 4.5 and that the Investor and the Holders from time to time may be irreparably harmed by any such failure, and accordingly agree that the Investor and such Holders, in addition to any other remedy to which they may be entitled at law or in equity, to the fullest extent permitted and enforceable under applicable law shall be entitled to compel specific performance of the obligations of the Company under this Section 4.5 in accordance with the terms and conditions of this Section 4.5.

(o) No Inconsistent Agreements. The Company shall not, on or after the Signing Date, enter into any agreement with respect to its securities that may impair the rights granted to the Investor and the Holders under this Section 4.5 or that otherwise conflicts with the provisions hereof in any manner that may impair the rights granted to the Investor and the Holders under this Section 4.5. In the event the Company has, prior to the Signing Date, entered into any agreement with respect to its securities that is inconsistent with the rights granted to the Investor and the Holders under this Section 4.5 (including agreements that are inconsistent with the order of priority contemplated by Section 4.5(b)(vi)) or that may otherwise conflict with the provisions hereof, the Company shall use its reasonable best efforts to amend such agreements to ensure they are consistent with the provisions of this Section 4.5.

(p) Certain Offerings by the Investor. In the case of any securities held by the Investor that cease to be Registrable Securities solely by reason of clause (2) in the definition of “Registrable Securities,” the provisions of Sections 4.5(b)(ii), clauses (iv), (ix) and (x)-(xii) of Section 4.5(d), Section 4.5(h) and Section 4.5(j) shall continue to apply until such securities otherwise cease to be Registrable Securities. In any such case, an “underwritten” offering or other disposition shall include any distribution of such securities on behalf of the Investor by one or more broker-dealers, an “underwriting agreement” shall include any purchase agreement entered into by such broker-dealers, and any “registration statement” or “prospectus” shall include any offering document approved by the Company and used in connection with such distribution.

(q) Registered Sales of the Warrant. The Holders agree to sell the Warrant or any portion thereof under the Shelf Registration Statement only beginning 30 days after notifying the Company of any such sale, during which 30-day period the Investor and all Holders of the Warrant shall take reasonable steps to agree to revisions to the Warrant to permit a public distribution of the Warrant, including entering into a warrant agreement and appointing a warrant agent.

4.6 Depositary Shares. Upon request by the Investor at any time following the Closing Date, the Company shall promptly enter into a depositary arrangement, pursuant to customary agreements reasonably satisfactory to the Investor and with a depositary reasonably acceptable to the Investor, pursuant to which the Preferred Shares or the Warrant Shares may be deposited and depositary shares, each representing a fraction of a Preferred Share or Warrant Share, as applicable, as specified by the Investor, may be issued. From and after the execution of any such depositary arrangement, and the deposit of any Preferred Shares or Warrant Shares, as applicable, pursuant thereto, the depositary shares issued pursuant thereto shall be deemed “Preferred Shares”, “Warrant Shares” and, as applicable, “Registrable Securities” for purposes of this Agreement.

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4.7 Restriction on Dividends and Repurchases.

(a) Prior to the earlier of (x) the third anniversary of the Closing Date and (y) the date on which all of the Preferred Shares and Warrant Shares have been redeemed in whole or the Investor has transferred all of the Preferred Shares and Warrant Shares to third parties which are not Affiliates of the Investor, neither the Company nor any Company Subsidiary shall, without the consent of the Investor, declare or pay any dividend or make any distribution on capital stock or other equity securities of any kind of the Company or any Company Subsidiary (other than (i) regular quarterly cash dividends of not more than the amount of the last quarterly cash dividend per share declared or, if lower, announced to its holders of Common Stock an intention to declare, on the Common Stock prior to November 17, 2008, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, (ii) dividends payable solely in shares of Common Stock, (iii) regular dividends on shares of preferred stock in accordance with the terms thereof and which are permitted under the terms of the Preferred Shares and the Warrant Shares, (iv) dividends or distributions by any wholly-owned Company Subsidiary or (v) dividends or distributions by any Company Subsidiary required pursuant to binding contractual agreements entered into prior to November 17, 2008).

(b) During the period beginning on the third anniversary of the Closing Date and ending on the earlier of (i) the tenth anniversary of the Closing Date and (ii) the date on which all of the Preferred Shares and Warrant Shares have been redeemed in whole or the Investor has transferred all of the Preferred Shares and Warrant Shares to third parties which are not Affiliates of the Investor, neither the Company nor any Company Subsidiary shall, without the consent of the Investor, (A) pay any per share dividend or distribution on capital stock or other equity securities of any kind of the Company at a per annum rate that is in excess of 103% of the aggregate per share dividends and distributions for the immediately prior fiscal year (other than regular dividends on shares of preferred stock in accordance with the terms thereof and which are permitted under the terms of the Preferred Shares and the Warrant Shares); provided that no increase in the aggregate amount of dividends or distributions on Common Stock shall be permitted as a result of any dividends or distributions paid in shares of Common Stock, any stock split or any similar transaction or (B) pay aggregate dividends or distributions on capital stock or other equity securities of any kind of any Company Subsidiary that is in excess of 103% of the aggregate dividends and distributions paid for the immediately prior fiscal year (other than in the case of this clause (B), (1) regular dividends on shares of preferred stock in accordance with the terms thereof and which are permitted under the terms of the Preferred Shares and the Warrant Shares, (2) dividends or distributions by any wholly-owned Company Subsidiary, (3) dividends or distributions by any Company Subsidiary required pursuant to binding contractual agreements entered into prior to November 17, 2008) or (4) dividends or distributions on newly issued shares of capital stock for cash or other property.

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(c) Prior to the earlier of (x) the tenth anniversary of the Closing Date and (y) the date on which all of the Preferred Shares and Warrant Shares have been redeemed in whole or the Investor has transferred all of the Preferred Shares and Warrant Shares to third parties which are not Affiliates of the Investor, neither the Company nor any Company Subsidiary shall, without the consent of the Investor, redeem, purchase or acquire any shares of Common Stock or other capital stock or other equity securities of any kind of the Company or any Company Subsidiary, or any trust preferred securities issued by the Company or any Affiliate of the Company, other than (i) redemptions, purchases or other acquisitions of the Preferred Shares and Warrant Shares, (ii) in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice, (iii) the acquisition by the Company or any of the Company Subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Company or any other Company Subsidiary), including as trustees or custodians, (iv) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock or trust preferred securities for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case set forth in this clause (iv), solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock (clauses (ii) and (iii), collectively, the “Permitted Repurchases”), (v) redemptions of securities held by the Company or any wholly- owned Company Subsidiary or (vi) redemptions, purchases or other acquisitions of capital stock or other equity securities of any kind of any Company Subsidiary required pursuant to binding contractual agreements entered into prior to November 17, 2008.

(d) Until such time as the Investor ceases to own any Preferred Shares or Warrant Shares, the Company shall not repurchase any Preferred Shares or Warrant Shares from any holder thereof, whether by means of open market purchase, negotiated transaction, or otherwise, other than Permitted Repurchases, unless it offers to repurchase a ratable portion of the Preferred Shares or Warrant Shares, as the case may be, then held by the Investor on the same terms and conditions.

(e) During the period beginning on the tenth anniversary of the Closing and ending on the date on which all of the Preferred Shares and Warrant Shares have been redeemed in whole or the Investor has transferred all of the Preferred Shares and Warrant Shares to third parties which are not Affiliates of the Investor, neither the Company nor any Company Subsidiary shall, without the consent of the Investor, (i) declare or pay any dividend or make any distribution on capital stock or other equity securities of any kind of the Company or any Company Subsidiary; or (ii) redeem, purchase or acquire any shares of Common Stock or other capital stock or other equity securities of any kind of the Company or any Company Subsidiary, or any trust preferred securities issued by the Company or any Affiliate of the Company, other than (A) redemptions, purchases or other acquisitions of the Preferred Shares and Warrant Shares, (B) regular dividends on shares of preferred stock in accordance with the terms thereof and which are permitted under the terms of the Preferred Shares and the Warrant Shares, or (C) dividends or distributions by any wholly-owned Company Subsidiary.

(f) “Junior Stock” means Common Stock and any other class or series of stock of the Company the terms of which expressly provide that it ranks junior to the Preferred Shares as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company. “Parity Stock” means any class or series of stock of the Company the terms of which do not expressly provide that such class or series will rank senior or junior to the Preferred Shares as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

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4.8 Executive Compensation. Until such time as the Investor ceases to own any debt or equity securities of the Company acquired pursuant to this Agreement or the Warrant, the Company shall take all necessary action to ensure that its Benefit Plans with respect to its Senior Executive Officers comply in all respects with Section 111(b) of the EESA as implemented by any guidance or regulation thereunder that has been issued and is in effect as of the Closing Date, and shall not adopt any new Benefit Plan with respect to its Senior Executive Officers that does not comply therewith. “Senior Executive Officers” means the Company’s “senior executive officers” as defined in subsection 111(b)(3) of the EESA and regulations issued thereunder, including the rules set forth in 31 C.F.R. Part 30.

4.9 Related Party Transactions. Until such time as the Investor ceases to own any Purchased Securities or Warrant Shares, the Company and the Company Subsidiaries shall not enter into transactions with Affiliates or related persons (within the meaning of Item 404 under the SEC’s Regulation S-K) unless (i) such transactions are on terms no less favorable to the Company and the Company Subsidiaries than could be obtained from an unaffiliated third party, and (ii) have been approved by the audit committee of the Board of Directors or comparable body of independent directors of the Company.

4.10 Bank and Thrift Holding Company Status. If the Company is a Bank Holding Company or a Savings and Loan Holding Company on the Signing Date, then the Company shall maintain its status as a Bank Holding Company or Savings and Loan Holding Company, as the case may be, for as long as the Investor owns any Purchased Securities or Warrant Shares. The Company shall redeem all Purchased Securities and Warrant Shares held by the Investor prior to terminating its status as a Bank Holding Company or Savings and Loan Holding Company, as applicable. “Bank Holding Company” means a company registered as such with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to 12 U.S.C. §1842 and the regulations of the Federal Reserve promulgated thereunder. “Savings and Loan Holding Company” means a company registered as such with the Office of Thrift Supervision pursuant to 12 U.S.C. § 1467(a) and the regulations of the Office of Thrift Supervision promulgated thereunder.

4.11 Predominantly Financial. For as long as the Investor owns any Purchased Securities or Warrant Shares, the Company, to the extent it is not itself an insured depository institution, agrees to remain predominantly engaged in financial activities. A company is predominantly engaged in financial activities if the annual gross revenues derived by the company and all subsidiaries of the company (excluding revenues derived from subsidiary depository institutions), on a consolidated basis, from engaging in activities that are financial in nature or are incidental to a financial activity under subsection (k) of Section 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)) represent at least 85 percent of the consolidated annual gross revenues of the company.

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Article V
Miscellaneous

5.1 Termination. This Agreement may be terminated at any time prior to the Closing:

(a) by either the Investor or the Company if the Closing shall not have occurred by the 30^th calendar day following the Signing Date; provided, however, that in the event the Closing has not occurred by such 30^th calendar day, the parties will consult in good faith to determine whether to extend the term of this Agreement, it being understood that the parties shall be required to consult only until the fifth day after such 30^th calendar day and not be under any obligation to extend the term of this Agreement thereafter; provided, further, that the right to terminate this Agreement under this Section 5.1(a) shall not be available to any party whose breach of any representation or warranty or failure to perform any obligation under this Agreement shall have caused or resulted in the failure of the Closing to occur on or prior to such date; or

(b) by either the Investor or the Company in the event that any Governmental Entity shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; or

(c) by the mutual written consent of the Investor and the Company.

In the event of termination of this Agreement as provided in this Section 5.1, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except that nothing herein shall relieve either party from liability for any breach of this Agreement.

5.2 Survival of Representations and Warranties. All covenants and agreements, other than those which by their terms apply in whole or in part after the Closing, shall terminate as of the Closing. The representations and warranties of the Company made herein or in any certificates delivered in connection with the Closing shall survive the Closing without limitation.

5.3 Amendment. No amendment of any provision of this Agreement will be effective unless made in writing and signed by an officer or a duly authorized representative of each party; provided that the Investor may unilaterally amend any provision of this Agreement to the extent required to comply with any changes after the Signing Date in applicable federal statutes. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative of any rights or remedies provided by law.

5.4 Waiver of Conditions. The conditions to each party’s obligation to consummate the Purchase are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law. No waiver will be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.

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5.5 Governing Law: Submission to Jurisdiction, Etc. This Agreement will be governed by and construed in accordance with the federal law of the United States if and to the extent such law is applicable, and otherwise in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. Each of the parties hereto agrees (a) to submit to the exclusive jurisdiction and venue of the United States District Court for the District of Columbia and the United States Court of Federal Claims for any and all civil actions, suits or proceedings arising out of or relating to this Agreement or the Warrant or the transactions contemplated hereby or thereby, and (b) that notice may be served upon (i) the Company at the address and in the manner set forth for notices to the Company in Section 5.6 and (ii) the Investor in accordance with federal law. To the extent permitted by applicable law, each of the parties hereto hereby unconditionally waives trial by jury in any civil legal action or proceeding relating to this Agreement or the Warrant or the transactions contemplated hereby or thereby.

5.6 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt, or (b) on the second business day following the date of dispatch if delivered by a recognized next day courier service. All notices to the Company shall be delivered as set forth in Schedule A, or pursuant to such other instruction as may be designated in writing by the Company to the Investor. All notices to the Investor shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the Investor to the Company.

If to the Investor:

United States Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 2312
Washington, D.C. 20220
Attention: Assistant General Counsel (Banking and Finance)
Facsimile: (202) 622-1974

5.7 Definitions

(a) When a reference is made in this Agreement to a subsidiary of a person, the term “subsidiary” means any corporation, partnership, joint venture, limited liability company or other entity (x) of which such person or a subsidiary of such person is a general partner or (y) of which a majority of the voting securities or other voting interests, or a majority of the securities or other interests of which having by their terms ordinary voting power to elect a majority of the board of directors or persons performing similar functions with respect to such entity, is directly or indirectly owned by such person and/or one or more subsidiaries thereof.

(b) The term “Affiliate” means, with respect to any person, any person directly or indirectly controlling, controlled by or under common control with, such other person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”) when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise.

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(c) The terms “knowledge of the Company” or “Company’s knowledge” mean the actual knowledge after reasonable and due inquiry of the “officers” (as such term is defined in Rule 3b-2 under the Exchange Act, but excluding any Vice President or Secretary) of the Company.

5.8 Assignment. Neither this Agreement nor any right, remedy, obligation nor liability arising hereunder or by reason hereof shall be assignable by any party hereto without the prior written consent of the other party, and any attempt to assign any right, remedy, obligation or liability hereunder without such consent shall be void, except (a) an assignment, in the case of a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Company’s stockholders (a “Business Combination”) where such party is not the surviving entity, or a sale of substantially all of its assets, to the entity which is the survivor of such Business Combination or the purchaser in such sale and (b) as provided in Sections 3.5 and 4.5.

5.9 Severability. If any provision of this Agreement or the Warrant, or the application thereof to any person or circumstance, is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, will remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.

5.10 No Third Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person or entity other than the Company and the Investor any benefit, right or remedies, except that the provisions of Section 4.5 shall inure to the benefit of the persons referred to in that Section.

* * *

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ANNEX A

FORM OF CERTIFICATE OF DESIGNATIONS FOR PREFERRED STOCK

[SEE EXHIBIT 3.3 TO THIS FORM 10-K]

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ANNEX B

FORM OF CERTIFICATE OF DESIGNATIONS
FOR WARRANT PREFERRED STOCK

[SEE EXHIBIT 3.4 TO THIS FORM 10-K]

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ANNEX C

FORM OF WAIVER

In consideration for the benefits I will receive as a result of my employer’s participation in the United States Department of the Treasury’s TARP Capital Purchase Program, I hereby voluntarily waive any claim against the United States or my employer for any changes to my compensation or benefits that are required to comply with the regulation issued by the Department of the Treasury as published in the Federal Register on October 20, 2008.

I acknowledge that this regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements, policies and agreements (including so-called “golden parachute” agreements) that I have with my employer or in which I participate as they relate to the period the United States holds any equity or debt securities of my employer acquired through the TARP Capital Purchase Program.

This waiver includes all claims I may have under the laws of the United States or any state related to the requirements imposed by the aforementioned regulation, including without limitation a claim for any compensation or other payments I would otherwise receive, any challenge to the process by which this regulation was adopted and any tort or constitutional claim about the effect of these regulations on my employment relationship.

-38-

ANNEX D

FORM OF OPINION

(a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of its incorporation.

(b) The Preferred Shares have been duly and validly authorized, and, when issued and delivered pursuant to the Agreement, the Preferred Shares will be duly and validly issued and fully paid and non-assessable, will not be issued in violation of any preemptive rights, and will rank pari passu with or senior to all other series or classes of Preferred Stock issued on the Closing Date with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company.

(c) The Warrant has been duly authorized and, when executed and delivered as contemplated by the Agreement, will constitute a valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether such enforceability is considered in a proceeding at law or in equity.

(d) The shares of Warrant Preferred Stock issuable upon exercise of the Warrant have been duly authorized and reserved for issuance upon exercise of the Warrant and when so issued in accordance with the terms of the Warrant will be validly issued, fully paid and non-assessable, and will rank pari passu with or senior to all other series or classes of Preferred Stock, whether or not issued or outstanding, with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company.

(e) The Company has the corporate power and authority to execute and deliver the Agreement and the Warrant and to carry out its obligations thereunder (which includes the issuance of the Preferred Shares, Warrant and Warrant Shares).

(f) The execution, delivery and performance by the Company of the Agreement and the Warrant and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company and its stockholders, and no further approval or authorization is required on the part of the Company.

(g) The Agreement is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether such enforceability is considered in a proceeding at law or in equity; provided, however, such counsel need express no opinion with respect to Section 4.5(h) or the severability provisions of the Agreement insofar as Section 4.5(h) is concerned.

-39-

ANNEX E

FORM OF WARRANT

[SEE EXHIBIT 4.1 TO THIS FORM 10-K]

-40-

SCHEDULE A

ADDITIONAL TERMS AND CONDITIONS

Company Information:
	Name of the Company:	First Priority Financial Corp.
	Corporate or other organizational form:	Business corporation
	Jurisdiction of Organization:	Commonwealth of Pennsylvania
	Appropriate Federal Banking Agency:	Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation
	Notice Information:	First Priority Financial Corp. 2 West Liberty Blvd. Suite 104 Malvern, Pennsylvania 19355 Attn: Lawrence E. Donato, Chief Financial Officer Phone: (484) 527-4022 Facsimile: (484) 527-4037 With a copy to:
		Stevens & Lee 111 North Sixth Street Reading, Pennsylvania 19603 Attn: Sunjeet S. Gill, Esquire Phone: (610) 478-2254 Facsimile: (610) 371-1228
Terms of the Purchase:
	Series of Preferred Stock Purchased:	Fixed Rate Cumulative Perpetual Preferred Stock, Series A
	Per Share Liquidation Preference of Preferred Stock:	$ 1,000.00
	Number of Shares of Preferred Stock Purchased:	4,579
	Dividend Payment Dates on the Preferred Stock:	February 15, May 15, August 15 and November 15 of each year

	Series of Warrant Preferred Stock:	Fixed Rate Cumulative Perpetual Preferred Stock, Series B
	Number of Warrant Shares:	254.44444
	Number of Net Warrant Shares (after net settlement):	229
	Exercise Price of the Warrant:	$100.00
	Purchase Price:	$4,579,000
Closing:
	Location of Closing:	Hughes Hubbard and Reed LLP One Battery Park Plaza New York, New York 10004-1482
	Time of Closing:	9:00 A.M. ET
	Date of Closing:	February 20, 2009
Wire Information for Closing:		ABA Number: 0313-0175-2 Bank: ATL CENT CAMP HILL Account Name: First Priority Bank, Malvern, PA 19355 Account Number: 220445 Beneficiary: First Priority Financial Corp.
Contact for Confirmation of Wire Information:		Mark Myers, Chief Accounting Officer First Priority Financial Corp. 2 West Liberty Blvd. Suite 104 Malvern, Pennsylvania 19355 Phone: (484) 527-4041 Cell: (610) 350-9511 Facsimile: (484) 527-4037 Email: mmyers@fpbk.com

SCHEDULE B

CAPITALIZATION

Capitalization Date:		January 31, 2009
Common Stock
	Par value:	$1.00 per share
	Total Authorized:	10,000,000 shares
	Outstanding:	3,122,929 shares
	Subject to warrants, options, convertible securities, etc.:	1,171,477 shares
	Reserved for benefit plans and other issuances1:	169,836 shares
	Remaining authorized but unissued:	5,535,758 shares
	Shares issued after Capitalization Date (other than pursuant to warrants, options, convertible securities, etc. as set forth above):	0 shares
Preferred Stock
	Par value:	$100.00 per share
	Total Authorized:	10,000,000 shares
	Outstanding (by series):	0 shares
	Reserved for issuance:	0 shares
	Remaining authorized but unissued:	10,000,000 shares

¹ The shares are reserved under the First Priority Financial Corp. 2005 Stock Compensation Plan.

Holders of 5% or more of any class of capital stock	Primary Address
David E. Sparks2                                   5.91% of outstanding shares	1572 Melville Road Pottstown, Pennsylvania 19465

Starboard Fund for                                7.89% of outstanding shares New Bancs, LP Martin Fiascone, General Partner3	200 West Adams Street, Suite 1015 Chicago, Illinois 60606
Conwell Limited Partnership                4.58% of outstanding shares Jerome S. Goodman, General Partner4	131-A-Gaither Drive, Mount Laurel, NJ 08054
Wellington Limited Partnership          2.11% of outstanding shares Jerome S. Goodman, General Partner5	131-A-Gaither Drive, Mount Laurel, NJ 08054

2	Mr. Sparks beneficially owns 186,371 shares of common stock, including 75,000 shares in the name of his wife and 2,000 shares in the name of his adult children, and 30,200 warrants to purchase common stock, of which, 15,000 are in his wife’s name and 400 are in the name of this adult children.
3	Starboard Fund for New Bancs beneficially owns 249,600 shares, including 41,600 warrants.
4	The Conwell Limited Partnership beneficially owns 144,000 shares, including 24,000 warrants. The Conwell Limited Partnership and Wellington Limited Partnership have the same general partner.
5	The Wellington Limited Partnership beneficially owns 66,000 shares, including 11,000 warrants. The Conwell Limited Partnership and Wellington Limited Partnership have the same general partner.

SCHEDULE C

LITIGATION

List any exceptions to the representation and warranty in Section 2.2(l) of the Securities Purchase Agreement – Standard Terms.

If none, please so indicate by checking the box: þ.

SCHEDULE D

COMPLIANCE WITH LAWS

List any exceptions to the representation and warranty in the second sentence of Section 2.2(m) of the Securities Purchase Agreement – Standard Terms.

If none, please so indicate by checking the box: þ.

List any exceptions to the representation and warranty in the last sentence of Section 2.2(m) of the Securities Purchase Agreement – Standard Terms.

If none, please so indicate by checking the box: þ.

SCHEDULE E

REGULATORY AGREEMENTS

List any exceptions to the representation and warranty in Section 2.2(s) of the Securities Purchase Agreement – Standard Terms.

If none, please so indicate by checking the box: þ.

EX-10.7

Exhibit 10.7

First Priority Financial Corp.
2 West Liberty Boulevard, Suite 104
Malvern, Pennsylvania 19355

February 20, 2009

VIA HAND DELIVERY

c/o First Priority Financial Corp.
2 West Liberty Boulevard, Suite 104
Malvern, Pennsylvania 19355

Dear                                                             :

First Priority Financial Corp. (the “Company”) anticipates entering into a Securities Purchase Agreement (the “Participation Agreement”), with the United States Department of the Treasury (“Treasury”) that provides for the Company’s participation in the Treasury’s TARP Capital Purchase Program (the “CPP”). If the Company does not participate or ceases at any time to participate in the CPP, this letter shall be of no further force and effect.

For the Company to participate in the CPP and as a condition to the closing of the investment contemplated by the Participation Agreement, the Company is required to establish specified standards for incentive compensation to its senior executive officers and to make changes to its compensation arrangements. To comply with these requirements, and in consideration of the benefits that you will receive as a result of the Company’s participation in the CPP, you agree as follows:

(1)	No Golden Parachute Payments. The Company is prohibiting any golden parachute payment to you during any “CPP Covered Period”.
(2)	Recovery of Bonus and Incentive Compensation. Any bonus and incentive compensation paid to you during a CPP Covered Period is subject to recovery or “clawback” by the Company if the payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria.
(3)	Compensation Program Amendments. Each of the Company’s compensation, bonus, incentive and other benefit plans, arrangements and agreements (including golden parachute, severance and employment agreements) (collectively, “Benefit Plans”) with respect to you is hereby amended to the extent necessary to give effect to provisions (1) and (2). For reference, certain affected Benefit Plans are set forth in Appendix A to this letter.

In addition, the Company is required to review its Benefit Plans to ensure that they do not encourage senior executive officers to take unnecessary and excessive risks that threaten the value of the Company. To the extent any such review requires revisions to any Benefit Plan with respect to you, you and the Company agree to negotiate such changes promptly and in good faith.

(4) Definitions and Interpretation. This letter shall be interpreted as follows:

• “Senior executive officer” means the Company’s “senior executive officers” as defined in Section 111 of the Emergency Economic Stabilization Act of 2008, as amended (collectively, “EESA”).

• “Golden parachute payment” is used with same meaning as in Section 111 of EESA.

• The term “Company” includes any entities treated as a single employer with the Company under 31 C.F.R. § 30.1(b) (as in effect on the Closing Date). You are also delivering a waiver pursuant to the Participation Agreement, and, as between the Company and you, the term “employer” in that waiver will be deemed to mean the Company as used in this letter.

• The term “CPP Covered Period” shall mean the period identified in subsection 111(a)(5) of EESA.

• Provisions (1) and (2) of this letter are intended to, and will be interpreted, administered and construed to, comply with Section 111 of EESA (and, to the maximum extent consistent with the preceding, to permit operation of the Benefit Plans in accordance with their terms before giving effect to this letter).

(5) Miscellaneous. Capitalized terms used but not defined herein have the meaning ascribed to them in the Participation Agreement. To the extent not subject to federal law, this letter will be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. This letter may be executed in two or more counterparts, each of which will be deemed to be an original. A signature transmitted by facsimile will be deemed an original signature.

The Board appreciates the concessions you are making and looks forward to your continued leadership during these financially turbulent times

Very truly yours, FIRST PRIORITY FINANCIAL CORP.
By:
	Name:	Lawrence E. Donato
	Title:	Chief Financial Officer

Intending to be legally bound, I agree with and accept the foregoing terms on the date set forth below.

  Name:

Appendix A

Certain Affected Benefit Plans

• Change in Control Agreement

• First Priority Financial Corp. 2005 Stock Compensation Plan

• First Priority Financial Corp. 2008 Deferred Compensation Plan

EX-21

Exhibit 21

Subsidiaries of the Registrant

First Priority Bank

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES
EXCHANGE ACT, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David E. Sparks, Chief Executive Officer of First Priority Financial Corp. (the “Company”), certify that:

1. I have reviewed the Company’s Annual Report on Form 10-K filed on March 24, 2009 (collectively, the “Report”);

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(c) disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ David E. Sparks David E. Sparks

Chief Executive Officer

March 24, 2009

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES
EXCHANGE ACT, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lawrence E. Donato, Chief Financial Officer of First Priority Financial Corp. (the Company”), certify that:

1. I have reviewed the Company’s Annual Report on Form 10-K filed on March 24, 2009 (collectively, the “Report”);

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(c) disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Lawrence E. Donato Lawrence E. Donato

Chief Financial Officer

March 24, 2009

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Annual Report of First Priority Financial Corp. (the “Company”) on Form 10-K for the period ended December 31, 2008, filed with the Securities and Exchange Commission on March 24, 2009 (collectively, the “Report”), I, David E. Sparks, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all in material respects, the financial condition and results of operations of the Company.

/s/ David E. Sparks David E. Sparks

Chief Executive Officer

March 24, 2009

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Annual Report of First Priority Financial Corp. (the “Company”) on Form 10-K for the period ended December 31, 2008, filed with the Securities and Exchange Commission on March 24, 2009 (collectively, the “Report”), I, Lawrence E. Donato, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Lawrence E. Donato Lawrence E. Donato

Chief Financial Officer

March 24, 2009

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.