Bank of Princeton
Annual Report 2007

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2007 Annual Report The Bank of Princeton Bank Wisely. THE BANK OF POSSIBILITIES your potential IDEAS ENTHUSIASM we believe in YOU Discovery CLARITY SUCCESS AMBITION seeing what is ahead meeting challenges BUSINESS Solutions road ahead INNOVATION here’s an idea BOLD tapping into your POTENTIAL your ROI VISION Absolutely IMAGINATION of COURSE! HOPE COMMUNITY PARTNERSHIP Table of Contents Letter to Shareholders 3 Independent Auditor’s Report 6 Balance Sheet 7 Statement of Operations 8 Statement of Stockholders’ Equity 9 Statement of Cash Flows 10 Notes to Financial Statements 11 Board of Directors / Advisory Board 23 Who we Are 24 Partners in the Community 25 Leadership through Innovation 27  Letter to Our Shareholders We are pleased to present the first annual report to shareholders from The Bank of Princeton (‘the Bank”). The attached financial statements reflect the financial activity for the year ended December 31, 2007 The Bank of Princeton represents the return of community banking to Princeton and its surrounding neighborhoods We did not just raise our initial capital of $30 million and set out to compete with all the national banks in the area; rather, we endeavored to bring a friendlier, more personalized style of banking to communities that still remember what that was like from not so long ago Whether it’s our free coin counting machines in every branch, our courier service that enables our business customers to spend more time in their shops, or our willingness to meet all of our customers at most any place and any time, our interpretation of community banking is clearly resonating throughout the area Community minded consumers seem to appreciate that when they bank with us, their deposits are being reinvested in their communities, not recycled to Pittsburgh or North Carolina And whether its our involvement with Princeton University Athletics, HiTops, Pop Warner football, or the New Jersey Symphony, we are doing our part to help many of the institutions that enliven and enhance the quality of our hometowns Given that this is our first annual report, permit us to summarize the highlights of those activities that brought us to where we are today: • In the Fall of 2005, a small group of founders began planning to start a bank in Princeton • In April of 2006, Peter Crowley was hired to become our first President and was tasked with getting the bank started • Between October 2006 and March 2007, the founders conducted a private fund raising effort which gathered $30 million to initially capitalize the bank • The initial management team was assembled both before and after opening, and began to make loans, develop consumer friendly products, take deposits, and to spread the word that a new bank had arrived in town • On April 24, 2007, the branch at 21 Chambers St was opened, with a more formal grand opening held on May 5th  • In November 2007, we held our first meeting with our Advisory Board, a collection of prominent local residents that help to guide our product development and market outreach • The Pennington office was opened in December 2007 and held its grand opening on January 12, 2008. • The Hamilton office opened on April 19, 2008 and had its grand opening on May 3, 2008. • Main headquarters branch, on Bayard Lane in Princeton, is scheduled to open in late 2008 • Assets grew slowly at first, then reached $48.4 million as of September 30, 2007, $66 5 million as of December 31, 2007, and more than $91 million as of March 31, 2008, more than tripling the size of the bank in its first year of operation. As the audited financial statements indicate, the Bank finished its December 31, 2007 fiscal year with $66,463,000 in assets, reflecting deposits of $37,751,000, loans outstanding, net of reserves, of $29,117,000, and stockholders’ equity of $28,340,000 The Statement of Operations reflects a net loss of $1,613,000 for the year. This number includes $214,000 of net costs incurred between January 1, 2007 and the bank’s official opening on April 24, 2007, $309,000 of non-cash expense pertaining to the issuance of options to management, and a net operating loss for the period from April 24, 2007 through December 31, 2007 of $1,090,000  Broadly speaking, the Bank benefitted in 2007 from high short term interest rates which enabled us to invest our initial capital at very favorable levels However, those same rates made deposit gathering more challenging as the high interest rates necessary to attract deposits narrowed the spreads that we were able to achieve on our loan products In the latter part of the year, the Federal Reserve started to cut rates aggressively The return of a positively sloped yield curve is far more beneficial for the long-term growth and health of the Bank, and rates have continued to decline thus far in 2008 Deposit activity has picked up handsomely as we develop and market products that are beneficial to our business customers, our municipal and non-profit customers, and to professionals such as lawyers, doctors, and accountants On the loan side, as of this writing , we are offering a five-year fixed rate home equity loan of 5.24%, with absolutely no associated fees. This new product, just introduced, is being well received. For those that have found themselves trapped in high interest, re-adjusting mortgage products, we have put together a consumer helper mortgage product which in certain cases, enables them to replace sky high adjustable rate products with lower, fixed rate loans. We are especially grateful for the commitment and dedication of all of our employees Starting any new enterprise is an exhausting, time-intensive task; we are particularly fortunate to have assembled such a high quality team to get the Bank started and as we grow, we are constantly hiring to maintain the highest service levels for our customers Your Board of Directors has performed admirably and the Advisory Board is learning how to enhance the Bank’s strong reputation and leverage our good work But it is our investors and our customers that are making this bank so successful We thank you all for your continued support and request that you keep looking for opportunities to send more business our way The current year is off to a strong start and we look forward to reporting to you on our continued growth Sincerely, Stephen Distler, Chairman Peter M Crowley, President  Independent Auditors Report Independent Auditor’s Report Independent Auditor’s Report To the Board of Directors The Bank of Princeton Princeton, New Jersey We have audited the accompanying balance sheet of The Bank of Princeton as of December 31, 2007, and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Bank of Princeton as of December 31, 2007, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.  Beard Miller Company LLP Malvern, Pennsylvania April 3, 2008 Balance Sheet Balance Sheet December 31, 2007 Assets Cash and due from banks Federal funds sold Cash and Cash Equivalents Securities available for sale Securities held to maturity Loans receivable, net of allowance for loan losses of $354,486 Restricted investment in bank stock Bank premises and equipment, net Accrued interest receivable Other assets Total Assets Liabilities and Stockholders’ Equity Liabilities Deposits: Non-interest bearing Interest-bearing Total Deposits Accrued interest payable Other liabilities Total Liabilities Stockholders’ Equity Common stock, $5 par value; authorized 10,000,000 shares; issued and outstanding 3,000,000 shares Surplus Accumulated deficit Accumulated other comprehensive gain Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity See notes to financial statements. 2007 $ 1,274,611 11,697,000 12,971,611 21,993,736 503,489 29,116,579 50,000 1,260,558 369,894 197,459 $66,463,326 $ 1,268,080 36,482,595 37,750,675 74,214 298,327 38,123,216 15,000,000 15,252,820 (2,152,232) 239,522 28,340,110 $66,463,326  Statement of Operations Statement of Operations Year Ended December 31, 2007 Interest Income Loans receivable, including fees Securities available for sale Federal funds sold Total Interest Income Interest Expense, Deposits Net Interest Income Provision for Loan Losses Net Interest Income after Provision for Loan Losses Non-Interest Income Loan servicing fee income Loss on sale of securities Other income Total Non-Interest Income Non-Interest Expenses  Salaries and employee benefits Occupancy and equipment Professional fees Advertising and promotion Loan expenses Other Total Non-Interest Expenses Net Loss See notes to financial statements. 2007 $ 625,212 389,671 1,160,724 2,175,607 539,764 1,635,843 354,486 1,281,357 32,666 (4,304) 4,075 32,437 1,627,935 309,216 216,172 283,578 92,567 397,460 2,926,928 $(1,613,134) Statement of Stockholders’ Equity Statement of Stockholders’ Equity Year Ended December 31, 2007 Balance - January 1, 2007 $ Common Stock Comprehensive loss: Net loss Change in net unrealized gains on securities available for sale, net of reclassification adjustment and tax effect Total Comprehensive Loss Sale of 3,000,000 shares of common stock, net of offering costs of $56,522 Share-based compensation expense Surplus $ - - - - - - 15,000,000 - 14,943,478 309,342 Accumulated Deficit Accumulated Other Comprehen- sive Gain $ (539,098) $ (1,613,134) - - Total $ (539,098) (1,613,134) - - - 239,522 239,522 (1,373,612) - - 29,943,478 309,342 Balance - December 31, 2007 $15,000,000 $15,252,820 $(2,152,232) $239,522 $28,340,110  See notes to financial statements. Statement of Cash Flows Statement of Cash Flows Year Ended December 31, 2007 Cash Flows from Operating Activities Net loss Adjustments to reconcile net loss to net cash used in operating activities: Provision for loan losses Depreciation Share-based compensation Net amortization of investment securities Net realized loss on sale of securities Increase in accrued interest receivable Increase in other assets Increase in accrued interest payable Decrease in other liabilities Net Cash Used in Operating Activities Cash Flows from Investing Activities Activity in available for sale securities: Purchases Proceeds from sales Activity in held to maturity securities, purchases Net increase in loans Purchases of restricted investment in bank stock Purchases of premises and equipment 0 Net Cash Used in Investing Activities Cash Flows from Financing Activities Net increase in deposits Proceeds from issuance of common stock, net Net Cash Provided by Financing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning Cash and Cash Equivalents - Ending Supplementary Cash Flows Information Interest paid See notes to financial statements. 2007 $(1,613,134) 354,486 74,859 309,342 856 4,304 (369,894) (197,459) 74,214 (364,161) (1,726,587) (25,628,963) 3,993,740 (504,250) (29,471,065) (50,000) (1,335,417) (52,995,955) 37,750,675 29,943,478 67,694,153 12,971,611 - $12,971,611 $ 465,550 Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 1 - Summary of Significant Accounting Policies Organization and Nature of Operations The Bank of Princeton (the “Bank”) was incorporated on July 17, 2006 under the laws of the State of New Jersey and is a New Jersey state chartered banking institution. The Bank was granted its bank charter on April 17, 2007. The Bank commenced operations on April 23, 2007 and is a full service bank providing personal and business lending and deposit services. As a state chartered bank, the Bank is subject to regulation of the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation. The area served by the Bank is primarily Mercer County, New Jersey. Prior to commencing operations, the Bank incurred $1,080,046 of organization and preopening costs, $539,098 of which was expensed in 2006, and $540,948 of which was expensed in 2007. Interest income of $360,539 was earned on escrow funds during 2007. These amounts expensed and earned in 2007 are included in the statement of operations for the period ended December 31, 2007 in the respective income and expense categories. Stock offering costs of $56,522 were netted against the proceeds from the sale of common stock. 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 and the valuation of deferred tax assets. Significant Group Concentrations of Credit Risk Most of the Bank’s activities are with customers located within Mercer County, New Jersey. Note 3 discusses the types of lending that the Bank engages in. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. The Bank does not have any significant concentrations to any one industry or customer. Presentation of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold, all of which mature within ninety days. Generally, federal funds are purchased for one day periods.  Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 1 - Summary of Significant Accounting Policies (Continued) 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 Bank intends to hold for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Bank’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. 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 terms of the securities. Securities classified as held to maturity are those debt securities the Bank 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. Declines in the fair value of 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 Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 2 Restricted investment in bank stock is comprised of stock in the Atlantic Central Banker’s Bank. All restricted stock is recorded at cost. Loans Receivable Loans receivable that management has the intent and the Bank the 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 Bank is generally amortizing 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 generally is 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. Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 1 - Summary of Significant Accounting Policies (Continued) 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 is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on known 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 consists of specific, general and unallocated components. The specific component relates to loans that are classified as either 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 is 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. At December 31, 2007, the entire allowance reflected a general reserve. 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. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer 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 Bank, (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 Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.  Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 1 - Summary of Significant Accounting Policies (Continued) Bank Premises and Equipment Bank 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. Advertising Costs The Bank follows the policy of charging the costs of advertising to expense as incurred. Advertising expense incurred for the period ended December 31, 2007 totaled approximately $284,000. 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. Comprehensive Income (Loss) Accounting principles generally require 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 (loss). The components of other comprehensive income for the year ended December 31, 2007 are as follows:  Unrealized holding gains on securities available for sale Reclassification adjustment for losses included in net loss Tax effect 2007 $358,608 4,304 362,912 (123,390) $239,522 Off-Balance Sheet Financial Instruments In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the balance sheet when they are funded. Employee Benefit Plan During 2007, the Bank established a 401(k) plan (“the Plan”). Under the Plan, all employees are eligible to contribute the maximum allowed by the Internal Revenue Code of 1986, as amended. The Bank may make discretionary matching contributions. During the period ended December 31, 2007, no matching contributions were made. Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 1 - Summary of Significant Accounting Policies (Continued) Share-Based Compensation The Bank adopted the provisions of Statement of Financial Standards No. 123(R), “Share-Based Payment.” This statement requires the Bank to recognize the cost of employee and organizer services received in share- based payment transactions and measure the cost based on the grant-date fair value of the award. The cost will be recognized over the period during which the employee or organizer is required to provide service in exchange for the award. Note 2 - Securities Available for Sale The amortized cost and approximate fair value of securities as of December 31, 2007 is summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available for Sale U.S. Government agency securities Mortgage-backed securities $16,795,870 4,834,954 $376,140 7,196 - $ (20,424) $17,172,010 4,821,726 $21,630,824 $383,336 $(20,424) $21,993,736 Securities Held to Maturity Obligations of state and political subdivisions $ 503,489 $ 5,257 $ - $ 508,746  At December 31, 2007, the Bank has three securities in an unrealized loss position due to interest rate fluctuations. There were no unrealized losses in the portfolio at December 31, 2007 that exceeded 12 months. The Bank has the intent and ability to hold this investment until maturity or market price recovery, therefore, they are not deemed to be other-than-temporarily impaired. The amortized cost and fair value of securities as of December 31, 2007, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the securities may be called without any penalties. Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Available for Sale Held to Maturity Amortized Cost $ 700,000 2,100,103 5,997,866 12,832,855 Fair Value Amortized Cost Fair Value $ 700,658 2,104,592 6,227,200 12,961,286 $ - 503,489 - - $ - 508,746 - - $21,630,824 $21,993,736 $503,489 $508,746 Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 2 - Securities Available for Sale (Continued) During 2007, the Bank sold securities available for sale for total proceeds of approximately $3,993,740, resulting in gross realized losses of $4,304. At December 31, 2007, the Bank had pledged to the Commissioner of Banking, State of New Jersey, $100,000 in U.S. Government agency securities, for the purpose of securing public deposits under the Governmental Unit Deposit Protection Act. Note 3 - Loans Receivable The composition of loans receivable at December 31, 2007 is as follows: Commercial term Commercial real estate Construction Home equity Consumer Total Loans Deferred fees Allowance for loan losses  Net Loans The changes in the allowance for loan losses for the period ended December 31, 2007 are as follows: Balance, beginning Provision for loan losses Balance, ending 2007 $ 3,059,135 16,132,127 5,653,778 2,098,160 2,637,550 29,580,750 (109,685) (354,486) $29,116,579 2007 $ - 354,486 $354,486 As of and for the period ended December 31, 2007, the Bank had no impaired loans, no nonaccrual loans, and no loans past due 90 days or more. Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 4 - Bank Premises and Equipment The components of premises and equipment at December 31, 2007 are as follows: Estimated Useful Lives 10 3 - 7 Leasehold improvements Furniture, fixtures and equipment Construction in progress Accumulated depreciation 2007 $ 679,602 565,367 90,448 1,335,417 (74,859) $1,260,558 Depreciation expense charged to operations amounted to $74,859 for the period ended December 31, 2007. During 2007, the Bank began construction of a branch building which is expected to be completed in May 2008. Total cost of the branch building is expected to be approximately $400,000, including the land, furniture and equipment, of which $90,448 was recorded in construction in progress at December 31, 2006. Note 5 - Deposits The components of deposits at December 31, 2007 are as follows: Demand, non-interest bearing Demand interest bearing and savings accounts Money market accounts Time, $100,000 and over Time, other At December 31, 2007, the scheduled maturities of time deposits are as follows: 2008 2009 2010 2011 2012  2007 $ 1,268,080 2,229,469 9,002,083 12,576,216 12,674,827 $37,750,675 $25,041,059 - - 131,984 78,000 $25,251,043 Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 6 - Lease Commitments and Total Rental Expense The Bank has operating leases for three of its branch locations, as well as its loan operations center. Future minimum lease payments by year under the non-cancellable lease agreements for the Bank’s facilities are as follows: 2008 2009 2010 2011 2012 Thereafter $ 205,426 206,841 202,009 168,467 138,665 441,467 $1,362,875 Rent expense for the four leases for the year ended December 31, 2007 was $190,440. Note 7 - Employment Agreement The Bank entered into employment agreements with certain employees. The terms of the agreements range from one to three years. The agreements include minimum annual salary commitments and for certain employees change of control provisions. Upon resignation after a change in the control of the Bank, as defined in the agreement, the individual will receive monetary compensation in the amount set forth in the agreements.  Note 8 - Stockholders’ Equity During 2007, the bank sold 3,000,000 shares of common stock at $10.00 per share, which resulted in net proceeds of $29,943,478 (after offering costs of $56,522) under an initial stock offering of 1,200,000 to 2,500,000 shares. The Bank reserved the right to in their sole and absolute discretion to increase the number of shares offered by 20% over the maximum. For every four (4) shares of common stock purchased in the offering, one (1) warrant to purchase one (1) additional share of the Bank's common stock at $12.00 was issued. Warrants are exercisable any time and expire three years from the date of issuance, which is April 1, 2010. There were 750,000 warrants outstanding at December 31, 2007. No warrants were exercised during the year ended December 31, 2007. The New Jersey Department of Banking, in issuing its charter to the Bank required an allocation of its initial capital to a reserve for organization expenses of $325,000 and a reserve for contingencies of $1,625,000 to defray anticipated initial losses. Accordingly, $1,950,000 of the Bank's surplus is reserved for this purpose until the Bank becomes profitable. Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 9 - Federal Income Taxes There is no provision for income taxes for the year ended December 31, 2007 due to the net operating losses incurred. The components of the net deferred tax liability at December 31, 2007 are as follows: Deferred tax assets: Allowance for loan losses Organization and start-up costs Net operating loss carryforwards Organizer warrants Other Valuation allowance Total Deferred Tax Assets, Net of Valuation Allowance Deferred tax liabilities: Property and equipment Cash basis conversions Unrealized gain on securities Deferred loan costs Net Deferred Tax Liability 2007 $ 123,128 410,418 397,583 109,656 1,176 1,041,961 (846,795) 195,166 (41,112) (134,941) (123,390) (19,113) (318,556) $ (123,390)  At December 31, 2007, the Bank has available unused net operating loss carryforwards available for federal and state income tax purposes of approximately $994,000 which expire in 2027 for federal purposes and 2014 for state purposes. Note 10 - Transactions with Executive Officers, Directors and Principal Stockholders The Bank 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 stockholders, 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. There were no loans receivable from related parties at December 31, 2007. Deposits of related parties totaled $7,691,595 as of December 31, 2007. Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 11 - Share-Based Compensation Organizers of the Bank were issued a total of 97,500 “organizer warrants” for their efforts during the organization and start-up of the Bank. These warrants are immediately exercisable, expire in 10 years and will enable the warrant holder to purchase one (1) share of common stock at $10.00 per share for each warrant exercised. In 2007, the Board of Directors adopted the 2007 Stock Option Plan, which was approved by the Board of Directors in August 2007, and was approved by the shareholders in October 2007. The 2007 Plan enables the Board of Directors to grant stock options to employees, directors, consultants, and other individuals who provide services to the Bank. The shares subject to or related to options under the Plan are authorized and unissued shares of the Bank. The maximum number of shares that may be subject to options under the Plan is 300,000, all of which may be issued as Incentive Stock Options and not more than 100,000 of which may be issued as Non-Qualified Stock Options. Incentive Stock Options are subject to limitations under Section 422 of the Internal Revenue Code. The Bank has reserved, for the purposes of the Plan, out of its authorized and unissued shares, such number of shares. The 2007 Plan will terminate ten years from stockholder approval. Options may not be granted with an exercise price that is less than 100% of the fair market value of the Bank’s common stock on the date of grant. Options may not be granted with a term longer than 10 years. However, any Incentive Stock Option granted to any employee who, at the time such Option is granted, owns more than 10% of the voting power of all classes of shares of the Bank, its parent or of a subsidiary may not have a term of more than five years. Options will vest and be exercisable at such time or times and subject to such terms and conditions as determined by the Board of Directors. Generally, options will vest over a vesting period of approximately equal percentages each year over an initial term no shorter than three (3) years. In October 2007, 125,750 Incentive Stock Options were issued under the Plan. At December 31, 2007, there are 174,250 shares available for grant under the 2007 Plan. 20 The following is a summary of the Bank's share-based compensation activity and related information for the year ended December 31, 2007: Warrants and Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2006 Stock warrants granted in 2007 Stock options granted in 2007 - 97,500 125,750 $ - 10.00 10.00 Outstanding at December 31, 2007 223,250 $10.00 9.5 years Exercisable at December 31, 2007 97,500 $10.00 9.3 years $ $ - - The fair value of each organizer warrant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grant in 2007: dividend yield of 0%; risk-free interest rate of 4.65%; expected life of 5 years and expected volatility of 19.95%. The volatility percentage was based on the average expected volatility of similar public financial institutions in the Bank’s market area. The fair value of the warrants granted in 2007 was $2.81. Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 11 - Share-Based Compensation (Continued) 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 for grants in 2007: dividend yield of 0%, risk-free interest rate of 4.34%, expected life of 7 years, and expected volatility of 20.89%. The volatility percentage was based on the average expected volatility of similar public financial institutions in the Bank's market area. The weighted average fair value of options granted in 2007 was $3.46 per share. Total share-based compensation cost for the year ended December 31, 2007 was $309,342 of which $35,203 related to stock options and $274,139 related to stock warrants granted to organizers. There were no tax benefits recognized related to the share-based compensation expense due to the net operating loss incurred. As of December 31, 2007, there was $399,000 of unrecognized compensation cost related to nonvested stock options granted in 2007. That cost is expected to be recognized on a graded vesting method over a weighted average period of 9.6 years. Note 12 - Financial Instruments with Off-Balance Sheet Risk The Bank 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 balance sheet. The Bank'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 Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. 2 The Bank had the following off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2007: Commitments to grant loans Unfunded commitments under lines of credit 2007 $13,205,000 9,165,359 $22,370,359 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. Notes to Financial Statements Notes to Financial Statements December 31, 2007 Note 13 - Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. the minimum capital requirements can initiate certain mandatory and possibly additional Failure to meet discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank’s 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 Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require 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, 2007, that the Bank meets all capital adequacy requirements to which it is subject. The Federal Deposit Insurance Corporation requires that the Bank maintain a ratio of Tier 1 leverage capital to total assets of at least 8% during the first three years of operation. Under these guidelines, the Bank is considered well capitalized as of December 31, 2007. The Bank’s actual capital amounts and ratios at December 31, 2007 are presented below: Actual For Capital Adequacy Purposes To be Well Capitalized under Prompt Corrective Action Provisions 22 Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Tier 1 capital (to average assets) $28,455 28,101 28,101 76.88 % $≥2,960 ≥1,480 75.92 ≥4,799 46.84 ≥8.0 % $≥3,701 ≥2,220 ≥4.0 ≥4,799 ≥8.0 ≥10.0 % ≥ 6.0 ≥ 8.0 The Bank is subject to certain restrictions on the amount of dividends that it may declare due to regulatory considerations. Board of Directors Advisory Board STEPHEN DISTLER, Chairman SCOTT SIPPRELLE, Chairman ROSS WISHNICK, Vice Chairman ANDREW CHON PETER M. CROWLEY JUDITH GIACIN RICHARD GILLESPIE JANET LASLEY ROBERT N. RIDOLFI, ESQ. Kristen Appleget David Bonanni Barbara Cuneo Peter Dawes Jessica Drurie John Horvath Yongkeun Joh Lance Liverman Scott Needham Khursheed Palkhiwala Joseph Ridolfi Peter Yi Incorporators 2 Andrew Chon Gregg Chaplin Peter M Crowley Stephen Distler Richard Gillespie Bumsung Han John Horvath Kevin Kenyon W Andrew Krusen Janet Lasley Emmet Lescroart Dennis Machulsky Casey K Min Scott Needham Henry Opatut Robert N. Ridolfi, Esq. James Riley Jeffrey Sands Eric Steinfeldt Ross Wishnick Who we Are EXECUTIVE LENDING Stephen Distler Chairman Peter Crowley President Lewis Foulke Chief Financial Officer Lauren Dezzi Kelly Tarity Amela Muslic Gerard Murray Chief Lending Officer Herb Schneider Nina Melker Kris Muse Praful Bhagat Joel Goldman Daniel Jackson Tamekia Jones OPERATIONS Rebecca Dittrich Brian Maslowski Karen Pfeifer LEGAL COUNSEL Pepper Hamilton, LLP Princeton, New Jersey INDEPENDENT AUDITOR Beard Miller Company, LLP Malvern, Pennsylvania PRINCETON BRANCH PENNINGTON BRANCH HAMILTON BRANCH Suzanne Lang Barbara Cromwell Maureen Brown 2 Karen Dwyer Joseph Ciampa Linda Brown Greg Talkington Charlene Jones Suzanne Lippincott April Sullivan David Oquendo Cathy Proctor Karen Spair Erin Winder Partners in the Community Other local banks have their homes out of state. The Bank of Princeton’s home is here in Mercer County We support the organizations that serve our communities We appreciate the work they do Every day Princeton Arts Council The Princeton Library Princeton University Bookstore HiTops 2 Princeton Little League The Princeton “Y” Leadership through Innovation through CONVENIENCE through ENVIRONMENT COIN MACHINE INNOVATIVE DESIGN through SERVICES through TECHNOLOGY 2 DOOR 2 DOOR COURIER REMOTE CAPTURE Temporary Headquarters Princeton Branch 21 Chambers Street Princeton, NJ 08542-3707 609-921-1700 Pennington Branch Route 31 South Suite 1 Pennington, NJ 08534 609-730-8500 Hamilton Branch 339 Route 33 Hamilton, NJ 08619-4401 609-854-0011 Future Headquarters Princeton 183 Bayard Lane Princeton, NJ 08540-3044 At The Bank of Princeton, we listen to you, we appreciate your business, and we’re committed to being a true resource for our community. We understand and we show it by providing you with the highest level of friendly, helpful, and personalized banking services. We get it — we know you want to be treated with respect, and we thank you, genuinely, for entrusting us with your banking. Most importantly, we believe that our own success is achieved only when yours is, when we deliver our unique banking experience to you… and everyone we meet. For you, in that way, we make a difference. Locations: Princeton Pennington Hamilton 21 Chambers St., Princeton, NJ 08542-3719 609.921.1700 • thebankofprinceton.com ( Just off Nassau St. on Chambers St. past the Nassau Christian Center)

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